UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K/A NO. 2
[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
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INDEX
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PART I 5
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 10
Research and Development 11
MARKETING, SALES AND CUSTOMER SUPPORT 12
Marketing Strategy 12
Sales Staff, Locations and Customer Support 12
BACKLOG 12
COMPETITION 13
GEOGRAPHIC AND BUSINESS LINE DATA 13
Geographic Revenue Data 13
Business Line Data 14
PROPRIETARY RIGHTS 14
EMPLOYEES 14
SALE OF THE COMPANY 15
MANAGEMENT 16
Directors and Executive Officers 16
ITEM 2. PROPERTIES 18
ITEM 3. LEGAL PROCEEDINGS 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
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PART II 19
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S 19
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 23
CONDITION AND RESULTS OF OPERATIONS
General 23
FINANCIAL POSITION 24
Results of Operations 27
Revenue 27
Foreign Revenue 28
Backlog 29
Costs of Consulting and Training and Costs of Licenses and
Maintenance 30
Selling, General and Administrative Expenses 31
Recovery of Accounts Receivable 32
Software Research and Development 32
Settlement of Class Action 32
Interest Income (Expense) 33
Foreign Exchange Losses 33
Disposal of Kinesix Division 33
Sale of the Assets of the Pipeline Business Line 34
Year 2000 Issue 34
STATEMENT OF CASH FLOWS 34
FORWARD-LOOKING INFORMATION 36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON 74
ACCOUNTING AND FINANCIAL DISCLOSURE
PART III 74
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE MANAGEMENT 74
ITEM 11. EXECUTIVE COMPENSATION 75
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND 82
MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 82
PART IV 83
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS 83
ON FORM 8-K
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PART I
BASIS OF PRESENTATION
EXPLANATION OF SECOND AMENDMENT TO 1997 FORM 10-K
As previously disclosed in the Annual Report on Form 10-K for the year
ended December 31, 1997, the Company has received extensive comment letters from
the Staff of the Securities and Exchange Commission ("SEC") on its Form 10-K for
the year ended December 31, 1995 and 1997, as well as other periodic SEC
reports, and the 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
determined to restate the Company's financial statements for the years ended
December 31, 1995, 1994 and 1993. The audited restated 1995 financial
statements were filed with the Company's 1997 Form 10-K/A No. 1, in which it was
disclosed that the Company intended to file the audited restated 1994 and 1993
financial statements upon the completion thereof.
The audited restatement of the 1994 and 1993 financial statements is now
complete and this second amendment to the 1997 Form 10-K includes such financial
statements. The restatement adjustments for the 1995, 1994 and 1993 audited
restatement adjustments are primarily attributable to the correction of items
previously reflected in revenues which did not meet the criteria for recognition
of revenue. 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, 1994 and 1993 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.
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. As discussed below, the Company sold the assets of its Pipeline
Simulation Business effective May 1, 1998. On June 17, 1998, the Company
entered into an agreement and plan of merger pursuant to which a subsidiary of
Baker Hughes Incorporated ("Baker") will acquire the Company, subject to
customary conditions as well as the approval of the Company's common
shareholders. 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, 1995, 1994 and 1993 the Company
spent $3.4 million, $2.9 million, $5.5 million, $4.9 million and $4.3 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, 1995, 1994 and 1993 was
$4.2 million, $6.7 million, $9.5 million, $8.8 million and $10.6 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.
GEOGRAPHIC AND BUSINESS LINE DATA
GEOGRAPHIC REVENUE DATA
The following table sets forth the Company's consolidated revenues by
geographic area for 1997, 1996, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
United States $ 3,536 $ 4,239 $ 6,542 $ 6,002 $ 7,935
Foreign:
Far East 2,415 3,849 4,191 2,724 1,701
Middle East 682 912 1,265 1,510 2,018
Canada 1,142 880 924 882 1,434
Europe 2,559 3,548 4,476 4,214 6,502
Central and South America 1,693 2,861 2,299 3,454 3,252
Africa 88 2,318 1,755 3,428 2,028
Other 277 397 0 0 0
------- ------- ------- ------- -------
Total Foreign 8,856 14,765 14,910 16,212 16,935
------- ------- ------- ------- -------
Total Revenue $12,392 $19,004 $21,452 $22,214 $24,870
======= ======= ======= ======= =======
</TABLE>
Revenue derived from foreign sources amounted to 71%, 78%, 70%, 73% and 68%
of total revenues for 1997, 1996, 1995, 1994 and 1993, 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.
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, 1995,
1994 and 1993:
<TABLE>
<CAPTION>
For the year ended December 31,
---------------------------------
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Exploration and Production
Consulting and training 46% 55% 50% 49% 48%
Licenses and Maintenance 32% 22% 26% 28% 21%
Other 2% 1% 2% 2% 1%
----- ----- ----- ----- -----
Total 80% 78% 78% 79% 70%
Pipeline Simulation
Consulting and training 8% 13% 13% 13% 17%
Licenses and Maintenance 11% 9% 8% 7% 12%
Other 1% *% 1% *% 1%
Total 20% 22% 22% 20% 30%
Other *% *% *% 1% *%
Total 100% 100% 100% 100% 100%
===== ===== ===== ===== =====
<FN>
*Less than 1%.
</TABLE>
During 1997, 1995, 1994 and 1993, 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. As of May 31, 1998, the Company had 51 full-time employees. The
Company also engages technical consultants as required to carry out project
work.
SALE OF THE COMPANY
On June 17, 1998, the Company executed an Agreement and Plan of Merger
(the "Merger Agreement") between the Company and Baker Hughes Oilfield
Operations, Inc. ("BHOO"), a wholly owned subsidiary of Baker Hughes
Incorporated, pursuant to which BHOO will acquire the Company by virtue of a
merger of the Company with and into a wholly owned subsidiary of BHOO to be
formed prior to the closing (the "Merger").
In the Merger, each share of the Company's Common Stock issued and
outstanding immediately prior to the consummation of the Merger will be
converted into the right to receive $0.44 in cash. In connection with the
Merger, the Company's senior secured lenders, Lindner Dividend Funds ("Lindner")
and Renaissance Capital Partners II, Ltd. ("Renaissance") have agreed to accept
discounted terms of $1.4 million and $1.3 million respectively in satisfaction
of the outstanding $6.5 million principal plus accrued interest and other
obligations owed by the Company to the lenders. Halliburton has agreed to
accept $2.5 million in cash in exchange for its $4.0 million preferred stock
holding in the Company.
The Merger Agreement supersedes a March 27, 1998 letter agreement regarding
the acquisition of the Company by Baker Hughes Incorporated or any of its
subsidiaries. Completion of the Merger is subject to customary conditions as
well as the approval of the Company's common shareholders. Closing is expected
in the third quarter of 1998.
Except for historical information contained herein, the statements in
this report are forward-looking statements that are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks and uncertainties
which may cause the Company's actual results in future periods to differ
materially from forecasted results. Those risks and uncertainties include,
among others, the financial strength and competitive pricing environment of the
oil and gas service industry, product demand, market acceptance and new product
development. Those and other risks are described in the Company's filings with
the SEC.
<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
First Quarter $ .20 $.125
1997
First Quarter
First Quarter .9375 .41
Second Quarter .70 .45
Third Quarter .82 .45
Fourth Quarter .80 .125
1996
First Quarter
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
1994
First Quarter 8.13 4.50
Second Quarter 6.00 4.00
Third Quarter 7.13 4.13
Fourth Quarter 7.25 4.88
1993
First Quarter 4.13 3.13
Second Quarter 4.00 2.75
Third Quarter 4.00 3.13
Fourth Quarter 4.75 3.00
</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 (Restated (Restated
- Note 2) - Note 2) - Note 2)
(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 $14,131 $16,211
Licenses and Maintenance 5,597 5,864 7,356 7,647 8,158
Other 304 277 566 436 501
Total revenue 12,392 19,004 21,452 22,214 24,870
Costs and expenses:
Costs of consulting and training 8,204 8,414 9,720 10,489 12,464
Costs of licenses and maintenance 2,356 3,636 5,103 5,137 2,144
Costs of other revenue 199 190 340 261 278
Selling, general and administrative 3,886 6,604 10,768 8,753 7,810
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 25,433 23,835
Income (loss) from operations (5,372) 838 (19,185) (3,219) 1,035
Other (expense) (54) (1,308) (348) (467) (805)
Income (loss) before income taxes (5,426) (470) (19,533) (3,686) 230
Credit (provision) for income taxes (20) 60 (200) (260) (375)
Income (loss) from continuing operations (5,446) (410) (19,733) (3,946) (145)
Discontinued operations
Income (loss) from operations of
Kinesix division(3) - (878) (5,164) 581 630
Loss on disposal of Kinesix division(3) - (478) - - -
Net income (loss) $ (5,446) $ (1,766) $(24,897) $(3,365) $ 485
=========== =========== ========= ======== ========
Income (loss) per common share:
Continuing operations $ (0.61) $ (0.05) $ (2.41) $ (.61) $ (.03)
Discontinued operations - (0.16) (.63) .09 .14
Net income (loss) $ (0.61) $ (0.21) $ (3.04) $ (.52) $ .11
=========== =========== ========= ======== ========
Diluted(5) $ - $ - $ - $ - $ .09
=========== =========== ========= ======== ========
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 6,777 5,876
Pipeline Simulation 2,465 4,303 4,565 4,726 7,468
Total Revenue $ 12,392 $ 19,004 $ 21,452 $22,214 $24,870
=========== =========== ========= ======== ========
BALANCE SHEET DATA:
Working capital $ (247) $ 2,270 $ (3,092) $ 3,441 $ 2,763
Total assets 14,878 22,708 24,186 44,774 44,147
Long-term obligations, net of current
portion 7,172 7,147 2,519 3,073 10,030
Redeemable convertible preferred stock 4,000 4,000 4,000 4,000 4,000
Stockholders' equity (deficit) $ (2,483) $ 3,037 $ 4,110 $28,409 $18,987
- ----------------------------------------- ----------- ----------- --------- -------- --------
</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. 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 Second 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 restated its 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, 1994 and 1993 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. Certain of the restated 1994 and 1993 amounts set forth in
the above table reflect adjustments to the corresponding unaudited amounts as
reported in the Company's 1997 Form 10-K/A No. 1, wherein it was disclosed that
the 1994 and 1993 audited restatement was still in progress at the time of the
filing thereof. Such adjustments, which are primarily attributable to
additional items as ascertained in the audit of the 1994 and 1993 restated
financial statements which were previously reflected in revenue but did not at
the time of revenue recognition meet the criteria therefor, are included in the
restatement adjustments discussed in Note 2 of the Notes to Consolidated
Financial Statements.
(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 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
June 17, 1998, the Company entered into an agreement and plan of merger pursuant
to which a subsidiary of Baker Hughes Incorporated ("Baker") will acquire the
Company, subject to customary conditions as well as the approval of the
Company's common shareholders. The acquisition does not include the Company's
Pipeline Simulation Business assets which were sold separately to LIC on May 1,
1998 as discussed in Section 7.3.12 below. 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 Second 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 restated the
Company's financial statements for the years ended December 31, 1995, 1994 and
1993, 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, 1994 and 1993 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.
Including the restatement of revenues from continuing operations to reclassify
in loss from discontinued operations the $2.0 million, $3.2 million and $4.0
million in revenues attributable to the Kinesix Division for 1995, 1994 and
1993, respectively, total revenues for 1995, 1994 and 1993 have been reduced
from the amounts previously reported by $2.6 million, $3.3 million and $4.2
million, respectively. In addition, the 1995, 1994 and 1993 restatements
resulted in a reduction (increase) of the net loss from the amounts previously
reported by $27,000, $60,000 and $165,000, respectively.
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. At December
31, 1994, the Company's working capital was 1.37 to 1, based on current assets
of $12.7 million and current liabilities of $9.3 million. The Company's working
capital at December 31, 1993 was 1.25 to 1, based on current assets of $13.9
million and current liabilities of $11.1 million.
On June 30, 1994, the Company sold 2.0 million newly issued shares of
Common Stock in a public offering from which the Company received net proceeds
of $8.1 million, net of related costs of approximately $270,000. The Company
used the proceeds from the public offering to repay its bank indebtedness of
$5.1 million, to reduce accounts payable and to increase working capital.
In July 1994, the underwriters of the public offering exercised an overallotment
option, resulting in the sale by the Company of 383,000 additional newly issued
shares of common stock, from which the Company received net proceeds of
approximately $1.6 million.
Simultaneously with completion of the public offering, Renaissance Capital
Partners II, Ltd. ("Renaissance") converted $1.75 million in principal amount of
convertible debentures (see Note 4 of Notes to Consolidated Financial
Statements) into 653,846 shares of Common Stock, which Renaissance sold in the
public offering. As a result of the Renaissance conversion, the Company reduced
paid-in capital by $119,000 for unamortized debt issuance costs related to the
converted debentures.
In 1995, the Company received net proceeds of approximately $1.0 million from
the sale of newly issued Common Stock in connection with the exercise of stock
options.
In addition, 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.
<PAGE>
7.3 RESULTS OF OPERATIONS
7.3.1 REVENUE
The following table sets forth revenues by business line for 1997, 1996,
1995, 1994 and 1993 (in thousands):
<TABLE>
<CAPTION>
For the year ended December 31,
1997 1996 1995 1994 1993
----------- ----------- ---------- ---------- ----------
(Restated) (Restated) (Restated)
See Note 2 to the financial statements
<S> <C> <C> <C> <C> <C>
E&P Consulting $ 5,491 $ 9,766 $ 10,091 $ 10,711 $ 11,526
E&P Technology 4,436 4,935 6,796 6,777 5,876
Pipeline Simulation 2,465 4,303 4,565 4,726 7,468
----------- ----------- ---------- ---------- ----------
Total Revenue $ 12,392 $ 19,004 $ 21,452 $ 22,214 $ 24,870
=========== =========== ========== ========== ==========
</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 the final settled contract amount of $3.9 million related to
a foreign consulting project with respect to which the work was performed and
revenue in the amount of $1.6 million was recognized prior to 1996 but then was
reserved as a bad debt in the fourth quarter of 1995 as collection of the $1.6
million receivable was at that time not deemed probable. (See section 7.3.6).
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 1997, 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 7.3.12 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 7.3.6)
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.
Comparison of 1995 to 1994
Total revenues decreased 3% to $21.5 million in 1995 from $22.2 million in
1994 primarily due to a decrease in E&P Consulting revenues. Total revenues
from product sales and related services of the Company's Exploration and
Production businesses remained approximately flat, reporting $16.9 million
revenues in 1995 compared to $17.5 million in 1994.
E&P revenues were $16.9 million in 1995 compared with $17.5 million in 1994.
Software license and maintenance revenue increased to $6.3 million in 1995 from
$6.2 million in 1994. Revenue from The Petroleum WorkBench, a subset of the E&P
software products, increased 7% to $4.5 million in 1995 from $4.2 million in
1994, mainly due to the sale of 30 copies of the software to a major US oil and
gas company. Revenue from stand-alone software products decreased 28% to $1.8
million in 1995 from $2.5 million in 1994. Consulting and training revenue
decreased 8% to $10.1 million in 1995 from $11.0 million in 1994.
Total Pipeline Simulation Business revenues decreased 4% to $4.5 million in 1995
from $4.7 million in 1994. Consulting and training revenue was $2.7 million in
1995 and 1994. Software license and maintenance revenue decreased 11% to $1.6
million in 1994 from $1.8 million in 1995 due to a general slowdown in the
Pacific Rim market. The Company released its TGNET Windows product in March,
1996.
Comparison of 1994 to 1993
Total revenues decreased 11% to 22.2 million in 1994 from $24.9 million in
1993. The decrease was primarily due to delays in the award of foreign
consulting projects in the consulting and training services in the Exploration
and Production and the Pipeline Simulation Businesses.
Total E&P revenues were flat at $17.5 million in 1994 and $17.4 million in
1993. Software license and maintenance revenue increased 19% to $6.2 million in
1994 from $5.2 million in 1993. Revenue from the Petroleum WorkBench increased
121% to $4.2 million in 1994 from $1.9 million in 1993 as the product became
more established in the marketplace. Consulting and training revenue decreased
8% to $11.0 million in 1994 from $12.0 million in 1993. The decrease was
primarily attributable to delay in award of several foreign consulting projects.
Total Pipeline Simulation Business revenues decreased 37% to $4.7 million
in 1994 from $7.5 million in 1993. Consulting and training revenue decreased
36% to $2.7 million in 1994 from $4.2 million in 1993. In 1993, the Pipeline
Simulation Business had higher consulting revenue due to completion work on the
final stages of several of the significant combined software and services
contracts that were initiated in 1991. Software license and maintenance revenue
increased marginally.
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, 1995, 1994 and 1993
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%
1994 (Restated)* 16,212 73%
1993 (Restated)* 16,935 68%
*See Note 2 to the financial statements
</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, 1995, 1994 and 1993.
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. The Company's loss from foreign operations in 1994 was primarily
attributable to a bad debt provisions of $1.4 million.
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 major revenue milestones on significant projects occurring in 1996 and
1994.
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 have declined
since 1996.
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.
The principal reduction in U.S. export revenues between 1994 and 1995
occurred in the Far East ($1.4 million) and Central and Southern America ($0.5
million). During the course of 1994 the Company's U.K. office became
substantially responsible for generating revenues from the Far East and
therefore U.S. export revenues declined.
The increase in U.S. export revenues between 1993 and 1994 was primarily
attributable to the Far East region ($0.9 million) as a result of increased
software sales from the E&P Businesses and greater project revenues from the
Pipeline Simulation Business.
7.3.3 BACKLOG
Backlog at December 31, 1997, 1996, 1995, 1994 and 1993 was $4.2 million,
$6.7 million, $9.5 million, $8.8 million and $10.6 million, respectively. 76% of
the backlog at December 31, 1997 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
---------------------------------------------
1997 1996 Net Change 1995 Net Change
----- ----- ----------- ----- -----------
<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>
<TABLE>
<CAPTION>
Costs as % of Revenue
---------------------------------------------
1995 1994 Net Change 1993 Net Change
----- ----- ----------- ----- -----------
<S> <C> <C> <C> <C> <C>
Costs of Consulting and Training 72% 74% 2% 77% 3%
Costs of Licenses and Maintenance 69% 67% (2%) 26% (41%)
Costs of Other Revenues 60% 60% - 55% (5%)
</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.
Comparison of 1995 to 1994
Costs of consulting and training decreased to $9.7 million in 1995 from
$10.5 million in 1994. Costs of consulting and training were 72% of consulting
and training revenue in 1995 and 74% in 1994. The decreased percentage was
partly the result of reduction in the number of the Company's consulting staff.
Costs of licenses and maintenance was $5.1 million in both 1995 and 1994 and
included an increase in software amortization to $5.4 million in 1995 from $3.6
million in 1994. Other costs of licenses and maintenance decreased to $1.0
million in 1995 from $1.4 million, partly as a result of staff reductions made
in light of lower revenue.
Comparison of 1994 to 1993
Costs of consulting and training decreased to $10.5 million in 1994 from
$12.5 million in 1993. The decrease resulted primarily from the lower level of
consulting activity in 1994 due to timing of work on large foreign consulting
contracts. Costs of consulting and training were 74% of consulting and training
revenue in 1994 and 77% in 1993.
Costs of licenses and maintenance increased to $5.1 million in 1994 from $2.1
million in 1993, including an increase in software amortization to $3.6 million
in 1994 from $3.4 million in 1993. Costs of licenses and maintenances was $5.1
million in 1994 by comparison to an adjusted cost of $2.1 million in 1993. The
adjusted cost resulted from the separation in 1993 of the Pipeline group into
Kinesix products and Pipeline products and services. The unadjusted costs in
1993 were approximately $4.9 million Costs of licenses and maintenance were 67%
of license and maintenance revenue in 1994 and 26% in 1993.
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.
Comparison of 1995 to 1994
Selling, general and administrative costs increased to $10.8 million in
1995 from $8.8 million in 1994. This increase was attributable to the following
factors:
(a) an increase in selling and marketing costs to $6.4 million in 1995 from
$5.6 million in 1994 as a result of the Company increasing its sales and
marketing activities, including increased costs for further market penetration
of the WorkBench product, and
(b) an increase in general and administrative costs to $2.9 million in 1995 from
$2.2 million in 1994, partly as a result of higher legal and audit costs.
Comparison of 1994 to 1993
Selling, general and administrative costs increased to $8.8 million in 1994
from $7.8 million in 1993. The Company increased its sales and marketing
activities for the purpose of further market penetration of the WorkBench and
the Company's other products.
7.3.6 RECOVERY OF ACCOUNTS RECEIVABLE
In 1996 the Company received payments totaling $3.9 million related to the
final settled contract amount for a foreign consulting project. The payments
included $1.6 million related to an account receivable that had been reserved
for at December 31, 1995 pursuant to the Company's recent practice of generally
increasing the allowance for doubtful accounts by the amount of any accounts
receivable that have aged more than six months. The receipt of the $1.6 million
has been reported as a reduction of expenses in the statement of operations
under the caption "Recovery of accounts receivable." The remaining amount of
$2.3 million was reported as revenue in 1996. See Section 7.3.1.
7.3.7 SOFTWARE RESEARCH AND DEVELOPMENT
The following table summarizes total costs of development and enhancement
of the Company's software products for the year ended December 31, 1997, 1996,
1995, 1994 and 1993. The Company's software development and enhancement costs
are accounted for in accordance with SFAS Statement No. 86.
<TABLE>
<CAPTION>
For the year ended December 31,
1997 1996 1995 1994 1993
------ ------ ------- ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Software expenditures:
Capitalized software costs $2,483 $1,963 $ 4,766 $4,105 $3,149
Costs charged to research and
development expense 919 890 780 793 1,139
Total software expenditures $3,402 $2,853 $ 5,546 $4,898 $4,288
====== ====== ======= ====== ======
Software expenses charged to
earnings
Research and development
expense $ 919 $ 890 $ 780 $ 793 $1,139
Amortization of capitalized
software 2,196 1,894 4,292 3,646 3,395
Reduction of capitalized
software costs - - 13,926 - -
------ ------ ------- ------ ------
Total software expenses
Recognized $3,115 $2,784 18,998 $4,439 $4,534
======
</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.
7.3.8 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.
7.3.9 INTEREST INCOME (EXPENSE)
The following table summarizes the components of interest income (expense)
for 1997, 1996, 1995, 1994 and 1993. 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>
For the year ended December 31,
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income $ 76 $ 34 $ 35 $ 21 $ 17
Interest incurred (657) (522) (606) (754) (966)
Interest capitalized 100 165 109 350 285
Net interest (expense) $(481) $(323) $(462) $(383) $(664)
====== ====== ====== ====== ======
</TABLE>
7.3.10 FOREIGN EXCHANGE LOSSES
The Company is subject to risks associated with its various transactions in
foreign currencies, primarily the British Pound and the Canadian Dollar, but the
Company currently does not believe 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 and 1995, the Company reported net foreign exchange gains of $13,000
and $114,000, respectively. During 1996, 1994 and 1993 the Company reported net
foreign exchange losses of $85,000, $84,000 and $141,000, respectively.
7.3.11 DISPOSAL OF KINESIX DIVISION
On October 9, 1996, the Company announced the execution of final contracts
for the previously announced sale of the net assets and business of its
graphical user interface segment, otherwise known as the Kinesix Division, to a
group including the former President of the Kinesix Division. The sale of this
segment of the Company's business was part of management strategy to narrow the
focus of the Company's activities to its primary market of the oil and gas
industry. The consideration to the Company in the transaction was $410,000,
including cash of $376,000 which was received by the Company in October 1996, a
note receivable for $32,000, and the purchaser's assumption of liabilities
totaling $59,000. The measurement date for accounting for the disposal was
August 26, 1996, the date on which management decided to sell the Kinesix
Division and the disposal date was September 3, 1996, the effective date of the
transaction. The transaction resulted in a loss on disposal of $478,000, which
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.
7.3.12 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, $4.5 million, $4.7
million and $7.5 million and contributed a net loss of $1.3 million, $.4
million, $1.4 million, $2.5 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.
7.3.13 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.
Comparison of 1995 to 1994
In 1995, net cash of $2.7 million was provided by operations compared to
net cash used in operations of $.6 million in 1994.
Comparison of 1994 to 1993
In 1994, net cash of $.6 million was used in operations compared to net
cash provided by operations of $1.7 in 1993.
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.
Net cash utilized in investing activities was $4.9 million in 1995 compared
to $5.2 million in 1994. The Company incurred total software development and
enhancements costs of $5.5 million and $4.9 million, of which $4.8 million and
$4.1 million was capitalized and $.8 million and $.8 million was charged to
expense as research and development costs, in the years of 1995 and 1994,
respectively.
Net cash utilized in investing activities was $5.2 million in 1994 compared
to $3.5 million in 1993. The Company incurred total software development and
enhancements costs of $4.9 million and $4.3 million, of which $4.1 million and
$3.1 million was capitalized and $.8 million and $1.1 million was charged to
expense as research and development costs, in the years of 1994 and 1993,
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.
In 1994, net cash of $6.3 million was provided by financing activities which
consisted of $10.7 million of cash from the sale of the Company's stock and $1.1
million of cash from the Company's borrowing against revolving credit facility
less $5.1 million repayment against the revolving credit facility.
In 1993, net cash of $1.2 million was provided by financing activities which
consisted of $0.5 million of cash from the Company's borrowing against revolving
credit facility and $0.9 million of cash from the Company's issuance of a $1.0
million 7-year convertible debenture discussed in Note 4.
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
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<S> <C>
INDEPENDENT AUDITORS' REPORT 38
INDEPENDENT AUDITORS' REPORT 39
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1997,1996 40
1995 (Restated), 1994 (Restated) AND 1993 (Restated)
CONSOLIDATED STATEMENTS OF OPERATIONS FOR 42
THE YEARS ENDED DECEMBER 31, 1997,1996, 1995 (Restated),
1994 (Restated) AND 1993 (Restated)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) 43
FOR THE YEARS ENDED DECEMBER 31, 1997,1996, 1995 (Restated),
1994 (Restated) AND 1993 (Restated)
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR 44
THE YEARS ENDED DECEMBER 31, 1997,1996, 1995 (Restated),
1994 (Restated) AND 1993 (Restated)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 46
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE 74
<FN>
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.
</TABLE>
<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 (deficit) 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.
As discussed in Note 2 to the financial statements, certain errors resulting in
an overstatement of previously reported revenues and expenses for the year ended
December 31, 1995 were discovered by the Company. Accordingly, the 1995
financial statements have been restated to correct the errors.
/s/ Ehrhardt Keefe Steiner & Hottman PC
April 7, 1998, except Note 2
for which the date is May 28, 1998,
and except Notes 1 and 14 for which
the date is June 17, 1998.
Denver, Colorado
<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, 1994
and 1993, and the related consolidated statements of operations, stockholders'
equity (deficit) 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, 1994 and 1993. 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, 1994 and 1993, 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.
As discussed in Note 2 to the financial statements, certain errors resulting in
an overstatement of previously reported revenues and expenses for the year ended
December 31, 1994 and 1993 were discovered by the Company. Accordingly, the
1994 and 1993 financial statements have been restated to correct the errors.
/s/ Ehrhardt Keefe Steiner & Hottman PC
July 1, 1998
Denver, Colorado
<PAGE>
<TABLE>
<CAPTION>
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1997 1996 1995 1994 1993
(Restated - (Restated - (Restated -
Note 2) Note 2) Note 2)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 705 $ 1,870 $ 413 $ 602 $ 135
Accounts receivable, net of allowance for
doubtful accounts of $881, $690, $3,301,
$4,417, and $831 1,678 5,609 6,728 4,806 9,514
Work in progress (unbilled revenue) 1,707 2,785 2,210 4,778 2,377
Pipeline assets held for sale, net of
provision of $2.2 million 1,350 - - - -
Assets of discontinued division - - 704 1,614 1,145
Other current assets 502 530 410 933 722
Total current assets 5,942 10,794 10,465 12,733 13,893
Software, net of accumulated amortization
and write-down of $36,798, $42,837,
$40,943, $22,724 and $19,246 7,334 9,604 9,535 22,972 22,514
Property and equipment, net of accumulated
depreciation and amortization of $4,261,
$5,218, $5,839, $5,305, and $4,892 248 823 1,277 1,711 1,229
Assets of discontinued division - - 795 4,890 4,334
Other assets 1,354 1,487 2,114 2,468 2,177
$ 14,878 $ 22,708 $ 24,186 $ 44,774 $ 44,147
========= ========= ============= ============= =============
LIABILITIES, REDEEMABLE PREFERRED
STOCK, AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities
Current portion of senior secured notes
payable $ - $ - $ 382 $ 286 $ 652
Line of credit 382 - 2,870 1,000 -
Accounts payable 842 1,389 3,261 2,605 3,119
Accrued salaries and fringe benefits 729 1,070 1,003 1,248 2,680
Accrued lease obligations 5 260 375 570 403
Deferred maintenance and other revenue 2,101 2,421 2,472 1,839 2,159
Accrued royalties 698 731 589 485 761
Accrual for costs to complete a contract 72 200 189 18 20
Accrued taxes 153 282 161 260 363
Accrued litigation liabilities - 1,574 - - -
Liabilities of discontinued division - - 515 434 640
Other current liabilities 1,207 597 1,740 547 333
Total current liabilities 6,189 8,524 13,557 9,292 11,130
Accrued lease obligations 61 79 333 720 1,128
Long-term obligations 611 568 557 603 5,402
Convertible debentures - - - - 3,500
Senior secured notes payable 6,500 6,500 1,629 1,750 -
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 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; 8,256,000; 8,064,000; and
4,667,000 shares issued and outstanding 888 884 825 806 467
Paid-in capital 49,489 49,474 48,850 48,233 35,860
Accumulated deficit (52,182) (46,736) (44,970) (20,073) (16,708)
Cumulative foreign currency translation
adjustment (678) (585) (595) (557) (632)
Total stockholders' equity (deficit) (2,483) 3,037 4,110 28,409 18,987
$ 14,878 $ 22,708 $ 24,186 $ 44,774 $ 44,147
========= ========= ============= ============= =============
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For the Year Ended December 31
1997 1996 1995 1994 1993
-------- -------- ------------- ------------- -------------
(Restated - (Restated - (Restated -
Note 2) Note 2) Note 2)
<S> <C> <C> <C> <C> <C>
Revenue
Consulting and training $ 6,491 $12,863 $ 13,530 $ 14,131 $ 16,211
Licenses and maintenance 5,597 5,864 7,356 7,647 8,158
Other 304 277 566 436 501
-------- -------- ------------- ------------- -------------
12,392 19,004 21,452 22,214 24,870
-------- -------- ------------- ------------- -------------
Costs and Expenses
Costs of consulting and training 8,204 8,414 9,720 10,489 12,464
Costs of licenses and maintenance 2,356 3,636 5,103 5,137 2,144
Costs of other revenue 199 190 340 261 278
Selling, general, and administrative 3,886 6,604 10,768 8,753 7,810
Recovery of accounts receivable - (1,568) - - -
Provision for sale of Pipeline assets 2,200 - - - -
Software research and development 919 890 780 793 1,139
Reduction for capitalized software costs - - 13,926 - -
-------- -------- ------------- ------------- -------------
Total costs and expenses 17,764 18,166 40,637 25,433 23,835
-------- -------- ------------- ------------- -------------
Income (Loss) from Operations (5,372) 838 (19,185) (3,219) 1,035
Other Income (Expense)
Loss contingency (expense) reversal 414 (900) - - -
Interest income 76 34 35 21 17
Interest expense (557) (357) (497) (404) (681)
Foreign exchange gains (losses) 13 (85) 114 (84) (141)
-------- -------- ------------- ------------- -------------
Income (Loss) Before Income Taxes (5,426) (470) (19,533) (3,686) 230
Income Taxes (Provision) Credit (20) 60 (200) (260) (375)
-------- -------- ------------- ------------- -------------
Income (Loss) from continuing operations (5,446) (410) (19,733) (3,946) (145)
Discontinued operations:
Income (Loss) from operation of
Kinesix division - (878) (5,164) 581 630
Loss on sale of Kinesix division - (478) - - -
Net income (loss) $(5,446) $(1,766) $ (24,897) $ (3,365) $ 485
======== ======== ============= ============= =============
Weighted Average Number of Common
Shares Outstanding
Basic 8,859 8,556 8,178 6,468 4,521
Income (Loss) Per Share:
Continuing operations $ (0.61) $ (0.05) $ (2.41) $ (.61) $ (.03)
Discontinued operations - (0.16) (.63) .09 .14
Net income (loss) $ (0.61) $ (0.21) $ (3.04) $ (.52) $ .11
======== ======== ============= ============= =============
Diluted - - - - 5,678
Continuing operations - - - - (.02)
Discontinued operations - - - - .11
Net income (loss) - - - - $ .09
======== ======== ============= ============= =============
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
Cumulative
Common Stock Paid-in Accumulated Translation Stockholders'
--------------- -------- ------------- ------------- ---------------
Shares Amount Capital Deficit Adjustment Equity
------ ------- -------- ------------- ------------- ---------------
(Restated - (Restated -
Note 2) Note 2)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992 4,461 $ 446 $ 35,269 $ (17,193) $ (555) $ 17,967
Stock sold for cash 16 2 46 - - 48
Compensation, services and vendor
payments 190 19 545 - - 564
Foreign currency translation
adjustment - - - - (77) (77)
Net income - - - 485 - 485
------ ------- -------- ------------- ------------- ---------------
Balance, December 31, 1993 4,667 467 35,860 $ (16,708) $ (632) $ 18,987
Stock sold for cash 2,667 267 10,471 - - 10,738
Conversion of convertible debentures
into Common Stock 654 65 1,566 - - 1,631
Compensation and services 76 7 336 - - 343
Foreign currency translation
adjustment - - - - 75 75
Net (loss) - - - (3,365) - (3,365)
------ ------- -------- ------------- ------------- ---------------
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) - - - (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)
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
For the Year Ended December 31,
1997 1996 1995 1994 1993
(Restated - (Restated - (Restated -
Note 2) Note 2) Note 2)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(5,446) $(1,766) $ (24,897) $ (3,365) $ 485
Adjustments:
Depreciation and amortization 2,670 2,653 4,845 4,293 3,832
Reduction in capitalized software costs - - 13,926 - -
Contract cost accruals (reversals) - - - - (333)
Changes in allowance for doubtful
accounts (163) (1,057) 2,649 4,864 165
Stock issued for compensation - 30 - - 27
Loss contingency provision (reversal) (414) 900 - - -
Provision for sale of Pipeline assets 2,200 - - - -
Changes in operating assets and liabilities:
(Increase) decrease in accounts
receivable and work in progress 3,689 1,747 (2,021) (2,497) 342
(Increase) decrease in other assets 161 245 892 (12) (1,125)
Decrease in accounts payable and
accrued expenses (1,442) (479) (2,584 (2,701) (1,134)
Decrease in accrued lease obligations (273) (369) (582) (241) (332)
Increase (decrease) in deferred revenue 186 (51) 633 (320) (341)
Net cash provided by (used in) continuing
operations 1,168 1,853 (7,139) (21) 1,586
Net cash provided by (used in)
discontinued operations - (28) 9,920 (547) 53
Net cash provided by (used in) operating
activities 1,168 1,825 2,781 (526) 1,639
CASH FLOWS FROM INVESTING ACTIVITIES
Capitalized software costs (2,483) (1,963) (4,766) (4,105) (3,149)
Purchases of equipment (139) (288) (133) (1,140) (333)
Net cash used in investing activities (2,622) (2,251) (4,899) (5,245) (3,482)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of stock - 5 230 10,738 48
Net borrowing activity on line of credit 382 (2,870) 2,029 1,104 531
Repayments of bank borrowings - (262) - (5,132) (212)
Proceeds from Senior Secured Notes - 5,000 - - -
Proceeds from issuance of convertible
debentures - - - - 921
Repayments of other obligations - - (292) (397) (44)
Net cash provided by financing activities 382 1,873 1,967 6,313 1,244
Effect of exchange rates on cash (93) 10 (38) (75) 77
Net increase (decrease) in cash and
equivalents (1,165) 1,457 (189) 467 (522)
Cash and cash equivalents at beginning of
year 1,870 413 602 135 657
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 705 $ 1,870 $ 413 $ 602 $ 135
======== ======== ============= ============= =============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 175 $ 388 $ 497 $ 437 $ 511
Foreign taxes 106 79 238 166 264
NON-CASH INVESTING AND FINANCING ACTIVITIES
Obligations incurred in purchases of
equipment - - - - 93
Conversion of convertible debenture to
Common Stock - 250 - - -
Conversion of accrued liabilities to equity 19 409 - - -
Software and equipment purchased for
stock - - - - 48
Accrued compensation and services paid in
Stock - - 406 343 449
- ---------------------------------------------- -------- -------- ------------- ------------- -------------
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
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 June 17, 1998 the Company entered into an
agreement and plan of merger pursuant to which a subsidiary of Baker Hughes
Incorporated is to acquire the Company which would result in the acquisition of
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 restated 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. Specifically, the transactions which were restated did
not have a valid contract, or the software was not shipped, or a side letter
existed which allowed the customer to defer payment based on a future contingent
event. In addition, the December 31, 1995, 1994 and 1993 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 11 below.
The December 31, 1995 financial statements included herein have been
restated from those included in the previously filed reports as follows:
<TABLE>
<CAPTION>
As previously '95 Restate '95 Restated
reported Adjustments Kinesix Financials
--------------- ------------- --------- --------------
<S> <C> <C> <C> <C>
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)
Loss from continuing operations (24,924) 27 5,164 (19,733)
Net Loss (24,924) 27 - (24,897)
Loss per share from continuing
operations (3.05) .01 .63 (2.41)
Loss per share (3.05) .01 - (3.04)
Total Assets 23,912 274 - 24,186
Stockholders Equity $ 4,110 - - $ 4,110
</TABLE>
NOTE 2 - RESTATEMENT OF FINANCIAL STATEMENTS (CONTINUED)
The December 31, 1994 financial statements included herein have been
restated from those included in the previously filed reports as follows:
<TABLE>
<CAPTION>
As previously '94 Restate '94 Restated
reported Adjustments Kinesix Financials
--------------- ------------- --------- --------------
<S> <C> <C> <C> <C>
Revenue
Consulting and training $ 15,038 $ 432 $ (1,339) $ 14,131
Licenses and maintenance 12,431 (2,838) (1,946) 7,647
Profit (Loss) from Operations (4,163) 1,525 (581) (3,219)
Loss from continuing operations (4,890) 1,525 (581) (3,946)
Net Loss (4,890) 1,525 - (3,365)
Loss per share from continuing
operations (.75) .23 (.09) (.61)
Loss per share (.75) .32 (.09) (.52)
Total Assets 44,544 106 124 44,774
Stockholders Equity $ 28,436 (27) - $ 28,409
</TABLE>
The December 31, 1993 financial statements included herein have been
restated from those included in the previously filed reports as follows:
<TABLE>
<CAPTION>
As previously '93 Restate '93 Restated
reported Adjustments Kinesix Financials
--------------- ------------- --------- --------------
<S> <C> <C> <C> <C>
Revenue
Consulting and training $ 17,696 $ (46) $ (1,439) $ 16,211
Licenses and maintenance 12,111 (1,244) (2,709) 8,158
Income from Operations 2,892 (1,227) (630) 1,035
Income from continuing operations 1,712 (1,227) (630) (145)
Net Income 1,712 (1,227) - 485
Income per share from continuing
operations .32 (.23) (.12) (.03)
Income per share .32 (.09) (.12) .11
Total Assets 45,903 (1,591) (165) 44,147
Stockholders Equity 20,539 (1,387) (165) 18,987
Beginning Accumulated Deficit $ (16,868) $ (325) $ - $ (17,193)
</TABLE>
NOTE 3 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Scientific Software-Intercomp, Inc. ("the Company") develops and markets
sophisticated software for the development and production and pipeline and
surface facilities areas of the worldwide oil and gas industry. The Company
also provides consulting and technical support services in each of these areas.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Scientific
Software-Intercomp, Inc. ("the Company") and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated through
consolidation.
NOTE 3 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
NOTE 3 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Work in progress at December 31, 1994 includes $301,000 related to fixed
price contracts for the development of software that is funded by others. 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.
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.
NOTE 3 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In the fourth quarter of 1995, the Company recorded a $17.9 million
write-down of its software products, including an approximately $4.0 million
write-down attributable to products of the Kinesix division disposed of in 1996
as discussed in Note 11, 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.
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, 1992 $ 31,552 $ 7,059 $ 38,611
1993 additions 2,406 743 3,149
--------------- ---------- ---------
Balance December 31, 1993 33,958 7,802 41,760
1994 additions 2,768 1,337 4,105
Allocations to WorkBench (9,850) 9,850 -
Retirements (167) - (167)
--------------- ---------- ---------
Balance December 31, 1994 26,707 18,989 45,696
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, 1992 $ 14,042 $ 1,809 $ 15,851
1993 amortization expense 2,370 1,025 3,395
--------------- ---------- ---------
Balance December 31, 1993 16,412 2,834 19,246
1994 amortization expense 1,166 2,480 3,646
Retirements (167) - (167)
--------------- ---------- ---------
Balance December 31, 1994 17,410 5,314 22,724
1995 amortization expense 1,542 2,750 4,292
Reduction of capitalized software costs (net
of a $4 million reduction attributable
to the Kinesix Division - see Note 11) 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, 1993 $ 17,546 $ 4,968 $ 22,514
Software, net Balance, December 31, 1994 $ 9,297 $ 13,675 $ 22,972
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
</TABLE>
NOTE 3 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 1995, 1994 and 1993, the level of software
research and development costs was, in the aggregate, $3.4 million, $2.8
million, $5.5 million, $4.9 million and $4.3 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, $109,000, $350,000
and $285,000 during the years ended December 31, 1997, 1996, 1995, 1994 and
1993, 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, $568,000, $647,000 and $614,000 for the years ended December 31, 1997,
1996, 1995, 1994 and 1993, 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,
1997 1996 1995 1994 1993
-------- ------ ------ ------ ------
(In thousands)
- ------------------------------------
<S> <C> <C> <C> <C> <C>
Property and leasehold improvements $ 442 $ 450 $ 428 $ 401 $ 356
Office furniture and equipment 789 828 2,389 2,369 2,312
Computer equipment 4,776 4,763 4,299 4,246 3,453
-------- ------ ------ ------ ------
6,007 6,041 7,116 7,016 6,121
Pipeline Assets Held For Sale (1,498) - - - -
-------- ------ ------ ------ ------
$ 4,509 $6,041 $7,116 $7,016 $6,121
======== ====== ====== ====== ======
Accumulated depreciation $ 5,519 $5,218 $5,839 $5,305 $4,892
Pipeline Accumulated Depreciation (1,258) - - - -
$ 4,261 $5,218 $5,839 $5,305 $4,892
======== ====== ====== ====== ======
Property and equipment, net of
accumulated depreciation $ 248 $ 823 $1,277 $1,711 $1,229
======== ====== ====== ====== ======
</TABLE>
FOREIGN CURRENCY TRANSLATION
Gains and losses from the effects of exchange rate fluctuations on
transactions denominated in foreign currencies are included in results of
operations. Assets and liabilities of the Company's foreign subsidiaries are
translated into U.S. dollars at period-end exchange rates, and their revenue and
expenses are translated at average exchange rates for the period. Deferred
taxes have not been allocated to the cumulative foreign currency translation
adjustment included in stockholders' equity because there is no intent to
repatriate earnings of the foreign subsidiaries.
INCOME TAXES
The Company accounts for income taxes whereby deferred tax liabilities or
assets are provided in the financial statements by applying the provisions of
applicable tax laws to measure the deferred tax consequences of temporary
differences that will result in net taxable or deductible amounts in future
years as a result of events recognized in the financial statements in the
current or preceding years. The types of differences between the tax basis of
assets and liabilities and their financial reporting amounts that give rise to
significant portions of the temporary differences include: software development
expenditures capitalized for books and deducted currently for taxes and related
amortization, depreciation of property and equipment, amortization of rental
obligations, losses accrued for book purposes, the recognition of software
license revenues, and goodwill determined for tax purposes that is not
deductible. Investment tax credits are recognized using the flow-through
method.
Foreign subsidiaries are taxed according to applicable laws of the
countries in which they do business. The Company has not provided U.S. income
taxes that would be payable on remittance of the cumulative undistributed
earnings of foreign subsidiaries because such earnings are intended to be
reinvested for an indefinite period of time. At December 31, 1997, 1996, 1995,
1994 and 1993 the undistributed earnings of the foreign subsidiaries were not
significant.
NOTE 3 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME (LOSS) PER SHARE
Income (loss) per share, which is calculated in accordance with SFAS No.
128, Earnings per Share, is computed based on the weighted average number of
common shares outstanding during each period. Diluted income per share assumes
the effects of conversion of dilutive potential common shares. No potential
common shares are included in the computation of diluted loss per share when a
loss from continuing operations exists, and thus diluted income (loss) per share
is not presented for 1997, 1996, 1995 and 1994. For 1993, diluted income per
share assumes the effects of conversion of all potentially dilutive securities,
including the convertible securities and outstanding stock options.
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, 1995, 1994 and 1993 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,
1995, 1994 and 1993.
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.
NOTE 3 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
NOTE 4 - FINANCING 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.
NOTE 4 - FINANCING ARRANGEMENTS, LONG-TERM OBLIGATIONS AND
NOTE PAYABLE (CONTINUED)
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:
<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.
NOTE 4 - FINANCING ARRANGEMENTS, LONG-TERM OBLIGATIONS AND
NOTE PAYABLE (CONTINUED)
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.
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 discussed below 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.
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.
NOTE 4 - FINANCING ARRANGEMENTS, LONG-TERM OBLIGATIONS AND
NOTE PAYABLE (CONTINUED)
1994 PUBLIC OFFERING OF COMMON STOCK
On June 30, 1994 the Company sold 2.0 million newly issued shares of Common
Stock in a public offering from which the Company received net proceeds of $8.1
million, net of related costs of approximately $270,000. The Company used the
proceeds from the public offering to repay its bank indebtedness of $5.1
million, to reduce accounts payable and to increase working capital.
In July 1994 the underwriters of the public offering exercised an overallotment
option, resulting in the sale by the Company of 383,000 additional newly issued
shares of Common Stock, from which the Company received net proceeds of
approximately $1.6 million.
Simultaneously with completion of the public offering, Renaissance Capital
Partners II, Ltd. ("Renaissance") converted $1.75 million in principal amount of
convertible debentures into shares of common stock which Renaissance sold in the
public offering. As a result of the Renaissance conversion, the Company reduced
paid-in capital by $119,000 for unamortized debt issuance costs related to the
converted debentures.
LINDNER FINANCING
In April 1996 Lindner Dividend Funds ("Lindner"), 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,
1997 1996 1995 1994 1993
----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Note payable to bank
due January, 1995 $ - $ - $ - $ - $5,028
Accrued lease costs 66 339 708 1,290 1,531
Deferred compensation 640 632 659 690 482
----- ----- ------ ------ ------
706 971 1,367 1,980 7,041
Less current portion 34 324 477 657 511
$ 672 $ 647 $ 890 $1,323 $6,530
===== ===== ====== ====== ======
</TABLE>
<PAGE>
NOTE 5 - INCOME TAXES
The components of the provisions for income taxes are as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996 1995 1994 1994
------ ----- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Current:
U.S. Federal $ - $ 12 $ - $ - $ (5)
Foreign - 46 (200) (255) (354)
State (20) 2 - (5) (16)
$ (20) $ 60 $(200) $(260) $(375)
====== ===== ====== ====== ======
</TABLE>
Following is a summary of United States and foreign pretax accounting
income (loss):
<TABLE>
<CAPTION>
For the year ended December 31,
1997 1996 1995 1994 1993
-------- ------ --------- -------- ------
<S> <C> <C> <C> <C> <C>
United States $(4,156) $(473) $ (9,861) $(2,206) $(373)
Foreign (1,270) 3 (9,672) (1,480) 603
$(5,426) $(470) $(19,533) $(3,686) $ 230
======== ====== ========= ======== ======
</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>
December 31,
1997 1996 1995 1994 1993
-------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C>
Taxes at U.S. Federal $ - $(160) $(5,108) $ 1,071 $(710)
statutory rate
Federal alternative -
minimum tax - 12 (753) 157 (5)
Foreign pretax (income)
loss) - - - 8 242
State income taxes (20) 2 - - (16)
Foreign withholding and
other foreign taxes - - 46 (200) (255) (354)
U.S. net operating loss
carry forward and
Valuation allowances - - 245 5,861 (1,331) 569
Other, net - - (85) - 90 (101)
$ (20) $ 60 $ (200) $ (260) $(375)
======== ====== ======== ======== ======
</TABLE>
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>
December 31,
1997 1996 1995 1994 1993
--------- -------- -------- --------- --------
(In thousands
<S> <C> <C> <C> <C> <C>
Taxable temporary differences:
Capitalized software $ (3,758) $(3,649) $(3,770) $(10,132) $(7,031)
(3,758) (3,649) (3,770) (10,132) (7,031)
--------- -------- -------- --------- --------
Deductible temporary differences:
Tax basis in excess of book
basis of property and equipment 200 98 98 80 390
Allowance for doubtful accounts 334 91 179 1,644 173
Rent expense 25 89 134 328 373
Contract expense accruals - 59 119 - -
Change in method of
revenue recognition 60
Vacation pay and bonuses 110 202 175 184 356
Accrued contingent liabilities 105 567 35 33 -
Provision for sale of Pipeline assets 836 - - - -
--------- -------- -------- --------- --------
1,610 1,106 740 2,269 1,352
Carryovers:
Net operating losses 9,061 6,397 7,503 6,815 6,053
Research and other credits 3,200 3,704 3,344 2,917 2,325
12,261 10,101 10,847 9,732 8,378
--------- -------- -------- --------- --------
Net deferred tax asset 10,113 7,558 7,817 1,869 2,699
Valuation allowance (10,113) (7,558) (7,817) (1,869) (2,699)
--------- -------- -------- --------- --------
$ 0 $ 0 $ 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>
NOTE 5 - INCOME TAXES (CONTINUED)
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. Utilization of the Company's net operating loss carryforwards may
be subject to limitations as a result of provisions of the Internal Revenue Code
relating to the utilization of such losses after a change in ownership of the
Company. See Note 14 below for a discussion of the pending acquisition of the
Company by a subsidiary of Baker Hughes Incorporated.
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, 1992 854,388 $2.00 to $4.88 $ 4.15 $ 3,548,000
Grants 219,500 . 3.38 to 4.15 3.73 819,000
Expirations (32,500) 3.50 to 3.75 3.93 (128,000)
Exercises (12,000) 2.00 to 3.50 2.92 (35,000)
----------- ------------
Balance at December 31, 1993 1,029,388 2.00 to 4.88 4.08 4,204,000
Grants 105,000 . 4.50 to 7.13 5.72 601,000
Expirations (50,109) . 3.13 to 4.88 4.11 (206,000)
Exercises (285,019) 2.00 to 4.88 3.74 (1,067,000)
----------- ------------
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 - - - - -
----------- ------------
Balance at December 31, 1997 1,610,624 $.1275 to $6.375 $ 1.45 $ 2,343,000
=========== ============
Number of shares exercisable:
December 31, 1993 871,000 $2.00 to $4.88 $ 4.17 $ 3,632,000
=========== ============
December 31, 1994 661,000 $2.00 to $7.13 $ 4.33 $ 2,862,000
=========== ============
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 $ 2,290,000
=========== ============
</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.
NOTE 6 - CAPITAL STOCK (CONTINUED)
In February 1997 the Company entered into a stock option agreement granting
to its Chief Executive Officer the right to purchase 600,000 shares of the
Company's Common Stock through February 10, 2002. The exercise prices are
150,000 shares at $.50 per share, 150,000 shares at $1.00 per share, 150,000
shares at $1.50 per share, and 150,000 shares at $2.00 per share. An option
previously granted to the Company's Chief Executive Officer to purchase 100,000
shares of the Company's Common Stock at an exercise price of $2.875 per share
was canceled.
STOCK BASED COMPENSATION
The Company 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 sets forth certain information regarding stock options
outstanding as of December 31, 1997:
<TABLE>
<CAPTION>
Weighted-
Average
Weighted- Exercise
Range of Number of Weighted- Average Number of Price of
Exercise Options Average Remaining Options Exercisable
Prices Outstanding Exercise Price Contractual Life Exercisable Options
- --------------- ----------- --------------- ---------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
.1275 to $.50 484,000 $ .49 3.84 yrs. 461,000 $ .49
.51 to $1.00 280,000 $ .83 4.06 yrs. 250,000 $ .85
1.01 to $2.00 578,709 $ 1.72 3.99 yrs. 573,709 $ 1.72
2.01 to $6.375 267,915 $ 3.29 4.72 yrs. 262,915 $ 3.31
1,610,624 1,547,624
=========== ===========
</TABLE>
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 years indicated had the Company adopted the fair value based method of
accounting for stock-based compensation.
<TABLE>
<CAPTION>
Year Ended
(In thousands)
December 31, December 31, December 31,
1997 1996 1995
--------------- -------------- --------------
<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:
NOTE 6 - CAPITAL STOCK (CONTINUED)
<TABLE>
<CAPTION>
Year Ended
(In thousands)
December 31, December 31, December 31,
1997 1996 1995
-------------- ------------- -------------
<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>
NOTE 7 - RETIREMENT AND COMPENSATION 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, 1995
and 1994, the Company did not issue any shares pursuant to this plan. In 1996
and 1993, the Company issued 18,000 shares and 30,000 shares, respectively, of
its Common Stock pursuant to this plan. In addition, the Company issued
separately as compensation to its former chief executive officer 15,000 shares
of Common Stock in 1996 and 14,000 shares of Common Stock in 1993 in connection
with the acquisition of a small technological software development company. The
Company also has a noncontributory employee stock purchase plan for employees to
purchase Common Stock through payroll deductions. No purchases were made under
the employee stock purchase plan during 1997, 1996 and 1995. In 1994 and1993,
the Company issued 3,000 shares, respectively, of its Common Stock pursuant to
the employee stock purchase plan.
NOTE 7 - RETIREMENT AND COMPENSATION PLANS
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, which subject to certain
limitations the Company may satisfy through the issuance of its Common Stock,
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,
$146,000, $221,000 and $228,000 in 1997, 1996, 1995, 1994 and 1993,
respectively. In 1997, 1996, 1995, 1994 and 1993 the Company issued 2,000
shares, 179,000 shares, 78,000 shares, 17,000 shares and 53,000 shares,
respectively, of its Common Stock pursuant to the target benefit retirement
plan.
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 56,000 shares of Common Stock. In 1995, the Company
issued 39,000 shares of its Common Stock in satisfaction of a $200,000
contribution accrued in 1994. In 1993 the Company accrued a contribution of
$180,000, which was paid in 1994 with approximately 37,000 shares of Common
Stock. In 1993, the Company issued 47,000 shares of its Common Stock in
satisfaction of a $159,000 contribution in 1992.
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, $229,000, $226,000
and $213,000 in 1997, 1996, 1995, 1994 and 1993, respectively, of which $27,000,
$42,000, $56,000, $73,000 and $52,000 is included in accrued salaries and
benefits at December 31, 1997, 1996, 1995, 1994 and 1993, respectively. The
Company issued 36,000 shares, 31,000 shares, 10,000 shares, 19,000 shares and
57,000 shares of its Common Stock pursuant to these plans in 1997, 1996, 1995,
1994 and 1993, 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, 1993
------------------------------------
(In Thousands)
Consolidated
------------
U.S. U.K. Canada Total
-------- ------ -------- --------
<S> <C> <C> <C> <C>
Revenue $13,466 $8,940 $ 2,464 $24,870
Income (loss) from continuing
operations (421) 279 (3) (145)
Identifiable assets 36,739 4,659 2,749 44,147
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31, 1994
------------------------------------
(In Thousands)
Consolidated
------------
U.S. U.K. Canada Total
-------- ------ -------- --------
<S> <C> <C> <C> <C>
Revenue $12,689 $8,020 $ 1,505 $22,214
Income (loss) from continuing operations (3,881) 323 (388) (3,946)
Identifiable assets 35,333 7,088 2,353 44,774
</TABLE>
<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>
NOTE 8 - INFORMATION ABOUT OPERATIONS (CONTINUED)
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. The Company's loss from foreign operations in
1994 was primarily attributable to a bad debt provision of $1.4 million.
U.S. export revenues by geographic area were as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Far East $1,154 $1,512 $1,014 $2,315 $1,379
Central and South America 1,693 2,848 2,088 2,655 3,252
Europe - 909 810 914 585
Canada & Other 66 206 181 917 552
$2,913 $5,475 $4,093 $6,801 $5,768
====== ====== ====== ====== ======
</TABLE>
During 1997, 1995, 1994 and 1993, 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
=============== ======== ======
</TABLE>
NOTE 8 - INFORMATION ABOUT OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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
====== ====== =======
December 31, 1994:
Companies $1,004 $4,725 $ 5,729
Governments and national
petroleum companies 71 3,320 3,391
Government contractors 462 2 464
$1,537 $8,047 $ 9,584
====== ====== =======
December 31, 1993:
Companies $2,019 $4,565 $ 6,584
Governments and national
petroleum companies 2 4,325 4,327
Government contractors 613 367 980
$2,634 $9,257 $11,891
====== ====== =======
</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>
1998 $ 540
1999 496
2000 487
2001 470
2002 348
Thereafter $ 468
</TABLE>
Total rent expense amounted to $866,000, $1,400,000, $1,400,000, $1,400,000
and $1,400,000 during 1997, 1996, 1995, 1994 and 1993, 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.
NOTE 10 - SALE OF THE ASSETS OF THE PIPELINE BUSINESS LINE (CONTINUED)
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.
<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
===================
</TABLE>
NOTE 11 - DISPOSAL OF KINESIX DIVISION
On October 9, 1996, the Company announced the execution of final contracts
for the previously announced sale of the net assets and business of its
graphical user interface segment, otherwise known as the Kinesix division, to a
group including the former President of the Kinesix division. The sale of this
segment of the Company's business was part of management strategy to narrow the
focus of the Company's activities to its primary market of the oil and gas
industry. The consideration to the Company in the transaction was $410,000
including cash of $376,000 which was received by the Company in October 1996, a
note receivable for $32,000, and the purchaser's assumption of liabilities
totaling $59,000. The measurement date for accounting for the disposal was
August 26, 1996, the date on which management decided to sell the Kinesix
division and the disposal date was September 3, 1996, the effective date of the
transaction. The transaction resulted in a loss on disposal of $478,000, which
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,
1995, 1994 and 1993, the Company had no recorded insurance recoveries for
uncollected foreign receivables.
CLAIM FOR INDIAN GAS PIPELINE PROJECT COSTS
Included in accounts receivable and long term assets for 1993 and 1994 were
$175,000 and $470,000, totaling $645,000, related to a claim for costs incurred
pursuant to a gas pipeline project in India for which the Company was a
subcontractor. A dispute occurred between the contractor, a French and Japanese
consortium, and the Indian customer, the national gas utility, over the amount
to be paid to the consortium and in turn the amount to be paid to the Company by
the consortium. In 1991 a settlement agreement was entered into by the Company
with the consortium providing that, depending upon the amount collected by the
consortium from the customer, the Company would receive on a proportionate basis
up to $1.4 million. The Company was informed that thereafter very prolonged
negotiations occurred between the consortium and the customer including
negotiations on a government-to-government level. Current management
understands that prior senior management believed as late as 1995, on the basis
of a 1995 meeting with the consortium, that collection of the $645,000 was
likely to occur in 1995 and accordingly prior senior management determined that
no provision was required through fiscal 1993. The 1991 settlement agreement
between the Company and the consortium also provided for the Company to perform
additional work on the project for which it was subsequently paid $1,100,000,
and the consortium also subsequently paid the Company $100,000 for assistance in
preparing the consortium's claim against the Indian customer. In early 1996 in
connection with the delayed completion of the audit of the Company's financial
statements for 1994, management concluded that since collection of the $645,000
had not occurred in 1995, the 1994 financial statements should contain a full
provision against such amount. Subsequently in 1996 in connection with the
completion of the audit for 1995, management concluded that the $645,000 should
be written off. The Company has recently been informed that the consortium may
have settled its claim against the Indian customer but the Company has not been
able to verify that a settlement has occurred, and has also not learned the
terms of any settlement, and therefore the Company is not yet able to determine
the amount the Company may receive.
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 Company has received extensive SECURITIES AND
EXCHANGE COMMISSION (SEC) COMMENT LETTERS. 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.
<PAGE>
NOTE 12 - CONTINGENCIES (CONTINUED)
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.
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. See Note 14 for a
discussion of the Company's responses to such comment letters.
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>
Net Before
As Originally Attributable Restate - '95 Restated '95 Restated
Reported To Kinesix Note 2 Adjustments Financials
- -------------------------- -------------- ----------- -------------- -------------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Reduction of capitalized
software costs $ (17,917) $ (3,991) $ (13,926) $ - $ (13,926)
Increase in bad debt
reserve provision (3,192) - (3,192) (655) (2,537)
Expense accruals and
other adjustments (1,625) - (1,625) - (1,625)
Total fourth quarter 1995
adjustments $ (22,734) $ (3,991) $ (18,743) $ (655) $ (18,088)
============== =========== ============== ============== ==========
</TABLE>
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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
ACQUISITION OF THE COMPANY
On June 17, 1998, the Company entered into an agreement and plan of merger
pursuant to which a subsidiary of Baker Hughes Incorporated will acquire the
Company, subject to certain conditions. The acquisition does not include the
separate sale of the assets of the Company's Pipeline Simulation Business to LIC
as discussed in Note 10, which sale closed on May 1, 1998.
The agreement and plan of merger provides that the shareholders of the
Company's Common Stock would receive $.44 per share in consideration for the
acquisition. In connection with the acquisition, the Company's senior secured
lenders, Lindner and 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.
The acquisition is subject to customary conditions as well as the approval
of the Company's common shareholders. Closing of the acquisition is expected in
the third quarter of 1998.
SEC COMMENT LETTERS
The Company believes that it completed in June 1998 the process of
providing responses to the SEC comment letters referred to in Note 12, as well
as an additional SEC comment letter received by the Company in June 1998. With
the filing of the audited restated 1994 and 1993 financial statements included
herein and discussed in Note 2 with the SEC as part of an amendment to the
Company's 1997 Annual Report on Form 10-K, the Company believes that all
financial accounting and disclosure issues raised in the SEC comment letters
will be resolved.
<PAGE>
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 $ 3,301,000 $ (1,057,000) $(1,554,000) $ 690,000
=========== ================ ============ ===========
Allowance for doubtful accounts:
Year Ended December 31,
1995 $ 4,417,000 $ 2,649,000 $(3,765,000) $ 3,301,000
=========== ================ ============ ===========
Allowance for doubtful accounts:
Year Ended December 31,
1994 $ 831,000 $ 5,452,000 $(1,866,000) $ 4,417,000
=========== ================ ============ ===========
Allowance for doubtful accounts:
Year Ended December 31,
1993 $ 682,000 $ 165,000 $ (16,000) $ 831,000
=========== ================ ============ ===========
</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.
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 $100,000, and (iii) the two
individuals who would have been in the group of three most highly compensated
officers other than the Chief Executive Officer as of December 31, 1997 but for
the fact that they were not serving as executive officer at that time.
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term Compensation
-------------------------------------------
Awards Payouts
------------------------
Annual Compensation Restricted
-------------------------------
Other Annual Stock All Other
Name and Salary Bonus Compensation Award(s) Options/ Compensation
Principal Position Year ($) ($) ($) ($) SARs(#) ($) Total
- -------------------------- ---- -------- ------- ------------- -------- --------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
George Steel(1) 1997 199,999 0 0 0 600,000 0 199,999
President and 1996 162,500 0 0 0 110,000 0 162,500
Chief Executive Officer 1995 0 0 0 0 0 0 0
- -------------------------- ---- -------- ------- ------------- -------- --------- ------------- -------
Robert G. Parish(2) 1997 156,992 0 0 0 25,000 0 156,992
Executive Vice President, 1996 146,485 28,074 0 0 7,000 0 174,559
Exploration & 5,715(3)
Production 1995 142,876 0 0 0 10,000 7,641(4) 156,232
Consulting
- --------------------------
Gordon L. Scheig 1997 76,750 0 52,195 0 25,000 0 128,945
Vice President, 1996 70,625 0 100,500 0 6,000 0 171,125
Sales - America 1995 75,000 3,637 29,096 0 0 0 107,733
Peter C. Colonomos 1997 89,999 0 23,204 0 0 0 113,203
Vice President, 1996 71,242 6,090 33,902 0 0 0 111,234
E&P Consulting 1995 0 0 0 0 0 0 0
Sales-South America
Dag G. Heggelund 1997 112,625 0 0 0 25,000 0 112,625
Vice President, 1996 101,708 5,000 0 0 10,000 0 106,708
WorkBench 1995 87,176 4,550 5,750 0 7,500 0 97,476
Development
<FN>
(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>
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 Percent of Exercise Expiration Grant Date
securities total or base date(1) present
underlying options/SARs price VALUE $(2)
Options/SARs granted to ($/Sh)
Name granted (#) employees in
fiscal year
(a) (b) (c) (d) (e) (f)
- ------------------- ------------- ------------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
George Steel 150,000 16.7% $ .50 2/10/02 $ 63,000
------------- ------------- ---------- ----------- ------------
150,000 16.7% $ 1.00 2/10/02 61,000
------------- ------------- ---------- ----------- ------------
150,000 16.7% $ 1.50 2/10/02 60,000
------------- ------------- ---------- ----------- ------------
150,000 16.7% $ 2.00 2/10/02 59,000
------------- ------------- ---------- ----------- ------------
Robert G. Parish 25,000 2.8% $ .50 7/21/98 15,000
------------- ------------- ---------- ----------- ------------
Gordon L. Scheig 25,000 2.8% $ .50 2/10/02 12,000
------------- ------------- ---------- ----------- ------------
Peter C. Colonomos 25,000 2.8% $ .50 4/20/98 12,000
------------- ------------- ---------- ----------- ------------
3,000 .3% $ .63 4/20/98 2,000
------------- ------------- ---------- ----------- ------------
Dag G. Heggelund 25,0000 2.8% $ .50 6/2/98 12,000
- ------------------- ------------- ------------- ---------- ----------- ------------
<FN>
(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.
</TABLE>
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>
Number of Unexercised
Options at
Fiscal Year End (#)
-------------------
Name Exercisable Unexercisable
----------- -------------
<S> <C> <C>
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 $2.875 per share
granted to Mr. Steel in January 1996.
The following table sets forth certain information regarding all repricings of
options held by any executive officer of the Company during the last ten fiscal
years:
Ten Year Option Repricings
<TABLE>
<CAPTION>
Securities Length of
underlying Market price of Exercise price original
number of stock at time of at time of New exercise Option term
Name Date options/SARs repricing or repricing or price ($) Remaining
repriced or amendment ($) amendment ($) at date of
amended (#) repricing or
Amendment
(a) (b) (c) (d) (e) (f) (g)
- -------------------- --------- ------------- ------------------ ---------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
George Steel,
President and Chief
Executive Officer 01/03/97 100,000 $ .50 $ 2.875 * 4 years
--------- ------------- ------------------ ---------------- ------------- -------------
</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>
<PAGE>
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>
Number of
Shares
Beneficially % Beneficial
Name and Address of Beneficial Owner Owned(6) Ownership(6)
<S> <C> <C>
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.
<FN>
(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.
</TABLE>
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(CONTINUED)
(1) Consists of exercisable options to acquire 610,000 shares of Common
Stock.
(2) Includes exercisable options to acquire 31,000 shares of Common Stock.
(3) Dr. Colonomos holds no options to acquire shares of Common Stock.
(4) Includes exercisable options to acquire 42,500 shares of Common Stock.
(5) Includes exercisable options to acquire 78,500 shares of Common Stock.
(6) Includes exercisable options to acquire 20,000 shares of Common Stock.
(7) Includes exercisable options to acquire 12,500 shares of Common Stock.
(8) Includes exercisable options to acquire 5,000 shares of Common Stock.
(9) Includes exercisable warrants to require 450,000 shares of Common Stock.
(10) Ryback Management Corporation controls the Lindner Funds, a senior
secured creditor of the Company.
(11) 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> <C> <S>
3. Exhibits
------------------------------------------------------------------------------------
2.1 Agreement and Plan of Merger dated June 17, 1998 between the Company and
Baker Hughes Oilfield Operations, Inc. (filed as Exhibit B to the Company's Report
on Form 8-K dated June 17, 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.
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 (filed as Exhibit 10.26 to the Company's 1997 Annual Report
on Form 10-K/A No. 1 and incorporated herein by reference.)
10.27 Description of Employment Arrangement effective February 1996 between
the Company and George Steel(filed as Exhibit 10.27 to the Company's 1997
Annual Report on Form 10-K/A No. 1 and incorporated herein by reference.)
10.28 Letter Agreement dated November 26, 1997 between the Company and
George Steel regarding Continued Employment(filed as Exhibit 10.28 to the
Company's 1997 Annual Report on Form 10-K/A No. 1 and incorporated herein
by reference.)
10.29 Change in Terms Agreement dated March 30, 1998 between the Company
and Bank One, Colorado, N.A.
10.30 Loan Agreement dated March 30, 1998 between the Company
and Bank One, Colorado, N.A.
10.31 Promissory Note of the Company dated April 30, 1998 payable to
Bank One, Colorado, N.A. in the amount of $300,000.
10.32 Change in Terms Agreement dated April 15, 1998 between the Company
and Bank One, Colorado, N.A.
10.33 Change in Terms Agreement dated October 30, 1997 between the Company
and Bank One, Colorado, N.A.
10.34 Change in Terms Agreement dated November 30, 1997 between the Company
and Bank One, Colorado, N.A.
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>
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.
July 1, 1998 /s/ George Steel
----------------
George Steel
Member of the Board of Directors, President and Chief
Executive Officer (a principal executive officer and director)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
/s/ George Steel July 1, 1998
- --------------------------------------------------------
George Steel
President and Chief Executive Officer and Director
/s/ Barbara J. Cavallo July 1, 1998
Financial Controller
/s/ William B. Nichols July 1, 1998
- --------------------------------------------------------
William B. Nichols, Director
/s/ Edward O. Price, Jr. July 1, 1998
- --------------------------------------------------------
Edward O. Price, Jr., Chairman of the Board of Directors
/s/ Jack L. Howard July 1, 1998
- --------------------------------------------------------
Jack L. Howard, Director
<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>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 705
<SECURITIES> 0
<RECEIVABLES> 2559
<ALLOWANCES> 881
<INVENTORY> 0
<CURRENT-ASSETS> 5942
<PP&E> 4509
<DEPRECIATION> 4261
<TOTAL-ASSETS> 14878
<CURRENT-LIABILITIES> 6189
<BONDS> 0
4000
0
<COMMON> 888
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> (2483)
<SALES> 12392
<TOTAL-REVENUES> 12392
<CGS> 0
<TOTAL-COSTS> 17764
<OTHER-EXPENSES> 13
<LOSS-PROVISION> 414
<INTEREST-EXPENSE> (481)
<INCOME-PRETAX> (5426)
<INCOME-TAX> 20
<INCOME-CONTINUING> (5446)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (5446)
<NET-INCOME> (1)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
EXHIBIT 10.24
ASSET PURCHASE AGREEMENT
TABLE OF CONTENTS
Page
----
ARTICLE I DEFINITIONS 1
ARTICLE II TERMS OF PURCHASE AND SALE 4
2.1 Sale of Assets 5
2.2 The Closing 5
2.3 Purchase Price and Payment 5
2.4 Closing Documents 5
ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER 6
3.1 Organization 6
3.2 Authority 7
3.3 Execution and Delivery 7
3.4 Binding Agreement 7
3.5 Title to the Assets 7
3.6 Outstanding Obligations 7
3.7 Contracts 7
3.8 Intellectual Property 7
3.9 Violation of Laws 8
3.10 Taxes 8
3.11 Bankruptcy 8
3.12 No Brokers 8
3.13 No Claims 8
3.14 Accuracy of Disclosures 9
3.15 Investment Company 9
3.16 Insurance 9
3.17 No Undisclosed Material Liabilities 9
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER 9
4.1 Organization 9
4.2 Execution and Delivery 9
4.3 Binding Agreement 10
4.4 Litigation 10
4.5 No Brokers 10
ARTICLE V COVENANTS OF SELLER 10
5.1 Access to the Company 10
5.2 Governmental Approvals 10
5.3 Notice of Changes 11
5.4 Maintain Assets and Operations 11
5.5 Litigation and Claims 11
ARTICLE VI CONDITIONS TO PURCHASER'S OBLIGATIONS 12
6.1 Performance by Seller 12
6.2 Seller's Certificate 12
6.3 Governmental Approvals 12
6.4 Deliveries 12
6.5 Contract Assurances 12
ARTICLE VII CONDITIONS TO SELLER'S OBLIGATIONS 13
7.1 Performance by Purchaser 13
7.2 Purchaser's Certificate 13
7.3 Deliveries 13
ARTICLE VIII TERMINATION PRIOR TO CLOSING 13
8.1 Termination 13
8.2 Effect on Obligations 13
8.3 Survival 13
ARTICLE IX INDEMNIFICATION 14
ARTICLE X MISCELLANEOUS 14
10.1 Entire Agreement 14
10.2 Successors and Assigns 14
10.3 Expenses 14
10.4 Taking of Necessary Action 14
10.5 Invalidity 15
10.6 Counterparts 15
10.7 Headings 15
10.8 Construction and References 15
10.9 Modification and Waiver 15
10.10 Notices 15
10.11 Public Announcements 16
10.12 Governing Law; Interpretation 16
10.13 Personnel 16
10.14 Noncompetition 17
10.15 Records 17
10.16 Sublease of U.K. Office 17
Exhibit A - List of Assets
Exhibit B - List of Assumed Obligations
Exhibit C - Deleted
Exhibit D - Deleted
Exhibit E - Form of Assignment and Bill of Sale
Exhibit F - List of Claims
Exhibit G - List of Insurance
Exhibit H - List of Employees
Exhibit I - Deleted
Exhibit J - List of Encumbrances to be Released at Closing
Exhibit K - Form of Assumption Agreement
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement (this "Agreement") dated as of March 1, 1998,
by and among SCIENTIFIC SOFTWARE-INTERCOMP, INC., a Colorado corporation
("SSI"), SSI BETHANY, INC., a Texas corporation ("SSI-Bethany") and SCIENTIFIC
SOFTWARE-INTERCOMP U.K., LTD., a corporation organized under the laws of the
United Kingdom ("SSI-UK") (SSI, SSI-Bethany and SSI-UK are hereinafter
collectively called "Seller"), whose address for purposes of this Agreement is
633 Seventeenth Street, Suite 1600, Denver, Colorado 80202 and LICENERGY, INC.,
a Texas corporation ("Purchaser"), whose address is 13831 Northwest Freeway,
Suite 235, Houston, Texas 77040. Seller and Purchaser are sometimes hereinafter
collectively referred to as the "Parties".
R E C I T A L S:
- - - - - - - -
A. Seller is the owner of the hereinafter described assets utilized by
the Pipeline Simulation Division of SSI ("P&F Division"); and
B. Seller desires to sell to Purchaser, and Purchaser desires to buy
from Seller, such assets, all in accordance with the terms of this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual representations, warranties,
covenants and agreements herein contained, and upon the terms and subject to the
conditions hereinafter set forth, the parties do hereby agree as follows:
ARTICLE I
DEFINITIONS
Capitalized terms used in this Agreement shall have the meanings given to
them in this Article I, unless defined elsewhere in this Agreement.
"Accounts Payable" shall mean those accounts payable more particularly
described in Part I of Exhibit B attached hereto.
----------
"Affiliate" shall mean with respect to any Person, an individual or entity
that, directly or indirectly, controls, is controlled by or is under common
control with such Person.
"Applicable Employee Obligations" shall mean (i) that portion of the P&F
Division's accrued employee sick leave and accrued annual leave liabilities (as
described in Part II of Exhibit B attached hereto) that is attributable to those
---------
employees of Seller that Purchaser elects to offer employment to pursuant to
Section 10.13 hereof, (ii) the accrued but unpaid sales commissions more
particularly described in Part III of Exhibit B attached hereto, and (iii) all
---------
severance liabilities (including accrued vacation) incurred by Seller in
connection with those technical employees of Seller that Purchaser elects not to
offer employment to pursuant to Section 10.13 hereof.
"Assets" shall mean all of the following described properties, rights,
interests and assets:
(a) the software more particularly described in Part I of Exhibit A
---------
attached hereto (the "Software");
(b) those contracts more particularly described in Part IIa. of Exhibit
-------
A attached hereto and those maintenance contracts more particularly described in
Part IIb. of Exhibit A attached hereto (collectively, the "Contracts");
----------
(c) all new software and/or consulting contracts, purchase orders and
maintenance agreements entered into by SSI's P&F Division between March 1, 1998
and the Closing Date (collectively, the "New Contracts");
(d) the computers, furniture, furnishings and other personal property
more particularly described in Part III of Exhibit A attached hereto (the
---------
"Personal Property");
(e) all work in progress, monies, rents, revenues, fees, accounts
receivable, profits, deposits, products, benefits and proceeds from or
attributable to the Software, the Contracts, the New Contracts or the Personal
Property including, but not limited to, those projected billed and unbilled
accounts receivable more particularly described in Part IV of Exhibit A attached
---------
hereto (such accounts receivable described in Part IV of Exhibit A being
---------
hereinafter called the "Accounts Receivable"), provided that there shall be
specifically excluded from the Assets and Accounts Receivable and reserved by
Seller (i) those accounts receivable listed on Part V of Exhibit A attached
---------
hereto, (ii) all accounts receivable billed by Seller up through the Closing
Date with respect to any Contract not identified in Part IV of Exhibit A and
---------
(iii) any previously billed accounts receivable that relate to the Software and
that are not included in the Accounts Receivable;
(f) all of SSI's right, title and interest in and to that certain
License Agreement dated September 13, 1996, by and between SSI and Kinesix
Corporation and the right to acquire all of SSI's right, title and interest in
and to the license for Stanford's MINOS optimization software;
(g) the benefit and the right to enforce all covenants, warranties,
guarantees and indemnities relating to the Software, the Contracts, the New
Contracts, the Personal Property or the Accounts Receivable and all security for
the payment or performance thereof;
(h) the Contract Rights and the Claims;
(i) the Incidental Rights; and
(j) each and every right, privilege and appurtenance in anywise
incident or appertaining to any of the properties, rights or interest described
in (a) through (h) above.
"Assumed Obligations" shall mean the Accounts Payable, the Applicable
Employee Obligations, the UPRC Obligation, the Warranty Obligations and all
obligations accruing under the Contracts and the New Contracts from and after
the Closing Date, to the extent such liabilities and obligations are not
liabilities or obligations which Seller has agreed to pay, be responsible for or
indemnify Purchaser against pursuant to the terms of this Agreement.
"Business Day" shall mean any day other than Saturday, Sunday or other day
on which federally chartered commercial banks in Houston, Texas are authorized
by law to close.
"Claims" shall mean all claims (including insurance and condemnation
claims) and causes of action of Seller against others with respect to the
Assets.
"Closing" shall have the meaning such term is given in Section 2.2 hereof.
"Closing Date" shall have the meaning such term is given in Section 2.2
hereof.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Contract Rights" shall mean all rights, titles, interests, benefits and
remedies in, to and under the Contracts and the New Contracts which under the
terms of the Contracts and the New Contracts are provided or stipulated to inure
to or be for the benefit of Seller, together with all other rights, titles,
interests, benefits and remedies of Seller in, to and under the Contracts and
the New Contracts.
"Default" shall mean, as to any party to this Agreement, a default by such
party in the performance of any of its material obligations hereunder and the
continuation of such default for a period of five (5) Business Days after
written notice is delivered m. Each of the parties that comprise Seller is duly
qualified or licensed to do business and is in good standing as a foreign
corporation in every jurisdiction in which the conduct of its business or the
ownership or leasing of its Assets requires it to be so qualified or licensed.
3.2 AUTHORITY. Each of the parties that comprise Seller has all
---------
requisite corporate power and authority to carry on its business as presently
conducted, to enter into this Agreement, and to perform its obligations
hereunder. The consummation of the transactions contemplated by this Agreement
will not (i) violate, or be in conflict with, (a) any provision of its charter,
bylaws or governing documents, or any agreement or instrument to which it is a
party or by which it is bound or (b) any Law applicable to Seller or the Assets,
or (ii) require the consent, authorization or approval of any third party.
3.3 EXECUTION AND DELIVERY. The execution, delivery and performance of
----------------------
this Agreement and the transactions contemplated hereunder, have been duly and
validly authorized by all requisite corporate action on the part of Seller.
3.4 BINDING AGREEMENT. This Agreement constitutes as of the date
------------------
hereof and all documents and instruments required hereunder to be executed and
delivered by Seller at Closing will constitute on the Closing Date, valid, legal
and binding obligations of Seller enforceable against Seller in accordance with
their respective terms, except as such enforceability may be limited by or
subject to (a) any bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to creditors' rights generally, (b) general principles of
equity (regardless of whether such enforceability is considered in a proceeding
in equity or at law) and (c) public policy.
3.5 TITLE TO THE ASSETS. Except for those Encumbrances disclosed on
-------------------
Exhibit J hereto that shall be released at Closing, Seller has good and
--------
marketable title to and is possessed of the Assets, free and clear of all
------
Encumbrances.
----
3.6 OUTSTANDING OBLIGATIONS. Except to the extent included within the
-----------------------
Assumed Obligations, all rentals, fees, payments and obligations due and payable
or performable on or prior to the Closing Date under or on account of the Assets
have been or will be duly paid, performed or provided for prior to the Closing
Date.
3.7 CONTRACTS. Each Contract is presently valid, subsisting and in
---------
full force and effect, no default now exists thereunder, Seller has not received
or given any notice of default or claimed default thereunder, and, except as
disclosed on Exhibit F attached hereto, Seller has no knowledge of any existing
---------
event or circumstance which with notice or passage of time or both could
constitute a default thereunder. The Assets are currently being operated,
maintained, and marketed in compliance with all terms and provisions of the
Contracts applicable thereto.
3.8 INTELLECTUAL PROPERTY. Seller owns, or is licensed or otherwise
---------------------
has the right to use, all patents, patent rights, trademarks, trademark rights,
trade names, trade name rights, service marks, service mark rights, copyrights
and other proprietary intellectual property rights and computer programs that
constitute the Software. Part I of Exhibit A attached hereto is a true and
---------
complete list of all of the Software and other intellectual property rights
owned by Seller and utilized by its P&F Division. No claims are pending or, to
the knowledge of Seller, threatened that Seller is infringing or otherwise
adversely affecting the rights of any Person with regard to any Software. To
the knowledge of Seller, no Person is infringing the rights of Seller with
respect to any Software. Except for those Encumbrances disclosed on Exhibit J
---------
hereto that shall be released at Closing, all of the Software that is owned by
Seller is owned free and clear of all Encumbrances and all Software that is
licensed by Seller is licensed pursuant to valid and existing license agreements
and such interests are not subject to any Encumbrances other than those under
the applicable license agreements. The consummation of the transactions
contemplated by this Agreement will not result in the loss of any Software.
3.9 VIOLATION OF LAWS. Seller, the Assets and Seller's ownership,
-----------------
maintenance, operation and marketing of the Assets are not in violation of any
Law applicable thereto; Seller has made, filed, obtained and/or paid all
filings, reports, permits, licenses, certificates, approvals and fees required
under applicable Law with respect to the Assets and Seller's ownership,
maintenance, operation and marketing of the Assets; and Seller has no knowledge,
and has not received any notice, of violation or claimed violation of any such
Law.
3.10 TAXES. All ad valorem, property, sales, gross receipts, excise,
-----
use, severance, employee, income, franchise and other taxes, as well as all
assessments and other governmental charges, penalties, interest and fines, which
have become due and payable prior to the Closing Date on or with respect to
Seller's business, the Assets, or Seller's ownership or operation of the Assets,
or which have been collected by Seller in connection with the Assets on behalf
of some governmental entity, have been properly paid or provision has been made
for the proper payment thereof prior to becoming delinquent; and all returns and
reports with respect to such matters have been duly and timely filed.
3.11 BANKRUPTCY. There are no bankruptcy, reorganization, or
----------
arrangement proceedings pending, being contemplated by or to the actual
knowledge of Seller threatened against Seller.
3.12 NO BROKERS. Except for the fee payable by Seller to Simmons &
----------
Company, no broker or finder has acted for or on behalf of Seller in connection
with this Agreement or the transactions contemplated by this Agreement, and no
broker or finder is entitled to any brokerage or finder's fee, or to any
commission, based in any way on agreements, arrangements or understandings made
by or on behalf of Seller.
3.13 NO CLAIMS. Except as shown on Exhibit F hereto, there are no
--------- ---------
claims, demands or suits, actions, proceedings or investigations pending or, to
Seller's knowledge, threatened before any court or governmental agency which
might result in a material impairment or loss of Seller's title to any part of
the Assets or the value thereof or which might materially hinder or impede the
consummation of this Agreement or the operation, maintenance or marketing of any
of the Assets, and Seller shall promptly notify Purchaser of any such matters
arising or threatened prior to Closing.
3.14 ACCURACY OF DISCLOSURES. All information and disclosures,
-------------------------
including the lists of Software, Contracts, Personal Property and Accounts
Receivable, set forth in this Agreement or in any exhibits hereto or furnished
by Seller to Purchaser in connection herewith are accurate and complete in all
material respects.
3.15 INVESTMENT COMPANY. Seller (i) is not an investment company or a
------------------
company controlled by an investment company within the meaning of the Investment
Company Act of 1940, as amended and (ii) is not subject in any respect to the
provisions of said act.
3.16 INSURANCE. Exhibit G lists all policies of risk insurance and all
--------- ---------
performance bonds and other performance security held or obtained by Seller
pertaining to the Assets or Seller's business relating to the Assets. Seller is
not a co-insurer under any policies of insurance listed on Exhibit G, except to
---------
the extent of the amount of deductible listed on Exhibit G applicable to such
---------
policies. No notice has been received from any insurance company that has
issued a policy insuring Seller with respect to any portion of the Assets (or
Seller's business relating thereto), or any board of fire underwriters (or other
body exercising similar functions) claiming any defects or deficiencies,
requiring the performance of any material repairs, replacements, alterations or
other work or requiring any changes in Seller's operations with respect to the
Assets.
3.17 NO UNDISCLOSED MATERIAL LIABILITIES. Seller is not a party to or
-----------------------------------
bound by (i) any agreement, contract or commitment limiting the freedom of
Seller to own, operate, sell, transfer or otherwise dispose of any Asset or to
compete with any Person or in any geographic area or (ii) any agreement,
contract or commitment that Seller expects, or with the exercise of reasonable
business judgment would expect, to have a material adverse effect on the value
of any of its Assets, other than agreements, contracts or commitments expected
to result in a loss in the ordinary course of Seller's business.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to Seller as follows:
4.1 ORGANIZATION. Purchaser is a corporation duly organized, validly
------------
existing and in good standing under the laws of the State of Texas and has all
requisite corporate power and authority to carry on its business as it is now
being conducted and to execute, deliver and perform this Agreement and to
consummate the transactions contemplated hereby.
4.2 EXECUTION AND DELIVERY. The execution, delivery and performance of
----------------------
this Agreement and the transactions contemplated hereunder, have been duly and
validly authorized by all requisite corporate action on the part of Purchaser.
The consummation of the transactions contemplated by this Agreement will not
require the consent, authorization or approval of any third party.
4.3 BINDING AGREEMENT. This Agreement constitutes as of the date
------------------
hereof and all documents and instruments required to be executed and delivered
by Purchaser at Closing will constitute on the Closing Date valid, legal and
binding obligations of Purchaser, enforceable against Purchaser in accordance
with their respective terms, except as such enforceability may be limited by or
subject to (a) any bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to creditors' rights generally, (b) general principles of
equity (regardless of whether such enforceability is considered in a proceeding
in equity or at law) and (c) public policy.
4.4 LITIGATION. There is no legal, judicial, administrative,
----------
governmental, arbitration or other action or proceeding or governmental
investigation pending against Purchaser or, to Purchaser's knowledge, threatened
against Purchaser, which seeks to enjoin or obtain damages in respect of the
consummation of the transactions contemplated hereby.
4.5 NO BROKERS. No broker or finder has acted for or on behalf of
----------
Purchaser in connection with this Agreement or the transactions contemplated by
this Agreement, and no broker or finder is entitled to any brokerage or finder's
fee, or to any commission, based in any way on agreements, arrangements or
understandings made by or on behalf of Purchaser.
ARTICLE V
COVENANTS OF SELLER
Seller covenants and agrees with Purchaser as follows:
5.1 ACCESS TO THE COMPANY. Seller shall afford to Purchaser and to the
---------------------
employees, agents, lenders, investors and authorized representatives of
Purchaser and to its counsel and accountants (collectively, the
"Representatives"), such reasonable access to the Assets, employees, officers,
offices, equipment, files, agreements, documents and books and records of the
P&F Division (including, without limitation, computer programs, tapes, and other
records), and the opportunity to make notes, abstracts and copies therefrom, as
may be requested by Purchaser in order that Purchaser may have full opportunity
to make such reasonable investigations as it shall desire with respect to the
Assets in connection with the transactions contemplated hereby.
5.2 GOVERNMENTAL APPROVALS. Seller shall use its best efforts, and
----------------------
shall cooperate with Purchaser, to obtain all permits, approvals, filings and
consents necessary or required to be obtained or made for the consummation by
Seller of the transactions contemplated by this Agreement under any applicable
federal law or the applicable laws of any state or foreign government having
jurisdiction over the transactions contemplated hereby.
5.3 NOTICE OF CHANGES. Seller shall promptly inform Purchaser in
------------------
writing if Seller becomes aware of any change that shall have occurred or that
shall have been threatened (or any development that shall have occurred or that
shall have been threatened involving a prospective change) in the financial
condition, results of operations, business or Assets of the P&F Division that is
or with the exercise of reasonable business judgment would be expected to have a
material adverse effect on the condition of the P&F Division or the Assets,
provided that such notification requirement shall not include notice of losses
incurred by the P&F Division in the ordinary course of its business. Seller
shall promptly inform Purchaser in writing if any representation or warranty
made by Seller in this Agreement shall cease to be accurate.
5.4 MAINTAIN ASSETS AND OPERATIONS. During the period from the date of
------------------------------
this Agreement through the Closing Date, Seller shall carry on the P&F Division
business in the usual, regular and ordinary course in a good and diligent manner
consistent with sound business practices and in compliance with all of its
contractual commitments and all applicable Laws. Seller shall use all
reasonable efforts to maintain and preserve its business organization in tact,
retain its present employees and consultants and maintain its relationship with
suppliers, customers and others having business relations with it. Seller
shall, unless otherwise consented to in writing by Purchaser, (i) maintain and
keep the Assets in their present condition and working order, ordinary wear and
tear and depreciation excepted, (ii) maintain in full force and effect all
policies of insurance, performance bonds or other performance security covering
the Assets or Seller's business relating to the Assets now maintained by
Seller, (iii) preserve in full force and effect all Contracts, Contract Rights,
Claims and Incidental Rights and shall not modify, terminate, compromise or
release any of same, (iv) not enter into any new agreements or commitments
affecting or relating to any of the Assets (including any New Contracts, but
specifically excluding the renewal of any maintenance contracts described in
Part IV of Exhibit A hereto which shall not require Purchaser's consent), (v)
---------
not bill customers under the maintenance contracts described in Part IIb. of
Exhibit A attached hereto prior to the billing date specified for each such
-------
maintenance contract in the last column of Part IIb. of Exhibit A, (vi) not
- ---------
reallocate any resources currently dedicated to the performance of work under
-
the Contracts, (vii) not incur, or agree to incur, any contractual obligation or
liability (absolute or contingent) with respect to the Assets, except current
liabilities incurred in the ordinary course of business, (viii) not encumber,
sell, mortgage, release, abandon or otherwise dispose of any of the Assets,
except items of personal property replaced by equivalent property or consumed in
normal operations, (ix) cause all liabilities of Seller incurred with respect to
or affecting the Assets to be paid in the ordinary course of business, and (x)
maintain in good order and condition all files, books, records, documents and
papers of Seller relating to or evidencing the Assets and continue to maintain
all accounting procedures and books of account with respect to the Assets in
accordance with GAAP.
5.5 LITIGATION AND CLAIMS. Seller shall promptly inform Purchaser in
---------------------
writing of any litigation, or of any claim or controversy or contingent
liability of which Seller becomes aware that might reasonably be expected to
become the subject of litigation, against Seller or affecting any of the Assets.
ARTICLE VI
CONDITIONS TO PURCHASER'S OBLIGATIONS
The obligations of Purchaser to purchase the Assets shall be subject to the
satisfaction (or waiver by Purchaser) on or prior to the Closing Date of all of
the following conditions:
6.1 PERFORMANCE BY SELLER. The representations and warranties of
----------------------
Seller set forth in this Agreement shall be true and correct at and as of the
Closing Date in all material respects. Seller shall have performed and complied
in all material respects with all covenants, agreements and conditions required
by this Agreement to be performed by or complied with by Seller prior to or at
Closing.
6.2 SELLER'S CERTIFICATE. Purchaser shall have received a certificate
--------------------
dated as of the Closing Date, executed by a duly authorized officer of Seller,
to the effect that the representations and warranties made under Article III
hereof are true at and as of the Closing Date.
6.3 GOVERNMENTAL APPROVALS. Purchaser shall have received all
-----------------------
consents, approvals and authorizations that Purchaser may be required to obtain
under applicable Law in connection with the acquisition of the Assets.
6.4 DELIVERIES. Seller shall have delivered, or caused to be
----------
delivered, to Purchaser each of the items set forth in Section 2.4(a) and (c)
hereof.
6.5 CONTRACT ASSURANCES. Purchaser shall have received for each of the
-------------------
Contracts (specifically excluding, however, the maintenance contracts described
in Part IIb. of Exhibit A) for which Purchaser requests it, customer estoppel
---------
letters or other assurances reasonably satisfactory to Purchaser to the effect
that (i) the Contracts are currently effective, (ii) the customers are not aware
of any outstanding material claims or material unsatisfied obligations for work
completed thereunder (provided that any such letter shall expressly state that
the customer in no way waives any rights or claims under the Contract as a
result of its response in the letter) and (iii) the customers under such
Contracts consent to the assignment thereof to Purchaser and agree to continue
to comply with and honor the existing terms of the Contracts after Purchaser
acquires the Assets.
ARTICLE VII
CONDITIONS TO SELLER'S OBLIGATIONS
The obligations of Seller to sell the Assets shall be subject to the
satisfaction (or waiver by Seller) on or prior to the Closing Date of all the
following conditions:
7.1 PERFORMANCE BY PURCHASER. The representations and warranties of
------------------------
Purchaser set forth in this Agreement shall be true and correct at and as of the
Closing Date in all material respects. Purchaser shall have performed and
complied in all material respects with all covenants, agreements and conditions
required by this Agreement to be performed by or complied with by Purchaser
prior to or at Closing.
7.2 PURCHASER'S CERTIFICATE. Seller shall have received a certificate
-----------------------
dated as of the Closing Date, executed by a duly authorized officer of
Purchaser, to the effect that the representations and warranties made under
Article IV are true at and as of the Closing Date.
7.3 DELIVERIES. Purchaser shall have delivered, or caused to be
----------
delivered, to Seller each of the items set forth in Section 2.4(b) and (c)
hereof.
ARTICLE VIII
TERMINATION PRIOR TO CLOSING
8.1 TERMINATION. This Agreement may be terminated at any time prior to
-----------
the Closing (a) by the mutual written consent of Purchaser and Seller, (b) by
Purchaser in writing if Seller shall be in Default and such Default shall not
have been cured or remedied, (c) by Seller in writing if Purchaser shall be in
Default and such Default shall not have been cured or remedied or (d) by either
Seller or Purchaser in writing, if there shall be in effect an order of a court
of competent jurisdiction prohibiting the consummation of the transactions
contemplated hereby.
8.2 EFFECT ON OBLIGATIONSError! Bookmark not defined.. Termination of
-------------------------------------------------
this Agreement pursuant to this Article shall terminate all obligations of the
parties hereunder, except for the obligations under Section 10.3 hereof and
except for the continuing obligations of SSI and Purchaser under the existing
Confidentiality Agreement between SSI and Purchaser; provided, however, that
-------- -------
termination pursuant to clauses (b) or (c) of Section 8.1 hereof shall not
relieve any Defaulting party from any liability to the other party hereto, it
being expressly agreed that such other party may pursue any and all remedies it
may have against the Defaulting party as a result of such Default, including an
action for damages.
8.3 SURVIVAL. All of the representations, warranties, covenants and
--------
indemnities of the Parties as described in this Agreement, to the extent not
fully performed prior to Closing, shall survive the Closing.
ARTICLE IX
INDEMNIFICATION
Seller agrees to indemnify, defend and hold Purchaser and its directors,
officers, shareholders and controlling Persons harmless from and against any and
all losses, liabilities, damages, costs and expenses (collectively, the
"Indemnified Liabilities") that Purchaser and its directors, officers,
shareholders and controlling Persons may incur or become subject to arising out
of or due to (i) any inaccuracy of any representation or the breach of any
warranty, covenant, undertaking or other agreement of Seller contained in this
Agreement, (ii) any act or omission of Seller prior to the Closing Date or (iii)
except for the Assumed Obligations, any and all claims, demands and causes of
action against Seller or the Assets relating to or arising out of any facts or
circumstances occurring prior to the Closing Date.
ARTICLE X
MISCELLANEOUS
10.1 ENTIRE AGREEMENT. This Agreement and the other agreements
-----------------
contemplated hereby constitute the sole understanding of the parties with
respect to the matters provided for herein and supersede any previous agreements
and understandings between the parties with respect to the subject matter
hereof. No amendment, modification or alteration of the terms or provisions of
this Agreement shall be binding unless the same shall be in writing and duly
executed by Seller and Purchaser.
10.2 SUCCESSORS AND ASSIGNS. The terms and conditions of this
------------------------
Agreement shall inure to the benefit of and be binding upon the parties hereto
and their respective successors and assigns. Purchaser shall have the right to
assign this Agreement to any Affiliate of Purchaser. Except as permitted in the
immediately preceding sentence, this Agreement may not be assigned by any party
without the prior written consent of the other party hereto.
10.3 EXPENSES. Whether or not the transactions contemplated by this
--------
Agreement are consummated, other than as expressly provided for herein, each of
the parties hereto shall pay the fees and expenses of its respective counsel,
accountants and other experts, and all other expenses incurred by such party
incident to the negotiation, preparation and execution of this Agreement and
consummation of the transactions contemplated hereby.
10.4 TAKING OF NECESSARY ACTION. After Closing, each of the parties
--------------------------
hereto agrees to take or cause to be taken all action and to do or cause to be
done all things reasonably requested by the other party to consummate and make
effective the transactions contemplated by this Agreement. If monies are
received by either party hereto which, under the terms hereof, belong to the
other party, the same shall be immediately paid over to such other party. Each
party shall cooperate with the other in good faith to help the other satisfy its
obligations hereunder.
10.5 INVALIDITY. If any term or other provision of this Agreement is
----------
invalid, illegal, or incapable of being enforced by any rule of law, or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner to
the end that transactions contemplated hereby are fulfilled to the extent
possible.
10.6 COUNTERPARTS. This Agreement may be executed in one or more
------------
counterparts, each of which shall for all purposes be deemed to be an original
and all of which shall constitute the same instrument.
10.7 HEADINGS. The headings of the Sections and paragraphs of this
--------
Agreement are included for convenience only and shall not be deemed to
constitute part of this Agreement or to affect the construction hereof or
thereof.
10.8 CONSTRUCTION AND REFERENCES. Words used in this Agreement,
-----------------------------
regardless of the number or gender specifically used, shall be deemed and
construed to include any other number, singular or plural, and any other gender,
masculine, feminine or neuter, as the context shall require. Unless otherwise
specified, all references to this Agreement to Sections, paragraphs or clauses
are deemed references to the corresponding Sections, paragraphs or clauses in
this Agreement, and all references to this Agreement to Schedules are references
to the corresponding Schedules attached to this Agreement.
10.9 MODIFICATION AND WAIVER. Any of the terms or conditions of this
-----------------------
Agreement may be waived in writing at any time by the party which is entitled to
the benefits thereof. No wavier of any of the provisions of this Agreement
shall be deemed to or shall constitute a waiver of any other provisions hereof
(whether or not similar).
10.10 NOTICES. Any notice, request, instruction or other document to
-------
be given hereunder by any party hereto to any other party shall be in writing
and delivered personally, via telecopy (with receipt confirmed) or by registered
or certified mail, postage prepaid,
if to Seller, to: Scientific Software-Intercomp, Inc.
633 Seventeenth Street, Suite 1600
Denver, Colorado 80202
Attention: George Steel, President
Fax: 303-293-0361
with copies to: Roger C. Cohen
Cohen, Brame & Smith
1700 Lincoln Street, Suite 1800
Denver, Colorado 80203
Fax: 303-894-0475
if to the Purchaser, to: LICENERGY, Inc.
13831 Northwest Freeway, Suite 235
Houston, Texas 77040
Attention: Chief Executive Officer
Fax: 713-895-8383
with copies to: Mark K. Boling
1177 West Loop South, Suite 500
Houston, Texas 77027
Fax: 713-622-3254
or at such other address for a party as shall be specified by like notice. Any
notice which is delivered personally in the manner provided herein shall be
deemed to have been duly given to the party to whom it is directed upon actual
receipt by such party (or its agent for notices hereunder). Any notice which is
addressed and mailed in the manner herein provided shall be conclusively
presumed to have been duly given to the party to which it is addressed at the
close of business, local time of the recipient, on the third day after the day
it is so placed in the mail. Any notice which is sent by telecopy shall be
deemed to have been duly given to the party to which it is addressed upon
telephonic confirmation of the same as provided herein. A copy of any notices
delivered by telecopy shall promptly be mailed in the manner herein provided to
the party to which such notice was given.
10.11 PUBLIC ANNOUNCEMENTS. Neither Seller nor Purchaser shall make
--------------------
any public statements, including, without limitation, any press releases, with
respect to this Agreement and the transactions contemplated hereby without the
prior written consent of the other party (which consent may not be unreasonably
withheld), except as may be required by law. Notwithstanding anything contained
in the previous sentence to the contrary, Purchaser shall not be required to
obtain Seller's prior written consent to any such public statements that are
made in connection with the public stock offering of LICENERGY, A/S.
10.12 GOVERNING LAW; INTERPRETATION. This Agreement shall be construed
-----------------------------
in accordance with and governed by the laws of the State of Texas.
10.13 PERSONNEL. As of the Closing Date, Seller shall have withheld
---------
for each payment made to any of Seller's employees whose work relates to the
Assets the amount of all taxes, including, but not limited to, income tax,
F.I.C.A., workmen's compensation and other deductions required to be withheld
and shall have paid the same over to the proper governmental authority.
Attached hereto as Exhibit H is a complete list of all persons currently
----------
employed by, or under contract as a consultant for Seller's P&F Division.
Purchaser may, but shall have no obligation to, offer employment to any of
Seller's employees whose work relates to the Assets. Seller shall indemnify and
hold Purchaser harmless from and against any and all liability arising (i) under
any pension plan, welfare plan, or benefit policy or arrangement maintained or
sponsored by Seller for its employees and (ii) with respect to any employees
hired by Purchaser, from any claims for employee injuries or health problems
occurring or commencing prior to Closing which are related to their work in
connection with the Assets. Seller warrants and represents that it is not party
to any collective bargaining agreement covering or relating to the employees of
Seller whose work relates to the Assets.
10.14 NONCOMPETITION. In consideration for Purchaser's execution of
--------------
this Agreement, Seller agrees that neither Seller nor any Affiliate of Seller
shall, for a period of five (5) years following the Closing (the "Noncompetition
Period"), directly or indirectly, engage or participate in any business that is
in competition in any manner whatsoever with the business that was conducted by
the P&F Division (the "Competing Business"). Seller further covenants and
agrees that during the Noncompetition Period Seller shall not, and shall cause
its Affiliates not to, (i) directly or indirectly, on its own behalf or on
behalf of other Persons, solicit, divert or appropriate or attempt to solicit,
divert or appropriate, to or for a Competing Business any Person who is a
customer of Seller's P&F Division, or (ii) directly or indirectly, on its own
behalf or on behalf of other Persons, solicit or take away, or attempt to
solicit or take away, any employees of Seller that Purchaser hires pursuant to
Section 10.13 hereof; provided, however, except for the restriction contained in
(ii) above, the restrictions contained in this Section 10.14 shall not apply to
any third party that acquires all or substantially all of the remaining assets
or acquires all of the stock of SSI.
10.15 RECORDS. All of the books, records, files, contracts and other
-------
documents and materials described in the definition of "Incidental Rights" that
are to be transferred to Purchaser at Closing (collectively, the "Records")
shall be the original copies thereof, except that Seller shall retain the
original copies of its accounting records. Purchaser shall afford Seller
reasonable access to the Records as requested by Seller. If Purchaser desires
to dispose of any such Records, Purchaser shall so notify Seller and Seller
shall have the right, at its option, to take delivery of such Records (at
Seller's expense). If Seller elects not to receive such Records or fails to
respond to Purchaser's notice within thirty (30) days after receipt thereof,
then Purchaser may dispose of such Records within its discretion.
10.16 SUBLEASE OF U.K. OFFICE. Seller and Purchaser recognize that
-----------------------
Purchaser is interested in subleasing a portion of SSI-UK's office space to
accommodate those employees of Seller that Purchaser elects to hire pursuant to
Section 10.13 hereof. Seller and Purchaser hereby agree that, so long as Seller
is not prohibited from doing so, at Closing, Seller and Purchaser shall enter
into a sublease agreement, in form mutually satisfactory to Seller and
Purchaser, whereby Purchaser shall sublease a portion of SSI-UK's office space
for a prorated rental, all as more particularly set forth in such sublease
agreement.
IN WITNESS WHEREOF, each of the parties hereto have caused this Agreement
to be executed on its behalf as of the date first above written.
SELLER:
SCIENTIFIC SOFTWARE-INTERCOMP, INC.
By: /s/ George Steel
------------------
Name: George Steel
-------------
Title: President/CEO
-------------
SSI BETHANY, INC.
By: /s/ George Steel
------------------
Name: George Steel
-------------
Title: President/CEO
-------------
SCIENTIFIC SOFTWARE-INTERCOMP U.K., LTD.
By: /s/ George Steel
------------------
Name: George Steel
-------------
Title: President/CEO
-------------
PURCHASER:
LICENERGY, INC.
By: /s/ John Hochstein
--------------------
Name: John Hochstein
---------------
Title: President
---------
LICENERGY, A/S hereby joins in the execution of this Agreement to
unconditionally guarantee the performance of all obligations of LICENERGY, INC.
and its Affiliates (in the event of an assignment of this Agreement to any such
Affiliate) under the terms of this Agreement. In the event of a default by
LICENERGY, INC. (or its Affiliate) in the performance of any such obligations,
recovery may be had against LICENERGY, A/S without requiring the prosecution of
the claim against LICENERGY, INC. (or its Affiliate).
LICENERGY, A/S
By: /s/ Gregers Larnaes
---------------------
Name: Gregers Larnaes
----------------
Title: Chairman of the Board
------------------------
By: /s/ Charles Nicholas Keating, Jr.
-------------------------------------
Name: Charles Nicholas Keating, Jr.
--------------------------------
Title: Director
--------
EXHIBIT 10.29
EXHIBIT 10.29
CHANGE IN TERMS AGREEMENT
Principal Loan Date Maturity Loan No. Call Collateral
Account Officer Initials
$1,200,000.00 04-15-1997 42 7979623550 410
------------- ---------- -- ---------- ---
References in the shaded area are for Lender's use only and do not limit the
applicability of the document to any particular loan or item.
Borrower: SCIENTIFIC SOFTWARE - INTERCOMP, INC. A Lender: BANK ONE, COLORADO,
N.A.
COLORADO CORPORATION DOWNTOWN BOULDER BANKING CENTER
1801 CALIFORNIA ST. - SUITE 295 2696 SOUTH COLORADO BLVD.
DENVER, CO 80202-2699 DENVER, CO 80222
Principal Amount: $1,200,000.00
Date of Agreement: March 30, 1996
DESCRIPTION OF EXISTING INDEBTEDNESS. A PROMISSORY NOTE DATED SEPTEMBER 20,
1994, IN THE ORIGINAL PRINCIPAL AMOUNT OF $5,000,000.00.
DESCRIPTION OF CHANGE IN TERMS. THE MATURITY DATE WILL NOW BE APRIL 15, 1997.
SEE BELOW FOR NEW INTEREST RATE. SEE BELOW FOR NEW PAYMENT SCHEDULE. THIS LINE
OF CREDIT IS NOW CAPPED AT $1,200,000.00.
PROMISE TO PAY. SCIENTIFIC SOFTWARE - INTERCOMP, INC., A COLORADO CORPORATION
("Borrower") promises to pay to BANK ONE, COLORADO, N.A. ("Lender"), or order,
in lawful money of the United States of America, the principal amount of One
Million Two Hundred Thousand & 00/100 Dollars ($1,200,000.00) or so much as may
be outstanding, together with interest on the unpaid outstanding principal
balance of each advance. Interest shall be calculated from the date of each
advance until repayment of each advance.
PAYMENT. Borrower will pay this loan in one payment of all outstanding
principal plus all accrued unpaid interest on April 15, 1997. In addition,
Borrower will pay regular monthly payments of accrued unpaid interest beginning
June 15, 1996, and all subsequent interest payments are due on the same day of
each month after that. Interest on this Agreement in computed on a 365/360
simple interest basis; that is, by applying the ratio of the annual interest
rate over a year of 360 days, multiplied by the outstanding principal balance,
multiplied by the actual number of days the principal balance is outstanding.
Borrower will pay Lender at Lender's address shown above or at such other place
as Lender may designate in writing. Unless otherwise agreed or required by
applicable law, payments will be applied first to accrued unpaid interest, then
to principal, and any remaining amount to any unpaid collection costs and late
charges.
VARIABLE INTEREST RATE. The interest rate on this Agreement is subject to
change from time to time based on changes in an index which is the LENDER'S
PRIME RATE (the "Index"). PRIME RATE IS THE LENDER'S BASE LENDING RATE AS
ANNOUNCED BY THE LENDER FROM TIME TO TIME AT ITS SOLE DISCRETION. AT ANY GIVEN
TIME, THE LENDER MAY MAKE LOANS, AT, ABOVE, OR BELOW ITS PRIME RATE. Lender
will tell Borrower the current index rate upon Borrower's request. Borrower
understands that Lender may make loans based on other rates as well. The
interest rate change will not occur more often than each DAY. The index
currently is 8.250% per annum. The interest rate to be applied to the unpaid
principal balance of this Agreement will be at a rate equal to the index,
resulting in an initial rate of 8.250% per annum. NOTICE: under no
circumstances will the interest rate on this Agreement be more than the maximum
rate allowed by applicable law.
PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full prepayment of
this Agreement, Borrower understands that Lender is entitled to a minimum
interest charge of $25.00. Other than Borrower's obligation to pay any minimum
interest charge, Borrower may pay without penalty all or a portion of the amount
owed earlier than it is due. Early payments will not, unless agreed to by
Lender in writing, relieve Borrower of Borrower's obligation to continue to make
payments of accrued unpaid interest. Rather, they will reduce the principal
balance due.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this
Agreement or any agreement related to this Agreement, or in any other agreement
or loan Borrower has with Lender. (c) Borrower defaults under any loan,
extension of credit, security agreement, purchase or sales agreement, or any
other agreement, in favor of any other creditor or person that may materially
affect any of Borrower's property or Borrower's ability to repay this Note or
perform Borrower's obligations under this Note or any of the Related Documents.
(d) Any representation or statement made or furnished to Lender by Borrower or
on Borrower's behalf is false or misleading in any material respect either now
or at the time made or furnished. (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any creditor
tries to take any of Borrower's property on or in which Lender has a lien or
security interest. This includes a garnishment of any of Borrower's accounts
with Lender. (g) Any of the events described in this default section occurs
with respect to any guarantor of this Agreement. (h) A material adverse change
occurs in Borrower's financial condition, or Lender believes the prospect of
payment or performance of the indebtedness is impaired.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Agreement and all accrued unpaid interest immediately due,
without notice, and then Borrower will pay that amount. Upon default, including
failure to pay upon final maturity, Lender, at its option, may also, if
permitted under applicable law, do one or both of the following: (a) increase
the variable interest rate on this Agreement to 25.000% per annum,* and (b) add
any unpaid accrued interest to principal and such sum will bear interest
therefrom until paid at the rate provided in this Agreement (including any
increased rate). The interest rate will not exceed the maximum rate permitted
by applicable law. Lender may hire or pay someone else to help collect this
Agreement if Borrower does not pay. Borrower also will pay Lender that amount.
This includes, subject to any limits under applicable law, Lender's attorneys'
fees and Lender's legal expenses whether or not there is a lawsuit, including
attorneys' fees and legal expenses for bankruptcy proceedings (including efforts
to modify or vacate any automatic stay or injunction), appeals, and any
anticipated post-judgment collection services. If not prohibited by applicable
law, Borrower also will pay any court costs, in addition to all other sums
provided by law. This Agreement has been delivered to Lender and accepted by
Lender in the State of Colorado. If there is a lawsuit, Borrower agrees upon
Lender's request to submit to the jurisdiction of the courts of BOULDER County,
the State of Colorado. Lender and Borrower hereby waive the right to any jury
trial in any action, proceeding, or counterclaim brought by either Lender or
Borrower against the other. This Agreement shall be governed by and construed
in accordance with the laws of the State of Colorado.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA, Keogh, and trust
accounts. Borrower authorizes Lender, to the extent permitted by applicable law,
to charge or setoff all sums owing on this Agreement against any and all such
accounts.
LINE OF CREDIT. This Agreement evidences a revolving line of credit. Advances
under this Agreement, as well as directions for payment from Borrower's
accounts, may be requested orally or in writing by Borrower or by an authorized
person. Lender may, but need not, require that all oral requests be confirmed
in writing. Borrower agrees to be liable for all sums either: (a) advanced in
accordance with the instructions of an authorized person or (b) credited to any
of Borrower's accounts with Lender. The unpaid principal balance owing on this
Agreement at any time may be evidenced by endorsements on this Agreement or by
Lender's internal records, including daily computer print-outs. Lender will
have no obligation to advance funds under this Agreement if: (a) Borrower or
any guarantor is in default under the terms of this Agreement or any agreement
that Borrower or any guarantor has with Lender, including any agreement made in
connection with the signing of this Agreement; (b) Borrower or any guarantor
ceases doing business or is insolvent; (c) any guarantor seeks, claims or
otherwise attempts to limit, modify or revoke such guarantor's guarantee of this
Agreement or any other loan with Lender, or (d) Borrower has applied funds
provided pursuant to this Agreement for purposes other than those authorized by
Lender.
CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms
of the original obligation or obligations, including all agreements evidenced or
securing the obligation(s), remain unchanged and in full force and effect.
Consent by Lender to this Agreement does not waive Lender's right to strict
performance of the obligation(s) as changed, nor obligate Lender to make any
future change in terms. Nothing in this Agreement will constitute a
satisfaction of the obligation(s). It is the intention of Lender to retain as
liable parties all makers and endorsers of the original obligation(s), including
accommodation parties, unless a party is expressly released by Lender in
writing. Any maker or endorser, including accommodation makers, will not be
released by virtue of this Agreement. If any person who signed the original
obligation does not sign this Agreement below, then all persons signing below
acknowledge that this Agreement is given conditionally, based on the
representation to Lender that the non-signing party consents to the changes and
provisions of this Agreement or otherwise will not be released by it. This
waiver applies not only to any initial extension, modification or release, but
also to all such subsequent actions.
MISCELLANEOUS PROVISIONS. Lender may delay or forgo enforcing any of its rights
or remedies under this Agreement without losing them. Borrower and any other
person who signs, guarantees or endorses this Agreement, to the extent allowed
by law, waive presentment, demand for payment, protest and notice of dishonor.
Upon any change in the terms of this Agreement, and unless otherwise expressly
stated in writing, no party who signs this Agreement, whether as maker,
guarantor, accommodation maker or endorser, shall be released from liability.
All such parties agree that Lender may renew or extend (repeatedly and for any
length of time) this loan, or release any party or guarantor or collateral; or
impair, fail to realize upon or perfect Lender's security interest in the
collateral; and take any other action deemed necessary by Lender without the
consent of or notice to anyone. All such parties also agree that Lender may
modify this loan without the consent of or notice to anyone other than the party
with whom the modification is made.
PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS
OF THIS AGREEMENT, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER
AGREES TO THE TERMS OF THE AGREEMENT AND ACKNOWLEDGES RECEIPT OF A COMPLETED
COPY OF THE AGREEMENT.
BORROWER:
SCIENTIFIC SOFTWARE - USTERCOMP, INC., A COLORADO CORPORATION
By:_____________________________________
RONALD J. HOTTOVY, Secretary
Variable Rate, Line of Credit.
LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.20b(c) 1996 ProServices, Inc. All
rights reserved. (CO-D20 E3.20 P3.20 SCI_LJ04.LN CS.OVL)
EXHIBIT 10.30
BANK ONE, COLORADO, N.A.
LOAN AGREEMENT
Borrower: SCIENTIFIC SOFTWARE - INTERCOMP, INC. A Lender: BANK ONE, COLORADO,
N.A.
COLORADO CORPORATION DOWNTOWN BOULDER BANKING CENTER
1801 CALIFORNIA ST. - SUITE 295 2696 SOUTH COLORADO BLVD.
DENVER, CO 80202-2699 DENVER, CO 80222
THIS LOAN AGREEMENT between SCIENTIFIC SOFTWARE-INTERCOMP, INC., A COLORADO
CORPORATION ("Borrower") and BANK ONE, COLORADO, N.A. ("Lender") is made and
executed on the following terms and conditions. Borrower has received prior
commercial loans from Lender of has applied to Lender for a commercial loan or
loans and other financial accommodations, including those which may be described
on any exhibit or schedule attached to this Agreement. All such loans and
financial accommodations, together with all future loans and financial
accommodations from Lender to Borrower, are referred to in this Agreement
individually as the "Loan" and collectively as the "Loans." Borrower
understands and agrees that: (a) In granting, renewing, or extending any Loan,
Lender is relying upon Borrower's representations, warranties, and agreements,
as set forth in this Agreement; (b) the granting, renewing, or extending of a
Loan by Lender at all times shall be subject to Lender's sole judgment and
discretion; and (c) all such Loans shall be and shall remain subject to the
following terms and conditions of this Agreement.
TERM. This Agreement shall be effective as of March 30, 1996 and shall continue
thereafter until all indebtedness of Borrower to Lender has been performed in
full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
AGREEMENT. The word "Agreement" means this Loan Agreement, as this Loan
Agreement may be amended or modified from time, together with all exhibits and
schedules attached to this Loan Agreement from time to time.
ACCOUNT. The word "Account" means a trade account, account receivable, or
other right to payment for goods or services rendered owing to borrower (or to a
third party grantor acceptable to Lender).
ACCOUNT DEBTOR. The words "Account Debtor" mean the person or entity
obligated upon an Account.
ADJUSTED NET INCOME. The words "Adjusted Net Income" mean net income after
taxes plus depreciation, amortization, lease expense, and interest expense.
ADVANCE. The word "Advance" means a disbursement of Loan funds under this
Agreement.
BORROWER. The word "borrower" means SCIENTIFIC SOFTWARE-INTERCOMP, INC., A
COLORADO CORPORATION. The word "Borrower" also includes, as applicable, all
subsidiaries and affiliates of Borrower as provided below in the paragraph
titled "Subsidiaries and Affiliates"
BORROWING BASE. The words "Borrowing Base" mean, as determined by Lender
from time to time, the lesser of $1,500,000.00, the value of the export working
capital guarantee made by Export-Import Bank of the U.S. or 90% of Borrower's
eligible export accounts receivable, as calculated on a Borrowing Base and
Compliance Certificate in the form attached as Exhibit "A".
BUSINESS DAY. The words "Business Day" mean a day on which commercial banks
are open for business in the State of Colorado.
CERCLA. The word "CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
CASH FLOW. The words "Cash Flow" mean net income after taxes, and
exclusive of extraordinary gains and income, plus depreciation and amortization,
less any amounts of R&D capitalized on the balance sheet.
COLLATERAL. The word "Collateral" means and includes without limitation
all property and assets granted as collateral security for a Loan, whether real
or personal property, whether granted directly or indirectly, whether granted
now or in the future, and whether granted in the form of a security interest,
mortgage, deed of trust, assignment, pledge chattel mortgage, chattel trust,
factor's lien, equipment trust, conditional sale, trust receipt, lien, charge,
lien or title retention contract, lease or consignment intended as a security
device, or any other security or lien interest whatsoever whether created by
law, contract, or otherwise.
DEBT. The word "Debt" means all of Borrower's liabilities.
ELIGIBLE ACCOUNTS. The words "Eligible Foreign Accounts" mean, at any
time, only those accounts which are insured by export credit insurance
acceptable to Lender, backed by letters of credit or from sales funded by the
Export-Import Bank of the U.S. or a multilateral institution such as the World
Bank or United Nations. The net amount of any Eligible Account against which
Borrower may borrow shall exclude all returns, discounts, credits, and offsets
of any nature. Unless otherwise agreed to by Lender in writing, Eligible
Accounts do not include:
(a) Accounts with respect to which the Account Debtor is an officer, an
employee or agent of Borrower.
(b) Accounts with respect to which the Account Debtor is a subsidiary
of, or affiliated with or related to Borrower or its shareholders, officers, or
directors.
(c) Accounts with respect to which goods are placed on consignment,
guaranteed sale, or other terms by reason of which the payment by the Account
Debtor may be conditional.
(d) Accounts with respect to which Borrower is or may become liable to
the Account Debtor for goods sold or services rendered by the Account Debtor to
Borrower.
(e) Accounts which are subject to dispute, counterclaim, or setoff.
(f) Accounts with respect to which the goods have not been shipped or
delivered, or the services have not been rendered, to the Account Debtor, except
for fees for maintenance services, and except for partially completed milestone
performance contracts.
(g) Accounts of any Account debtor who has filed or has had filed
against it a petition in bankruptcy or an application for relief under any
provision of any state or federal bankruptcy, insolvency, or debtor-in-relief
acts; or who has had appointed a trustee, custodian, or received for the assets
of such Account Debtor; or who has made an assignment for the benefit of
creditors or has become insolvent or fails generally to pay its debts (including
its payrolls) as such debts become due.
(h) Accounts with respect to which the Account Debtor is the United
States Government or any department or agency of the Untied States.
(i) Accounts which are unpaid more than 90 days after the customer's
acceptance or 150 days after invoice or shipment, whichever occurs earlier.
(j) Accounts with respect to which the Account Debtor is in a country
where Eximbank will not provide coverage for the financing of export
transactions, as set forth in the schedule published from time to time by
Eximbank, called the "Country Limitation Schedule", which sets forth on a
country by country basis whether and under what conditions Eximbank will provide
coverage for the financing of export transactions to the countries listed
therein.
ERISA. The word "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
EVENT OF DEFAULT. The words "Event of Default" mean and include any of
the Events of Default set forth below in the section titled "EVENTS OF DEFAULT."
GRANTOR. The word "Grantor" means and includes each and all the persons or
entities granting a Security interest in any Collateral for the Indebtedness,
including without limitations all Borrowers granting such a Security Interest.
GUARANTOR. The word "Guarantor" means and includes without limitation,
each and all of the guarantors, sureties, and accommodation parties in
connection with any indebtedness.
INDEBTEDNESS. The word "Indebtedness" means and includes without
limitation all Loans, together with all other obligations, debts and liabilities
of Borrower to Lender, or any one or more of them, as well as all claims by
Lender against Borrower, or any one or more of them; whether now or hereafter
existing, voluntary or involuntary, due or not due, absolute or contingent,
liquidated or unliquidated; whether Borrower may be liable individually or
jointly with others; whether Borrower may be obligated as a guarantor, surety,
or otherwise; whether recovery upon such Indebtedness may be or hereafter may
become barred by any statute of limitations; and whether such Indebtedness may
be or hereafter may become otherwise unenforceable.
LENDER. The word "Lender" means BANK ONE, COLORADO, N.A., its successors
and assigns.
LINE OF CREDIT. The words "Line of Credit" mean the credit facility
described in this Section titled "LINE OF CREDIT" below.
LIQUID ASSETS. The words "Liquid Assets" mean Borrower's cash on hand,
plus government obligations with maturities less than 365 days, plus Borrower's
receivables.
LOAN. The word "Loan" or "Loans" means and includes any and all commercial
loans and financial accommodations from Lender to Borrower, whether now or
hereafter existing, and however evidenced, including without limitation: (1) a
300,000.00 revolving Line of Credit to finance working capital needs related to
export sales, at an interest rate of Bank One, Colorado, N.A. Prime Rate minus
1.25%; and (2) a $1,200,000.00 revolving Line of Credit to finance working
capital needs related to export sales and issue U.S. Dollar and foreign currency
standby letters of credit to support international sales.
NOTE. The word "Note" means Borrower's and any cosigners' promissory note
or notes, if any, evidencing Borrower's Loan obligations in favor of Lender, as
well as any substitute, replacement or refinancing note or notes therefor.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements, guaranties,
security agreements, mortgages, deeds of trust, and all other instruments,
agreements and documents, whether now or hereafter existing, executed in
connection with the Indebtedness.
SECURITY AGREEMENT. The words "Security Agreement" mean and include
without limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract, or
otherwise, evidencing, governing, representing, or creating a Security interest.
SECURITY INTEREST. The words "Security Interest" mean and include without
limitation any type of collateral security, whether in the form of a lien
charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel
trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or
title retention contract, lease or consignment intended as a security device, or
any other security or lien interest whatsoever, whether created by law,
contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendments and Reauthorization
Act of 1986 as now or hereafter amended.
SUBORDINATED DEBT. The words "Subordinated Debt" mean indebtedness and
liabilities of Borrower which have been subordinated by written agreement to
indebtedness owed by Borrower to Lender in form and substance acceptable to
Lender.
TANGIBLE NET WORTH. The words "Tangible Net Worth" mean Borrower's total
assets excluding all intangible assets (i.e., goodwill, trademarks, patents,
copyrights, organizational expenses, and similar intangible items, but including
leaseholds and leasehold improvements) less total Debt.
WORKING CAPITAL. The words "Working Capital" mean Borrower's current
assets, excluding prepaid expenses, less Borrower's current liabilities.
LINE OF CREDIT. Lender agrees to make advances to Borrower and issue standby
letters of credit on Borrower's behalf from time to time from the date of this
Agreement to the maturity date of any line of credit, provided the aggregate
amount of such Advances or issued standby letters of credit outstanding at any
time does not exceed the Borrowing Base. For Borrowing Base purposes, standby
letters of credit denominated in foreign currencies will be marked up by 20% to
cover currency fluctuations unless hedged with a forward option currency
contract. Any letters of credit prior to the date of shipment of the Items
covered by the subject letter of credit are excluded from the borrowing
availability. Disbursements shall not be made to finance the cost of
manufacturing or selling of those Items which are to be sold on terms other than
those set forth in Item (7) the Loan Authorization Agreement (Exhibit B, and
also referred to as Annex A). Disbursements shall not be made (a) except for
the purpose of enabling the Borrower to finance the cost of manufacturing or
selling the Items, and (b) after the Availability Date set forth in item (10) of
the Authorization Agreement. Within the foregoing limits, Borrower may borrow,
partially or wholly prepay, and reborrow under this Agreement as follows.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make any
Advance to or for the account of Borrower and to issue standby letters of credit
under this Agreement is subject to the following conditions precedent, with all
documents, instruments, opinions, reports, and other items required under this
Agreement to be in form and substance satisfactory to Lender:
(a) Lender shall have received evidence that this Agreement and all
Related Documents have been duly authorized, executed, and delivered by Borrower
to Lender.
(b) Lender shall have received such documents, and, if an Event of
Default has occurred, such opinion of counsel or supplemental opinion as Lender
may request.
(c) The security interests in the Collateral shall have been duly
authorized, created, and perfected with first lien priority and shall be in full
force and effect.
(d) All guaranties required by Lender for the Lines of Credit shall
been executed by each Guarantor, delivered to Lender, and be in full force and
effect.
(e) Lender shall have received a 90% guarantee acceptable to Lender
from the Export-Import Bank of the U.S. for Lender's export revolving line of
credit to Borrower.
(f) Lender, at its option and for its sole benefit, shall have conducted an
inspection of Borrower's Accounts, Inventory, books, records, and operations,
and Lender shall be satisfied as to their condition.
(g) Borrower shall have paid or will pay to Lender all fees, costs and
expenses specified in this Agreement and the Related Documents as are then due
and payable. Lender will not impose any charge on Borrower in connection with
this Loan Agreement and the Note(s) other than reasonable fees charged by the
Lender in accordance with normal commercial lending practices.
(h) There shall not exist at the time of any Advance a condition which
would constitute an Event of Default under this Agreement.
MAKING LOAN ADVANCES. Advances under the credit facility are restricted
solely to the export revolving line of credit guaranteed by the Export-Import
Bank of the U.S. Advances, as well as directions for payment from Borrower's
accounts, may be requested orally or in writing by authorized persons. Lender
may, but need not, require that all oral requests be confirmed in writing. Each
Advance shall be conclusively deemed to have been made at the request of and for
the benefit of Borrower (a) when credited to any deposit account of Borrower
maintained with Lender or (b) when advanced in accordance with the instructions
of an authorized person. Lender, at its option, may set a cutoff time, after
which all requests for Advances will be treated as having been requested on the
next succeeding Business Day.
MANDATORY LOAN REPAYMENTS/ADDITIONAL COLLATERAL. If at any time the aggregate
principal amount of the outstanding Advances plus issued standby letters of
credit shall exceed the applicable Borrowing Base, Borrower, immediately upon
written or oral notice from Lender shall either (a) pay to Lender an amount
equal to the difference between the outstanding principal balance of the
Advances plus issued letters of credit and the Borrowing Base or (b) furnish
additional security to Lender, in form and amount satisfactory to Lender and the
Export-Import Bank of the U.S.
LOAN ACCOUNT. Lender shall maintain on its books a record of account in which
Lender shall make entries for each Advance and such other debits and credits as
shall be appropriate with the credit facility. Lender shall provide Borrower
with periodic statements of Borrower's accounts, which statements will be
considered to be correct and conclusively binding on Borrower unless Borrower
notifies Lender to the contrary with thirty (30) days after Borrower's receipt
of any such statement which Borrower deems to be incorrect.
OPERATING ACCOUNT. Borrower shall utilize a regular operating account with
Lender.
COLLATERAL. To secure payment of the Lines of Credit and performance of all
other Loans, obligations and duties owed by Borrower to lender, Borrower (and
others, if required) shall grant to Lender Security Interests in such property
and assets as Lender may require (the "Collateral"), including without
limitation Borrower's present and future Accounts, contract rights, general
intangibles, proprietary software, equipment, inventory and assignment of credit
insurance. Lender's Security Interests in the Collateral shall be continuing
liens and shall include the proceeds and products of the Collateral, including
without limitation the proceeds of any insurance. With respect ot the
Collateral, Borrower agrees and represents and warrants to Lender:
PERFECTION OF SECURITY INTERESTS. Borrower agrees to execute such financing
statements and to take whatever other actions are requested by Lender to perfect
and continue Lender's Security Interests in the Collateral. Upon request of
Lender, Borrower will deliver to Lender any and all of the documents evidencing
or constituting the Collateral, and Borrower will note Lender's interest upon
any all chattel paper if not delivered to Lender for possession by Lender.
Contemporaneous with the execution of this Agreement, Borrower will execute one
or more UCC financing statements and any similar statements as may be required
by applicable law, and will file such financing statements and all such similar
statements in the appropriate location or locations. Borrower hereby appoints
Lender as its irrevocable attorney-in-fact for the purpose of executing any
documents necessary to perfect or to continue any Security Interest. Lender
may, at any time, and without further authorization from Borrower, file a
carbon, photograph, facsimile, or other reproduction of any financing statement
for use as a financing statement. Borrower will reimburse Lender for all
expenses for the perfection, termination, and the continuation of the perfection
of Lender's security interest in the Collateral. Borrower promptly will notify
Lender of any change in Borrower's name including any change to the assumed
business names of Borrower. Borrower also will promptly notify Lender of any
change in Borrower's Employer Identification Number. Borrower further agrees to
notify Lender in writing prior to any change in address or location of
Borrower's principal governance office or should Borrower merge or consolidate
with any other entity.
COLLATERAL RECORDS. Borrower does not, and at all times hereafter shall, keep
correct and accurate records of the Collateral, all of which records shall be
available to Lender or Lender's representative upon demand for inspection and
copying at any reasonable time. With respect to the Accounts, Borrower agrees
to keep and maintain such records as Lender may require, including without
limitation information concerning Eligible Accounts and Account balances and
agings. With respect to Inventory and Work in Progress, Borrower agrees to keep
and maintain such records as Lender may require, including without limitation
records itemizing and describing the kind, type, quality and quantity of
Inventory and Work in Progress, Borrower's costs and selling prices, and the
monthly withdrawals and additions to Inventory and Work in Progress: The
following is an accurate and complete list of all locations at which Borrower
keeps or maintains business records concerning Borrower's Accounts, Inventory
and Work in Progress: 1801 California Street, Suite 295, Denver, Colorado
80202; 10333 Richmond Avenue, Suite 1000, Houston, Texas 77042.
COLLATERAL SCHEDULES. Concurrently with the execution and delivery of this
Agreement, Borrower shall execute and deliver to Lender schedules of Accounts
and Eligible Accounts, in form and substance satisfactory to the Lender.
Thereafter Borrower shall execute and deliver to Lender such supplemental
schedules of Eligible Accounts and such other matters and information relating
to the Accounts as Lender may request.
REPRESENTATIONS AND WARRANTIES CONCERNING ACCOUNTS. With respect to the
Accounts, Borrower represents and warrants to Lender: (a) Each Account
represented by Borrower to be an Eligible Account for purposes of this
Agreement, conforms to the requirements of the definition of an Eligible
Account; (b) All Account information listed on schedules delivered to Lender
will be true and correct, subject to immaterial variance; (c) Borrower has good
and marketable title to Accounts due and collectible outside the United States;
such accounts support exports originating from the United States; and proceeds
from the collection of such accounts are remitted to the United States on a
bi-monthly basis; (d) Lender, its assigns, or agents shall have the right at any
time and at Borrower's expense to inspect, examine, and audit Borrower's records
and to confirm with Account Debtors the accuracy of such Accounts.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender as
of the date of this Agreement and as of the date of each disbursement of Loan
proceeds:
ORGANIZATION. Borrower is a corporation which is duly organized, validly
existing, and in good standing where incorporated. Borrower has the full power
and authority to own its properties and to transact the business in which it is
presently engaged or presently proposes to engage. Borrower also is duly
qualified as a foreign corporation and is in good standing in all states in
which the failure to so qualify would have a material adverse effect on its
businesses or financial condition.
AUTHORIZATION. The execution, delivery, and performance of this Agreement
and all Related Documents by Borrower, to the extent to be executed, delivered
or performed by Borrower, have been duly authorized by all necessary action by
Borrower within two (2) days after the date of this Agreement; do not require
the consent or approval of any other person, regulatory authority or
governmental body; and do not conflict with, result in a violation of, or
constitute a default under (a) any provision of its articles of incorporation,
operating agreement, or any other agreement or other instrument binding upon
Borrower or (b) any law, governmental regulation, court decree, or order
applicable to Borrower.
FINANCIAL INFORMATION. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as of the
date of the statement, and there has been no material adverse change in
Borrower's financial condition subsequent to the date of the most recent
financial statement supplied to Lender. Borrower has no material contingent
obligations except as disclosed in such financial statements.
LEGAL EFFECT. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower enforceable against Borrower in
accordance with their respective terms.
PROPERTIES. Except as contemplated by this Agreement or as previously
disclosed in Borrower's financial statements or in writing to Lender and as
accepted by Lender, and except for property tax liens for taxes not presently
due and payable, Borrower owns and has good title to all of Borrower's
properties free and clear of all Security interests, and has not executed any
security documents or financing statements relating to such properties. All of
Borrower's properties are titled in Borrower's legal name, and Borrower has not
used, or filed a financing statement under, any other name for at least the last
five 5) years.
LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against Borrower
is pending or threatened, and no other event has occurred which may materially
adversely affect Borrowers financial condition or properties, other than
litigation, claims, or other events, if any, that have been disclosed to and
acknowledged by Lender in writing.
TAXES. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all taxes,
assessments and other governmental charges have been paid in full, except those
presently being or to be contested by Borrower in good faith in the ordinary
course of business and for which adequate reserves have been provided.
LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or permitted
the filing or attachment of any Security Interest on or affecting any of the
Collateral directly or indirectly securing repayment of Borrower's Loan and
Note, that would be prior or that may in any way be superior to Lender's
Security Interests and rights in and to such Collateral.
BINDING EFFECT. This Agreement, the Note and all Security Agreements
directly or indirectly securing repayment of Borrower's Loan and Note are
binding upon Borrower as well as upon Borrower's successors, representatives and
assigns, and are legally enforceable in accordance with their respective terms.
COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.
EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower
may have any liability complies in all material respects with all applicable
requirements of law and regulations, and (i) no Reportable Event nor Prohibited
Transaction (as defined in ERISA) has occurred with respect to any such plan,
(ii) Borrower has not withdrawn from any such plan or initiated steps to do so,
and (iii) no steps have been taken to terminate any such plan.
INVESTMENT COMPANY ACT. Borrower is not an "investment company" or a
company "controlled" by an "investment company", within the meaning of the
Investment Company Act of 1940, as amended.
PUBLIC UTILITY HOLDING COMPANY ACT. Borrower is not a "holding company",
or a "subsidiary company" of a "holding company", or an "affiliate" of a
"holding company" or of a "subsidiary company" of a "holding company", or an
"affiliate" of a "holding company" or of a "subsidiary company" of a "holding
company", within the meaning of the Public Utility Holding Compete Act of 1935
as amended.
REGULATIONS G, T AND U. Borrower is not engaged principally, or as one of
its important activities, in the business of extending credit for the purpose of
purchasing or carrying margin stock (within the meaning of the Regulations G, T
and U of the Board of Governors of the Federal Reserve System).
LOCATION OF BORROWER'S OFFICES AND RECORDS. The chief place of business of
Borrower and the office or offices where Borrower keeps its records concerning
the Collateral is located at 1801 California Street, Suite 295, Denver, Colorado
80202. Additional records are kept at 10333 Richmond Avenue, Suite 1000,
Houston, Texas 77042.
INFORMATION. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection with this
Agreement or any transaction contemplated hereby is, and all information
hereafter furnished by or on behalf of Borrower to Lender will be true and
accurate in every material respect on the date as of which such information is
dated or certified; and none of such information is or will be incomplete by
omitting to state any material fact necessary to make such information not
misleading.
SURVIVAL OF REPRESENTATION AND WARRANTIES. Borrower understands and agrees
that Lender is relying upon the above representations and warranties in
extending Loan Advances to Borrower. Borrower further agrees that the foregoing
representations and warranties shall be continuing in nature and shall remain in
full force and effect until such time as Borrower's Loan and Note shall be paid
in full, or until this Agreement shall be terminated in the manner provided
above, whichever is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
DEPOSIT ACCOUNTS. Borrower will maintain all material deposit accounts
with Lender.
EXPORT-IMPORT BANK OF THE U.S. GUARANTY. At the request of Lender, either
orally or in writing, comply with any requirement imposed on Lender by the
Export-Import Bank of the U.S. in connection with their Guaranty.
LITIGATION. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, ad (b) all litigation and claims and
all threatened litigation and claims affecting Borrower or any Guarantor which
could materially affect the financial condition of Borrower or the financial
condition of any Guarantor.
FINANCIAL RECORDS. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis and
permit Lender to examine and audit Borrower's books and records at all
reasonable times.
FINANCIAL STATEMENTS. Furnish Lender with: (a) as soon as available, but
in no event later than 120 days after the end of each fiscal year, Borrower's
annual CPA audited financial statement and Form 10-K for the year ended; (b)
within 45 days after the end of each quarter, Borrower's quarterly financial
statements prepared as Form 10-Q; (c) within 30 days after the end of each
month, Borrower's internally prepared financial statements, agings of
receivables and payables, and Borrowing Base and Compliance Certificate in the
form attached as Exhibit A; (e) within 30 days after the end of each month,
Borrower's shipment and credit insurance premium paid report. All financial
reports required to be provided under this Agreement shall be prepared in
accordance with generally accepted accounting principles, applied on a
consistent basis, and certified by Borrower as being true and correct.
RECONCILIATION AND OTHER STATEMENTS. The Borrower shall submit to the
Lender monthly written accounts receivable reconciliation statements covering
the collateral.
ADDITIONAL INFORMATION. Furnish such additional information and
statements, lists of assets and liabilities, inventory schedules, budgets,
forecasts, tax returns, and other reports whit respect to Borrower's or
Guarantors' financial condition and business operations as Lender may request
from time to time.
FINANCIAL COVENANTS AND RATIOS. Comply with the following covenants and
ratios:
TANGIBLE NET WORTH. Maintain a minimum Tangible Net Worth of not less than
- -$3,000,000.00 on a quarterly basis.
NET WORTH RATIO. Maintain a ratio of Total Liabilities to Tangible net
Worth of less than 3.00 to 1.00 on a quarterly basis.
CURRENT RATIO. Maintain a ratio of Current Assets to Current Liabilities
in excess of 1.0 to 1.00 on a quarterly basis.
CASH FLOW REQUIREMENTS. Maintain a positive cash flow at the end of each
fiscal year.
Except as provided above, all computations made to determine compliance with the
requirements contained in this paragraph shall be made in accordance with
generally accepted accounting principles, applied on a consistent basis, and
certified by Borrower as being true and correct.
FEES AND CHARGES. In addition to all other agreed upon fees and charges,
pay the following: 1) any fees charged by the Export-Import Bank of the U.S.
for providing its guarantee to Lender; 2) cost of an annual field examination,
not to exceed $3,000.00 per examination; 3) standard Letter of Credit fees as
established by the International Division of Bank One, Boulder, N.A.
INSURANCE. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect to
Borrower's properties and operations, in form, amounts, coverages and with
insurance companies reasonably acceptable to Lender. Borrower, upon request of
Lender, will deliver to Lender from time to time the policies or certificates of
insurance in form satisfactory to Lender, including stipulations that coverages
will not be cancelled or diminished without at least ten (10) days' prior
written notice to Lender. In connection with all policies covering assets in
which Lender holds or is offered a security for loans, Borrower will provide
Lender with such loss payable or other endorsements as Lender may require.
INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on
each existing insurance policy showing such information as Lender may reasonably
request, including without limitation the following: (a) the name of the
insurer; (b) the risks insured; (c) the amount of the policy; (d) the properties
insured; (e) the then current property values on the basis of which insurance
has been obtained, and the manner of determining those values; and (f) the
expiration date of the policy.
OTHER AGREEMENTS. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any other
creditor and notify Lender immediately in writing of any default in connection
with any other such agreements.
LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's and its
subsidiaries (as defined in the paragraph below entitled Subsidiaries and
Affiliates) business operations, unless specifically consented to the contrary
by Lender in writing.
TAXES, CHARGES AND LIENS. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all assessments,
taxes, governmental charges, levies and liens, of every kind and nature, imposed
upon Borrower or its properties, income, or profits, prior to the date on which
penalties would attach, and all lawful claims that, if unpaid, might become a
lien or charge upon any of Borrowers properties, income, or profits. Provided
however, Borrower will not be required to pay and discharge any such assessment,
tax, charge, levy, lien or claim so long as (a) the legality of the same shall
be contested in good faith by appropriate proceedings, and (b) Borrower shall
have established on its books adequate reserves with respect to such contested
assessment, tax, charge, levy, lien, or claim in accordance with generally
accepted accounting practices. Borrower, upon demand of Lender, will furnish to
Lender evidence of payment of the assessments, taxes, charges, levies, liens and
claims and will authorize the appropriate governmental official to deliver to
Lender at any time a written statement of any assessments, taxes, charges,
levies, liens and claims against Borrower's properties, income, or profits.
PERFORMANCE. Perform and comply with all terms, conditions, and provisions
set forth in this Agreement and in all other instruments and agreements between
Borrower and Lender in a timely manner, and promptly notify Lender if Borrower
learns of the occurrence of any event which constitutes an Event of Default
under this Agreement.
OPERATIONS. Substantially maintain its present executive and management
personnel; conduct is business affairs in a reasonable and prudent manner and in
compliance with all applicable federal, state and municipal laws, ordinances,
rules and regulations respecting its properties, charters, businesses and
operations, including without limitation, compliance with the Americans With
Disabilities Act and with all minimum funding standards and other requirements
of ERISA and other laws applicable to Borrower's employee benefit plans.
INSPECTION. The Borrower shall permit a representative of the Lender to
make reasonable inspections at any time during normal business hours of the
Borrower's facilities, activities, books and records, and cause its officers and
employees to give full cooperation and assistance in connection therewith, so
that Lender can determine whether the Borrower has maintained the Collateral
Value at in accordance with the terms of this Agreement. If Borrower now or at
any time hereafter maintains any records (including without limitation computer
generated records and computer software programs for the generation of such
records) in the possession of a third party, Borrower, upon request of Lender,
shall notify such party to permit Lender free access to such records at all
reasonable times and to provide Lender with copies of any records it may
request, all at Borrower's expense. When any such inspection is characterized
by Lender as a "field examination", Lender will limit such field examination to
one a year and Borrower will pay Lender a fee related to its costs of any such
field examination in an amount not to exceed $3,000.00 per examination. Such
Information that the Lender obtains shall remain confidential and will not be
disclosed to third parties.
ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all
respects with all environmental protection federal, state and local laws,
statutes, regulations and ordinances; not cause or permit to exist, as a result
of an intentional or unintentional action or omission on its part or on the part
of any third party, or property owned and or occupied by Borrower, any
environmental activity where damage may result to the environment, unless such
environmental activity is pursuant to and in compliance with the conditions of a
permit issued by the appropriate federal, state or local governmental
authorities; shall furnish to Lender promptly and in any event within thirty
(30) days after receipt thereof a copy of any notice, summons, lien, citation,
directive, letter or other communication from any governmental agency or
instrumentality concerning any intentional or unintentional action or omission
on Borrower's part in connection with any environmental activity whether or not
there is damage to the environment and/or other natural resources.
ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing statements,
instruments, documents and other agreements as Lender or its attorneys may
reasonably request to evidence and secure the Loans and to perfect all Security
Interests.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
CAPITAL EXPENDITURES. Make or contract to make capital expenditures,
including leasehold improvements, in any fiscal quarter in excess of
$200,000.00.
INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the normal
course of business and indebtedness to Lender contemplated by this Agreement,
create, incur or assume indebtedness for borrowed money, including capital
leases, except (i) debt to Renaissance Capital Partners II, Ltd. in the form of
convertible debentures (ii) $45,000,000 in long term debt to Lindner Dividend
Fund and (iii) short-term debt up to $300,000.00 incurred by Scientific
Software-Intercomp (U.K.), Ltd. for working capital purposes or otherwise (b)
sell, transfer, mortgage, assign, pledge, lease, grant a security interest in,
or encumber any of Borrower's assets, except for financing instruments sold in
relation to Grantor sales or licensing of Grantor's proprietary software, or (c)
sell with recourse any of Borrower's accounts, except to Lender and except liens
for taxes not yet due or deposits or pledges in connection with or to secure
payment of workmen's compensation, unemployment insurance or other social
security or in connection with the good faith contest of any tax lien.
CONTINUITY OF OPERATIONS. (a) Engage or enter into any agreement to engage
in any business activities substantially different than those in which Borrower
is presently engaged, or (b) cease or enter into any agreement to cease
operations, liquidate, merge, transfer, acquire or consolidate with any other
entity, change ownership, dissolve or transfer or sell Collateral out of the
ordinary course of business, or (c) pay any dividends on Borrower's stock (other
than dividends payable in its stock) or purchase or retire any of Borrower's
outstanding shares with cash.
LOANS, ACQUISITIONS, INVESTMENTS AND GUARANTIES. (a) Make, or permit to
exist, any investment, by loan, stock or security purchase or otherwise, in any
subsidiary or other entity of any kind, except in its existing subsidiaries as
defined below in the paragraph entitled "Subsidiaries and Affiliates", and
except investments in U.S. Government obligations or investment grade marketable
securities, or (b) incur any obligation as surety or guarantor, except by
indorsement of instruments for deposit, endorsement of financing instruments
related to sales on Borrower's behalf or collection in the ordinary course of
business and except for the guaranty of Borrower's Canadian subsidiary, IRDE,
and its financing arrangement with the Export Development Corporation.
SALES OF ASSETS. Dispose of, sell, lease or transfer all or substantially
all of its assets, other than sales of inventory in the ordinary course of
business.
TRANSFER OF CONTROLLING EQUITY INTEREST. The Borrower shall not transfer,
purchase or redeem, or permit any subsidiary to transfer or purchase, any shares
of the Borrower's capital stock resulting in a controlling equity interest
unless such transfer, purchase or redemption is effected solely from the
proceeds of and within a reasonable time after the issuance to third parties by
the Borrower or its subsidiary of capital stock which is in addition to the
capital stock of the Borrower or its subsidiary, as the case may be, outstanding
on the date of the Loan Agreement.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower whether under this Agreement or under any other agreement, Lender shall
have no obligation to make Loan Advances or to disburse Loan proceeds if: (a)
Borrower or any Guarantor is in default under the terms of this Agreement or any
of the Related Documents or any other agreement that Borrower or any Guarantor
has with Lender; (b) Borrower becomes insolvent, files a petition in bankruptcy
or similar proceedings, or is adjudged a bankrupt; (c) there occurs a material
adverse change in Borrower's financial condition in the financial condition of
any Guarantor, or in the value of any Collateral securing any Loan; (d) any
Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such
Guarantor's guaranty of the Loan or any other loan with Lender.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA, Keogh, and trust
accounts. Borrower authorizes Lender, to the extent permitted by applicable law
to charge or setoff all sums, owing on the indebtedness against any and all such
accounts. However, the Lender's right of setoff will be limited to Borrower's
pro-rata share of any joint venture equity interest.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when due
on the loans.
OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition contained in
this Agreement or in any of the Related Documents, or failure of Borrower to
comply with or to perform any other term, obligation, covenant or condition
contained in any other agreement between Lender and Borrower ten (10) days after
receiving written notice from Lender demanding cure of such default. If the
cure requires more than ten (10) days, Borrower shall immediately initiate steps
which Lender deems in Lender's sole discretion to be sufficient to cure the
default and thereafter shall continue and complete all reasonable and necessary
steps sufficient to produce compliance as soon as reasonably practical.
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person that
may materially affect any of Borrower's property or Borrower's or any Grantor's
ability to repay the Loans or perform their respective obligations under this
Agreement or any of the Related Documents.
FALSE STATEMENTS. Any warranty, representation, or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under this
Agreement or the Related Documents is false or misleading in any material
respect, either now or at the time made or furnished.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of any
Security Agreement to create a valid and perfected Security interest) at any
time and for any reason.
INSOLVENCY. Any dissolution or termination of Borrower's existence as a
going business, insolvency, appointment of a receiver for any part of Borrower's
property, any assignment for the benefit of creditors, any type of creditor
workout, or the commencement of any proceeding under any bankruptcy or
insolvency laws by or against Borrower.
CREDITOR OR FORFEITURE PROCEEDING. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help, repossession
or any other method, by any creditor of Borrower, any creditor of any Grantor
against any collateral securing the indebtedness, or by any governmental agency.
This includes a garnishment, attachment, or levy on or of any of Borrower's
deposit accounts with Lender.
CHANGE IN OWNERSHIP. Any single change in ownership of twenty-five percent
(25%) or more of the common stock of Borrower.
ADVERSE CHANGE. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
indebtedness is impaired.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except
where otherwise provided in this Agreement or the related documents, all
commitments and obligations of Lender under this agreement or the Related
Documents or any other agreement immediately will terminate (including any
obligation to make Loan Advances or disbursements), and, at Lender's option, all
indebtedness immediately will become due and payable all without notice of any
kind to Borrower, except that in the case of an Event of Default of the type
described in the "insolvency" subsection above, such acceleration shall be
automatic and not optional. In addition, Lender shall have all the rights and
remedies provided in the Related Documents of available at law, in equity, or
otherwise. Except as may be prohibited by applicable law, all of Lender's
rights and remedies shall be cumulative and may be exercised singularly or
concurrently. Election by Lender to pursue any remedy shall not exclude pursuit
of any other remedy, and an election to make expenditures or to take action to
perform an obligation of Borrower or of any Grantor shall not affect Lender's
right to declare a default and to exercise its rights and remedies.
NOTICE IN EVENT OF FILING OF ACTION FOR DEBTOR'S RELIEF. The Borrower shall
promptly notify the Lender in writing of the occurrence of any of the following:
(1) the Borrower begins or consents in any manner to any proceeding or
arrangement for its liquidation in whole or in part or to any other proceeding
or arrangement whereby any of its assets are subject generally to the payment of
its liabilities or whereby any receiver, trustee, liquidator the like is
appointed for it or any for appointment as a debtor-in-possession under Title 11
of the U.S. Code); (2) the Borrower fails to obtain the dismissal or stay on
appeal within thirty (30) calendar days of the commencement of any proceeding
arrangement referred to in (1) above; (3) the Borrower begins any other
procedure for the relief of financially distressed or insolvent debtors, or such
procedure has been commenced against it, whether voluntarily or involuntarily,
and such procedure has not been effectively terminated, dismissed or stayed
within thirty (30) calendar days after the commencement thereof, or (4) the
Borrower begins any procedure for its dissolution, or a procedure therefore has
been commenced against it.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the party or
parties sought to be charged or bound by the alteration or amendment.
APPLICABLE LAW. This Agreement has been delivered to Lender and accepted
by Lender in the State of Colorado. If there is a lawsuit, Borrower agrees upon
Lender's request to submit to the jurisdiction of the courts of Boulder County,
the State of Colorado. Lender and Borrower hereby waive the right to any jury
trial in any action, proceeding, or counterclaim brought by either Lender or
Borrower against the other. This Agreement shall be governed by and construed
in accordance with the laws of the State of Colorado.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions of
this Agreement.
MULTIPLE PARTIES. All obligation of Borrower under this Agreement shall be
joint and several, and all references to Borrower shall mean each and every
Borrower. This means that each of the persons signing below is responsible for
all obligations in this Agreement.
COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's
out-of-pocket expenses, including reasonable attorneys' fees, incurred in
connection with the preparation, execution, enforcement and collection of this
Agreement or in connection with the Loans made pursuant to this Agreement.
Lender may pay someone else to help collect the Loans and to enforce this
Agreement, and Borrower will pay that amount. This includes, subject to any
limits under applicable law, Lender's attorney' fees and Lender's legal
expenses, whether or not there is a lawsuit, including attorney's fees for
bankruptcy proceedings (including efforts to modify or vacate any automatic stay
or injunction), appeals, and any anticipated post-judgment collection services.
Borrower also will pay any court costs, in addition to all other sums provided
by law.
NOTICES. All notices required to be given under this Agreement shall be
effective when actually delivered or when deposited with a nationally recognized
overnight courier or deposited in the United States mail, first class, postage
prepaid, addressed to the party to whom the notice is to be given at the address
shown above. Any party may change its address for notices under this Agreement
by giving formal written notice to the other parties, specifying that the
purpose of the notice is to change the party's address. To the extent permitted
by Applicable law, if there is more than one Borrower, notice to any Borrower
will constitute notice to all Borrowers. For notice purposes, Borrower agrees
to keep Lender informed at all times of Borrower's current address(es).
SEVERABILITY. If a court of competent jurisdiction finds any provision of
the Agreement to be invalid or unenforceable as to any person or circumstance,
such finding shall not render that provision invalid or unenforceable as to any
other persons or circumstances. If feasible, any such offending provision shall
be deemed to be modified to be within the limits of enforceability or validity;
however, if the offending provision cannot be so modified, it shall be stricken
and all other provisions of this Agreement in all other respects shall remain
valid and enforceable.
SUBSIDIARIES AND AFFILIATES. To the extent the context of any provisions
of this Agreement makes it appropriate, including without limitation any
representation, warranty or covenant, the word "Borrower" as used herein shall
include all subsidiaries of Borrower, with the exception of its Canadian
subsidiary, IRDE. Notwithstanding the foregoing however, under no circumstances
shall this Agreement be construed to require Lender to make any Loan or other
financial accommodation to any subsidiary of Borrower.
SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure to the
benefit of Lender, its successors and assigns. Borrower shall not, however,
have the right to assign its rights under this Agreement or any interest
therein, without the prior written consent of Lender.
SURVIVAL. All warranties, representations, and covenants made by Borrower
in this Agreement or in any certificate or other instrument delivered by
Borrower to Lender under this Agreement shall be considered to have been relied
upon by Lender and will survive the making of the Loan and delivery to Lender of
the Related Documents, regardless of any investigation made by Lender or on
Lender's behalf.
TIME IS OF THE ESSENCE. Time is of the essence in the performance of this
Agreement.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No delay
or omission on the part of Lender in exercising any right shall operate as a
waiver of such right or any other right. A waiver by Lender of a provision of
this Agreement shall not prejudice or constitute a waiver of Lender's right
otherwise to demand strict compliance with that provision of any other provision
of this Agreement. No prior waiver by Lender, nor any course for dealing
between Lender and Borrower, or between Lender and any Grantor, shall constitute
a waiver of any of Lender's rights or of any obligations of Borrower or of any
Grantor as to any future transactions. Whenever the consent of Lender is
required under this Agreement, the granting of such consent by Lender in any
instance shall not constitute continuing consent in subsequent instances where
such consent is required and in all cases such consent may be granted or
withheld in the sole discretion of Lender.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT, AND
BORROWER AGREWES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF MARCH 30, 1996.
BORROWER:
SCIENTIFIC SOFTWARE-INTERCOMP, INC.
A Colorado Corporation
By:___________________________________________
Ronald J. Hottovy, Vice President/Secretary
LENDER:
BANK ONE, COLORADO, N.A.
By:____________________________________
Eric R. Long, Assistant Vice President
EXHIBIT 10.31
PROMISSORY NOTE
Principal Loan Date Maturity Loan No. Call Collateral
Account Officer Initials
$300,000.00 04-30-1996 04-15-1997 42 7979623550
----------- ---------- ---------- -- ----------
410
---
References in the shaded area are for Lender's use only and do not limit the
applicability of the document to any particular loan or item.
Borrower: SCIENTIFIC SOFTWARE - INTERCOMP, INC. A Lender: BANK ONE, COLORADO,
N.A.
COLORADO CORPORATION DOWNTOWN BOULDER BANKING CENTER
1801 CALIFORNIA ST. - SUITE 295 2696 SOUTH COLORADO BLVD.
DENVER, CO 80202-2699 DENVER, CO 80222
Principal Amount: $300,000.00 Initial Rate: 7.000%
Date of Note: April 30, 1996
PROMISE TO PAY. SCIENTIFIC SOFTWARE - INTERCOMP, INC., A COLORADO CORPORATION
("Borrower") promises to pay to BANK ONE, COLORADO, N.A. ("Lender"), or order,
in lawful money of the United States of America, the principal amount of Three
Hundred Thousand & 00/100 Dollars ($300,000.00) or so much as may be
outstanding, together with interest on the unpaid outstanding principal balance
of each advance. Interest shall be calculated from the date of each advance
until repayment of each advance.
PAYMENT. Borrower will pay this loan in one payment of all outstanding
principal plus all accrued unpaid interest on April 15, 1997. In addition,
Borrower will pay regular monthly payments of accrued unpaid interest beginning
June 15, 1996, and all subsequent interest payments are due on the same day of
each month after that. Interest on this Note is computed on a 365/360 simple
interest basis; that is, by applying the ratio of the annual interest rate over
a year of 360 days, multiplied by the outstanding principal balance, multiplied
by the actual number of days the principal balance is outstanding. Borrower
will pay Lender at Lender's address shown above or at such other place as Lender
may designate in writing. Unless otherwise agreed or required by applicable
law, payments will be applied first to accrued unpaid interest, then to
principal, and any remaining amount to any unpaid collection costs and late
charges.
VARIABLE INTEREST RATE. The Interest rate on this Note is subject to change
from time to time based on changes in an index which is the LENDER'S PRIME RATE
(the "Index). PRIME RATE IS THE LENDER'S BASE LENDING RATE AS ANNOUNCED BY THE
LENDER FROM TIME TO TIME AT ITS SOLE DISCRETION. AT ANY GIVEN TIME, THE LENDER
MAY MAKE LOANS, AT, ABOVE, OR BELOW ITS PRIME RATE. Lender will tell Borrower
the current index rate upon Borrower's request. Borrower understands that
Lender may make loans based on other rates as well. The interest rate change
will not occur more often than each DAY. The Index currently is 8.250% per
annum. The Interest rate to be applied to the unpaid principal balance of this
Note will be at a rate of 1.250 percentage points under the Index, resulting in
an initial rate of 7.000% per annum. NOTICE: Under no circumstances will the
interest rate on this Note be more than the maximum rate allowed by applicable
law.
PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full prepayment of
this Note, Borrower understands that Lender is entitled to a minimum Interest
charge of $25.00. Other than Borrower's obligation to pay any minimum interest
charge, Borrower may pay without penalty all or a portion of the amount owed
earlier than it is due. Early payments will not, unless agreed to by Lender in
writing, relieve Borrower of Borrower's obligation to continue to make payments
of accrued unpaid interest. Rather, they will reduce the principal balance due.
DEFAULT. Borrower will be in default if any of the following happens (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished. (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any creditor
tries to take any of Borrower's property on or in which Lender has a lien or
security interest. This includes a garnishment of any of Borrower's accounts
with Lender. (g) Any of the events described in this default section occurs
with respect to any guarantor of this Note. (h) A material adverse change
occurs in Borrower's financial condition, or Lender believes the prospect of
payment or performance of the indebtedness is impaired.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon default, including failure
to pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, do one or both of the following: (a) increase the variable
interest rate on this Note to 25.000% per annum,* and (b) add any unpaid accrued
interest to principal and such sum will bear interest therefrom until paid at
the rate provided in this Note, (including any increased rate). The interest
rate will not exceed the maximum rate permitted by applicable law. Lender may
hire or pay someone else to help collect this Note if Borrower does not pay.
Borrower also will pay Lender that amount. This includes, subject to any limits
under applicable law, Lender's attorneys' fees and Lender's legal expenses
whether or not there is a lawsuit, including attorneys' fees and legal expenses
for bankruptcy proceedings (including efforts to modify or vacate any automatic
state or injunction), appeals, and any anticipated post-judgment collection
services. If not prohibited by applicable law, Borrower also will pay any court
costs, in addition to all other sums provided by law. THIS NOTE HAS BEEN
DELIVERED TO LENDER AND ACCEPTED BY LENDER IN THE STATE OF COLORADO. IF THERE
IS A LAWSUIT, BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE
JURISDICTION OF THE COURTS OF BOULDER COUNTY, THE STATE OF COLORADO. LENDER AND
BORROWER HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR
COUNTERCLAIM BROUGHT BY EITHER LENDER OR BORROWER AGAINST THE OTHER. THIS NOTE
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
COLORADO.
* 5.00% OVER THE INDEX
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and trust accounts. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on this Note against any and
all such accounts.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note, as well as directions for payment from Borrower's accounts, may be
requested orally or in writing by Borrower or by an authorized person. Lender
may, but need not, require that all oral requests be confirmed in writing.
Borrower agrees to be liable for all sums either: (a) advanced in accordance
with the instructions of an authorized person or (b) credited to any of
Borrower's accounts with Lender. The unpaid principal balance owing on this
Note at any time may be evidenced by endorsements on this Note or by Lender's
internal records, including daily computer print-outs. Lender will have no
obligation to advance funds under this Note if: (a) Borrower or any guarantor
is in default under the terms of this Note or any agreement that Borrower or any
guarantor has with Lender, including any agreement made in connection with the
signing of this Note; (b) Borrower or any guarantor ceases doing business or is
insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit,
modify or revoke such guarantor's guarantee of this Note or any other loan with
Lender, or (d) Borrower has applied funds provided pursuant to this Note for
purposes other than those authorized by Lender.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive
presentment, demand for payment, protest and notice of dishonor. Upon any
change in the terms of this Note, and unless otherwise expressly stated in
writing, no party who signs this Note, whether as maker, guarantor,
accommodation maker or endorser, shall be released from liability. All such
parties agree that Lender may renew or extend (repeatedly and for any length of
time) this loan, or release any party or guarantor or collateral; or impair,
fail to realize upon or perfect Lender's security interest in the collateral;
and take any other action deemed necessary by Lender without the consent of or
notice to anyone. All such parties also agree that Lender may modify this loan
without the consent of or notice to anyone other than the party with whom the
modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
SCIENTIFIC SOFTWARE - INTERCOMP, INC., A COLORADO CORPORATION
By:_____________________________________
RONALD J. HOTTOVY, Secretary
EXHIBIT 10.32
CHANGE IN TERMS AGREEMENT
Principal Loan Date Maturity Loan No. Call Collateral
Account Officer Initials
$900,000.00 10-15-1997 42 7979623550 410
----------- ---------- -- ---------- ---
References in the shaded area are for Lender's use only and do not limit the
applicability of the document to any particular loan or item.
Borrower: SCIENTIFIC SOFTWARE - INTERCOMP, INC. A Lender: BANK ONE, COLORADO,
N.A.
COLORADO CORPORATION DOWNTOWN BOULDER BANKING CENTER
1801 CALIFORNIA ST. - SUITE 295 2696 SOUTH COLORADO BLVD.
DENVER, CO 80202-2699 DENVER, CO 80222
Principal Amount: $900,000.00 Date
of Agreement: April 15, 1997
DESCRIPTION OF EXISTING INDEBTEDNESS. A PROMISSORY NOTE DATED SEPTEMBER 20,
1994, IN THE ORIGINAL PRINCIPAL AMOUNT OF $5,000,000.00.
DESCRIPTION OF CHANGE IN TERMS. THE MATURITY DATE WILL NOW BE OCTOBER 15, 1997.
SEE BELOW FOR NEW INTEREST RATE. THIS LINE OF CREDIT IS NOW CAPPED AT
$900,000.00.
PROMISE TO PAY. SCIENTIFIC SOFTWARE - INTERCOMP, INC., A COLORADO CORPORATION
("Borrower") promises to pay to BANK ONE, COLORADO, N.A. ("Lender"), or order,
in lawful money of the United States of America, the principal amount of Nine
Hundred Thousand & 00/100 Dollars ($900,000.00) or so much as may be
outstanding, together with interest on the unpaid outstanding principal balance
of each advance. Interest shall be calculated from the date of each advance
until repayment of each advance.
PAYMENT. Borrower will pay this loan in one payment of all outstanding
principal plus all accrued unpaid interest on October 15, 1997. In addition,
Borrower will pay regular monthly payments of accrued unpaid interest beginning
May 15, 1997, and all subsequent interest payments are due on the same day of
each month after that. Interest on this Agreement is computed on a 365/360
simple interest basis; that is, by applying the ratio of the annual interest
rate over a year of 360 days, multiplied by the outstanding principal balance,
multiplied by the actual number of days the principal balance is outstanding.
Borrower will pay Lender at Lender's address shown above or at such other place
as Lender may designate in writing. Unless otherwise agreed or required by
applicable law, payments will be applied first to accrued unpaid interest, then
to principal, and any remaining amount to any unpaid collection costs and late
charges.
VARIABLE INTEREST RATE. The interest rate on this Agreement is subject to
change from time to time based on changes in an index which is the LENDER'S
PRIME RATE (the "Index"). PRIME RATE IS THE LENDER'S BASE LENDING RATE AS
ANNOUNCED BY THE LENDER FROM TIME TO TIME AT ITS SOLE DISCRETION. AT ANY GIVEN
TIME, THE LENDER MAY MAKE LOANS, AT, ABOVE, OR BELOW ITS PRIME RATE. Lender
will tell Borrower the current index rate upon Borrower's request. Borrower
understands that Lender may make loans based on other rates as well. The
interest rate change will not occur more often than each DAY. The Index
currently is 8.500% per annum. The interest rate to be applied to the unpaid
principal balance of this Agreement will be at a rate equal to the Index,
resulting in an initial rate of 8.500% per annum. NOTICE: Under no
circumstances will the interest rate on this Agreement be more than the maximum
rate allowed by applicable law.
PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full prepayment of
this Agreement, Borrower understands that Lender is entitled to a minimum
interest charge of $25.00. Other than Borrower's obligation to pay any minimum
interest charge, Borrower may pay without penalty all or a portion of the amount
owed earlier than it is due. Early payments will not, unless agreed to by
Lender in writing, relieve Borrower of Borrower's obligation to continue to make
payments of accrued unpaid interest. Rather, they will reduce the principal
balance due.
DEFAULR. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this
Agreement or any agreement related to this Agreement, or in any other agreement
or loan Borrower has with Lender. (c) Borrower defaults under any loan,
extension of credit, security agreement, purchase or sales agreement, or any
other agreement, in favor of any other creditor or person that may materially
affect any of Borrower's property or Borrower's ability to repay this Note or
perform Borrower's obligations under this Note or any of the Related Documents.
(d) Any representation or statement made or furnished to Lender by Borrower or
on Borrower's behalf is false or misleading in any material respect either now
or at the time made or furnished. (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any creditor
tries to take any of Borrower's property on or in which Lender has a lien or
security interest. This includes a garnishment of any of Borrower's accounts
with Lender. (g) Any guarantor dies or any of the other events described in
this default section occurs with respect to any guarantor of this Agreement.
(h) A material adverse change occurs in Borrower's financial condition, or
Lender believes the prospect of payment or performance of the indebtedness is
impaired.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Agreement and all accrued unpaid interest immediately due,
without notice, and then Borrower will pay that amount. Upon default, including
failure to pay upon final maturity, Lender, at its option, may also, if
permitted under applicable law, do one or both of the following: (a) increase
the variable interest rate on this Agreement to 25.000% per annum, and (b) add
any unpaid accrued interest to principal and such sum will bear interest
therefrom until paid at the rate provided in this Agreement (including any
increased rate). The interest rate will not exceed the maximum rate permitted
by applicable law. Lender may hire or pay someone else to help collect this
Agreement if Borrower does not pay. Borrower also will pay Lender that amount.
This includes, subject to any limits under applicable law, Lender's attorneys'
fees and Lender's legal expenses whether or not there is a lawsuit, including
attorneys' fees and legal expenses for bankruptcy proceedings (including efforts
to modify or vacate any automatic stay or injunction), appeals, and any
anticipated post-judgment collection services. If not prohibited by applicable
law, Borrower also will pay any court costs, in addition to all other sums
provided by law. THIS AGREEMENT HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY
LENDER IN THE STATE OF COLORADO. IF THERE IS A LAWSUIT, BORROWER AGREES UPON
LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THE COURTS OF BOULDER COUNTY,
THE STATE OF COLORADO. LENDER AND BORROWER HEREBY WAIVE THE RIGHT TO ANY JURY
TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER LENDER OR
BORROWER AGAINST THE OTHER. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF COLORADO.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on this Agreement against any
and all such accounts.
LINE OF CREDIT. This Agreement evidences a revolving line of credit. Advances
under this Agreement, as well as directions for payment from Borrower's
accounts, may be requested orally or in writing by Borrower or by an authorized
person. Lender may, but need not, require that all oral requests be confirmed
in writing. Borrower agrees to be liable for all sums either: (a) advanced in
accordance with the instructions of an authorized person or (b) credited to any
of Borrower's accounts with Lender. The unpaid principal balance owing on this
Agreement at any time may be evidenced by endorsements on this Agreement or by
Lender's internal records, including daily computer print-outs. Lender will
have no obligation to advance funds under this Agreement if: (a) Borrower or
any guarantor is in default under the terms of this Agreement or any agreement
that Borrower or any guarantor has with Lender, including any agreement made in
connection with the signing of this Agreement; (b) Borrower or any guarantor
ceases doing business or is insolvent; (c) any guarantor seeks, claims or
otherwise attempts to limit, modify or revoke such guarantor's guarantee of this
Agreement or any other loan with Lender, or (d) Borrower has applied funds
provided pursuant to this Agreement for purposes other than those authorized by
Lender.
CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms
of the original obligation or obligations, including all agreements evidenced or
securing the obligation(s), remain unchanged and in full force and effect.
Consent by Lender to this Agreement does not waive Lender's right to strict
performance of the obligation(s) as changed, nor obligate Lender to make any
future change in terms. Nothing in this Agreement will constitute a
satisfaction of the obligation(s). It is the intention of Lender to retain as
liable parties all makers and endorsers of the original obligation(s), including
accommodation parties, unless a party is expressly released by Lender in
writing. Any maker or endorser, including accommodation makers, will not be
released by virtue of this Agreement. If any person who signed the original
obligation does not sign this Agreement below, then all persons signing below
acknowledge that this Agreement is given conditionally, based on the
representation to Lender that the non-signing party consents to the changes and
provisions of this Agreement or otherwise will not be released by it. This
waiver applies not only to any initial extension, modification or release, but
also to all such subsequent actions.
MISCELLANEOUS PROVISIONS. Lender may delay or forgo enforcing any of its rights
or remedies under this Agreement without losing them. Borrower and any other
person who signs, guarantees or endorses this Agreement, to the extent allowed
by law, waive presentment, demand for payment, protest and notice of dishonor.
Upon any change in the terms of this Agreement, and unless otherwise expressly
stated in writing, no party who signs this Agreement, whether as maker,
guarantor, accommodation maker or endorser, shall be released from liability.
All such parties agree that Lender may renew or extend (repeatedly and for any
length of time) this loan, or release any party or guarantor or collateral; or
impair, fail to realize upon or perfect Lender's security interest in the
collateral; and take any other action deemed necessary by Lender without the
consent of or notice to anyone. All such parties also agree that Lender may
modify this loan without the consent of or notice to anyone other than the party
with whom the modification is made.
PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS
OF THIS AGREEMENT, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER
AGREES TO THE TERMS OF THE AGREEMNT AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY
OF THE AGREEMENT.
BORROWER:
SCIENTIFIC SOFTWARE - INTERCOMP, INC., A COLORADO CORPORATION
By:_____________________________________
GEORGE STEEL, President
Variable Rate, Line of Credit.
LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.22b(c) 1997 CFI ProServices, Inc.
All rights reserved. (CO-D20 E3.22a SCI_JB05LN C5.OVL)
EXHIBIT 10.33
CHANGE IN TERMS AGREEMENT
Principal Amount Date of Agreement:
$650,000.00 October 30, 1997
Borrower: Lender:
Scientific Software-Intercomp, Inc., Bank One, Colorado, N.A.
A Colorado corporation 1125 17th Street
633 17th Street, Suite 1600 Denver, CO 80202
Denver, CO 80202
DESCRIPTION OF EXISTING INDEBTEDNESS: A PROMISSORY NOTE DATED SEPTEMBER 20,
1994 IN THE ORIGINAL PRINCIPAL AMOUNT OF $5,000,000.00, AS MODIFIED BY A (1)
CHANGE IN TERMS AGREEMENT, DATED MAY 31, 1995, CHANGING THE MATURITY DATE TO
JULY 15, 1995; (2) CHANGE IN TERMS AGREEMENT, DATED JULY 15, 1995, CHANGING THE
MATURITY DATE TO AUGUST 15, 1995; (3) CHANGE IN TERMS AGREEMENT, DATED AUGUST
15, 1995, CHANGING THE MATURITY DATE TO SEPTEMBER 15, 1995 AND CHANGING THE
PRINCIPAL AMOUNT TO $4,500,000.00; (4) CHANGE IN TERMS AGREEMENT, DATED
SEPTEMBER 15, 1995, CHANGING THE MATURITY DATE TO SEPTEMBER 30, 1995; (5) CHANGE
IN TERMS AGREEMENT, DATED SEPTEMBER 30, 1995, CHANGING THE MATURITY DATE TO
OCTOBER 15, 1995; (6) CHANGE IN TERMS AGREEMENT, DATED OCTOBER 15, 1995,
CHANGING THE MATURITY DATE TO MARCH 30, 1996; (7) CHANGE IN TERMS AGREEMENT,
DATED MARCH 30, 1996, CHANGING THE MATURITY DATE TO APRIL 15, 1997 AND CHANGING
THE PRINCIPAL AMOUNT TO $1,200,000.00; AND (8) CHANGE IN TERMS AGREEMENT, DATED
APRIL 15, 1997, CHANGING THE MATURITY DATE TO OCTOBER 15, 1997 AND CHANGING THE
PRINCIPAL AMOUNT TO $900,000.00 (COLLECTIVELY, THE "PROMISSORY NOTE").
-----------------
DESCRIPTION OF CHANGE IN TERMS: (1) The maturity date will now be November 30,
1997; (2) the interest rate is changed as set forth below in the paragraph
entitled "VARIABLE INTEREST RATE;" and (3) the principal amount of this line of
credit loan is capped at $650,000.00.
PROMISE TO PAY. Borrower promises to pay to Lender, or order, in lawful money
of the United States of America, the principal amount of Six Hundred Fifty
Thousand and 00/100 Dollars ($650,000.00), or so much as may be outstanding,
together with interest on the unpaid outstanding principal balance of each
advance. Interest shall be calculated from the date of each advance until
repayment of each advance.
PAYMENT. Borrower will pay this loan in one payment of all outstanding
principal plus all accrued unpaid interest on November 30, 1997. In addition,
Borrower will pay a payment of accrued unpaid interest on November 15, 1997.
VARIABLE INTEREST RATE. The interest rate on this Agreement is subject to
change from time to time based on changes in an index which is the LENDER'S
PRIME RATE (the "Index"). PRIME RATE IS LENDER'S BASE LENDING RATE AS ANNOUNCED
-----
BY LENDER FROM TIME TO TIME AT ITS SOLE DISCRETION. AT ANY GIVEN TIME, LENDER
MAY MAKE LOANS AT, ABOVE OR BELOW ITS PRIME RATE. Lender will tell Borrower the
current Index rate upon Borrower's request. Borrower understands that Lender
may make loans based on other rates as well. The interest rate change will not
occur more often than each DAY. The Index currently is 8.50% per annum. The
interest rate to be applied to the unpaid principal balance of this Agreement,
including current outstanding balances, will be at the rate of one (1)
percentage point over the Index, resulting in an initial rate of 9.50% per
annum. NOTICE: Under no circumstances will the interest rate on this Agreement
be more than the maximum rate allowed by applicable law.
CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms
of the Promissory Note remain in full force and effect, including without
limitation, conditions constituting events of default, Lender's rights upon
default and offset rights. In addition, all agreements evidencing or securing
the obligation(s) remain unchanged and in full force and effect, including that
Loan Agreement dated March 30, 1996 (the "Loan Agreement"), as such may have
--------------
been modified by written agreement between Borrower and Lender. Consent by
Lender to this Agreement does not waive Lender's right to restrict performance
of the obligation(s) as changed, nor obligate Lender to make any further change
in terms. Nothing in this Agreement will constitute a satisfaction of the
obligation(s). It is the intention of Lender to retain as liable parties all
makers and endorsers of the original obligation(s), including accommodation
parties, unless a party is expressly released by Lender in writing. Any maker
or endorser, including accommodation makers, will not be released by virtue of
this Agreement. If any person who signed the original obligation does not sign
this Agreement below, then all persons signing below acknowledge that this
Agreement is given conditionally, based on the representation to Lender that the
non-signing party consents to the changes and provision of this Agreement or
otherwise will not be released by it. This waiver applies not only to any
initial extension, modification or release, but also to all such subsequent
actions.
FORBEARANCE. Borrower acknowledges that it is not currently in compliance with
all of the covenants of the Loan Agreement. Lender's forbearance in declaring a
default is in Lender's sole discretion and in no way shall Lender's forbearance
constitute a waiver or forbearance of any right or remedy Lender may have,
including but not limited to, the right or remedy it may have to declare a
default or to protect any of the collateral encumbered by commercial security
agreements. Nothing contained herein shall be construed as a waiver or
forbearance of any right or remedy of Lender based upon any default or failure
of Borrower to pay or perform any and all terms and conditions of the Promissory
Note, this Agreement, the Loan Agreement, or any security agreement, whether
such default exists as of the date hereof or occurs hereafter.
RELEASE. Borrower hereby absolutely and unconditionally releases and forever
discharges Lender, its agents, directors, officers, employees, assigns,
attorneys, and Banc One Corporation ("Banc One") and all of Banc One's
---------
subsidiaries and entities, (collectively, the "Released Parties") from any and
----------------
all actions, causes of action, suits, debts, defenses, sums of money,
controversies, claims, counterclaims and demands, of any kind whatsoever, in law
or in equity, whether presently known or unknown, which Borrower may have or
ever had against the Released Parties as of the date hereof.
RATIFICATION. Borrower ratifies, affirms, reaffirms, acknowledges, confirms and
agrees that the Promissory Note and this Agreement and each and every other
document and instrument which evidences or secures the payment of loans to
Lender, including the Loan Agreement, represent a valid and enforceable,
collectible obligation of Borrower, and Borrower further acknowledges that there
are no existing claims, events or rights of set off with respect to any of the
aforementioned instruments or documents, and further acknowledges and represents
that as of the date of the execution of this Agreement, no event has occurred
and no condition exists which constitutes a default by Lender under the Loan
Agreement or other documents, either with or without notice or lapse of time.
MISCELLANEOUS PROVISIONS. Lender may delay or forgo enforcing any of its rights
or remedies under this Agreement without losing them. Obligations of Borrower
under this Agreement are joint and several. Borrower and any other person who
signs, guarantees or endorses this Agreement, to the extent allowed by law,
waive presentment, demand for payment, protest and notice of dishonor. Upon any
change in the terms of this Agreement, and unless otherwise expressly stated in
writing, no party who signs this Agreement, whether as maker, guarantor,
accommodation maker or endorser, shall be released from liability. All such
parties agree that Lender may renew or extend (repeatedly and for any length of
time) this loan, or release any party or guarantor or collateral; or impair,
fail to realize upon or prefect Lender's security interest in the collateral;
and take any other action deemed necessary by Lender without the consent of or
notice to anyone. All such parties also agree that Lender may modify this loan
without the consent of or notice to anyone other than the party with whom the
modification is made. If there is any conflict between the terms of this
Agreement and the terms of the Promissory Note or any other Change in Terms
Agreements, the terms of this Agreement shall control.
PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISION
OF THIS AGREEMENT. BORROWER AGREES TO THE TERMS OF THIS AGREEMENT AND
ACKNOWLSDGES RECEIPT OF A COMPLETED COPY OF THIS AGREEMENT.
Borrower:
SCIENTIFIC SOFTWAE-INTERCOMP, INC.,
A Colorado corporation
By:__________________________
George Steel, President
EXHIBIT 10.34
CHANGE IN TERMS AGREEMENT
Principal Amount Date of Agreement:
$650,000.00 November 30, 1997
Borrower: Lender:
Scientific Software-Intercomp, Inc., Bank One, Colorado, N.A.
A Colorado corporation 1125 17th Street
633 17th Street, Suite 1600 Denver, CO 80202
Denver, CO 80202
DESCRIPTION OF EXISTING INDEBTEDNESS: A PROMISSORY NOTE DATED SEPTEMBER 20,
1994 IN THE ORIGINAL PRINCIPAL AMOUNT OF $5,000,000.00, AS MODIFIED BY A (1)
CHANGE IN TERMS AGREEMENT, DATED MAY 31, 1995, CHANGING THE MATURITY DATE TO
JULY 15, 1995; (2) CHANGE IN TERMS AGREEMENT, DATED JULY 15, 1995, CHANGING THE
MATURITY DATE TO AUGUST 15, 1995; (3) CHANGE IN TERMS AGREEMENT, DATED AUGUST
15, 1995, CHANGING THE MATURITY DATE TO SEPTEMBER 15, 1995 AND CHANGING THE
PRINCIPAL AMOUNT TO $4,500,000.00; (4) CHANGE IN TERMS AGREEMENT, DATED
SEPTEMBER 15, 1995, CHANGING THE MATURITY DATE TO SEPTEMBER 30, 1995; (5) CHANGE
IN TERMS AGREEMENT, DATED SEPTEMBER 30, 1995, CHANGING THE MATURITY DATE TO
OCTOBER 15, 1995; (6) CHANGE IN TERMS AGREEMENT, DATED OCTOBER 15, 1995,
CHANGING THE MATURITY DATE TO MARCH 30, 1996; (7) CHANGE IN TERMS AGREEMENT,
DATED MARCH 30, 1996, CHANGING THE MATURITY DATE TO APRIL 15, 1997 AND CHANGING
THE PRINCIPAL AMOUNT TO $1,200,000.00; AND (8) CHANGE IN TERMS AGREEMENT, DATED
APRIL 15, 1997, CHANGING THE MATURITY DATE TO OCTOBER 15, 1997 AND CHANGING THE
PRINCIPAL AMOUNT TO $900,000.00, (9) CHANGE IN TERMS AGREEMENT, DATED OCTOBER
30, 1997, CHANGING THE MATURITY DATE TO NOVEMBER 30, 1997 AND CHANGING THE
PRINCIPAL AMOUNT TO $650,000.00 (COLLECTIVELY, THE "PROMISSORY NOTE").
DESCRIPTION OF CHANGE IN TERMS: (1) The maturity date will now be August 15,
1998; (2) Borrower shall make monthly interest only payments; (3) a principal
reduction payment sufficient to reduce the outstanding principal amount to zero
shall be due and payable on March 15, 1998; (4) as of March 15, 1998,
$230,000.00 shall remain available under the loan to secure that certain standby
letter of credit in the amount of $2,000.00, which expires on July 4, 1998, and
that certain standby letter of credit in the amount of $226,000.00, which
expires on August 4, 1998.
Promise to pay. Borrower promises to pay to Lender, or order, in lawful money
of the United States of America, the principal amount of Six Hundred Fifty
Thousand and 00/100 Dollars ($650,000.00), or so much as may be outstanding,
together with interest on the unpaid outstanding principal balance.
PAYMENT. Borrower will continue to pay this loan by making regular monthly
payments of accrued unpaid interest on the 15th day of each month. A principal
reduction payment sufficient to reduce the outstanding principal amount to zero
shall be due and payable on March 15, 1998, after which time the loan shall be
non-revolving and only available to secure that certain standby letter of credit
in the amount of $2,000.00, which expires on July 4, 1998, and that certain
standby letter of credit in the amount of $226,000.00, which expires on August
4, 1998.
VARIABLE INTEREST RATE. The interest rate on this Agreement is subject to
change from time to time based on changes in an index which is the LENDER'S
PRIME RATE (the "Index"). PRIME RATE IS LENDER'S BASE LENDING RATE AS ANNOUNCED
BY LENDER FROM TIME TO TIME AT ITS SOLE DISCRETION. AT ANY GIVEN TIME, LENDER
MAY MAKE LOANS AT, ABOVE OR BELOW ITS PRIME RATE. Lender will tell Borrower
the current Index rate upon Borrower's request. Borrower understands that
Lender may make loans based on other rates as well. The interest rate change
will not occur more often than each DAY. The Index currently is 8 1/2 % per
annum. The interest rate to be applied to the unpaid principal balance of this
Agreement, including current outstanding balances, will be at the rate of one
(1) percentage point over the Index, resulting in an initial rate of 9 1/2 % per
(2) annum. NOTICE: Under no circumstances will the interest rate on this
(3) Agreement be more than the maximum rate allowed by applicable law.
CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms
of the Promissory Note remain in full force and effect, including without
limitation, conditions constituting events of default, Lender's rights upon
default and offset rights. In addition, all agreements evidencing or securing
the obligation(s) remain unchanged and in full force and effect, including that
Loan Agreement dated March 30, 1996 (the "Loan Agreement"), as such may have
been modified by written agreement between Borrower and Lender. Consent by
Lender to this Agreement does not waive Lender's right to restrict performance
of the obligation(s) as changed, nor obligate Lender to make any further change
in terms. Nothing in this Agreement will constitute a satisfaction of the
obligation(s). It is the intention of Lender to retain as liable parties all
makers and endorsers of the original obligation(s), including accommodation
parties, unless a party is expressly released by Lender in writing. Any maker
or endorser, including accommodation makers, will not be released by virtue of
this Agreement. If any person who signed the original obligation does not sign
this Agreement below, then all persons signing below acknowledge that this
Agreement is given conditionally, based on the representation to Lender that the
non-signing party consents to the changes and provision of this Agreement or
otherwise will not be released by it. This waiver applies not only to any
initial extension, modification or release, but also to all such subsequent
actions.
FORBEARANCE. Borrower acknowledges that it is not currently in compliance with
all of the covenants of the Loan Agreement. Lender's forbearance in declaring a
default is in Lender's sole discretion and in no way shall Lender's forbearance
constitute a waiver or forbearance of any right or remedy Lender may have,
including but not limited to, the right or remedy it may have to declare a
default or to protect any of the collateral encumbered by commercial security
agreements. Nothing contained hereof shall be construed as a waiver or
forbearance of any right or remedy of Lender based upon any default or failure
of borrower to pay or perform any and all terms and conditions of the Promissory
Note, this Agreement, the Loan Agreement, or any security agreement, whether
such default exists as of the date hereof or occurs hereafter.
RELEASE. Borrower hereby absolutely and unconditionally releases and forever
discharges Lender, its agents, directors, officers, employees, assigns,
attorneys, and Banc One Corporation ("Banc One") and all of Banc One's
subsidiaries and entities, (collectively, the "Released Parties") from any and
all actions, causes of action, suits, debts, defenses, sums of money,
controversies, claims, counterclaims and demands, of any kind whatsoever, in law
or in equity, whether presently known or unknown, which Borrower may have or
ever had against the Released Parties as of the date hereof.
RATIFICATION. Borrower ratifies, affirms, reaffirms, acknowledges, confirms and
agrees that the Promissory Note and this Agreement and each and every other
document and instrument which evidences or secures the payment of loans to
Lender, including the Loan Agreement, represent a valid and enforceable,
collectible obligation of Borrower, and Borrower further acknowledges that there
are no existing claims, events or rights of set off with respect to any of the
aforementioned instruments or documents, and further acknowledges and represents
that as of the date of the execution of this Agreement, no event has occurred
and no condition exists which constitutes a default by Lender under the Loan
Agreement or other documents, either with or without notice or lapse of time.
MISCELLANEOUS PROVISIONS. Lender may delay or forgo enforcing any of its rights
or remedies under this Agreement without losing them. Obligations of Borrower
under this Agreement are joint and several. Borrower and any other person who
signs, guarantees or endorses this Agreement, to the extent allowed by law,
waive presentment, demand for payment, protest and notice of dishonor. Upon any
change in the terms of this Agreement, and unless otherwise expressly stated in
writing, no party who signs this Agreement, whether as maker, guarantor,
accommodation maker or endorser, shall be released from liability. All such
parties agree that Lender may renew or extend (repeatedly and for any length of
time) this loan, or release any party or guarantor or collateral; or impair,
fail to realize upon or prefect Lender's security interest in the collateral;
and take any other action deemed necessary by Lender without the consent of or
notice to anyone. All such parties also agree that Lender may modify this loan
without the consent of or notice to anyone other than the party with whom the
modification is made. If there is any conflict between the terms of this
Agreement and the terms of the Promissory Note or any other Change in Terms
Agreements, the terms of this Agreement shall control.
PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISION
OF THIS AGREEMENT. BORROWER AGREES TO THE TERMS OF THIS AGREEMENT AND
ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS AGREEMENT.
Borrower:
SCIENTIFIC SOFTWARE-INTERCOMP, INC.,
A Colorado corporation
By:__________________________
George Steel, President
