67
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, 1997
[ ] 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 jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
633 17th 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 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 $1,175,501
based upon 6,717,151 shares held by such persons and the close price of $.175
on March 31, 1998. The number of shares outstanding of the Registrant's no
par value common stock at March 31, 1998 was 8,917,151.
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.
<PAGE>
INDEX
PAGE
PART I
BASIS OF PRESENTATION 4
ITEM 1. BUSINESS 4
THE COMPANY 4
General 4
History 5
Strategy 5
PRODUCTS, SERVICES AND CUSTOMERS 7
E&P 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 11
BACKLOG 11
COMPETITION 11
GEOGRAPHIC AND BUSINESS LINE DATA 12
Geographic Revenue Data 12
Business Line Data 12
PROPRIETARY RIGHTS 13
EMPLOYEES 13
SALE OF THE COMPANY 13
MANAGEMENT 15
Directors and Executive Officer 15
ITEM 2. PROPERTIES 17
ITEM 3. LEGAL PROCEEDINGS 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
PART II
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 25
Recovery of Accounts Receivable 25
Software Research and Development 25
Settlement of Class Action 26
Interest Income (Expense) 26
Foreign Exchange Losses 26
Disposal of Kinesix Division 27
Sale of the Assets of the Pipeline Business Line 27
STATEMENT OF CASH FLOWS 27
FORWARD-LOOKING INFORMATION 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 29
PART III 57
PART IV 58
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS 58
ON FORM 8-K
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 for the financial year of 1995 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. On April 1, 1998, the Company announced that it had entered into an
agreement to be acquired by Baker Hughes Incorporated ("Baker").
The Company's Exploration and Production Division (E&P) markets
computer-aided production 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 Simulation 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. The Company has signed a binding
definitive agreement to sell the Pipeline assets to LICEnergy A/S, Inc. (LIC)
effective May 1, 1998 as discussed in Management Discussion Note 12.
The consulting and training services are the single largest element of
the Company's business, comprising 52% of the Company's total revenues in
1997.
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 E&P
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 E&P software products to operate on UNIX -based
workstations and personal computers, and more recently on 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 the Company's high technology
stand-alone products. In 1997, new modules of Petroleum WorkBench were
released which increased the technical breadth of this software package.
These developments have had the effect of significantly expanding the market
for the Company's 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 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 on personal computers that will permit non-expert
professionals to describe, simulate, monitor and manage the complete range of
reservoir development and production activities.
The Company's executive offices are located at 633 17th Street, Suite
1600, 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. 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, and to reduce 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 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 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 "WBserv," 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 led to a different kind of software environment, 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. 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 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 Company's first integrated product, Petroleum WorkBench, includes six
of the Company's major stand-alone E&P 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 non-expert professionals working
individually or in asset teams 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 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.
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. 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.
BAKER ACQUISITION. The Company believes that its prospective acquisition
by Baker will better enable it to carry out the above described strategy.
PRODUCTS, SERVICES AND CUSTOMERS
E&P PRODUCTS, SERVICES AND CUSTOMERS
The Company's 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 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 products being marketed
by the Company are:
Reservoir Description. This module has the capability of log and core
analysis to calculate rock and fluid properties; and geological cross-section,
mapping and contouring capability.
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 characterization of 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, Comp5 (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. The Company will
be releasing in early 1998 a new compositional simulator, named Comp5, which
combines features and functionality of COMP III and COMP 4. Comp5 will also
be interfaced to the Petroleum WorkBench, thus combining the benefits of
compositional simulation and of integrated reservoir management.
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 heat combustion and combustion reaction
kinetics. This simulator is used to predict optimum recovery using thermal
enhanced recovery processes for reservoir development.
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. Expert or non-expert professionals can use this integrated set of
products to select optimal reservoir development plans using the highest
technology more quickly and efficiently than with non-integrated and
individually designed products. By delivering in a Microsoft Windows 95/NT
PC-based integrated environment advanced petroleum technology originally
developed for Unix workstations, the Petroleum WorkBench makes this technology
accessible to a much larger market of professionals.
The current release of the Petroleum WorkBench includes technology and
applications for well core and log analysis; well test design and
interpretation (Interpret/2); reservoir simulation (SimBest II) with graphical
pre- and post-processing; production decline analysis; well performance
modeling (WPM). This is combined with various graphical display capabilities,
including mapping and cross-sections. In 1997, the Company released a new
module for geostatistical modeling, WBgeos. In early 1998, a new release will
extend the graphical pre- and post-processor and the network interface,
WBserv, for reservoir simulation to handle compositional simulation.
WBgeos. A new add-on module released in Q4 1997 which extends the
reservoir modeling capabilities of the Petroleum WorkBench to include modern
geostatistical technology. An alternative to traditional mapping of reservoir
properties using contours (hand-drawn or computer-generated), geostatistics
provide a better representation of the variation of these properties between
wells, resulting in reservoir models more faithful to the real reservoir
geology. As WBgeos is fully integrated to the reservoir simulation module in
the WorkBench, higher quality geologic models can be readily simulated,
yielding more efficient history matching and more reliable reservoir
performance predictions.
WBserv. The client/server option for the Petroleum WorkBench which
allows engineers and geoscientists to use high-performance Unix workstations
for compute-intensive applications like reservoir simulation while operating
all interactive and graphical software in a desktop Windows 95/NT environment.
With this network feature provided through a dedicated client/server module, a
smaller number of high-end workstations can efficiently handle the needs of a
team of users, a department, or an entire company spread across several
geographic locations, resulting in lower Information Services capital and
operating costs. Simultaneously, users remain in a familiar Windows computing
environment, eliminating the need for users to be trained on workstations and
their unfriendly Unix and X-Windows software systems, while benefiting from
the high-performance computing this computer hardware offers.
In addition, the Company has specialized simulators for gas producers
and/or gas utilities: Omega (gas storage reservoir simulator) and Omnet
(reservoir simulator for multiple gas storage reservoirs and surface network
facilities and pipelines).
The Company also provides consulting and training, on the use and
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 monitoring, 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 performs
reserve evaluations; special simulation techniques for artificial lift,
horizontal drilling and massive hydraulic fracturing; and designs and
recommends development plans for an entire oil field.
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 modeling,
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 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.
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 E&P area, a new version of Petroleum WorkBench was released in
1997 with the addition of a geostatistics module. Additional enhancements
including conversion to an open architecture and updates to other modules are
planned. The Company will be releasing in early 1998 a new compositional
simulator named Comp5, which will replace Comp III. Development and upgrade
of black oil and thermal is ongoing. In the Pipeline area, a new version of
TGNET was released in 1Q 1998.
During the year ended December 31, 1997 and 1996, the Company spent $2.5
million and $2.9 million, respectively, 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 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/support 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, 1997 and 1996, was $4.2 million and
$6.7 million, respectively, of which 76% is expected to be earned by December
31, 1998. Approximately 19% of year-end backlog relates to Pipeline projects
that will be transferred with the sale of the Pipeline assets.
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, product obsolescence and competitors' worldwide marketing
capability. 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; Landmark, a
subsidiary of 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.
<PAGE>
GEOGRAPHIC AND BUSINESS LINE DATA
GEOGRAPHIC REVENUE DATA
The following table sets forth the Company's consolidated revenues by
geographic area for 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------- -------
(In thousands)
<S> <C> <C>
United States $ 3,536 $ 4,239
------- -------
Foreign:
Far East 2,415 3,849
Middle East 682 912
Canada 1,142 880
Europe 2,559 3,548
Central and South America 1,693 2,861
Africa 88 2,318
Other 277 397
------- -------
Total Foreign 8,856 14,765
Total Revenue $12,392 $19,004
======= =======
</TABLE>
Revenue derived from foreign sources amounted to $8,856 (71% of total
revenue) and $14,765 (78% of total revenue) during 1997 and 1996. 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 1997
and 1996:
<TABLE>
<CAPTION>
1997 1996
----- -----
<S> <C> <C>
Exploration and Production
Consulting and training 46% 55%
Licenses 14% 10%
Maintenance 18% 12%
Other 2% 1%
----- -----
Total 80% 78%
----- -----
Pipeline and surface facilities
Consulting and training 8% 13%
Licenses 4% 5%
Maintenance 7% 4%
Other 1% *%
----- -----
Total 20% 22%
----- -----
Other *% *%
----- -----
Total 100% 100%
===== =====
<FN>
*Less than 1%.
</TABLE>
During 1997, 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. During 1996, the Company derived $2.3
million, or 12% of its consolidated revenue from National Nigerian Petroleum
Corporation.
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, 1997, the Company employed 88 persons full-time in all
locations. The Company also engages technical consultants as required to
complete project work.
SALE OF THE COMPANY
On April 1, 1998, the Company announced that it had entered into a
binding agreement with Baker Hughes Incorporated ("Baker") to acquire all of
the outstanding shares of Scientific Software-Intercomp, Inc. ("Company")
which would result in Baker acquiring the Company's ongoing Exploration and
Production (E&P) Consulting and Technology (reservoir software) businesses,
subject to certain conditions. The sale does not include the Company's
Pipeline Simulation Division assets which are being purchased separately by
LIC. The Company had previously entered into a non-binding Outline of Terms
agreement for the acquisition of the Company by Well Service Technology A/S
("WST"). The Outline of Terms agreement between the Company and WST lapsed on
March 6, 1998 without the parties coming to a definitive agreement.
The press release announcing the acquisition by Baker is included in the
Company's filed Form 8K as Exhibit "A" and the agreement with Baker is Exhibit
"B."
The agreement with Baker provides that the shareholders of the Company's
common stock would receive a maximum of $.50 and a minimum of $.30 net per
share in consideration for the acquisition, with the maximum and minimum
amounts per share depending on the amount payable to Halliburton Company
("Halliburton"), the preferred shareholder of the Company. The amount payable
to Halliburton would be in exchange for the preferred stock of the Company.
The acquisition is subject to customary conditions as well as the
approval of the Company's common shareholders.
The Company's senior secured lenders, the Lindner Funds ("Lindner") and
Renaissance Capital Partners II, Ltd. ("Renaissance") have agreed to accept
discounted terms of $1.4 million and $1.3 million respectively in satisfaction
of the outstanding $6.5 million principal plus accrued interest and other
obligations owed by the Company to the lenders. The agreements with Lindner
and Renaissance are included in the filed Form 8K as Exhibit "C" and "D"
respectively. Halliburton has agreed to accept $2.5 million in cash in
exchange for its $4.0 million preferred stock holding in the Company. The
agreement with Halliburton is included in the filed Form 8K as Exhibit "E."
As a result of the agreement with Halliburton, the Company expects the
consideration payable to the Company's common shareholders to be approximately
$.49 per share, subject to possible downward adjustment based on the results
of Baker's continued due diligence.
The agreement with Baker, while binding, will be further detailed in a
subsequent customary definitive agreement between Baker and the Company,
containing the terms set forth in the agreement announced on April 1, 1998.
Closing of the acquisition is expected in the third quarter of 1998.
<PAGE>
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, 1997. All directors are elected for a term of one year and
serve until their successors are elected and qualified.
<TABLE>
<CAPTION>
Name Age Position
- --------------------------------------------- --- ---------------------------------------------------
<S> <C> <C>
George Steel 51 Chief Executive Officer, President and Director
Barbara J. Cavallo 52 Financial Controller
Edward F. Frazier 52 Corporate Secretary, Vice President Human Resources
Robert G. Parish, Ph.D. 56 Executive Vice President-
Exploration and Production Consulting
J. Marc Sofia 38 Vice President-E&P Technology
William B. Nichols, Ph.D. 69 Director
Edward O. Price, Jr. 68 Chairman, Director
Jack L. Howard 35 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 and in December, 1997, with the approval of the Board of Directors, he
chose to step down as Chairman but to continue his responsibilities as
President, Chief Executive Officer and as a Director of the Company. Mr.
Steel 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. He has a B.S. degree in Natural
Science from St. Andrews in Scotland.
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 1993 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 and holds memberships in the
National Certified Public Accountants Association, Texas Certified Public
Accountants Association, Houston Chapter of Texas CPAs.
Mr. Frazier joined the Company in September, 1981, and was elected
Corporate Secretary in May, 1996. He 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. Mr.
Frazier resigned from the Company and his position as Corporate Secretary and
Vice President on January 23, 1998.
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 E&P Technology
Division in May 1996. Mr. Sofia heads a team of professionals responsible for
the development, marketing, sales, and technical support of the Company's E&P
software and technology. Mr. Sofia joined Petro-Canada in September 1982
where he was involved in project engineering, well test interpretation, and
reservoir 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. Dr. Nichols was elected to the Board of Directors of
the Company in 1989.
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. Mr. Price was elected to the Board of Directors of the Company in 1993.
Mr. Price was elected Chairman of the Company in December, 1997.
Mr. Jack Howard is a principal and fund manager of Mutual Securities,
Santa Rosa, California, a division of Cowles, Sabol & Co., Inc., whose clients
have a substantial holding in the common stock of SSI. Mr. Howard, 35 years
old, is also a director of Gateway Industries and Roses Holdings. He has been
a stockbroker for 12 years, specializing in locating, researching, and
accumulating undervalued securities in businesses which were statistically
inexpensive in relation to their cash flow and/or potential. He is a member
of the management team of Steel Partners, a private investment fund. Mr.
Howard is CFO of Roses and acting President of Gateway Industries. Mr. Howard
was elected a Director of the Company in December, 1997.
ITEM 2. PROPERTIES
All of the Company's operations are conducted in leased space as follows:
<TABLE>
<CAPTION>
Approximate Current
Location Lease Expiration Sq. Ft. Annual Rent
- ------------------------ ---------------- ------- -----------
<S> <C> <C> <C>
Denver, Colorado May 2002 10,300 152,000
Houston, Texas April 1998 10,000 65,000*
Calgary, Alberta, Canada September 2001 10,700 31,000
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.
* $65,000 for a four month period from January to April 1998.
ITEM 3. LEGAL PROCEEDINGS
To the knowledge of management, there are no claims pending or threatened
against the Company or any of its subsidiaries which individually or
collectively could have a material adverse effect upon the Company or its
financial condition.
Securities and Exchange Commission Investigation. On September 11, 1997,
the Company resolved the investigation by the Securities and Exchange
Commission ("SEC") of the Company's disclosures and financial statements for
the years ended December 31, 1993, 1994 and 1995. Without admitting or
denying any of the allegations of the SEC, the Company settled the matter by
consenting to the entry of a permanent injunction prohibiting future
violations by the Company of Section 17(a) of the Securities Act of 1933, and
Sections 10 (b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange
Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder and
to an order to restate the Company's financial statements for the years ended
December 31, 1993, 1994 and 1995. The SEC staff has advised the Company that,
with the entry of the permanent injunction, the investigation into this matter
as to the Company has been concluded.
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.
<PAGE>
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, 1998, the Company had approximately 450
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
------------- -----------
High Low
------ -----
<S> <C> <C>
1998
First Quarter 51/8 31/4
First Quarter $ .20 $.125
1997
First Quarter 51/8 31/4
First Quarter .9375 .41
Second Quarter .70 .45
Third Quarter .82 .45
Fourth Quarter .80 .125
1996
First Quarter 51/8 31/4
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 trades its common stock in the over-the-counter market.
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA(1)
<TABLE>
<CAPTION>
1997 1996
-------- --------
(In thousands, except per share data)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Consulting and training $ 6,491 $12,863
Licenses 2,503 2,817
Maintenance 3,094 3,047
Other 304 277
-------- --------
Total revenue 12,392 19,004
-------- --------
Costs and expenses:
Costs of consulting and training 8,204 8,414
Costs of licenses 1,495 2,394
Costs of maintenance 861 1,242
Costs of other revenue 199 190
Selling, general and administrative 3,886 6,604
Recovery of accounts receivable - (1,568)
Provision for sale of Pipeline assets 2,200 -
Research and development 919 890
Total costs and expenses 17,764 18,166
-------- --------
Income (loss) from operations (5,372) 838
Other (expense) (54) (1,308)
-------- --------
Loss before income taxes (5,426) (470)
Credit provision for income taxes (20) 60
-------- --------
Loss from continuing operations (5,446) (410)
Discontinued operations
Loss from operations of Kinesix division(3) - (878)
Loss on disposal of Kinesix division(3) - (478)
-------- --------
Net loss (5,446) $(1,766)
======== ========
Loss per share:
Continuing operations $ (0.61) $ (0.05)
Discontinued operations $ - (0.16)
-------- --------
Net loss $ (0.61) $ (0.21)
======== ========
OTHER FINANCIAL DATA:
Revenue
E&P Consulting $ 5,491 $ 9,766
WorkBench (E&P Products) 4,436 4,935
P&F Division 2,465 4,303
-------- --------
Total Revenue $12,392 $19,004
======== ========
BALANCE SHEET DATA:
Working capital $(3,044) $ 2,270
Total assets 17,808 22,708
Long-term obligations, net of current portion 7,172 7,147
Redeemable convertible preferred stock 4,000 4,000
Stockholders' equity (deficit) $(2,483) $ 3,037
<FN>
(1) The above table sets forth a summary of selected consolidated
financial data for the Company as of December 31, 1997 and 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 for the financial year of 1995 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 included 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.
(4) During 1997, the Company's management and Board of Directors designed
and implemented a plan to improve the Company's financial performance through
a merger, alliance or sale of the Company and to divest the Company of
underperforming assets. As part of this plan, the Company announced on
January 5, 1998 an intent to sell the Pipeline Simulation Division assets.
These assets as of December 31, 1997 were estimated to have a net carrying
value of $3.9 million.
On March 2, 1998, the Company announced the signing of a definitive
binding agreement to sell the assets of the Pipeline Simulation business line
to LIC. The transaction which is expected to close on or before May 1, 1998
will result in consideration to the Company of $1.5 million in cash and the
assumption by LIC. of current obligations up to a maximum of $230,000. Based
on fair market value estimates, the Company recorded a provision of $2.2
million to write down the carrying amounts of the Pipeline assets to estimated
fair value less cost to sell. The Pipeline Simulation business line recorded
sales of $2.5 million and $4.3 million and contributed a net loss of $1.3
million and $.4 million in 1997 and 1996, respectively, excluding the
provision for the loss of sale of Pipeline assets recorded in 1997.
</TABLE>
<PAGE>
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, 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 2
of Notes to Consolidated Financial Statements.
7.2 FINANCIAL POSITION
7.2.1 OVERALL FINANCIAL POSITION
At December 31, 1997, the Company's working capital ratio was .67 to 1,
based on current assets of $6.1 million and current liabilities of $9.1
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 20%
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 non-detachable warrants to purchase 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 (See
-------------------------------------------
Section 7.2.2.1) 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 can generate 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. Financing available under the Company's revolving credit facility
and internally generated funds may not provide the Company with sufficient
liquidity and working capital to meet its anticipated short-term and long-term
operating needs. Funding may have to be sought from alternative sources
and/or costs may have to be reduced and/or other strategies implemented.
There can be no assurances 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 16, 1997, the Company and Bank One agreed to extend the
revolving credit facility through October 15, 1997. The revolving credit
facility was decreased from $1.5 million to $.9 million. The collateral for
the line is the Company's accounts receivables 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 the Renaissance Capital Partners II, Ltd. ("Renaissance")
senior secured notes.
On October 30, 1997, the Company and Bank One agreed to change the terms
of the April 16, 1997 agreement to:
1. Extend the maturity date to November 30, 1997,
2. Change the interest rate from the bank's prime rate of interest to the
bank's prime rate of interest plus one (1) percentage point, and
3. Limit the principal amount of the line of the revolving credit facility
to $650,000.
On November 30, 1997, the Company and Bank One agreed to extend the
maturity date to August 15, 1998 and to reduce the principal amount of the
line of the revolving credit facility to $230,000 after March 15, 1998. The
credit line of $230,000 would remain available only to secure certain standby
letters of credit. The Company is currently in default with respect to such
March 15, 1998 reductions.
The credit facility is supported by a guarantee from Exim Bank which
reduces down as the credit line reduces and expires in full on August 15,
1998. The Company pays Exim Bank a fee equal to 1.5% of the guarantee and is
required to purchase credit insurance for foreign receivables at a cost of
$.38 per hundred dollars of the amount of the insured receivables.
As of December 31, 1997 the balances of the revolving credit facility,
amounts of short-term cash borrowings and letters of credit outstanding, and
credit available under the revolving credit facility were as follows:
<TABLE>
<CAPTION>
(In thousands)
---------------
<S> <C>
Revolving credit facility limit $ 650,000
===============
Borrowing base (limited by insurance coverage and
amount of qualified receivables
Amounts outstanding:
Short-term cash borrowings 382,000
Letters of credit 257,000
639,000
---------------
Credit available $ 11,000
===============
</TABLE>
Under the terms of the then existing bank credit agreement, in April 1996
the Company repaid the $2.9 million balance 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 $750,000 balance owed pursuant
to the new bank credit agreement at September 30, 1996.
At December 31, 1997, the Company was in violation of the loan covenants
on its notes payable to Bank One, Lindner, and Renaissance. Lindner and
Renaissance have waived these violations as of December 31, 1997. A waiver is
expected from Bank One, though it has not been received as of 4/14/98.
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 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
E&P Consulting $ 5,491 $ 9,766
E&P Technology (Software) 4,436 4,935
Pipeline Simulation 2,465 4,303
------- -------
Total Revenue $12,392 $19,004
======= =======
</TABLE>
Total revenues decreased 35% to $12.4 million in 1997 from $19.0 million
-------------------------------------------------------------------------
in 1996. All divisions of the Company experienced a decline in revenues due
- ------------------------------------------------------------------------------
to lack of sales and a reduction of the number of billable personnel caused by
- ------------------------------------------------------------------------------
personnel attrition in Consulting. Revenues decreased 44% to $5.5 million in
- ------------------------------------------------------------------------------
1997 in Exploration and Production (E&P) Consulting compared to $9.8 million
- ------------------------------------------------------------------------------
in 1996. Revenues in 1996 included revenue of $2.3 million recognized upon
- ------------------------------------------------------------------------------
collection of a foreign receivable for work performed in 1995 which had not
- ------------------------------------------------------------------------------
been previously recognized as revenue. (See Section 7.3.6)
- -----------------------------------------------------------------
Revenues in Pipeline Simulation were $2.5 million in 1997 which
------------------------------------------------------------------------
represented a 43% decrease in reported 1996 revenues of $4.3 million. The
-------------------------------------------------------------------------
1997 revenues for E&P Technology (software) decreased to $4.4 million or 10%
---------------------------------------------------------------------------
compared to 1996 revenues of $4.9 million.
-----------------------------------------------
The Company's number of days sales outstanding (DSO) has reduced due to
improved business processes.
7.3.2 FOREIGN REVENUE
Revenue derived from foreign sources during 1996 and 1997 is set forth
below:
<TABLE>
<CAPTION>
Revenue From
Foreign Percentage of
Sources Total Revenue
--------------- --------------
(In thousands)
<S> <C> <C>
1997 $ 8,856 71%
1996 14,765 78%
</TABLE>
Management believes that foreign revenue will continue to be an important
factor in the Company's business. 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, 1997 was $4.2 million, of which 76% is expected
to be earned by December 31, 1998. Approximately 19% of year-end backlog
related to Pipeline projects which will be transferred with the sale of the
assets of the Pipeline Simulation Division.
7.3.4 COSTS OF CONSULTING AND TRAINING AND COSTS OF LICENSES AND
MAINTENANCE
In the second quarter of 1996, management took steps to reduce overhead,
non-billable staff personnel, and other costs, and to further emphasize direct
accountability for profitability and cash performance at the operating level.
These measures resulted in lower expenses in 1997. However, revenues in
Consulting and Training declined.
<TABLE>
<CAPTION>
Costs as % of Revenue
----------------------
1997 1996 Net Change
---------------------- ----- -----------
<S> <C> <C> <C>
Costs of Consulting and Training 126% 65% (61%)
Costs of Licenses 60% 85% 25%
Costs of Maintenance 28% 41% 13%
Costs of Other Revenues 65% 69% 4%
</TABLE>
Costs of consulting and training as a percent of revenue increased in
1997 over 1996 due to lower revenue in relation to division fixed costs. The
1996 costs include approximately $700,000 related to revenue recognized upon
collection of the foreign receivable and payment for cancellation of a
contract referred to in Section 7.3.1 above. Costs of licenses and
maintenance were lower as a percentage of revenues in 1997 compared to 1996
due to more direct control of costs at the division level.
7.3.5 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
In the second quarter of 1996, management took steps to reduce overhead,
personnel, and other costs. These measures resulted in lower costs in 1997.
Selling, General and Administrative expense decreased $2.7 million or 41%
to $3.9 million in 1997 from $6.6 million in 1996. In the fourth quarter of
1997, the Company took further action to reduce costs by reduction of staff in
the E&P Technology and General Administrative areas. The Company accrued
termination costs totaling $172K, all of which will be paid in 1998. The
expenses for 1996 include provisions for expenses of $600K related to
severance costs. The severance cost provisions in 1997 and 1996 were made in
accordance with EITF 94-3. The Selling, General and Administrative expenses
for 1997 include a provision of $200K related to payroll taxes for current
and former foreign national employees.
7.3.6 RECOVERY OF ACCOUNTS RECEIVABLE
In 1996 the Company received payments totaling $3.9 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 recent 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 $2.3 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 1997 and 1996. The Company's software
development and enhancement costs are accounted for in accordance with FASB
Statement No. 86.
<TABLE>
<CAPTION>
1997 1996
------ ------
(In thousands)
- --------------------------------------
<S> <C> <C>
Software expenditures:
Capitalized software costs $2,483 $1,963
Costs charged to research and
development expense 919 890
Total software expenditures $3,402 $2,853
====== ======
Software expenses charged to earnings
Research and development expense $ 919 $ 890
Amortization of capitalized software 2,196 1,911
Total software expenses recognized $3,115 $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 by comparison to expenditure levels in the years prior
to 1996, and is focusing primarily on adaptation of the Company's software
products to the personal computer market.
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 included the former President and Chief Executive Officer of
the Company, its former Chief Financial Officer and a former Executive Vice
President, violated Section 10(b) of the Securities Exchange Act of 1934 and
Rule 10(b)-5 promulgated thereunder in issuing financial reports for the first
three quarters of the Company's 1994 fiscal year which failed to comply with
generally accepted accounting principles with respect to revenues recognized
from the Company's contracts with value added resellers. The Plaintiff sought
to have the Court determine that the lawsuit constituted 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 did not contest whether the claim constituted a proper class action.
The Defendants and the Plaintiff initially reached agreement for
settlement of the claim involving the payment of $1.1 million in cash, to be
provided by the Company's liability insurer in a court-supervised escrow
account, and the Company's issuance of warrants to purchase common stock
exercisable at the market price of the stock at the time of completion of the
settlement, with the number of warrants to be such that their aggregate value
was $900K. Subsequently, the settlement agreement was modified to eliminate
the warrants and to provide for an additional $525K in cash, to be paid by the
Company. The Company concluded that the foregoing settlement was in its best
interests in view of the uncertainties of litigation, the substantial costs of
defending the claim and the material amount of management time which would be
required for such defense. The Company recorded a $900K loss contingency in
the second quarter of 1996 relating to the proposed agreement for settlement
of the Marshall Wolf claim in accordance with Question 1 of SAB Topic 5:Y. On
May 23, 1997, the final approval of the fairness of the settlement was granted
by the Court. The Company paid $525K in cash and reversed a net $315K of the
loss contingency reserve of $900K after applying additional incurred legal
costs.
7.3.9 INTEREST INCOME (EXPENSE)
The following table summarizes the components of interest income
(expense) for 1997 and 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>
1997 1996
------ ------
(In thousands)
- ----------------------
<S> <C> <C>
Interest income $ 76 $ 34
Interest incurred (687) (522)
Interest capitalized 130 165
Net interest (expense) $(481) $(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 1997, the Company reported a net foreign exchange gain of $13K.
During 1996, the Company reported a net foreign exchange loss of $85K.
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
$410K, including cash of $376K which was received by the Company in October
1996, a note receivable for $32K, and the purchaser's assumption of
liabilities totaling $59K. The measurement date for accounting for the
disposal was August 26, 1996, the date on which management decided to sell the
Kinesix Division and the disposal date was September 3, 1996, the effective
date of the transaction. The transaction resulted in a loss on disposal of
$478K, which included estimated losses to be incurred by the Kinesix Division
from the measurement date to the date of disposal of $66K. From the
measurement date to the balance sheet date of September 30, 1996, the Company
incurred a net loss of $66K in operating the Kinesix Division, which was
charged to a reserve that was recorded in accounting for the loss on disposal.
Loss from operation of the discontinued segment from January 1, 1996 to the
measurement date was $878K, including recognition of an expense of $674K
related to the Consolidated Financial Statements to an award against the
Company by the American Arbitration Association.
7.3.12 SALE OF THE ASSETS OF THE PIPELINE BUSINESS LINE
During 1997, the Company's management and Board of Directors designed and
implemented a plan to improve the Company's financial performance through a
merger, alliance or sale of the Company and to divest the Company of
underperforming assets. As part of this plan, the Company announced on
January 5, 1998 an intent to sell the Pipeline Simulation Division assets.
These assets as of December 31, 1997 were estimated to have a net carrying
value of $3.9 million.
On March 2, 1998, the Company announced the signing of a definitive
binding agreement to sell the assets of the Pipeline Simulation business line
to LIC. The transaction which is expected to close on or before May 1, 1998
will result in consideration to the Company of $1.5 million in cash and the
assumption by LIC. of current obligations up to a maximum of $230,000. Based
on fair market value estimates, the Company recorded a provision of $2.2
million to write down the carrying amounts of the Pipeline assets to estimated
fair value less cost to sell. The Pipeline Simulation business line recorded
sales of $2.5 million and $4.3 million and contributed a net loss of $1.3
million and $.4 million in 1997 and 1996, respectively, excluding the
provision for the loss of sale of Pipeline assets recorded in 1997.
7.4 STATEMENT OF CASH FLOWS
7.4.1 CASH FLOWS FROM OPERATING ACTIVITIES
In 1997, net cash of $1.1 million was provided by operating activities.
Net accounts receivable balances as a percentage of revenues declined from 30%
in 1996 to 22% in 1997. In 1996, net cash of $1.8 million was provided by
operating activities. The most significant reason was the receipt of $3.9
million related to a foreign consulting contract. See Section 7.3.6.
7.4.2 CASH FLOWS FROM INVESTING ACTIVITIES
Net cash of $2.6 million and $2.3 million was utilized in investing
activities in 1997 and 1996 respectively. The Company incurred total software
development and enhancement costs of $3.4 million and $2.9 million, of which
$2.5 million and $2.0 million was capitalized and $.9 million and $.9 million
was charged to expense as research and development costs, in the years 1997
and 1996 respectively.
7.4.3 CASH FLOWS FROM FINANCING ACTIVITIES
In 1997, net cash of $.4 million was provided by financing activities
which consisted primarily of cash of $.4 million received from the Company's
borrowing against the Bank One revolving credit facility.
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 borrowing of $750,000 under the new bank line
of credit. The $750,000 was repaid in October 1996. The Company also used
$1.9 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.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1997 AND 1996
CONSOLIDATED STATEMENTS OF OPERATIONS FOR
THE YEARS ENDED DECEMBER 31, 1997 AND 1996
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
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 for the financial year of 1995 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.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Scientific Software-Intercomp, Inc.
Denver, Colorado
We have audited the accompanying consolidated balance sheets of Scientific
Software-Intercomp, Inc. and subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of operations, stockholders' equity
and cash flows for the years then ended. Our audits also included the
financial statement schedule as of and for the year ended December 31, 1997
and 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Scientific
Software-Intercomp, Inc. and subsidiaries as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for the years 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.
The accompanying consolidated financial statements have been prepared assuming
that Scientific Software-Intercomp, Inc. (the Company) will continue as a
going concern. As discussed in Note 1 to the consolidated financial
statements, the Company has suffered recurring losses from operations and has
a net capital deficiency that raise substantial doubt about the entity's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The consolidated financial statements
do not include any adjustments that might result from this uncertainty.
Ehrhardt Keefe Steiner & Hottman PC
April 7, 1998
Denver, Colorado
<PAGE>
<TABLE>
<CAPTION>
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
December 31, December 31,
1997 1996
-------------- --------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 705 $ 1,870
Accounts receivable, net of allowance for doubtful
accounts of $881 and $690 2,721 5,609
Work in progress (unbilled revenue) 2,147 2,785
Other current assets 502 530
Total current assets 6,075 10,794
Software, net of accumulated amortization and write-down
of $45,033 and $42,837 9,891 9,604
Property and Equipment, net of accumulated
depreciation and amortization of $5,519 and $5,218 488 823
Other Assets 1,354 1,487
-------------- --------------
$ 17,808 $ 22,708
============== ==============
LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND STOCKHOLDERS' EQUITY
Current Liabilities
Note payable to bank $ 382 $ -
Accounts payable 1,072 1,389
Accrued salaries and fringe benefits 729 1,070
Accrued lease obligations 5 260
Deferred maintenance and other revenue 2,601 2,421
Accrued royalties 698 731
Accrual for costs to complete a contract 72 200
Accrued taxes 153 282
Accrued litigation liabilities - 1,574
Provision for sale of Pipeline assets 2,200 -
Other current liabilities 1,207 597
-------------- --------------
Total current liabilities 9,119 8,524
Accrued Lease Obligations 61 79
Long-Term Obligations 611 568
Senior Secured Notes Payable 6,500 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 4,000
Commitments and Contingencies
Stockholders' Equity
Common stock, no par value; $.10 stated value;
25,000,000 authorized, 8,878,000 and 8,840,000 shares
issued and outstanding 888 884
Paid-in capital 49,489 49,474
Accumulated deficit (52,182) (46,736)
Cumulative foreign currency translation adjustment (678) (585)
-------------- --------------
Total stockholders' equity (deficit) (2,483) 3,037
-------------- --------------
$ 17,808 $ 22,708
============== ==============
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For the Year Ended December 31,
1997 1996
--------- ---------
<S> <C> <C>
Revenue
Consulting and training $ 6,491 $ 12,863
Licenses 2,503 2,817
Maintenance 3,094 3,047
Other 304 277
--------- ---------
12,392 19,004
--------- ---------
Costs and Expenses
Costs of consulting and training 8,204 8,414
Costs of licenses 1,495 2,394
Costs of maintenance 861 1,242
Costs of other revenue 199 190
Selling, general, and administrative 3,886 6,604
Recovery of accounts receivable - (1,568)
Provision for sale of Pipeline assets (Note 9) 2,200 -
Software research and development 919 890
Total costs and expenses 17,764 18,166
--------- ---------
Income (Loss) from Operations (5,372) 838
Other Income (Expense)
Loss contingency (expense) reversal (Note 11) 414 (900)
Interest income 76 34
Interest expense (557) (357)
Foreign exchange gains (losses) 13 (85)
--------- ---------
Loss Before Income Taxes (5,426) (470)
Income Taxes (Provision) Credit (20) 60
--------- ---------
Loss from continuing operations (5,446) (410)
Discontinued operations - (Note 10):
Loss from operation of Kinesix division - (878)
Loss on sale of Kinesix division - (478)
Net loss $ (5,446) $ (1,766)
========= =========
Weighted Average Number of Common
Shares Outstanding 8,859 8,556
========= =========
Loss Per Share:
Continuing operations $ (0.61) $ (0.05)
Discontinued operations - (0.16)
--------- ---------
Net loss $ (0.61) $ (0.21)
========= =========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
Cumulative
Common Stock Paid-in Accumulated Translation Treasury Stock Stockholders'
------------ --------------
Shares Amount Capital Deficit Adjustment Shares Amount Equity
------- -------- -------- --------- ------------ -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 8,256 $ 825 $ 48,850 $(44,970) $ (595) --- $ --- $ 4,110
Stock sold for cash 3 5 5
Conversion of convertible
debentures into common stock 282 29 210 239
Compensation, services and vendors 299 30 409 439
Foreign currency translation
adjustment 10 10
Net (loss) (1,766) (1,766)
------- --------
Balance, December 31, 1996 8,840 884 49,474 (46,736) (585) --- --- 3,037
Compensation, services and vendors 38 4 15 19
Foreign currency translation
adjustment (93) (93)
Net (loss) (5,446) (5,446)
------- --------
Balance, December 31, 1997 8,878 $ 888 $ 49,489 $(52,182) $ (678) $(2,483)
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
For the Year Ended December 31,
1997 1996
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss $(5,446) $(1,766)
Adjustments:
Depreciation and amortization 2,670 2,653
Provision for losses on accounts receivable (163) (1,057)
Stock issued for compensation - 30
Loss contingency provision (reversal) (414) 900
Provision for sale of Pipeline assets (Note 9) 2,200 -
Changes in operating assets and liabilities:
Decrease in accounts receivable
and work in progress 3,689 1,747
Decrease in other assets 161 245
Decrease in accounts payable and
accrued expenses (1,442) (479)
Decrease in accrued lease obligations (273) (369)
Increase (decrease)in deferred revenue 186 (51)
-------- --------
Net cash provided by continuing operations 1,168 1,853
Net cash used in discontinued operations - (28)
Net cash provided by operating activities 1,168 1,825
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capitalized software costs (2,483) (1,963)
Purchases of equipment (139) (288)
Net cash utilized in investing activities (2,622) (2,251)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of stock - 5
Net borrowing activity on line of credit 382 (2,870)
Repayments of bank borrowings - (262)
Proceeds from Senior Secured Notes - 5,000
Net cash provided by financing activities 382 1,873
-------- --------
Effect of exchange rates on cash (93) 10
-------- --------
Net increase (decrease)in cash and equivalents (1,165) 1,457
Cash and cash equivalents at beginning of year 1,870 413
-------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 705 $ 1,870
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest, net of amounts capitalized $ 481 $ 388
Foreign taxes 106 79
NON-CASH INVESTING AND FINANCING ACTIVITIES
Exchange of convertible debenture for common stock - 250
Conversion of accrued liabilities to equity 19 400
</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 - BASIS FOR PREPARATION OF FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared on
a going concern basis which contemplates the realization of assets and
liquidation of liabilities in the ordinary course of business. The Company
has suffered a significant loss from continuing and discontinued operations of
$5,446 million in 1997 resulting in an accumulated deficit of $52,182 million
at December 31, 1997.
On April 1, 1998, the Company announced that it had entered into a
binding agreement with Baker Hughes Incorporated ("Baker") to acquire all of
the outstanding shares of Scientific Software-Intercomp, Inc. ("Company")
which would result in Baker acquiring the Company's ongoing Exploration and
Production (E&P) Consulting and Technology (reservoir software) businesses,
subject to certain conditions. The sale does not include the Company's
Pipeline Simulation Division assets which are being purchased separately by
LIC The Company had previously entered into a non-binding Outline of Terms
agreement for the acquisition of the Company by Well Service Technology A/S
("WST"). The Outline of Terms agreement between the Company and WST lapsed on
March 6, 1998 without the parties coming to a definitive agreement.
The agreement with Baker provides that the shareholders of the Company's
common stock would receive a maximum of $.50 and a minimum of $.30 net per
share in consideration for the acquisition, with the maximum and minimum
amounts per share depending on the amount payable to Halliburton Company
("Halliburton"), the preferred shareholder of the Company. The amount payable
to Halliburton would be in exchange for the preferred stock of the Company.
The acquisition is subject to customary conditions as well as the
approval of the Company's common shareholders.
The Company's senior secured lenders, the Lindner Funds ("Lindner") and
Renaissance Capital Partners II, Ltd. ("Renaissance") have agreed to accept
discounted terms of $1.4 million and $1.3 million respectively in satisfaction
of the outstanding $6.5 million principal plus accrued interest and other
obligations owed by the Company to the lenders. Halliburton has agreed to
accept $2.5 million in cash in exchange for its $4.0 million preferred stock
holding in the Company.
As a result of the agreement with Halliburton, the Company expects the
consideration payable to the Company's common shareholders to be approximately
$.49 per share, subject to possible downward adjustment based on the results
of Baker's continued due diligence.
The agreement with Baker, while binding, will be further detailed in a
subsequent customary definitive agreement between Baker and the Company,
containing the terms set forth in the agreement announced on April 1, 1998.
Closing of the acquisition is expected in the third quarter of 1998.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded
asset amounts and classification of liabilities except for the provision for
the sale of the Pipeline Simulation business line that might be necessary
should the Company be unable to continue in existence.
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Scientific Software-Intercomp, Inc. ("the Company") develops and markets
sophisticated software for the development and production and pipeline and
surface facilities areas of the worldwide oil and gas industry. 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.
All significant intercompany balances and transactions have been eliminated
through consolidation.
REVENUE
The Company recognized software license revenue pursuant to SOP 91-1 on
delivery provided that a legally-binding licensing agreement containing all
material terms has been executed, 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.
The Company adopted SOP 97-2 which was effective December 17, 1997.
Pursuant to SOP 97-2, the Company enters into contracts separate of the
software license agreements for all training and services related to the
software sale.
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.
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 1997 are expected to be billed and collected
by December 31, 1998 except for those contracts in progress that will be
assumed under the pending Pipeline asset sale agreement. 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 Statement of Financial Accounting Standard (SFAS) 68, the
funded software development revenues do 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.
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
SFAS 86. Development costs incurred prior to the determination of
technological feasibility are expensed as research and development expense as
incurred. At each end of year 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.
<PAGE>
Following is a summary of capitalization and amortization for the Company's
software products.
<TABLE>
<CAPTION>
Basic
Technology
Products WorkBench Total
--------------- ---------- -------
(In thousands)
<S> <C> <C> <C>
Capitalized Software Costs:
Balance, January 1, 1996 $ 29,968 $ 20,510 $50,478
1996 additions 1,661 302 1,963
--------------- ---------- -------
Balance, December 31, 1996 31,629 20,812 52,441
1997 additions 1,224 1,259 2,483
Balance, December 31, 1997 $ 32,853 $ 22,071 $54,924
=============== ========== =======
Accumulated Amortization:
Balance, January 1, 1996 $ 27,133 $ 13,793 $40,926
1996 amortization expense 620 1,291 1,911
--------------- ---------- -------
Balance, December 31, 1996 27,753 15,084 42,837
1997 amortization expense 789 1,407 2,196
Balance, December 31, 1997 $ 28,542 $ 16,491 $45,033
=============== ========== =======
Software, net of accumulated amortization of
Balance, December 31, 1996 $ 3,876 $ 5,728 $ 9,604
Software, net of accumulated amortization of
Balance, December 31, 1997 $ 4,311 $ 5,580 $ 9,891
</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, 1997. 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 years ended December 31, 1997 and 1996, the level of software research and
development costs was $3.4 million and $2.8 million, respectively. To reduce
internal capital requirements for software development projects, the Company
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 $.1 million and $.165 million
during the years ended December 31, 1997 and 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 $474,000 and $742,000, for the years
ended December 31, 1997 and 1996, respectively.
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, December 31,
1997 1996
------------- -------------
(In thousands)
- --------------------------------------
<S> <C> <C>
Properties and leasehold improvements $ 442 $ 450
Office furniture and equipment 789 828
Computer equipment 4,776 4,763
------------- -------------
6,007 6,041
Less accumulated depreciation and
amortization 5,519 5,218
$ 488 $ 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 basis 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, 1997 and 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 1997 and 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 5 of Notes to
Consolidated Financial Statements). Fully diluted loss per share is not
presented for 1997 and 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,
approximates fair value as of December 31, 1997 and 1996 due to their relative
short maturity.
Carrying amounts of debt issued approximates fair value as interest rates
on these instruments approximates market interest rates at December 31, 1997
and 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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (SFAS 130), which establishes
standards for reporting and display of comprehensive income, its components
and accumulated balances. Comprehensive income is defined to include all
changes in equity except those resulting from investments by owners and
distributions to owners. Among other disclosures, SFAS 130 requires that all
items that are required to be recognized under current accounting standards as
components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements.
Also, in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131), which supersedes Statement of Financial Accounting
Standards No. 14, "Financial Reporting for Segments of a Business Enterprise."
SFAS 131 establishes standards for the way that public companies report
information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS 131 defines operating segments as components of a company
about which separate financial information is available, that is evaluated
regularly by the chief operating decision maker in deciding how to allocate
resources and in assessing performance.
SFAS 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and requires comparative information for
earlier years to be restated. Because of the recent issuance of the
standards, management has been unable to fully evaluate the impact, if any,
the standards may have on future financial statement disclosures. Results of
operations and financial position, however, will be unaffected by
implementation of these standards.
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - BANKING ARRANGEMENTS, LONG-TERM OBLIGATIONS AND NOTE PAYABLE
UNITED STATES CREDIT AGREEMENTS
Effective April 16, 1997, the Company and Bank One agreed to extend the
revolving credit facility through October 15, 1997. The revolving credit
facility was decreased from $1.5 million to $.9 million. The collateral for
the line is the Company's accounts receivables from non-U.S. domiciled
customers to the extent necessary to collateralize the line. All receivables
not necessary for the line and substantially all other assets except those of
the Canadian subsidiary are collateral for the Lindner Dividend Fund
("Lindner") and Renaissance Capital Partners II, Ltd. ("Renaissance") senior
secured notes.
On October 30, 1997, the Company and Bank One agreed to change the terms
of the April 16, 1997 agreement to:
1. Extend the maturity date to November 30, 1997,
2. Change the interest rate from the bank's prime rate of interest to the
bank's prime rate of interest plus one (1) percentage point, and
3. Limit the principal amount of the line of the revolving credit facility
to $650,000.
On November 30, 1997, the Company and Bank One agreed to extend the
maturity date to August 15, 1998 and to reduce the principal amount of the
line of the revolving credit facility to $230,000 after March 15, 1998. The
credit line of $230,000 would remain available only to secure certain standby
letters of credit. The Company is in default with respect to March 15, 1998
reduction commitment.
The credit facility is supported by a guarantee from EximBank which
reduces down as the credit line reduces and expires in full on August 15,
1998. The Company pays EximBank a fee equal to 1.5% of the guarantee and is
required to purchase credit insurance of foreign receivables at a cost of $.38
per hundred dollars of the amount of the insured receivables.
As of December 31, 1997, 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 $ 650,000
===============
Borrowing base (limited by insurance coverage and
amount of qualified receivables
Amounts outstanding:
Short-term cash borrowings 382,000
Letters of credit 257,000
639,000
---------------
Credit available $ 11,000
===============
</TABLE>
Under the terms of the then existing 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 $750,000 balance owed pursuant
to the new bank credit agreement at September 30, 1996.SCIENTIFIC
SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - BANKING ARRANGEMENTS, LONG-TERM OBLIGATIONS AND NOTE PAYABLE
(CONTINUED)
Interest rates applicable to short-term cash borrowings under the credit
facility are equal to the bank's prime rate of interest plus one (1)
percentage point on any borrowings. At December 31, 1997 interest rates
applicable to short-term cash borrowings were 9.5%. The agreement requires
that the Company meets certain requirements regarding operating results and
financial condition and prohibits the Company from paying dividends without
the bank's prior written consent.
At December 31, 1997, the Company was in violation of the loan covenants
on its Notes payables to Bank One, Lindner, and Renaissance. Lindner and
Renaissance have waived these violations as of December 31, 1997. A waiver is
expected from Bank One, though it has not been received as of April 14, 1998.
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.
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 not in compliance
with the loan covenants at December 31, 1997. 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, 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 non-detachable
warrants 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.
Also see Note 12 to the Consolidated Financial Statements.
LINDNER FINANCING
In April 1996 Lindner Funds, then a 14% shareholder in the Company and,
at December 31, 1997, a 20% 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 282,218 million shares of the Company's
common stock at an exercise price of $3.00 per share for five years.
Also see Note 12 to the Consolidated Financial Statements.
LONG-TERM OBLIGATIONS
The components of long-term obligations are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
---- ----
(In thousands)
<S> <C> <C>
Deferred lease costs $ 66 $339
Deferred compensation 640 632
---- ----
706 971
Less current portion 34 324
$672 $647
==== ====
</TABLE>
NOTE 4 - INCOME TAXES
<TABLE>
<CAPTION>
Year Ended
December 31, December 31,
1997 1996
---- ----
(In thousands)
<S> <C> <C>
Current:
U.S. Federal $20 $12
Foreign - 46
State - 2
$20 $60
=== ===
</TABLE>
The components of the provisions for income taxes are as follows:
Following is a summary of United States and foreign pretax accounting
income (loss):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
---- ----
(In thousands)
<S> <C> <C>
United States $(4,176) $(473)
Foreign (1,270) 3
-------- ------
$(5,426) $(470)
======== ======
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - INCOME TAXES (CONTINUED)
</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, December 31,
1997 1996
---- ----
(In thousands)
<S> <C> <C>
Taxes at U.S. Federal statutory rate $ - $(160)
Federal alternative minimum tax - 12
State income taxes (20) 2
Foreign withholding and other foreign taxes - 46
U.S. net operating loss carry forward and
valuation allowances - 245
Other, net - (85)
----- ------
$(20) $ 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, December 31,
1997 1996
---- ----
(In thousands)
<S> <C> <C>
Taxable temporary differences:
Capitalized software $ (3,758) $ (3,649)
----------- -----------
(3,758) (3,649)
----------- -----------
Deductible temporary differences:
Tax basis in excess of book basis of
property and equipment 200 98
Allowance for doubtful accounts 334 91
Rent expense 25 89
Contract expense accruals - 59
Vacation pay and bonuses 110 202
Accrued contingent liabilities 105 567
Provision for sale of Pipeline assets 836 -
----------- -----------
1,610 1,106
Carryovers:
Net operating losses 9,061 6,397
Research and other credits 3,200 3,704
----------- -----------
12,261 10,101
----------- -----------
Net deferred tax asset 10,113 7,558
Valuation allowance (10,113) (7,558)
----------- -----------
$ 0 $ 0
</TABLE>
At December 31, 1997 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 $23.8 million 2000 to 2011
Net operating loss carry forwards for US
Federal alternative minimum income
tax purposes 16.0 million 2000 to 2011
Research credit carry forwards 3.2 million 1997 to 2011
Investment tax credit carry forwards .3 million 1997 to 2000
Alternative minimum tax credit carry forwards .07 million 2007 to 2011
</TABLE>
In addition, the Company has net operating loss carryforwards for U.K.
and Canadian income tax purposes of approximately $23 million and $1.6
million, respectively.
NOTE 5 - CAPITAL STOCK
REDEEMABLE PREFERRED STOCK
In April 1990, Halliburton Company ("Halliburton"), 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 sheets 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.
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5- CAPITAL STOCK (CONTINUED)
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 is 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.
Also see Note 12 to the Consolidated Financial Statements.
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, options to purchase 5,000
shares at an exercise price of $.128 were issued in 1997; 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.
Following is a summary of stock option activity for:
<TABLE>
<CAPTION>
Option Price (equal to Market
Number Value at Date of Grant)
-----------------------
of Weighted
Shares Per Share Average Total
----------- ------------------ -------- ------------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 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
Grants 896,000 .1275 to 2.000 1.02 911,941
Expirations (369,376), .50 to 4.875 2.77 (1,024,728)
Exercises 0 0 0
----------- --------
Balance at December 31, 1997 1,610,624 2,346,213
=========== ==================
Number of shares exercisable:
December 31, 1997 1,547,624
===========
</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 canceled.
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 896,000 and 814,209 stock options
to employees, directors and consultants during 1997 and 1996, respectively.
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, 1997 had the Company adopted the fair value
based method of accounting for stock-based compensation.
<PAGE>
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------
1997 1997
-------------- --------
(In thousands)
<S> <C> <C>
Difference between fair value
and intrinsic value methods
(additional compensation expense) $ 396 $ 974
Net loss (5,842) (2,740)
Loss per share (.66) (.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 1997 in the respective year:
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------
1997 1997
------------- -----------
(In thousands)
<S> <C> <C>
Dividend yield 0.0% 0.0%
Average annual volatility 160.0% 117.0%
Average annual risk-free interest rate 5.4% 5.4%
Expected lives 5-10 years 5-10 years
</TABLE>
NOTE 6 - RETIREMENT AND COMPENSATION PLANS
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. In 1997, no
shares were issued pursuant to the Company's plan. In the 1996 Form 10K, the
Company reported 582 shares being contributed to the plan which was incorrect.
The Company contributed 299,000 shares to the plan for the year of 1996. The
Company also has a noncontributory employee stock purchase plan for employees
to purchase common stock through payroll deductions.
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 $254K and $182K in
1997 and 1996, respectively.
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 1997
and 1996.
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6- RETIREMENT AND COMPENSATION PLANS (CONTINUED)
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 $139K in 1997, of which $27K is
included in accrued salaries and benefits at December 31, 1997.
In fourth quarter of 1997, the Company took further action to reduce
costs by reduction of staff in the E&P Technology and General Administrative
areas. The Company accrued termination costs totaling $172K, all of which
will be paid out in 1998. The expenses for 1996 include provisions for
expenses of $600K related to severance costs.
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 operations (413) 473 (470) (410)
Identifiable assets 19,435 2,164 1,109 22,708
<CAPTION>
Year Ended December 31, 1997
----------------------------
<S> <C> <C> <C> <C>
Revenue $ 6,386 $ 4,618 $1,388 $12,392
Income (loss) from operations (4,196) (1,229) (41) (5,446)
Identifiable assets 15,343 1,539 926 17,808
</TABLE>
U.S. export revenues by geographic area were as follows:
<TABLE>
<CAPTION>
Year Ended
December 31, December 31,
1997 1996
------------- -------------
(In thousands)
<S> <C> <C>
Far East $ 1,154 $ 1,512
Central and South America 1,693 2,848
Europe - 909
Canada & Other 66 206
$ 2,913 $ 5,475
============= =============
</TABLE>
During 1997, there was no single customer that accounted for 10% or more
of the Company's revenue, the loss of which would have a material adverse
effect on the Company's business. During the year ended December 31, 1996,
the Company derived $2.3 million, or 12%, of its consolidated revenue from
National Nigerian Petroleum Corporation.
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - INFORMATION ABOUT OPERATIONS (CONTINUED)
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, 1997, 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, 1997:
Companies $ 934 $ 2,783 $3,717
Governments and national
petroleum companies 3 1,088 1,091
Government contractors 44 16 60
--------------- --------
$ 981 $ 3,887 $4,868
=============== ======== ======
December 31, 1996:
Companies $ 5,028 $ 2,076 $7,104
Governments and national
petroleum companies 432 742 1,174
Government contractors 54 62 116
$ 5,514 $ 2,880 $8,394
=============== ======== ======
</TABLE>
DRAFT, 04/15/98 9:04 AM
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - LEASE COMMITMENTS (CONTINUED)
NOTE 8 - LEASE COMMITMENTS
At December 31, 1997 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> <C>
1998 $ 540
1999 496
2000 487
2001 470
2002 348
Thereafter $ 468
</TABLE>
Total rent expense amounted to $866K and $1,400K during 1997 and 1996,
respectively.
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - SALE OF THE ASSETS OF THE PIPELINE BUSINESS LINE
During 1997, the Company's management and Board of Directors designed and
implemented a plan to improve the Company's financial performance through a
merger, alliance or sale of the Company and to divest the Company of
underperforming assets. As part of this plan, the Company announced on
January 5, 1998 an intent to sell the Pipeline Simulation Division assets.
These assets as of December 31, 1997 were estimated to have a net carrying
value of $3.9 million.
On March 2, 1998, the Company announced the signing of a definitive
binding agreement to sell the assets of the Pipeline Simulation business line
to LIC. The transaction which is expected to close on or before May 1, 1998
will result in consideration to the Company of $1.5 million in cash and the
assumption by LIC. of current obligations up to a maximum of $230,000. Based
on fair market value estimates, the Company recorded a provision of $2.2
million to write down the carrying amounts of the Pipeline assets to estimated
fair value less cost to sell. The Pipeline Simulation business line recorded
sales of $2.5 million and $4.3 million and contributed a net loss of $1.3
million and $.4 million in 1997 and 1996, respectively, excluding the
provision for the loss of sale of Pipeline assets recorded in 1997.
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 included 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.
NOTE 11 - CONTINGENCIES
To the knowledge of management, there are no significant claims pending
or threatened against the Company or any of its subsidiaries.
The WOLF CLASS ACTION LAWSUIT settlement was completed on May 23, 1997.
THE SECURITIES AND EXCHANGE COMMISSION INVESTIGATION was settled, as it
pertained to the Company, on September 11, 1997. THE SECURITIES AND EXCHANGE
COMMISSION (SEC) COMMENT LETTER is still under discussion with the staff of
the SEC. There follows a description of these issues:
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - CONTINGENCIES (CONTINUED)
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 included the former President and Chief Executive Officer of
the Company, its former Chief Financial Officer and a former Executive Vice
President, violated Section 10(b) of the Securities Exchange Act of 1934 and
Rule 10(b)-5 promulgated thereunder in issuing financial reports for the first
three quarters of the Company's 1994 fiscal year which failed to comply with
generally accepted accounting principles with respect to revenues recognized
from the Company's contracts with value added resellers. The Plaintiff sought
to have the Court determine that the lawsuit constituted 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 did not contest whether the claim constituted a proper class action.
The Defendants and the Plaintiff initially reached agreement for
settlement of the claim involving the payment of $1.1 million in cash, to be
provided by the Company's liability insurer in a court-supervised escrow
account, and the Company's issuance of warrants to purchase common stock
exercisable at the market price of the stock at the time of completion of the
settlement, with the number of warrants to be such that their aggregate value
was $900K. Subsequently, the settlement agreement was modified to eliminate
the warrants and to provide for an additional $525K in cash, to be paid by the
Company. The Company concluded that the foregoing settlement was in its best
interests in view of the uncertainties of litigation, the substantial costs of
defending the claim and the material amount of management time which would be
required for such defense. The Company recorded a $900K loss contingency in
the second quarter of 1996 relating to the proposed agreement for settlement
of the Marshall Wolf claim. On May 23, 1997, the final approval of the
fairness of the settlement was granted by the Court. The Company paid $525K
in cash and reversed a net $315K of the loss contingency reserve of $900K
after applying additional incurred legal costs.
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION. On September 11, 1997,
the Company resolved the investigation by the Securities and Exchange
Commission ("SEC") of the Company's disclosures and financial statements for
the years ended December 31, 1993, 1994 and 1995. Without admitting or
denying any of the allegations of the SEC, the Company settled the matter by
consenting to the entry of a permanent injunction prohibiting future
violations by the Company of Section 17(a) of the Securities Act of 1933, and
Sections 10 (b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange
Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder and
to an order to restate the Company's financial statements for the years ended
December 31, 1993, 1994 and 1995. The SEC staff has advised the Company that,
with the entry of the permanent injunction, the investigation into this matter
as to the Company has been concluded.
SECURITIES AND EXCHANGE COMMISSION COMMENT LETTER. The Company has
received an extensive comment 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 for the
financial year of 1995 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.
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - SUBSEQUENT EVENTS
On April 1, 1998, the Company announced that it had entered into a
binding agreement with Baker Hughes Incorporated ("Baker") to acquire all of
the outstanding shares of Scientific Software-Intercomp, Inc. ("Company")
which would result in Baker acquiring the Company's ongoing Exploration and
Production (E&P) Consulting and Technology (reservoir software) businesses,
subject to certain conditions. The sale does not include the Company's
Pipeline Simulation Division assets which are being purchased separately by
LIC. The Company had previously entered into a non-binding Outline of Terms
agreement for the acquisition of the Company by Well Service Technology A/S
("WST"). The Outline of Terms agreement between the Company and WST lapsed on
March 6, 1998 without the parties coming to a definitive agreement.
The agreement with Baker provides that the shareholders of the Company's
common stock would receive a maximum of $.50 and a minimum of $.30 net per
share in consideration for the acquisition, with the maximum and minimum
amounts per share depending on the amount payable to Halliburton Company
("Halliburton"), the preferred shareholder of the Company. The amount payable
to Halliburton would be in exchange for the preferred stock of the Company.
The acquisition is subject to customary conditions as well as the
approval of the Company's common shareholders.
The Company's senior secured lenders, the Lindner Funds ("Lindner") and
Renaissance Capital Partners II, Ltd. ("Renaissance") have agreed to accept
discounted terms of $1.4 million and $1.3 million respectively in satisfaction
of the outstanding $6.5 million principal plus accrued interest and other
obligations owed by the Company to the lenders. Halliburton has agreed to
accept $2.5 million in cash in exchange for its $4.0 million preferred stock
holding in the Company.
As a result of the agreement with Halliburton, the Company expects the
consideration payable to the Company's common shareholders to be approximately
$.49 per share, subject to possible downward adjustment based on the results
of Baker's continued due diligence.
The agreement with Baker, while binding, will be further detailed in a
subsequent customary definitive agreement between Baker and the Company,
containing the terms set forth in the agreement announced on April 1, 1998.
Closing of the acquisition is expected in the third quarter of 1998.
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
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,
1997 $ 690,000 $ 308,000 $ (117,000) $ 881,000
=========== ================ ============ ===========
Allowance for doubtful accounts:
Year Ended December 31,
1996 $ 3,811,000 $ (1,057,000) $(2,064,000) $ 690,000
=========== ================ ============ ===========
</TABLE>
Note:
In 1996, 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.
<PAGE>
PART III
Items 10, 11, 12, and 13 of Part III (except for information required
with respect to executive officers of the Company which is set forth under
Item 1, Part I of this report) have been omitted from this report. The
Company will file with the Securities and Exchange Commission, not later than
120 days after the close of its fiscal year ended December 31, 1997, a
definitive proxy statement pursuant to Regulation 14A, which involves the
election of directors. The information required by Items 10, 11, 12, and 13
of this report will appear in the definitive proxy statement and is
incorporated by reference thereto into Part III of this report.
<PAGE>
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.
<TABLE>
<CAPTION>
3. Exhibits
-------------------------------------------------------------------------------------
<C> <S>
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 II, 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
</TABLE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE
REGISTRANT
The registrant owns all of the outstanding capital stock of the following
corporations:
<TABLE>
<CAPTION>
CORPORATION STATE OR PROVINCE OF INCORPORATION
- -------------------------------------------- ----------------------------------
<S> <C>
Intercomp Resource Development & Province of Alberta, Canada
Engineering, (Canada) Ltd.
In-Situ Research and Engineering Ltd. Province of Alberta, Canada
Microcomp Management Ltd. Province of Alberta, Canada
IRAD Development Ltd. Province of Alberta, Canada
247011 Alberta Limited Province of Alberta, Canada
Scientific Software-Intercomp (U.K.) Limited United Kingdom
Scientific Software Texas, Inc. Texas
SSI Bethany, Inc. Texas
</TABLE>
<PAGE>
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.
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April 15, 1998 /s/ George Steel
----------------
George Steel
Member of the Board of Directors, President and Chief
Executive Officer (a principal executive officer and director)
</TABLE>
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.
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<CAPTION>
<S> <C>
/s/ George Steel April 15, 1998
- ----------------------------------------------------------------------------------
George Steel
President and Chief Executive Officer (a principal executive officer and director)
/s/ Barbara J. Cavallo April 15, 1998
Financial Controller
/s/ William B. Nichols April 15, 1998
- ----------------------------------------------------------------------------------
William B. Nichols, Director
/s/ Edward O. Price April 15, 1998
- ----------------------------------------------------------------------------------
Edward O. Price, Chairman of the Board of Directors
/s/ Jack L. Howard April 15, 1998
- ----------------------------------------------------------------------------------
Jack L. Howard, Director
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EXHIBIT INDEX
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Exhibit Page
Number Exhibit Description No.
------ ------------------- ---
4
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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 II, 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
</TABLE>
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 705
<SECURITIES> 0
<RECEIVABLES> 3,602
<ALLOWANCES> 881
<INVENTORY> 0
<CURRENT-ASSETS> 6,075
<PP&E> 6,007
<DEPRECIATION> 5,519
<TOTAL-ASSETS> 17,808
<CURRENT-LIABILITIES> 9,119
<BONDS> 0
4,000
0
<COMMON> (2,483)
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 17,808
<SALES> 12,392
<TOTAL-REVENUES> 12,392
<CGS> 0
<TOTAL-COSTS> 17,764
<OTHER-EXPENSES> 13
<LOSS-PROVISION> 414
<INTEREST-EXPENSE> (557)
<INCOME-PRETAX> (5,426)
<INCOME-TAX> 20
<INCOME-CONTINUING> (5,446)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,446)
<EPS-PRIMARY> (0.61)
<EPS-DILUTED> 0
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