1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB/A
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
MARCH 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 13(D)
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 0-4882
SCIENTIFIC SOFTWARE-INTERCOMP, INC.
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(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
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COLORADO . . . . . . . . . . . . . . . . . . . . . . . . . . . 84-0581776
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STATE (OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (IRS EMPLOYER IDENTIFICATION NO.)
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633 17TH STREET, SUITE 1600, DENVER, COLORADO 80202
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)
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(303) 292-1111
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(ISSUER'S TELEPHONE NUMBER INCLUDING AREA CODE)
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(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED FROM LAST
REPORT).
CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION
13 OR 15 (D) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR SUCH
SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND
(2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES NO X .
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
CHECK WHETHER THE REGISTRANT FILED ALL DOCUMENTS AND REPORTS REQUIRED TO BE
FILED BY SECTION 12, 13 OR 15(D) OF THE EXCHANGE ACT AFTER THE DISTRIBUTION OF
SECURITIES UNDER A PLAN CONFIRMED BY COURT. YES NO . NOT APPLICABLE.
APPLICABLE ONLY TO CORPORATE ISSUERS
STATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON
EQUITY, AS OF THE LATEST PRACTICABLE DATE: 9,046,804 SHARES OF NO PAR VALUE
COMMON STOCK OUTSTANDING AS OF APRIL 30, 1998.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
YES NO X .
(This Form 10-QSB includes 15 pages)
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INDEX
Explanatory Note:
The Company's periodic reports filed with the Securities and Exchange Commission
("SEC") for the periods through December 31, 1997 have been filed under the
disclosure requirements of SEC Regulations S-K and S-X. As of December 31,
1997, the Company met all of the criteria for filing its reports with the SEC
under the disclosure requirements of SEC Regulation S-B, which applies to "small
business issuers." Accordingly, beginning with this Quarterly Report on Form
10-QSB for the quarter ended March 31, 1998, the Company will file its reports
in accordance with Regulation S-B.
Explanation of Amendment to March 31, 1998 Form 10-QSB:
The original Quarterly Report on Form 10-QSB for the quarter ended March 31,
1998 is amended hereby solely to (i) reclassify for balance sheet purposes what
was originally reported as a $2.2 million current liability for the provision
for the sale of the assets of the Company's Pipeline Simulation business
discussed in Note 1 of the Notes to Consolidated Financial Statements into a
reduction of a separate current asset line item representing the segregated
Pipeline Simulation assets disposed of on May 1, 1998 and (ii) make
corresponding disclosures in Note 4 of the Notes to Consolidated Financial
Statements.
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PAGE
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets at March 31, 1998 (Unaudited) and . . . 3
December 31, 1997
Consolidated Statements of Operations for the . . . . . . . . . . . 4
three months ended March 31, 1998 and 1997 (Unaudited)
Consolidated Statements of Cash Flows for the . . . . . . . . . . . 5
three months ended March 31, 1998 and 1997 (Unaudited)
Notes to Consolidated Financial Statements. . . . . . . . . . . . . 6
Item 2 - Management's Discussion and Analysis of Financial Condition. 11
and Results of Operations
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . 14
Item 3 - Defaults Upon Senior Securities. . . . . . . . . . . . . . . 15
Item 6 - Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 15
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SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
March 31, December 31,
1998 1997
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(Unaudited) (Audited)
ASSETS
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Current Assets
Cash and cash equivalents. . . . . . . . . . . . . . . . $ 615 $ 705
Accounts receivable, net of allowance for doubtful
accounts of $861 and $881. . . . . . . . . . . . . . . 1,050 1,678
Work in progress (unbilled revenue). . . . . . . . . . . 1,845 1,707
Pipeline Assets held for sale, net of provision
for impairment of $2,200 (Note 4). . . . . . . . . . . 756 1,350
- ---------------------------------------------------------
Other current assets . . . . . . . . . . . . . . . . . . 561 502
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Total current assets . . . . . . . . . . . . . . . . . 4,827 5,942
Software, net of accumulated amortization of
$37,250 and $36,798. . . . . . . . . . . . . . . . . . 7,211 7,334
Property and Equipment, net of accumulated depreciation
and amortization of $4,390 and $4,261. . . . . . . . . 175 248
Other Assets. . . . . . . . . . . . . . . . . . . . . . . 1,388 1,354
----------- --------------
$ 13,601 $ 14,878
=========== ==============
LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable. . . . . . . . . . . . . . . . . . . . . . $ 382 $ 382
Accounts payable . . . . . . . . . . . . . . . . . . . . 996 842
Accrued salaries and fringe benefits . . . . . . . . . . 698 729
Accrued lease obligations. . . . . . . . . . . . . . . . 5 5
Deferred maintenance and other revenue . . . . . . . . . 1,792 2,101
Accrued Royalties. . . . . . . . . . . . . . . . . . . . 743 698
Accrual for costs to complete a contract . . . . . . . . 47 72
Accrued taxes. . . . . . . . . . . . . . . . . . . . . . 108 153
Other current liabilities. . . . . . . . . . . . . . . . 902 1,207
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Total current liabilities. . . . . . . . . . . . . . . 5,673 6,189
Accrued Lease Obligations. . . . . . . . . . . . . . . . 55 61
Long-Term Obligations . . . . . . . . . . . . . . . . . . 615 611
Senior Secured Notes Payable. . . . . . . . . . . . . . . 6,500 6,500
Redeemable Preferred Stock
Series A Convertible Preferred Stock, $5 par value;
1,200,000 shares authorized, 800,000 shares issued and
outstanding. . . . . . . . . . . . . . . . . . . . . . . 4,000 4,000
Commitments and Contingencies (Notes 5 and 6)
Stockholders' Equity
Common stock, no par value; $.10 stated value;
25,000,000 shares authorized, 8,917,151 and 8,878,000
shares issued and outstanding. . . . . . . . . . . . . 892 888
Paid-in capital. . . . . . . . . . . . . . . . . . . . . 49,491 49,489
Accumulated deficit. . . . . . . . . . . . . . . . . . . (52,906) (52,182)
Cumulative foreign currency translation adjustment . . . (678) (678)
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Total stockholders' equity . . . . . . . . . . . . . . (3,242) (2,483)
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$ 13,601 $ 14,878
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The accompanying notes are an integral part of the consolidated financial
statements
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SCIENTIFIC SOFTWARE-INTERCOMP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three months ended
March 31, 1998 March 31, 1997
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(Unaudited) (Unaudited)
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REVENUE
Consulting and training . . . . . . . . . . . . . . . $ 1,448 $ 2,041
Licenses. . . . . . . . . . . . . . . . . . . . . . . 566 725
Maintenance . . . . . . . . . . . . . . . . . . . . . 643 803
Other . . . . . . . . . . . . . . . . . . . . . . . . 50 65
2,707 3,634
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COSTS AND EXPENSES
Costs of consulting and training. . . . . . . . . . . 1,571 1,473
Costs of licenses . . . . . . . . . . . . . . . . . . 518 626
including software amortization of $495 and $549
Costs of maintenance. . . . . . . . . . . . . . . . . 301 284
Costs of other revenue. . . . . . . . . . . . . . . . 3 23
Selling, general and administrative . . . . . . . . . 810 1,123
Software research and development . . . . . . . . . . 100 118
3,303 3,647
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LOSS FROM OPERATIONS . . . . . . . . . . . . . . . . . (596) (13)
OTHER EXPENSE
Loss contingency (expense) reversal (Note 5). . . . . - 99
Interest income (expense), net. . . . . . . . . . . . (92) (120)
Foreign exchange gains (losses) . . . . . . . . . . . (36) 53
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Income (Loss) Before Income Taxes. . . . . . . . . . . (724) 19
Provision For Income Taxes . . . . . . . . . . . . . . - 10
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Income (Loss) from Continuing Operations . . . . . . . (724) 9
NET INCOME (LOSS). . . . . . . . . . . . . . . . . . . $ (724) $ 9
==================== ================
Weighted Average Number of Common and
Common Equivalent Shares Outstanding. . . . . . . . . 8,881 8,758
==================== ================
Income (Loss) Per Common and
Common Equivalent Share:
Net Income (Loss) . . . . . . . . . . . . . . . . . . $ (.08) $ .00
==================== ================
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The accompanying notes are an integral part of the consolidated financial
statements.
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SCIENTIFIC SOFTWARE-INTERCOMP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three months ended
March 31, 1998 March 31, 1997
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(Unaudited) (Unaudited)
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CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss) from continuing operations . . . . $ (724) $ 9
Adjustments:
Depreciation and amortization. . . . . . . . . . . 568 688
Provision for losses on accounts receivable. . . . (20) (76)
Loss contingency (reversal)(Note 5). . . . . . . . - (99)
Changes in operating assets and liabilities:
Decrease in accounts receivable
and work in progress . . . . . . . . . . . . . . 1,104 1,826
(Increase) in other assets . . . . . . . . . . . . (93) (213)
Decrease in accounts payable and
accrued expenses . . . . . . . . . . . . . . . . (202) (1,220)
Decrease in accrued lease obligations. . . . . . . (6) (104)
(Decrease) in deferred revenue. . . . . . . . . . (309) (244)
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Net cash provided by continuing operations . . . 318 567
CASH FLOWS FROM INVESTING ACTIVITIES
Capitalized software costs . . . . . . . . . . . . . (372) (614)
Purchases of equipment . . . . . . . . . . . . . . . - (50)
Net cash utilized in investing activities. . . . (372) (664)
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Effect of exchange rates on cash. . . . . . . . . . . (36) (39)
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Net increase (decrease) in cash and cash equivalents. (90) (136)
Cash and cash equivalents at beginning of period. . . 705 1,870
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CASH AND CASH EQUIVALENTS AT END OF PERIOD. . . . . . $ 615 $ 1,734
==================== ================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . $ 116 $ 117
Foreign taxes. . . . . . . . . . . . . . . . . . . . $ 176 $ 23
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The accompanying notes are an integral part of the consolidated financial
statements.
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SCIENTIFIC SOFTWARE-INTERCOMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - UNAUDITED INTERIM INFORMATION
This report includes the consolidated financial statements of Scientific
Software-Intercomp, Inc., ("the Company") and its wholly-owned subsidiaries.
The Company has received extensive comment letters from the Staff of the
Securities and Exchange Commission ("SEC") on its Forms 10-K for the years ended
December 31, 1995 and 1997 and on its Forms 10-Q for the quarters ended March
31, 1996 and June 30, 1996 and the financial statements included therein. The
Company is responding to those comments. Resolution of some of the comments may
result in certain revisions of those Forms, in addition to the restatement of
the Company's financial statements for 1995, 1994 and 1993 as discussed below,
and of the financial statements therein, which may also result in certain
corresponding revisions to this report.
As a result of procedures undertaken by the Company in responding to the
comment letters from the SEC Staff as discussed above, as well as the separate
SEC investigation of the Company's disclosures and financial statements for the
years ended December 31, 1995, 1994 and 1993 which was concluded relating to the
Company in September 1997, the Company has determined that restatements of the
Company's financial statements for the years ended December 31, 1995, 1994 and
1993 are necessary. Completion of such restatements are currently in progress.
As such restatements are completed, the Company intends to amend its 1997 Form
10-K to include the audited restated financial statements for the years ended
December 31, 1995, 1994 and 1993, along with corresponding financial
disclosures.
The consolidated financial statements for the interim periods presented
herein reflect all adjustments (which except as otherwise disclosed herein
consist solely of normal recurring adjustments) which, in the opinion of the
Company, are necessary to fairly present the results of operations, financial
position, and cash flows, as of the dates and for the periods presented.
Operating results for the three month period ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. The Notes to Consolidated Financial Statements included in
the Company's Form 10-K for year ended December 31, 1997, which indicate that
the financial statements of the Company have been prepared on a going concern
basis, should be read in conjunction with these interim consolidated financial
statements.
On April 1, 1998, the Company announced that it had entered into a binding
agreement with Baker Hughes Incorporated ("Baker") for Baker to acquire all of
the outstanding shares of the 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 Business assets which were
purchased separately by LICENERGY on May 1, 1998 for $1.5 million in cash and
the assumption of $145,000 of current liabilities.
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.
Except for historical information contained herein, the statements in this
report are forward-looking statements that are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks and uncertainties
which may cause the Company's actual results in future periods to differ
materially from forecasted results. Those risks and uncertainties include,
among others, the financial strength and competitive pricing environment of the
oil and gas service industry, product demand, market acceptance and new product
development. Those and other risks are described in the Company's filings with
the SEC.
NOTE 2 - BANK CREDIT AGREEMENT
UNITED STATES LINES OF CREDIT.
Effective April 16, 1997 the Company and Bank One agreed to extend the
revolving credit facility through October 15, 1997. Due to the Company's
improved cash position and decreased need for credit at that time, the revolving
credit facility was decreased from $1.5 million to $.9 million. The collateral
for the line is the Company's accounts receivable from non-U.S. domiciled
customers to the extent necessary to collateralize the line. All receivables
not necessary for the line and substantially all other assets except those of
the Canadian subsidiary are collateral for The Lindner Dividend Fund ("Lindner")
and Renaissance Capital Partners II, Ltd. ("Renaissance") senior secured notes.
On October 30, 1997, the Company and Bank One agreed to change the terms of
the 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. Subsequently, Bank One agreed that the revolving credit facility
could remain at $650,000 in consideration of the Company's agreement to repay
the principal outstanding balance on May 1, 1998. On May 1, 1998, the Company
paid off the loan balance of $382,000 with interest.
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 March 31, 1998 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:
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Revolving credit facility limit (limited by
insurance coverage and amounts of
qualified receivables) $650,000
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Amounts outstanding:
Short-term cash borrowings . . . . . . . . 379,856
Letters of credit. . . . . . . . . . . . . $267,537
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Credit available . . . . . . . . . . . . . . $ 2,607
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At March 31, 1998, the Company was in violation of identical financial
covenants with respect to its notes payable to Bank One, Lindner and
Renaissance, for which the Company has received waivers from Lindner and
Renaissance for the reporting period.
The covenants violated require that the Company's tangible net worth, as it
and other covenant terms are defined in the covenants, exceed $(3 million); its
net liabilities to net worth ratio not exceed 3 to 1; its current ratio exceed 1
to 1; and that the Company has positive annual cash flow at the end of the most
recent fiscal year. As of March 31, 1998, the Company's tangible net worth, net
liabilities to net worth ratio, current ratio, and annual cash flow, as defined
under the covenants, were approximately $(6 million), 15 to 1, .85 to 1 and $(.5
million), respectively.
As of March 31, 1998, the Company continues to classify the notes payable
to Lindner and Renaissance as long-term obligations since both Lindner and
Renaissance have waived the financial covenant violations for the reporting
period and indicated that they would not require repayment of the debt on
demand. The Company's note payable to Bank One is classified as a short-term
liability as of March 31, 1998 and was repaid in full on May 1, 1998.
In addition, the Company has not made its interest payment due October,
1997 on the Lindner and Renaissance debt. Lindner and Renaissance have taken no
action with respect to such defaults, and such defaults will be remedied by the
agreements of Lindner and Renaissance discussed in Note 1 above if the pending
sale of the Company to Baker discussed in Note 1 is completed.
NOTE 3 - INCOME TAXES
The Company's income tax expense is primarily due to foreign taxes withheld
at the source on sales in some foreign countries. Consequently, these taxes
cause the Company's effective tax rate to vary from the Federal statutory rate.
The Company incurred a current tax provision from foreign taxes and for that
portion of the U.S. profit reported for this period that cannot be offset by the
Company's loss carry forward.
NOTE 4 - 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 assets. These assets as of
December 31, 1997 were estimated to have a net carrying value of $4.3 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 closed on May 1, 1998 resulted in consideration to the
Company of $1.5 million in cash and the assumption by LIC of current obligations
of $145,000. 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.
As of March 31, 1998, the net carrying value of the Pipeline assets held
for sale is $756,000, which represents a $594,000 decrease in the assets value
from December 31, 1997 due to a decline in accounts receivables and
work-in-progress (unbilled receivables). The decrease in accounts receivables
and work-in-progress from fourth quarter 1997 is due to decline in product sales
and consulting revenue on projects as a result of staff attrition.
NOTE 5 -COMMITMENTS
The Company has extended the Houston office lease which expired April 30,
1998 to July 31, 1998.
NOTE 6 - 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 Kinesix Europe Arbitration was settled in February, 1997. The Securities
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and Exchange Commission (SEC) Investigation, as it pertains to the Company, was
------------------------------------------
completed on September 11, 1997. The Securities and Exchange Commission Comment
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Letters are still under discussion with the staff of the SEC. There follows a
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description of these issues.
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 10b-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. The Company
recorded a $900,000 loss contingency in the second quarter of 1996 relating to
the proposed agreement for settlement of the Marshall Wolf claim in accordance
with Question 1 of SAB Topic 5:7. 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. 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.
ARBITRATION NUMBER 70T 181 0038 96 D; KINESIX, A DIVISION OF SCIENTIFIC
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SOFTWARE-INTERCOMP, INC. AND KINESIX (EUROPE) LTD., AN ENGLISH COMPANY -
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HOUSTON, TEXAS. The Company, through Kinesix, a Division of the Company,
-------------
entered into a Territory Distributor Agreement with Kinesix (Europe) Ltd.
---
("KEL"), an unaffiliated entity located in London, U.K. The Distributor
---
Agreement required under most circumstances a decision from the American
---
Arbitration Association ("AAA") before its termination could be effective. On
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March 4, 1996 the Company commenced arbitration seeking declaration of
termination of the Distributor Agreement and money due the Company for
receivables outstanding as of December 31, 1995 of $296,000 for which the
Company had fully provided. Thereafter, KEL in writing advised its customer
base that it had ceased to trade in Kinesix products. As a result of this
action by KEL and pursuant to the Distributor Agreement, the Company had
declared the Distributor Agreement terminated without the requirement of
arbitration. In the interim, on April 1, 1996 KEL filed an answer and
counterclaim with the AAA and asserted damages that exceed $1 million without
substantiation.
On October 1, 1996, a panel of the American Arbitration Association made an
award in favor of KEL against the Company in the aggregate amount of $674,000.
Such award was totally unanticipated by the Company and its counsel. On October
21, 1996, the Company filed a petition in a Texas state court seeking to have
the award vacated on the grounds that the arbitrators erroneously denied the
Company's request for a postponement of the arbitration hearing which prejudiced
the Company in view of the claimant's failure to meet its obligation to disclose
material testimony to be given at the hearing and that the arbitrators made a
gross mistake of law in failing to apply a release and waiver given by the
claimant following its knowledge of the complained of acts of the Company. The
award in favor of KEL was settled in February 1997 for $575,000. The Company
recognized an expense for the amount of the $674,000 award, which has been
included in the loss from operation of the discontinued Kinesix Division for the
year ended December 31, 1996, and included a liability of $674,000 in the
balance sheet as part of other current liabilities. The Company recorded a
credit to expense of $99,000 in first quarter 1997, representing the difference
between $575,000 and the previously accrued amount of $674,000.
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 LETTERS. The Company has
received extensive comment letters from the Staff of the Securities and Exchange
Commission ("SEC") on its Forms 10-K for the years ended December 31, 1995 and
1997 and on its Forms 10-Q for the quarters ended March 31, 1996 and June 30,
1996 and the financial statements included therein. The Company is responding
to those comments. Resolution of some of the comments may result in certain
revisions of those Forms in addition to the restatement of the Company's
financial statements for 1995, 1994 and 1993 as discussed in Note 1 above, and
of the financial statements therein, which may result in corresponding revisions
to this report.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
UNAUDITED INTERIM INFORMATION
This report includes the consolidated financial statements of the Company
and its wholly-owned subsidiaries. The Company has received extensive comments
letters from the Staff of the Securities and Exchange Commission ("SEC") on its
Forms 10-K for the year ended December 31, 1995 and 1997 and on its Forms 10-Q
for the quarters ended March 31, 1996 and June 30, 1996 and the financial
statements included therein. The Company is responding to those comments.
Resolution of some of the comments may result in certain revisions of those
Forms, in addition to the restatement of the Company's financial statements for
1995, 1994 and 1993 as discussed in Note 1 of the Notes to Consolidated
Financial Statements presented herein, and of the financial statements therein,
which may also result in certain corresponding revisions to this report. The
consolidated financial statements for the interim periods presented herein
reflect all adjustments (which except as otherwise disclosed herein consist
solely of normal recurring adjustments) which, in the opinion of the Company,
are necessary to fairly present the results of operations, financial position,
and cash flows, as of the dates and for the periods presented. Operating
results for the three month period ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998.
RESULTS OF OPERATIONS
First quarter 1998 total revenue decreased 26% to $2.7 million compared to
$3.6 million in 1997. Net loss was $724,000, or $(.08) per share in the first
quarter of 1998, compared to a net income of $9,000, or $.00 per share in the
first quarter of 1997.
Comparative revenue by business unit are set forth in the following table:
<PAGE>
<TABLE>
<CAPTION>
First Quarter
-------------
1998 1997 Pct. Change
------------- ----- ------------
(In thousands)
<S> <C> <C> <C>
E & P Consulting . . 1,207 1,822 (34%)
E & P Technology . . 828 1,215 (31%)
Pipeline Simulation. 673 597 13%
------------- ----- ------------
Total Revenue . . . 2,707 3,634 (26%)
============= ===== ============
</TABLE>
The Exploration and Production (E & P) Consulting first quarter 1998
revenue decrease was partly caused by a reduction in the number of billable
employees due to market competition for experienced personnel. Lower backlog,
causing inefficiency, also reduced revenues.
E & P Technology first quarter 1998 revenue decrease was caused by lower
unit sales of the Petroleum WorkBench.
Pipeline SiPipeline Simulation Business first quarter 1998 revenue was
slightly ahead of the 1997 average quarterly revenue, helped by the release of
the Company's new version of its TGNET product. The Pipeline Simulation assets
were purchased by LICENERGY on May 1, 1998. The purchase was accounted for as a
disposal of assets in accordance with Accounting Interpretations of Accounting
Principal Board Opinion 30 (AIN-APB30).
Backlog at March 31, 1998 was $3.5 million, down from the backlog at
December 31, 1997 backlog of $4.2 million, partly due to difficulties
experienced by the Company in the marketplace caused by ongoing uncertainty
concerning its future.
COSTS OF CONSULTING AND TRAINING AND COSTS OF LICENSES AND MAINTENANCE
Comparative percentage of costs to revenue by business line are set forth
in the following table:
<TABLE>
<CAPTION>
First Quarter
--------------
1998 1997 Net Change
-------------- ----- -----------
<S><S>
Cost of Consulting & Training 108% 72% (36%)
Cost of Licenses 92% 86% (6%)
Cost of Maintenance 47% 35% (12%)
Cost of Other Revenue 6% 35% 29%
</TABLE>
Costs of consulting and training as a percent of revenue increased in 1998
over 1997 due to lower revenue in relation to fixed costs.
Costs of licenses and maintenance as a percentage of revenue increased in
1998 over 1997 due to the decline in revenue.
The Company incurred a loss from operations of $596K in first quarter of
1998 compared to a loss of $13K in the first quarter of 1997. The Company
reported a net loss of $724K in first quarter, 1998 compared to a net profit of
$9K in 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, General and Administrative expense decreased $313K or 28% to $810K
in the first quarter of 1998 from $1,123 million in the first quarter of 1997,
as reductions in overhead, announced in December, 1997 impacted costs.
SOFTWARE RESEARCH AND DEVELOPMENT
The Company's software development and enhancement costs are accounted for
in accordance with FASB Statement No. 86. The following table summarizes total
costs of development and enhancement of the Company's software products for
first quarter ended March 31, 1998 and 1997 respectively.
<TABLE>
<CAPTION>
First Quarter
--------------
1998 1997
-------------- -----
<S><S> $K
Software expenditures
Capitalized software costs $372 $614
Cost charged directly to operations 100 118
Total software expenditures $472 $732
============== =====
Software expenses charged to earnings
Cost charged directly to operations $100 $118
Amortization of capitalized software 495 549
Total software expenses charged to earnings
$595 $667
============== =====
</TABLE>
The Company continues its commitment to the development and enhancement of
its software products and expects significant product upgrades to be released in
1998, although operating losses in recent quarters and the lack of further
equity investment has necessarily reduced the Company's software development
expenditures.
LOSS CONTINGENCY
The Company recorded a credit to expense of $99,000 in the first quarter of
1997 related to the settlement of the Kinesix Europe Arbitration Award discussed
in Note 5 of the Notes to Consolidated Financial Statements. The expense
reversal represented the difference between the previously accrued loss
contingency amount of $674,000 and the actual settlement payment of $575,000.
INTEREST INCOME (EXPENSE)
The following table summarizes the components of interest income (expense)
during first quarter ended March 31, 1998 and 1997 respectively. The
capitalized interest was included as a component of the capitalized cost of
software development projects in progress in accordance with FASB Statement No.
34.
<TABLE>
<CAPTION>
First Quarter
---------------
1998 1997
--------------- ------
(In thousands)
<S> <C> <C>
Interest income . . . $ 7 $ 27
Interest incurred . . (123) (117)
Interest capitalized. 24 (30)
Net interest expense. $ (92) $(120)
=============== ======
</TABLE>
FOREIGN EXCHANGE LOSSES
The Company is subject to risks associated with its various transactions in
foreign currencies, primarily the British Pound and the Canadian Dollar, but the
Company currently does not believe they are material. The Company continually
monitors its risks and uses forward rates in the setting of exchange rates in
the costing and pricing for significant projects to minimize risk. During the
three months ended March 31, 1998, the Company reported a net foreign exchange
loss of $36K compared to a net foreign exchange gain of $53K for the three
months ended March 31, 1997.
FINANCIAL POSITION
The Company's working capital ratio at March 31, 1998 was .85 to 1.0, based
on current assets of $4.8 million and current liabilities of $5.7 million. The
Company's working capital ratio at December 31, 1997 was .96 to 1.0.
Cash provided from operations was $323K for the three months ended March
31, 1998, compared to $567K for the year-ago period. The decline in cash
provided from operations is primarily due to lower sales.
Cash used in investing activities decreased $292K over the first quarter of
1997 due to the reduced costs for capital equipment. Total capitalized software
for the full year 1998 is projected to be approximately $1.5 million, which the
Company plans to fund from internal cash flows.
CASH FLOW FROM OPERATIONS
The Company has completed the financing and restructuring of the
convertible debentures discussed in Note 2 of the Notes to Consolidated
Financial Statements included in the Company's Form 10-K for the year ended
December 31, 1997 and the bank revolving line of credit described in Note 2
above. The Company anticipates that it will have negative cash flow from
operations in the second and third quarters of 1998. Although the proceeds from
the sale of the Pipeline Simulation Business have improved the cash position of
the Company by $1.5 million, the Company may not be able to meet its anticipated
short-term (less than one year) operating needs. The Company does not
anticipate that it will be successful in obtaining any required additional debt
or equity financing at this time. The Company is in default on the interest
payment due October, 1997 for the Lindner and Renaissance debt as discussed in
Note 2 of the Financial Statements.
INFLATION
The Company's results of operations have not been affected by inflation and
management does not expect inflation to have a significant effect on its
operations in the future.
FORWARD-LOOKING INFORMATION
From time to time, the Company or its representatives have made or may make
forward-looking statements, orally or in writing. Such forward-looking
statements may be included in, but not limited to, press releases, oral
statements made with the approval of an authorized executive officer or in
various filings made by the Company with the Securities and Exchange Commission.
Words or phrases "will likely result", "are expected to", "will continue", "is
anticipated", "estimate", "project or projected", or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. The Company wishes to ensure
that such statements are accompanied by meaningful cautionary statements, so as
to maximize to the fullest extent possible the protections of the safe harbor
established in the Reform Act. Accordingly, such statements are qualified in
their entirety by reference to and are accompanied by the following discussion
of certain important factors that could cause actual results to differ
materially from such forward-looking statements.
Investors should also be aware of factors that could have a negative impact
on the Company's prospects and the consistency of progress in the areas of
revenue generation, profitability, liquidity, and generation of capital
resources. These include: (i) technological and market conditions in the oil
and gas industry and software industry, (ii) possible inability of the Company
to attract investors for its equity securities or otherwise raise adequate funds
from any source, (iii) increased governmental regulation, (iv) unexpected
increases in competition, (v) possible inability to retain key employees.
The risks identified here are not all inclusive. Furthermore, reference is
also made to other sections of this report that include additional factors that
could adversely impact the Company's business and financial performance.
Moreover, the Company operates in a very competitive and rapidly changing
environment. New risk factors emerge from time to time and it is not possible
for Management to predict all of such risk factors, nor can it assess the impact
of all such risk factors on the Company's business or the extent to which any
factor or combination of factors may cause actual results to differ materially
from those contained in any forward-looking statements. Accordingly,
forward-looking statements should not be relied upon as a prediction of actual
results.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
To the knowledge of management, there are no significant claims pending or
threatened against the Company or any of its subsidiaries which individually or
collectively could have a material adverse effect upon the Company or its
financial condition. See Note 5 of the Notes to Consolidated Financial
Statements.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company is in default on the interest payment for the Lindner and
Renaissance debt as discussed in Note 2 to the Financial Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EX-27- Financial Data Schedule.
b. Reports on Form 8-K:
Report on Form 8-K filed on February 13, 1998 reporting under Item 5
that the Company had signed a preliminary agreement with LICENERGY, A/S (LIC) of
Birkeroed, Denmark, to sell its Pipeline Simulation Business to LIC.
Report on Form 8-K filed on April 13, 1998, reporting under Item 5
that the Company had entered into a binding agreement with Baker Hughes
Incorporated ("Baker") for Baker to acquire all of the outstanding shares of the
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 Business which is being purchased separately by LICENERGY Inc.
Report on Form 8-K filed on April 27, 1998 reporting under Item 5 that
Dr. Robert G. Parish, Executive Vice President of the Company and Chairman and
Managing Director, of Scientific Software-Intercomp, U.K. (Limited), a wholly
owned United Kingdom subsidiary of the Company, was terminated on April 17,
1998.
Report on Form 8-K filed on May 5, 1998 reporting under Item 5 that
the Company has completed the previously announced sale of its Pipeline
Simulation Business to LICENERGY, INC., a wholly owned subsidiary of LICENERGY
A/S, Denmark.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
<TABLE>
<CAPTION>
<S> <C>
SCIENTIFIC SOFTWARE-INTERCOMP, INC.
June 4, 1998 . . . . . . . . . . . . . . . . . . /s/ George Steel
- ------------------------------------------------ ---------------------------------------------------
Date . . . . . . . . . . . . . . . . . . . . . . George Steel, President and Chief Executive Officer
(a principal executive officer and director)
June 4, 1998 . . . . . . . . . . . . . . . . . . /s/ Barbara J. Cavallo
- ------------------------------------------------ ---------------------------------------------------
Date . . . . . . . . . . . . . . . . . . . . . . Barbara J. Cavallo, Financial Controller
</TABLE>
[ARTICLE] 5
<TABLE>
<S> <C>
[PERIOD-TYPE] 3-MOS
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] MAR-31-1998
[CASH] 615
[SECURITIES] 0
[RECEIVABLES] 1,050
[ALLOWANCES] 861
[INVENTORY] 0
[CURRENT-ASSETS] 4,827
[PP&E] 4,565
[DEPRECIATION] 4,390
[TOTAL-ASSETS] 13,601
[CURRENT-LIABILITIES] 5,673
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 4,000
[COMMON] 892
[OTHER-SE] 0
[TOTAL-LIABILITY-AND-EQUITY] 13,601
[SALES] 2,707
[TOTAL-REVENUES] 2,707
[CGS] 3,303
[TOTAL-COSTS] 3,303
[OTHER-EXPENSES] 0
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 92
[INCOME-PRETAX] (724)
[INCOME-TAX] 0
[INCOME-CONTINUING] (724)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (724)
[EPS-PRIMARY] (1)
[EPS-DILUTED] 0
</TABLE>
