UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K/A NO. 1
[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
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State (or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
633 17th Street, Denver, Colorado 80202
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(Address of principal executive offices including zip code)
(303) 292-1111
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(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
None
<PAGE>
INDEX
PAGE
PART I
EXPLANATION OF AMENDMENT TO FORM 10-K FOR 1997 5
ITEM 1. BUSINESS 5
THE COMPANY 5
General 5
History 7
Strategy 7
PRODUCTS, SERVICES AND CUSTOMERS 9
Exploration and Production Products, Services and Customers
9
Pipeline Simulation Products, Services and Customers 11
Research and Development 12
MARKETING, SALES AND CUSTOMER SUPPORT 12
Marketing Strategy 12
Sales Staff, Locations and Customer Support 12
BACKLOG 13
COMPETITION 13
GEOGRAPHIC AND BUSINESS LINE DATA 14
Geographic Revenue Data 14
Business Line Data 15
PROPRIETARY RIGHTS 15
EMPLOYEES 15
SALE OF THE COMPANY 16
MANAGEMENT 17
Directors and Executive Officers 17
ITEM 2. PROPERTIES 19
ITEM 3. LEGAL PROCEEDINGS 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
<PAGE>
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S 20
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 24
CONDITION AND RESULTS OF OPERATIONS
General 24
FINANCIAL POSITION 25
Results of Operations 27
Revenue 27
Foreign Revenue 28
Backlog 29
Costs of Consulting and Training and Costs of Licenses and Maintenance
29
Selling, General and Administrative Expenses 30
Recovery of Accounts Receivable 30
Software Research and Development 31
Settlement of Class Action 31
Interest Income (Expense) 32
Foreign Exchange Losses 32
Disposal of Kinesix Division 32
Sale of the Assets of the Pipeline Business Line 32
STATEMENT OF CASH FLOWS 33
FORWARD-LOOKING INFORMATION 34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON 71
ACCOUNTING AND FINANCIAL DISCLOSURE
PART III 71
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE MANAGEMENT 71
ITEM 11. EXECUTIVE COMPENSATION 71
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND 76
MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 77
PART IV 78
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS 78
ON FORM 8-K
<PAGE>
PART I
BASIS OF PRESENTATION
EXPLANATION OF AMENDMENT TO 1997 FORM 10-K
As previously disclosed in the original Annual Report on Form 10-K for the
year ended December 31, 1997 filed with the Securities and Exchange Commission
("SEC") on April 15, 1998, the Company has received an extensive comment letter
from the Staff of the SEC on its Form 10-K for the year ended December 31, 1995,
as well as other periodic SEC reports, and the financial statements included
therein. The Company has also received subsequent comment letters from the SEC
Staff, including a comment letter on the original 1997 Form 10-K.
As a result of procedures undertaken by the Company in responding to such
comment letters, 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 as to the Company in September 1997, the Company
has determined to restate the Company's financial statements for the years ended
December 31, 1995, 1994 and 1993. Accordingly, this amended filing of the 1997
Form 10-K includes audited restated financial statements for the year ended
December 31, 1995, including a restated balance sheet as of December 31, 1995,
and restated selected financial data with respect to the years ended December
31, 1995, 1994 and 1993. See Note 2 of the Notes to the Consolidated Financial
Statements presented elsewhere herein for a further discussion of the
restatement adjustments to the 1995 financial statements, including a table
presenting certain amounts as restated compared to the corresponding amounts as
originally reported. Such restatements also reflect for comparability purposes
the disposition by the Company of the Kinesix division effective September 3,
1996. See Note 11 of the Notes to Consolidated Financial Statements presented
elsewhere herein. Completion of the audited restatement of the Company's
financial statements for the years ended December 31, 1994 and 1993 is currently
in progress. When such restatement is complete, the Company intends to file
with the SEC the audited restated 1993 and 1994 financial statements, along with
corresponding financial disclosures, in a further amendment to this 1997 Form
10-K.
In addition, this amended filing of the 1997 Form 10-K includes those items
previously omitted from Part III of the original 1997 Form 10-K.
Financial disclosures contained in this amended filing of the 1997 Form
10-K reflect, where appropriate, changes to conform to the restated financial
statements included herein and to the Company's responses to the SEC Staff's
comment letters. General information in the original 1997 Form 10-K that is not
related to the foregoing changes was presented as of the April 15, 1998 original
filing date or earlier, as indicated. Unless otherwise stated, such general
information has not been updated in this amended filing.
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"). See Note 14 of
the Notes to Consolidated Financial Statements for a further discussion of the
pending acquisition of the Company by Baker.
The Company's Exploration and Production business lines consist of the
Exploration and Production Consulting (E&P Consulting) business line and the
Exploration and Production Technology (E&P Technology) business line. E&P
Technology 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 consulting
services of E&P Consulting 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 Business 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
Pipeline Simulation Business 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. During 1997, the Company's management and Board
of Directors formulated 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
sold the assets of the Pipeline Simulation Business to LICEnergy A/S, Inc. of
Denmark (LIC) effective May 1, 1998 as discussed in Note 10 of the Notes to
Consolidated Financial Statements.
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. In
the E&P Consulting business, consultants typically use the Company's products to
carry out their project work, but software sales are generally standalone and do
not generally result from the Consulting services. E&P Consulting revenues
represented 55% of total Exploration and Production revenues in 1997. In the
Pipeline Simulation Business, consulting services and sales of software are
quite tightly linked. Consulting services in that division may include the
integration of the Company's off-the-shelf software and sometimes may involve
various degrees of customization; consulting and training revenues totaled 60%
of the revenues of the Pipeline Simulation Business 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 Technology
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 Technology 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 Company's new chief executive
officer, took a strategic view of the situation in which the Company 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 Technology 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, as discussed in Note 14 of the Notes to Consolidated Financial
Statements, will better enable it to carry out the above described strategy.
PRODUCTS, SERVICES AND CUSTOMERS
EXPLORATION AND PRODUCTION 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 the fourth quarter of 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 SIMULATION 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 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.
During 1997, the Company's management and Board of Directors formulated 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 sold the assets of
the Pipeline Simulation Business to LICEnergy A/S, Inc. of Denmark (LIC)
effective May 1, 1998 as discussed in Note 10 of the Notes to Consolidated
Financial Statements.
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 E&P Technology, 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 years ended December 31, 1997, 1996 and 1995, the Company spent
$3.4 million, $2.9 million and $5.5 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 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, 1996 and 1995, was $4.2
million, $6.7 million and $9.5 million, respectively, of which 76% of the 1997
amount is expected to be earned by December 31, 1998. Approximately 19% of
year-end backlog for 1997 relates to Pipeline Simulation projects that were
transferred with the sale of the Pipeline Simulation assets on May 1, 1998 as
discussed in Note 10 of the Notes to Consolidated Financial Statements.
Levels of backlog have declined in proportion to declines in annual
revenue. End of year backlogs vary depending on the timing of major sales, but
approximate to between 3 and 5 months of revenue.
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 Simulation 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, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
United States. . . . . . . $ 3,536 $ 4,239 $ 6,542
Foreign:
Far East. . . . . . . . . 2,415 3,849 4,191
Middle East . . . . . . . 682 912 1,265
Canada. . . . . . . . . . 1,142 880 924
Europe. . . . . . . . . . 2,559 3,548 4,476
Central and South America 1,693 2,861 2,299
Africa. . . . . . . . . . 88 2,318 1,755
Other . . . . . . . . . . 277 397 0
------- ------- -------
Total Foreign. . . . . . . 8,856 14,765 14,910
------- ------- -------
Total Revenue. . . . . . . $12,392 $19,004 $21,452
======= ======= =======
</TABLE>
Revenue derived from foreign sources amounted to 71%, 78% and 70% of total
revenues for 1997, 1996 and 1995, respectively. 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 8 of the Notes 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.
<PAGE>
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 1997,1996 and
1995:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Exploration and Production
Consulting and training . 46% 55% 50%
Licenses and Maintenance. 32% 22% 26%
Other . . . . . . . . . . 2% 1% 2%
---- ---- ----
Total . . . . . . . . . 80% 78% 78%
Pipeline Simulation
Consulting and training . 8% 13% 13%
Licenses and Maintenance. 11% 9% 8%
Other . . . . . . . . . . 1% *% 1%
---- ---- ----
Total . . . . . . . . . 20% 22% 22%
---- ---- ----
Other. . . . . . . . . . . *% *% *%
Total . . . . . . . . . 100% 100% 100%
==== ==== ====
</TABLE>
*Less than 1%.
During 1997 and 1995, 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 the 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
As discussed in Note 14 of the Notes to Consolidated Financial Statements,
on April 1, 1998 the Company announced that it had entered into a binding letter
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
businesses, subject to certain conditions. The sale does not include the
Company's Pipeline Simulation Software assets which were purchased separately by
LIC on May 1, 1998.
The agreement with Baker provides that the shareholders of the Company's
Common Stock will 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 payments 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.
<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 normally elected for a term of one year
and serve until their successors are elected and qualified. However, due to
delays in resolving issues associated with the Company's financial statements as
discussed in Note 2 of the Notes to Consolidated Financial Statements, the
Company has not completed a proxy statement and held a shareholder meeting for
the election of directors since 1994.
<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-
E&P Consulting
Dag G. Heggelund, Ph.D. . 35 Vice President - WorkBench Development
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 as of December 31, 1997 was Managing Director of SSI UK,
Ltd., the Company's United Kingdom subsidiary. He was responsible for the E&P
Consulting business line. 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. Dr. Parish's employment with the Company was terminated in
April 1998.
Dr. Heggelund joined the Company in February 1993, as Product Manager for
the Petroleum WorkBench and was promoted to Vice President in February 1996.
Prior to joining the Company, he founded and was President of Technological
Software Development Inc. Dr. Heggelund holds M.S. and Ph.D. degrees in
Petroleum Engineering from Texas A&M University. He was Vice President,
Petroleum WorkBench Development, until resigning from the Company on February
27, 1998.
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 business
line 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
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 the Company. Mr. Howard, 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 July 1998 10,000 $ 113,750*
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.
* $113,750 for a seven month period from January to July 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, its
financial condition, results of operations or cash flows.
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 ("NNM")
under the symbol "SSFT" until July 11, 1995, when the Company's stock was
delisted from NNM as a result of the Company's failure to remain current in its
public reporting obligations. Since July 11, 1995 the Company's Common Stock
has traded in the over-the-counter market. The following are high and low
prices of sales of the Company's Common Stock for the periods indicated during
which the Company's Common Stock was traded on NNM, and the range of high and
low closing bid quotations for the Company's Common Stock during the periods
after July 11, 1995, as reported in the "pink sheets" maintained by the National
Quotation Bureau, Inc. Such quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
Quarter Ended 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
1995
First Quarter. 6.63 5.88
Second Quarter 5.88 3.00
Third Quarter. 3.38 1.75
Fourth Quarter 3.38 2.63
</TABLE>
At March 31, 1998, the Company had approximately 450 stockholders of
record.
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.
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA(1)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------------------- -------------------- --------- -------- --------
(Restated - Note 2) (Restated - Note 2) (Restated - Note 2)
(Unaudited) (Unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Consulting and training . . . . . . . . . . . $ 6,491 $ 12,863 $ 13,530 $13,699 $16,257
Licenses and Maintenance. . . . . . . . . . . 5,597 5,864 7,356 7,647 8,590
Other . . . . . . . . . . . . . . . . . . . . 304 277 566 436 501
Total revenue . . . . . . . . . . . . . . . 12,392 19,004 21,452 21,782 25,348
-------------------- -------------------- --------- -------- --------
Costs and expenses:
Costs of consulting and training. . . . . . . 8,204 8,414 9,720 10,482 12,464
Costs of licenses and maintenance . . . . . . 2,356 3,636 5,103 4,964 2,324
Costs of other revenue. . . . . . . . . . . . 199 190 340 261 278
Selling, general and administrative . . . . . 3,886 6,604 10,768 8,725 7,858
Recovery of accounts receivable . . . . . . . - (1,568) - - -
Provision for sale of Pipeline assets(4). . . 2,200 - - - -
Research and development. . . . . . . . . . . 919 890 780 793 1,139
Reduction in capitalized software costs . . . - - 13,926 - -
Total costs and expenses. . . . . . . . . . 17,764 18,166 40,637 25,225 24,063
-------------------- -------------------- --------- -------- --------
Income (loss) from operations. . . . . . . . . (5,372) 838 (19,185) (3,443) 1,285
Other (expense). . . . . . . . . . . . . . . . (54) (1,308) (348) (467) (805)
-------------------- -------------------- --------- -------- --------
Loss before income taxes . . . . . . . . . . . (5,426) (470) (19,533) (3,910) 480
Credit (provision) for income taxes. . . . . . (20) 60 (200) (260) (375)
-------------------- -------------------- --------- -------- --------
Loss from continuing operations. . . . . . . . (5,446) (410) (19,733) (4,170) 105
Discontinued operations
Income (loss) from operations of
Kinesix division(3) . . . . . . . . . . . . . - (878) (5,164) 90 770
Loss on disposal of Kinesix division(3) . . . - (478) - - -
-------------------- -------------------- --------- -------- --------
Net income (loss) . . . . . . . . . . . . . $ (5,446) $ (1,766) $(24,897) $(4,080) $ 875
==================== ==================== ========= ======== ========
Income (loss) per common share:
Primary
Continuing operations . . . . . . . . . . . $ (0.61) $ (0.05) $ (2.41) $ (.64) $ .02
Discontinued operations . . . . . . . . . . - (0.16) (.63) .01 .14
-------------------- -------------------- --------- -------- --------
Net income (loss) . . . . . . . . . . . . . $ (0.61) $ (0.21) $ (3.04) $ (.63) $ .16
==================== ==================== ========= ======== ========
Fully diluted(5). . . . . . . . . . . . . . $ - $ - $ - $ - $ .13
==================== ==================== ========= ======== ========
OTHER FINANCIAL DATA:
Revenue
E&P Consulting. . . . . . . . . . . . . . . . $ 5,491 $ 9,766 $ 10,091 $10,711 $11,526
E&P Technology. . . . . . . . . . . . . . . . 4,436 4,935 6,796 5,944 6,404
Pipeline Simulation . . . . . . . . . . . . . 2,465 4,303 4,565 5,127 8,230
-------------------- -------------------- --------- -------- --------
Total Revenue . . . . . . . . . . . . . . . $ 12,392 $ 19,004 $ 21,452 $21,782 $26,160
==================== ==================== ========= ======== ========
BALANCE SHEET DATA:
Working capital. . . . . . . . . . . . . . . . $ (247) $ 2,270 $ (3,092) $ 5,953 $ (920)
Total assets . . . . . . . . . . . . . . . . . 14,878 22,708 24,186 46,767 40,091
Long-term obligations, net of current portion
7,172 7,147 2,519 3,060 4,848
Redeemable convertible preferred stock . . . . 4,000 4,000 4,000 4,000 4,000
Stockholders' equity (deficit) . . . . . . . . $ (2,483) $ 3,037 $ 4,110 $31,552 $15,780
==================== ==================== ========= ======== ========
</TABLE>
(1) The above table sets forth a summary of selected consolidated financial
data for the Company as of December 31, 1997, 1996, 1995, 1994 and 1993 and for
each of the years then ended. With respect to selected consolidated financial
data as of December 31, 1997, 1996 and 1995 and for each of the years then
ended, such data is derived from the audited consolidated financial statements
presented elsewhere herein and should be read in conjunction with such financial
statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." As discussed under the "Explanation of Amendment to
1997 Form 10-K" caption above, the Company has received extensive comment
letters from the Staff of the SEC on various periodic SEC reports and the
Company's financial statements included therein. As a result of procedures
undertaken by the Company in responding to such comment letters, as well as the
separate SEC investigation of the Company's disclosures and financial statements
which was concluded as to the Company in September 1997, the Company has
determined to restate the Company's financial statements for the years ended
December 31, 1995, 1994 and 1993. With respect to selected consolidated
financial data as of December 31, 1995, 1994 and 1993 and for each of the years
then ended, such data reflects such restatements. See Note 2 of the Notes to
Consolidated Financial Statements for a further discussion of the restatement
adjustments to the 1995 financial statements, including a table presenting
certain amounts as restated compared to the corresponding amounts as originally
reported. Such restatements also reflect for comparability purposes the
disposition by the Company of the Kinesix division effective September 3, 1996.
See Note 11 of the Notes to Consolidated Financial Statements presented
elsewhere herein. As previously reported in the Selected Consolidated Financial
Data presented in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995, (i) total revenues for 1994 and 1993 were $27,909 and
$30,314, respectively, including Kinesix division amounts of $3,289 and $4,154,
respectively, (ii) income (loss) from operations for 1994 and 1993 was $(4,163)
and $2,892, respectively, including Kinesix division amounts of $(135) and $426,
respectively, and (iii) net income (loss) for 1994 and 1993 was $(4,890) and
$1,712, respectively (all amounts are in thousands). Completion of the
restatement of the Company's financial statements for the years ended December
31, 1994 and 1993 is currently in progress. When such restatement is complete,
the Company intends to file audited restated 1993 and 1994 financial statements,
along with corresponding financial disclosures, in a further amendment to this
1997 Form 10-K.
(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 SEC.
(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 11 to the Consolidated Financial Statements.
(4) During 1997, the Company's management and Board of Directors formulated
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 $3.9 million.
On May 1, 1998, the Company sold the assets of the Pipeline Simulation business
line to LIC, resulting 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 in 1997 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, $4.3 million, $4.6 million, $5.1 million and $8.2 million and
contributed a net loss of $1.3 million, $.4 million, $1.4 million, $2.6 million
and $.4 million in 1997, 1996, 1995, 1994 and 1993, respectively, excluding the
provision for the loss of sale of Pipeline assets recorded in 1997.
(5) See Note 3 of the Notes to Consolidated Financial Statements for a
discussion of the Company's policy regarding the presentation of fully diluted
income (loss) per common share.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
7.1 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's financial statements have been prepared on
the assumption that the Company will continue as a going concern. As discussed
in Note 1 of the Notes to Consolidated Financial Statements contained herein,
the Company has experienced recurring losses from operations and has a
significant accumulated shareholders' deficit, which raises substantial doubt
about the Company's ability to continue as a going concern. The Company's
plans in this regard are discussed below and in Note 1 of the Notes to
Consolidated Financial Statements.
As discussed in Note 14 of the Notes to Consolidated Financial Statements,
on April 1, 1998, the Company announced that it had entered into a binding
agreement pursuant to which the Company would be acquired by Baker Hughes
Incorporated ("Baker"), excluding the assets of the Company's Pipeline
Simulation Business which were sold to LIC on May 1, 1998 as discussed in
Section 7.3.13 below. The acquisition of the Company by Baker is subject to
customary conditions, as well as the approval by the Company's shareholders. It
is currently expected that the closing of the acquisition will occur in the
third quarter of 1998.
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 3 of Notes to Consolidated
Financial Statements.
As discussed under the "Explanation of Amendment to the 1997 Form 10-K"
caption above, the Company has received extensive comment letters from the Staff
of the SEC on various periodic reports of the Company filed with the SEC, and
the Company's financial statements included therein. As a result of procedures
undertaken by the Company in responding to such comment letters, 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 as to
the Company in September 1997, the Company has determined to restate the
Company's financial statements for the years ended December 31, 1995, 1994 and
1993. The Company has completed the restatement of its financial statements for
the year ended December 31, 1995, which are presented elsewhere herein. See
Note 2 of the Notes to the Consolidated Financial Statements for a further
discussion of the restatement adjustments to the 1995 financial statements,
including a table presenting certain amounts as restated compared to the
corresponding amounts as originally reported. Such restatement also reflects
for comparability purposes the disposition by the Company of the Kinesix
division effective September 3, 1996. See Note 11 of the Notes to Consolidated
Financial Statements. Completion of the audited restatement of the Company's
financial statements for the years ended December 31, 1994 and 1993 is currently
in progress. When such restatement is complete, the Company intends to file
with the SEC as an amendment to the 1997 Form 10-K the audited restated 1993 and
1994 financial statements, along with corresponding financial disclosures.
Including the restatement of revenues from continuing operations to reclassify
in loss from discontinued operations the $2.0 million in 1995 revenues
attributable to the Kinesix Division, total revenues for 1995 have been reduced
from the amount previously reported by $2.6 million, from $24.1 million to $21.5
million. In addition, the 1995 restatement resulted in a reduction of the net
loss from the amount previously reported by $27,000, from $24,924,000 to
$24,897,000.
7.2 FINANCIAL POSITION AND FINANCING AGREEMENTS
At December 31, 1997, the Company's working capital ratio was .96 to 1,
based on current assets of $5.9 million and current liabilities of $6.2 million.
The Company's working capital was 1.27 to 1 at December 31, 1996 based on
current assets of $10.8 million and current liabilities of $8.5 million. At
December 31, 1995, the Company's working capital was .77 to 1, based on current
assets of $10.5 million and current liabilities of $13.6 million.
The Company has obtained the following financing and restructuring of
convertible debentures and bank revolving line of credit:
- - In April 1996 Lindner Funds ("Lindner"), whose parent company, Ryback
Management Corporation, was then a 14% shareholder and is currently a 19%
shareholder of the Company, invested $5 million in the Company in exchange for a
senior secured note at 7% payable in five years and non-detachable warrants to
purchase 1.5 million shares of the Company's Common Stock at an exercise price
of $3.00 per share for five years.
- - In April 1996 Renaissance Capital Partners II, Ltd. ("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 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.
- - The Lindner and Renaissance transactions were accounted for under
Accounting Principles Board Opinion No. 14, Accounting for Convertible Debt and
-----------------------------------
Debt Issued with Stock Purchase Warrants, by accounting for the notes and the
- --------------------------------------------
non-detachable warrants as a single obligation with no separate value assigned
- --
to the warrants.
- - Effective April 1, 1996 Bank One and the Export-Import Bank of the United
States ("Exim Bank") restructured and renewed a bank line of credit for the
Company to April 15, 1997. Bank One established a revolving line of credit
pursuant to which the Company could 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 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
bank credit agreement as of September 30, 1996. 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 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 and 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 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>
<S> <C>
Revolving credit facility limit $650,000
Amounts outstanding:
Short-term cash borrowings. . 382,000
Letters of credit . . . . . . 257,000
639,000
--------
Credit available. . . . . . . . $ 11,000
========
</TABLE>
The Company has completed the financing and restructuring of the
convertible debentures and the bank revolving line of credit described 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 in May 1998 have improved the cash position of
the Company by $1.5 million, the Company may not be able to meet all of its
anticipated short-term (less than one year) operating needs. At this time the
Company does not anticipate that it will be successful in obtaining any required
additional debt or equity financing.
At December 31, 1997, 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 December 31, 1997, 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 $(5.8 million), 7.42 to 1, .96
to 1, and $(5.4 million), respectively.
As of December 31, 1997, 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 December 31, 1997 and was repaid in full on May 1, 1998.
In addition, the Company has not made its interest payment due in 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 14 of the Notes to
Consolidated Financial Statements if the pending sale of the Company to Baker
discussed in Note 14 is completed.
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. 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
The following table sets forth revenues by business line for 1997, 1996 and
1995 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(Restated)
<S> <C> <C> <C>
E&P Consulting . . . $ 5,491 $ 9,766 $10,091
E&P Technology . . . 4,436 4,935 6,796
Pipeline Simulation. 2,465 4,303 4,565
Total Revenue. . . . $12,392 $19,004 $21,452
======= ======= =======
</TABLE>
Comparison of 1997 to 1996
Total revenues decreased 35% to $12.4 million in 1997 from $19.0 million in
1996. All business lines of the Company experienced a decline in revenues due
to a decreased level of sales.
Revenue in E&P Consulting decreased 44% to $5.5 million in 1997 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 prior to 1996 and
recognized as revenue in those periods, however, was subsequently written off to
bad debt during 1995 as collection of the receivable was no longer anticipated
by the Company. (See section 7.3.7). Revenue in 1997 declined as a result of the
decrease in the number of billable personnel caused by personnel attrition
resulting from the competitive market for experienced personnel. During the year
the Company initiated steps to replace the personnel who had left the Company.
Revenues in E&P Technology decreased 10% to $4.4 million in 1997 compared to
$4.9 million in 1996. The Company introduced new products and product upgrades
to existing software in 1997, but increasing competition and high investment by
the Company's two principal competitors limited sales.
Revenues in Pipeline Simulation, the assets of which were sold to LIC on May 1,
1998 as discussed in Section 7.3.13 below, decreased 42% to $2.5 million in 1997
compared to $4.3 million in 1996. Sales declined partly as the result of
increasing competitive price and market share pressure, and partly as the result
of delays in the completion of several major projects
Comparison of 1996 to 1995
Total revenues decreased 12% to $19.0 million in 1996 from $21.5 million in
1995. Most of the decline in revenue was in the E&P Technology business line.
Revenue in E&P Consulting decreased 3% to $9.8 million in 1996 compared to
$10.1 million in 1995. Revenues in 1996 included revenue of $2.3 million
recognized upon collection of a foreign receivable for work performed prior to
1996 and recognized as revenue in those periods, however, was subsequently
written off to bad debt during 1995 as collection of the receivable was no
longer anticipated by the Company. (See section 7.3.7)
Revenues in E&P Technology decreased 28% to $4.9 million in 1996 compared to
$6.8 million in 1995. The decrease was primarily attributable to the significant
non-recurring sale in 1995 of 30 copies of the Company's Petroleum WorkBench
software to a major U.S. oil and gas company.
Revenues in Pipeline Simulation decreased 4% to $4.3 million in 1996 compared to
$4.5 million in 1995, with sales of the Company's upgraded software product
released in March 1996, TGNET Windows, offsetting a reduction in project
revenues.
The Company's number of days' revenues outstanding in accounts receivable (DRO)
has historically been relatively high due to the nature and terms of many of the
Company's revenue contracts and due to the relatively slow-paying nature of
several of the foreign entities with which the Company has done business. The
Company has taken measures in this regard to improve contractual payment terms
and to improve business processes to reduce the DRO. As a result, DRO has
decreased from 1995 to 1997.
7.3.2 FOREIGN REVENUE
Revenue derived from foreign sources during 1997, 1996 and and 1995 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%
1995 (Restated) 14,910 70%
</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. Levels of export
revenues are subject to a number of factors, including market changes,
competitive pressures, political instability, changes in protective tariffs, tax
policies and export-import controls.
Comparison of Foreign Revenues for 1997, 1996 and 1995.
Foreign revenues have continued to grow as a percentage of total revenue
since the early 1990's when oil and gas companies started to spend a larger part
of their budget in non-USA exploration and development. The Company expects
that foreign revenues will vary on an annual basis as significant projects are
started and completed, but will probably now remain in the order of 70% to 80%
of total revenues.
In 1995, the Company's foreign operations experienced an aggregate loss
from operations of $9.8 million, which was primarily attributable to the portion
of the 1995 write-down of capitalized software and bad debt provision allocable
to foreign operations. See Note 13 of the Notes to Consolidated Financial
Statements
U. S. export revenues as presented in Note 8 of the Notes to Consolidated
Financial Statements were generated primarily through non-recurring software
sales in the Pipeline Simulation and E&P Technology business lines and through
large Pipeline Simulation consulting projects. The nature of these export
revenues can result in significant variations from year to year.
In the Far East, U.S. export revenues have predominantly been Pipeline projects,
with a major revenue milestone on a significant project occurring in 1996.
Thus, revenue is high ($1.5 million) in 1996 by comparison to 1995 and 1997.
Central/South America projects have generally been E&P Consulting projects. As
financial performance on these projects has often been unsatisfactory, the
Company has de-emphasized this market. Accordingly, revenues in 1995 and 1996
have declined to $1.7 million in 1997.
U.S. export revenues in Europe, which result primarily from Pipeline projects,
decreased in 1997 as the Company focused its Pipeline resources in other parts
of the world.
U.S. export revenues in Canada are generally small, non-recurring Pipeline
projects and thus revenues are quite variable. In addition, the Company does
not cover the Canada market with permanent sales staff.
7.3.3 BACKLOG
Backlog at December 31, 1997, 1996 and 1995 was $4.2 million, $6.7 million
and $9.5 million, respectively, of which 76% is expected to be earned by
December 31, 1998. Approximately 19% of year-end backlog for 1997 related to
Pipeline projects which were transferred with the sale of the assets of the
Pipeline Simulation Software effective May 1, 1998.
Levels of backlog have declined in proportion to declines in annual
revenue. End of year backlogs vary depending on the timing of major sales, but
approximate to between 3 and 5 months of revenue.
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
----------------------
Net Change Net Change
1997 1996 1995
---------------------- ----------- -----
<S> <C> <C> <C> <C> <C>
Costs of Consulting and Training. 126% 65% (61%) 72% 7%
Costs of Licenses and Maintenance 42% 62% 20% 69% 7%
Costs of Other Revenues . . . . . 65% 69% 4% 60% (9)%
</TABLE>
Comparison of 1997 to 1996.
Costs of consulting and training as a percentage of revenues increased to
126% in 1997 from 65% in 1996 primarily due to the following reasons: (i) in
1996, revenues included $2.3 million resulting from the collection of the full
$3.8 million contract amount for a foreign project for which most of the project
costs were incurred prior to 1996 and for which the $1.6 million in revenue
recognized in 1995 was reserved in 1995 as a bad debt; and (ii) 1997 revenues
decreased to $6.5 million without a corresponding decrease in costs that are
fixed in nature.
Costs of licenses and maintenance as a percentage of revenues decreased from
1996 to 1997 as a result of cost reduction efforts beginning in the second half
of 1996 which were focused on employees in the E&P Technology business line who
did not have direct customer responsibilities.
Comparison of 1996 to 1995
Costs of consulting and training as a percentage of revenues decreased from
1995 to 1996 primarily due to the $1.6 million in costs incurred in 1995 with
respect to the above-discussed foreign project, an additional $2.3 million of
revenue for which was recognized in 1996, without significant additional project
costs, upon the collection in 1996 of the full contract amount.
Costs of licenses and maintenance as a percentage of revenues decreased from 69%
in 1995 to 62% in 1996 primarily due to control of costs at the E&P Technology
business line level.
7.3.5 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Comparison of 1997 to 1996.
In the second quarter of 1996, management took steps to reduce overhead,
personnel, and other costs. These measures resulted in lower costs in 1997
compared to 1996. Selling, General and Administrative expense decreased $2.7
million or 41% to $3.9 million in 1997 from $6.6 million in 1996. Selling costs
were reduced by $2.4 million and General Administrative costs were reduced by
$0.3 million as the result of reductions in staffing in the second quarter of
1996 and throughout 1997.
Comparison of 1996 to 1995.
Selling, general and administrative expense decreased $4.2 million or 39%
to $6.6 million in 1996 from $10.8 million in 1995. As a result of increased
receivable collection efforts, the provision for bad debts decreased from $2.6
million in 1995, which included the reserve of a $1.6 million receivable for a
foreign project, to $.4 million in 1996. General Administrative costs were
reduced by $0.5 million in 1996 as the result of reductions in staffing in the
third quarter of 1995. For a discussion of certain non-recurring charges for
1995, see Note 13 of the Notes to Consolidated Financial Statements.
7.3.7 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.
7.3.8 SOFTWARE RESEARCH AND DEVELOPMENT
The following table summarizes total costs of development and enhancement
of the Company's software products for 1997, 1996 and 1995. The Company's
software development and enhancement costs are accounted for in accordance with
SFAS Statement No. 86.
<TABLE>
<CAPTION>
1997 1996 1995
------ ------- -------
(In thousands)
<S> <C> <C> <C>
Software expenditures:
Capitalized software costs . . . . . . . $2,483 $ 1,963 $ 4,766
Costs charged to research and
development expense . . . . . . . . . . 919 890 780
Total software expenditures. . . . . . . $3,402 $ 2,853 $ 5,546
====== ======= =======
Software expenses charged to earnings
Research and development expense . . . . $ 919 $ 890 $ 780
Amortization of capitalized software . . 2,196 1,894 4,292
Reduction of capitalized software costs. - 13,926
------ -------
Total software expenses recognized . . . $3,115 $ 2,784 18,998
======
</TABLE>
The Company has continued its commitment to the development and enhancement
of its software products. The Company has continued 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 will necessarily reduce the
Company's future software development expenditures. In 1996, management reduced
the level of software development expenditures by comparison to prior years
because sales of software had not reached the projected levels.
7.3.9 SETTLEMENT OF SECURITIES CLASS ACTION LAWSUIT
In October 1995, a class action lawsuit was filed in the United States
District Court of the District of Colorado alleging that the Defendants, which
included the Company, 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 1994 which failed to comply with generally accepted accounting
principles with respect to revenues recognized from the Company's contracts with
value added resellers.
The Defendants and the Plaintiff initially reached agreement during 1996
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 $900,000. Subsequently, the settlement agreement was modified to eliminate
the warrants and to provide for an additional $525,000 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 $900,000 loss contingency in
1996 relating to the proposed agreement for settlement of the claim in
accordance with Question 1 of SAB Topic 5:Y. In May 1997, the final approval of
the fairness of the settlement was granted by the Court. The Company paid
$525,000 in cash and reversed a net $315,000 of the loss contingency reserve of
$900,000 after applying additional incurred legal costs.
7.3.10 INTEREST INCOME (EXPENSE)
The following table summarizes the components of interest income (expense)
for 1997, 1996 and 1995. The capitalized interest was included as a component
of the capitalized cost of software development projects in progress in
accordance with SFAS Statement No. 34.
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(In thousands)
- ----------------------
<S> <C> <C> <C>
Interest income. . . . $ 76 $ 34 $ 35
Interest incurred. . . (657) (522) (606)
Interest capitalized . 100 165 109
Net interest (expense) $(481) $(323) $(462)
====== ====== ======
</TABLE>
7.3.11 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 that such risks 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 $13,000.
During 1996, the Company reported a net foreign exchange loss of $85,000.
During 1995, the Company reported a net foreign exchange gain of $114,000.
7.3.12 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 $66,00 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 the Consolidated
Financial Statements to an award against the Company by the American Arbitration
Association.
7.3.13 SALE OF THE ASSETS OF THE PIPELINE BUSINESS LINE
During 1997, the Company's management and Board of Directors formulated 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.
As discussed in Note 10 of the Notes to Consolidated Financial Statements,
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 closed on May 1, 1998 resulting 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. The Pipeline Simulation
business line recorded sales of $2.5 million, $4.3 million and $4.6 million and
contributed a net loss of $1.3 million, $.4 million and $1.4 million in 1997,
1996 and 1995, respectively, excluding the provision for the loss of sale of
Pipeline assets recorded in 1997.
7.3.14 YEAR 2000 ISSUE
Many computer systems experience problems handling dates beyond the year
1999. Therefore, some computer hardware and software will need to be modified
prior to the year 2000 in order to remain functional. The Company is assessing
the internal readiness of its computer systems and the compatibility of its
software products for handling the year 2000. Generally, the Company's software
requires prediction through future time periods and as such major changes to the
software are not required. The Company plans to devote the necessary resources
to resolve all significant year 2000 issues in a timely manner. Costs
associated with the year 2000 assessment and correction of problems noted are
expensed as incurred. Based on management's current assessment, it does not
believe that the cost of such actions will have a material effect on the
Company's results of operations or financial condition.
7.4 STATEMENT OF CASH FLOWS
7.4.1 CASH FLOWS FROM OPERATING ACTIVITIES
Comparison of 1997 to 1996.
In 1997, net cash of $1.2 million was provided by operating activities.
Net accounts receivable balances as a percentage of revenues declined from 30%
in 1996 to 14% 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.
Comparison of 1996 to 1995.
In 1996, net cash of $1.8 million was provided by operations compared to
net cash provided by operations of $2.7 million in 1995.
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. For the years 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.
Net cash utilized in investing activities was $2.3 million in 1996 compared
to $4.9 million in 1995. The Company incurred total software development and
enhancement costs of $2.9 million and $5.5 million, of which $2.0 million and
$4.8 million was capitalized and $.9 million and $.8 million was charged to
expense as research and development costs, in the years of 1996 and 1995,
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.
In 1995, net cash of $2.0 million was provided by financing activities
which consisted primarily of cash of $2.6 million received from the Company's
borrowing against Bank One revolving credit facility.
7.4.4 USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements requires that management make
certain estimates and assumptions that affect reported amounts of assets and
liabilities and disclosure of contingencies as of the date of the financial
statements and the reported amounts of revenue, expenses, gains and losses
during the reporting period. Actual results may vary from estimates and
assumptions that were used in preparing the financial statements for any period,
which may require adjustments that affect the results of operations in later
periods. See Note 3 of the Notes to Consolidated Financial Statements contained
herein.
7.4.5 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, 1997,1996
AND 1995 (RESTATED)
CONSOLIDATED STATEMENTS OF OPERATIONS FOR
THE YEARS ENDED DECEMBER 31, 1997,1996 AND 1995 (RESTATED)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997,1996 AND 1995 (RESTATED)
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE YEARS ENDED DECEMBER 31, 1997,1996 AND 1995 (RESTATED)
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.
<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 (the Company) as of December 31, 1997,
1996 and 1995, 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 II as of and for the years ended
December 31, 1997, 1996 and 1995. 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 the Company as of
December 31, 1997, 1996 and 1995, 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
II, 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 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.
/s/ Ehrhardt Keefe Steiner & Hottman PC
April 7, 1998, except Note 2
for which the date is May 28, 1998.
Denver, Colorado
<PAGE>
<TABLE>
<CAPTION>
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
December 31, December 31, December 31,
1997 1996 1995
-------------- -------------- --------------
(Restated -
Note 2)
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents. . . . . . . . . . . . . . . . $ 705 $ 1,870 $ 413
Accounts receivable, net of allowance for doubtful
accounts of $881, $690 and $3,301. . . . . . . . . . . 1,678 5,609 6,728
Work in progress (unbilled revenue). . . . . . . . . . . 1,707 2,785 2,210
Pipeline assets held for sale, net of provision for
impairment of $2,200 (Note 10) . . . . . . . . . . . . 1,350 - -
Assets of discontinued division (Note 11). . . . . . . . - - 704
Other current assets . . . . . . . . . . . . . . . . . . 502 530 410
Total current assets . . . . . . . . . . . . . . . . . 5,942 10,794 10,465
Software, net of accumulated amortization and write-down
of $36,798, $42,837 and $40,943. . . . . . . . . . . . . 7,334 9,604 9,535
Property and Equipment, net of accumulated
depreciation and amortization of $4,261, $5,218 and
$ 5,839 248 823 1,277
Assets of discontinued division (Note 11) . . . . . . . . - - 795
Other Assets. . . . . . . . . . . . . . . . . . . . . . . 1,354 1,487 2,114
-------------- -------------- --------------
$ 14,878 $ 22,708 $ 24,186
============== ============== ==============
LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Current portion of senior secured notes payabLE. . . . . $ - $ - $ 382
Line of credit . . . . . . . . . . . . . . . . . . . . . 382 - 2,870
Accounts payable . . . . . . . . . . . . . . . . . . . . 842 1,389 3,261
Accrued salaries and fringe benefits . . . . . . . . . . 729 1,070 1,003
Accrued lease obligations. . . . . . . . . . . . . . . . 5 260 375
Deferred maintenance and other revenue . . . . . . . . . 2,101 2,421 2,472
Accrued royalties. . . . . . . . . . . . . . . . . . . . 698 731 589
Accrual for costs to complete a contract . . . . . . . . 72 200 189
Accrued taxes. . . . . . . . . . . . . . . . . . . . . . 153 282 161
Accrued litigation liabilities . . . . . . . . . . . . . - 1,574 -
Liabilities of discontinued division (Note 11) . . . . . - - 515
Other current liabilities. . . . . . . . . . . . . . . . 1,207 597 1,740
-------------- -------------- --------------
Total current liabilities. . . . . . . . . . . . . . . 6,189 8,524 13,557
Accrued Lease Obligations . . . . . . . . . . . . . . . . 61 79 333
Long-Term Obligations . . . . . . . . . . . . . . . . . . 611 568 557
Senior Secured Notes Payable. . . . . . . . . . . . . . . 6,500 6,500 1,629
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 4,000
Commitments and Contingencies
Stockholders' Equity (Deficit)
Common stock, no par value; $.10 stated value;
25,000,000 authorized, 8,878,000; 8,840,000
and 8,256,000 shares issued and outstanding. . . . . . 888 884 825
Paid-in capital. . . . . . . . . . . . . . . . . . . . . 49,489 49,474 48,850
Accumulated deficit. . . . . . . . . . . . . . . . . . . (52,182) (46,736) (44,970)
Cumulative foreign currency translation adjustment . . . (678) (585) (595)
-------------- -------------- --------------
Total stockholders' equity (deficit) . . . . . . . . . (2,483) 3,037 4,110
-------------- -------------- --------------
$ 14,878 $ 22,708 $ 24,186
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<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 1995
-------- -------- ---------
(Restated - Note 2)
<S> <C> <C> <C>
Revenue
Consulting and training . . . . . . . . . . . . $ 6,491 $12,863 $ 13,530
Licenses and maintenance. . . . . . . . . . . . 5,597 5,864 7,356
Other . . . . . . . . . . . . . . . . . . . . . 304 277 566
-------- -------- ---------
12,392 19,004 21,452
-------- -------- ---------
Costs and Expenses
Costs of consulting and training. . . . . . . . 8,204 8,414 9,720
Costs of licenses and maintenance . . . . . . . 2,356 3,636 5,103
Costs of other revenue. . . . . . . . . . . . . 199 190 340
Selling, general, and administrative. . . . . . 3,886 6,604 10,768
Recovery of accounts receivable . . . . . . . . - (1,568) -
Provision for sale of Pipeline assets (Note 10) 2,200 - -
Software research and development . . . . . . . 919 890 780
Reduction for capitalized software costs. . . . - - 13,926
-------- -------- ---------
Total costs and expenses. . . . . . . . . . . 17,764 18,166 40,637
-------- -------- ---------
Income (Loss) from Operations. . . . . . . . . . (5,372) 838 (19,185)
Other Income (Expense)
Loss contingency (expense) reversal (Note 12) . 414 (900) -
Interest income . . . . . . . . . . . . . . . . 76 34 35
Interest expense. . . . . . . . . . . . . . . . (557) (357) (497)
Foreign exchange gains (losses) . . . . . . . . 13 (85) 114
-------- -------- ---------
Loss Before Income Taxes . . . . . . . . . . . . (5,426) (470) (19,533)
Income Taxes (Provision) Credit. . . . . . . . . (20) 60 (200)
-------- -------- ---------
Loss from continuing operations. . . . . . . . . (5,446) (410) (19,733)
Discontinued operations - (Note 11):
Loss from operation of Kinesix division . . . . - (878) (5,164)
Loss on sale of Kinesix division. . . . . . . . - (478) -
Net loss . . . . . . . . . . . . . . . . . . . . $(5,446) $(1,766) $(24,897)
======== ======== =========
Weighted Average Number of Common
Shares Outstanding. . . . . . . . . . . . . . . 8,859 8,556 8,178
======== ======== =========
Loss Per Share:
Continuing operations . . . . . . . . . . . . . $ (0.61) $ (0.05) $ (2.41)
Discontinued operations . . . . . . . . . . . . - (0.16) (.63)
-------- -------- ---------
Net loss. . . . . . . . . . . . . . . . . . . . $ (0.61) $ (0.21) $ (3.04)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
then developed a
89
<TABLE>
<CAPTION>
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
Cumulative
Common Stock Paid-in Accumulated Translation Stockholders'
------------
Shares Amount Capital Deficit Adjustment Equity
------- -------- -------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994. . . . . 8,064 $ 806 $ 48,233 $(20,073) $ (557) $ 28,409
Stock sold for cash . . . . . . . . 65 6 224 230
Compensation and services . . . . . 127 13 393 - - 406
Foreign currency translation
adjustment . . . . . . . . . . . . - - - - (38) (38)
Net (loss) (Restated) . . . . . . . - - - (24,897) - (24,897)
------- -------- -------- --------- ------------ ---------
Balance, December 31, 1995. . . . . 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)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
For the Year Ended December 31,
1997 1996 1995
-------- -------- ---------
(Restated - Note 2)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . $(5,446) $(1,766) $(24,897)
Adjustments:
Depreciation and amortization . . . . . . . . . . . . . . 2,670 2,653 4,845
Reduction in capitalized software costs . . . . . . . . . - - 13,926
Changes in allowance for doubtful accounts. . . . . . . . (163) (1,057) 2,649
Stock issued for compensation . . . . . . . . . . . . . . - 30 -
Loss contingency provision (reversal) . . . . . . . . . . (414) 900 -
Provision for sale of Pipeline assets (Note 10) . . . . . 2,200 - -
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable
and work in progress. . . . . . . . . . . . . . . . . 3,689 1,747 (2,021)
Decrease in other assets. . . . . . . . . . . . . . . . 161 245 892
Decrease in accounts payable and
accrued expenses. . . . . . . . . . . . . . . . . . . (1,442) (479) (2,632)
Decrease in accrued lease obligations . . . . . . . . . (273) (369) (582)
Increase (decrease) in deferred revenue . . . . . . . . 186 (51) 633
-------- -------- ---------
Net cash provided by continuing operations. . . . . . . . 1,168 1,853 (7,187)
Net cash provided by (used) (in) discontinued operations. - (28) 9,920
Net cash provided by operating activities . . . . . . . . 1,168 1,825 2,733
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capitalized software costs. . . . . . . . . . . . . . . . . (2,483) (1,963) (4,766)
Purchases of equipment. . . . . . . . . . . . . . . . . . . (139) (288) (133)
Net cash used in investing activities . . . . . . . . . . (2,622) (2,251) (4,899)
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of stock . . . . . . . . . . . . . . . . - 5 230
Net borrowing activity on line of credit. . . . . . . . . . 382 (2,870) 2,029
Repayments of bank borrowings . . . . . . . . . . . . . . . - (262) -
Proceeds from Senior Secured Notes. . . . . . . . . . . . . - 5,000 -
Repayments of other obligations . . . . . . . . . . . . . . - - (292)
-------- -------- ---------
Net cash provided by financing activities . . . . . . . . 382 1,873 1,967
-------- -------- ---------
Effect of exchange rates on cash . . . . . . . . . . . . . . (93) 10 10
-------- -------- ---------
Net increase (decrease) in cash and equivalents. . . . . . . (1,165) 1,457 (189)
Cash and cash equivalents at beginning of year . . . . . . . 1,870 413 602
-------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR . . . . . . . . . . $ 705 $ 1,870 $ 413
======== ======== =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . $ 175 $ 388 $ 497
Foreign taxes . . . . . . . . . . . . . . . . . . . . . . . 106 79 238
NON-CASH INVESTING AND FINANCING ACTIVITIES
Conversion of convertible debenture to Common Stock . . . . - 250 -
Conversion of accrued liabilities to equity . . . . . . . . 19 400 -
Accrued compensation and services paid in stock . . . . . . - - 406
</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.
As discussed in Note 14 below, on April 1, 1998 the Company announced that
it had entered into a binding letter 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 Consulting (E&P Consulting) and
Exploration and Production Technology (E&P Technology) businesses, subject to
certain conditions. 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.
NOTE 2 - RESTATEMENT OF FINANCIAL STATEMENTS
As previously disclosed in various periodic reports of the Company filed
with the Securities and Exchange Commission ("SEC"), the Company has received
extensive comment letters from the Staff of the SEC on its Form 10-K for the
year ended December 31, 1995, as well as other periodic SEC reports, and the
financial statements included therein. The Company has also received a
subsequent comment letter from the SEC Staff on its Form 10-K for the year ended
December 31, 1997.
As a result of procedures undertaken by the Company in responding to such
comment letters, 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 as to the Company in September 1997, the Company
has agreed to restate its financial statements for the years ended December 31,
1995, 1994 and 1993. Such adjustments are primarily attributable to the
correction of items previously reflected in revenues which did not meet the
criteria for recognition as revenue discussed below. In addition, the December
31, 1995 financial statements presented herein have been restated to reflect for
comparability purposes the disposition by the Company of the Kinesix Division
effective September 3, 1996 as discussed in Note 10 below. Accordingly, the
financial statements for December 31, 1995 have been restated and are presented
herein. Completion of the restatements of the December 31, 1994 and 1993
financial statements is currently in progress. As these restatements are
completed, the Company intends to further amend its 1997 Form 10-K to include
the audited restated financial statements for the years ended December 31, 1994
and 1993, along with corresponding financial statement disclosures.
NOTE 2 - RESTATEMENT OF FINANCIAL STATEMENTS (CONTINUED)
The December 31, 1995 financial statements included herein have been
restated from those included in the previously filed 1995 Form 10-K as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
As previously. . . . . . . . . . . . . . . . . . . . . . . . . . '95 Restate '95 Restated
reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments Kinesix Financials
Revenue
Consulting and training. . . . . . . . . . . . . . . . . . . . . $ 14,444 $ - $ (914) $ 13,530
Licenses and maintenance . . . . . . . . . . . . . . . . . . . . 9,061 (655) (1,050) 7,356
Loss from Operations . . . . . . . . . . . . . . . . . . . . . . . (24,485) 136 5,164 (19,185)
Net Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24,924) 27 - (24,897)
Loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . (3.05) .01 - (3.04)
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,912 274 - 24,186
Stockholders Equity. . . . . . . . . . . . . . . . . . . . . . . . $ 4,110 - - $ 4,110
NOTE 3 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
</TABLE>
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 recognizes software license revenue pursuant to the American
Institute of Certified Public Accountants Statement of Position ("SOP") 91-1 on
delivery provided that a legally-binding licensing agreement containing all
material terms has been fully 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 all obligations. 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.
<PAGE>
NOTE 3 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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.
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 issued by the
Financial Accounting Standards Board (FASB), the funded software development
revenues do not include revenue for funded development software projects where
the Company had a contractual obligation to refund all or part of the funding.
For such contracts the Company records receipt of funds by recognizing an
obligation to repay.
<PAGE>
NOTE 3 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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, which includes the completion of a
detail program design in accordance with paragraph 4a of SFAS No. 86.
Development costs incurred prior to the determination of technological
feasibility are expensed as research and development expense as incurred. At
each balance sheet date, the Company records a writedown for any software
products equal to the excess, if any, of unamortized cost over net realizable
value. Net realizable value is the estimated future gross revenue for a product
reduced by the estimated future costs of completion and disposal, including the
costs of performing maintenance and customer support.
Amortization of capitalized software costs is determined each year based on
the greater of: (1) the amount computed using the ratio of current year gross
revenue to the sum of current and anticipated future gross revenue for that
product or (2) straight-line amortization. Through 1995, the Company amortized
the capitalized software development costs of its stand-alone software products
and related enhancements over a 13-year period and capitalized software
development costs of Petroleum WorkBench and Sammi were amortized over a
seven-year period. As discussed below, commencing January 1, 1996, the Company
amortized all its capitalized software costs over a five-year period.
At each balance sheet date, the unamortized capitalized costs of software
products are compared to their estimated net realizable values on a
product-by-product basis. Net realizable value is the estimated future gross
revenue for a product reduced by the estimated future costs of completion and
disposal, including the cost of performing maintenance and customer support.
The carrying amount of a software product is written down by the amount, if any,
by which the unamortized capitalized costs of a computer software product
exceeds its net realizable value. The reduced amount of capitalized software
costs that have been written down to net realizable value at the close of an
annual fiscal period is considered to be the cost for subsequent accounting
purposes, and the amount of the write-down is not subsequently restored.
In the fourth quarter of 1995, the Company recorded a $17.9 million write-down
of its software products and changed the amortization period for all its
software products to five years, commencing January 1, 1996. Various conditions
and circumstances existing at December 31, 1995 made this write-down necessary,
including the cumulative effects on the marketplace of the releases of Windows
95, Windows NT, and new, more powerful Pentium-based personal computers, which
the Company concluded had changed the broad market for corporate computer
systems and software. During 1995, the Company successfully released the
Windows version of its WorkBench product, which incorporates the Company's core
software products plus graphical and interactive features of a Windows
environment, constituting a major breakthrough for the Company. The reaction
from the marketplace was positive and by the last quarter of 1995, circumstances
were in place that justified a fundamental decision for the Company to change
its strategic emphasis to the personal computer market, instead of the previous
emphasis of providing products for all segments of computer hardware mainframe,
minicomputer, and personal computer markets. The circumstances existing in the
fourth quarter of 1995 also included the positive reaction from clients in the
latter part of 1996 to "WB Serve", a personal computer application that allows
for the seamless transfer of compute intensive operations to servers and
minicomputers.
NOTE 3 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Circumstances existing in the fourth quarter of 1995 indicated that the
access point of software users would be based on desktop 32 bit technology. The
computing capacity of desktop computers had far surpassed any level that the
Company had contemplated in any of its evaluations of capitalized software costs
at previous balance sheet dates, and far surpassed the computing capacity of
desktop computers that the majority of the computing industry had predicted.
While previously, extremely large and complex software such as that of the
Company could not have operated on other than mainframe or minicomputers, the
personal computers that had then become available along with the continued
enhancements of Distributed Compute Environments (DCE) made it possible to
operate such software from desktop personal computers.
Based on the foregoing circumstances that were in place at the end of 1995,
under the leadership of its new president, Mr. George Steel, in January 1996 the
Company concluded 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. In connection with this shift in market
direction, Mr. Steel also introduced several other specific management
strategies. Previously, the Company had been striving to achieve aggressive
revenue targets, many of which entailed making 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
personal computer platforms.
A significant effect of the above was to decrease the levels of revenue targeted
and strived for. Cost reductions were necessary, primarily staff reductions and
reductions in the level of planned development expenditures. Rapid change was
necessary and these new strategies would result in a narrowing of the computer
platforms on which the Company's products would be offered. Essentially, the
entire Company was downsized and refocused. The overall effect of these new
strategies resulted in lower projected future revenue streams that required the
write-down of $17.9 million to the Company's capitalized software.
Commencing January 1, 1996, the Company amortizes all its capitalized software
costs over a five-year period. In the current environment of accelerating
technological change, development languages and tools have changed
significantly. It is now possible to create new and advanced code for the
graphical and interactive aspects of software at a fraction of the time
previously required. The Company decided to reduce the useful life used for
amortization to five years to recognize the rapid change of these aspects of the
software, which is common for software companies that provide software to the
personal computer markets. The Company will continue to evaluate developments
in technology and the marketplace in future periods for circumstances that might
require additional reduction in the amortization period used for capitalized
software costs.
<PAGE>
NOTE 3 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 December 31, 1994 . . . . . . . . . . . . . . . . . . . . $ 26,723 $ 18,989 $ 45,712
1995 additions. . . . . . . . . . . . . . . . . . . . . . . . . 3,245 1,521 4,766
--------------- ---------- ---------
Balance, December 31, 1995. . . . . . . . . . . . . . . . . . . . $ 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
=============== ========== =========
Pipeline Software Held for Sale . . . . . . . . . . . . . . . . (10,792) - (10,792)
Net Balance, December 31, 1997. . . . . . . . . . . . . . . . . . $ 22,061 $ 22,071 $ 44,132
=============== ========== =========
Accumulated Amortization:
Balance December 31, 1994 . . . . . . . . . . . . . . . . . . . . $ 17,411 $ 5,314 $ 22,725
1995 amortization expense . . . . . . . . . . . . . . . . . . . 1,542 2,750 4,292
Reduction of capitalized software costs . . . . . . . . . . . . 8,197 5,729 13,926
--------------- ---------- ---------
Balance, December 31, 1995. . . . . . . . . . . . . . . . . . . . $ 27,150 $ 13,793 $ 40,943
1996 amortization expense . . . . . . . . . . . . . . . . . . . 603 1,291 1,894
--------------- ---------- ---------
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
=============== ========== =========
Pipeline Software Accum. Amortization . . . . . . . . . . . . . (8,235) - (8,235)
Net Balance, December 31, 1997. . . . . . . . . . . . . . . . . . $ 20,307 $ 16,491 $ 36,798
=============== ========== =========
Software, net Balance, December 31, 1995. . . . . . . . . . . . . . $ 2,818 $ 6,717 $ 9,535
Software, net Balance, December 31, 1996. . . . . . . . . . . . . . $ 3,876 $ 5,728 $ 9,604
Software, net Balance, December 31, 1997. . . . . . . . . . . . . . $ 1,754 $ 5,580 $ 7,334
<PAGE>
NOTE 3 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
</TABLE>
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, 1996 and 1995, the level of software research and
development costs was, in the aggregate, $3.4 million, $2.8 million and $6.6
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 SFAS No. 86.
During 1995, the Company accounted for a funded software development
project whereby the Company was obligated to repay the funds if the Company was
not successful in its efforts to develop a product which met the specification
of the third party. The Company recorded a liability and expensed the costs as
incurred in accordance with SFAS No. 68.
The Company capitalized interest costs of $100,000, $165,000 and $109,000
during the years ended December 31, 1997, 1996 and 1995 respectively, as part of
the cost of software development projects in progress.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is 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 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,
$742,000 and $568,000, for the years ended December 31, 1997, 1996 and 1995,
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
<PAGE>
NOTE 3 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Following are the components of property and equipment:
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1997 1996 1995
-------------- ------------- -------------
(In thousands)
- ------------------------------------
<S> <C> <C> <C>
Property and leasehold improvements. $ 442 $ 450 $ 428
Office furniture and equipment . . . 789 828 2,389
Computer equipment . . . . . . . . . 4,776 4,763 4,299
-------------- ------------- -------------
6,007 6,041 7,116
Pipeline Assets Held For Sale. . . (1,498) - -
-------------- ------------- -------------
$ 4,509 $ 6,041 $ 7,116
============== ============= =============
Accumulated depreciation . . . . . . $ 5,519 $ 5,218 $ 5,839
Pipeline Accumulated Depreciation. (1,258) - -
$ 4,261 $ 5,218 $ 5,839
============== ============= =============
Property and equipment, net of
accumulated depreciation. . . . . . $ 248 $ 823 $ 1,277
============== ============= =============
</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.
<PAGE>
NOTE 3 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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, 1996 and
1995 the undistributed earnings of the foreign subsidiaries were not
significant.
INCOME PER SHARE
Primary income per common and common equivalent share, which is calculated
in accordance with SFAS No. 128, Earnings per 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, 1996 and 1995, 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, 1996 and 1995 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 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, 1996 and 1995 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,
1996 and 1995.
<PAGE>
NOTE 3 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect 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, expenses, gains and losses
during the reporting period. Use of estimates is significant with regard to
capitalized software costs and the related amortization. Actual results may
vary from estimates and assumptions that were used in preparing the financial
statements for any period, which may require adjustments that affect the results
of operations in later periods.
PRIOR PERIOD RECLASSIFICATION
Certain reclassifications of prior period balances have taken place to
allow for proper comparison to the current period presentation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS No. 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 No. 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 No. 131), which supersedes Statement of Financial Accounting
Standards No. 14, "Financial Reporting for Segments of a Business Enterprise."
SFAS No. 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 No.
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 Nos. 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.
<PAGE>
NOTE 4 - BANKING ARRANGEMENTS, LONG-TERM OBLIGATIONS AND NOTE
PAYABLE
UNITED STATES CREDIT AGREEMENTS
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 discussed below. In October 1996, the Company repaid the $750,000 balance
owed pursuant to the new bank credit agreement at September 30, 1996.
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 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. 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.
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 to EximBank an annual fee equal to 1.5% of the amount 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.
The Company has not made a determination as to the filing of claims for
insurance recoveries for uncollected foreign receivables.
As of December 31, 1997, the amounts of short-term cash borrowings and
letters of credit outstanding, and credit available under the revolving credit
facility were as follows:
<PAGE>
NOTE 4 - BANKING ARRANGEMENTS, LONG-TERM OBLIGATIONS AND NOTE
PAYABLE (CONTINUED)
<TABLE>
<CAPTION>
December 31, 1997
------------------
<S> <C>
Revolving credit facility limit $ 650,000
Amounts outstanding:
Short-term cash borrowings. . 382,000
Letters of credit . . . . . . 257,000
639,000
------------------
Credit available. . . . . . . . $ 11,000
==================
</TABLE>
Interest rates applicable to short-term cash borrowings under the credit
facility are equal to the bank's prime rate of interest plus one 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 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 December 31, 1997, 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 $(5.8 million), 7.42 to 1, .96
to 1, and $(5.4 million), respectively.
As of December 31, 1997, 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 December 31, 1997 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 14 below if the pending
sale of the Company to Baker discussed in Note 14 is completed.
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.
<PAGE>
NOTE 4 - BANKING ARRANGEMENTS, LONG-TERM OBLIGATIONS AND NOTE
PAYABLE (CONTINUED)
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
In 1992 the Company sold a $2.5 million 7-year convertible debenture to
Renaissance Capital Partners II, Ltd. ("Renaissance") which bore interest at 11%
per annum and was convertible into Common Stock of the Company at a conversion
price of $2.50 per share. Interest was payable monthly with principal payments
of $25,000 commencing October 1, 1995.
In 1993 the Company sold a $1.0 million 7-year convertible debenture to
Renaissance which bore interest at 11% per annum, payable monthly, and was
convertible into Common Stock of the Company at a conversion price of $3.25 per
share. 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. The outstanding balance of $1.75 million consisted of a balance of
$750,000 on the original $2.5 million debenture and the $1 million debenture,
all of which was 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 totaling $1.75
million in principal were 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 the
convertible debentures into 282,218 shares of the Company's Common Stock at a
conversion rate of $.89 per share, which was the fair market value of a share of
the Company's Common Stock on the date of conversion, and converted the balance
of $1.5 million of principal of the convertible debentures into a senior secured
note at 7% payable in five years and non-detachable five-year warrants to
acquire 450,000 shares of the Company's Common Stock at an exercise price of
$3.00 per share. The terms of the secured note and non-detachable stock
purchase right are substantially the same as for those issued to Lindner Funds
discussed below.
The financing agreement with Renaissance with respect to the senior secured
note requires that the Company satisfy certain financial covenants regarding
operating results and financial condition. As discussed above, 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
senior secured note is outstanding.
<PAGE>
NOTE 4 - BANKING ARRANGEMENTS, LONG-TERM OBLIGATIONS AND NOTE
PAYABLE (CONTINUED)
See Note 14 below for a discussion of the agreement by Renaissance to
accept a discounted amount in satisfaction of the Company's obligation to
Renaissance if the pending acquisition of the Company by Baker is completed.
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 shares of the Company's Common Stock
at an exercise price of $3.00 per share for five years.
Also see Note 14 below.
LONG-TERM OBLIGATIONS
The components of long-term obligations are as follows:
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Deferred lease costs. $ 66 $339 $ 708
Deferred compensation 640 632 659
---- ---- ------
706 971 1,367
Less current portion. 34 324 477
$672 $647 $ 890
==== ==== ======
</TABLE>
NOTE 5 - INCOME TAXES
The components of the provisions for income taxes are as follows:
<TABLE>
<CAPTION>
For the Years Ended
December 31, December 31, December 31,
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Current:
U.S. Federal. . . . . . . . . . . $ - $12 $ -
Foreign . . . . . . . . . . . . . - 46 (200)
State . . . . . . . . . . . . . . (20) 2 -
$ (20) $60 $(200)
=============== === ======
NOTE 5 - INCOME TAXES (CONTINUED)
</TABLE>
Following is a summary of United States and foreign pretax accounting
income (loss):
<TABLE>
<CAPTION>
For the Years Ended
December 31, December 31, December 31,
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
United States $(4,156) $(473) $ (9,861)
Foreign . . . (1,270) 3 (9,672)
(5,426) (470) $(19,533)
======== ====== =========
</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>
For the Years Ended
December 31, December 31, December 31,
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Taxes at U.S. Federal statutory rate. . . . $ - $ (160) $(5,108)
Federal alternative minimum tax . . . . . . - - 1 12 (753)
State income taxes. . . . . . . . . . . . . (20) 2 2
Foreign withholding and other foreign taxes - - 4 46 (200)
U.S. net operating loss carry forward and
Valuation allowances . . . . . . . . . . . - - 2 245 5,861
Other, net. . . . . . . . . . . . . . . . . - - (85) -
$ (20) 6$60 $ (200)
======== ========== ========
</TABLE>
<PAGE>
NOTE 5 - INCOME TAXES (CONTINUED)
The components of deferred taxes in the balance sheets, which were fully
eliminated by a valuation allowance, were as follows:
<TABLE>
<CAPTION>
<S><S>
For the Years Ended
December 31, December 31, December 31,
1997 1996 1995
---- ---- ----
(In thousands)
Taxable temporary differences:
Capitalized software $(3,758) $(3,649) $(3,770)
(3,758) (3,649) (3,770)
--------- -------- --------
Deductible temporary differences:
Tax basis in excess of book basis of
property and equipment 200 98 98
Allowance for doubtful accounts 334 91 179
Rent expense 25 89 134
Contract expense accruals - 59 119
Vacation pay and bonuses 110 202 175
Accrued contingent liabilities 105 567 35
Provision for sale of Pipeline assets 836 - -
--------- -------- --------
1,610 1,106 740
Carryovers:
Net operating losses 9,061 6,397 7,503
Research and other credits 3,200 3,704 3,344
12,261 10,101 10,847
--------- -------- --------
Net deferred tax asset 10,113 7,558 7,817
Valuation allowance (10,113) (7,558) (7,817)
--------- -------- --------
$0 $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
------ ----------
<
<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 6 - 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.
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 14 below.
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.
NOTE 6 - CAPITAL STOCK (CONTINUED)
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 December 31, 1994. 799,262 $2.00 to $7.13 $ 4.42 $ 3,532,000
Grants . . . . . . . . . . . 95,000 . 2.25 to 5.00 2.49 236,000
Expirations. . . . . . . . . (175,387) 2.00 to 6.38 4.11 (721,000)
Exercises. . . . . . . . . . (63,750) 2.00 to 4.88 3.50 (223,000)
----------- ------------
Balance at December 31, 1995. 655,125 2.00 to 7.13 4.31 2,824,000
Grants . . . . . . . . . . . 814,209 . 2.25 to 5.00 1.47 1,197,000
Expirations (382,834) 50 to 7.125 4.08 (1,562,000)
Exercises. . . . . . . . . . (2,500) 2.25 2.25 (6,000)
Balance at December 31, 1996 1,084,000 50 to 6.375 2.27 2,453,000
Grants . . . . . . . . . . . 896,000 .1275 to 2.000 1.02 914,000
Expirations. . . . . . . . . (369,376), .50 to 4.875 2.77 (1,024,000)
Exercises. . . . . . . . . . 0 - - 0 0
----------- ------------
Balance at December 31, 1997. 1,610,624 $.1275 to $6.375 $ 1.45 $ 2,343,000
=========== ============
Number of shares exercisable:
December 31, 1995 . . . . . . 545,000 $2.00 to $7.13 $ 4.52 $ 2,463,000
=========== ============
December 31, 1996 . . . . . . 480,000 1.91 to 6.375 3.17 1,522,000
=========== ============
December 31, 1997 . . . . . . 1,547,624 $.1275 to $6.375 $ 1.48 $ 2,299,000
=========== ============
</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.
NOTE 6 - CAPITAL STOCK (CONTINUED)
STOCK BASED COMPENSATION
The Company adopted SFAS No. 123, Accounting for Stock-Based Compensation,
as of January 1, 1996, and such adoption is reflected with respect to the
presentation herein of 1995 amounts. 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, 814,209 and 95,000 stock options to employees, directors and
consultants during 1997, 1996 and 1995, respectively.
The per-share weighted-average fair value of stock options granted in 1997,
1996 and 1995 was 855,000, 997,000 and 236,000, 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.
<TABLE>
<CAPTION>
Year Ended
December 31, December 31, December 31,
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Difference between fair value. . . $
and intrinsic value methods
(additional compensation expense) $ 396 $ 974 300
Net loss . . . . . . . . . . . . . (5,842) (2,740) (25,200)
Loss per share . . . . . . . . . . (.66) (.32) (3.08)
======== ======== ========
</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 the respective year:
<TABLE>
<CAPTION>
Year Ended
December 31, December 31, December 31,
1997 1996 1995
------------- ------------- -------------
(In thousands)
<S> <C> <C> <C>
Dividend yield. . . . . . . . . . . . . 0.0% 0.0% 0.0%
Average annual volatility . . . . . . . 160.0% 117.0% 257.0%
Average annual risk-free interest rate. 5.4% 5.4% 5.4%
Expected lives. . . . . . . . . . . . . 5-10 years 5-10 years 7-10 years
</TABLE>
<PAGE>
NOTE 7 - 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 and
1995, no shares were issued pursuant to the Company's plan. The Company
contributed 299,000 shares pursuant to the plan in 1996. The Company also has a
noncontributory employee stock purchase plan for employees to purchase Common
Stock through payroll deductions. In 1995, 370,000 shares were purchased under
the employee stock purchase plan.
The Company maintains a qualified target benefit retirement plan that
covers substantially all of its U.S. employees. Such plan is a defined
contribution plan and 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 $254,000, $182,000 and $146,000 in 1997, 1996 and 1995,
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. In 1995, the Company accrued $125,000 contribution, which was paid in
1996 with approximately 55,000 shares of Common Stock.
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 $139,000, $148,000 and $229,000 in 1997,
1996 and 1995 respectively, of which $27,000, $42,000 and $56,000 is included in
accrued salaries and benefits at December 31, 1997, 1996 and 1995, respectively.
<PAGE>
NOTE 8 - 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>
For the Year Ended December 31, 1995
------------------------------------
(In Thousands)
Consolidated
--------------
U.S. U.K. Canada Total
-------------- -------- -------- ---------
<S> <C> <C> <C> <C>
Revenue. . . . . . . . . . . . . . . . . $ 11,363 $ 7,339 $ 2,750 $ 21,452
Income (loss) from continuing operations
(9,931) (8,933) (869) (19,733)
Identifiable assets. . . . . . . . . . . 17,843 3,580 2,763 24,186
</TABLE>
<TABLE>
<CAPTION>
For the 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 continuing operations
(413) 473 (470) (410)
Identifiable assets. . . . . . . . . . . 19,435 2,164 1,109 22,708
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
------------------------------------
(In Thousands)
Consolidated
--------------
U.S. U.K. Canada Total
-------------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue. . . . . . . . . . . . . . . . . $ 6,386 $ 4,618 $ 1,388 $12,392
Income (loss) from continuing operations
(4,176) (1,229) (41) (5,446)
Identifiable assets. . . . . . . . . . . 12,413 1,539 926 14,878
</TABLE>
In 1995, the Company's foreign operations experienced an aggregate
loss from operations of $9.8 million, which was primarily attributable to the
write-down of capitalized software and bad debt provision allocable to foreign
operations. See Note 13 below.
U.S. export revenues by geographic area were as follows:
<TABLE>
<CAPTION>
For the Years Ended
December 31, December 31, December 31,
1997 1996 1995
-------------------- ------------- -------------
(In thousands)
<S> <C> <C> <C>
Far East. . . . . . . . . . . . . . . . . . . . . $ 1,154 $ 1,512 $ 1,014
Central and South America . . . . . . . . . . . . 1,693 2,848 2,088
Europe. . . . . . . . . . . . . . . . . . . . . . - 909 810
Canada & Other. . . . . . . . . . . . . . . . . . 66 206 181
$ 2,913 $ 5,475 $ 4,093
==================== ============= =============
NOTE 8 - INFORMATION ABOUT OPERATIONS (CONTINUED)
</TABLE>
During 1997 and 1995, 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.
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. . . . . . . . $ 294 $ 1,940 $2,234
Governments and national
petroleum companies. . 3 1,088 1,091
Government contractors . 44 16 60
--------------- --------
$ 341 $ 3,044 $3,385
=============== ======== ======
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
=============== ======== ======
December 31, 1995:
Companies. . . . . . . . $ 2,041 $ 5,105 $7,146
Governments and national
petroleum companies. . 137 1,598 1,735
Government contractors . 57 0 57
$ 2,235 $ 6,703 $8,938
=============== ======== ======
<PAGE>
</TABLE>
NOTE 9 - 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 $866,000, $1,400,000 and $1,400,000 during
1997, 1996 and 1995, respectively.
NOTE 10 - 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 is expected to close on 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,
$4.3 million and $4.6 million and contributed a net loss of $1.3 million, $.4
million and $1.4 million in 1997, 1996 and 1995, respectively, excluding the
provision for the loss of sale of Pipeline assets recorded at December 31, 1997.
Following is the schedule detail of assets and liabilities associated with the
sale.
<PAGE>
NOTE 10 - SALE OF THE ASSETS OF THE PIPELINE BUSINESS LINE (CONTINUED)
<TABLE>
<CAPTION>
December 31, 1997
-------------------
(In thousands)
<S> <C>
Assets
Accounts Receivable. . . . . . . . . . . . . . . . $ 1,043
WIP (unbilled receivables) . . . . . . . . . . . . 440
Property & Equipment, net of accumulated
Depreciation, $1,258. . . . . . . . . . . . . . . 240
Capitalized Software, net of amortization, $8,235. 2,557
-------------------
$ 4,280
Less: Liabilities Assumed
Deferred Maintenance . . . . . . . . . . . . . . . 500
Payables . . . . . . . . . . . . . . . . . . . . . 230
-------------------
3,550
Costs of Sale. . . . . . . . . . . . . . . . . . . 150
-------------------
3,700
Less: Expected Proceeds . . . . . . . . . . . . . . 1,500
Provision from loss on Sale. . . . . . . . . . . . . $ 2,200
===================
NOTE 11 - DISPOSAL OF KINESIX DIVISION
</TABLE>
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.
<PAGE>
NOTE 12 - CONTINGENCIES
To the knowledge of management, there are no significant claims pending or
threatened against the Company or any of its subsidiaries as of December 31,
1997 which could have a materially adverse effect on the Company's financial
position, results of operations or cash flows. As of December 31, 1997, 1996
and 1995, the Company had no recorded insurance recoveries for uncollected
foreign receivables.
Prior to 1995, the Company had included within other assets a $470,000
receivable balance related to costs incurred in connection with a gas pipeline
project in India. Although the negotiations for settlement of the Company's
claim were continuing at December 31, 1995, the Company determined that the
probability of collection was remote and wrote off the asset in total.
The WOLF CLASS ACTION LAWSUIT settlement was completed on May 23, 1997.
The KINESIX EUROPE Arbitration was settled in February 1997. The SECURITIES AND
EXCHANGE COMMISSION INVESTIGATION, as it pertained to the Company, was completed
on September 11, 1997. THE SECURITIES AND EXCHANGE COMMISSION (SEC) COMMENT
LETTERS ARE still under discussion with the staff of the SEC. Following is a
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 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 $900,000.
Subsequently, the settlement agreement was modified to eliminate the warrants
and to provide for an additional $525,000 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 $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 SEC Staff Accounting
Bulletin Topic 5:Y. On May 23, 1997, the final approval of the fairness of the
settlement was granted by the Court. The Company paid $525,000 in cash and
reversed a net $315,000 of the loss contingency reserve of $900K after applying
additional incurred legal costs.
<PAGE>
NOTE 12 - CONTINGENCIES (CONTINUED)
ARBITRATION NUMBER 70T 181 0038 96 D; KINESIX, A DIVISION OF SCIENTIFIC
---------------------------------------------------------------------------
SOFTWARE-INTERCOMP, INC. AND KINESIX (EUROPE) LTD., AN ENGLISH COMPANY -
-----------------------------------------------------------------------------
HOUSTON, TEXAS. The Company, through Kinesix, a Division of the Company,
-------------
entered into a Territory Distributor Agreement with Kinesix (Europe) Ltd.
---
("KEL"), an unaffiliated entity located in London, U.K. The Distributor
---
Agreement required under most circumstances a decision from the American
---
Arbitration Association ("AAA") before its termination could be effective. On
---
March 4, 1996 the Company commenced arbitration seeking declaration of
termination of the Distributor Agreement and money due the Company for
receivables outstanding as of December 31, 1995 of $296,000 for which the
Company had fully provided an allowance for doubtful accounts. 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 AAA made an award in favor of KEL
against the Company in the aggregate amount of $674,000 and the Company recorded
an accrual for the loss contingency in the third quarter of 1996 in accordance
with SFAS No. 5. 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 December 31, 1996 balance sheet as part of other current
liabilities. The Company recorded a credit to expense of $99,000 in the first
quarter of 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 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. 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 2 above and of the financial
statements therein.
NOTE 13 - CERTAIN NON-RECURRING CHARGES
In January 1996 the Company appointed George Steel as president and chief
operating officer. Following this change, Mr. Steel and management undertook a
review of the Company's policies regarding capitalized software costs, bad debt
reserves and expense accruals. As a result of this review, the Company made the
following adjustments in the fourth quarter of 1995, which are discussed under
corresponding subheadings below.
<TABLE>
<CAPTION>
As Originally Net Before
Reported Attributable Restate - '95 Restated '95 Restated
To Kinesix Note 2 Adjustments Financials
- ---------------------------------------- ------------- ----------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Reduction of capitalized software costs
$(17,917) $(3,991) $(13,926)
Increase in bad debt reserve provision
(3,192) - (3,192)
Expense accruals and other adjustments
(1,625) - (1,625)
Total fourth quarter 1995 adjustments
$(22,734) $(3,991) $ 18,743
========= ======== =========
Reported
To Kinesix
- ----------------------------------------
(In thousands)
<S> <C> <C>
Reduction of capitalized software costs
$ - $(13,926)
Increase in bad debt reserve provision
(655) (2,537)
Expense accruals and other adjustments
- (1,625)
Total fourth quarter 1995 adjustments
$(655) $(18,088)
====== =========
</TABLE>
REDUCTION OF CAPITALIZED SOFTWARE COSTS
The Company concluded that it had not been realizing an adequate return on
its capitalized software development costs; that the rate of technological
change applicable to the Company's software products was accelerating; and that
accordingly the value of its capitalized software was impaired. As a result the
Company made a one-time reduction of the carrying value of capitalized software
costs by $17,917,000 effective December 31, 1995.
The $17,917,000 capitalized software development cost reduction was
determined by an evaluation of each of the Company's principal software
products. The evaluation included a projection of the future revenue streams
from the products with those projected revenue streams adjusted using historical
variance factors derived from previous forecasts. The revenue streams were also
reduced to reflect normal costs of developing, maintaining and marketing
software in order to project a reasonable return to the Company on its software
investment.
In addition to the one-time reduction of capitalized software development
costs, the Company reduced the estimated useful lives of its capitalized
software from 7-13 years to a new life, beginning in 1996, of 5 years. Such a
reduction in useful life reflects the anticipated increase in technological
change along with an anticipated continued requirement of the Company to expend
significant funds for software development in order to remain competitive in its
marketplace.
As part of the downsizing and refocusing of the Company, management began
allocating reduced amounts of funds to software development activities by
comparison to past years. Management estimates that resources to be allocated
to software development will be in the range of $2 million to $3 million
annually in the immediate term. Since this approximates the current rate of
annual amortization expense, management does not expect the net carrying value
of capitalized software to increase significantly in the foreseeable future.
<PAGE>
NOTE 13 - CERTAIN NON-RECURRING CHARGES (CONTINUED)
INCREASE IN BAD DEBT RESERVE PROVISION
During late 1995 and early 1996 the Company established a policy that
required stringent review of accounts receivable over six months old. As a
result of this new policy, in the fourth quarter of 1995 the Company increased
its 1995 provision for doubtful accounts by $2,537,000, The Company determined
that the chance was remote that it would be able to collect accounts receivable
of $3,455,000 and thus as of December 31, 1995 had written off such amounts.
The corresponding provision for doubtful accounts of $3,301,0000 almost entirely
consists of transactions recognized in 1995, including $1,561,000 from a foreign
consulting project and $487,000 from a software sale on which the payments have
been significantly delayed. The $1,561,000 was collected by the Company in the
third and fourth quarters of 1996 after renewed efforts to collect the
outstanding balance.
EXPENSE ACCRUALS AND OTHER ADJUSTMENTS
Also in the fourth quarter of 1995, the Company made various expense
accruals and other adjustments totaling $1,625,000. A total of $853,000 for
various expense accruals was comprised primarily of non-recurring audit and
legal fees in the amounts of $351,000 and 170,000, respectively, which were
primarily attributable to adjustments to reflect obligations for prior services
rendered by the Company's auditors and legal counsel, the re-audit of the
Company's 1994 financial statements by new auditors after the resignation of the
Company's prior auditors in June 1995 after performing a substantial amount of
audit work with respect to the 1994 financial statements, and various legal and
regulatory matters for which the Company required the services of legal counsel.
As a result of the Company's review of the status of various consulting and
software contracts, the Company accrued a liability as of December 31, 1995 for
the reimbursement of $200,000 in funds provided by a third party for a funded
development project for which all features to be provided by the Company were
not then developed and for which the party in the fourth quarter of 1995
demanded reimbursement. Further, in the fourth quarter of 1995 the Company
recorded a $130,000 provision for costs to complete a Pipeline Simulation
project which as a result of project tests in October 1995 the customer
indicated that further work was necessary to complete the project, and accrued
$70,000 for costs to complete a project for which the customer demanded in the
fourth quarter of 1995 additional work on certain aspects of the project.
The Company also wrote off in the fourth quarter of 1995 $272,000 in capitalized
software costs attributable to a Pipeline Simulation software product which the
Company concluded that it could not fund to completion as a result of strategic
product line decisions and the reduced availability of internally-generated
funds, and $100,000 in unbillable costs attributable to a project in Spain with
respect to which correspondence from the vendor beginning in the fourth quarter
of 1995 indicated that payments would not be made.
1996 AND 1997 STAFF REDUCTION PLANS
In 1996, the Company took steps to reduce costs and implemented a staff
reduction plan pursuant to which the Company terminated in 1996 ten employees
who were in the E&P Technology and administrative employee groups. As of
December 31, 1996, the Company had accrued severance costs in the total amount
of $101,000 for such plan and was included in selling, general and
administrative expense, and paid in 1996.
<PAGE>
NOTE 13 - CERTAIN NON-RECURRING CHARGES (CONTINUED)
In 1997, the Company implemented a second staff reduction plan pursuant to
which the Company terminated in 1997 eight employees who were employees in the
E&P Technology and administrative employee groups. The Company accrued
termination costs in the total amount of $172,000, all of which was included in
selling, general and administrative expense, and none of which was paid as of
December 31, 1997.
NOTE 14 - SUBSEQUENT EVENTS
On April 1, 1998, the Company announced that it had entered into a binding
letter 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 E&P Consulting and E&P
Technology businesses, subject to certain conditions. The sale does not include
the Company's Pipeline Simulation Software assets which are being purchased
separately by LIC.
The agreement with Baker provides that the shareholders of the Company's
Common Stock will 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
will 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 payments 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.
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
=========== ================ ============ ===========
Allowance for doubtful accounts:
Year Ended December 31,
1995. . . . . . . . . . . . . . $ 4,617,000 $ 2,649,000 $(3,965,000) $ 3,301,000
=========== ================ ============ ===========
</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>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
During the Company's two most recent fiscal years and through the date of
the filing of this report, there have been no changes in and disagreements with
the Company's accountants on matters of accounting and financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding the Company's directors and executive officers is set
forth in Part 1 Item 1 of this report under the caption "Management."
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, requires the
Company's officers and directors and persons who own more than 10% of a
registered class of the Company's equity securities to file reports of ownership
on Form 3 and changes in ownership on Form 4 or 5 with the Securities and
Exchange Commission. Such officers, directors, and 10% shareholders are also
required by Commission rules to furnish the Company with copies of all Section
16(a) reports they file.
Based solely on its review of the copies of such forms received by it or
written representations from certain reporting persons, the Company believes
that, during the year ended December 31, 1997, all Section 16(a) filing
requirements applicable to its officers, directors, and 10% stockholders were
satisfied on a timely basis. In making these statements, the Company has relied
upon the written representation of its officers and directors.
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes the total compensation awarded to, earned
by, or paid for services rendered to the Company in all capacities during 1997,
1996 and 1995, respectively, by the "Named Executive Officers" who include (i)
the Company's President and Chief Executive Officer, (ii) each of the Company's
three most highly compensated executive officers other than its Chief Executive
Officer who were serving as officers of the Company as of December 31, 1997 and
whose annual salary and bonus for 1997 exceeded $100,000, and (iii) the two
individuals who would have been in the group of three most highly compensated
officers other than the Chief Executive Officer as of December 31, 1997 but for
the fact that they were not serving as executive officer at that time.
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term Compensation
----------------------
Awards Payouts
------ -------
Annual Compensation Restricted
-------------------
Other Annual Stock All Other
Name and Salary Bonus Compensation Award(s) Options/
Principal Position Year ($) ($) ($) ($)
- ------------------------------------------------------------------- ------------- -------- ------------- -------- ---------
<S> <C> <C> <C> <C> <C>
George Steel(1) . . . . . . . . . . . . . . . . . . . . . . . . . . 1997 199,999 0 0 0
President and . . . . . . . . . . . . . . . . . . . . . . . . . . . 1996 162,500 0 0 0
Chief Executive Officer . . . . . . . . . . . . . . . . . . . . . . 1995 0 0 0 0
- ------------------------------------------------------------------- ------------- -------- ------------- -------- ---------
Robert G. Parish(2) . . . . . . . . . . . . . . . . . . . . . . . . 1997 156,992 0 0 0
Executive Vice President,
1996 146,485 28,074 0 0
Exploration & . . . . . . . . . . . . . . . . . . . . . . . . . . . 1995 142,876 0 0 0
Production. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,641(4)
Consulting
- -------------------------------------------------------------------
Gordon L. Scheig. . . . . . . . . . . . . . . . . . . . . . . . . . 1997 76,750 0 52,195 0
Vice President, . . . . . . . . . . . . . . . . . . . . . . . . . . 1996 70,625 0 100,500 0
Sales - America . . . . . . . . . . . . . . . . . . . . . . . . . . 1995 75,000 3,637 29,096 0
Peter C. Colonomos. . . . . . . . . . . . . . . . . . . . . . . . . 1997 89,999 0 23,204 0
Vice President, . . . . . . . . . . . . . . . . . . . . . . . . . . 1996 71,242 6,090 33,902 0
E&P Consulting. . . . . . . . . . . . . . . . . . . . . . . . . . . 1995 0 0 0 0
Sales-South America
Dag G. Heggelund. . . . . . . . . . . . . . . . . . . . . . . . . . 1997 112,625 0 0 0
Vice President, . . . . . . . . . . . . . . . . . . . . . . . . . . 1996 101,708 5,000 0 0
WorkBench . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1995 87,176 4,550 5,750 0
Development
(1) George Steel joined the Company January 15, 1996.
(2) Robert G. Parish was terminated on April 17, 1998.
(3) Executive perquisite allowance.
(4) U.K. auto allowance.
(5) Peter C. Colonomos resigned from the Company in January 1998.
(6) Dag G. Heggelund resigned from the Company in February 1998.
Name and Compensation
Principal Position SARs(#) ($) Total
- ------------------------------------------------------------------- ------------- -------- -------
<S> <C> <C> <C>
George Steel(1) . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 0 199,999
President and . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,000 0 162,500
Chief Executive Officer . . . . . . . . . . . . . . . . . . . . . . 0 0 0
- ------------------------------------------------------------------- ------------- -------- -------
Robert G. Parish(2) . . . . . . . . . . . . . . . . . . . . . . . . 25,000 0 156,992
Executive Vice President,
7,000 0 174,559
Exploration & . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 5,715(3) 156,232
Production
Consulting
- -------------------------------------------------------------------
Gordon L. Scheig. . . . . . . . . . . . . . . . . . . . . . . . . . 25,000 0 128,945
Vice President, . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 0 171,125
Sales - America . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 107,733
Peter C. Colonomos. . . . . . . . . . . . . . . . . . . . . . . . . 0 0 113,203
Vice President, . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 111,234
E&P Consulting. . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 0
Sales-South America
Dag G. Heggelund. . . . . . . . . . . . . . . . . . . . . . . . . . 25,000 0 112,625
Vice President, . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 0 106,708
WorkBench . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,500 0 97,476
Development
(1) George Steel joined the Company January 15, 1996.
(2) Robert G. Parish was terminated on April 17, 1998.
(3) Executive perquisite allowance.
(4) U.K. auto allowance.
(5) Peter C. Colonomos resigned from the Company in January 1998.
(6) Dag G. Heggelund resigned from the Company in February 1998.
</TABLE>
<PAGE>
Executive Compensation Policies
The Company's policy regarding base salaries for senior executives
recognizes each individual's levels of responsibility, and his contribution
toward the success of his respective area of responsibilities and to the Company
in general. All senior executives have significant experience in the oil and
gas industry and most have advanced degrees. Accordingly, the Company uses oil
and gas industry data and professional association data, as well as data from
companies included in the Standard & Poor's Energy Composite Index used to
prepare the Performance Table below, to ensure that base salaries are
competitive within the Company's industry.
Due to the Company's current financial performance and condition, which raise
doubt as to whether the Company will be able to continue as a going concern, the
Company does not at this time have a general policy for increases in executive
compensation or bonuses which are linked to the Company's financial performance
and does not expect to establish such a policy until such time as the Company is
able to return to profitability and financial stability. Prior thereto, any
executive compensation increases will be granted only in the event of material
increases in an executive's responsibilities and performances based upon an
evaluation of each individual executive.
In addition to the base salary and bonus plan, the Company established
guidelines in 1991 for the award of stock options to senior executives and other
key employees. These guidelines are reviewed each year by management to
determine if additional stock options should be granted to senior executives and
key contributors. Stock options with respect to an aggregate of 625,000 shares
were issued to senior executives during 1997. Included in such option grants
was the issuance to George Steel, the Company's Chief Executive Officer, of an
option to acquire 600,000 shares in exchange for a previously issued option as
described under the "Stock Option Repricing/Exchange" caption below. The
foregoing restructuring of Mr. Steel's stock option was approved in light of the
adverse effect on the market price for the Company's Common Stock of
circumstances in the Company occurring prior to Mr. Steel's employment and for
the purpose of providing for him an incentive with respect to the Company's
subsequent performance.
Edward O. Price, Jr., member of the Compensation Committee
William B. Nichols, Member of the Compensation Committee
Compensation of Directors
For attendance at Board of Directors meetings during the year ended
December 31, 1997, Edward O. Price, Jr. and William B. Nichols were compensated
in the amount of $4,000 each. Directors did not receive any option grants
during 1997 other than Jack L. Howard who, upon becoming a Director during 1997,
received an option to purchase 5,000 shares of Common Stock at $.128 per share,
representing the public trading market price of the Common Stock at that time.
<PAGE>
The following table summarizes the individual grants of stock options made
during the last completed fiscal year to each of the Named Executive Officers.
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
-------------------------------------
Individual Grants
-----------------
Number of securities underlying Options/SARs granted (#)
(c)
Name (b)
(d)
(e)
(a)
- -------------------
<S> <C>
George Steel. . . . 150,000
--------------------------------------------------------
150,000
--------------------------------------------------------
150,000
--------------------------------------------------------
150,000
--------------------------------------------------------
Robert G. Parish. . 25,000
--------------------------------------------------------
Gordon L. Scheig. . 25,000
--------------------------------------------------------
Peter C. Colonomos. 25,000
--------------------------------------------------------
3,000
--------------------------------------------------------
Dag G. Heggelund. . 25,0000
- ------------------- --------------------------------------------------------
Percent of total options/SARs granted to employees in
fiscal year Exercise or base price ($/Sh) Expiration date(1) Grant Date present value $(2)
Name
(f)
(a)
- -------------------
<S> <C> <C> <C> <C>
George Steel. . . . 16.7% $ .50 2/10/02 $ 63,000
16.7% $ 1.00 2/10/02 61,000
16.7% $ 1.50 2/10/02 60,000
16.7% $ 2.00 2/10/02 59,000
Robert G. Parish. . 2.8% $ .50 7/21/98 15,000
Gordon L. Scheig. . 2.8% $ .50 2/10/02 12,000
Peter C. Colonomos. 2.8% $ .50 4/20/98 12,000
Dag G. Heggelund. 2.8% $ .50 6/2/98 12,000
</TABLE>
(1)Employee options generally have five year terms, but terminate 95 days after
the termination of employment. The employment of Robert G. Parish, Peter C.
Colonomos and Dag G. Heggelund terminated in April, January and February of
1998, respectively.
(2)Based on the Black-Scholes option-pricing model using the assumptions for
1997 set forth in Note 6 of the Notes to Consolidated Financial Statements.
The following table sets forth certain information regarding the stock
options held as of December 31, 1997 by the Named Executive Officers:
AGGREGATED FISCAL YEAR END OPTIONS VALUES
<TABLE>
<CAPTION>
<S> <C> <C>
Number of Unexercised
Options at
Fiscal Year End (#)
----------------------
Name . . . . . . . Exercisable Unexercisable
- ------------------ ---------------------- -------------
George Steel . . . 610,000 0
Gordon L. Scheig . 31,000 0
Peter C. Colonomos 0 0
Robert G. Parish . 78,500 2,500
Dag G. Heggelund . 42,500 0
</TABLE>
There were no exercises of stock options by any of the Named Executive
Officers during the last completed fiscal year.
Based on the closing bid quotation of $.125 per common share on December 31,
1997, none of the unexercised options held by the Named Executive Officers was
in-the-money as of December 31, 1997.
STOCK OPTION REPRICING/EXCHANGE
The Company's Board of Directors authorized the grant to George Steel
effective January 3, 1997 of an option to acquire in the aggregate 600,000
shares of the Company's common stock at exercise prices of (i) $.50 per share,
which was the per share fair market value of the Company's common stock on the
date of the grant, with respect to 150,000 shares, (ii) $1.00 per share with
respect to 150,00 shares, (iii) $1.50 per share with respect to 150,000 shares,
and (iv) $2.00 per share with respect to 150,000 shares. The option agreement
for this grant provided for the cancellation of the option to acquire 100,000
shares of the Company's common stock at an exercise price of $2.875 per share
granted to Mr. Steel in January 1996.
The following table sets forth certain information regarding all repricings of
options held by any executive officer of the Company during the last ten fiscal
years:
Ten Year Option Repricings
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Securities Length of original
underlying Market price of Exercise price Option term
number of stock at time of at time of New exercise Remaining at date
Name . . . . . . . . Date options/SARs repricing or repricing or price ($) of repricing or
repriced or amendment ($) amendment ($) Amendment
amended (#)
(a). . . . . . . . . (b) (c) (d) (e) (f) (g)
- -------------------- ------------ ------------------- ---------------- -------------- ------------------ ----------------
George Steel,. . . . 01/03/97 100,000 $ .50 $ 2.875 * 4 years
President and Chief
Executive Officer
</TABLE>
*See the discussion immediately above for applicable exercise prices with
respect to the option for which the original option was exchanged.
The Company does not have any defined benefit or actuarial plan under which
benefits are determined primarily by final compensation (or average final
compensation) and years of service.
Employment, Termination of Employment and Change-In-Control Arrangements
In connection with the commencement in January, 1996 of the employment of
George Steel as President of the Company the Company agreed that if there is a
change in control of the Company and if as a result thereof the employment of
Mr. Steel is terminated without cause or he resigns his employment, the Company
will (a) pay to him as severance one year's salary at the time of his employment
termination, (b) reimburse him for any loss realized on the sale of his home in
Denver, Colorado which he purchased in connection with the commencement of his
employment if such sale is necessitated as a result of a change in his place of
employment, (c) reimburse him for all out-of-pocket expenses reasonably incurred
for the relocation of his residence to Scotland (Mr. Steel's place of birth) if
such relocation occurs, and (d) include him and his dependents within the
Company's medical benefits plan for one year following such employment
termination. In November, 1997, in order to obtain the continued services of
Mr. Steel as President and Chief Executive Officer of the Company, the Company
agreed that his annual compensation would continue at the rate of $200,000 per
year, which was his initial rate of compensation when first employed, and that
to the extent he had accepted a lesser rate of compensation during prior
periods, the underpayment would be restored. The Company also agreed that if
Mr. Steel's employment with the Company continued until at least June 1, 1998,
he would receive upon any subsequent termination of his employment, other than a
termination for cause, a severance payment of $50,000. Such $50,000 severance
payment will not however be paid if Mr. Steel receives the one year's annual
salary severance payment described above applicable to a change of control.
It is not known at this time how the acquisition of the Company by Baker,
if completed, will affect Mr. Steel's employment and accordingly the application
of the foregoing severance arrangements is uncertain.
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee of the Company's Board of
Directors are Edward O. Price, Jr. and William B. Nichols. No member of the
Compensation Committee was at any time during 1997 or at any other time an
officer or employee of the Company. No executive officer of the Company serves
as a member of the Board of Directors or compensation committee of any entity
which has one or more executive officers serving as a member of the Company's
Board of Directors or Compensation Committee.
Performance Table
The following table compares the Company's cumulative total stockholder
return on its Common Stock for the period from December 31, 1992 to December 31,
1997 with the Standard & Poor's 500 Stock Index ("S&P 500") and the Standard &
Poor's Energy Composite Index ("S&P Energy Composite") over the same period.
The S&P Energy Composite has been used because a significant portion of the
Company's products are used primarily by the energy industry. This comparison
assumes the investment of $100 on December 31, 1992 and the reinvestment of all
dividends.
Comparison of Cumulative Total Return
Among Scientific Software-Intercomp, Inc.,
the S&P 500 and the S&P Energy Composite
<TABLE>
<CAPTION>
12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Scientific Software-Intercomp, Inc. $ 100 $ 118.33 $ 166.67 $ 66.67 $ 40.67 $ 3.33
--------- --------- --------- --------- --------- ---------
S&P 500 . . . . . . . . . . . . . . $ 100 $ 110.08 $ 111.53 $ 153.45 $ 188.68 $ 251.62
--------- --------- --------- --------- --------- ---------
S&P Energy Composite. . . . . . . . $ 100 $ 115.73 $ 120.17 $ 157.13 $ 197.64 $ 247.54
- ----------------------------------- --------- --------- --------- --------- --------- ---------
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of May 6, 1998 with respect
to the Common Stock of the Company owned by each person who is known by the
Company to beneficially own five percent or more of the outstanding Common
Stock, by each Director of the Company, by each Named Executive Officer of the
Company as described in Item 11 above, and by all Directors and Named Executive
Officers of the Company as a group. On May 6, 1998 there were 9,046,804 shares
of the Company's Common Stock outstanding, which were held by approximately 450
shareholders of record.
<TABLE>
<CAPTION>
<S> <C> <C>
Number of
Shares
Beneficially % Beneficial
Name and Address of Beneficial Owner . . . . . . . . . . . . . . . . . Owned(6) Ownership(6)
George Steel(1)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . 610,000(7) 6.3%
Gordon L. Scheig(1). . . . . . . . . . . . . . . . . . . . . . . . . . 47,036(8) *
Peter C. Colonomos, Ph.D.(1)(3). . . . . . . . . . . . . . . . . . . . 2,928(9) *
Dag G. Heggelund, Ph.D.(1)(3). . . . . . . . . . . . . . . . . . . . . 42,500(10) *
Robert G. Parish, Ph.D.(1)(4). . . . . . . . . . . . . . . . . . . . . 121,315(11) 1.3%
William B. Nichols, Ph.D.(2) . . . . . . . . . . . . . . . . . . . . . 88,741(12) *
Edward O. Price, Jr.(2). . . . . . . . . . . . . . . . . . . . . . . . 15,500(13) *
Jack L. Howard(2). . . . . . . . . . . . . . . . . . . . . . . . . . . 63,000(14) *
All Named Executive Officers and Directors as a group (8) individuals
993,244 10.1%
Renaissance Capital Partners II, Ltd.
Renaissance Capital Group, Inc.
Managing General Partner
8080 N. Central Expressway
Suite 210-LB 59
Dallas, TX 75206-1857
Vance M. Arnold, Executive Vice President. . . . . . . . . . . . . . . 847,218(15) 8.9%
Ryback Management Corporation(16)
7711 Carondelet Avenue, Suite 700
St. Louis, MO 63105
Eric Ryback, President . . . . . . . . . . . . . . . . . . . . . . . . 3,230,000(17) 30.6
*Amount represents less than one percent.
</TABLE>
(1) Named Executive Officer
(2) Member of the Board of Directors
(3) Dr. Colonomos resigned from all positions with the Company in January
1998
(4) Dr. Heggelund resigned from all positions with the Company in February
1998.
(5) Dr. Parish's employment with the Company was terminated in April 1998.
(6) Applicable Percentage ownership is based on 9,046,804 shares of Common
Stock outstanding as of May 6, 1998, together with applicable options or
warrants for such stockholder. Beneficial ownership is determined in accordance
with the rules of the Securities and Exchange Commission and generally includes
voting or investment power with respect to securities. Shares of Common Stock
issuable upon the exercise of options or warrants presently convertible or
exercisable within 60 days of May 6, 1998 are deemed to be beneficially owned by
the person holding such options or warrants for the purpose of computing the
percentage of ownership of such person but are not treated as outstanding for
the purpose of computing the percentage of any other person.
(7) Consists of exercisable options to acquire 610,000 shares of Common
Stock.
(8) Includes exercisable options to acquire 31,000 shares of Common Stock.
(9) Dr. Colonomos holds no options to acquire shares of Common Stock.
(10) Includes exercisable options to acquire 42,500 shares of Common Stock.
(11) Includes exercisable options to acquire 78,500 shares of Common Stock.
(12) Includes exercisable options to acquire 20,000 shares of Common Stock.
(13) Includes exercisable options to acquire 12,500 shares of Common Stock.
(14) Includes exercisable options to acquire 5,000 shares of Common Stock.
(15) Includes exercisable warrants to require 450,000 shares of Common
Stock.
(16) Ryback Management Corporation controls the Lindner Funds, a senior
secured creditor of the Company.
(17) Includes exercisable warrants to acquire 1,500,000 shares of Common
Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Other than the Company's compensation of its executive officers for their
services as such, and the transactions with Lindner Funds (which is controlled
by Ryback Management Corporation, a greater than 5% shareholder of the Company)
described in the Notes to Consolidated Financial Statements, the Company was not
a party to any transaction or series of similar transactions since January 1,
1997 (or which is currently proposed) in which the amount involved exceeded
$60,000 and in which any director, executive officer or 5% shareholder of the
Company (or a member of the immediate family of the foregoing) had a material
interest.
<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>
<C> <S>
3. Exhibits
--------------------------------------------------------------------------------------
2.1 Letter Agreement dated March 27, 1998 between the Company and
Baker Hughes Incorporated (filed as Exhibit B to the Company's report
on Form 8-K dated March 27, 1998 and incorporated herein by reference.)
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.
10.21 Letter Agreement dated March 30, 1998 between the Company and Lindner
Funds (filed as Exhibit C to the Company's Report on Form 8-K dated
March 27, 1998 and incorporated herein by reference.)
10.22 Letter Agreement dated March 30, 1998 between the Company and
Renaissance Partners II, Ltd. (filed as Exhibit D to the Company's Report on
Form 8-K dated March 27, 1998 and incorporated herein by reference.)
10.23 Letters dated March 27, 1998 and March 30, 1998 regarding agreement
With Halliburton Company (filed as Exhibit E to the Company's Report on
Form 8-K dated March 27, 1998 and incorporated herein by reference.)
10.24 Asset Purchase Agreement dated March 1, 1998 by and among Scientific
Software-Intercomp, Inc., SSI Bethany, Inc., Scientific Software-Intercomp
U.K., Ltd. and LICENERGY, Inc. (to be filed by amendment).
10.25 Letter Agreement dated April 30, 1998 between the Company and
LICENERGY, INC. (filed as Exhibit A to the Company's report on
Form 8-K dated May 1, 1998 and incorporated herein by reference.)
10.26 Stock Option Agreement dated January 3, 1997 between the Company
and George Steel.
10.27 Description of Employment Arrangement effective February 1996 between
the Company and George Steel.
10.28 Letter Agreement dated November 26, 1997 between the Company and
George Steel regarding Continued Employment.
10.29 Change in Terms Agreement dated November 30, 1997 between the Company
and Bank One, Colorado, N.A. (to be filed by amendment).
16.1 Letters re: Change in Certifying Accountant (filed as exhibits to the
Company's Form 8-K dated June 30, 1995 and incorporated herein by
reference.
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.
<TABLE>
<CAPTION>
<S> <C>
May 29, 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.
<TABLE>
<CAPTION>
<S> <C>
/s/ George Steel . . . . . . . . . . . . . . . . . . . . May 29, 1998
- --------------------------------------------------------
George Steel
President and Chief Executive Officer and Director
/s/ Barbara J. Cavallo . . . . . . . . . . . . . . . . . May 29, 1998
Financial Controller
/s/ William B. Nichols . . . . . . . . . . . . . . . . . May 29, 1998
- --------------------------------------------------------
William B. Nichols, Director
/s/ Edward O. Price, Jr. . . . . . . . . . . . . . . . . May 29, 1998
- --------------------------------------------------------
Edward O. Price, Jr., Chairman of the Board of Directors
/s/ Jack L. Howard . . . . . . . . . . . . . . . . . . . May 29, 1998
- --------------------------------------------------------
Jack L. Howard, Director
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 705
<SECURITIES> 0
<RECEIVABLES> 2,559
<ALLOWANCES> 881
<INVENTORY> 0
<CURRENT-ASSETS> 5,942
<PP&E> 4,529
<DEPRECIATION> 4,261
<TOTAL-ASSETS> 14,878
<CURRENT-LIABILITIES> 6,189
<BONDS> 0
4,000
0
<COMMON> (2,483)
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 14,878
<SALES> 12,392
<TOTAL-REVENUES> 12,392
<CGS> 0
<TOTAL-COSTS> 17,764
<OTHER-EXPENSES> 13
<LOSS-PROVISION> 414
<INTEREST-EXPENSE> (481)
<INCOME-PRETAX> (5,426)
<INCOME-TAX> 20
<INCOME-CONTINUING> (5,446)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (5,446)
<NET-INCOME> (1)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
Exhibit 10.26
SECURITIES ISSUED UPON EXERCISE OF THIS OPTION HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED ("THE ACT"), AND ARE "RESTRICTED
SECU-RITIES" AS THAT TERM IS DEFINED IN RULE 144 UNDER THE ACT. THE SECURITIES
MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANS-FERRED EXCEPT PURSUANT TO
AN EFFECTIVE REGISTRA-TION STATEMENT UNDER THE ACT OR PURSUANT TO AN EXEMPTION
FROM REGISTRATION UNDER THE ACT, THE AVAILABILITY OF WHICH IS TO BE ESTABLISHED
TO THE SATISFACTION OF THE COMPANY.
SCIENTIFIC SOFTWARE-INTERCOMP, INC.
-----------------------------------
STOCK OPTION AGREEMENT
----------------------
THIS STOCK OPTION AGREEMENT, hereinafter referred to as this "Agreement,"
is made as of February 10, 1997 (the "Grant Date") between Scientific
Software-Intercomp, Inc., a Colorado corporation (the "Co-mpany"), and George
Steel (the "Optionee").
The Company hereby grants an option (the "Option") for the purchase of
600,000 shares (the "Shares") of common stock of the Company (the "Common
Stock") to the Optionee at the price and in all respects subject to the terms,
definitions and provi-sions of this Agreement.
1. Option Exercise Price. The exercise prices for the Option shall be as
- -- ---------------------
follows:
- --
(a) The option shall be exercisable with respect to 150,000 Shares at $.50
per share;
(b) The option shall be exercisable with respect to 150,000 Shares at $1.00
per share;
(c) The option shall be exercisable with respect to 150,000 Shares at $1.50
per share; and
(d) The option shall be exercisable with respect to 150,000 Shares at $2.00
per share.
2. Option Period. The Option Period shall commence on the Grant Date and
- -- -------------
expire at 12:00 o'clock p.m., Denver time, on February 10, 2002, which is five
- --
years from the Grant Date, subject to provisions of Section 4 hereof.
3. Exercise of Option. This Option shall be exercisable for all or a lesser
- -- ------------------
number of Shares at any time during the Option Period by a written notice to the
Company which shall:
(a) State the election to exercise the Option and the number of Shares in
respect of which it is being exer-cised;
(b) Contain such representations and agreements as to the Optionee's
investment intent with respect to the Shares for purposes of compliance with
applicable securities laws as may be satisfactory to the Company's counsel; and
(c) Be signed by the person or persons entitled to exercise the Option and,
if the Option is being exer-cised by any person or persons other than the
Optionee, be accompanied by proof, satisfactory to counsel for the Company, of
the right of such per-son or persons to exercise the Option.
Payment of the purchase price of Shares with respect to which the Option is
being exercised shall be by cash or certified check, previously acquired shares
of Common Stock having a fair market value equal to the Option price or
previously acquired shares of Common Stock having a fair market value less than
the Option price, plus cash or certi-fied check, and shall be delivered with the
notice of exercise. The certificate or certificates for Shares as to which the
Option shall be exercised shall be registered in the name of the person or
persons exercising the Option.
4. Early Termination of Option.
- -- ------------------------------
Notwithstanding the provisions of Section 2, the Option Period shall terminate:
(a) After the completion of the merger or sale of substantially all of the
stock or assets of the Company in a transaction in which the Company is not the
survivor, except for the merger of the Company into a wholly-owned subsidiary
(and the Company shall not be considered the surviving corporation for purposes
hereof if the Company is the survivor of a reverse triangular merger); or
(b) Upon the lapse of the number of days specified below after termination
of the employment of the Optionee for any reason:
(i) 90 days if the employment termination occurs during the first year
following the Grant Date;
(ii) 120 days if the employment termination occurs during the second year
following the Grant Date;
(iii) 150 days if the employment termination occurs during the third year
following the Grant Date; and
(iv) 180 days if the employment termination occurs during the fourth year
following the Grant Date.
5. Non-transferability. The Option shall be non-transferrable except to the
- -- -------------------
person or persons to whom the Optionee's rights under the Option pass by will or
the laws of descent and distribution.
6. Adjustments Upon Changes in Capitalization. Whenever a stock split,
- -- ------------------------------------------
stock dividend or other similar change in capital-ization of the Company occurs,
- --
the number of shares of Common Stock that can thereafter be pur-chased, and the
Option price per share shall be appropriately adjusted.
7. Notices. Each notice relating to this Agreement shall be in writing and
- -- -------
delivered in person or by certified mail to the address or addresses on file
with the Company. Each notice shall be deemed to have been given on the date it
is received. Each notice to the Company shall be addressed to it at its
principal office, attention of the Secre-tary. Anyone to whom a notice may be
given under this Agreement may designate a new address by notice to that effect.
8. Benefits of Agreement. This Agreement shall inure to the benefit of and
- -- ---------------------
be binding upon each successor of the Company and the Optionee's heirs, legal
representatives and permitted transferees. This Agreement shall be the sole and
exclusive source of any and all rights which the Optionee, his heirs, legal
representatives and permitted transferees may have in respect to the Option.
9. Registration. The Company shall use its best efforts to register at the
- -- ------------
Company's expense the Shares issuable upon exercise of the Option under the
Securities Act of 1933, as amended, on Form S-8 or an equivalent form as soon as
practicable after such form is available for registration of such Shares.
10. Cancellation of Outstanding Options. The Optionee's option to purchase
- --- -----------------------------------
100,000 shares of the Common Stock of the Company at an exercise price of $2.875
per share granted on January 15, 1996 is hereby surrendered and cancelled.
IN WITNESS WHEREOF, the Company and the Optionee have caused this Agreement
to be executed as of the day, month and year first above written.
SCIENTIFIC SOFTWARE-INTERCOMP, INC.
By: /s/ E. O. Price, Jr.
------------------------
Title: Chairman, Compensation Committee
/s/ George Steel
------------------
George Steel
Exhibit 10.27
GEORGE STEEL
EMPLOYMENT ARRANGEMENT
Effective February 28, 1996, the Board of Directors of Scientific
Software-Intercomp, Inc. approved the following employment arrangement with
respect to George Steel.
Mr. Steel shall receive a salary of $200,000 per annum, subject to
annual review and possible increase by the Board of Directors and its
Compensation Committee.
Mr. Steel shall be entitled to a bonus with respect to 1996 of a
percentage of the foregoing annual compensation based upon the financial
performance of the Corporation in achieving its 1996 operating plan approved by
the Board of Directors as follows:
Percent of Base Salary
-------------------------
As to: Profit % Cash Flow Total
-------- --------- -----
Less than 60% of Plan 0 0
100% of Plan 25% 25% 50%
Over 140% of Plan 50% 50% 100%
To the extent that the achievement by the Corporation with respect to its 1966
operating plan is greater than 60 percent of profit or cash flow but less than
100 percent, Mr. Steel's bonus percent of base salary applicable to profit or
cash flow will be a pro rata portion of 25 percent determined on a linear basis
and similarly if the Corporation's achievement is greater than 100 percent but
less than 140 percent, the bonus percent will be a pro rata portion of 140
percent determined on a linear basis. The definition of cash flow for purposes
of the foregoing shall be agreed upon by Mr. Steel and the Chairman and Chief
Executive Officer of the Corporation. Profits and cash flow shall not include
any recovery of revenues previously written off. The bonus plans of Mr. Steel
for years subsequent to 1996 shall be as agreed upon by him and the Board of
Directors and its Compensation Committee.
Mr. Steel shall be entitled to other fringe benefits of a nature
consistent with those provided to other senior executives of the Corporation
including its Chairman and Chief Executive Officer.
Mr. Steel shall be entitled to an option to purchase 100,000 shares of
the Corporation's common stock at $2.875 per share, which was the market price
of such stock on January 15, 1996 when Mr. Steel's employment by the Corporation
commenced, and which option shall contain other terms and conditions consistent
with options granted to other senior executives of the Corporation including its
Chairman and Chief Executive Officer.
<PAGE>
In the event that on or before January 15, 1999, there is (i) a change
of control of the Corporation involving a change in the composition of a
majority of the members of its Board of Directors, other than a change resulting
from natural attrition factors, and if as a result thereof the employment of Mr.
Steel is terminated without cause, (ii) a bankruptcy liquidation of the
Corporation, or (iii) a change of control of the Corporation resulting from an
acquisition and if as a result thereof the employment of Mr. Steel is terminated
without cause or Mr. Steel resigns his employment with the Corporation, the
Corporation shall (a) pay to him as severance one year's annual salary at the
rate thereof at the time of such termination, (b) reimburse him for any loss
realized on the sale of his Denver home purchased in connection with his
commencement of employment with the Corporation, which sale is necessitated as a
result of a change in his place of employment, and further reimburse him for all
out-of-pocket moving and travel expenses reasonably and actually incurred by him
and his descendants in order to relocate his residence at that time to Scotland,
(c) include him and his dependents within the Corporation's or comparable
medical insurance and other medical benefits coverage for one year following
such termination as if he had continued to be employed, and (d) cause all of his
Corporation stock options to become fully vested and to be exercisable during
the remaining term thereof irrespective of the termination of his employment.
Exhibit 10.28
SCIENTIFIC SOFTWARE-INTERCOMP, INC.
633 17TH STREET, #1600
DENVER, CO 80202
November 26, 1997
Mr. George Steel
President
Scientific Software-Intercomp, Inc.
633 17th Street, #1600
Denver, CO 80202
Dear George:
This letter will set forth our agreement with respect to your
continued employment by Scientific Software-Intercomp, Inc.
1. You shall remain employed as the President and Chief Executive
Officer of SSI and shall remain as a member of its Board of Directors. SSI has
accepted your resignation as Chairman of the Board and you have been replaced in
that position by Edward Price.
2. Your salary shall be paid at the rate of $200,000 per annum, as
previously agreed. SSI acknowledges that for a substantial prior period you
have not received salary at that rate. SSI remains obligated to restore such
underpayment and such obligation shall be discharged as soon as financially
practicable.
3. Subject to the provisions of paragraph 4 below, in the event
that your employment with SSI continues until at least June 1, 1998, upon the
termination of your employment on that date or thereafter, other than a
termination for cause, SSI shall make a severance payment to you at that time of
$50,000. Such severance payment shall also be made to you if SSI elects to
terminate your employment prior to June 1, 1998 without cause.
4. You shall remain entitled to the severance benefits set forth
in paragraph 5 of the February 1996 SSI Consent of Directors applicable upon a
change of control or an acquisition of SSI, and in the event of your receipt of
such benefits, you shall not also be entitled to the severance payment set forth
in paragraph 3 above.
If the foregoing correctly sets forth our agreement, please sign and
return the attached copy of this letter. Execution may be in counterparts by
facsimile.
Very truly yours,
SCIENTIFIC SOFTWARE-INTERCOMP, INC.
By_________________________________________
Chairman of the Board
Agreed this ___ day of November, 1997.
____________________________________
George Steel
<PAGE>
CONSENT OF DIRECTORS
OF
SCIENTIFIC SOFTWARE-INTERCOMP, INC.
Pursuant to Section 7-108-202, Colorado Revised Statutes, the undersigned,
being all of the Directors of Scientific Software-Intercomp, Inc., a Colorado
corporation, acting without notice or a meeting, hereby waive notice and the
holding of such meeting and consent to, adopt and vote in favor of the following
Resolutions:
I.
RESOLVED that Edward O. Price be the Chairman of the Board of Directors of
the Corporation; and
FURTHER RESOLVED that Mr. Price be compensated for time spent by him as
Chairman of the Board of Directors, over and above time regularly spent by
Directors, at the rate of $750 per day.
II.
RESOLVED that the Corporation enter into the letter agreement with George
Steel with respect to his capacity as President and Chief Executive Officer of
the Corporation in the form attached to this Consent of Directors.
This Consent of Directors may be executed in counterparts by facsimile.
Dated this 30th day of December, 1997.
/s/ Edward O. Price, Jr.______________
----------------------------
Edward O. Price, Jr.
/s/ William B. Nichols_______________
- ----------------------------------------
William B. Nichols
/s/ George Steel_____________________
- ---------------------------------------
George Steel
