-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TK14kPtULfXQlIK0CREMwLjr49Hx526YMOo7tABPpvbeyONKVc+UVOApG5QKWYev VkawWP9iaKfSbkr/j1KE9A== 0000087822-98-000027.txt : 19980703 0000087822-98-000027.hdr.sgml : 19980703 ACCESSION NUMBER: 0000087822-98-000027 CONFORMED SUBMISSION TYPE: DEFM14A PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19980702 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCIENTIFIC SOFTWARE INTERCOMP INC CENTRAL INDEX KEY: 0000087822 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 840581776 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: DEFM14A SEC ACT: SEC FILE NUMBER: 000-04882 FILM NUMBER: 98660236 BUSINESS ADDRESS: STREET 1: 633 17TH STREET STREET 2: SUITE 1600 CITY: DENVER STATE: CO ZIP: 80202 BUSINESS PHONE: 3032921111 MAIL ADDRESS: STREET 1: 1801 CALIFORNIA STREET CITY: DENVER STATE: CO ZIP: 80202 FORMER COMPANY: FORMER CONFORMED NAME: SCIENTIFIC SOFTWARE CORP DATE OF NAME CHANGE: 19840813 DEFM14A 1 SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 Filed by the Registrant [X] Filed by a Party other than the Registrant [ ] Check the appropriate box: [] Preliminary Proxy Statement [] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) [X] Definitive Proxy Statement [ ] Definitive Additional Materials [ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12 SCIENTIFIC SOFTWARE-INTERCOMP, INC. (Name of Registrant as Specified In Its Charter) N/A (Name of Person(s) Filing Proxy Statement if other than the Registrant) Payment of Filing Fee (check the appropriate box): [ ] No fee required. [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. 1) Title of each class of securities to which transaction applies: Common Stock 2) Aggregate number of securities to which transaction applies: 9,057,304 3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): $0.44 cash per share per Agreement and Plan of Merger. 4) Proposed maximum aggregate value of transaction: $3,985,214 5) Total fee paid: $797 [X] Fee paid previously with preliminary materials. [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. 1) Amount Previously Paid: 2) Form, Schedule or Registration Statement No.: 3) Filing Party: 4) Date Filed: [SCIENTIFIC SOFTWARE-INTERCOMP, INC. LETTERHEAD] July 2, 1998 Dear Shareholder: You are cordially invited to attend the Special Meeting of Shareholders of Scientific Software-Intercomp, Inc., a Colorado corporation (the "Company"), to be held at 10:00 a.m., local time, on July 30, 1998 in the Company's executive offices at 633 17th Street, Suite 1600, Denver, Colorado. The meeting is extremely important, since you will be asked to consider and vote upon the Agreement and Plan of Merger (the "Merger Agreement") dated June 17, 1998 between the Company and Baker Hughes Oilfield Operations, Inc., a California corporation ("BHOO") and wholly owned subsidiary of Baker Hughes Incorporated, a Delaware corporation. Pursuant to the Merger Agreement, the Company will merge with and into a Colorado corporation and 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, WITHOUT INTEREST. The enclosed Notice of Special Meeting, Proxy Statement and proxy card are being sent to Shareholders of the Company as of June 12, 1998, the voting record date. These materials provide a detailed description of the matters to be voted on as well as other important information, and we ask you to consider them carefully. YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE MERGER AGREEMENT. IN ADDITION, THE --- BOARD OF DIRECTORS HAS RECEIVED THE OPINION OF SIMMONS & COMPANY INTERNATIONAL THAT THE CONSIDERATION TO BE RECEIVED BY THE HOLDERS OF THE COMPANY'S COMMON STOCK IN CONNECTION WITH THE MERGER IS FAIR, FROM A FINANCIAL POINT OF VIEW, TO SUCH HOLDERS. APPROVAL OF THE MERGER AGREEMENT REQUIRES THE AFFIRMATIVE VOTE OF THE HOLDERS OF TWO-THIRDS OF THE OUTSTANDING SHARES OF THE COMPANY'S COMMON STOCK. YOUR VOTE --------- IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, WE ENCOURAGE YOU ------------- TO READ THE ATTACHED PROXY STATEMENT CAREFULLY AND THEN SIGN, DATE, AND RETURN YOUR PROXY CARD PROMPTLY IN THE ENVELOPE PROVIDED. Very truly yours, George Steel President and Chief Executive Officer SCIENTIFIC SOFTWARE-INTERCOMP, INC. 633 17th Street, Suite 1600 Denver, Colorado 80202 NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON JULY 30, 1998 To the Shareholders of Scientific Software-Intercomp, Inc.: A Special Meeting of Shareholders (the "Special Meeting") of Scientific Software-Intercomp, Inc., a Colorado corporation (the "Company"), will be held on July 30, 1998 at 10:00 a.m., local time, at the principal executive offices of the Company at 633 17th Street, Suite 1600, Denver, Colorado 80202, for the following purposes: 1. To consider and vote upon an Agreement and Plan of Merger dated June 17, 1998 (the "Merger Agreement") between the Company and Baker Hughes Oilfield Operations, Inc., a California corporation ("BHOO") and wholly owned subsidiary of Baker Hughes Incorporated, a Delaware corporation, as described in the accompanying Proxy Statement, pursuant to which the Company will merge with and into a Colorado corporation and wholly owned subsidiary of BHOO to be formed prior to the closing (the "Merger") and 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, without interest. The Merger is subject to customary conditions as well as the approval of the Company's shareholders. 2. To transact such other business as may properly come before the Special Meeting or any reconvened meeting after any adjournments or postponements thereof. Approval of the Merger Agreement requires the affirmative vote of the holders of two-thirds of the outstanding shares of the Company's Common Stock. Pursuant to the Bylaws of the Company, the Board of Directors has fixed June 12, 1998 as the record date for the determination of shareholders entitled to notice of and to vote at the Special Meeting. Accordingly, only the Company's shareholders of record at the close of business on such date will be entitled to notice of and to vote at the Special Meeting or any reconvened meeting after any adjournments or postponements thereof. A list of the Company's shareholders entitled to vote at the Special Meeting will be available for inspection beginning July 2, 1998 during ordinary business hours at the principal executive offices of the Company at 633 17th Street, Suite 1600, Denver, Colorado 80202. Shareholders of the Company who comply with the requirements of Article 113 of the Colorado Business Corporation Act are or may be entitled to assert dissenter's rights and seek a judicial determination of the fair value of their shares of stock. See "The Merger - Dissenters' Rights" in the accompanying Proxy Statement. Your vote is important regardless of the number of shares you own. Each shareholder, whether or not he or she plans to attend the special meeting, is requested to sign, date and return the enclosed proxy card in the enclosed postage-paid envelope without delay. Any proxy given by a shareholder may be revoked at any time before it is exercised. Any shareholder present at the special meeting may revoke his or her proxy and vote personally on each matter brought before the special meeting. However, if you are a shareholder whose shares are not registered in your own name, you will need additional documentation from your record holder to vote personally at the special meeting. Please do not send any certificates for your shares at this time. BY ORDER OF THE BOARD OF DIRECTORS George Steel President and Chief Executive Officer Denver, Colorado July 2, 1998 SCIENTIFIC SOFTWARE-INTERCOMP, INC. PROXY STATEMENT SPECIAL MEETING OF SHAREHOLDERS TO BE HELD JULY 30, 1998 This Proxy Statement is being furnished to shareholders of Scientific Software-Intercomp, Inc., a Colorado corporation (the "Company"), in connection with the solicitation of proxies by the Board of Directors of the Company (the "Board of Directors") from the holders of shares of the Company's common stock, no par value (the "Common Stock"), for use at a Special Meeting of Shareholders (the "Special Meeting") to be held on July 30, 1998 at 10:00 a.m., local time, at the principal executive offices of the Company at 633 17th Street, Suite 1600, Denver, Colorado 80202, and at any reconvened meeting after any adjournments or postponements thereof. At the Special Meeting, shareholders will be asked to consider and vote upon an Agreement and Plan of Merger dated June 17, 1998 (the "Merger Agreement") between the Company and Baker Hughes Oilfield Operations, Inc., a California corporation ("BHOO") and wholly owned subsidiary of Baker Hughes Incorporated, a Delaware corporation ("Baker Hughes"), pursuant to which the Company will merge with and into a Colorado corporation and wholly owned subsidiary of BHOO to be formed prior to the closing (the "Merger") and 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, without interest. The Merger is subject to customary conditions as well as the approval of the Company's shareholders. The Board of Directors knows of no additional matters that will be presented for consideration at the Special Meeting. Execution of a proxy, however, confers on the designated proxyholders discretionary authority to vote the shares of Common Stock covered thereby in accordance with their best judgment on such other business, if any, that may properly come before the Special Meeting or any reconvened meeting after any adjournments or postponements thereof. The Company anticipates that this Proxy Statement and accompanying form of proxy will be first mailed or given to shareholders of the Company on or about July 3, 1998. NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT IN CONNECTION WITH THE SOLICITATION OF PROXIES MADE HEREBY, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OTHER PERSON. ALL INFORMATION CONTAINED IN THIS PROXY STATEMENT RELATING TO THE COMPANY HAS BEEN SUPPLIED BY THE COMPANY AND ALL INFORMATION CONTAINED IN THIS PROXY STATEMENT RELATING TO BAKER HUGHES OR BHOO HAS BEEN SUPPLIED BY BAKER HUGHES OR BHOO. (continued on next page) The date of this Proxy Statement is July 2, 1998. (continued from previous page) AVAILABLE INFORMATION The Company is subject to the informational reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports and other information with the Securities and Exchange Commission (the "SEC"). Such reports and other information material may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549-1004. Copies of such material can be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-1004, upon payment of prescribed fees. In addition, the Commission maintains a Website ((http://www.sec.gov) that contains reports, proxy and information statements ------- and other information regarding registrants that file electronically with the Commission through the Electronic Data Gathering, Analysis, and Retrieval System. ii TABLE OF CONTENTS Page ---- SUMMARY 1 THE SPECIAL MEETING 6 General 6 Matters to be Considered at the Special Meeting 6 Voting at the Special Meeting; Record Date; Required Vote 6 Proxies 7 CERTAIN CONSIDERATIONS RELATING TO THE MERGER 8 Background of the Merger 8 Initial Considerations 8 Disposition of Pipeline Simulation Business 9 Negotiations for the Sale of the Company 9 Reasons for the Merger; Recommendation of the Company's Board of Directors 16 Financial Advisor; Fairness Opinion 17 Interests of Directors in the Merger 20 Risks of Non-Consummation 20 Expenses of the Merger 20 THE MERGER 21 Form of the Merger 21 Merger Consideration 21 Shareholder Meeting 21 Effective Time of the Merger 21 Procedures for Exchange of Certificates 21 Financing Arrangements by Sub, BHOO or Baker Hughes 22 Regulatory Matters 22 Debt Repayment and Repurchase of Preferred Stock 22 Disposition of Pipeline Simulation Business 22 Dissenters' Rights 22 The Merger Agreement 24 Merger Consideration 24 Treatment of Stock Options and Warrants 25 Representations and Warranties 25 Covenants Relating to Conduct of Business by the Company Pending the Merger 25 No Solicitation of Acquisition Proposals 26 Indemnification and Insurance 26 Certain Additional Provisions 26 Conditions to the Merger 26 Financial Tests 27 Termination 28 Termination Fee and Expenses 28 Amendment; Waiver 29 Payments to Dissenting Shareholders 29 Accounting Treatment 29 CERTAIN FEDERAL INCOME TAX CONSEQUENCES 30 Page ---- DESCRIPTION OF SCIENTIFIC SOFTWARE-INTERCOMP, INC. 31 Business 31 Properties 38 Legal Proceedings 38 Management's Discussion and Analysis of Financial Condition and Results of Operations 39 Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 50 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 51 Price Range of Common Stock and Dividends 52 PAYMENT TO SHAREHOLDERS 52 EXPERTS 53 PROPOSALS BY SHAREHOLDERS 53 FINANCIAL INFORMATION F-1 Annexes - ------- Annex I - Agreement and Plan of Merger Annex II - Opinion of Simmons & Company International Annex III - Article 113 of the Colorado Business Corporation Act 48 SUMMARY The following is a summary of certain information contained elsewhere in this Proxy Statement. This summary is qualified in its entirety by the more detailed information contained, or incorporated by reference, in this Proxy Statement and the Annexes hereto. Shareholders are urged to read this Proxy Statement and the Annexes hereto in their entirety. Unless otherwise defined herein, capitalized terms used in this summary have the respective meanings ascribed to them elsewhere in this Proxy Statement. THE COMPANIES SCIENTIFIC SOFTWARE-INTERCOMP, INC. Scientific Software-Intercomp, Inc. (the "Company") develops and markets software for the development and production of oil and gas wells and provides associated interdisciplinary technical support services, consulting and training. The Company's total revenues for the year ended December 31, 1997 were approximately $12.4 million and its total assets as of March 31, 1998 and December 31, 1997 were approximately $13.6 million and $14.9 million, respectively. Effective May 1, 1998, the Company sold the assets of its Pipeline Simulation Business to LICENERGY A/S ("LIC"). The Company was incorporated under the laws of the State of Colorado in 1968. The Company's principal executive offices are located at 633 17th Street, Suite 1600, Denver, CO 80202 and its telephone number is (303) 292-1111. BAKER HUGHES OILFIELD OPERATIONS, INC. Baker Hughes Oilfield Operations, Inc. ("BHOO") is a wholly owned subsidiary of Baker Hughes Incorporated ("Baker Hughes"). BHOO provides products and services for the worldwide oilfield service industry. As reported in Baker Hughes' Annual Report on Form 10-K for the fiscal year ended September 30, 1997, Baker Hughes' total revenues for the fiscal year ended September 30, 1997 were approximately $3.7 billion, and Baker Hughes' total assets as of September 30, 1997 were approximately $4.8 billion. Baker Hughes' common stock is listed on the New York Stock Exchange, the Pacific Stock Exchange and the Swiss Stock Exchange. Pursuant to the Agreement and Plan of Merger dated June 17, 1998 (the "Merger Agreement") between the Company and BHOO, BHOO will prior to the closing form a Colorado corporation and wholly owned subsidiary of BHOO ("Sub") to effect the Merger (as defined below). At the Effective Time (as defined below), the Company will merge with and into Sub (the "Merger") and each share of the Company's Common Stock issued and outstanding immediately prior thereto will be converted into the right to receive $0.44 in cash, without interest. BHOO has sufficient cash resources to conclude the Merger. Consummation of the Merger is not conditioned upon Baker Hughes, BHOO or Sub obtaining financing to pay the aggregate Merger consideration due to the holders of the Company's Common Stock upon consummation of the Merger. The principal executive offices of Baker Hughes and BHOO are located at 3900 Essex Lane, Houston, TX 77027-5177, and its telephone number is (713) 439-8600. THE SPECIAL MEETING TIME, DATE AND PLACE The Special Meeting of Shareholders (the "Special Meeting") will be held at 10:00 a.m. local time on July 30, 1998 at the principal executive offices of the Company at 633 17th Street, Suite 1600, Denver, Colorado. See "The Special Meeting - General." RECORD DATE; SHARES ENTITLED TO VOTE Shareholders of the Company at the close of business on June 12, 1998 (the "Record Date") are entitled to notice of and to vote at the Special Meeting and any reconvened meeting after any adjournments or postponements thereof. On that date, the outstanding securities of the Company entitled to vote on the Merger Agreement consisted of 9,046,804 shares of the Company's no par value common stock (the "Common Stock"). Shares of the Company's Series A Preferred Stock do not have voting rights with respect to the Merger Agreement. Each share of Common Stock is entitled to one vote. All such shares will vote together as a single class on the matters expected to be acted on at the Special Meeting. See "The Special Meeting - Voting at the Special Meeting; Record Date; Required Vote." PURPOSES OF THE SPECIAL MEETING The purposes of the Special Meeting are: 1. To consider and vote upon the Merger Agreement between the Company and BHOO, pursuant to which the Company will merge with and into Sub and each share of the Company's Common Stock issued and outstanding immediately prior to the Merger will be converted into the right to receive $0.44 in cash, without interest. The Merger is subject to customary conditions as well as the approval of the Company's shareholders. 2. To transact such other business as may properly come before the Special Meeting or any reconvened meeting after any adjournments or postponements thereof. VOTE REQUIRED Under the applicable provisions of the Colorado Business Corporation Act (the "CBCA"), approval of the Merger Agreement requires the affirmative vote of the holders of two-thirds of the shares of the Common Stock outstanding and entitled to vote. Approval of the Merger Agreement by the requisite vote of the Company's shareholders is a condition to the consummation of the Merger. In determining whether the Merger Agreement has received the requisite number of affirmative votes, abstentions and broker non-votes will be counted and will have the same effect as a vote against the Merger Agreement. The presence, in person or by properly executed proxy, of the holders of one-third of the outstanding shares of the Common Stock is necessary to constitute a quorum at the Special Meeting. See "The Special Meeting - Voting at the Special Meeting; Record Date; Required Vote and - Proxies." As of the Record Date, the members of the Board of Directors of the Company had in the aggregate the right to vote approximately 1.4% of the shares of Common Stock entitled to vote at the Special Meeting. Each of the Directors has indicated to the Company that he intends to vote all of his shares in favor of the Merger Agreement. As of the Record Date, Baker Hughes and BHOO do not own any shares of the Company's Common Stock. PROCEDURES FOR EXCHANGE OF CERTIFICATES Promptly after the consummation of the Merger, a letter of transmittal and instructions for surrendering stock certificates will be mailed to the holders of Common Stock for use in exchanging such holder's stock certificates for the Merger Consideration (as described below). SHAREHOLDERS SHOULD NOT RETURN STOCK CERTIFICATES WITH THE ENCLOSED PROXY. See "The Merger - Procedures for Exchange of Certificates." RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS The Company's Board of Directors believes that the Merger is fair to, and in the best interests of, the Company and its shareholders, and unanimously has approved the Merger Agreement and recommends that the Company's shareholders vote FOR the approval of the Merger Agreement. The recommendation of the Board of Directors is based on a number of factors described in this Proxy Statement. See "Certain Considerations Relating to the Merger - Reasons for the Merger; Recommendation of the Company's Board of Directors." OPINION OF FINANCIAL ADVISOR Simmons & Company International ("Simmons"), an investment banking firm specializing in the oilfield services and equipment industry, has delivered to the Company's Board of Directors a written opinion dated June 15, 1998, a copy of which is attached to this Proxy Statement as Annex II, that the consideration to be received by the holders of the Company's Common Stock in connection with the Merger is fair, from a financial point of view, to such shareholders. The attached opinion sets forth the assumptions made, matters considered, the scope and limitations of the review undertaken and procedures followed by Simmons, and should be read in its entirety. See "Certain Considerations Relating to the Merger - Financial Advisor; Fairness Opinion." THE MERGER FORM OF MERGER Pursuant to the Merger Agreement, the Company will merge with and into Sub, each share of the Company's Common Stock issued and outstanding immediately prior to the Merger will be converted into the right to receive $0.44 in cash, without interest, the separate corporate existence of the Company will cease, and Sub will be the surviving corporation, with the corporate name of Sub to be changed to "Scientific Software-Intercomp, Inc." See "The Merger - Form of the Merger." Upon consummation of the Merger, the shares of Common Stock will, except as described below, be converted into the right to receive the Merger Consideration (as described below), and the Company's shareholders will have no ownership interest in or control over either the Company, Baker Hughes, BHOO or Sub. THE EFFECTIVE TIME The Merger will become effective immediately when the articles of merger are filed with the Secretary of State of the State of Colorado (the "Effective Time"). Pursuant to the Merger Agreement, the filing of the articles of merger will be made as soon as practicable after the closing of the Merger, which is to occur no later than two business days after the satisfaction or waiver of the conditions to the Merger set forth in the Merger Agreement. CONSIDERATION TO BE RECEIVED IN THE MERGER Upon the consummation of the Merger, each outstanding share of Common Stock, other than shares as to which dissenters' rights have been duly asserted and perfected under Colorado law, will be automatically converted into the right to receive $0.44 in cash, without interest (the "Merger Consideration"). See "The Merger - Merger Consideration," " - Procedures for Exchange of Certificates" and " - The Merger Agreement - Merger Consideration." TREATMENT OF STOCK OPTIONS AND WARRANTS At the Effective Time, each outstanding option to purchase the Company's Common Stock, whether or not then exercisable or vested, shall be canceled by the Company, and each holder of a canceled option will be entitled to receive from Sub at such time an amount in cash, without interest, equal to the product of (i) the number of shares of the Company's Common Stock previously subject to such option and (ii) the excess, if any, of the Merger Consideration over the exercise price per share of such option, reduced by any applicable withholding. Of the currently outstanding options to acquire in the aggregate 1,552,124 shares of the Company's Common Stock, options to acquire in the aggregate 10,500 shares of Common Stock have exercise prices less than the Merger Consideration. Each outstanding warrant to purchase the Company's Common Stock will be canceled prior to the closing of the Merger. See "The Merger - The Merger Agreement - Treatment of Stock Options and Warrants." CONDITIONS TO THE MERGER The obligations of the Company and BHOO to consummate the Merger are subject to various conditions, including obtaining requisite shareholder approval and other conditions customary to transactions of this nature. The Merger Agreement is also subject to certain financial tests with respect to the Company's condition at the Effective Time. It is anticipated that such conditions will be satisfied by the date of the Special Meeting and that the Merger will be effected promptly following such meeting. See "The Merger - The Merger Agreement - Conditions to the Merger." NO SOLICITATION OF ACQUISITION PROPOSALS Pursuant to the Merger Agreement and subject to certain other terms, the Company and its representatives are prohibited from soliciting or encouraging acquisition proposals or furnishing any confidential or non-public information to any person relating to an acquisition proposal. See "The Merger - The Merger Agreement - No Solicitation of Acquisition Proposals." TERMINATION The Merger Agreement may be terminated in certain circumstances (at any time prior to consummation, whether before or after approval and adoption of the Merger Agreement by the shareholders of the Company), including the following: (i) by the Company pursuant to the Merger Agreement provisions regarding unsolicited acquisition proposals; (ii) by mutual written consent of the Company and BHOO or (iii) by either the Company or BHOO (a) if there has been a material uncured breach by the other party of any representation, warranty, covenant or agreement and with respect to the Company, such breach has a sufficient adverse effect so as to cause the Company to fail to meet certain financial tests set forth in the Merger Agreement, (b) if any action by any court, arbitrator, governmental body or agency making illegal or otherwise restricting, preventing or prohibiting the Merger has become final and non-appealable, or (c) at any time after September 30, 1998, if the Merger has not been consummated on or before such date. See "The Merger - The Merger Agreement - Termination." In some circumstances, such a termination will require the Company to pay to BHOO a termination fee. See "The Merger - The Merger Agreement - Termination Fee and Expenses." REGULATORY MATTERS The Merger is not subject to the notification and waiting period requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976. See "The Merger - Regulatory Matters." DEBT REPAYMENT AND REPURCHASE OF PREFERRED STOCK The Company is indebted to Lindner Dividend Funds ("Lindner") and Renaissance Capital Partners II, Ltd. ("Renaissance") in the aggregate amount of $6.5 million pursuant to senior secured notes payable held by Lindner and Renaissance, plus accrued interest. The Company did not make its interest payment due in October 1997 on the Lindner and Renaissance debt and the Company is also in violation of financial covenants with respect to such debt. In connection with the Merger, Lindner and Renaissance have agreed to accept discounted amounts of $1.4 million and $1.3 million, respectively, in satisfaction of the outstanding amounts owed by the Company to the lenders. In addition, Halliburton Company ("Halliburton"), the holder of all of the issued and outstanding shares of the Company's preferred stock, has agreed to accept $2.5 million in cash in exchange for its $4.0 million preferred stock holding in the Company. Under the Merger Agreement, the discounted $1.4 million obligation to Lindner will be paid at the Closing and the discounted $1.3 million obligation to Renaissance will become payable on July 1, 1999. The Merger Agreement further provides that the Company's preferred stock held by Halliburton will be repurchased for $2.5 million at or before the Closing. See "The Merger - Debt Repayment and Repurchase of Preferred Stock." DISPOSITION OF PIPELINE SIMULATION BUSINESS Effective May 1, 1998, the Company sold to LIC the assets of the Company's Pipeline Simulation Business in exchange for $1,500,000 in cash and the assumption by LIC of certain current liabilities associated with the Pipeline Simulation Business in the amount of $145,000. See "Certain Considerations Relating to the Merger - Background of the Merger - Disposition of Pipeline Simulation Business" and "The Merger - Disposition of the Pipeline Simulation Business." INTERESTS OF DIRECTORS IN THE MERGER In considering the recommendation of the Company's Board of Directors with respect to the Merger, the Company's shareholders should be aware that George Steel, a member of the Board of Directors, has an employment and change in control arrangement with the Company pursuant to which the Company has a severance payment obligation to him upon a termination of his employment as President and Chief Executive Officer of the Company after a change in control of the Company. In addition, the Merger Agreement provides that the officers and directors of the Company will be entitled to continuing indemnification by Sub after the Effective Time against certain possible claims relating to the period prior to the Effective Time to the same extent as such persons are presently entitled to indemnification under the Articles of Incorporation and the Bylaws of the Company. The Merger Agreement also provides that the Company may obtain a tail policy for the current directors and officers' policy held by the Company provided that the total premium for such tail policy does not exceed $55,750. See "Certain Considerations Relating to the Merger - Interests of Directors in the Merger" and "The Merger - The Merger Agreement - Indemnification and Insurance." CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER The conversion of Common Stock into the right to receive cash consideration in the Merger will be a taxable transaction for federal income tax purposes and may also be a taxable transaction for state, local, foreign and other tax purposes. Shareholders are urged to consult their own tax advisors as to the particular tax consequences to them resulting from the Merger, including the applicability and effect of federal, state, local, foreign and other tax laws. See "Certain Federal Income Tax Consequences." DISSENTERS' RIGHTS Shareholders of the Company are or may be entitled under Article 113 of the CBCA to assert dissenters' rights with respect to the Merger Agreement and thereby obtain cash payment for the "fair value" of their shares of Common Stock (excluding any element of value arising from the anticipation of the Merger unless such exclusion would be inequitable) by delivering to the Company before the vote on the Merger Agreement a written notice of an intention to exercise such dissenters' rights and refraining from voting in favor of the Merger Agreement. To exercise such rights, a shareholder must strictly comply with all of the procedural requirements of Article 113 of the CBCA, descriptions of which are provided below under the heading "The Merger----Dissenters' Rights" and the full text of which are attached to this Proxy Statement as Annex III. Under Article 113 of the CBCA, the "fair value" of stock may be subject to determination in judicial proceedings, the result of which cannot be predicted. FAILURE TO TAKE ANY OF THE STEPS REQUIRED UNDER ARTICLE 113 OF THE CBCA MAY RESULT IN THE LOSS OF SUCH STATUTORY DISSENTERS' RIGHTS. See "The Merger - Dissenters' Rights" and Annex III to this Proxy Statement. THE SPECIAL MEETING GENERAL This Proxy Statement is being furnished to the holders of shares of the Company's common stock in connection with the solicitation of proxies by the Board of Directors for use at the Special Meeting of Shareholders to be held on July 30, 1998 at 10:00 a.m., local time, at the principal executive offices of the Company at 633 17th Street, Suite 1600, Denver, Colorado 80202, and at any reconvened meeting after any adjournments or postponements thereof. MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING At the Special Meeting, the Shareholders will be asked to consider and vote upon the Merger Agreement, pursuant to which the Company will merge with and into Sub and each share of the Company's Common Stock issued and outstanding immediately prior to the Merger will be converted into the right to receive $0.44 in cash, without interest. The Merger is subject to customary conditions as well as the approval of the Company's shareholders. Shareholder approval of the Merger Agreement will constitute approval of the Merger and the transactions contemplated thereby. THE BOARD OF DIRECTORS UNANIMOUSLY HAS APPROVED THE MERGER AGREEMENT AND RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR APPROVAL OF THE MERGER AGREEMENT. VOTING AT THE SPECIAL MEETING; RECORD DATE; REQUIRED VOTE The Board of Directors has fixed June 12, 1998 as the record date (the "Record Date") for the determination of shareholders of the Company entitled to notice of and to vote at the Special Meeting and any reconvened meeting after any adjournments or postponements thereof. Only the Company's shareholders of record at the close of business on such date will be entitled to notice of and to vote at the Special Meeting. On the Record Date, the outstanding securities of the Company entitled to vote on the Merger Agreement consisted of 9,046,804 shares of Common Stock held by approximately 450 shareholders of record. Shares of the Company's Series A Preferred Stock do not have voting rights with respect to the Merger Agreement. Each share of Common Stock is entitled to one vote. All such shares will vote together as a single class on the matters expected to be acted upon at the Special Meeting. Under the applicable provisions of the Colorado Business Corporation Act (the "CBCA"), approval of the Merger Agreement requires the affirmative vote of the holders of two-thirds of the shares of the Common Stock outstanding and entitled to vote. Approval of the Merger Agreement by the requisite vote of the Company's shareholders is a condition to the consummation of the Merger. If an executed proxy card is returned and the shareholder has indicated that the shares represented by the proxy card shall be abstained from voting on the Merger Agreement, the shares represented by such proxy will be considered present at the meeting for purposes of determining a quorum and for purposes of calculating the vote, but will not be considered to have been voted in favor of the Merger Agreement. If an executed proxy card is returned by a broker holding shares of Common Stock in street name which indicates that the broker does not have discretionary authority as to certain shares to vote on any matter, such shares will be considered present at the meeting for purposes of determining a quorum and for purposes of calculating the vote, but will not be voted with respect to the Merger Agreement. Because the Merger Agreement requires the affirmative vote of two-thirds of the voting power of all shares of the Company's capital stock outstanding and entitled to vote at the Special Meeting, abstentions and "broker non-votes" will have the same effect as a vote against the Merger Agreement. As of the Record Date, the members of the Board of Directors of the Company had in the aggregate the right to vote approximately 1.4% of the shares of Common Stock entitled to vote at the Special Meeting. Each of the Directors has indicated to the Company that he intends to vote all of his shares in favor of the Merger Agreement. As of the Record Date, Baker Hughes and BHOO do not own any shares of the Company's Common Stock. Shareholders of the Company are or may be entitled under Article 113 of the CBCA to assert dissenters' rights with respect to the Merger Agreement. See "The Merger - Dissenters' Rights." PROXIES This Proxy Statement is being furnished to holders of Common Stock in connection with the solicitation of proxies by the Board of Directors for use at the Special Meeting. The presence, in person or by properly executed proxy, of the holders of one-third of the outstanding shares of the Common Stock is necessary to constitute a quorum at the Special Meeting, however, approval of the Merger Agreement requires the affirmative vote of the holders of two-thirds of the outstanding Common Stock. All shares of Common Stock which are entitled to vote and are represented at the Special Meeting by properly executed proxies received prior to or at the Special Meeting, and not duly revoked, will be voted at the Special Meeting in accordance with the instructions indicated on such proxies. If no instructions are indicated on a properly executed proxy, such proxy will be voted in accordance with the recommendations of the Company's management and thus voted FOR the approval of the Merger Agreement. If any other matters are properly presented for consideration at the Special Meeting, including, among other things, consideration of a motion to adjourn or postpone the Special Meeting to another time and/or place (including, without limitation, for the purpose of soliciting additional proxies), the persons named in the enclosed form of proxy and acting thereunder will have discretion to vote on such matters in accordance with their best judgment. The Company has no knowledge of any matters to be presented at the Special Meeting other than those matters described herein. SHAREHOLDERS SHOULD NOT FORWARD ANY STOCK CERTIFICATES WITH THEIR PROXY CARDS. --- Any proxy given pursuant to this solicitation may be revoked by the person giving it at any time before it is voted. Proxies may be revoked by (i) filing with the President of the Company, at or before the taking of the vote at the Special Meeting, a written notice of revocation bearing a later date than the proxy, (ii) duly executing a later dated proxy relating to the same shares and delivering it to the President of the Company at or before the taking of the vote at the Special Meeting or (iii) attending the Special Meeting and voting in person. Attendance at the Special Meeting will not in and of itself constitute a revocation of a proxy. In addition, shareholders whose shares of Common Stock are not registered in their own name will need additional documentation from the record holder of such shares to vote personally at the Special Meeting. Any written notice of revocation or subsequent proxy should be sent so as to be delivered to Scientific Software-Intercomp, Inc., 633 17th Street, Suite 1600, Denver, Colorado 80202, Attention: George Steel, President, or hand-delivered to the President of the Company at or before the taking of the vote at the Special Meeting. If a quorum is not present at the time of the Special Meeting, or if fewer shares are likely to be voted in favor of approval of the Merger Agreement than the number required for approval, the Special Meeting may be adjourned, with or without a vote of shareholders, for the purpose of obtaining additional proxies or votes or for any other purpose. If the Company proposes to adjourn the Special Meeting by a vote of the shareholders, the persons named in the enclosed proxy card will vote all shares for which they have voting authority in favor of such adjournment. At any subsequent reconvening of the Special Meeting, all proxies will be voted in the same manner as such proxies would have been voted at the original convening of the meeting (except for any proxies which have theretofore effectively been revoked or withdrawn), notwithstanding that they may have been effectively voted on the same or any other matter at a previous meeting. Proxies are being solicited by and on behalf of the Board of Directors. All expenses of this solicitation, including the cost of preparing this Proxy Statement, will be borne by the Company. It is currently estimated that such expenses will be approximately $75,000. In addition to solicitation by use of the mails, proxies may be solicited by directors, officers and employees of the Company or its subsidiaries in person or by telephone, telegram or other means of communication. Such directors, officers and employees will not be additionally compensated, but may be reimbursed for reasonable out-of-pocket expenses in connection with such solicitation. Arrangements will also be made with custodians, nominees and fiduciaries for the forwarding of proxy solicitation materials to beneficial owners of shares held of record by such persons, and the Company may reimburse such custodians, nominees and fiduciaries for reasonable expenses incurred in connection therewith. The Company has engaged the services of The Altman Group, Inc. to distribute proxy solicitation materials to brokers and other nominees and to assist in the solicitation of proxies from the Company's stockholders for a fee of $7,500 plus $5.00 per call to record shareholders and non-objecting beneficial owners, as well as the reimbursement of reasonable out-of-pocket expenses. CERTAIN CONSIDERATIONS RELATING TO THE MERGER BACKGROUND OF THE MERGER Initial Considerations On January 15, 1996, George Steel became President and Chief Operating Officer of the Company and a member of the Board of Directors. Subsequently there was comprehensive review of the Company's operations, its financial results over a long period of time, its financial condition and its near term prospects. Over the course of several Board of Directors meetings between February 1, 1996 and April 30, 1996, Mr. Steel expressed a number of concerns to the Board. He proposed significant changes to operations, significant cost reductions and plans to improve performance in the delivery of software and in customer relationships. During this period, the Company's debt was restructured, with Lindner Dividend Funds ("Lindner") and Renaissance Capital Partners II ("Renaissance"), providing $6.5 million of new financing having a five year term with interest at 7% per annum. On May 13, 1996, Mr. Steel replaced E.A. Breitenbach as Chairman and Chief Executive Officer of the Company. In 1995 the Company and Smedvig Technology A.S. ("Smedvig"), a Norwegian oilfield service company, held preliminary discussions on a possible merger or acquisition transaction between the companies but the discussions had not been conclusive. As a result of the review of the Company's prospects as discussed above and various strategic alternatives being considered as a result thereof, in June 1996 the Company renewed these discussions and held several meetings with Smedvig to again explore merger or acquisition possibilities. In late August 1996, the Company and Smedvig reached a general agreement for Smedvig's acquisition of the assets and certain operating liabilities of the Company for $23 million. The acquisition was approved by the Board of Directors on August 11, 1996. A letter of intent providing for that transaction was executed on September 10, 1996 and the prospective acquisition was publicly announced on September 11, 1996. Thereafter, Smedvig commenced detailed due diligence on the Company. On October 9, 1996 the Company received an extensive comment letter from the SEC on its financial statements for 1995 and the first two quarters of 1996 raising a number of questions as to the propriety of the Company's accounting for those periods, as well as prior periods, particularly with respect to revenue recognition matters. On October 14, 1996 Smedvig advised the Company that it was terminating its acquisition because completion of its due diligence would not be possible. The Company reported increasing losses and declining revenues during the remainder of 1996 and into 1997. The concerns of the Board of Directors for the Company's ability to continue as a viable independent entity increased, and such matter was continually assessed by the Board. On June 17, 1997, the Board of Directors of the Company met to consider a recommendation by Mr. Steel that the Company initiate a process intended to result in a merger, joint venture or sale of the Company in view of its continued losses, declining revenue, poor business outlook, shrinking capital resources and need to invest substantially to update its software products. After extensive discussion, the Board unanimously approved Mr. Steel's recommendation and authorized the engagement of Simmons to assist the Company. Simmons is an internationally recognized Houston investment banking firm with substantial experience in providing financial advice and assistance to oilfield service companies, particularly in connection with mergers and acquisitions. It was agreed by the Directors at the June 17 meeting that the Directors would shortly thereafter meet with the managers of the Company's business units to further review the Company's operations in connection with the decision to seek a transaction. The Board of Directors met on July 9, 1997 at which meeting Frederick W. Charlton, a Director of Simmons, was present. The managers of the Company's business units were also present and described current and projected performance of operations. Mr. Charlton then reviewed the activities and capabilities of Simmons and explained that the market for transactions in the oil field service market was currently active. The Board was of the view that the Company was able to offer a potential partner or an acquiror its unique technology and worldwide reputation and expertise and that as a result shareholders should likely be able to realize a return from a transaction. The Board concluded that the alternative of the Company continuing as an independent entity was likely to provide shareholders a lower return. After evaluating alternatives, the Directors again unanimously approved a resolution to pursue a sale of the Company and to engage Simmons for that purpose. On August 5, 1997 the Company executed an engagement letter with Simmons under which Simmons would review and analyze the Company's operations and projected performance, prepare a descriptive offering memorandum, contact qualified candidates for acquisition of the Company and analyze and assist with the development and completion of potential transactions. Simmons also agreed to render a fairness opinion to the Board of Directors on a transaction, if requested. During August 1997, Simmons and the Company prepared a descriptive memorandum, and Simmons developed a list of approximately 60 companies which might have a potential interest in an acquisition of the Company. In early September 1997, Simmons began contacting the companies on its list of potential acquirors. As a result of such contacts, 20 companies expressed some level of initial interest, and Simmons delivered to such companies the descriptive memorandum after confidentiality agreements were executed. Board meetings were held on August 29 and September 10, 1997 to review the progress of operations and to review the activities and discussions with potential transaction partners. Disposition Of Pipeline Simulation Business Most of the potential acquirors of the Company did not express a particular interest in acquiring the Company's Pipeline Simulation business. The Pipeline Simulation business had historically been an underperforming business and was not believed to have as favorable future prospects as the Company's Exploration and Production business lines. In addition, the services and software products of the Pipeline Simulation business were generally unrelated to the services and software of the Exploration and Production business lines. Accordingly, in 1997 the Company made a decision to endeavor to sell the Pipeline Simulation business to eliminate losses and to generate needed funds to enable the Company to focus on the opportunities of its Exploration and Production Divisions. During 1996 and 1997, representatives of the Company met with representatives of LICENERGY, A/S ("LIC"), a Danish company. During November and December, 1997 LIC requested and was provided with due diligence materials on the Pipeline Simulation business, and management and technical personnel of the Company met with management and technical employees of LIC. Throughout this period Simmons contacted other parties possibly interested in acquiring the Pipeline Simulation business. Also during this period, the Company's Board of Directors reviewed the situation with the Pipeline Simulation business and its possible sale. The Company and LIC negotiated in January, 1998 a non-binding outline of terms for the acquisition of the Pipeline Simulation business by LIC at a price of $1.5 million payable in cash. The Board of Directors of the Company approved the terms of the outline at a meeting on February 4, 1998 and on February 10 a letter of intent was executed. A binding Asset Purchase Agreement was executed March 1, 1998. The acquisition was closed on May 1, 1998 at which time the Company received the $1.5 million purchase price. In addition to the transfer of substantially all of the assets of the Pipeline Simulation business, liabilities of $145,000 were assumed by LIC, and certain receivables of the Pipeline Simulation business were retained by the Company. In connection with the acquisition Lindner and Renaissance released liens they held on the assets of the Pipeline Simulation business without receipt of any payments by them. Bank One, Colorado, N.A. released a lien it held on the assets of the Pipeline Simulation business in consideration for the repayment of the $380,000 loan balance due it, after which there remained outstanding Bank One letters of credit issued on behalf of the Company totaling $228,000, the liability for which was secured. Negotiations for the Sale of the Company Prior to the engagement of Simmons, one company expressed substantial interest in acquiring the Company. Meetings were held between representatives of that potential acquiror and management of the Company over the period from May to September, 1997. Several meetings took place between the Company and the potential acquiror in September 1997. The meetings included a review by the potential acquiror of the confidential memorandum prepared by Simmons and an in-depth review with the management and technical representatives of the Company. A meeting of the Board of Directors of the Company, at which a representative of Simmons was present, was held on September 27, 1997 to review a letter received on September 25 from that potential acquiror stating its interest in pursuing a transaction with the Company. Certain assumptions were made concerning long-term debt, preferred stock, the completion of due diligence and other terms. The proposed net price per common share was between $1.00 and $1.06 per share. On October 8, 1997 the Board of Directors held a meeting by telephone in which a representative of Simmons participated, to review the status of operations, cash flow and the discussions and meetings the Company had held with several parties possibly interested in a potential transaction with the Company, as well as the continuing discussions with the previously identified potential acquiror. The Simmons representative had proposed and discussed with the potential acquiror an increase in the price proposed in its letter of September 25. The senior secured lenders and Halliburton, the Company's preferred stockholder, were not agreeable to any discount in their indebtedness or liquidation preference in connection with the proposed acquisition. On October 9, 1997, the president of the potential acquiror and Mr. Steel agreed on a non-binding outline of terms providing for a purchase price for the assets and certain operating liabilities of the Company of $21 million subject to various adjustments. The net price per common share would be approximately $1.12. The proposal was conditioned on the results of the completion of a detailed due diligence process. The offer was extensively discussed by the Company's Board of Directors at a telephonic meeting on October 10, 1997. A significant issue for the possible acquisition of the Company by the foregoing potential acquiror was whether a license held by the Company for certain technology was transferable in connection with a sale of the Company's assets. On October 28, 1997 the Board of Directors met by telephone. Mr. Steel reported that the potential acquiror was prepared to proceed notwithstanding the technology license transfer issue but required that the purchase price be reduced to $17.1 million because of various due diligence issues. On October 30, 1997, the Board of Directors of the Company met with Simmons to consider the revised acquisition proposal. Mr. Steel reported that the purchase price offer had been further reduced to $15.5 million (or a net price per common share of approximately $0.51) as a result of general concerns about the business of the Company and its prospects emanating from the due diligence process, including the Company's loss of certain key employees. The Board then met directly with a representative of the potential acquiror and were unable to obtain an improvement in the purchase offer. Mr. Charlton of Simmons advised the Board at the meeting that under the circumstances of the Company's condition and in view of the lack of other offers for the acquisition of the Company, it was likely that Simmons would be able to provide an opinion that the acquisition would be fair to shareholders from a financial point of view. The Board of Directors reviewed all of the Company's alternatives and considered its obligations to creditors as well as to shareholders. It was agreed that Mr. Steel should leave the Board meeting to meet with the President of the potential acquiror in a final effort to improve the purchase offer. At the meeting with the potential acquiror Mr. Steel was advised that the potential acquiror had concluded to withdraw any purchase offer for the Company because of a number of concerns. Subsequent to the termination of the foregoing acquisition negotiations Simmons continued to discuss a transaction with the other previously contacted parties and made contact with several additional companies. These contacts led to a number of discussions among Simmons, Mr. Steel and potential acquirors but none progressed to an offer or definitive status. In September, 1997 a senior officer of Baker Hughes had indicated to Simmons that Baker Hughes was not interested in pursuing an acquisition of the Company at that time. Subsequently, on December 12, 1997, a manager of a Baker Hughes subsidiary expressed a possible interest in pursuing an acquisition of the Company. Due diligence materials, including profit and loss statements, product information and publicly available data were furnished to Baker Hughes by the Company on December 13, 1997. In light of previous discussions between Baker Hughes and Simmons, the Company was concerned about the likelihood of reaching an agreement with Baker Hughes, and the Company continued to hold discussions with other potential acquirors. On January 6, 1998, a representative of Simmons and Mr. Steel met with representatives of Baker Hughes to discuss Baker Hughes' interest in acquiring the Company. On January 12, Baker Hughes submitted a due diligence list requesting information regarding the Company's products, business, legal proceedings, organization and other matters. A few days later the Company provided Baker Hughes with additional information regarding the Company in response to the due diligence list. During this period the Company recognized that unless it was able to discount its senior secured indebtedness to Lindner and Renaissance and discount the liquidation preference on the Company's preferred stock held by Halliburton, it was likely that little if any proceeds from the sale of the Company would remain available for common shareholders. The Company was indebted to Lindner in the principal amount of $5 million plus unpaid accrued interest and was indebted to Renaissance in the amount of $1.5 million plus unpaid accrued interest. The debts to Lindner and Renaissance are secured by all of the assets of the Company and are convertible into common stock of the Company at $3.00 per share. Halliburton holds all 800,000 shares of the Company's outstanding preferred stock. The preferred stock is convertible into common stock at $13.33 per share. In the event of a liquidation of the Company, the holder of the preferred stock is entitled to receive $5.00 per share, or an aggregate of $4 million, before any payment to common shareholders. If the preferred stock remains outstanding in 2004, the Company would then have an obligation to redeem it for $4 million. In 1996 in connection with the possible acquisition of the Company by Smedvig, the Company discussed with Halliburton a discounting of its liquidation preference on the Company's preferred stock, but no agreement was reached at that time. On January 20, 1998, the Company met with Renaissance at which time it was agreed that in connection with a sale of the Company, Renaissance would forgive accrued interest owed it and discount the principal amount of the indebtedness to it by 20% to $1.2 million. On January 21, the Company and Renaissance met with Halliburton to discuss a discounting of its preferred stock liquidation preference. The Company proposed in the event of a sale that Halliburton receive $1 million in satisfaction of the preference. Halliburton agreed to consider the Company's offer. On January 29 the Company met with Lindner to discuss a discount of the indebtedness to it. Lindner indicated it would agree to accepting a substantial discount to the face value of its debt. The Company offered to pay Lindner $1.2 million with respect to the $5 million plus interest owed it. However, no agreement was reached at that meeting. On February 3, 1998, Mr. Steel and a representative of Simmons met with Mr. Eric Mattson, Senior Vice President and Chief Financial Officer of Baker Hughes, and with Mr. Andrew Szescila, Senior Vice President of Baker Hughes and President of BHOO, to discuss Baker Hughes' interest in acquiring the Company. It was agreed that both parties over the following few days would consider the benefits to Baker Hughes of an acquisition of the Company. On February 5, 1998 Mr. Steel and Mr. Szescila discussed and agreed on the agenda of a meeting between SSI and Baker Hughes management to be held on February 9 at the offices of Baker Hughes. The meeting was to focus on how the Company's products and skills could fit with, and leverage, Baker Hughes' activities, both externally and with Baker Hughes' internal operations. It was understood that if Baker Hughes thereafter decided to proceed, an acquisition offer for the Company would be made within two weeks of the February 9 meeting. At the conclusion of the February 9 meeting, it also was agreed that representatives of the Company's software management would meet with BHOO representatives later that week. The Company was concerned not only as to whether Baker Hughes would make such an acquisition proposal but also whether it would be able to do so in a timely manner and whether any proposal would contain substantial due diligence conditions that could be satisfied only over a long period of time. The Company's operations and financial condition were continuing to deteriorate making the timing of an acquisition of increasing importance. The Company's Board of Directors held telephonic meetings on January 23, and February 4, 18, and 19, 1998 at which the Directors discussed the Company's condition and its need to be acquired without any substantial delay. During December 1997 the Managing Director of the Company's U.K. subsidiary expressed interest to Mr. Steel in endeavoring to structure a purchase of the Company by a management group. Mr. Steel responded that the Company would consider any alternative that would benefit shareholders and creditors of the Company. There was contact between the Managing Director and Well Service Technology A/S ("WST"), a privately held Norwegian oil field service and technology company. Thereafter Mr. Steel and Eric Evenson, the President of WST, had a number of telephone conversations in which Mr. Evenson expressed strong interest in acquiring the Company. On February 12, 1998 Mr. Evenson and WST's Denver counsel met with Mr. Steel, E.O. Price, Jr., who had become Chairman of the Board of the Company, a representative of Simmons and the Company's counsel to discuss the acquisition of the Company by WST. At that meeting it was apparent that WST had a high interest in acquiring the Company and was prepared to proceed in a prompt manner with an acquisition. There was extensive discussion of restructuring the Company's indebtedness to Lindner and Renaissance on a discounted basis and making a discounted payment to Halliburton with respect to the Company's preferred stock. It also appeared that WST's due diligence process would be completed on a very timely basis. At that time the Company was uncertain as to the level of Baker Hughes' interest in acquiring the Company and on the timetable for Baker Hughes' plans. On February 18 and 19, 1998, Messrs. Evenson and Steel met with Renaissance to discuss the acquisition of the Company by WST. Renaissance agreed that in satisfaction of the Company's obligation to it, and in payment for the 397,000 shares of the Company's common stock owned by it, it would accept $250,000 in cash at the closing of the acquisition by WST, a promissory note for $750,000 and $250,000 (subject to possible adjustment) in WST stock when WST first established a public market for its stock. On February 18, Messrs. Steel and Evenson talked with Lindner which agreed to accept $1.4 million in cash payable at the time of an acquisition of the Company by WST in exchange for the Company's indebtedness to it and the 1,730,000 shares of the Company's common stock owned by it. Also, on February 18, Messrs. Steel and Evenson also met with Halliburton to discuss the disposition of the Company's preferred stock held by it. There was no agreement reached with Halliburton but there was discussion of a number of alternatives including the provision of services by WST to Halliburton. Further, on February 18, the Board of Directors of the Company met by telephone to discuss the status of the possible acquisition of the Company by WST and by Baker Hughes. It was the view of the Directors that although an acquisition of the Company by Baker Hughes could possibly be more beneficial to shareholders, as well as to employees and customers, there was greater uncertainty in the Company's ability to complete an acquisition by Baker Hughes. Thus, in considering the Company's continuing deteriorating operations and financial condition, the Board concluded to continue negotiations with WST. On February 19, 1998 the Board of Directors of the Company met by telephone and a representative of Simmons participated in the meeting. The Simmons' representative reported that Simmons had made some inquiries as to WST's financial capability to fund an acquisition of the Company and believed that it would be able to do so. Simmons advised the Board of Directors that it would consider issuing a fairness opinion on an acquisition by WST and should be able to complete its analysis within one week. At a telephonic Board meeting on February 20, the Board of Directors reviewed further the potential acquisition by WST of the assets and liabilities of the Company (exclusive of the Pipeline Simulation business). After extensive discussion, the Board of Directors unanimously approved the Company's entering into an outline of terms with WST, providing for WST's acquisition of the assets and liabilities of the Company in consideration of $.30 per share for common shareholders. On February 20, 1998 the Company and WST executed an Outline of Terms providing for WST's acquisition of the Company's assets and liabilities and its payment to common shareholders of $.30 per share. The Outline of Terms did not bind the Company to complete an acquisition transaction with WST and provided that the acquisition was conditioned on completing the above described agreements with Renaissance and Lindner, on an agreement with Halliburton acceptable to WST and on the sale of the Company's Pipeline Simulation business (as described above) for net proceeds of at least $1 million. The Outline of Terms required completion of a binding acquisition agreement by March 6, 1998, with all due diligence by WST to have been completed prior to the execution of such definitive agreement. A press release was issued on February 20, 1998 with respect to the Outline of Terms executed by the Company and WST. The press release did not however disclose the contemplated per common share consideration to be received from WST. The WST Outline of Terms obligated the Company to cease to pursue other acquisition alternatives, except to respond to any other acquisition indications of interest in accordance with the fiduciary obligations of the Company's Board of Directors. Such restriction would terminate if a mutually acceptable definitive acquisition agreement were not executed by the Company and WST by March 6, 1998. If the Company were acquired by a purchaser other than WST, the Company would pay to WST a break-up fee of $100,000 but such fee would not be applicable if the Company and WST failed to enter into the definitive acquisition agreement. On February 24, 1998 Baker Hughes called Simmons and explained that Baker Hughes had seen the WST press release announcing the Outline of Terms and remained interested in pursuing an acquisition of the Company. Baker Hughes indicated that it would consider an offer of up to $.50 per share of Common Stock. Simmons and Baker Hughes talked further on February 26 and the Company's Board of Directors considered this development in a telephonic meeting on February 27. On March 4, 1998, the Company and its counsel along with a representative of Simmons met with Baker Hughes and its counsel. During the meeting, Baker Hughes made inquiries regarding the status and provisions of the Company's Outline of Terms with WST. Baker Hughes informed the Company that it did not want to pursue an acquisition of the Company while the Outline of Terms remained in effect. On March 5 the Board of Directors of the Company met by telephone. After consideration of the alternatives available to the Company, the Board authorized Mr. Steel to execute a definitive agreement with WST involving a payment of $.30 per share to common shareholders, provided that the agreement contained a customary fiduciary-out right of the Company to respond to a subsequent more favorable unsolicited third party acquisition offer. On March 5, 1998, after the Board of Directors meeting, Mr. Steel called WST's Denver counsel to inquire as to when WST would present a draft of the definitive agreement to the Company. He was advised that WST was waiting for the completion of agreements with Renaissance and Halliburton. Mr. Steel then talked to Halliburton who advised him that it had not yet agreed with WST on terms for the disposition of its preferred stock of the Company but that it expected such an agreement to involve a combination of software, technology services and future payments. Late on Friday March 6, 1998, the Company received from WST's Denver counsel a draft of the definitive agreement. It departed materially from the Outline of Terms with respect to (i) providing for a price of $.28 per share for the Company's common stock; (ii) reducing that price to the extent of the Company's losses between January 1, 1998 and the date of closing (which the Company expected to be substantial); (iii) deferring the payment of one-half of the purchase price for an unspecified period of time; (iv) not covering WST's assumption of the Company's bank indebtedness or severance obligations for employees not to be employed by WST; (v) providing that the Company would be liable for all transaction expenses including the fee payable to Simmons; (vi) conditioning the purchase obligation of WST upon certain employees of the Company agreeing to become employed by WST; and (vii) conditioning the purchase obligation of WST on sixty days of continued due diligence. On Sunday, March 8, 1998, Mr. Steel sent a letter to WST's Denver counsel pointing out that the draft definitive agreement did not conform in material respects to the Outline of Terms and that accordingly the Outline of Terms was terminated in view of its requirement for the execution of a definitive acquisition agreement by March 6. On the same day the Company's counsel advised counsel for Baker Hughes that the WST agreement had terminated and provided Baker Hughes with a copy of Mr. Steel's letter to WST's counsel. On March 9 WST's counsel replied by letter expressing the belief that the parties could still reach a mutually acceptable agreement. The Company's counsel replied with a letter reiterating the absence of any currently existing agreement or understanding between the Company and WST but stating that the Company was prepared to meet to continue to discuss a possible acquisition by WST provided that WST confirmed by letter that the parties were free to proceed or not to proceed without being bound by the Outline of Terms. Such a letter was provided by WST's counsel on March 9, 1998. On March 10, 1998, a representative of Simmons talked with Mr. Mattson who reported that Baker Hughes remained interested in pursuing an acquisition of the Company and was prepared to discuss an acquisition agreement with the Company. Mr. Mattson however expressed concern about the status of the Company's preferred stock held by Halliburton. He indicated that Baker Hughes was prepared to proceed with an acquisition agreement involving the payment of $.50 per share to the Company's common shareholders provided that no more than $2.4 million in cash would be paid with respect to the preferred stock at closing or provided that a $4 million payment on the preferred stock would not become payable until 2004. If however more than $2.4 million would be paid on the preferred stock at closing, the price to the Company's common shareholders would be $.30 per share. During this period of time Mr. Steel kept members of the Company's Board of Directors continually informed by telephone of all developments. On March 10, 1998, Mr. Steel met with Mr. Joe Donovan, Vice President, Technology, for Baker Hughes Solutions, who explained that Baker Hughes generally was satisfied with the business issues relating to the acquisition of the Company but that moving forward with the acquisition required resolution of various other matters. On March 11 Mr. Donovan called Mr. Steel and advised him that Baker Hughes was prepared to execute a non-binding letter of intent, with a definitive agreement to follow after satisfactory completion of due diligence. Mr. Steel explained that the Company did not want to be in a position of not having a binding agreement with either Baker Hughes or WST. It was later agreed between the parties that Baker Hughes' counsel would prepare a binding agreement containing only customary termination rights. Such an agreement was to be ready for signature by March 13. Subsequently, Baker Hughes advised the Company that it would not be able to proceed that quickly, and the Company again became concerned about its ability to complete an acquisition by Baker Hughes. On March 11, 1998, Halliburton discussed with Simmons the possibility that Halliburton might accept $2.5 million cash in satisfaction of its preferred share holding. On March 12, 1998, Mr. Steel and the Company's counsel met with WST's Denver counsel to review in detail the various material changes from the Outline of Terms contained in the draft definitive agreement provided by WST on March 6. WST's Counsel responded that he would talk with Mr. Evenson and report back to the Company. Thereafter, for a number of days there was no communication from WST or its counsel. The Company's Board of Directors considered the status of acquisition negotiations with both Baker Hughes and WST in telephonic meetings on March 18 and 20, 1998. On March 18, 1998, the Company received a draft letter agreement from Baker Hughes that generally corresponded to the prior negotiations with Baker Hughes. Issues raised by Baker Hughes' draft letter agreement were then negotiated. A remaining issue was a proposed requirement by Baker Hughes that the licensor of certain technology used by the Company consent to the transfer of that license to Baker Hughes, which requirement was not acceptable to the Company. An additional substantive issue was Baker Hughes' proposal that the price to be paid to common shareholders would be reduced automatically to $.30 per share if any amount in excess of $2.4 million were required to be paid to satisfy the Company's preferred stock held by Halliburton rather than declining ratably depending upon the amount between $2.4 million and $4.0 million required to be paid. There were certain other issues with respect to a break-up fee payable to Baker Hughes if the acquisition were not completed. On March 20, 1998 WST made a new written proposal to the Company involving a number of adjustments to the purchase price having the effect of reducing the payment to SSI common shareholders to $.18 per share. On March 24, 1998, following up on a letter from the Company to Halliburton dated March 16, Simmons discussed with Halliburton the possibility of Halliburton accepting $2.5 million in cash in full satisfaction of its preferred share holding. On March 24, 1998, the Company's counsel talked with WST's counsel who explained that the acquisition price to be paid by WST was negotiable, notwithstanding the proposal made by WST on March 20. On March 25, Mr. Steel and the Company's counsel had a telephone conversation with Mr. Evenson the result of which was an increase in the latest WST acquisition offer to $0.26 per share for the Company's common shareholders. Mr. Steel advised Mr. Evenson that the Company would provide a final response to the WST offer on March 27. Subsequently, Mr. Steel advised Baker Hughes that the Company needed to be able to execute the letter agreement with Baker Hughes by the morning of March 27 for the Company not to proceed with an agreement with WST. The Board of Directors of the Company met by telephone on March 23, 24 and 26, 1998. At those meetings the status of negotiations with WST and Baker Hughes was discussed. A representative of Simmons participated in the March 26 meeting. On March 27, 1998, Baker Hughes advised the Company that it was prepared to remove as a basis for termination of an agreement for acquisition of the Company a requirement that the technology licensor consent to the transfer of the license. Baker Hughes also indicated that it was prepared to agree that the price payable to common shareholders would be adjusted proportionately based on any amount over $2.4 million but less than $4 million payable on the Company's preferred stock held by Halliburton. Certain other issues regarding the letter agreement also were satisfactorily resolved with Baker Hughes. Later that day the Board of Directors of the Company met by telephone. A representative of Simmons participated in the meeting and stated that Simmons could provide an opinion that the acquisition by Baker Hughes was fair to shareholders from a financial point of view at a price of $.30 per share or greater. Mr. Steel then called Mr. Evenson and informed him that a final answer to the WST latest proposal could not be provided until Monday morning, March 30. Mr. Evenson was at that time in Norway where it was the end of the day. Mr. Evenson expressed upset at the delay and advised Mr. Steel that WST's revised offer was "off the table." On the afternoon of March 27, 1998 the Company executed the letter agreement with Baker Hughes. The March 27 letter agreement between the Company and Baker Hughes provided for a per share price for common shareholders of between $.30 and $.50 depending upon the amount payable to Halliburton in satisfaction of its rights with respect to the Company's preferred stock, with the price being $.50 per share if $2.4 million or less is payable and $.30 per share if $4 million is payable. The agreement was conditional on (a) Lindner agreeing to accept $1.4 million in satisfaction of the Company's $5 million principal indebtedness to it plus accrued interest, and in satisfaction of the right of Lindner to purchase Company common stock, and on (b) an agreement with Renaissance to accept a new obligation of $1.3 million in satisfaction of the $1.5 million principal indebtedness owed it plus accrued interest and its right to purchase common stock, with such $1.3 million to be payable on July 1, 1999 with interest thereon of seven percent per annum. The letter agreement also conditioned the purchase obligation of Baker Hughes on (i) the Company's unaudited financial statements of SSI as of December 31, 1997 previously furnished by the Company to Baker Hughes having been prepared in accordance with generally accepted accounting principles, (ii) the Company having completed the sale of its Pipeline Simulation Business for at least $1.5 million in cash proceeds, (iii) the net working capital of the Company at closing being no less than its net working capital per the unaudited December 31, 1997 consolidated balance sheet furnished to Baker Hughes prior to the letter agreement date, less $500,000, but excluding therefrom the assets of the Pipeline Simulation Business, but including the proceeds from the sale thereof, and excluding the fee payable to Simmons and all of the principal and interest of the Company's indebtedness to Lindner, and (iv) the absence of certain material adverse items with respect to the Company and its subsequent operations with the aggregate effect of $500,000 or more. While the letter agreement was not subject to a general due diligence condition, it was agreed that Baker Hughes would continue its due diligence to determine whether the Company had complied with the provisions of the agreement. On March 27, 1998 Halliburton advised Simmons that it would accept $2.5 million in cash payable at the closing of an acquisition of the Company in satisfaction of the preferred stock of the Company, provided that the acquisition is consummated by August 31, 1998, and a letter agreement so providing was executed on that date. On March 31, 1998, the Company executed a letter agreement with Lindner providing for the payment to it of $1.4 million on the completion of an acquisition of the Company in satisfaction of the principal and interest of the Company's indebtedness to Lindner and its related stock purchase rights. On March 31, 1998 the Company also executed a letter agreement with Renaissance providing that upon the closing of an acquisition of the Company there would be issued to Renaissance in satisfaction of the principal and interest of the Company's indebtedness to it and its related stock purchase rights a new promissory note in the amount of $1.3 million payable, with simple interest at the rate of seven percent per annum, on July 1, 1999. Based upon the foregoing, on April 1 the Company issued a press release announcing the letter agreement with Baker Hughes and an expected payment of $.49 per share to the Company's common shareholders. On April 24, 1998, the Board of Directors met in the offices of Simmons, at which meeting Simmons made a written and oral presentation to the Company on the Baker Hughes transaction. Simmons valued the transaction at $10.4 million representing the amount then payable to common shareholders ($.49 per share at that time), the amounts payable to the Company's secured lenders (Lindner, Renaissance and Bank One), the amount payable to retire the Company's preferred stock and the amount payable to Simmons. Based upon certain analyses performed by Simmons as summarized under "Financial Advisor; Fairness Opinion" below, the Board of Directors concluded that: i. Baker Hughes had substantially satisfied all of the Company's transactional requirements and was moving towards the execution of a final definitive acquisition agreement; ii. The proposed sale of the Company to Baker Hughes represented at that time the only known viable strategic alternative for the Company's shareholders, creditors, employees, customers and other stakeholders; iii. In light of the Company's current financial condition and substantial employee turnover, values offered by the terms of the merger substantially exceed those of maintaining the status quo; iv. Based on an in-depth analysis of the transaction, of the Company and of current market conditions, Simmons believes that the transaction is fair to the Company's shareholders from a financial point of view. Subsequent to the execution of the letter agreement Baker Hughes engaged in further due diligence on the Company and the Company provided extensive additional information to Baker Hughes. On May 21, 1998 Baker Hughes presented the Company with issues resulting from its due diligence and requested a purchase price adjustment, related principally to expenses under various benefit plans and to costs under certain customer contracts. The proposed adjustments were discussed extensively by the Company and Baker Hughes and on May 29, 1998 Baker Hughes proposed a compromise adjustment which gave effect to the 103,000 additional common shares of Common Stock issued by the Company during 1997 in connection with its U.K. employee benefit plans and reflected certain costs associated with a Latin American contract which the Company may not be able to recover. The Company and Baker Hughes conducted further extensive negotiations with respect to the proposed adjustments and on June 1, 1998 Baker Hughes and the Company agreed to a price of $.44 per share. On June 5, 1998, the Board of Directors of the Company again met by telephone. A representative of Simmons participated in the meeting and advised the Board of Directors that Simmons would be able to issue an opinion to the Board of Directors that a purchase price of $.44 per share would be fair to shareholders from a financial point of view. On June 15, 1998 Simmons issued a supplement to its April 24, 1998 presentation to the Company's Board of Directors on the transaction confirming its prior opinion on the fairness of the transaction to shareholders from a financial point of view. On June 17, 1998, the Merger Agreement was executed by the Company and BHOO. REASONS FOR THE MERGER; RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS The Board of Directors of the Company has unanimously approved the Merger Agreement and believes that the Merger is in the best interests of the shareholders. The Board of Directors recommends that shareholders vote FOR the approval of the Merger Agreement. Each of the directors of the Company has advised the Company that he intends to vote all of the shares of the Company's Common Stock that he owns in favor of the Merger Agreement. The Board of Directors, in reaching its decision, considered a number of factors, including, without limitation, the following: I. The financial terms of the Merger. II. The terms of the Merger Agreement and the terms of the other agreements to be entered into between the other parties in connection with the Merger, in particular the agreements with the Company's senior secured lenders, its short term bank line provider and its preferred shareholder which agreements make possible the payments to be made to the Company's common shareholders. III. The financial condition, results of operations, business and prospects of the Company and its component businesses, and information with respect to current industry, economic and market conditions, as well as the risks involved in achieving those prospects. As described above under "Background of the Merger," the Board had required management in July, 1997 to present the alternative option of the Company remaining independent or pursuing alternative courses and such alternatives have been subsequently reevaluated from time to time. In considering these alternatives, the Board determined that the shareholders and creditors have a significantly higher probability of realizing a return pursuant to the Merger than to the Company's following an independent course. In particular the Board considered it unlikely that the Company would receive further equity funding and its current lenders have stated that they would not consider additional investment in the Company. The Board was cognizant of the changing oil and gas services industry environment with increasing emphasis upon size and the ability of its large competitors to provide a wide range of integrated products and services contrasted with the Company's need to make further investment in updating its software products. The Board determined that the current and prospective economic and competitive environment facing the Company presented substantial uncertainties for the Company's business prospects as an independent company. IV. The fact that the Company was unable to make the interest payments due in October 1997 on its long-term debt of $6.5 million to its two prime lenders. While the creditors had agreed to waive the payment defaults for some time to allow the Company to determine its strategic course, both lenders had advised the Company that they were not prepared to consider additional investment in the Company. V. The fact that the Company's revolving credit facility had been continuously reduced over a period of four years from $5.0 million to a facility of only $230,000 in March 1998 and that such facility would remain available at that time only to secure certain standby letters of credit. VI. The fact that the Company may, in accordance with the Merger Agreement, under certain circumstances furnish information to, and discuss and negotiate with, parties other than BHOO who have an interest in a transaction with the Company, and that the Company may terminate the Merger Agreement with BHOO if an unsolicited transaction is proposed which the Board of Directors believes is more favorable to the Company and its shareholders than the terms of the Merger Agreement, subject to the payment of a fee to BHOO of a maximum of $500,000, subject to adjustment (see "----The Merger Agreement----No Solicitation of Acquisition Proposals" and "----Expenses; Termination Fee"); the Board of Directors considered the amount of such fee in relation to the consideration offered by Baker Hughes and BHOO and concluded that the obligation of the Company to pay such fee in the event it exercises its right to terminate the Merger Agreement would not materially deter alternative proposals. The Board considered their "fiduciary out" an imperative condition to proceeding with the Merger and Baker Hughes and BHOO accepted this condition. VII. The comprehensive unsuccessful efforts of Simmons to obtain acquisition interest by other parties on a more favorable basis and the Company's unsuccessful negotiations with the other parties which had expressed an acquisition interest. In view of the wide variety of factors considered by the Board, the Board did not find it practicable to assign quantitative relative weights to the specific factors considered in making its determination that the Merger is fair to, and in the best interests of, the Company's shareholders. FINANCIAL ADVISOR; FAIRNESS OPINION The Company and Simmons have been in contact since the middle of 1996 and as the result of formal meetings in the middle of 1997 the Company retained Simmons on August 5, 1997 to act as the Company's financial advisor. The Company retained Simmons to explore the Company's alternatives for maximizing shareholder value and to act as its exclusive investment banking representative and financial advisor for the purpose of advising the Company concerning possible transactions, including a sale of all or a part of the Company. Simmons is an internationally recognized investment banking firm specializing in the oilfield services and equipment industry that is engaged in, among other things, the evaluation of businesses and their securities in connection with mergers and acquisitions, divestitures, and the raising of debt and equity financing in the private and public markets. Simmons was selected as financial advisor based upon such expertise and experience. At an April 24, 1998 meeting of the Company's Board of Directors at which the preliminary form, terms and provisions of an agreement for the acquisition of the Company by Baker Hughes, involving an expected per share consideration of $.49, were approved and adopted, Simmons rendered its opinion to the Company's Board of Directors, based on various considerations and assumptions discussed below and Simmons' general knowledge of the mergers and acquisitions market for companies similar to the Company, that, as of such date, the expected consideration to be received by the holders of Common Stock in the acquisition was fair, from a financial point of view, to the shareholders of the Company. Such opinion was updated at a Board of Directors meeting on June 5, 1998 at which time the Board approved a revision in the per share price to be paid by BHOO from $.49 to $.44. The full text of the final written opinion of Simmons, dated June 15, 1998, which sets forth assumptions made, matters considered and limits on the review undertaken by Simmons, is attached as Annex II to this Proxy Statement and is incorporated herein by reference. THE COMPANY'S SHAREHOLDERS ARE URGED TO READ THE OPINION IN ITS ENTIRETY. Simmons' opinion is directed only to the fairness, from a financial point of view, to the shareholders of the Company of the consideration to be received in the Merger, and does not constitute a recommendation to the Company's shareholders as to how such shareholders should vote at the Special Meeting. The summary of the opinion of Simmons set forth in this Proxy Statement is qualified in its entirety by reference to the full text of such opinion included in Annex II. In arriving at its written opinion, Simmons, among other things, reviewed: (i) a draft of the Merger Agreement dated June 14, 1998; (ii) the financial statements and other information concerning the Company, including the Annual Reports on Form 10-K of the Company for each of the years in the four-year period ended December 31, 1997; the amended Annual Report on Form 10-K/A No. 1 of the Company for the year ended December 31, 1997 (including restated financial results for the three years ended December 31, 1995); the Quarterly Report on Form 10-QSB/A of the Company for the quarter ended March 31, 1998; and the Current Reports on Form 8-K of the Company related to events occurring on September 11, 1996; October 9, 1996; September 11, 1997; December 11, 1997; February 10, 1998; March 27, 1998; April 17, 1998; and May 1, 1998; (iii) certain other internal information, primarily financial in nature, concerning the business and operations of the Company furnished by the Company for purposes of Simmons' analysis; (iv) certain publicly available information concerning the trading of, and the trading market for, the Company's Common Stock; (v) certain publicly available information with respect to certain other companies that Simmons believes to be comparable to the Company and the trading markets for certain of such other companies' securities; (vi) certain publicly available information concerning the estimates of the future operating and financial performance of the Company and the comparable companies prepared by industry experts unaffiliated with the Company; and (vii) certain publicly available information concerning the nature and terms of certain other transactions considered relevant to the inquiry; and made such other analyses and examinations as we have deemed necessary or appropriate. Simmons has also met with certain other officers and employees of the Company to discuss the foregoing, as well as other matters believed relevant to the inquiry. Simmons relied upon and assumed, without independent verification, the accuracy and completeness of all financial and other information that was furnished to it by the Company or otherwise reviewed by Simmons. The Board of Directors of the Company did not specifically engage Simmons to, and therefore Simmons did not, verify the accuracy or completeness of any such information nor did Simmons make any evaluation or appraisal of any assets or liabilities of the Company. Simmons' opinion was necessarily based on economic, market and other conditions as they existed on, and the information made available to it as of, the date thereof. Simmons' opinion as expressed herein, in any event, is limited to the fairness, from a financial point of view, to the shareholders of the Company as defined in Annex II of the consideration to be received by the holders of the Company's Common Stock. Merger Consideration Under the Merger Agreement, shareholders of the Company are to receive $0.44 in cash, without interest, per share of common stock of the Company. In aggregate, the Company's shareholders are expected to receive approximately $3,980,594, based on the 9,046,804 shares outstanding. The following is a summary of certain analyses performed by Simmons in rendering its opinion as to the fairness, from a financial point of view, to the Company's shareholders of the consideration to be received by the holders of the Company's Common Stock. Company Analysis Simmons analyzed the current financial condition of the Company, including the fact that the Company has in recent periods suffered recurring losses from operations and has a net capital deficiency, as well as certain other factors which raise substantial doubt regarding the Company's ability to continue as a going concern absent the acquisition of the Company by an entity with greater financial resources than the Company. Included in such factors considered was an analysis of the Company's cash availability, including its borrowing capability, and its short-term cash needs. Based on short-term projections provided by the Company, Simmons noted that the Company could exhaust its available cash balances before the end of fiscal 1998. Simmons also noted that the Company currently is in default under financial covenants with respect to its outstanding debt and credit facilities and is in default with respect to the interest payments due in October 1997 on its senior secured notes payable. Premium Analysis and Stock Trading History Simmons calculated the premium represented by the Merger Consideration of $0.44 per share over recent trading prices of the Company's Common Stock. The Merger Consideration represented a (i) 152.9%, (ii) 144.4%, (iii) 142.8%, (iv) 151.8%, (v) 172.6%, and (vi) 6.9% premium over the Company's stock price (i) as averaged over the ten trading days immediately prior to April 1, 1998, the date the pending Share Exchange was first announced, (ii) at the close of trading on March 31, 1998, (iii) as averaged over the one month period ended March 31, 1998, (iv) as averaged over the two month period ended March 31, 1998, (v) as averaged over the six month period ended March 31, 1998, and (vi) as averaged over the 12 month period ended March 31, 1998. Simmons also analyzed, using data compiled by Securities Data Company, the premiums paid in 721 acquisitions consummated between January 1, 1992 and June 5, 1998. Simmons found that the weighted average premium paid by the acquiror over the closing price of the stock of the target company one day prior to the announcement of the transaction was 31.7%. Simmons compared this result with the results of the premium analysis for the Company's Common Stock discussed above. Comparable Transaction Analysis Using publicly available and confidential information available to Simmons, Simmons analyzed the transaction values and the implied transaction multiples of eight merger and acquisition transactions of oilfield service and equipment companies since May 1995, including the following publicly disclosed transactions (acquiror/acquired company): Western Atlas/3-D Geophysical; Halliburton/Landmark Graphics; Digicon/Veritas; Venture Seismic/Boone Geophysical; Landmark Graphics/Geographix; Tech-Sym Corporation/Cogni-Seis Development (the "Comparable Transactions"). Among other things, Simmons analyzed for the Comparable Transactions, as available, the ratio of the transaction value to the target company's revenues as reported for the 12 months prior to the transaction. An analysis of the Comparable Transactions' ratios of transaction value to revenues yielded a range of 0.6x to 3.0x, as compared to 1.0x for the Company based on the $0.44 per share value to be received in the Merger. Simmons also noted that a direct comparison of the Comparable Transactions' ratios of transaction value to EBDIT (earnings before depreciation, amortization, interest and taxes), with such ratio for the Company based on the $0.44 per share value in the Merger, was not meaningful due to the Company's negative EBDIT. Comparable Public Company Analysis Simmons reviewed certain publicly available financial, operating and stock market information as of June 5, 1998 for the Company and certain publicly traded companies (the "Comparable Companies"). The Comparable Companies included Dawson Geophysical Company, Eagle Geophysical, Inc., GeoScience Corporation, Petroleum Geo-Services ASA, Seitel Inc., Veritas DGC Inc., and Western Atlas, Inc. Among other things, Simmons analyzed for the Comparable Companies the ratio of Adjusted Market Value (total market equity value plus debt, less cash in excess of five percent of revenues) to trailing 12 months' ("TTM") revenues. An analysis of the Comparable Companies' ratios of Adjusted Market Value to TTM revenues yielded a range of 1.3x to 5.0x, as compared to 1.0x for the Company based on the $0.44 per share value in the Merger. Simmons also noted a direct comparison of the Comparable Companies' ratios of Adjusted Market Value to TTM EBDIT with such ratio for the Company based on the $0.44 per share value in the Merger, and a direct comparison of the Comparable Companies' ratios of stock price to TTM earnings per share ("EPS") and to TTM cash flow per share ("CFPS") with such ratios for the Company based on the $0.44 per share value in the Merger, were not meaningful due to the Company's negative TTM EBDIT, TTM EPS and TTM CFPS. Analysis of Transaction Proceeds to Senior Lenders and Preferred Stock Holder Simmons noted that in connection with the Merger Lindner and Renaissance have agreed to accept discounted terms of $1.4 million and $1.3 million, respectively, in full satisfaction of the $5.0 million and $1.5 million, respectively, principal amounts of senior secured notes, plus accrued interest and other obligations owed to Lindner and Renaissance by the Company. Simmons also noted that Halliburton has agreed to accept $2.5 million in cash in exchange for its $4.0 million preferred stock holding in the Company at the closing of a third party acquisition of the Company if the acquisition is completed prior to August 31, 1998. Other Considerations The preparation of a fairness opinion is a complex analytical process involving various determinations as to the most appropriate and relevant methods of financial analyses and the application of those methods to particular circumstances and, therefore, such an opinion is not readily susceptible to summary description. The summary of the analytical models used by Simmons as set forth above does not purport to be a complete description of the analyses performed, or the matters considered, by Simmons in rendering its opinion. Simmons believes that its analyses and the summary set forth above must be considered as a whole and that selecting portions of such analyses would create an incomplete view of the process underlying the analyses set forth in the Simmons fairness opinion. The analyses performed by Simmons are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than suggested by such analyses. Such analyses were prepared as a part of Simmons' advisory engagement, as well as part of Simmons' analyses of the fairness, from a financial point of view, to the shareholders of the Company of the resulting Merger Consideration, and were provided to the Company's Board of Directors over the course of Simmons' engagement and updated in connection with the delivery of Simmons' fairness opinion. Based upon the foregoing analyses and its general knowledge of and experience in the valuation of securities, Simmons concluded that the Merger Consideration to be received by the shareholders of the Company is fair from a financial point of view to the Company's shareholders. In addition, as described above, the presentation of Simmons' fairness opinion to the Company's Board of Directors was one of the many factors taken into consideration by the Company's Board of Directors in making its determination to approve the Merger Agreement. Terms of Simmons' Engagement The terms of engagement of Simmons by the Company are set forth in a letter dated August 5, 1997 (the "Engagement Letter"). Pursuant to the terms of the Engagement letter, as compensation for services as financial advisor, the Company has agreed to pay Simmons a fee of $350,000, payable upon the consummation of the Merger. If the Merger is not consummated, Simmons will not receive such fee. In addition, the Company has agreed to pay Simmons an initial fee of $50,000, of which $25,000 has been paid to date. Further, the Company has agreed to reimburse Simmons for the out-of-pocket expenses incurred by Simmons in connection with its engagement. The Company has also agreed to indemnify Simmons against certain liabilities arising out of Simmons' engagement. INTERESTS OF DIRECTORS IN THE MERGER In considering the recommendation of the Company's Board of Directors with respect to the Merger, the Company's shareholders should be aware that George Steel, the Company's President and Chief Executive Officer and a member of the Board of Directors, has an employment and change in control arrangement with the Company pursuant to which in connection with the commencement in January 1996 of the employment of Mr. 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 proposed and 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 Merger will affect Mr. Steel's employment by the Company and accordingly the application of the foregoing severance arrangements is uncertain. In addition, the Merger Agreement provides that the officers and directors of the Company will be entitled to continuing indemnification by Sub after the Effective Time against certain possible claims relating to the period prior to the Effective Time to the same extent as such persons are presently entitled to indemnification under the Company's Articles of Incorporation and the Bylaws and that the Company may obtain a tail policy for the current directors and officers' policy held by the Company provided that the total premium for such tail policy does not exceed $55,750. See "The Merger - The Merger Agreement - Indemnification and Insurance." RISKS OF NON-CONSUMMATION The obligations of the Company to consummate the Merger are subject to a number of conditions, including approval of the Merger Agreement by the holders of at least two-thirds of the outstanding shares of the Company's Common Stock. See "The Merger - The Merger Agreement - Conditions to the Merger." EXPENSES OF THE MERGER The Merger will involve the payment of various expenses by the parties. However, through the Merger, Sub will effectively bear the expenses incurred by the Company in connection with the Merger. If the Merger is not consummated, the Company and BHOO will each bear their own expenses incurred in connection with the Merger Agreement and the transactions contemplated thereby. Expenses in connection with the Merger include amounts paid to financial advisors; legal fees and expenses; and other miscellaneous expenses. The amount of these expenses cannot be determined at this time. For further information with respect to fee arrangements with financial advisors, see "Certain Considerations Relating to the Merger - Terms of Simmons' Engagement." THE MERGER FORM OF THE MERGER The Merger Agreement provides that, subject to the requisite approval by the Company's shareholders and satisfaction or waiver of certain other conditions, at the Effective Time the Company will merge with and into Sub and each share of the Company's Common Stock issued and outstanding immediately prior to the Merger will be converted into the right to receive $0.44 in cash, without interest. As a result of the Merger, the separate corporate existence of the Company will cease and Sub will be the surviving corporation, with the corporate name of Sub to be changed to "Scientific Software-Intercomp, Inc." Upon consummation of the Merger, the shares of Common Stock will, except as described below, be converted into the right to receive the Merger Consideration (as described below), and the Company's shareholders will have no ownership interest in or control over either the Company, Baker Hughes, BHOO or Sub. MERGER CONSIDERATION Upon the consummation of the Merger, each outstanding share of Common Stock, other than shares as to which dissenters' rights have been duly asserted under Colorado law, will be automatically converted into the right to receive $0.44 in cash, without interest. (the "Merger Consideration"). SHAREHOLDER MEETING Pursuant to the Merger Agreement, the Company will as promptly as possible call a meeting of its shareholders to consider and vote upon the approval of the Merger Agreement. EFFECTIVE TIME OF THE MERGER The Merger will become effective immediately when the articles of merger are filed with the Secretary of State of the State of Colorado (the "Effective Time"). Pursuant to the Merger Agreement, the filing of the articles of merger will be made as soon as practicable after the closing of the Merger, which is to occur no later than two business days after the satisfaction or waiver of the conditions to the Merger set forth in the Merger Agreement unless otherwise agreed to by the Company and BHOO. See " - The Merger Agreement - Conditions to the Merger." PROCEDURES FOR EXCHANGE OF CERTIFICATES At or as soon as practicable after the Effective Time, Sub will deposit in trust with the Exchange Agent cash in the aggregate amount equal to the product of (i) the number of shares of Common Stock outstanding immediately prior to the Effective Time (other than shares as to which dissenters' rights have been duly asserted under Colorado law) and (ii) the Merger Consideration. As soon as reasonably practicable after the Effective Time, Sub will cause the Exchange Agent to mail to each record holder of Common Stock immediately before the Effective Time a letter of transmittal (which will specify that delivery will be effected, and risk of loss and title to certificates for shares of Common Stock will pass only upon proper delivery of such certificates to the Exchange Agent) and instructions for use in effecting the surrender of certificates pursuant to such letter of transmittal. SHAREHOLDERS SHOULD NOT FORWARD SCIENTIFIC SOFTWARE-INTERCOMP STOCK CERTIFICATES TO THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED LETTERS OF TRANSMITTAL. SHAREHOLDERS SHOULD NOT RETURN STOCK CERTIFICATES WITH THE ENCLOSED PROXY. Upon surrender to the Exchange Agent of a certificate theretofore evidencing shares of Common Stock, together with a duly executed letter of transmittal, the holder of such certificate will be entitled to receive in exchange therefor the Merger Consideration payable under the Merger Agreement in respect of each share of Common Stock theretofore evidenced by such certificate so surrendered. No interest will accrue or be paid on the Merger Consideration payable upon the surrender of any certificate. If the Merger Consideration is to be paid to a person other than the person in whose name the surrendered certificate is registered on the Company's stock transfer books, it will be a condition to the payment that the certificate so surrendered be properly endorsed for transfer and that the person requesting such payment has paid any transfer or other taxes required as a result of the payment of the Merger Consideration to a person other that the registered holder of the certificate surrendered. At the Effective Time, the stock transfer books of the Company in place prior to the Effective Time will be closed, and thereafter there will be no transfers on such books by the holders of the shares of Common Stock immediately prior to the Effective Time. At any time following the third month after the Effective Time, Sub will be entitled to require the Exchange Agent to deliver to Sub any funds which had been made available to the Exchange Agent and not disbursed to the holders of the Common Stock immediately prior to the Effective Time as a result of the failure of holders to surrender their certificates, after which time former shareholders of the Company, subject to applicable law, may look to Sub only as general creditors thereof with respect to payment of the Merger Consideration upon surrender of certificates for shares of Common Stock. FINANCING ARRANGEMENTS BY SUB, BHOO OR BAKER HUGHES Consummation of the Merger is not conditioned upon Sub, BHOO or Baker Hughes obtaining financing in order to pay the aggregate Merger Consideration due to the holders of Common Stock upon consummation of the Merger. REGULATORY MATTERS The merger is not subject to the notification and waiting period requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, since the aggregate value of the Merger is less than $15 million. DEBT REPAYMENT AND REPURCHASE OF PREFERRED STOCK The Company is indebted to Lindner and Renaissance in the aggregate amount of $6.5 million pursuant to senior secured notes payable held by Lindner and Renaissance, plus accrued interest. The Company did not make its interest payment due in October 1997 on the Lindner and Renaissance debt, and the Company is also in violation of identical financial covenants with respect to such debt. Lindner and Renaissance agreed on March 31, 1998 to accept at the closing of the Merger discounted amounts of $1.4 million and $1.3 million, respectively, in satisfaction of outstanding amounts owed by the Company to the lenders. In addition, on March 27, 1998 Halliburton agreed to accept $2.5 million in cash in exchange for its $4.0 million preferred stock holding in the Company at the closing of a third party acquisition of the Company, provided that the acquisition is completed prior to August 31, 1998. Under the Merger Agreement, the discounted $1.4 million obligation to Lindner will be paid at the Closing and the discounted $1.3 million obligation to Renaissance will become payable on July 1, 1999. The Merger Agreement further provides that the Company's preferred stock held by Halliburton will be repurchased for $2.5 million at or before the Closing. DISPOSITION OF THE PIPELINE SIMULATION BUSINESS Consummation of the Merger Agreement is conditioned upon the Company's disposition of the assets of its Pipeline Simulation business for cash proceeds of at least $1,500,000. Effective May 1, 1998, the Company sold to LIC the assets of the Company's Pipeline Simulation Business in exchange for $1,500,000 in cash and the assumption by LIC of certain current liabilities associated with the Pipeline Simulation Business in the amount of $145,000. DISSENTERS' RIGHTS Shareholders of the Company, whether or not entitled to vote on the Merger Agreement, who do not wish to accept the consideration to be paid pursuant to the Merger Agreement are or may be entitled to assert dissenters' rights under Article 113 of the Colorado Business Corporation Act ("CBCA"), whereby dissenters may elect to be paid in cash the "fair value" of their shares of Common Stock (plus interest) in lieu of the consideration provided in the Merger Agreement. "Fair value" with respect to dissenters' shares means the value of shares immediately before consummation of the corporate action to which the dissenter objects, excluding any appreciation or depreciation in anticipation of such corporate action, unless such exclusion would be inequitable. If the Company and dissenting shareholders cannot agree on the fair value of the underlying dissenters' shares, such value may be determined pursuant to an appraisal in a court proceeding. The following is a brief summary of the statutory procedures which must be strictly followed by a holder of the Company's Common Stock in order to dissent from the Merger and perfect dissenters' rights under Article 113 of the CBCA. THIS SUMMARY IS NOT INTENDED TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO ARTICLE 113 OF THE CBCA, THE TEXT OF WHICH IS ATTACHED AS ANNEX III TO THIS PROXY STATEMENT. If any holder of the Company's Common Stock elects to exercise his or her right to dissent from the Merger and demand payment of the fair value of his or her shares, such shareholder must satisfy each of the following conditions: (i) such shareholder must cause the Company to receive prior to the shareholder vote on the Merger Agreement a written notice of his or her intention to demand payment for his or her shares if the Merger is consummated (this written notice of intention to demand payment is required in addition to refraining from voting in favor of the Merger Agreement discussed below; neither voting against, abstaining from voting or failing to vote on the Merger Agreement will constitute written notice of intention to demand payment under Article 113 of the CBCA); (ii) such shareholder must refrain from voting his or her shares in favor of the Merger Agreement (abstaining or failing to vote will satisfy this requirement, but a vote in favor of the Merger Agreement, by proxy or in person, or the return of a signed proxy which does not specify a vote against the Merger Agreement or an abstention, will constitute a waiver of dissenters' rights and will nullify any previously delivered written notice of intention to demand payment); and (iii) such shareholder must, within thirty days of the mailing by the Company of a notice to all shareholders who are entitled to demand payment for their shares under Article 113 of the CBCA by satisfying the first two conditions immediately above, cause the Company to receive a written payment demand and deposit with the Company the stock certificates representing the shares of Common Stock owned by such shareholder. If any shareholder who wishes to dissent from the Merger fails to comply with any of the above-summarized conditions set forth in Article 113 of the CBCA and the Merger Agreement is consummated, he or she will be entitled to receive the consideration provided in the Merger Agreement but will not have any dissenters' rights under Article 113. Consequently, any shareholder who desires to exercise his or her dissenters' rights is urged to read carefully Article 113 and consult a legal advisor before attempting to exercise such rights. All written notices of intention to demand payment for shares under Article 113 of the CBCA should be delivered to: George Steel, President, Scientific Software-Intercomp, Inc., 633 17th Street, Suite 1600, Denver, CO 80202, and should be executed by, or on behalf of, the shareholder of record. A record shareholder may not assert dissenters' rights as to less than all of the shares of the Company's Common Stock registered in such shareholder's name unless such shareholder asserts such rights with respect to all of the Common Stock beneficially owned by another person and delivers to the Company a written notice which states such dissent and the name, address, and federal taxpayer identification number, if any, of each person on whose behalf the record shareholder asserts dissenters' rights. In that event, the rights of a record shareholder will be determined as if the shares as to which the record shareholders dissents and the other shares of the record shareholder were registered in the names of different shareholders. A beneficial shareholder may assert dissenters' rights as to the shares held on the beneficial shareholder's behalf if such beneficial shareholder (i) causes the Company to receive the record shareholder's written consent to the dissent not later than the time the beneficial shareholder asserts dissenters' rights and (ii) dissents with respect to all shares beneficially owned by the beneficial shareholder. Not later than ten days following the Effective Time, the Company will give written notice to all shareholders who prior to the shareholder vote on the Merger Agreement delivered to the Company a written notice of their intention to demand payment for their shares if the Merger is consummated and refrained from voting their shares in favor of the Merger Agreement. Any such shareholder who wishes to assert dissenters' rights must then, within thirty days after such notice from the Company is mailed, deliver to the Company a written payment demand and deposit with the Company the stock certificates representing the shares of Common Stock owned by such shareholder. In connection with such written payment demand, the Company will require as permitted by Article 113 that (i) the dissenter certify in writing as to whether or not the dissenter acquired beneficial ownership of the shares before the date that the terms of the Merger Agreement were publicly announced and (ii) where a record shareholder dissents with respect to the shares held by any one or more beneficial shareholders, each such beneficial shareholder must certify to the Company that the beneficial shareholder and the record shareholder or record shareholders of all shares beneficially owned by the beneficial shareholder have asserted, or will timely assert, dissenters' rights as to all of the shares owned by the beneficial shareholder. After the receipt by the above-discussed thirty-day deadline of a written payment demand, the Company will pay to the shareholder the fair value of the shares, as estimated by the Company, together with interest from the Effective Time until the date of payment, which payment will be accompanied by (i) the financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997, as amended, and Quarterly Report on Form 10-QSB for the quarter ended March 31, 1998, as amended, (ii) a statement of the Company's estimate of the fair value of the shares, (iii) an explanation of how the interest was calculated, and (iv) a statement of the dissenter's right to demand supplemental payment along with a copy of Article 113 of the CBCA. However, the Company will as permitted under Article 113 of the CBCA withhold payment from dissenting shareholders who do not certify in writing, in or with the payment demand, that they acquired beneficial ownership of the stock prior to the date of first public announcement of the terms of the Merger Agreement, notify such shareholders of the Company's estimate of fair value of the shares, the rate of interest to be used, and the basis thereof and offer to pay these amounts if the shareholder agrees to accept them in full satisfaction of his or her rights. If the dissenting shareholder believes that the amount paid or offered by the Company is less than the fair value of his or her shares or that interest was incorrectly calculated, he or she may, within thirty days after the date the Company paid or offered its estimate of the fair value of the shares, deliver to the Company a written notice of the dissenting shareholder's estimate of the fair value of the shares and of the amount of interest due and may demand payment of any deficiency from the payment made by the Company or reject the Company's offer, as the case may be. If a demand for payment by a dissenting shareholder remains unresolved, the Company may within sixty days after receiving the payment demand commence a proceeding in the District Court for the City and County of Denver, Colorado to determine the fair value of the shares and accrued interest. If the Company does not commence the proceeding within such sixty-day period, it must pay to each dissenter whose demand remains unresolved the amount demanded. If the Company does commence a proceeding, all dissenters whose demands have not been settled shall be parties to such proceeding. The court may appoint appraisers to consider evidence and recommend a decision on the question of fair value. It is currently expected that the Company will take the position that the fair value of the Company's Common Stock for purposes of determining payments to be made to any dissenting shareholders is best indicated by the quoted price for the Company's Common Stock on March 31, 1998, the last trading day before the proposed Merger was first announced by the Company. At that time the quoted price for the Company's Common Stock as reported in the "pink sheets" maintained by the National Quotation Bureau, Inc. was $0.18 per share. A court may nonetheless ultimately determine the fair value to be more or less than such quoted price. Shareholders of the Company who are considering exercising their dissenters' rights may also wish to consider selling their shares of the Company's Common Stock in the open market as an alternative. The court generally must assess the costs of the proceeding against the Company, except that the court may assess costs against all or some of the dissenters in amounts the court finds equitable to the extent the court finds the dissenters acted arbitrarily, vexatiously, or not in good faith in demanding payment. In addition, the court may assess the fees and expenses of counsel and experts for the respective parties in amounts the court finds equitable against any party the court finds acted arbitrarily, vexatiously, or not in good faith. If the court finds that the services of counsel for any dissenter were of substantial benefit to other dissenters similarly situated and that the fees for such services should not be assessed against the Company, the court may award to the counsel reasonable fees to be paid out of the amounts awarded to the dissenters who were benefited. THE MERGER AGREEMENT Merger Consideration Upon the consummation of the Merger, each outstanding share of Common Stock, other than shares as to which dissenters' rights have been duly asserted under Colorado law, will be automatically converted into the right to receive the Merger Consideration. Treatment of Stock Options and Warrants At the Effective Time, each outstanding option to purchase the Company's Common Stock, whether or not then vested or exercisable, will be canceled by the Company and each holder of a canceled option will be entitled to receive from BHOO at the time of such cancellation, an amount in cash, without interest, equal to the product of (i) the number of shares of the Company's Common Stock previously subject to such option whether or not then exercisable or vested, and (ii) the excess, if any, of the Merger Consideration over the exercise price per share applicable to such option reduced by any applicable income tax withholding. Of the currently outstanding options to acquire in the aggregate 1,552,124 shares of the Company's Common Stock, options to acquire in the aggregate 10,500 shares of Common Stock have exercise prices less than the Merger Consideration. The Company has agreed to obtain consents from its option holders to the foregoing payment procedure. Each outstanding warrant to purchase the Company's Common Stock will be canceled prior to the Closing in connection with the amendments to the Company's loan agreements with Lindner and Renaissance. Representations and Warranties The Merger Agreement contains various representations and warranties of each of the Company and BHOO. These include, among other things, representations and warranties of the Company as to (i) its organization and good standing, (ii) the identity and ownership of its subsidiaries, (iii) its capital structure, (iv) its authority relative to the execution and delivery of, and performance of its obligations under, the Merger Agreement, (v) the absence of conflicts between the Merger Agreement and applicable law and the contracts of the Company, (vi) status of the compliance of the Company's financial statements with accounting standards and the status of its filings with the SEC and regulatory authorities, (vii) the absence of undisclosed liabilities in and changes with respect to its financial statements in its filings with the SEC, (viii) taxes, (ix) the absence of pending or threatened material litigation or other actions, (x) the absence of any default under agreements to which the Company is a party, (xi) compliance with applicable laws including compliance with requirements applicable to the Company's foreign subsidiaries' prior operations in Libya, (xii) employee benefit plans, (xiii) labor matters, (xiv) its properties, licenses and permits, (xv) certain environmental matters, (xvi) intellectual property rights and (xvii) insurance. The representations and warranties of BHOO include, among other things, those as to (i) the organization and good standing of BHOO, (ii) its authority relative to the execution and delivery of, and performance of its obligations under, the Merger Agreement, (iii) the absence of conflicts between the Merger Agreement and applicable law and the contracts of BHOO and (iv) the availability to Sub of sufficient funds to fulfill its obligations under the Merger Agreement. Covenants Relating to Conduct of Business by the Company Pending the Merger Pursuant to the Merger Agreement, the Company has agreed that the Company (and its subsidiaries) will: (i) carry on its businesses in the ordinary course of such business as previously conducted, (ii) not declare or pay any dividends on or make other distributions in respect of any of its capital stock, split, combine or reclassify any of its capital stock or issue of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, (iii) except for the repurchase by the Company of the shares of its preferred stock held by Halliburton for a price not to exceed $2,500,00 as contemplated by the Merger Agreement, not repurchase or otherwise acquire any shares of its capital stock, (iv) not issue any securities except for the issuance of Common Stock pursuant to the exercise of previously granted stock options, (v) not make any loans to any person except for the customary advancement of routine employee expenses, (vi) not amend or propose to amend its articles of incorporation or bylaws, (vii) not acquire or agree to acquire a substantial equity interest in or a substantial portion of the assets of, any other business, (viii) not dispose of any material portion of its assets, (ix) not authorize a plan of complete or partial liquidation or dissolution of the Company, (x) not agree to increase any compensation or benefits to be received by any of its directors, officers or employees or terminate the employment of any employee of the Company without cause, (xi) not incur any indebtedness for borrowed money except for working capital under existing credit facilities, guarantee any such indebtedness, enter into any lease agreement or security agreement in connection with any indebtedness or commit to aggregate capital expenditures in excess of $10,000, (xii) notify BHOO of any material occurrence in its business or of any legal proceedings or investigations, (xiii) maintain all policies of insurance, (xiv) not enter into any agreement which is not terminable by the Company without penalty on no more than thirty days' prior notice to the other party and (xv) not solicit any inquiry, proposal or offer to acquire the Company (as discussed more fully under "No Solicitation of Acquisition Proposals" immediately below). No Solicitation of Acquisition Proposals Under the Merger Agreement the Company has agreed that it will not, nor will it permit any of its directors, officers, employees or agents to, solicit or encourage, directly or indirectly, any inquiry, proposal or offer with respect to an acquisition of the Company (an "Acquisition Proposal") or engage in any negotiations regarding an Acquisition Proposal. However, the Merger Agreement does not prohibit the Company or its directors from, after giving notice to BHOO (i) complying with Rule 14e-2 of the Exchange Act regarding disclosure of the Company's position with respect to Acquisition Proposal involving a tender offer for the shares of the Company's Common Stock or (ii) prior to the Special Meeting of Shareholders (a) providing information (pursuant to a confidentiality agreement in reasonably customary form) to or engaging in any negotiations or discussions with any person or entity who has made an unsolicited Acquisition Proposal to acquire all the outstanding shares of Common Stock of the Company that is superior to the Merger and is reasonably capable of being financed and consummated (a "Superior Proposal") and (b) terminating the Merger Agreement to concurrently enter into a definitive acquisition agreement with respect to the Superior Proposal if the Company's directors, after consultation with its outside legal counsel, determine that the failure to do so would be inconsistent with its fiduciary or other legal obligations to its stockholders or creditors. If the Company terminates the Merger Agreement to enter into an acquisition agreement with respect to a Superior Proposal, the Company must pay to BHOO a termination fee as discussed more fully under "Termination Fee and Expenses" below. Indemnification and Insurance The Merger Agreement provides that the officers and directors of the Company will be entitled to continuing indemnification by Sub after the Effective Time against certain possible claims relating to the period prior to the Effective Time to the same extent as such persons are presently entitled to indemnification under the Articles of Incorporation and the Bylaws of the Company. The Merger Agreement also provides that the Company may obtain a tail policy for the current directors and officers' policy held by the Company provided that the total premium for such tail policy does not exceed $55,750. Certain Additional Provisions Pursuant to the Merger Agreement, the Company has agreed, among other things, to (i) provide BHOO access to the Company's employees and representatives and books and records of, and other information regarding, the Company, (ii) supply BHOO with certain reports on a periodic basis, (iii) repurchase at or prior to the closing of the Merger Agreement its shares of Preferred Stock held by Halliburton for an aggregate price not to exceed $2,500,000, (iv) use all reasonable efforts to cause the Loan Agreement dated April 26, 1996 (the "Lindner and Renaissance Loan Agreement") among the Company, Lindner and Renaissance to be amended to provide that the amount owed by the Company to Lindner under such Loan Agreement is reduced to no more than $1,400,000 (to be paid in full at the closing) and the amount owed by the Company to Renaissance under such Loan Agreement is reduced to $1,300,000 (to bear simple interest of 7% and to mature on July 1, 1999), and that Lindner and Renaissance shall no longer have any rights to acquire any shares of the Company's capital stock, (v) prior to the closing pay in full the amount owed by the Company to Bank One, Colorado, N.A. ("Bank One") under the Borrower Agreement dated December 17, 1997 between Bank One and the Company, and cause any security interests of Bank One under such agreement to be fully released. Conditions to the Merger The respective obligations of each party to effect the Merger are subject to the satisfaction prior to the Closing Date of the following conditions: (i) the Merger Agreement must have been approved by the requisite affirmative vote of the holders of the outstanding shares of the Company's Common Stock entitled to vote thereon, (ii) all consents, approvals, permits and authorizations required to be obtained prior to the Effective Time from any governmental entity in connection with the consummation of the Merger Agreement must be obtained, except where the failure to obtain such consents, approvals, permits would not be reasonably likely to result in a material adverse effect on BHOO or the Company (assuming the Merger has taken place), and no such consent, approval, permit or authorization shall impose terms or conditions that would be reasonably likely to have a material adverse effect on BHOO or the Company (assuming the Merger has taken place) and (iii) no injunctions or restraints issued by any court of competent jurisdiction or other legal restraint preventing the consummation of the Merger shall be in effect. The obligations of BHOO to effect the Merger are further subject to the satisfaction of the following conditions: (i) each of the representations and warranties made by the Company in the Merger Agreement must be true and correct in all material respects as of the date of the Merger Agreement and the Closing Date except for any breach which would not have a sufficient adverse effect so as to cause the Company to fail to meet certain financial tests set forth in the Merger Agreement, (ii) the Company must have performed in all material respects all obligations required to be performed by the Company under the Merger Agreement, (iii) no injunction shall be in effect which imposes any limitations on the ability of BHOO to control the business or operations of BHOO or the Company, imposes any limitations on BHOO's ownership of operation of BHOO's or the Company's businesses or assets or compelling BHOO to divest or hold separate all or any portions of the businesses or assets of BHOO or the Company, or imposing any limitation on BHOO or the Company regarding the conduct of business, and no suit or proceeding seeking such an injunction or otherwise preventing the consummation of the Merger shall be pending, (iv) the Company must have obtained all third-party consents required to consummate the Merger, (v) there shall not be pending any material litigation or proceeding against the Company, (vi) all intellectual property rights owned or used by the Company that have not heretofore been assigned to the Company by its employees, consultants and agents shall have been assigned to the Company or BHOO's designee, (vii) prior to the closing the Lindner and Renaissance Loan Agreement shall have been amended to provide that the amount owed by the Company to Lindner under such agreement is reduced to no more than $1,400,000 (to be paid in full at the closing) and the amount owed by the Company to Renaissance under such Loan Agreement is reduced to $1,300,000 (to bear simple interest of 7% and to mature on July 1, 1999), and that Lindner and Renaissance shall no longer have any rights to acquire any shares of the Company's capital stock, (viii) at or prior to the closing the amount owed by the Company to Bank One under the Borrower Agreement dated December 17, 1997 between Bank One and the Company must be paid in full and any security interests of Bank One under such agreement must be fully released, (ix) no material adverse event with respect to the Company shall have occurred, (x) all of the shares of the Company's preferred stock held by Halliburton shall have been repurchased for an amount not to exceed $2,500,000, (xi) the Company must have disposed of the assets of its Pipeline Simulation Business for cash proceeds of at least $1,500,000, and (xii) compliance with two financial tests as described under the "Financial Tests" caption below. Lindner and Renaissance agreed on March 31, 1998 to accept at the closing of the Merger discounted amounts of $1.4 million and $1.3 million respectively in satisfaction of the outstanding $6.5 million principal plus accrued interest. On March 27, 1998, Halliburton agreed to accept $2.5 million in cash in exchange for its $4.0 million preferred stock holding in the Company at the closing of a third party acquisition of the Company, provided that the acquisition is completed prior to August 31, 1998. Under the Merger Agreement, the discounted $1.4 million obligation to Lindner will be paid at the Closing and the discounted $1.3 million obligation to Renaissance will become payable on July 1, 1999. The Merger Agreement further provides that the Company's preferred stock held by Halliburton will be repurchased for $2.5 million at or before the Closing. Effective May 1, 1998, the Company sold to LIC the assets of the Company's Pipeline Simulation Business in exchange for $1,500,000 in cash and the assumption by LIC of certain current liabilities associated with the Pipeline Simulation Business in the amount of $145,000. The obligations of the Company to effect the Merger are further subject to the satisfaction of the following conditions that: (i) each of the representations and warranties made by BHOO in the Merger Agreement must be true and correct in all material respects as of the date of the Merger Agreement and the Closing Date and (ii) BHOO must have performed in all material respects all obligations required to be performed by it under the Merger Agreement. Financial Tests The obligation of BHOO to effect the Merger is subject to the Company's compliance with two financial tests. The first test requires that the net working capital of the Company reflected on an unaudited consolidated balance sheet as of a date no earlier than seven days prior to the Closing Date be no less than the net working capital reflected on the Company's unaudited December 31, 1997 consolidated balance sheet furnished to Baker Hughes prior to the March 27, 1998 letter agreement, less $500,000. The computation of net working capital at closing will exclude the assets of the Pipeline Simulation Business sold to LIC but will include the proceeds from such sale and the computation of net working capital will also exclude the fee payable to Simmons, all of the principal and interest of the Company's indebtedness to Lindner and Renaissance and certain other adjustments to net working capital as previously agreed between the Company and BHOO. The second financial test with respect to the obligation of BHOO to effect the Merger is that after the date of the Merger Agreement there has been no material adverse discovery relating to the Company that individually or in the aggregate adversely affect, or could reasonably be expected to adversely affect, the Company or its business in an amount of $500,000 or greater. The matters described in the Company's Annual Report on Form 10-K for the year ended December 31, 1997 as filed with the SEC will not constitute a material adverse discovery nor will operating losses in the ordinary course of business of the Company unless such losses result in the Company's failure to satisfy the net working capital test described above. Termination The Merger Agreement may be terminated and the Merger abandoned at any time prior to the Effective Time, whether before or after approval of the Merger Agreement by shareholders of the Company, under the following circumstances: (i) by mutual written consent of the Company and BHOO; (ii) by the Company or BHOO if (a) the Merger is not consummated by September 30, 1998 (provided that the right to terminate shall not be available to the party whose failure to fulfill any covenant or agreement under the Merger Agreement is the cause of the failure to consummate the Merger Agreement by September 30, 1998), (b) the issuance of any final and nonappealable order, decree or ruling which prohibits the Merger or (c) at a duly held meeting of the Company's shareholders the required approval by the requisite vote of such shareholders shall not have been obtained; (iii) by BHOO if (a) the Company fails to use its good faith best efforts to call and hold a shareholders meeting to vote on the Merger Agreement by July 27, 1998, (b) the Company fails to comply in any material respect with any of the covenants or agreements contained in the Merger Agreement to be complied with or performed by the Company at or prior to such date of termination (provided such breach has not been cured within thirty days following receipt by the Company of notice of such breach and is existing at the time of termination of the Merger Agreement), (c) any representation or warranty of the Company contained in the Merger Agreement is not true and correct in all material respects and not cured within thirty days except for any breach which would not have a sufficient adverse effect so as to cause the Company to fail to meet certain financial tests described above, or (d) there has been any material adverse change or discovery with respect to the Company which causes the Company to fail the financial tests described above; (iv) by the Company if (a) BHOO fails to comply in any material respect with any of the covenants or agreements contained in the Merger Agreement to be complied with or performed by it at or prior to such date of termination (provided such breach has not been cured with thirty days following receipt by BHOO of notice of such breach and is existing at the time of termination of the Merger Agreement) or (b) any representation or warranty of BHOO contained in the Merger Agreement is not true and correct in all material respects and not cured within thirty days; (v) by BHOO if the Board of Directors of the Company (a) withdraws or modifies in a manner adverse to BHOO its recommendation or approval of the Merger Agreement, or (b) recommends to the Company's shareholders any other Acquisition Proposal; (vi) by the Company if it elects to terminate the Merger Agreement to enter into a definitive acquisition agreement with respect to a Superior Proposal if the Company's directors, after consultation with its outside legal counsel, determine that the failure to do so would be inconsistent with its fiduciary or other legal obligations to its stockholders or creditors; or (vii) by BHOO if any governmental entity issues any final injunction or takes any other action which permanently imposes any limitations on the ability of BHOO to control the business or operations of BHOO or the Company, imposes any limitations on BHOO's ownership of operation of BHOO's or the Company's businesses or assets or compelling BHOO to divest or hold separate all or any portions of the businesses or assets of BHOO or the Company. Termination Fee and Expenses The Merger Agreement provides that each party will bear its own expenses in connection with the Merger Agreement and the transactions contemplated thereby if the Merger is not consummated. If either BHOO or the Company terminates the Merger Agreement because (i) of the failure of any condition to the Merger the satisfaction of which is or was within the reasonable control of the Company, (ii) (a) the Company fails to use its good faith best efforts to call and hold a shareholders meeting to vote on the Merger Agreement by July 27, 1998, (b) the Company fails to comply in any material respect with any of the covenants or agreements contained in the Merger Agreement (provided such breach has not been cured with thirty days following receipt by the Company of notice of such breach and is existing at the time of termination of the Merger Agreement), (c) any representation or warranty of the Company contained in the Merger Agreement is not true and correct in all material respects and not cured within thirty days except for any breach which would not have a sufficient adverse effect so as to cause the Company to fail to meet certain financial tests set forth in the Merger Agreement, or (d) there has been any material adverse change or discovery with respect to the Company which causes the Company to fail to meet certain financial tests, (iii) the Board of Directors of the Company (a) withdraws or modifies in a manner adverse to BHOO its recommendation or approval of the Merger Agreement, or (b) recommends to the Company's shareholders any other Acquisition Proposal, or (iv) the Company elects to terminate the Merger Agreement to enter into a definitive acquisition agreement with respect to a Superior Proposal if the Company's directors, after consultation with its outside legal counsel, determine that the failure to do so would be inconsistent with its fiduciary or other legal obligations to its stockholders or creditors (each a "Termination Payment Event"), the Company must pay to BHOO as a result of such termination a fee in the amount of $500,000. If BHOO or the Company terminates the Merger Agreement for any reason other than a Termination Payment Event and the Company consummates an acquisition transaction within one year of the date of the Merger Agreement, the Company must pay to BHOO a fee in the amount of $500,000, except that if the Merger Agreement is terminated by BHOO because of a failure of a condition the satisfaction of which was not within the Company's reasonable control and the Company consummates an acquisition transaction other than with Halliburton, then the foregoing termination fee will be (i) reduced to $250,000 if such acquisition transaction was for equivalent consideration no more than $1 million less than the aggregate Merger Consideration or (ii) eliminated if such acquisition transaction was for equivalent consideration more than $1 million less than the aggregate Merger Consideration. Amendment; Waiver The Merger Agreement provides that it may be amended at any time before or after approval of the Merger Agreement by the Company's shareholders, but after any such shareholder approval no amendment may be made which by law requires further approval by the Company's shareholders without such further shareholder approval. In addition, the parties to the extent legally allowed may waive any inaccuracies in the representations and warranties and waive compliance with any of the agreements or conditions contained in the Merger Agreement. Payments to Dissenting Shareholders For a discussion of dissenting shareholders' rights with respect to the Merger Agreement, see "Dissenters' Rights." ACCOUNTING TREATMENT It is anticipated that the Merger will be accounted for and treated by Sub as a purchase business combination transaction. Accordingly, the assets and liabilities of the Company will be recorded at their fair values as of the Effective Time. CERTAIN FEDERAL INCOME TAX CONSEQUENCES The following discussion summarizes certain federal income tax considerations resulting from the Merger. It is a summary of existing law and proposed Treasury Regulations only, and it is not intended as a substitute for careful tax planning. No rulings will be applied for from the Internal Revenue Service ("IRS") with respect to any of the federal income tax consequences discussed herein, and thus there can be no assurance that the IRS will agree with the conclusions set forth below. Subsequent proposed, temporary or final Treasury Regulations may adopt different positions. Moreover, the legal authorities on which the discussion is based may be changed at any time. Any such changes may be retroactively applied and could modify the federal income tax consequences that result from the Merger. The federal income tax consequences to any particular shareholder may be affected by matters not discussed below. For example, certain types of holders (including holders who acquired shares of Common Stock pursuant to the exercise of options or otherwise as compensation, holders who may be subject to the alternative minimum tax, individuals who are not citizens or residents of the United States, foreign corporations, insurance companies, tax-exempt organizations and regulated investment companies) may be subject to special rules not addressed herein. THE DISCUSSION SET FORTH BELOW IS INCLUDED FOR GENERAL INFORMATION ONLY. SHAREHOLDERS SHOULD CONSULT WITH THEIR TAX ADVISORS TO DETERMINE THE PARTICULAR TAX CONSEQUENCES RESULTING FROM THE MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL AND FOREIGN AND OTHER TAX LAWS. The conversion of the Common Stock into the right to receive cash consideration in the Merger will be a taxable transaction for federal income tax purposes and may also be a taxable transaction for state, local or other tax purposes. With respect to the Merger Consideration, a holder of shares of Common Stock will recognize gain or loss at the Effective Time equal to the difference between (i) the sum of the amount of cash consideration to be received and (ii) such shareholder's tax basis in the Common Stock. A shareholder who exercises dissenters' rights will recognize gain or loss equal to the difference between (i) the amount of cash received pursuant to such exercise of dissenters' rights and (ii) such shareholder's tax basis in the Common Stock. Recognized gain or loss will be capital gain or loss, assuming the shares of Common Stock are held as a capital asset, and will be long-term capital gain or loss if such shares of Common Stock are held for more than eighteen months, mid-term capital gain or loss if such shares of Common Stock are held more than one year but less than eighteen months, and short-term capital gain or loss if such shares of Common Stock are held for one year or less. Such gain or loss must be calculated separately for each block of Shares of Common Stock (e.g. shares acquired at the same price in a single transaction) held by the holder. Backup Withholding and Reporting Requirements. Backup withholding at the rate of 31% may apply in certain circumstances with respect to dividends paid on, and proceeds from the taxable sale, exchange or other disposition of, the Company's Common Stock, unless the shareholder (i) comes within certain exempt categories and, when required, demonstrates this fact or (ii) provides a correct taxpayer identification number and otherwise complies with applicable requirements of the backup withholding rules. A shareholder who does not provide the Company with his or her correct taxpayer identification number may be subject to penalties imposed by the IRS. Any amount withheld under these rules will be creditable against the shareholder's federal income tax liability. The Company will report to their shareholders and the IRS the amount of "reportable payments" and any amounts withheld with respect to the Company's Common Stock during each calendar year. THE FOREGOING DISCUSSION OF MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES, IS FOR GENERAL INFORMATION PURPOSES ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, EACH SHAREHOLDER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF SATE, LOCAL AND FOREIGN TAX LAWS, AND OF PROPOSED CHANGES IN APPLICABLE TAX LAWS. DESCRIPTION OF SCIENTIFIC SOFTWARE-INTERCOMP, INC. BUSINESS The Company develops and markets software for the development and production of oil and gas wells 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. 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. 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 LIC effective May 1, 1998 as discussed in Note 10 of the Notes to the Annual Consolidated Financial Statements contained herein. Prior to the sale, the Company's Pipeline Simulation business marketed 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 included implementation of real time system projects, leak sensitivity analysis and design studies, operator training and product training courses, real time system tuning and optimization and expert witness testimony. The 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 were tightly linked. Consulting services in that Business included the integration of the Company's off-the-shelf software and sometimes involved 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 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 Company reduced its emphasis on making sales to new customers in widely dispersed international markets and in marketplaces with widely diverging computing platform environments. The Company focused on high quality performance in serving existing customers in order to achieve an adequate rate of return in future periods. Cost reductions were carried out, reducing staff and reducing development expenditures by comparison to 1995 and earlier years. 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. 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 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 LIC effective May 1, 1998 as discussed in Note 10 of the Notes to the Annual Consolidated Financial Statements. Prior to the sale, the Company's Pipeline Simulation business marketed 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 included 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. 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 the first quarter of 1998. During the years ended December 31, 1997, 1996 and 1995, the Company spent $3.4 million, $2.9 million and $5.5 million, respectively, for development of new products and the improvement and enhancement of existing products. Marketing, Sales and Customer Support Marketing Strategy The Company's marketing strategy is to create customer awareness of existing and new products and to publicize its technical expertise through participation at technical meetings and conferences, publication of scientific papers, presentation of technical proposals to existing and potential customers, and sponsorship of product focus groups. The Company continually surveys the market and analyzes the products and services offered by the Company and its competitors in order to identify new developments, market trends and changing preferences and requirements of the market place. The Company will develop marketing plans specifically tailored for its products that identify the appropriate distribution channels to reach the target market or market segment and will permit the effective promotion of the products. The Company supports its customers by providing complete consulting, technical and training services by experts in computer systems and the various technical applications disciplines for all product areas. Sales Staff, Locations and Customer Support The Company sells its products, consulting and other services on a worldwide basis primarily through its direct sales force. Since sales of the Company's products require technical interaction with customers, members of the sales force generally are technically qualified as well as having significant sales and marketing experience. In addition, sales and marketing personnel are actively supported by technical personnel and senior management of the Company. Sales/support personnel are located in each of the Company's offices in Denver, Houston, Calgary, London, and Beijing, People's Republic of China. Local sales agents are utilized principally in countries in which local representation is necessary or appropriate. The Company markets certain of its products through local agents in certain foreign countries. The Company provides installation and product training, on-site consulting and 24-hour telephone availability of systems and technical experts as part of its customer support services. Backlog The Company's backlog at December 31, 1997, 1996 and 1995, was $4.2 million, $6.7 million and $9.5 million, respectively, of which 76% of the 1997 amount is expected to be earned by December 31, 1998. Approximately 19% of year-end backlog for 1997 relates to Pipeline Simulation projects that were transferred with the sale of the Pipeline Simulation assets on May 1, 1998 as discussed in Note 10 of the Notes to the Annual 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; 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 and 1995:
1997 1996 1995 ---- ---- ---- (In thousands) United States. . . . . . . $ 3,536 $ 4,239 $ 6,542 Foreign: Far East. . . . . . . . . 2,415 3,849 4,191 Middle East . . . . . . . 682 912 1,265 Canada. . . . . . . . . . 1,142 880 924 Europe. . . . . . . . . . 2,559 3,548 4,476 Central and South America 1,693 2,861 2,299 Africa. . . . . . . . . . 88 2,318 1,755 Other . . . . . . . . . . 277 397 0 ------- ------- ------- Total Foreign. . . . . . . 8,856 14,765 14,910 ------- ------- ------- Total Revenue. . . . . . . $12,392 $19,004 $21,452 ======= ======= =======
Revenue derived from foreign sources amounted to 71%, 78% and 70% of total revenues for 1997, 1996 and 1995, respectively. Foreign revenue is subject to a number of factors such as political instability, changes in protective tariffs, tax policies, and export-import controls. See Note 8 of the Notes to the Annual 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 and 1995:
1997 1996 1995 ---- ---- ---- Exploration and Production Consulting and training . 46% 55% 50% Licenses and Maintenance. 32% 22% 26% Other . . . . . . . . . . 2% 1% 2% ---- ---- ---- Total . . . . . . . . . 80% 78% 78% Pipeline Simulation Consulting and training . 8% 13% 13% Licenses and Maintenance. 11% 9% 8% Other . . . . . . . . . . 1% *% 1% ---- ---- ---- Total . . . . . . . . . 20% 22% 22% ---- ---- ---- Other. . . . . . . . . . . *% *% *% Total . . . . . . . . . 100% 100% 100% ==== ==== ====
*Less than 1%. During 1997 and 1995, there was no single customer that accounted for 10% or more of the Company's revenue and the loss of which would have a material adverse effect on the Company's business. During 1996, the Company derived $2.3 million, or 12% of its consolidated revenue from the National Nigerian Petroleum Corporation. Proprietary Rights The Company has protected its proprietary computer software by restricting access to the underlying source code through technical means and by requiring its customers to enter into licensing arrangements that are protective of the Company's intellectual property rights in such software. For enforcement of its rights in the software, the Company relies upon laws relating to trade secrets and the misappropriation of confidential business information, as well as unfair competition laws, which are generally recognized in both state and international judicial proceedings. Additionally, the Company obtains federal and international protection of its computer software through federal copyright and the international copyright protection afforded by the Berne Convention with reciprocal copyright protection in over 75 countries. To date, the Company has not sought to patent any of its computer software. While the Company does not rule out obtaining patent protection for computer software at some future time, the present procedure for obtaining patent protection would require the Company to secure a patent in the United States and all foreign countries where the software might be utilized, even though the patentability of software in some foreign countries remains questionable and in the process of patenting the software in the United States the Company would be required to fully disclose the source code to the public through its patent application. In addition, the Company requires all employees and consultants who have access to its proprietary information and software to execute confidentiality agreements. Employees As of December 31, 1997, the Company employed 88 persons full-time in all locations. As of May 31, 1998, the Company had 51 full-time employees, the reduction reflecting the sale of the Pipeline Simulation business on May 1, 1998 and attrition among the remaining employees. The Company also engages technical consultants as required to carry out project work. PROPERTIES All of the Company's operations are conducted in leased space as follows:
Approximate Current Location Lease Expiration Sq. Ft. Annual Rent - ------------------------ ---------------- ------- ------------ 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
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. 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 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. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The Company develops and markets software for the development and of oil and gas wells and provides associated inter-disciplinary technical support services, consulting and training. 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 contained herein. 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 the Annual Consolidated Financial Statements, 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. The Company has entered into a merger agreement pursuant to which the Company would be acquired and merged into an indirect wholly owned subsidiary of Baker Hughes, excluding the assets of the Company's Pipeline Simulation Business which were sold to LIC on May 1, 1998 as discussed below. The acquisition of the Company by Baker Hughes is subject to customary conditions, as well as the approval by the Company's shareholders. It is currently expected that the closing of the acquisition will occur in the third quarter of 1998. The Company recognizes software license revenue on delivery provided that a legally binding licensing agreement containing all material terms has been executed, there are no remaining significant obligations and that collection of the resulting receivable is probable. In a contract where the remaining obligations are insignificant such as installation, training and testing, the allocable revenue is deferred and recognized upon completion of performance. The Company does not recognize any software revenue until all significant vendor obligations are met. Software maintenance revenue is recognized on a straight-line basis over the term of the contract. Certain combined software and service contracts are accounted for using the percentage of completion method with contract revenue recognized based on: (a) value-added output measures of progress for the software portion of the contract after meeting certain specified contractual criteria, and having used the installed software in completing specifications for the engineering services on the project, which have been accepted by the client, and (b) input measures of work performed on an hours-to-hours basis for the services portion of the contract. Fixed-price contract revenue is recognized using the percentage of completion method, calculated on the ratio of labor hours incurred to total projected labor hours. Losses on contracts accounted for using the percentage of completion method are recognized at the time they are identified. See Note 3 of Notes to Consolidated Financial Statements. 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 its financial statements for the years ended December 31, 1995, 1994 and 1993. The Company's audited restated financial statements for the year ended December 31, 1995 are presented elsewhere herein. See Note 2 of the Notes to the Annual Consolidated Financial Statements for a further discussion of the restatement adjustments to the 1995 financial statements, including a table presenting certain amounts as restated compared to the corresponding amounts as originally reported. Such restatement also reflects for comparability purposes the disposition by the Company of the Kinesix division effective September 3, 1996. See Note 11 of the Notes to the Annual Consolidated Financial Statements. The Company's audited restated Company's financial statements for the years ended December 31, 1994 and 1993, along with corresponding financial disclosures, have been filed with the SEC as an amendment to the Company's 1997 Form 10-K. Including the restatement of revenues from continuing operations to reclassify in loss from discontinued operations the $2.0 million in 1995 revenues attributable to the Kinesix Division, total revenues for 1995 have been reduced from the amount previously reported by $2.6 million, from $24.1 million to $21.5 million. In addition, the 1995 restatement resulted in a reduction of the net loss from the amount previously reported by $27,000, from $24,924,000 to $24,897,000. FINANCIAL POSITION AND FINANCING AGREEMENTS At December 31, 1997, the Company's working capital ratio was .96 to 1, based on current assets of $5.9 million and current liabilities of $6.2 million. The Company's working capital was 1.27 to 1 at December 31, 1996 based on current assets of $10.8 million and current liabilities of $8.5 million. At December 31, 1995, the Company's working capital was .77 to 1, based on current assets of $10.5 million and current liabilities of $13.6 million. The Company's working capital ratio at March 31, 1998 was .85 to 1.0, based on current assets of $4.8 million and current liabilities of $5.7 million. The Company has obtained the following financing and restructuring of convertible debentures and bank revolving line of credit: In April 1996 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 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. 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: i. Extend the maturity date to November 30, 1997, ii. 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 iii. 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:
December 31, 1997 March 31, 1998 ------------------ --------------- Revolving credit facility limit $ 650,000 $ 650,000 Amounts outstanding: Short-term cash borrowings. . 382,000 379,856 Letters of credit . . . . . . 257,000 267,537 639,000 647,393 ------------------ --------------- Credit available. . . . . . . . $ 11,000 $ 2,607 ================== ===============
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 and March 31, 1998, the Company was in violation of identical financial covenants with respect to its notes payable to Bank One, Lindner and Renaissance, for which the Company has received waivers from Lindner and Renaissance for the reporting period. The covenants violated require that the Company's tangible net worth, as it and other covenant terms are defined in the covenants, exceed $(3 million); its net liabilities to net worth ratio not exceed 3 to 1; its current ratio exceed 1 to 1; and that the Company has positive annual cash flow at the end of the most recent fiscal year. As of 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 March 31, 1998, the Company's tangible net worth, net liabilities to net worth ratio, current ratio, and annual cash flow, as defined under the covenants, were approximately $(6 million), 15 to 1, .85 to 1 and $(.5 million), respectively. As of December 31, 1997 and March 31, 1998, the Company continues to classify the notes payable to Lindner and Renaissance as long-term obligations since both Lindner and Renaissance have waived the financial covenant violations for the reporting period and indicated that they would not require repayment of the debt on demand. The Company's note payable to Bank One is classified as a short-term liability as of December 31, 1997 and March 31, 1998 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 the Annual Consolidated Financial Statements if the pending sale of the Company to Baker Hughes 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. RESULTS OF OPERATIONS Revenue The following table sets forth revenues by business line for 1997, 1996 and 1995 (in thousands):
1997 1996 1995 ------- ------- ------- (Restated) E&P Consulting . . . $ 5,491 $ 9,766 $10,091 E&P Technology . . . 4,436 4,935 6,796 Pipeline Simulation. 2,465 4,303 4,565 Total Revenue. . . . $12,392 $19,004 $21,452 ======= ======= =======
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 by the Company. (See the discussion under the "Recovery of Accounts Receivables" caption below.) Revenue in 1997 declined as a result of the decrease in the number of billable personnel caused by personnel attrition resulting from the competitive market for experienced personnel. During the year the Company initiated steps to replace the personnel who had left the Company. Revenues in E&P Technology decreased 10% to $4.4 million in 1997 compared to $4.9 million in 1996. The Company introduced new products and product upgrades to existing software in 1997, but increasing competition and high investment by the Company's two principal competitors limited sales. Revenues in Pipeline Simulation, the assets of which were sold to LIC on May 1, 1998 as discussed under the "Sale of the Assets of the Pipeline Business Line" caption, 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 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 by the Company. (See the discussion under the "Recovery of Accounts Receivables" caption below.) Revenues in E&P Technology decreased 28% to $4.9 million in 1996 compared to $6.8 million in 1995. The decrease was primarily attributable to the significant non-recurring sale in 1995 of 30 copies of the Company's Petroleum WorkBench software to a major U.S. oil and gas company. Revenues in Pipeline Simulation decreased 4% to $4.3 million in 1996 compared to $4.5 million in 1995, with sales of the Company's upgraded software product released in March 1996, TGNET Windows, offsetting a reduction in project revenues. The Company's number of days' revenues outstanding in accounts receivable (DRO) has historically been relatively high due to the nature and terms of many of the Company's revenue contracts and due to the relatively slow-paying nature of several of the foreign entities with which the Company has done business. The Company has taken measures in this regard to improve contractual payment terms and to improve business processes to reduce the DRO. As a result, DRO has decreased from 1995 to 1997. Comparison of First Quarter 1998 to First Quarter 1997 The following table sets forth revenues by business line for the first quarter of 1998 and 1997:
First Quarter -------------- 1998 1997 Pct. Change -------------- ------ ------------ (In thousands) E & P Consulting . . $ 1,207 $1,822 (34%) E & P Technology . . 828 1,215 (31%) Pipeline Simulation. 672 597 13% -------------- ------ ------------ Total Revenue. . . . $ 2,707 $3,634 (26%) ============== ====== ============
First quarter 1998 total revenue decreased 26% to $2.7 million compared to $3.6 million in 1997. Net loss was $724,000, or $(.08) per share in the first quarter of 1998, compared to a net income of $9,000, or $.00 per share in the first quarter of 1997. The E & P Consulting first quarter 1998 revenue decrease was partly caused by a reduction in the number of billable employees due to market competition for experienced personnel. Lower backlog, causing inefficiency, also reduced revenues. E & P Technology first quarter 1998 revenue decrease was caused by lower unit sales of the Petroleum WorkBench. Pipeline Simulation Business first quarter 1998 revenue was slightly ahead of the 1997 average quarterly revenue, helped by the release of the Company's new version of its TGNET product. The Pipeline Simulation assets were purchased by LIC on May 1, 1998. The purchase was accounted for as a disposal of assets in accordance with Accounting Interpretations of Accounting Principal Board Opinion 30 (AIN-APB30). Foreign Revenue Revenue derived from foreign sources during 1997, 1996 and and 1995 is set forth below:
Revenue From Foreign Percentage of Sources Total Revenue --------------- -------------- (In thousands) 1997. . . . . . $ 8,856 71% 1996. . . . . . $ 14,765 78% 1995 (Restated) $ 14,910 70%
Management believes that foreign revenue will continue to be an important factor in the Company's business. See "Business Geographic and Business Line Data" for information regarding the particular geographic areas in which the Company generated foreign source revenue during these periods. Levels of export revenues are subject to a number of factors, including market changes, competitive pressures, political instability, changes in protective tariffs, tax policies and export-import controls. Comparison of Foreign Revenues for 1997, 1996 and 1995 Foreign revenues have continued to grow as a percentage of total revenue since the early 1990's when oil and gas companies started to spend a larger part of their budget in non-USA exploration and development. The Company expects that foreign revenues will vary on an annual basis as significant projects are started and completed, but will probably now remain in the order of 70% to 80% of total revenues. In 1995, the Company's foreign operations experienced an aggregate loss from operations of $9.8 million, which was primarily attributable to the portion of the 1995 write-down of capitalized software and bad debt provision allocable to foreign operations. See Note 13 of the Notes to the Annual Consolidated Financial Statements U. S. export revenues as presented in Note 8 of the Notes to the Annual Consolidated Financial Statements were generated primarily through non-recurring software sales in the Pipeline Simulation and E&P Technology business lines and through large Pipeline Simulation consulting projects. The nature of these export revenues can result in significant variations from year to year. In the Far East, U.S. export revenues have predominantly been Pipeline projects, with a major revenue milestone on a significant project occurring in 1996. Thus, revenue is high ($1.5 million) in 1996 by comparison to 1995 and 1997. Central/South America projects have generally been E&P Consulting projects. As financial performance on these projects has often been unsatisfactory, the Company has de-emphasized this market. Accordingly, revenues in 1995 and 1996 have declined to $1.7 million in 1997. U.S. export revenues in Europe, which result primarily from Pipeline projects, decreased in 1997 as the Company focused its Pipeline resources in other parts of the world. U.S. export revenues in Canada are generally small, non-recurring Pipeline projects and thus revenues are quite variable. In addition, the Company does not cover the Canada market with permanent sales staff. Backlog Backlog at December 31, 1997, 1996 and 1995 was $4.2 million, $6.7 million and $9.5 million, respectively. 76% of the 1997 amount 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 revenue. Backlog amounts vary depending on the timing of major sales, but approximate to between 3 and 5 months of revenue. Backlog at March 31, 1998 was $3.5 million, down from the backlog at December 31, 1997 backlog of $4.2 million, partly due to difficulties experienced by the Company in the marketplace caused by ongoing uncertainty concerning its future. Costs of Consulting and Training and Costs of Licenses and Maintenance 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.
Costs as % of Revenue ---------------------- Net Change Net Change 1997 1996 1995 ---------------------- ----------- ----- 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)%
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 First Quarter 1998 to First Quarter 1997 Comparative percentages of costs to revenue by business line for the first quarter of 1998 and 1997 are set forth in the following table:
First Quarter -------------- 1998 1997 Net Change -------------- ----- ----------- Cost of Consulting & Training 108% 72% (36%) Cost of Licenses. . . . . . . 92% 86% (6%) Cost of Maintenance . . . . . 47% 35% (12%) Cost of Other Revenue . . . . 6% 35% 29%
Costs of consulting and training as a percent of revenue increased in the first quarter of 1998 over the first quarter of 1997 due to lower revenue in relation to fixed costs. Costs of licenses and maintenance as a percentage of revenue increased in the first quarter of 1998 over the first quarter of 1997 due to the decline in revenue. 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 the Annual Consolidated Financial Statements. Comparison of First Quarter 1998 to First Quarter 1997 Selling, General and Administrative expense decreased $313,000 or 28% to $810,000 in the first quarter of 1998 from $1.123 million in the first quarter of 1997, as reductions in overhead, announced in December, 1997 impacted costs. 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 was reported as a reduction of expenses in the statement of operations under the line item "Recovery of accounts receivable." The remaining amount of $2.3 million was reported as revenue in 1996. See the discussion above under the "Revenue" caption. Software Research and Development The following table summarizes total costs of development and enhancement of the Company's software products for 1997, 1996 and 1995. The Company's software development and enhancement costs are accounted for in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86.
1997 1996 1995 ------ ------ ------- (In thousands) Software expenditures: Capitalized software costs . . . . . . . $2,483 $1,963 $ 4,766 Costs charged to research and development expense. . . . . . . . . . . 919 890 780 Total software expenditures. . . . . . . $3,402 $2,853 $ 5,546 ====== ====== ======= Software expenses charged to earnings Research and development expense . . . . $ 919 $ 890 $ 780 Amortization of capitalized software . . 2,196 1,894 4,292 Reduction of capitalized software costs. - - 13,926 ------ ------ ------- Total software expenses recognized . . . $3,115 $2,784 18,998 ======
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. Comparison of First Quarter 1998 to First Quarter 1997 The following table summarizes total costs of development and enhancement of the Company's software products for first quarter ended March 31, 1998 and 1997, respectively.
First Quarter -------------- 1998 1997 -------------- ----- K $K Software expenditures Capitalized software costs . . . . . . . . . . $ 372 $ 614 Cost charged directly to operations. . . . . . 100 118 Total software expenditures. . . . . . . . . . $ 472 $ 732 ============== ===== Software expenses charged to earnings Cost charged directly to operations. . . . . . $ 100 $ 118 Amortization of capitalized software . . . . . 495 549 Total software expenses charged to earnings $ 595 $ 667 ============== =====
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 Exchange Act 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. Interest Income (Expense) The following table summarizes the components of interest income (expense) for 1997, 1996 and 1995, and for the first quarter ended March 31, 1998 and 1997, respectively. The capitalized interest was included as a component of the capitalized cost of software development projects in progress in accordance with SFAS No. 34.
First Quarter --------------- 1997 1996 1995 1998 1997 --------------- ------ ------ ------ ------ (In thousands) Interest income. . . . $ 76 $ 34 $ 35 $ 7 $ 27 Interest incurred. . . (657) (522) (606) (123) (117) Interest capitalized . 100 165 109 24 (30) Net interest (expense) $ (481) $(323) $(462) (92) $(120) =============== ====== ====== ====== ======
Foreign Exchange Losses The Company is subject to risks associated with its various transactions in foreign currencies, primarily the British Pound and the Canadian Dollar, but the Company currently does not believe that such risks are material. The Company continually monitors its risks and uses forward rates in the setting of exchange rates in the costing and pricing for significant projects to minimize risk. During 1997, the Company reported a net foreign exchange gain of $13,000. During 1996, the Company reported a net foreign exchange loss of $85,000. During 1995, the Company reported a net foreign exchange gain of $114,000. During the three months ended March 31, 1998, the Company reported a net foreign exchange loss of $36,000 compared to a net foreign exchange gain of $53,000 for the three months ended March 31, 1997. 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 operations 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. The Company recorded a credit to expense of $99,000 in the first quarter of 1997 related to the settlement of the Kinesix Europe Arbitration Award discussed in Note 5 of the Notes to Interim Consolidated Financial Statements. The expense reversal represented the difference between the previously accrued loss contingency amount of $674,000 and the actual settlement payment of $575,000. 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 the Annual 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 Simulation 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 Simulation assets recorded in 1997. 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. STATEMENT OF CASH FLOWS 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 as discussed above under the caption "Recovery of Accounts Receivables." 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 First Quarter 1998 to First Quarter 1997 Cash provided from operations was $323,000 for the three months ended March 31, 1998, compared to $576,000 for the year-ago period. The decline in cash provided from operations is primarily due to lower sales. Cash Flows from Investing Activities Comparison of 1997 to 1996 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. Comparison of 1996 to 1995 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. Comparison of First Quarter 1998 to First Quarter 1997 Cash used in investing activities decreased $292,000 from the first quarter of 1998 to the first quarter of 1997 due to the reduced costs for capital equipment. Total capitalized software for the full year 1998 is projected to be approximately $1.5 million, which the Company plans to fund from internal cash flows. Cash 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 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 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. 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 the Annual Consolidated Financial Statements contained herein. Inflation The Company's results of operations have not been affected by inflation and management does not expect inflation to have a significant effect on its operations in the future. FORWARD-LOOKING INFORMATION From time to time, the Company or its representatives have made or may make forward-looking statements, orally or in writing. This Proxy Statement contains forward-looking statements. 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. 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 this Proxy Statement, there have been no changes in and disagreements with the Company's accountants on matters of accounting and financial disclosure. 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 of the Company's Named Executive Officers, as defined by the rules of the SEC, 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.
Number of Name and Address of Beneficial Owner . . . . . . . . . . . . . . . . . Shares % Beneficial Beneficially Ownership(6) Owned(6) George Steel(1)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . 610,000(7) 6.3% Gordon L. Scheig(1). . . . . . . . . . . . . . . . . . . . . . . . . . 47,036(8) * Peter C. Colonomos, Ph.D.(1)(3). . . . . . . . . . . . . . . . . . . . 2,928(9) * Dag G. Heggelund, Ph.D.(1)(4). . . . . . . . . . . . . . . . . . . . . 42,500(10) * Robert G. Parish, Ph.D.(1)(5). . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . 847,218(15) 8.9% Suite 210-LB 59 Dallas, TX 75206-1857 Vance M. Arnold, Executive Vice President Ryback Management Corporation(16) 7711 Carondelet Avenue, Suite 700 St. Louis, MO 63105. . . . . . . . . . . . . . . . . . . . . . . . . . 3,230,000(17) 30.6% Eric Ryback, President *Amount represents less than one percent.
(1) Named Executive Officer. (2) Member of the Board of Directors. (3) Dr. Colonomos resigned from all positions with the Company in January 1998. (4) Dr. Heggelund resigned from all positions with the Company in February 1998. (5) Dr. Parish's employment with the Company was terminated in April 1998. (6) Applicable Percentage ownership is based on 9,046,804 shares of Common Stock outstanding as of May 6, 1998, together with applicable options or warrants for such stockholder. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of Common Stock issuable upon the exercise of options or warrants presently convertible or exercisable within 60 days of May 6, 1998 are deemed to be beneficially owned by the person holding such options or warrants for the purpose of computing the percentage of ownership of such person but are not treated as outstanding for the purpose of computing the percentage of any other person. (7) Consists of exercisable options to acquire 610,000 shares of Common Stock. (8) Includes exercisable options to acquire 31,000 shares of Common Stock. (9) Dr. Colonomos holds no options to acquire shares of Common Stock. (10) Includes exercisable options to acquire 42,500 shares of Common Stock. (11) Includes exercisable options to acquire 78,500 shares of Common Stock. (12) Includes exercisable options to acquire 20,000 shares of Common Stock. (13) Includes exercisable options to acquire 12,500 shares of Common Stock. (14) Includes exercisable options to acquire 5,000 shares of Common Stock. (15) Includes exercisable warrants to require 450,000 shares of Common Stock. (16) Ryback Management Corporation controls the Lindner Dividend Funds, a senior secured creditor of the Company. (17) Includes exercisable warrants to acquire 1,500,000 shares of Common Stock. In addition, J. Marc Sofia and Barbara J. Cavallo, who are executive officers of the Company not included as Named Executive Officers, beneficially own 81,393 shares and 45,980 shares of Common Stock, respectively, including exercisable options to acquire 74,000 shares and 42,000 shares of Common Stock, respectively, none of which options has an exercise price less than the Merger Consideration of $0.44 per share. Further, Edward F. Frazier, who was an executive officer of the Company during 1997, beneficially owns 11,434 shares of Common Stock, including no exercisable options to acquires shares of Common Stock. PRICE RANGE OF COMMON STOCK AND DIVIDENDS Since July 11, 1995 the Company's Common Stock has traded in the over-the-counter market. The following are high and low closing bid quotations for the Company's Common Stock during the periods indicated, 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.
Quarter Ended Prices ------------- High Low ------ ----- 1998 First Quarter. 51/8 31/4 First Quarter. $ .20 $.125 Second Quarter .42 .20 1997 First Quarter. 51/8 31/4 First Quarter. .9375 .41 Second Quarter .70 .45 Third Quarter. .82 .45 Fourth Quarter .80 .125 1996 First Quarter. 51/8 31/4 First Quarter. 3.75 2.38 Second Quarter 2.88 1.63 Third Quarter. 1.88 .75 Fourth Quarter .94 .23
At May 6, 1998, the Company had approximately 450 stockholders of record. The Company has not paid dividends on its Common Stock since 1981 and does not intend to pay dividends in the foreseeable future. In addition, the payment of dividends is prohibited by the terms of the Company's current revolving credit facility. On March 31, 1998, the last trading day before the announcement by the Company of the execution of the letter agreement with respect to the Merger, the high and low quotations for the Common Stock were $0.18 and $0.17 per share, respectively. On June 30, 1998 (the last practicable date prior to the mailing of this Proxy Statement), the high and low bid quotations of the Common Stock were both $0.39 per share. PAYMENT TO SHAREHOLDERS To receive the consideration to which shareholders will be entitled as a result of the Merger, each shareholder will be required to surrender the certificates evidencing the shares of the Company's Common Stock to the Exchange Agent. Promptly after the Effective Time, the Exchange Agent will mail or make available to each shareholder a notice and letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the share of the Company's Common Stock shall pass, only upon proper delivery of the shares to the Exchange Agent) advising such shareholder of the effectiveness of the Merger and the procedures to be used in effecting the surrender of shares for payment therefor. Promptly after surrender of such shares, the shareholder will receive the Merger Consideration. Shareholders should surrender shares only with a letter of transmittal. PLEASE DO NOT SEND SHARES WITH THE ENCLOSED PROXY. If payment of the Merger Consideration is to be made to a person other than a person in whose name the shares are registered, it shall be a condition of payment that the shares so surrendered shall be properly endorsed or otherwise be in proper form for transfer and that the person requesting such payment shall pay any transfer or other taxes required by reason of the payment to a person other than the registered holder of the shares, or shall establish to the satisfaction of BHOO that such tax either has been paid or is not applicable. Until surrendered and exchanged in accordance with the Merger Agreement, after the Effective Time each share of the Company's Common Stock shall represent only the right to receive the Merger Consideration. At the close of business on the day prior to the date of the Effective Time, the stock transfer books shall be closed and no further transfers shall be made. If thereafter any shares are presented for transfer, such shares shall be canceled and exchanged for the Merger Consideration; provided, however, that from after 180 days following the Effective Time, holders of certificates formerly representing the Company's Common Stock will be entitled to look exclusively to Sub and only as general creditors thereof with respect to the Merger Consideration payable upon surrender of such certificates formerly representing the Company's Common Stock for any amount paid to a public official pursuant to any applicable abandoned property, escheat or similar law. EXPERTS The audited financial statements of the Company included in this Proxy Statement, to the extent and for the periods indicated in their reports, have been audited by Ehrhardt Keefe Steiner & Hottman PC, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing in giving such reports. Representatives of Ehrhardt Keefe Steiner & Hottman PC are expected to be present at the Special Meeting. These representatives will have an opportunity to make statements if they so desire and will be available to respond to appropriate questions. PROPOSALS BY SHAREHOLDERS Shareholder proposals intended to be presented at the 1999 Annual Meeting of Shareholders, in the event that the Merger is not consummated prior thereto, must be submitted in writing, addressed to the Secretary of the Company, 633 17th Street, Suite 1600, Denver, Colorado 80202, and must be received by the Company prior to December 31, 1998. The Company reserves the right to exclude any proposal which does not meet all requirements for inclusion established by the SEC in effect at that time. F-14 FINANCIAL INFORMATION INDEX TO FINANCIAL STATEMENTS INTERIM CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets at March 31, 1998 (Unaudited) and December 31, 1997 F-2 Consolidated Statements of Operations for the Three Months Ended March 31, 1998 and 1997 (Unaudited) F-3 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997 (Unaudited) F-4 Notes to Consolidated Financial Statements (Unaudited) F-5 ANNUAL CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors' Report F-9 Consolidated Balance Sheets at December 31, 1997, 1996 and 1995 (Restated) F-10 Consolidated Statements of Operations for the Years Ended December 31, 1997, 1996 and 1995 (Restated) F-11 Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the Years Ended December 31, 1997, 1996 and 1995 (Restated) F-12 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 (Restated) F-13 Notes to Consolidated Financial Statements F-14 SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
March 31, December 31, ----------- -------------- 1998 1997 ----------- -------------- (Unaudited) - --------------------------------------------------------- ASSETS Current Assets Cash and cash equivalents. . . . . . . . . . . . . . . . $ 615 $ 705 Accounts receivable, net of allowance for doubtful accounts of $861 and $881. . . . . . . . . . . . . . . 1,050 1,678 Work in progress (unbilled revenue). . . . . . . . . . . 1,845 1,707 Pipeline Assets held for sale, net of Provision for impairment of $2,200 (Note 4). . . . . . 756 1,350 Other current assets . . . . . . . . . . . . . . . . . . 561 502 ----------- -------------- Total current assets . . . . . . . . . . . . . . . . . 4,827 5,942 Software, net of accumulated amortization of $37,250 and $36,798. . . . . . . . . . . . . . . . . . 7,211 7,334 Property and Equipment, net of accumulated depreciation and amortization of $4,390 and $4,261. . . . . . . . . 175 248 Other Assets. . . . . . . . . . . . . . . . . . . . . . . 1,388 1,354 ----------- -------------- $ 13,601 $ 14,878 =========== ============== LIABILITIES, REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS' (DEFICIT) Current Liabilities Notes payable. . . . . . . . . . . . . . . . . . . . . . $ 382 $ 382 Accounts payable . . . . . . . . . . . . . . . . . . . . 996 842 Accrued salaries and fringe benefits . . . . . . . . . . 698 729 Accrued lease obligations. . . . . . . . . . . . . . . . 5 5 Deferred maintenance and other revenue . . . . . . . . . 1,792 2,101 Accrued royalties. . . . . . . . . . . . . . . . . . . . 743 698 Accrual for costs to complete a contract . . . . . . . . 47 72 Accrued taxes. . . . . . . . . . . . . . . . . . . . . . 108 153 Other current liabilities. . . . . . . . . . . . . . . . 902 1,207 ----------- -------------- Total current liabilities. . . . . . . . . . . . . . . 5,673 6,189 Accrued Lease Obligations . . . . . . . . . . . . . . . . 55 61 Long-Term Obligations . . . . . . . . . . . . . . . . . . 615 611 Senior Secured Notes Payable. . . . . . . . . . . . . . . 6,500 6,500 Redeemable Preferred Stock Series A Convertible Preferred Stock, $5 par value; 1,200,000 shares authorized, 800,000 shares issued and outstanding. . . . . . . . . . . . . . . . . . . . . . . 4,000 4,000 Commitments and Contingencies (Notes 5 and 6) Stockholders' (Deficit) Common stock, no par value; $.10 stated value; 25,000,000 shares authorized, 9,046,804 and 8,878,000 shares issued and outstanding. . . . . . . . . . . . . 892 888 Paid-in capital. . . . . . . . . . . . . . . . . . . . . 49,491 49,489 Accumulated deficit. . . . . . . . . . . . . . . . . . . (52,906) (52,182) Accumulated other comprehensive income - foreign currency translation adjustment. . . . . . . . (719) (678) Total stockholders' (deficit). . . . . . . . . . . . . (3,242) (2,483) ----------- -------------- $ 13,601 $ 14,878 =========== ==============
The accompanying notes are an integral part of the consolidated financial statements SCIENTIFIC SOFTWARE-INTERCOMP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three months ended March 31, 1998 March 31, 1997 ---------------- ---------------- (Unaudited) (Unaudited) REVENUE Consulting and training . . . . . . . . . . . . . . . $ 1,448 $ 2,041 Licenses. . . . . . . . . . . . . . . . . . . . . . . 566 725 Maintenance . . . . . . . . . . . . . . . . . . . . . 643 803 Other . . . . . . . . . . . . . . . . . . . . . . . . 50 65 2,707 3,634 ---------------- ---------------- COSTS AND EXPENSES Costs of consulting and training. . . . . . . . . . . 1,571 1,473 Costs of licenses including software amortization of $495 and $549. 518 626 Costs of maintenance. . . . . . . . . . . . . . . . . 301 284 Costs of other revenue. . . . . . . . . . . . . . . . 3 23 Selling, general and administrative . . . . . . . . . 810 1,123 Software research and development . . . . . . . . . . 100 118 3,303 3,647 ---------------- ---------------- LOSS FROM OPERATIONS . . . . . . . . . . . . . . . . . (596) (13) OTHER EXPENSE Loss contingency (expense) reversal (Note 6). . . . . - 99 Interest income (expense), net. . . . . . . . . . . . (92) (120) Foreign exchange gains (losses) . . . . . . . . . . . (36) 53 ---------------- ---------------- Income (Loss) Before Income Taxes. . . . . . . . . . . (724) 19 Provision For Income Taxes . . . . . . . . . . . . . . - (10) ---------------- ---------------- Income (Loss) from Continuing Operations . . . . . . . (724) 9 Net Income (Loss). . . . . . . . . . . . . . . . . . . $ (724) $ 9 ================ ================ Weighted Average Number of Common Shares Outstanding . 8,881 7,858 ================ ================ Income (Loss) Per Common Share: Net Income (Loss). . . . . . . . . . . . . . . . . . $ (.08) $ .00 ================ ================
The accompanying notes are an integral part of the consolidated financial statements SCIENTIFIC SOFTWARE-INTERCOMP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Three months ended March 31, 1998 March 31, 1997 -------------- -------------- (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) from continuing operations . . $ (724) $ 9 Adjustments: Depreciation and amortization. . . . . . . . . 568 688 Provision for losses on accounts receivable. . (20) (76) Loss contingency (reversal)(Note 6). . . . . . - (99) Changes in operating assets and liabilities: Decrease in accounts receivable and work in progress . . . . . . . . . . . . 1,104 1,826 Increase in other assets . . . . . . . . . . . (93) (213) Decrease in accounts payable and accrued expenses . . . . . . . . . . . . . . (197) (1,220) Decrease in accrued lease obligations. . . . . (6) (104) Decrease in deferred revenue . . . . . . . . . (309) (244) ------- -------- Net cash provided by continuing operations . 323 567 CASH FLOWS FROM INVESTING ACTIVITIES Capitalized software costs . . . . . . . . . . . (372) (614) Purchases of equipment . . . . . . . . . . . . . - (50) Net cash utilized in investing activities. . (372) (664) ------- -------- Effect of exchange rates on cash. . . . . . . . . (41) (39) ------- -------- Net decrease in cash and cash equivalents . . . . (90) (136) Cash and cash equivalents at beginning of period. 705 1,870 ------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD. . . . $ 615 $ 1,734 ======= ======== SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the period for: Interest . . . . . . . . . . . . . . . . . . . . $ 116 $ 117 Foreign taxes. . . . . . . . . . . . . . . . . . 176 23
The accompanying notes are an integral part of the consolidated financial statements. SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - UNAUDITED INTERIM INFORMATION The consolidated financial statements for the interim periods presented herein include the accounts of Scientific Software-Intercomp, Inc. ("the Company") and its wholly-owned subsidiaries, and reflect all adjustments (which except as otherwise disclosed herein consist solely of normal recurring adjustments) which, in the opinion of the Company, are necessary to fairly present the results of operations, financial position, and cash flows, as of the dates and for the periods presented. Operating results for the three month period ended March 31, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. The Notes to the Annual Consolidated Financial Statements contained herein, which indicate that the financial statements of the Company have been prepared on a going concern basis, should be read in conjunction with these interim consolidated financial statements. On 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 (E&P) Consulting and Technology (reservoir software) businesses, subject to certain conditions. The sale does not include the Company's Pipeline Simulation Business assets which were purchased separately by LICENERGY on May 1, 1998 for $1.5 million in cash and the assumption of $145,000 of current liabilities. The agreement 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 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 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. NOTE 2 - BANK CREDIT AGREEMENT United States Lines of Credit. Effective April 16, 1997 the Company and Bank One agreed to extend the revolving credit facility through October 15, 1997. Due to the Company's improved cash position and decreased need for credit at that time, the revolving credit facility was decreased from $1.5 million to $9 million. The collateral for the line is the Company's accounts receivable from non-U.S. domiciled customers to the extent necessary to collateralize the line. All receivables not necessary for the line and substantially all other assets except those of the Canadian subsidiary are collateral for The Lindner Dividend Funds ("Lindner") and Renaissance Capital Partners II, Ltd. ("Renaissance") senior secured notes. On October 30, 1997, the Company and Bank One agreed to change the terms of the April 16, 1997 agreement to: 1. Extend the maturity date to November 30, 1997; 2. Change the interest rate from the bank's prime rate of interest to the bank's prime rate of interest plus one (1) percentage point; and 3. Limit the principal amount of the line of the revolving credit facility to $650,000. On November 30, 1997, the Company and Bank One agreed to extend the maturity date to August 15, 1998 and to reduce the principal amount of the line of the revolving credit facility to $230,000 after March 15, 1998. The credit line of $230,000 would remain available only to secure certain standby letters of credit. Subsequently, Bank One agreed that the revolving credit facility could remain at $650,000 in consideration of the Company's agreement to repay the principal outstanding balance on May 1, 1998. On May 1, 1998, the Company paid off the loan balance of $382,000 with interest. The credit facility is supported by a guarantee from Exim Bank which reduces down as the credit line reduces and expires in full on August 15, 1998. The Company pays Exim Bank a fee equal to 1.5% of the guarantee and is required to purchase credit insurance for foreign receivables at a cost of $.38 per hundred dollars of the amount of the insured receivables. As of March 31, 1998 the balances of the revolving credit facility, amounts of short-term cash borrowings and letters of credit outstanding, and credit available under the revolving credit facility were as follows: Revolving credit facility limit (limited by insurance coverage and amounts of $ 650,000 Qualified receivables) Amounts outstanding: Short-term cash borrowings 379,856 Letters of credit 267,537 ------- Credit available $ 2,607 = ===== At March 31, 1998, the Company was in violation of identical financial covenants with respect to its notes payable to Bank One, Lindner and Renaissance, for which the Company has received waivers from Lindner and Renaissance for the reporting period. The covenants violated require that the Company's tangible net worth, as it and other covenant terms are defined in the covenants, exceed $(3 million); its net liabilities to net worth ratio not exceed 3 to 1; its current ratio exceed 1 to 1; and that the Company has positive annual cash flow at the end of the most recent fiscal year. As of March 31, 1998, the Company's tangible net worth, net liabilities to net worth ratio, current ratio, and annual cash flow, as defined under the covenants, were approximately $(6 million), 15 to 1, .85 to 1 and $(.5 million), respectively. As of March 31, 1998, the Company continues to classify the notes payable to Lindner and Renaissance as long-term obligations since both Lindner and Renaissance have waived the financial covenant violations for the reporting period and indicated that they would not require repayment of the debt on demand. The Company's note payable to Bank One is classified as a short-term liability as of March 31, 1998 and was repaid in full on May 1, 1998. In addition, the Company has not made its interest payment due October, 1997 on the Lindner and Renaissance debt. Lindner and Renaissance have taken no action with respect to such defaults, and such defaults will be remedied by the agreements of Lindner and Renaissance discussed in Note 1 above if the pending sale of the Company to BHOO discussed in Note 1 is completed. NOTE 3 - INCOME TAXES The Company's income tax expense is primarily due to foreign taxes withheld at the source on sales in some foreign countries. Consequently, these taxes cause the Company's effective tax rate to vary from the Federal statutory rate. The Company incurred a current tax provision from foreign taxes and for that portion of the U.S. profit reported for this period that cannot be offset by the Company's loss carry forward. NOTE 4 - SALE OF THE ASSETS OF THE PIPELINE BUSINESS LINE During 1997, the Company's management and Board of Directors 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. On March 2, 1998, the Company announced the signing of a definitive binding agreement to sell the assets of the Pipeline Simulation business line to LIC. The transaction which closed on May 1, 1998 resulted in consideration to the Company of $1.5 million in cash and the assumption by LIC of current obligations of $145,000. Based on fair market value estimates, the Company recorded a provision of $2.2 million to write down the carrying amounts of the Pipeline assets to estimated fair value less cost to sell. As of March 31, 1998, the net carrying value of the Pipeline assets held for sale is $756,000, which represents a $594,000 decrease in the assets value from December 31, 1997 due to a decline in accounts receivables and work-in-progress (unbilled receivables). The decrease in accounts receivables and work-in-progress from fourth quarter 1997 is due to decline in product sales and consulting revenue on projects as a result of staff attrition. NOTE 5 - COMMITMENTS The Company has extended the Houston office lease which expired April 30, 1998 to July 31, 1998. NOTE 6 - CONTINGENCIES To the knowledge of management, there are no significant claims pending or threatened against the Company or any of its subsidiaries. The Wolf Class Action Lawsuit settlement was completed on May 23, 1997. The ---------------------------- Kinesix Europe Arbitration was settled in February, 1997. The Securities and ------------------------- --------------- Exchange Commission Investigation, as it pertains to the Company, was completed -------------------------------- on September 11, 1997. The Company has fully responded to the Securities and -------------- Exchange Commission Comment Letters. There follows 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 10b-5 promulgated thereunder in issuing financial reports for the first three quarters of the Company's 1994 fiscal year which failed to comply with generally accepted accounting principles with respect to revenues recognized from the Company's contracts with value added resellers. The Plaintiff sought to have the Court determine that the lawsuit constituted a proper class action on behalf of all persons who purchased stock of the Company during the period from May 20, 1994 through July 10, 1995, with certain exclusions, and the Company did not contest whether the claim constituted a proper class action. The Defendants and the Plaintiff initially reached agreement for settlement of the claim involving the payment of $1.1 million in cash, to be provided by the Company's liability insurer in a court-supervised escrow account, and the Company's issuance of warrants to purchase common stock exercisable at the market price of the stock at the time of completion of the settlement, with the number of warrants to be such that their aggregate value was $900K. The Company recorded a $900,000 loss contingency in the second quarter of 1996 relating to the proposed agreement for settlement of the Marshall Wolf claim in accordance with Question 1 of SAB Topic 5:7. Subsequently, the settlement agreement was modified to eliminate the warrants and to provide for an additional $525K in cash, to be paid by the Company. The Company concluded that the foregoing settlement was in its best interests in view of the uncertainties of litigation, the substantial costs of defending the claim and the material amount of management time which would be required for such defense. On May 23, 1997, the final approval of the fairness of the settlement was granted by the Court. The Company paid $525K in cash and reversed a net $315K of the loss contingency reserve of $900K after applying additional incurred legal costs. ARBITRATION NUMBER 70T 181 0038 96 D; KINESIX, A DIVISION OF SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND KINESIX (EUROPE) LTD., AN ENGLISH COMPANY - HOUSTON, TEXAS. The Company, through Kinesix, a Division of the Company, entered into a Territory Distributor Agreement with Kinesix (Europe) Ltd. ("KEL"), an unaffiliated entity located in London, U.K. The Distributor Agreement required under most circumstances a decision from the American Arbitration Association ("AAA") before its termination could be effective. On March 4, 1996 the Company commenced arbitration seeking declaration of termination of the Distributor Agreement and money due the Company for receivables outstanding as of December 31, 1995 of $296,000 for which the Company had fully provided. Thereafter, KEL in writing advised its customer base that it had ceased to trade in Kinesix products. As a result of this action by KEL and pursuant to the Distributor Agreement, the Company had declared the Distributor Agreement terminated without the requirement of arbitration. In the interim, on April 1, 1996 KEL filed an answer and counterclaim with the AAA and asserted damages that exceed $1 million without substantiation. On October 1, 1996, a panel of the American Arbitration Association made an award in favor of KEL against the Company in the aggregate amount of $674,000. Such award was totally unanticipated by the Company and its counsel. On October 21, 1996, the Company filed a petition in a Texas state court seeking to have the award vacated on the grounds that the arbitrators erroneously denied the Company's request for a postponement of the arbitration hearing which prejudiced the Company in view of the claimant's failure to meet its obligation to disclose material testimony to be given at the hearing and that the arbitrators made a gross mistake of law in failing to apply a release and waiver given by the claimant following its knowledge of the complained of acts of the Company. The award in favor of KEL was settled in February 1997 for $575,000. The Company recognized an expense for the amount of the $674,000 award, which has been included in the loss from operation of the discounted Kinesix Division for the year ended December 31, 1996, and included a liability of $674,000 in the balance sheet as part of other current liabilities. The Company recorded a credit to expense of $99,000 in first quarter 1997, representing the difference between $575,000 and the previously accrued amount of $674,000. SECURITIES AND EXCHANGE COMMISSION INVESTIGATION. On September 11, 1997, the Company resolved the investigation by the Securities and Exchange Commission ("SEC") of the Company's disclosures and financial statements for the years ended December 31, 1993, 1994 and 1995. Without admitting or denying any of the allegations of the SEC, the Company settled the matter by consenting to the entry of a permanent injunction prohibiting future violations by the Company of Section 17(a) of the Securities Act of 1933, and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder and to an order to restate the Company's financial statements for the years ended December 31, 1993, 1994 and 1995. The SEC Staff has advised the Company that, with the entry of the permanent injunction, the investigation into this matter as to the Company has been concluded. SECURITIES AND EXCHANGE COMMISSION COMMENT LETTERS. The Company has received extensive comment letters from the Staff of the SEC on its Forms 10-K for the years ended December 31, 1995 and 1997 and on its Forms 10-Q for the quarters ended March 31, 1996, June 30, 1996 and March 31, 1998 and the financial statements included therein. The Company believes that it completed in June 1998 the process of providing responses to such SEC comment letters. With the filing with the SEC of the audited restated 1994 and 1993 financial statements as discussed in Note 2 of the Notes to the Annual Consolidated Financial Statements, the Company believes that all financial accounting and disclosure issues raised in the SEC comment letters will be resolved. NOTE 7 - COMPREHENSIVE INCOME Comprehensive income as defined by Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, is net income plus direct adjustments to shareholders' equity. The cumulative translation adjustment of certain foreign entities is the only such direct adjustment recorded by the Company. The following table sets forth comprehensive income for the three
Three Months Ended March 31, 1998 1997 ------ ------ Comprehensive income (loss) Net income (loss) $(724) $ 9 Cumulative translation adjustment, net of tax (41) (39) Total comprehensive income (loss) $(765) $ (30) ====== ======
months ended March 31, 1998 and 1997. 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. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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. 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
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts) December 31, December 31, December 31, 1997 1996 1995 ---- ---- ---- ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . (Restated - Current Assets . . . . . . . . . . . . . . . . . . . . . . . Note 2) Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 705 $ 1,870 $ 413 Accounts receivable, net of allowance for doubtful accounts of $881, $690 and $3,301 . . . . . . . . . . . . 1,678 5,609 6,728 Work in progress (unbilled revenue) . . . . . . . . . . . . 1,707 2,785 2,210 Pipeline assets held for sale, net of provision for impairment of $2,200 (Note 10). . . . . . . . . . . . . . 1,350 - - Assets of discontinued division (Note 11) . . . . . . . . . - - 704 Other current assets. . . . . . . . . . . . . . . . . . . . 502 530 410 ------------- ----------- ----------- Total current assets. . . . . . . . . . . . . . . . . . . 5,942 10,794 10,465 Software, net of accumulated amortization and write-down of $36,798, $42,837 and $40,943 . . . . . . . . . . . . . . 7,334 9,604 9,535 Property and Equipment, net of accumulated depreciation and amortization of $4,261, $5,218 and $5,839. 248 823 1,277 Assets of discontinued division (Note 11). . . . . . . . . . - - 795 Other Assets . . . . . . . . . . . . . . . . . . . . . . . . 1,354 1,487 2,114 $ 14,878 $ 22,708 $ 24,186 ============= =========== =========== LIABILITIES, REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities Current portion of senior secured notes payable . . . . . . $ - $ - $ 382 Line of credit (Note 4) . . . . . . . . . . . . . . . . . . 382 - 2,870 Accounts payable. . . . . . . . . . . . . . . . . . . . . . 842 1,389 3,261 Accrued salaries and fringe benefits. . . . . . . . . . . . 729 1,070 1,003 Accrued lease obligations (Note 4). . . . . . . . . . . . . 5 260 375 Deferred maintenance and other revenue. . . . . . . . . . . 2,101 2,421 2,472 Accrued royalties . . . . . . . . . . . . . . . . . . . . . 698 731 589 Accrual for costs to complete a contract. . . . . . . . . . 72 200 189 Accrued taxes . . . . . . . . . . . . . . . . . . . . . . . 153 282 161 Accrued litigation liabilities. . . . . . . . . . . . . . . - 1,574 - Liabilities of discontinued division (Note 11). . . . . . . - - 515 Other current liabilities . . . . . . . . . . . . . . . . . 1,207 597 1,740 ------------- ----------- ----------- Total current liabilities . . . . . . . . . . . . . . . . 6,189 8,524 13,557 Accrued Lease Obligations (Note 4) . . . . . . . . . . . . . 61 79 333 Long-Term Obligations. . . . . . . . . . . . . . . . . . . . 611 568 557 Senior Secured Notes Payable . . . . . . . . . . . . . . . . 6,500 6,500 1,629 Redeemable Preferred Stock Series A Redeemable Convertible Preferred Stock, $5 par value; 1,200,000 shares authorized, 800,000 shares issued and outstanding . . . . . . . . . . 4,000 4,000 4,000 Commitments and Contingencies (Notes 9 and 12) Stockholders' Equity (Deficit) Common stock, no par value; $.10 stated value; 25,000,000 authorized, 8,878,000; 8,840,000 and 8,256,000 shares issued and outstanding . . . . . . . 888 884 825 Paid-in capital . . . . . . . . . . . . . . . . . . . . . . 49,489 49,474 48,850 Accumulated deficit . . . . . . . . . . . . . . . . . . . . (52,182) (46,736) (44,970) Cumulative foreign currency translation adjustment. . . . . (678) (585) (595) ------------- ----------- ----------- Total stockholders' equity (deficit). . . . . . . . . . . (2,483) 3,037 4,110 ------------- ----------- ----------- $ 14,878 $ 22,708 $ 24,186 ============= =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For the Year Ended December 31 1997 1996 1995 -------- -------- --------- (Restated - Note 2) REVENUE Consulting and training . . . . . . . . . . . . $ 6,491 $12,863 $ 13,530 Licenses and maintenance. . . . . . . . . . . . 5,597 5,864 7,356 Other . . . . . . . . . . . . . . . . . . . . . 304 277 566 -------- -------- --------- Total Revenues. . . . . . . . . . . . . . . . . 12,392 19,004 21,452 -------- -------- --------- COSTS AND EXPENSES Costs of consulting and training. . . . . . . . 8,204 8,414 9,720 Costs of licenses and maintenance . . . . . . . 2,356 3,636 5,103 Costs of other revenue. . . . . . . . . . . . . 199 190 340 Selling, general, and administrative. . . . . . 3,886 6,604 10,768 Recovery of accounts receivable . . . . . . . . - (1,568) - Provision for sale of Pipeline assets (Note 10) 2,200 - - Software research and development . . . . . . . 919 890 780 Reduction for capitalized software costs (Note 13) . . . . . . . . . . . . . . . . . . - - 13,926 -------- -------- --------- Total costs and expenses. . . . . . . . . . . . 17,764 18,166 40,637 -------- -------- --------- INCOME (LOSS) FROM OPERATIONS . . . . . . . . . . (5,372) 838 (19,185) OTHER INCOME (EXPENSE) Loss contingency (expense) reversal (Note 12) . 414 (900) - Interest income . . . . . . . . . . . . . . . . 76 34 35 Interest expense. . . . . . . . . . . . . . . . (557) (357) (497) Foreign exchange gains (losses) . . . . . . . . 13 (85) 114 -------- -------- --------- Loss Before Income Taxes. . . . . . . . . . . . . (5,426) (470) (19,533) Income Taxes (Provision) Credit (Note 5). . . . . (20) 60 (200) -------- -------- --------- Loss from continuing operations . . . . . . . . . (5,446) (410) (19,733) Discontinued operations - (Note 11): Loss from operation of Kinesix division . . . . - (878) (5,164) Loss on sale of Kinesix division. . . . . . . . - (478) - Net loss. . . . . . . . . . . . . . . . . . . . . $(5,446) $(1,766) $(24,897) ======== ======== ========= Weighted Average Number of Common Shares Outstanding. . . . . . . . . . . . . . . 8,859 8,556 8,178 ======== ======== ========= Loss Per Share: Continuing operations . . . . . . . . . . . . . $ (0.61) $ (0.05) $ (2.41) Discontinued operations . . . . . . . . . . . . - (0.16) (.63) -------- -------- --------- Net loss. . . . . . . . . . . . . . . . . . . . $ (0.61) $ (0.21) $ (3.04)
The accompanying notes are an integral part of the consolidated financial statements. 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 ------ Balance, December 31, 1994. . . . . 8,064 $806 $48,233 $(20,073) $(557) $ 28,409 Stock sold for cash . . . . . . . . 65 6 224 - 230 Compensation and services . . . . . 127 13 393 - - 406 Foreign currency translation adjustment . . . . . . . . . . . . - - - - (38) (38) Net (loss) (Restated) . . . . . . . - - - (24,897) - (24,897) ----- ---- ------- --------- ------ --------- Balance, December 31, 1995. . . . . 8,256 825 48,850 (44,970) (595) 4,110 Stock sold for cash . . . . . . . . 3 - 5 - - 5 Conversion of convertible debentures into Common Stock (Note 4). . . . . . . . . . . . 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)
The accompanying notes are an integral part of the consolidated financial statements. SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 1997 1996 1995 -------- -------- --------- (Restated - Note 2) CASH FLOWS FROM OPERATING ACTIVITIES Net loss. . . . . . . . . . . . . . . . . . . . . . . . $(5,446) $(1,766) $(24,897) Adjustments: Depreciation and amortization . . . . . . . . . . . . 2,670 2,653 4,845 Reduction in capitalized software costs . . . . . . . - - 13,926 Changes in allowance for doubtful accounts. . . . . . (163) (1,057) 2,649 Stock issued for compensation . . . . . . . . . . . . - 30 - Loss contingency provision (reversal) . . . . . . . . (414) 900 - Provision for sale of Pipeline assets (Note 10) . . . 2,200 - - Changes in operating assets and liabilities: (Increase) decrease in accounts receivable and work in progress. . . . . . . . . . . . . . . . 3,689 1,747 (2,021) Decrease in other assets. . . . . . . . . . . . . . . 161 245 892 Decrease in accounts payable and accrued expenses. . . . . . . . . . . . . . . . . . (1,442) (479) (2,632) Decrease in accrued lease obligations . . . . . . . . (273) (369) (582) Increase (decrease) in deferred revenue . . . . . . . 186 (51) 633 -------- -------- --------- Net cash provided by continuing operations. . . . . . . 1,168 1,853 (7,187) Net cash provided by (used in) discontinued operations. - (28) 9,920 Net cash provided by operating activities . . . . . . . 1,168 1,825 2,733 -------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Capitalized software costs. . . . . . . . . . . . . . . (2,483) (1,963) (4,766) Purchases of equipment. . . . . . . . . . . . . . . . . (139) (288) (133) Net cash used in investing activities . . . . . . . . (2,622) (2,251) (4,899) -------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from sale of stock . . . . . . . . . . . . . . - 5 230 Net borrowing activity on line of credit. . . . . . . . 382 (2,870) 2,029 Repayments of bank borrowings . . . . . . . . . . . . . - (262) - Proceeds from Senior Secured Notes. . . . . . . . . . . - 5,000 - Repayments of other obligations . . . . . . . . . . . . - - (292) -------- -------- --------- Net cash provided by financing activities . . . . . . 382 1,873 1,967 -------- -------- --------- Effect of exchange rates on cash . . . . . . . . . . . . (93) 10 10 -------- -------- --------- Net increase (decrease) in cash and equivalents. . . . . (1,165) 1,457 (189) Cash and cash equivalents at beginning of year . . . . . 1,870 413 602 -------- -------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR . . . . . . . . $ 705 $ 1,870 $ 413 ======== ======== ========= SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the year for: Interest. . . . . . . . . . . . . . . . . . . . . . . . $ 175 $ 388 $ 497 Foreign taxes . . . . . . . . . . . . . . . . . . . . . 106 79 238 NON-CASH INVESTING AND FINANCING ACTIVITIES Conversion of convertible debenture to Common Stock . . - 250 - Conversion of accrued liabilities to equity . . . . . . 19 409 - Accrued compensation and services paid in stock . . . . - - 406
(IN THOUSANDS) The accompanying notes are an integral part of the financial statements. SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS FOR PREPARATION OF FINANCIAL STATEMENTS BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared on a going concern basis which contemplates the realization of assets and liquidation of liabilities in the ordinary course of business. The Company has suffered a significant loss from continuing and discontinued operations of $5.4 million in 1997 resulting in an accumulated deficit of $52.2 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 discussed below. Specifically, the transactions for which restatement adjustments have been made did not at the time of the previously reported revenue recognition have a valid contract, or the software had not been shipped, or a side letter existed which indicated that the customer could defer payment based on a future contingent event. In addition, the December 31, 1995 financial statements presented herein have been restated to reflect for comparability purposes the disposition by the Company of the Kinesix Division effective September 3, 1996 as discussed in Note 11 below. Accordingly, the financial statements for December 31, 1995 have been restated and are presented herein. The Company's audited restated financial statements for the years ended December 31, 1994 and 1993 have been filed with the SEC as an amendment to the Company's 1997 Form 10-K. The December 31, 1995 financial statements included herein have been restated from those included in the previously filed 1995 Form 10-K as follows:
As previously '95 Restate '95 Restated reported Adjustments Kinesix Financials Revenue Consulting and training. . . . $ 14,444 $ - $ (914) $ 13,530 Licenses and maintenance . . . 9,061 (655) (1,050) 7,356 Loss from operations. . . . . . (24,485) 136 5,164 (19,185) 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) Net loss per share. . . . . . . (3.05) .01 - (3.04) Total assets. . . . . . . . . . 23,912 274 - 24,186 Stockholders Equity . . . . . . $ 4,110 - - $ 4,110
NOTE 3 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS Scientific Software-Intercomp, Inc. (the "Company") develops and markets software for the development and production of oil and gas wells. The Company also provides consulting and technical support services. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated through consolidation. REVENUE The Company recognizes software license revenue pursuant to the American Institute of Certified Public Accountants Statement of Position ("SOP") 91-1 on delivery provided that a legally-binding licensing agreement containing all material terms has been fully executed, there are no remaining significant obligations and that collection of the resulting receivable is probable. In a contract where the remaining obligations are insignificant such as installation, training and testing, the allocable revenue is deferred and recognized upon completion of all obligations. The Company does not recognize any software revenue until all significant vendor obligations are met. Software maintenance revenue is recognized on a straight-line basis over the term of the contract. The Company adopted SOP 97-2 which was effective December 17, 1997. Pursuant to SOP 97-2, the Company enters into contracts separate of the software license agreements for all training and services related to the software sale. Beginning in 1991 the Company entered into certain combined software and service contracts pursuant to which the Company provides off-the-shelf software, combined with pipeline engineering services, relating to leak detection and operations analysis of pipeline networks. The engineering services provided pursuant to these contracts include analysis of the characteristics of the client's specific pipeline network and entering these characteristics into the Company's software. The Company also markets the off-the-shelf software for use by clients, as is, without the services included in these contracts. The Company measures progress-to-completion for combined software and services contracts on a value added output basis for the off-the-shelf software portion of the contracts when: (1) a license for the off-the-shelf software has been executed that is enforceable for the customary price of the Company's off-the-shelf software, (2) the off-the-shelf software has been installed on the project computer, and (3) the installed off-the-shelf software has been used for completing and providing to the client specifications for the engineering services on the project, which have been accepted by the client. The Company measures progress-to-completion for the engineering services portion of the contracts based on labor hours incurred. This accounting policy for contract revenue does not apply if programming changes must be made to the software. Contract costs are recognized based on the percentage of completion applied to total estimated project costs, resulting in a constant gross margin percentage over the term of the contract. Revenue earned in performance of time and material contracts is recognized at contractual rates as labor hours and associated costs are incurred. Fixed-price contract revenue is recognized using the percentage of completion method, calculated based on the ratio of labor hours incurred to total projected labor hours. Revenue accrued under time and material contracts is classified as work in progress on the Consolidated Balance Sheet if contractual milestones for billing have not been reached. Such amounts are later billed in accordance with applicable contract terms. The work in progress amounts at December 31, 1997 are expected to be billed and collected by December 31, 1998 except for those contracts in progress that will be assumed under the pending Pipeline asset sale agreement. Anticipated losses on contracts accounted for using the percentage of completion method are recognized at the time they are identified. Costs incurred for specific anticipated contracts are deferred when recoverability of the costs from the anticipated contract is determined to be probable. The Company's work-in-progress balance represents revenue earned and recognized for which billing milestones have not yet been reached. The revenue on these contracts is recognized using the percentage of completion method, and related qualifying software development costs are capitalized if the Company retains ownership and the right to market the developed software. In accordance with Statement of Financial Accounting Standard (SFAS) 68 issued by the Financial Accounting Standards Board (FASB), the funded software development revenues do not include revenue for funded development software projects where the Company had a contractual obligation to refund all or part of the funding. For such contracts the Company records receipt of funds by recognizing an obligation to repay. CAPITALIZED SOFTWARE COSTS Capitalized software is stated at the lower of cost or net realizable value. The Company capitalizes costs of purchased software and qualifying internal costs of developing and enhancing its software products after the determination of technological feasibility, which includes the completion of a detail program design in accordance with paragraph 4a of SFAS No. 86. Development costs incurred prior to the determination of technological feasibility are expensed as research and development expense as incurred. At each balance sheet date, the Company records a writedown for any software products equal to the excess, if any, of unamortized cost over net realizable value. Net realizable value is the estimated future gross revenue for a product reduced by the estimated future costs of completion and disposal, including the costs of performing maintenance and customer support. Amortization of capitalized software costs is determined each year based on the greater of: (1) the amount computed using the ratio of current year gross revenue to the sum of current and anticipated future gross revenue for that product or (2) straight-line amortization. Through 1995, the Company amortized the capitalized software development costs of its stand-alone software products and related enhancements over a 13-year period and capitalized software development costs of Petroleum WorkBench and Sammi were amortized over a seven-year period. As discussed below, commencing January 1, 1996, the Company amortized all its capitalized software costs over a five-year period. At each balance sheet date, the unamortized capitalized costs of software products are compared to their estimated net realizable values on a product-by-product basis. Net realizable value is the estimated future gross revenue for a product reduced by the estimated future costs of completion and disposal, including the cost of performing maintenance and customer support. The carrying amount of a software product is written down by the amount, if any, by which the unamortized capitalized costs of a computer software product exceeds its net realizable value. The reduced amount of capitalized software costs that have been written down to net realizable value at the close of an annual fiscal period is considered to be the cost for subsequent accounting purposes, and the amount of the write-down is not subsequently restored. In the fourth quarter of 1995, the Company recorded a $17.9 million write-down of its software products, 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. The Company reduced its emphasis on making sales to new customers in widely dispersed international markets and in marketplaces with widely diverging computing platform environments. The Company focused on high quality performance in serving existing customers in order to achieve an adequate rate of return in future periods. Cost reductions were carried out, reducing staff and reducing development expenditures by comparison to 1995 and earlier years. 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. Following is a summary of capitalization and amortization for the Company's software products.
Basic Technology Products WorkBench Total --------------- ---------- --------- (In thousands) Capitalized Software Costs: Balance December 31, 1994. . . . . . . . . . . . $ 26,723 $ 18,989 $ 45,712 1995 additions . . . . . . . . . . . . . . . . 3,245 1,521 4,766 --------------- ---------- --------- Balance, December 31, 1995 . . . . . . . . . . . 29,968 20,510 50,478 1996 additions . . . . . . . . . . . . . . . . 1,661 302 1,963 --------------- ---------- --------- Balance, December 31, 1996 . . . . . . . . . . . 31,629 20,812 52,441 1997 additions . . . . . . . . . . . . . . . . 1,224 1,259 2,483 Balance, December 31, 1997 . . . . . . . . . . . 32,853 22,071 54,924 Pipeline Software Held for Sale. . . . . . . . (10,792) - (10,792) Net Balance, December 31, 1997 . . . . . . . . . $ 22,061 $ 22,071 $ 44,132 =============== ========== ========= Accumulated Amortization: Balance December 31, 1994. . . . . . . . . . . . $ 17,411 $ 5,314 $ 22,725 1995 amortization expense. . . . . . . . . . . 1,542 2,750 4,292 Reduction of capitalized software costs (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, 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
The Company's working capital and cash requirements will continue to be influenced by the level of software research and development costs. During the years ended December 31, 1997, 1996 and 1995, the level of software research and development costs was, in the aggregate, $3.4 million, $2.8 million and $5.5 million, respectively. To reduce internal capital requirements for software development projects, the Company pursues opportunities to fund software research and development costs through development projects with oil and gas industry partners, government agencies and others. In this type of funded development project, participating companies or other entities provide all or a portion of the funds required to develop or enhance a software product in exchange for access to the resulting software at discounted or nominal prices with the Company retaining ownership and licensing rights to the product. In accordance with generally accepted accounting principles, the Company generally records as consulting revenue amounts received from these third parties and capitalizes the qualifying portion of related costs incurred as software development costs in accordance with SFAS No. 86. During 1995, the Company accounted for a funded software development project whereby the Company was obligated to repay the funds if the Company was not successful in its efforts to develop a product which met the specification of the third party. The Company recorded a liability and expensed the costs as incurred in accordance with SFAS No. 68. The Company capitalized interest costs of $100,000, $165,000 and $109,000 during the years ended December 31, 1997, 1996 and 1995 respectively, as part of the cost of software development projects in progress. PROPERTY AND EQUIPMENT Property and equipment are stated at cost, and depreciation is provided on a straight-line basis over the estimated useful lives of these assets. Maintenance and repairs are charged to expense as incurred. The cost and accumulated depreciation of property and equipment sold or otherwise disposed of are retired from the accounts and the resulting gain or loss is included in profit or loss in the period realized. Total depreciation expense was $474,000, $742,000 and $568,000, for the years ended December 31, 1997, 1996 and 1995, respectively. The Company assigns the following useful lives to Property and Equipment : Computer Software and Equipment: 3 to 5 years Leasehold Improvements: The lesser of 7 to 10 years or the remaining term of the lease. Office Furniture and Equipment: 3 to 10 years Following are the components of property and equipment:
December 31, December 31, December 31, 1997 1996 1995 -------------- ------------- ------------- (In thousands) - ------------------------------------ Property and leasehold improvements. $ 442 $ 450 $ 428 Office furniture and equipment . . . 789 828 2,389 Computer equipment . . . . . . . . . 4,776 4,763 4,299 -------------- ------------- ------------- 6,007 6,041 7,116 Pipeline Assets Held For Sale . . . (1,498) - - -------------- ------------- ------------- $ 4,509 $ 6,041 $ 7,116 ============== ============= ============= Accumulated depreciation . . . . . . $ 5,519 $ 5,218 $ 5,839 Pipeline Accumulated Depreciation . (1,258) - - $ 4,261 $ 5,218 $ 5,839 ============== ============= ============= Property and equipment, net of accumulated depreciation. . . . . . $ 248 $ 823 $ 1,277 ============== ============= =============
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 and 1995 the undistributed earnings of the foreign subsidiaries were not significant. 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 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 and 1995. CASH EQUIVALENTS For purposes of the consolidated financial statements, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. On occasion the Company will have balances in excess of the federally insured amount. LOAN ORIGINATION FEES AND COSTS Fees and direct costs incurred for the origination of loans are deferred and amortized over the contractual lives of the loans. DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS Carrying amounts of financial instruments including cash, cash equivalents, accounts receivable, accounts payable and accrued expenses, approximates fair value as of December 31, 1997, 1996 and 1995 due to their relative short maturity. Carrying amounts of debt issued approximates fair value as interest rates on these instruments approximates market interest rates at December 31, 1997, 1996 and 1995. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue, expenses, gains and losses during the reporting period. Use of estimates is significant with regard to capitalized software costs and the related amortization. Actual results may vary from estimates and assumptions that were used in preparing the financial statements for any period, which may require adjustments that affect the results of operations in later periods. PRIOR PERIOD RECLASSIFICATION Certain reclassifications of prior period balances have taken place to allow for proper comparison to the current period presentation. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," 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 SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which supersedes SFAS 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 - BANKING ARRANGEMENTS, LONG-TERM OBLIGATIONS AND NOTE PAYABLE UNITED STATES CREDIT AGREEMENTS Under the terms of the then existing bank credit agreement, in April 1996 the Company repaid the $2.9 million balance then owed pursuant to the previous line of credit, using proceeds from the Lindner and Renaissance Senior Secured Notes discussed below. In October 1996, the Company repaid the $750,000 balance owed pursuant to the new bank credit agreement at September 30, 1996. Effective April 16, 1997 the Company and Bank One agreed to extend the revolving credit facility through October 15, 1997. Due to the Company's improved cash position and decreased need for credit at that time, the revolving credit facility was decreased from $1.5 million to $.9 million. The collateral for the line is the Company's accounts receivables from non-U.S. domiciled customers to the extent necessary to collateralize the line. All receivables not necessary for the line and substantially all other assets except those of the Canadian subsidiary are collateral for the Lindner Dividend Funds ("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: i. Extend the maturity date to November 30, 1997, ii. 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 iii. Limit the principal amount of the line of the revolving credit facility to $650,000. On November 30, 1997, the Company and Bank One agreed to extend the maturity date to August 15, 1998 and to reduce the principal amount of the line of the revolving credit facility to $230,000 after March 15, 1998. The credit line of $230,000 would remain available only to secure certain standby letters of credit. Subsequently, Bank One agreed that the revolving credit facility could remain at $650,000 in consideration of the Company's agreement to repay the principal outstanding balance on May 1, 1998. The credit facility is supported by a guarantee from EximBank which reduces down as the credit line reduces and expires in full on August 15, 1998. The Company pays to EximBank an annual fee equal to 1.5% of the amount of the guarantee and is required to purchase credit insurance of foreign receivables at a cost of $.38 per hundred dollars of the amount of the insured receivables. The Company has not made a determination as to the filing of claims for insurance recoveries for uncollected foreign receivables. As of December 31, 1997, the amounts of short-term cash borrowings and letters of credit outstanding, and credit available under the revolving credit facility were as follows:
December 31, 1997 ------------------ 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 ==================
Interest rates applicable to short-term cash borrowings under the credit facility are equal to the bank's prime rate of interest plus one percentage point on any borrowings. At December 31, 1997 interest rates applicable to short-term cash borrowings were 9.5%. The agreement requires that the Company meets certain requirements regarding operating results and financial condition and prohibits the Company from paying dividends without the bank's prior written consent. At December 31, 1997, the Company was in violation of identical financial covenants with respect to its notes payable to Bank One, Lindner and Renaissance, for which the Company has received waivers from Lindner and Renaissance for the reporting period. The covenants violated require that the Company's tangible net worth, as it and other covenant terms are defined in the covenants, exceed $(3 million); its net liabilities to net worth ratio not exceed 3 to 1; its current ratio exceed 1 to 1; and that the Company has positive annual cash flow at the end of the most recent fiscal year. As of December 31, 1997, the Company's tangible net worth, net liabilities to net worth ratio, current ratio, and annual cash flow, as defined under the covenants, were approximately $(5.8 million), 7.42 to 1, .96 to 1, and $(5.4 million), respectively. As of December 31, 1997, the Company continues to classify the notes payable to Lindner and Renaissance as long-term obligations since both Lindner and Renaissance have waived the financial covenant violations for the reporting period and indicated that they would not require repayment of the debt on demand. The Company's note payable to Bank One is classified as a short-term liability as of December 31, 1997 and was repaid in full on May 1, 1998. In addition, the Company has not made its interest payment due October, 1997 on the Lindner and Renaissance debt. Lindner and Renaissance have taken no action with respect to such defaults, and such defaults will be remedied by the agreements of Lindner and Renaissance discussed in Note 14 below if the pending sale of the Company to Baker Hughes Incorporated 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, 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 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 a subsidiary of Baker Hughes Incorporated is completed. LINDNER FINANCING In April 1996 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:
December 31, December 31, December 31, 1997 1996 1995 ---- ---- ---- (In thousands) Accrued lease costs . $ 66 $339 $ 708 Deferred compensation 640 632 659 ---- ---- ------ 706 971 1,367 Less current portion. 34 324 477 $672 $647 $ 890 ==== ==== ======
NOTE 5 - INCOME TAXES The components of the provisions for income taxes are as follows:
For the Years Ended December 31, December 31, December 31, 1997 1996 1995 ---- ---- ---- (In thousands) Current: U.S. Federal $ - $12 $ - Foreign. . . - 46 (200) State. . . . (20) 2 - $ (20) $60 $(200) =============== === ======
Following is a summary of United States and foreign pretax accounting income (loss):
For the Years Ended December 31, December 31, December 31, 1997 1996 1995 ---- ---- ---- (In thousands) United States $(4,156) $(473) $ (9,861) Foreign . . . (1,270) 3 (9,672) $(5,426) $(470) $(19,533) ======== ====== =========
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:
For the Years Ended December 31, December 31, December 31, 1997 1996 1995 ---- ---- ---- (In thousands) Taxes at U.S. Federal statutory rate. . . . $ - $ (160) $(5,108) Federal alternative minimum tax . . . . . . - - 1 12 (753) State income taxes. . . . . . . . . . . . . (20) 2 2 Foreign withholding and other foreign taxes - - 4 46 (200) U.S. net operating loss carry forward and Valuation allowances . . . . . . . . . . . - - 2 245 5,861 Other, net. . . . . . . . . . . . . . . . . - - (85) - $ (20) 6$60 $ (200) ======== ========== ========
The components of deferred taxes in the balance sheets, which were fully eliminated by a valuation allowance, were as follows:
For the Years Ended December 31, December 31, December 31, 1997 1996 1995 ---- ---- ---- (In thousands) Taxable temporary differences: Capitalized software. . . . . . . . . $ (3,758) $(3,649) $(3,770) (3,758) (3,649) (3,770) --------- -------- -------- Deductible temporary differences: Tax basis in excess of book basis of property and equipment. . . . . . . . 200 98 98 Allowance for doubtful accounts . . . 334 91 179 Rent expense. . . . . . . . . . . . . 25 89 134 Contract expense accruals . . . . . . - 59 119 Vacation pay and bonuses. . . . . . . 110 202 175 Accrued contingent liabilities. . . . 105 567 35 Provision for sale of Pipeline assets 836 - - --------- -------- -------- 1,610 1,106 740 Carryovers: Net operating losses. . . . . . . . . 9,061 6,397 7,503 Research and other credits. . . . . . 3,200 3,704 3,344 12,261 10,101 10,847 --------- -------- -------- Net deferred tax asset . . . . . . . . 10,113 7,558 7,817 Valuation allowance. . . . . . . . . . (10,113) (7,558) (7,817) --------- -------- -------- $ 0 $ 0 $ 0 ========= ======== ========
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.
Amount Expiration ------ ---------- < 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
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"), an 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. 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:
Option Price (equal to Market Number Value at Date of Grant) ----------------------- of Weighted Shares Per Share Average Total ---------- ------------------- -------- ------------ 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 . 2.50 to 5.00 1.47 1,197,000 Expirations (382,834) 50 to 7.125 4.08 (1,562,000) Exercises. . . . . . . . . . (2,500) 2.25 2.25 (6,000) Balance at December 31, 1996 1,084,000 50 to 6.375 2.27 2,453,000 Grants . . . . . . . . . . . 896,000 .1275 to 2.000 1.02 914,000 Expirations. . . . . . . . . (369,376) .50 to 4.875 2.77 (1,024,000) Exercises. . . . . . . . . . 0 - - 0 0 ---------- ------------ Balance at December 31, 1997. 1,610,624 $.1275 to $6.375 $ 1.45 $ 2,343,000 ========== ============ Number of shares exercisable: December 31, 1995 . . . . . . 545,000 $2.00 to $7.13 $ 4.52 $ 2,463,000 ========== ============ December 31, 1996 . . . . . . 480,000 $1.91 to $6.375 $ 3.17 $ 1,522,000 ========== ============ December 31, 1997 . . . . . . 1,547,624 $.1275 to $6.375 $ 1.48 $ 2,290,000 ========== ============
Exercise prices of substantially all outstanding non-statutory options and all outstanding incentive stock options were set at the fair market value of the stock at the date of grant. No accounting recognition is given to options granted at exercise prices equal to fair market value at date of grant until they are exercised at which time the proceeds received by the Company are credited to Common Stock and paid-in capital. In February 1997 the Company entered into a stock option agreement granting to its Chief Executive Officer the right to purchase 600,000 shares of the Company's Common Stock through February 10, 2002. The exercise prices are 150,000 shares at $.50 per share, 150,000 shares at $1.00 per share, 150,000 shares at $1.50 per share, and 150,000 shares at $2.00 per share. An option previously granted to the Company's Chief Executive Officer to purchase 100,000 shares of the Company's Common Stock at an exercise price of $2.875 per share was canceled. STOCK BASED COMPENSATION The Company 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:
Weighted-Average Exercise Price of Exercisable Options ------------------------------------------------------ Number of Options Outstanding Weighted-Average Remaining Contractual Life ------------------------------------------------------ -------------------------------------------- Range of Exercise. Weighted-Average Exercise Price ------------------------------------------------------ Prices - ------------------ .1275 to $.50 . . 484,000 $ .49 .51 to $1.00. . . 280,000 $ .83 1.01 to $2.00 . . 578,709 $ 1.72 2.01 to $6.375. . 267,915 $ 3.29 1,610,624 1,547,624 ====================================================== ============================================ Number of Options Exercisable ----------------------------- Range of Exercise Prices - ------------------ .1275 to $.50 . . 3.84 yrs. 461,000 $ .49 .51 to $1.00. . . 4.06 yrs. 250,000 $ .85 1.01 to $2.00 . . 3.99 yrs. 573,709 $1.72 2.01 to $6.375. . 4.72 yrs. 262,915 $3.31
The following table summarizes the difference between the fair value and intrinsic value methods and the proforma net loss and loss per share amounts for the year ending December 31, 1997 had the Company adopted the fair value based method of accounting for stock-based compensation.
For the Years Ended ------------------- December 31, December 31, December 31, 1997 1996 1995 ---- ---- ---- (In thousands) 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)
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:
For the Years Ended ------------------- December 31, December 31, December 31, 1997 1996 1995 ---- ---- ---- (In thousands) 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
NOTE 7 - RETIREMENT AND COMPENSATION PLANS STOCK PURCHASE PLANS The Company has a stock purchase plan, which was adopted in 1991, under which employees and consultants to the Company can elect to receive shares of Common Stock as payment for compensation, services and expenses. In 1997 and 1995, the Company did not issue any shares pursuant to this plan. In 1996, the Company issued 18,000 shares of 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. 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. 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 and $146,000 in 1997, 1996 and 1995, respectively. In 1997, 1996 and 1995, the Company issued 2,000 shares, 179,000 shares and 78,000 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 a $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 contribution accrued in 1994. The Company has similar retirement benefit plans, including employee stock ownership programs, covering employees of its foreign subsidiaries. The amount charged to expense for these plans was $139,000, $148,000 and $229,000 in 1997, 1996 and 1995 respectively, of which $27,000, $42,000 and $56,000 is included in accrued salaries and benefits at December 31, 1997, 1996 and 1995, respectively. The Company issued 36,000 shares, 31,000 shares and 10,000 shares of its Common Stock pursuant to these plans in 1997, 1996 and 1995, respectively. 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.
For the Year Ended December 31, 1995 ------------------------------------ (In Thousands) Consolidated -------------- U.S. U.K. Canada Total -------------- -------- -------- --------- 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
For the Year Ended December 31, 1996 ------------------------------------ (In Thousands) Consolidated -------------- U.S. U.K. Canada Total -------------- ------ -------- -------- 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
For the Year Ended December 31, 1997 ------------------------------------ (In Thousands) Consolidated -------------- U.S. U.K. Canada Total -------------- -------- -------- -------- 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
In 1995, the Company's foreign operations experienced an aggregate loss from operations of $9.8 million, which was primarily attributable to the write-down of capitalized software and bad debt provision allocable to foreign operations. See Note 13 below. U.S. export revenues by geographic area were as follows:
For the Years Ended December 31, December 31, December 31, 1997 1996 1995 ---- ---- ---- (In thousands) Far East. . . . . . . . . $1,154 $1,512 $1,014 Central and South America 1,693 2,848 2,088 Europe. . . . . . . . . . - 909 810 Canada & Other. . . . . . 66 206 181 $2,913 $5,475 $4,093 ====== ====== ======
During 1997 and 1995, there was no single customer that accounted for 10% or more of the Company's revenue, the loss of which would have a material adverse effect on the Company's business. During the year ended December 31, 1996, the Company derived $2.3 million, or 12%, of its consolidated revenue from National Nigerian Petroleum Corporation. CONCENTRATIONS OF CREDIT RISK Most of the Company's clients are large, established U.S. and foreign companies (sometimes acting as government contractors), governments, and national oil and gas companies of foreign governments. Qualifying foreign receivables are insured, subject to a deductible loss amount, under an insurance policy with the Foreign Credit Insurance Association, an agency of the United States Export-Import Bank. The Company performs credit evaluations of its customers' financial condition when considered necessary and generally does not require collateral. At December 31, 1997, accounts receivable, net of doubtful accounts and work in progress, related to the following customer groups:
United States Foreign Total ------------- ------- ----- (in thousands) December 31, 1997: Companies. . . . . . . . $ 294 $1,940 $2,234 Governments and national petroleum companies. . 3 1,088 1,091 Government contractors . 44 16 60 --------------- ------ $ 341 $3,044 $3,385 =============== ====== ====== December 31, 1996: Companies. . . . . . . . $ 5,028 $2,076 $7,104 Governments and national petroleum companies. . 432 742 1,174 Government contractors . 54 62 116 $ 5,514 $2,880 $8,394 =============== ====== ====== December 31, 1995: Companies. . . . . . . . $ 2,041 $5,105 $7,146 Governments and national petroleum companies. . 137 1,598 1,735 Government contractors . 57 - 57 $ 2,235 $6,703 $8,938 =============== ====== ======
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:
Year Amount --------------- ------ (in thousands) 1998 . . . . $ 540 1999 . . . . 496 2000 . . . . 487 2001 . . . . 470 2002 . . . . 348 Thereafter $ 468
Total rent expense amounted to $866,000, $1,400,000 and $1,400,000 during 1997, 1996 and 1995, respectively. NOTE 10 - SALE OF THE ASSETS OF THE PIPELINE BUSINESS LINE During 1997, the Company's management and Board of Directors 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. 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.
December 31, 1997 ------------------- (In thousands) 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 Plus: Costs of Sale. . . . . . . . . . . . . . . . 150 ------------------- 3,700 Less: Expected Proceeds. . . . . . . . . . . . . . 1,500 Provision from loss on Sale . . . . . . . . . . . . $ 2,200 ===================
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. NOTE 12 - CONTINGENCIES To the knowledge of management, there are no significant claims pending or threatened against the Company or any of its subsidiaries as of December 31, 1997 which could have a materially adverse effect on the Company's financial position, results of operations or cash flows. As of December 31, 1997, 1996 and 1995, the Company had no recorded insurance recoveries for uncollected foreign receivables. Prior to 1995, the Company had included in accounts receivable and long term assets amounts of $175,000 and $470,000, respectively, which amounts were fully reserved as of December 31, 1994, related to a claim for costs incurred in connection with a gas pipeline project in India. Although the negotiations for settlement of the Company's claim were continuing at December 31, 1995, the Company determined that the probability of collection was remote and in 1995 wrote off the amounts in total. The WOLF CLASS ACTION LAWSUIT settlement was completed on May 23, 1997. The KINESIX EUROPE Arbitration was settled in February 1997. The SECURITIES AND EXCHANGE COMMISSION INVESTIGATION, as it pertained to the Company, was completed on September 11, 1997. The Company has received extensive SECURITIES AND EXCHANGE COMMISSION (SEC) COMMENT. Following is a description of these issues: MARSHALL WOLF, ON HIS BEHALF AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED VS. E. A. BREITENBACH, R. J. HOTTOVY, JIMMY L. DUCKWORTH, AND SCIENTIFIC SOFTWARE-INTERCOMP, INC. On October 5, 1995, a claim was filed in the United States District Court of the District of Colorado alleging that the Defendants, who included the former President and Chief Executive Officer of the Company, its former Chief Financial Officer and a former Executive Vice President, violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10(b)-5 promulgated thereunder in issuing financial reports for the first three quarters of the Company's 1994 fiscal year which failed to comply with generally accepted accounting principles with respect to revenues recognized from the Company's contracts with value added resellers. The Plaintiff sought to have the Court determine that the lawsuit constituted a proper class action on behalf of all persons who purchased stock of the Company during the period from May 20, 1994 through July 10, 1995, with certain exclusions, and the Company did not contest whether the claim constituted a proper class action. The Defendants and the Plaintiff initially reached agreement for settlement of the claim involving the payment of $1.1 million in cash, to be provided by the Company's liability insurer in a court-supervised escrow account, and the Company's issuance of warrants to purchase Common Stock exercisable at the market price of the stock at the time of completion of the settlement, with the number of warrants to be such that their aggregate value was $900,000. Subsequently, the settlement agreement was modified to eliminate the warrants and to provide for an additional $525,000 in cash, to be paid by the Company. The Company concluded that the foregoing settlement was in its best interests in view of the uncertainties of litigation, the substantial costs of defending the claim and the material amount of management time which would be required for such defense. The Company recorded a $900,000 loss contingency in the second quarter of 1996 relating to the proposed agreement for settlement of the Marshall Wolf claim in accordance with Question 1 of SEC Staff Accounting Bulletin Topic 5:Y. On May 23, 1997, the final approval of the fairness of the settlement was granted by the Court. The Company paid $525,000 in cash and reversed a net $315,000 of the loss contingency reserve of $900K after applying additional incurred legal costs. 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 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 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.
Net Before As Originally Attributable Restate - '95 Restated '95 Restated Reported To Kinesix Note 2 Adjustments -------- ---------- ------ ----------- Financials ---------- (In thousands) 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) ========= ======== ========= ====== =========
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. 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 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 as discussed in Note 2, the Company believes that all financial accounting and disclosure issues raised in the SEC comment letters will be resolved. I-29 ANNEX I AGREEMENT AND PLAN OF MERGER BETWEEN BAKER HUGHES OILFIELD OPERATIONS, INC. AND SCIENTIFIC SOFTWARE-INTERCOMP, INC. DATED AS OF JUNE 17, 1998 TABLE OF CONTENTS ARTICLE I THE MERGER I-6 1.1 THE MERGER; EFFECTIVE TIME OF THE MERGER I-6 1.2 CLOSING I-6 1.3 EFFECTS OF THE MERGER I-6 ARTICLE II EFFECT OF MERGER ON CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES I-6 2.1 MERGER CONSIDERATION FOR SSI COMMON STOCK I-6 2.2 EFFECT OF THE MERGER ON OTHER CAPITAL STOCK I-7 CANCELLATION OF TREASURY STOCK AND BHOO-OWNED STOCK I-7 2.4 TREATMENT OF STOCK OPTIONS AND WARRANTS I-7 2.5 DISSENTING SHARES I-7 2.4 EXCHANGE OF CERTIFICATES I-7 ARTICLE III REPRESENTATIONS AND WARRANTIES I-8 3.1 REPRESENTATIONS AND WARRANTIES OF SSI I-8 (A) ORGANIZATION, STANDING AND POWER I-8 (B) CAPITAL STRUCTURE I-8 (C) AUTHORITY; NO VIOLATIONS; CONSENTS AND APPROVALS I-9 (D) SEC DOCUMENTS I-10 (E) INFORMATION SUPPLIED I-10 (F) ABSENCE OF CERTAIN CHANGES OR EVENTS I-10 (G) NO UNDISCLOSED MATERIAL LIABILITIES I-10 (H) NO DEFAULT I-11 (I) COMPLIANCE WITH APPLICABLE LAWS I-11 (J) LITIGATION I-11 (K) TAXES I-11 (L) PENSION AND BENEFIT PLANS; ERISA; EMPLOYEES I-12 (M) LABOR MATTERS I-13 (N) INTANGIBLE PROPERTY I-13 (O) ENVIRONMENTAL MATTERS I-14 (P) OPINION OF FINANCIAL ADVISOR I-15 (Q) VOTE REQUIRED I-15 (R) INSURANCE I-15 (S) BROKERS I-15 3.2 REPRESENTATIONS AND WARRANTIES OF BHOO I-17 (A) ORGANIZATION, STANDING AND POWER I-17 (B) AUTHORITY; NO VIOLATIONS, CONSENTS AND APPROVALS I-17 (C) BROKERS I-17 ARTICLE IV COVENANTS RELATING TO CONDUCT OF BUSINESS OF SSI I-17 4.1 CONDUCT OF BUSINESS BY SSI PENDING THE EFFECTIVE TIME I-17 (A) ORDINARY COURSE I-17 (B) DIVIDENDS; CHANGES IN STOCK I-18 (C) ISSUANCE OF SECURITIES; LOANS I-18 (D) GOVERNING DOCUMENTS I-18 (E) NO ACQUISITIONS I-18 (F) NO DISPOSITIONS I-18 (G) NO DISSOLUTION, ETC I-18 (H) CERTAIN EMPLOYEE MATTERS I-18 (I) INDEBTEDNESS; LEASES; CAPITAL EXPENDITURES I-19 4.2 NO SOLICITATION I-19 ARTICLE V ADDITIONAL AGREEMENTS I-20 5.1 PREPARATION OF THE PROXY STATEMENT I-20 5.2 ACCESS TO INFORMATION I-20 5.3 SSI STOCKHOLDERS MEETING I-20 5.4 FILINGS; OTHER ACTION I-20 5.5 REPURCHASE OF SSI PREFERRED STOCK I-20 5.6 STOCK OPTIONS I-20 5.7 OTHER ACTIONS I-20 5.8 SSI DEBT REPAYMENT I-21 5.9 PUBLIC ANNOUNCEMENTS I-21 5.10 RECORDING OF CANCELLATION OF INDEBTEDNESS I-21 5.11 SUB FUNDING OPTION I-21 5.12 DIRECTORS AND OFFICERS INDEMNIFICATION I-21 5.13 INCORPORATION OF SUB I-22 ARTICLE VI CONDITIONS PRECEDENT I-22 6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER I-22 (A) SSI STOCKHOLDER APPROVAL I-22 (B) OTHER APPROVALS I-22 (C) NO INJUNCTIONS OR RESTRAINTS I-22 6.2 CONDITIONS OF OBLIGATIONS OF BHOO AND SUB I-22 (A) REPRESENTATIONS AND WARRANTIES I-22 (B) PERFORMANCE OF OBLIGATIONS OF SSI I-22 (C) ABSENCE OF CERTAIN ACTION I-22 (M) PSD DISPOSITION I-23 (N) NO AFFILIATE INDEBTEDNESS I-23 6.3 CONDITIONS OF OBLIGATIONS OF SSI I-24 (A) REPRESENTATIONS AND WARRANTIES I-24 (B) PERFORMANCE OF OBLIGATIONS OF BHOO AND SUB I-24 ARTICLE VII TERMINATION AND AMENDMENT I-24 7.1 TERMINATION I-24 7.2 EFFECT OF TERMINATION I-25 7.3 AMENDMENT I-26 7.4 EXTENSION; WAIVER I-26 ARTICLE VIII GENERAL PROVISIONS I-26 8.1 PAYMENT OF EXPENSES I-26 8.2 NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS I-26 8.3 NOTICES I-26 8.4 INTERPRETATION I-27 8.5 COUNTERPARTS I-27 8.6 ENTIRE AGREEMENT; NO THIRD-PARTY BENEFICIARIES I-27 8.7 GOVERNING LAW I-27 8.8 NO REMEDY IN CERTAIN CIRCUMSTANCES I-27 8.9 ASSIGNMENT I-27 8.10 SCHEDULES I-28 GLOSSARY OF DEFINED TERMS Acquisition Proposal 4.2(a) Acquisition Transaction 4.2(a) Affiliate 3.1(d) Agreement Preamble Articles of Merger 1.1 Bank One Debt 5.8 BHOO Preamble Break-up Fee 7.2(b) CERCLA 3.1(o)(A) CBCA 1.1 Certificates 2.6(b) Closing 1.1 Closing Date 1.2 Code Recitals Constituent Corporations 1.3(a) Dissenting Shares 2.5 Effective Time 1.1 Environmental Law 3.1(o)(A) ERISA 3.1(l)(i) Exchange Act 3.1(c)(iii) Exchange Agent 2.6(a) GAAP 3.1(d) Governmental Entity 3.1(c)(iii) Halliburton Repurchase 5.5 Hazardous Materials 3.1(o)(B) Indemnified Liabilities 5.7(a) Indemnified Parties 5.7(a) Injunction 6.1(c) IRS 3.1(k)(ii) Lindner 5.8 Lindner and Renaissance Loan Agreement 5.8 Lindner Debt 5.8(a) Lindner Warrant 5.8 Material Adverse Change 3.1(a) Material Adverse Discovery 7.1(c) Material Adverse Effect 3.1(a) Merger Recitals Merger Consideration 2.1 Net Working Capital 6.2(l) OSHA 3.1(o)(A) PBGC 3.1(l)(iii) Proxy Statement 3.1(c)(iii) Release 3.1(o)(C) Remedial Action 3.1(o)(D) Renaissance 5.8 Renaissance Debt 5.8(b) Renaissance Warrant 5.8 Returns 3.1(k)(i) Revenue 2.1(e)(i) SEC 3.1(a) Securities Act 3.1(d) Simmons 3.1(p) SSI Preamble SSI Common Stock 2.1 SSI Employee Benefit Plans 3.1(l)(iv) SSI ERISA Affiliate 3.1(l)(i) SSI Intangible Property 3.1(n) SSI Litigation 3.1(j) SSI Order 3.1(j) SSI Pension Plans 3.1(l)(i) SSI Permits 3.1(i) SSI Preferred Stock 2.2 SSI Representatives 4.2(a) SSI SEC Documents 3.1(d) SSI Stock Options 3.1(b) SSI Stock Plan 3.1(b) SSI Warrants 3.1(b) Sub Preamble Subsidiary 3.1(a) Surviving Corporation 1.3(a) Taxes 3.1(k) Termination Payment Event 7.2(b) Voting Debt 3.1(b) SCHEDULES TO THE AGREEMENT AND PLAN OF MERGER -
Schedule No.. Description - ------------- --------------------------------------------------- 3.1(a). . . . - Subsidiaries; Jurisdiction of Incorporation 3.1(b). . . . - Capital Structure 3.1(c). . . . - Authority; No Violations; Consents and Approvals 3.1(d). . . . - SEC Documents 3.1(f). . . . - Absence of Certain Changes or Events 3.1(g). . . . - No Undisclosed Material Liabilities 3.1(h). . . . - No Default 3.1(i). . . . - Compliance with Applicable Laws 3.1(j). . . . - Litigation 3.1(k)( i), (ii), (iii), (vi) - Taxes 3.1(l)(ii), (v), (vi), (ix) - Pension and Benefit Plans; ERISA 3.1(m)(i), (ii) - Labor Matters 3.1(n). . . . - Intangible Property 3.1(o). . . . - Environmental Matters 3.1(r). . . . - Insurance 3.1(s). . . . - Brokers 3.1(t). . . . - Certain Indebtedness 3.1(u). . . . - Foreign Compliance 3.1(v). . . . - Real Property 3.1(w). . . . - Owned Equipment 3.1(x). . . . - Leased Equipment 3.1(y). . . . - Accounts Receivable 3.1(z). . . . - Contracts 3.1(aa) - Customers and Suppliers 3.1(ab) - Year 2000 Matters 4.1(f). . . . - No Dispositions 4.1(c). . . . - Issuances of Securities
------ AGREEMENT AND PLAN OF MERGER ----------------------------- AGREEMENT AND PLAN OF MERGER, dated as of June 17, 1998 (this "Agreement"), - -------------------------------------------------------------------------------- between Baker Hughes Oilfield Operations, Inc., a California corporation - -------------------------------------------------------------------------------- ("BHOO"), and Scientific Software-Intercomp, Inc., a Colorado corporation - -------------------------------------------------------------------------------- ("SSI"). - -------- WHEREAS, the Boards of Directors of BHOO and SSI each have determined that - -------------------------------------------------------------------------------- it is in the best interests of their respective stockholders for SSI to merge - -------------------------------------------------------------------------------- with and into a Colorado corporation and wholly owned subsidiary of BHOO to be - -------------------------------------------------------------------------------- formed by BHOO following the date hereof and prior to the Closing ("Sub") on the - -------------------------------------------------------------------------------- terms and subject to the conditions of this Agreement (the "Merger"); - ------------------------------------------------------------------------------- WHEREAS, BHOO and SSI desire to make certain representations, warranties, - -------------------------------------------------------------------------------- covenants and agreements in connection with the Merger and also to prescribe - -------------------------------------------------------------------------------- various conditions to the Merger; - ------------------------------------- NOW, THEREFORE, in consideration of the foregoing and the representations, - -------------------------------------------------------------------------------- warranties, covenants and agreements herein contained, the parties agree as - -------------------------------------------------------------------------------- follows: - -------- ARTICLE I --------- THE MERGERARTICLE ITHE MERGER ----------------------------- 1.1 The Merger; Effective Time of the Merger1.1 The Merger; - -------------------------------------------------------------------------------- Effective Time of the Merger. Upon the terms and subject to the conditions of - -------------------------------------------------------------------------------- this Agreement and in accordance with the Colorado Business Corporation Act (the - -------------------------------------------------------------------------------- "CBCA"), SSI will be merged with and into Sub at the Effective Time (as - -------------------------------------------------------------------------------- hereinafter defined). The Merger shall become effective immediately when the - -------------------------------------------------------------------------------- articles of merger (the "Articles of Merger"), prepared and executed in - -------------------------------------------------------------------------------- accordance with the relevant provisions of the CBCA, is filed with the Secretary - -------------------------------------------------------------------------------- of State of the State of Colorado or, if agreed to by the parties, at such time - -------------------------------------------------------------------------------- thereafter as is provided in the Articles of Merger (the "Effective Time"). The - -------------------------------------------------------------------------------- filing of the Articles of Merger shall be made as soon as practicable on or - -------------------------------------------------------------------------------- after the closing of the Merger (the "Closing"). - ------------------------------------------------------- 1.2 Closing1.2 Closing. The Closing shall take place at 10:00 a.m. - -------------------------------------------------------------------------------- on a date to be specified by the parties, which shall be no later than the - -------------------------------------------------------------------------------- second business day after satisfaction (or waiver in accordance with this - -------------------------------------------------------------------------------- Agreement) of the latest to occur of the conditions set forth in Article VI (the - -------------------------------------------------------------------------------- "Closing Date"), at the offices of Baker & Botts, L.L.P., One Shell Plaza, 910 - -------------------------------------------------------------------------------- Louisiana, Houston, Texas 77002, unless another date or place is agreed to in - -------------------------------------------------------------------------------- writing by the parties. - -------------------------- 1.3 Effects of the Merger1.3 Effects of the Merger. (a) At the - -------------------------------------------------------------------------------- Effective Time, (i) SSI will be merged with and into Sub, the separate existence - -------------------------------------------------------------------------------- of SSI shall cease and Sub shall continue as the surviving corporation (SSI and - -------------------------------------------------------------------------------- Sub are sometimes referred to herein as the "Constituent Corporations" and Sub - -------------------------------------------------------------------------------- is sometimes referred to herein as the "Surviving Corporation"); the Articles of - -------------------------------------------------------------------------------- Incorporation of Sub as in effect immediately prior to the Effective Time shall - -------------------------------------------------------------------------------- be the Articles of Incorporation of the Surviving Corporation, provided, that - -------------------------------------------------------------------------------- the name of Sub will be changed to "Scientific Software-Intercomp, Inc."; and - -------------------------------------------------------------------------------- (ii) the Bylaws of Sub as in effect immediately prior to the Effective Time - -------------------------------------------------------------------------------- shall be the Bylaws of the Surviving Corporation. - -------------------------------------------------------- (b) The directors of Sub immediately prior to the Effective Time will, - -------------------------------------------------------------------------------- from and after the Effective Time and without further action, become the initial - -------------------------------------------------------------------------------- directors of the Surviving Corporation, and the officers of Sub immediately - -------------------------------------------------------------------------------- prior to the Effective Time will, from and after the Effective Time and without - -------------------------------------------------------------------------------- further action, become the initial officers of the Surviving Corporation, and - -------------------------------------------------------------------------------- such directors and officers shall serve until their successors have been duly - -------------------------------------------------------------------------------- elected or appointed and qualified or until their earlier death, resignation or - -------------------------------------------------------------------------------- removal in accordance with Articles of Incorporation and Bylaws. - ------------------------------------------------------------------------ ARTICLE II ---------- EFFECT OF MERGER ON CAPITAL STOCK OF THE -------------------------------------------- CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATESARTICLE IIEFFECT OF MERGER ON CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES -------------------------------------------------------------------------- 2.1 Merger Consideration for SSI Common Stock2.1 Merger - -------------------------------------------------------------------------------- Consideration for SSI Common Stock. Each share of Common Stock, without par - -------------------------------------------------------------------------------- value, of SSI ("SSI Common Stock") issued and outstanding immediately prior to - -------------------------------------------------------------------------------- the Effective Time (other than any Dissenting Shares (as defined in Section - -------------------------------------------------------------------------------- 2.5)) shall be canceled and converted automatically into the right to receive, - -------------------------------------------------------------------------------- $.44 in cash, without interest (the "Merger Consideration"). All such shares of - -------------------------------------------------------------------------------- SSI Common Stock, when so converted, shall no longer be held by the holders of - -------------------------------------------------------------------------------- certificates representing such shares prior to the Effective Time, and each such - -------------------------------------------------------------------------------- holder shall cease to have any rights with respect thereto other than the right - -------------------------------------------------------------------------------- to receive the Merger Consideration. - ---------------------------------------- 2.2 Effect of the Merger on Other Capital Stock2.2 Effect of the - -------------------------------------------------------------------------------- Merger on Other Capital Stock. Each issued and outstanding share of Series A - -------------------------------------------------------------------------------- Preferred Stock, par value $5.00 per share, of SSI ("SSI Preferred Stock"), will - -------------------------------------------------------------------------------- not be converted into any consideration in the Merger but SSI will cause such - -------------------------------------------------------------------------------- shares to be repurchased and placed in SSI's treasury prior to the Merger as - -------------------------------------------------------------------------------- provided in Section 5.5 hereof. - ----------------------------------- 2.3 Cancellation of Treasury Stock and BHOO-Owned Stock - --------------------------------------------------------------------------- Cancellation of Treasury Stock and BHOO-Owned Stock. Each share of SSI Common - -------------------------------------------------------------------------------- Stock and all other shares of capital stock of SSI that are owned by SSI as - -------------------------------------------------------------------------------- treasury stock immediately prior to the Effective Time and any shares of SSI - -------------------------------------------------------------------------------- Common Stock and all other shares of capital stock of SSI owned by BHOO, Sub or - -------------------------------------------------------------------------------- any other wholly owned Subsidiary (as defined in Section 3.1(a)) of BHOO or SSI - -------------------------------------------------------------------------------- shall be canceled and retired and shall cease to exist and no Merger - -------------------------------------------------------------------------------- Consideration or other consideration shall be delivered or deliverable in - -------------------------------------------------------------------------------- exchange therefor. - ------------------- 2.4 Treatment of Stock Options and Warrants2.4 Treatment of Stock - -------------------------------------------------------------------------------- Options and Warrants. At the Effective Time, each outstanding SSI Stock Option - -------------------------------------------------------------------------------- (as defined in Section 3.1(b)), whether or not then exercisable or vested, shall - -------------------------------------------------------------------------------- be canceled by SSI and each holder of a canceled option shall be entitled to - -------------------------------------------------------------------------------- receive from the Surviving Corporation at the time of such cancellation, an - -------------------------------------------------------------------------------- amount in cash, without interest, equal to the product of (i) the number of - -------------------------------------------------------------------------------- shares of SSI Common Stock previously subject to such option whether or not then - -------------------------------------------------------------------------------- exercisable or vested, and (ii) the excess, if any, of the Merger Consideration - -------------------------------------------------------------------------------- over the exercise price per share applicable to such option reduced by any - -------------------------------------------------------------------------------- applicable withholding. Each outstanding SSI Stock Warrant (as defined in - -------------------------------------------------------------------------------- Section 3.1(b)) will be canceled prior to the Closing in connection with - -------------------------------------------------------------------------------- amendments to the loan agreement as set forth in Section 5.8. SSI will obtain - -------------------------------------------------------------------------------- agreements from option holders to receive the net cash payments contemplated by - -------------------------------------------------------------------------------- the first sentence of this Section 2.4. - --------------------------------------------- 2.5 Dissenting Shares2.5 Dissenting Shares. (a) Notwithstanding - -------------------------------------------------------------------------------- any provision of this Agreement to the contrary, shares of SSI Common Stock that - -------------------------------------------------------------------------------- are outstanding immediately prior to the Effective Time and which are held by - -------------------------------------------------------------------------------- stockholders who have not voted in favor of the Merger or consented thereto in - -------------------------------------------------------------------------------- writing and who have made properly in writing a demand to obtain payment for - -------------------------------------------------------------------------------- such Shares in accordance with Article 113 of the CBCA (collectively, the - -------------------------------------------------------------------------------- "Dissenting Shares") will not be acquired for, converted into or represent the - -------------------------------------------------------------------------------- right to receive the Merger Consideration. Such stockholders will be entitled - -------------------------------------------------------------------------------- to receive payment from SSI of the value of such shares held by them in - -------------------------------------------------------------------------------- accordance with the provisions of such Article 113, except that all Dissenting - -------------------------------------------------------------------------------- Shares held by stockholders who shall have failed to perfect or who effectively - -------------------------------------------------------------------------------- have withdrawn or lost their rights to appraisal of such shares under such - -------------------------------------------------------------------------------- Article 113 shall thereupon be deemed to have been acquired for, converted into - -------------------------------------------------------------------------------- and become exchangeable for, as of the Effective Time, the right to receive the - -------------------------------------------------------------------------------- Merger Consideration, without any interest thereon, upon surrender, in the - -------------------------------------------------------------------------------- manner provided in Section 2.6 of the certificate or certificates that formerly - -------------------------------------------------------------------------------- evidenced such shares. - ------------------------ (b) SSI shall give BHOO and Sub (i) prompt notice of any demands to - -------------------------------------------------------------------------------- obtain payment received by SSI, withdrawals of such demands, and any other - -------------------------------------------------------------------------------- instruments served pursuant to Colorado Law in respect of Dissenting Shares and - -------------------------------------------------------------------------------- received by SSI and (ii) the opportunity to direct all negotiations and - -------------------------------------------------------------------------------- proceedings with respect to demands to obtain payment under Colorado Law. SSI - -------------------------------------------------------------------------------- shall not, except with the prior written consent of BHOO, make any payment with - -------------------------------------------------------------------------------- respect to any demands to obtain payment or offer to settle or settle any such - -------------------------------------------------------------------------------- demands. - -------- 2.4 Exchange of Certificates2.4 Exchange of Certificates. - -------------------------------------------------------------------------------- (a) Exchange Agent. Prior to the Effective Time, BHOO or Sub shall - -------------------------------------------------------------------------------- designate a bank or trust company reasonably satisfactory to SSI to act as agent - -------------------------------------------------------------------------------- (the "Exchange Agent") in connection with the Merger to receive the funds to - -------------------------------------------------------------------------------- which holders of shares of SSI Common Stock shall become entitled pursuant to - -------------------------------------------------------------------------------- Section 2.1. At or as soon as practicable after the Effective Time, Sub or the - -------------------------------------------------------------------------------- Surviving Corporation, as applicable, will deposit in trust with the Exchange - -------------------------------------------------------------------------------- Agent, cash in the aggregate amount equal to the product of (i) the number of - -------------------------------------------------------------------------------- shares of SSI Common Stock outstanding immediately prior to the Effective Time - -------------------------------------------------------------------------------- (other than Dissenting Shares) and (ii) the Merger Consideration. Such funds - -------------------------------------------------------------------------------- shall be invested by the Exchange Agent as directed by the Surviving - ------------------------------------------------------------------------------- Corporation; provided, however, that no loss on any investment made pursuant to - -------------------------------------------------------------------------------- this Section 2.6(a) shall relieve the Surviving Corporation of its obligation to - -------------------------------------------------------------------------------- pay the Merger Consideration for each share of SSI Common Stock outstanding - -------------------------------------------------------------------------------- immediately prior to the Effective Time (other than Dissenting Shares). - -------------------------------------------------------------------------------- (b) Exchange Procedures. As soon as reasonably practicable after the - -------------------------------------------------------------------------------- Effective Time, the Surviving Corporation shall cause the Exchange Agent to mail - -------------------------------------------------------------------------------- to each person who was, at the Effective Time, a holder of record of shares of - -------------------------------------------------------------------------------- SSI Common Stock entitled to receive the Merger Consideration pursuant to - -------------------------------------------------------------------------------- Section 2.1 a form of letter of transmittal (which shall specify that delivery - -------------------------------------------------------------------------------- will be effected, and risk of loss and title to the certificates evidencing such - -------------------------------------------------------------------------------- shares (the "Certificates") will pass, only upon proper delivery of the - -------------------------------------------------------------------------------- Certificates to the Exchange Agent) and instructions for use in effecting the - -------------------------------------------------------------------------------- surrender of the Certificates pursuant to such letter of transmittal. Upon - -------------------------------------------------------------------------------- surrender to the Exchange Agent of a Certificate, together with such letter of - -------------------------------------------------------------------------------- transmittal, duly completed and validly executed in accordance with the - -------------------------------------------------------------------------------- instructions thereto, and such other documents as may be required pursuant to - -------------------------------------------------------------------------------- such instructions, the holder of such Certificate shall be entitled to receive - -------------------------------------------------------------------------------- in exchange therefor the Merger Consideration for each share formerly evidenced - -------------------------------------------------------------------------------- by such Certificate, and such Certificate shall then be canceled. No interest - -------------------------------------------------------------------------------- shall accrue or be paid on the Merger Consideration payable upon the surrender - -------------------------------------------------------------------------------- of any Certificate for the benefit of the holder of such Certificate. If - -------------------------------------------------------------------------------- payment of the Merger Consideration is to be made to a person other than the - -------------------------------------------------------------------------------- person in whose name the surrendered Certificate is registered on the stock - -------------------------------------------------------------------------------- transfer books of SSI, it shall be a condition of payment that the Certificate - -------------------------------------------------------------------------------- so surrendered shall be endorsed properly or otherwise be in proper form for - -------------------------------------------------------------------------------- transfer and that the person requesting such payment shall have paid all - -------------------------------------------------------------------------------- transfer and other taxes required by reason of the payment of the Merger - -------------------------------------------------------------------------------- Consideration to a person other than the registered holder of the Certificate - -------------------------------------------------------------------------------- surrendered or shall have established to the satisfaction of BHOO or the - -------------------------------------------------------------------------------- Surviving Corporation that such taxes either have been paid or are not - -------------------------------------------------------------------------------- applicable. BHOO or the Surviving Corporation shall pay all charges and - -------------------------------------------------------------------------------- expenses, including those of the Exchange Agent, in connection with the - -------------------------------------------------------------------------------- distribution of the Merger Consideration. - --------------------------------------------- (c) Termination of Exchange Fund. At any time following the third - -------------------------------------------------------------------------------- month after the Effective Time, the Surviving Corporation shall be entitled to - -------------------------------------------------------------------------------- require the Exchange Agent to deliver to the Surviving Corporation any funds - -------------------------------------------------------------------------------- which had been made available to the Exchange Agent and not disbursed to holders - -------------------------------------------------------------------------------- of SSI Common Stock (including, without limitation, all interest and other - -------------------------------------------------------------------------------- income received by the Exchange Agent in respect of all funds made available to - -------------------------------------------------------------------------------- it) and, thereafter, such holders shall be entitled to look to the Surviving - -------------------------------------------------------------------------------- Corporation (subject to abandoned property, escheat and other similar laws) only - -------------------------------------------------------------------------------- as general creditors thereof with respect to any Merger Consideration that may - -------------------------------------------------------------------------------- be payable upon due surrender of the Certificates held by them. Notwithstanding - -------------------------------------------------------------------------------- the foregoing, neither BHOO nor the Surviving Corporation shall be liable to any - -------------------------------------------------------------------------------- holder of SSI Common Stock for any Merger Consideration delivered in respect of - -------------------------------------------------------------------------------- such stock to a public official pursuant to any abandoned property, escheat or - -------------------------------------------------------------------------------- other similar law. - -------------------- (d) No Further Ownership Rights in SSI Common Stock. At the Effective - -------------------------------------------------------------------------------- Time, the stock transfer books of SSI shall be closed and, thereafter, there - -------------------------------------------------------------------------------- shall be no further registration of transfers by holders of shares of SSI Common - -------------------------------------------------------------------------------- Stock immediately prior to the Effective Time on the records of SSI. From and - -------------------------------------------------------------------------------- after the Effective Time, the holders of shares of SSI Common Stock outstanding - -------------------------------------------------------------------------------- immediately prior to the Effective Time shall cease to have any rights with - -------------------------------------------------------------------------------- respect to such shares except as otherwise provided herein or by applicable law. - -------------------------------------------------------------------------------- ARTICLE III ----------- REPRESENTATIONS AND WARRANTIESARTICLE IIIREPRESENTATIONS AND WARRANTIES ----------------------------------------------------------------------- 3.1 Representations and Warranties of SSI3.1 Representations and - -------------------------------------------------------------------------------- Warranties of SSI. SSI represents and warrants to BHOO and Sub as follows: - -------------------------------------------------------------------------------- (a) Organization, Standing and Power(a) Organization, Standing and - -------------------------------------------------------------------------------- Power. Each of SSI and its Subsidiaries (as defined below) is a corporation, - -------------------------------------------------------------------------------- limited liability company or partnership duly organized, validly existing and in - -------------------------------------------------------------------------------- good standing under the laws of its state or jurisdiction of incorporation or - -------------------------------------------------------------------------------- organization, has all requisite power and authority to own, lease and operate - -------------------------------------------------------------------------------- its properties and to carry on its business as now being conducted, and is duly - -------------------------------------------------------------------------------- qualified and in good standing to do business in each jurisdiction in which the - -------------------------------------------------------------------------------- business it is conducting, or the operation, ownership or leasing of its - -------------------------------------------------------------------------------- properties, makes such qualification necessary, other than in such jurisdictions - -------------------------------------------------------------------------------- where the failure so to qualify would not have a Material Adverse Effect (as - -------------------------------------------------------------------------------- defined below) on SSI. SSI has heretofore delivered to BHOO complete and - -------------------------------------------------------------------------------- correct copies of its Articles of Incorporation and Bylaws, each as amended to - -------------------------------------------------------------------------------- the date hereof. SSI and all Subsidiaries of SSI and their respective - -------------------------------------------------------------------------------- jurisdictions of incorporation or organization, percentage ownership by SSI and - -------------------------------------------------------------------------------- jurisdiction where qualified to do business are identified on Schedule 3.1(a). - -------------------------------------------------------------------------------- As used in this Agreement, "Subsidiary" means, with respect to any party, any - -------------------------------------------------------------------------------- corporation or other organization, whether incorporated or unincorporated, of - -------------------------------------------------------------------------------- which: (i) such party or any other Subsidiary of such party is a general partner - -------------------------------------------------------------------------------- (excluding partnerships, the general partnership interests of which are held by - -------------------------------------------------------------------------------- such party or any Subsidiary of such party that do not have a majority of the - -------------------------------------------------------------------------------- voting interest in such partnership); or (ii) at least a majority of the - -------------------------------------------------------------------------------- securities or other interests having by their terms ordinary voting power to - -------------------------------------------------------------------------------- elect a majority of the Board of Directors or others performing similar - -------------------------------------------------------------------------------- functions with respect to such corporation or other organization is, directly or - -------------------------------------------------------------------------------- indirectly, owned or controlled by such party or by any one or more of its - -------------------------------------------------------------------------------- Subsidiaries, or by such party and any one or more of its Subsidiaries. As used - -------------------------------------------------------------------------------- in this Agreement: a "Material Adverse Effect" or "Material Adverse Change" - -------------------------------------------------------------------------------- shall mean, in respect of SSI or BHOO, as the case may be, any effect or change - -------------------------------------------------------------------------------- that is or, as far as can be reasonably determined, is reasonably likely to be, - -------------------------------------------------------------------------------- materially adverse to (i) the condition (financial or otherwise) of such party - -------------------------------------------------------------------------------- and its Subsidiaries taken as a whole (including the results of operations, - -------------------------------------------------------------------------------- financial condition or prospects thereof) or the assets or liabilities thereof, - -------------------------------------------------------------------------------- taken as a whole, or (ii) the enforcement or validity of this Agreement. - -------------------------------------------------------------------------------- (b) Capital Structure(b) Capital Structure. As of the date hereof, - -------------------------------------------------------------------------------- the authorized capital stock of SSI consists of 25,000,000 shares of SSI Common - -------------------------------------------------------------------------------- Stock and 1,200,000 shares of SSI Preferred Stock. At the close of business on - -------------------------------------------------------------------------------- April 30, 1998: (i) 9,046,804 shares of SSI Common Stock and 800,000 shares of - -------------------------------------------------------------------------------- SSI Preferred Stock were issued and outstanding, 1,552,124 shares of SSI Common - -------------------------------------------------------------------------------- Stock were reserved for issuance pursuant to outstanding options ("SSI Stock - -------------------------------------------------------------------------------- Options") under SSI's Stock Option Plan (the "SSI Stock Plan") and 1,950,000 - -------------------------------------------------------------------------------- shares of SSI Common Stock were reserved for issuance pursuant to outstanding - -------------------------------------------------------------------------------- warrants to purchase SSI Common Stock at an exercise price of $3.00 per share - -------------------------------------------------------------------------------- (the "SSI Warrants"), (ii) no shares of SSI Common Stock were held by SSI in its - -------------------------------------------------------------------------------- treasury; and (iii) no bonds, debentures, notes or other indebtedness having the - -------------------------------------------------------------------------------- right to vote (or convertible into securities having the right to vote) on any - -------------------------------------------------------------------------------- matters on which SSI stockholders may vote ("Voting Debt") were issued or - -------------------------------------------------------------------------------- outstanding. All outstanding shares of SSI Common Stock are validly issued, - -------------------------------------------------------------------------------- fully paid and nonassessable and are not subject to preemptive rights. Except - -------------------------------------------------------------------------------- as set forth on Schedule 3.1(b), all outstanding shares of capital stock of the - -------------------------------------------------------------------------------- Subsidiaries of SSI are owned by SSI, or a direct or indirect wholly owned - -------------------------------------------------------------------------------- Subsidiary of SSI, free and clear of all liens, charges, encumbrances, claims - -------------------------------------------------------------------------------- and options of any nature. Except as set forth in this Section 3.1(b) or on - -------------------------------------------------------------------------------- Schedule 3.1(b) and except for changes since April 30, 1998 resulting from the - -------------------------------------------------------------------------------- exercise of employee stock options granted pursuant to, or from issuances or - -------------------------------------------------------------------------------- purchases under, the SSI Stock Plan or as contemplated by this Agreement, there - -------------------------------------------------------------------------------- are outstanding: (i) no shares of capital stock, Voting Debt or other voting - -------------------------------------------------------------------------------- securities of SSI; (ii) no securities of SSI or any Subsidiary of SSI - -------------------------------------------------------------------------------- convertible into or exchangeable for shares of capital stock, Voting Debt or - -------------------------------------------------------------------------------- other voting securities of SSI or any Subsidiary of SSI; and (iii) no options, - -------------------------------------------------------------------------------- warrants, calls, rights (including preemptive rights), commitments or agreements - -------------------------------------------------------------------------------- to which SSI or any Subsidiary of SSI is a party or by which it is bound in any - -------------------------------------------------------------------------------- case obligating SSI or any Subsidiary of SSI to issue, deliver, sell, purchase, - -------------------------------------------------------------------------------- redeem or acquire, or cause to be issued, delivered, sold, purchased, redeemed - -------------------------------------------------------------------------------- or acquired, additional shares of capital stock or any Voting Debt or other - -------------------------------------------------------------------------------- voting securities of SSI or of any Subsidiary of SSI, or obligating SSI or any - -------------------------------------------------------------------------------- Subsidiary of SSI to grant, extend or enter into any such option, warrant, call, - -------------------------------------------------------------------------------- right, commitment or agreement. Except as set forth on Schedule 3.1(b), there - -------------------------------------------------------------------------------- are not as of the date hereof and there will not be at the Effective Time any - -------------------------------------------------------------------------------- stockholder agreements, voting trusts or other agreements or understandings to - -------------------------------------------------------------------------------- which SSI is a party or by which it is bound relating to the voting of any - -------------------------------------------------------------------------------- shares of the capital stock of SSI that will limit in any way the solicitation - -------------------------------------------------------------------------------- of proxies by or on behalf of SSI from, or the casting of votes by, the - -------------------------------------------------------------------------------- stockholders of SSI with respect to the Merger. Except as set forth on Schedule - -------------------------------------------------------------------------------- 3.1(b), there are no restrictions on SSI to vote the stock of any of its - -------------------------------------------------------------------------------- Subsidiaries. Except as set forth on Schedule 3.1(b), there are no persons - -------------------------------------------------------------------------------- known to beneficially or of record own over one percent of the outstanding - -------------------------------------------------------------------------------- shares of SSI Common Stock. - ------------------------------- (c) Authority; No Violations; Consents and Approvals(c) Authority; - -------------------------------------------------------------------------------- No Violations; Consents and Approvals. - ------------------------------------------ (i) The Board of Directors of SSI has, by unanimous vote of all - -------------------------------------------------------------------------------- directors with no negative vote, approved the Merger and this Agreement and - -------------------------------------------------------------------------------- declared the Merger and Agreement to be in the best interests of the - -------------------------------------------------------------------------------- stockholders of SSI. The directors of SSI have advised SSI and BHOO that they - -------------------------------------------------------------------------------- currently intend to vote or cause to be voted all of the shares beneficially - -------------------------------------------------------------------------------- owned by them and their affiliates in favor of approval of the Merger and this - -------------------------------------------------------------------------------- Agreement. SSI has all requisite corporate power and authority to enter into - -------------------------------------------------------------------------------- this Agreement and, subject, with respect to consummation of the Merger, to - -------------------------------------------------------------------------------- approval of this Agreement and the Merger by the stockholders of SSI in - -------------------------------------------------------------------------------- accordance with the CBCA, to consummate the transactions contemplated hereby. - -------------------------------------------------------------------------------- The execution and delivery of this Agreement and the consummation of the - -------------------------------------------------------------------------------- transactions contemplated hereby have been duly authorized by all necessary - -------------------------------------------------------------------------------- corporate action on the part of SSI, subject, with respect to consummation of - -------------------------------------------------------------------------------- the Merger, to approval of this Agreement and the Merger by the stockholders of - -------------------------------------------------------------------------------- SSI in accordance with the CBCA. This Agreement has been duly executed and - -------------------------------------------------------------------------------- delivered by SSI and, subject, with respect to consummation of the Merger, to - -------------------------------------------------------------------------------- approval of this Agreement and the Merger by the stockholders of SSI in - -------------------------------------------------------------------------------- accordance with the CBCA, and assuming this Agreement constitutes the valid and - -------------------------------------------------------------------------------- binding obligation of each of BHOO and Sub, constitutes a valid and binding - -------------------------------------------------------------------------------- obligation of SSI enforceable in accordance with its terms, subject, as to - -------------------------------------------------------------------------------- enforceability, to bankruptcy, insolvency, reorganization and other laws of - -------------------------------------------------------------------------------- general applicability relating to or affecting creditors' rights and to general - -------------------------------------------------------------------------------- principles of equity. - ----------------------- (ii) Except as set forth on Schedule 3.1(c), the execution and - -------------------------------------------------------------------------------- delivery of this Agreement does not, and the consummation of the transactions - -------------------------------------------------------------------------------- contemplated hereby and compliance with the provisions hereof will not, conflict - -------------------------------------------------------------------------------- with, or result in any violation of, or default (with or without notice or lapse - -------------------------------------------------------------------------------- of time, or both) under, or give rise to a right of termination, cancellation or - -------------------------------------------------------------------------------- acceleration of any obligation or to the loss of a material benefit under, or - -------------------------------------------------------------------------------- give rise to a right of purchase under, result in the creation of any lien, - -------------------------------------------------------------------------------- security interest, charge or encumbrance upon any of the properties or assets of - -------------------------------------------------------------------------------- SSI or any of its Subsidiaries under, or otherwise result in a detriment to SSI - -------------------------------------------------------------------------------- or any of its Subsidiaries under, any provision of (i) the Articles of - -------------------------------------------------------------------------------- Incorporation or Bylaws of SSI or any provision of the comparable charter or - -------------------------------------------------------------------------------- organizational documents of any of its Subsidiaries, (ii) any loan or credit - -------------------------------------------------------------------------------- agreement, note, bond, mortgage, indenture, lease or other agreement, - ----------------------------------------------------------------------------- instrument, permit, concession, franchise or license applicable to SSI or any of - -------------------------------------------------------------------------------- its Subsidiaries, (iii) any joint venture or other ownership arrangement or (iv) - -------------------------------------------------------------------------------- assuming the consents, approvals, authorizations or permits and filings or - -------------------------------------------------------------------------------- notifications referred to in Section 3.1(c)(iii) are duly and timely obtained or - -------------------------------------------------------------------------------- made and the approval of the Merger and this Agreement by the stockholders of - -------------------------------------------------------------------------------- SSI has been obtained, any judgment, order, decree, statute, law, ordinance, - -------------------------------------------------------------------------------- rule or regulation applicable to SSI or any of its Subsidiaries or any of their - -------------------------------------------------------------------------------- respective properties or assets. - ----------------------------------- (iii) No consent, approval, order or authorization of, or - -------------------------------------------------------------------------------- registration, declaration or filing with, or permit from any court, - ---------------------------------------------------------------------------- governmental, regulatory or administrative agency or commission or other - -------------------------------------------------------------------------------- governmental authority or instrumentality, domestic or foreign (a "Governmental - -------------------------------------------------------------------------------- Entity"), is required by or with respect to SSI or any of its Subsidiaries in - -------------------------------------------------------------------------------- connection with the execution and delivery of this Agreement by SSI or the - -------------------------------------------------------------------------------- consummation by SSI of the transactions contemplated hereby, except for: (A) - -------------------------------------------------------------------------------- the filing with the SEC of (x) a proxy statement in preliminary and definitive - -------------------------------------------------------------------------------- form relating to the meeting of SSI's stockholders to be held in connection with - -------------------------------------------------------------------------------- the Merger (the "Proxy Statement") and (y) such reports under Section 13(a) of - -------------------------------------------------------------------------------- the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and such - -------------------------------------------------------------------------------- other compliance with the Exchange Act and the rules and regulations thereunder, - -------------------------------------------------------------------------------- as may be required in connection with this Agreement and the transactions - -------------------------------------------------------------------------------- contemplated hereby; (B) the filing of the Articles of Merger with the Secretary - -------------------------------------------------------------------------------- of State of the State of Colorado; (C) such filings and approvals as may be - -------------------------------------------------------------------------------- required by any applicable state securities, "blue sky" or takeover laws, or - -------------------------------------------------------------------------------- environmental laws; and (D) such filings and approvals as may be required by any - -------------------------------------------------------------------------------- foreign premerger notification, securities, corporate or other law, rule or - -------------------------------------------------------------------------------- regulation. - ----------- (d) SEC Documents(d) SEC Documents. SSI has made available to BHOO - -------------------------------------------------------------------------------- a true and complete copy of each report, schedule, registration statement and - -------------------------------------------------------------------------------- definitive proxy statement filed by SSI with the SEC since December 31, 1994 and - -------------------------------------------------------------------------------- prior to the date of this Agreement (the "SSI SEC Documents") which are all the - -------------------------------------------------------------------------------- documents that SSI was required to file with the SEC since such date. Except as - -------------------------------------------------------------------------------- set forth on Schedule 3.1(d), as of their respective dates, the SSI SEC - -------------------------------------------------------------------------------- Documents complied in all material respects with the requirements of the - -------------------------------------------------------------------------------- Securities Act of 1933, as amended (the "Securities Act"), or the Exchange Act, - -------------------------------------------------------------------------------- as the case may be, and the rules and regulations of the SEC thereunder - -------------------------------------------------------------------------------- applicable to such SSI SEC Documents, and none of the SSI SEC Documents - -------------------------------------------------------------------------------- contained any untrue statement of a material fact or omitted to state a material - -------------------------------------------------------------------------------- fact required to be stated therein or necessary to make the statements therein, - -------------------------------------------------------------------------------- in light of the circumstances under which they were made, not misleading. - -------------------------------------------------------------------------------- Except as set forth on Schedule 3.1(d), the financial statements of SSI included - -------------------------------------------------------------------------------- in the SSI SEC Documents complied in all material respects with the published - -------------------------------------------------------------------------------- rules and regulations of the SEC with respect thereto, were prepared in - -------------------------------------------------------------------------------- accordance with generally accepted accounting principles ("GAAP") applied on a - -------------------------------------------------------------------------------- consistent basis during the periods involved (except as may be indicated in the - -------------------------------------------------------------------------------- notes thereto or, in the case of the unaudited statements, as permitted by Rule - -------------------------------------------------------------------------------- 10-01 of Regulation S-X of the SEC) and fairly present in accordance with - -------------------------------------------------------------------------------- applicable requirements of GAAP (subject, in the case of the unaudited - -------------------------------------------------------------------------------- statements, to normal, recurring adjustments, none of which are material) the - -------------------------------------------------------------------------------- consolidated financial position of SSI and its consolidated Subsidiaries as of - -------------------------------------------------------------------------------- their respective dates and the consolidated results of operations and the - -------------------------------------------------------------------------------- consolidated cash flows of SSI and its consolidated Subsidiaries for the periods - -------------------------------------------------------------------------------- presented therein. Except as disclosed in the SSI SEC Documents or in Schedule - -------------------------------------------------------------------------------- 3.1(d), there are no agreements, arrangements or understandings between SSI and - -------------------------------------------------------------------------------- any party who is at the date of this Agreement or was at any time prior to the - -------------------------------------------------------------------------------- date hereof but after December 31, 1994 an Affiliate (as defined below) of SSI - -------------------------------------------------------------------------------- that are required to be disclosed in the SSI SEC Documents. Except as disclosed - -------------------------------------------------------------------------------- in Schedule 3.1(d), all SSI SEC Documents were filed timely when they were - -------------------------------------------------------------------------------- originally due. For purposes of this Agreement "Affiliate" means with respect - -------------------------------------------------------------------------------- to any person or entity, any other person or entity that directly or indirectly, - -------------------------------------------------------------------------------- controls, is controlled by, or is under common control with such person or - -------------------------------------------------------------------------------- entity. - ------- (e) Information Supplied(e) Information Supplied. None of the - -------------------------------------------------------------------------------- information supplied or to be supplied by SSI and included or incorporated by - -------------------------------------------------------------------------------- reference in the Proxy Statement will, at the date mailed to stockholders of SSI - -------------------------------------------------------------------------------- or at the time of the meeting of such stockholders to be held in connection with - -------------------------------------------------------------------------------- the Merger or at the Effective Time, contain any untrue statement of a material - -------------------------------------------------------------------------------- fact or omit to state any material fact required to be stated therein or - -------------------------------------------------------------------------------- necessary in order to make the statements therein, in light of the circumstances - -------------------------------------------------------------------------------- under which they are made, not misleading. If at any time prior to the - -------------------------------------------------------------------------------- Effective Time any event with respect to SSI or any of its Subsidiaries, or with - -------------------------------------------------------------------------------- respect to other information supplied by SSI for inclusion in the Proxy - -------------------------------------------------------------------------------- Statement, shall occur which is required to be described in an amendment of, or - -------------------------------------------------------------------------------- a supplement to, the Proxy Statement, such event shall be so described, and such - -------------------------------------------------------------------------------- amendment or supplement shall be promptly filed with the SEC and, as required by - -------------------------------------------------------------------------------- law, disseminated to the stockholders of SSI. The Proxy Statement, insofar as - -------------------------------------------------------------------------------- it relates to SSI or its Subsidiaries or other information supplied by SSI for - -------------------------------------------------------------------------------- inclusion therein, will comply in all material respects with the provisions of - -------------------------------------------------------------------------------- the Exchange Act and the rules and regulations thereunder. - ------------------------------------------------------------------ (f) Absence of Certain Changes or Events(f) Absence of Certain - -------------------------------------------------------------------------------- Changes or Events. Except as disclosed in, or reflected in the financial - -------------------------------------------------------------------------------- statements included in, the SSI SEC Documents or on Schedule 3.1(f), or except - -------------------------------------------------------------------------------- as expressly contemplated by this Agreement, since December 31, 1997, there has - -------------------------------------------------------------------------------- not been: (i) any declaration, setting aside or payment of any dividend or - -------------------------------------------------------------------------------- other distribution (whether in cash, stock or property) with respect to any of - -------------------------------------------------------------------------------- SSI's capital stock; (ii) any amendment of any material term of any outstanding - -------------------------------------------------------------------------------- equity security of SSI or any Subsidiary; (iii) any repurchase, redemption or - -------------------------------------------------------------------------------- other acquisition by SSI or any Subsidiary of any outstanding shares of capital - -------------------------------------------------------------------------------- stock or other equity securities of, or other ownership interests in, SSI or any - -------------------------------------------------------------------------------- Subsidiary, except as contemplated by SSI Benefit Plans; (iv) any material - -------------------------------------------------------------------------------- change in any method of accounting or accounting practice or any tax method, - -------------------------------------------------------------------------------- practice or election by SSI or any Subsidiary; or (v) any other transaction, - -------------------------------------------------------------------------------- commitment, dispute or other event or condition (financial or otherwise) of any - -------------------------------------------------------------------------------- character (whether or not in the ordinary course of business) that has or is - -------------------------------------------------------------------------------- likely to have had a Material Adverse Effect on SSI. - ------------------------------------------------------------- (g) No Undisclosed Material Liabilities(g) No Undisclosed Material - -------------------------------------------------------------------------------- Liabilities. Except as disclosed in the SSI SEC Documents or on Schedule - -------------------------------------------------------------------------------- 3.1(g), as of the date hereof, there are no liabilities of SSI or any of its - -------------------------------------------------------------------------------- Subsidiaries of any kind whatsoever, whether accrued, contingent, absolute, - -------------------------------------------------------------------------------- determined, determinable or otherwise, other than: (i) liabilities adequately - -------------------------------------------------------------------------------- provided for on the balance sheet of SSI dated as of December 31, 1997 - -------------------------------------------------------------------------------- (including the notes thereto) contained in SSI's Annual Report on Form 10-K for - -------------------------------------------------------------------------------- the year ended December 31, 1997; (ii) liabilities under this Agreement; and - -------------------------------------------------------------------------------- (iii) liabilities incurred in the ordinary course of business after December 31, - -------------------------------------------------------------------------------- 1997, which have not had and are not likely to have a Material Adverse Effect on - -------------------------------------------------------------------------------- SSI. - ---- (h) No Default(h) No Default. Neither SSI nor any of its - -------------------------------------------------------------------------------- Subsidiaries is in default or violation (and no event has occurred which, with - -------------------------------------------------------------------------------- notice or the lapse of time or both, would constitute a default or violation) of - -------------------------------------------------------------------------------- any term, condition or provision of (i) their respective charter and by-laws, - -------------------------------------------------------------------------------- (ii) except as disclosed in Schedule 3.1(h), any note, bond, mortgage, - -------------------------------------------------------------------------------- indenture, license, agreement or other instrument or obligation to which SSI or - -------------------------------------------------------------------------------- any of its Subsidiaries is now a party or by which SSI or any of its - -------------------------------------------------------------------------------- Subsidiaries or any of their respective properties or assets may be bound or - -------------------------------------------------------------------------------- (iii) any order, writ, injunction, decree, statute, rule or regulation - ------------------------------------------------------------------------------- applicable to SSI or any of its Subsidiaries. - ---------------------------------------------------- (i) Compliance with Applicable Laws(i) Compliance with Applicable - -------------------------------------------------------------------------------- Laws. SSI and its Subsidiaries hold all permits, licenses, variances, - -------------------------------------------------------------------------------- exemptions, orders, franchises and approvals of all Governmental Entities - -------------------------------------------------------------------------------- necessary for the lawful conduct of their respective businesses (the "SSI - -------------------------------------------------------------------------------- Permits"). SSI and its Subsidiaries are in compliance with the terms of the SSI - -------------------------------------------------------------------------------- Permits. Except as disclosed in the SSI SEC Documents or as set forth on - -------------------------------------------------------------------------------- Schedule 3.1(i), the businesses of SSI and its Subsidiaries are not being - -------------------------------------------------------------------------------- conducted in violation of any law, ordinance or regulation of any Governmental - -------------------------------------------------------------------------------- Entity. Except as set forth on Schedule 3.1(i), as of the date of this - -------------------------------------------------------------------------------- Agreement, no investigation or review by any Governmental Entity with respect to - -------------------------------------------------------------------------------- SSI or any of its Subsidiaries is pending or, to the best knowledge of SSI as of - -------------------------------------------------------------------------------- the date hereof, threatened. Schedule 3.1(i) sets forth each such failure to - -------------------------------------------------------------------------------- hold or comply with the terms of SSI Permits, each such violation of law, - -------------------------------------------------------------------------------- ordinance or regulation of any governmental entity and each such pending or - -------------------------------------------------------------------------------- threatened investigation or review by any governmental entity existing on the - -------------------------------------------------------------------------------- date hereof that involves amounts in excess of $10,000. - --------------------------------------------------------------- (j) Litigation(j) Litigation. Except as disclosed in the SSI SEC - -------------------------------------------------------------------------------- Documents or on Schedule 3.1(j) hereto, there is no suit, action or proceeding - -------------------------------------------------------------------------------- pending, or, to the best knowledge of SSI, threatened against or affecting SSI - -------------------------------------------------------------------------------- or any Subsidiary of SSI ("SSI Litigation"), and SSI and its Subsidiaries have - -------------------------------------------------------------------------------- no knowledge of any facts that are likely to give rise to any SSI Litigation, - -------------------------------------------------------------------------------- nor is there any judgment, decree, injunction, rule or order of any Governmental - -------------------------------------------------------------------------------- Entity or arbitrator outstanding against SSI or any Subsidiary of SSI ("SSI - -------------------------------------------------------------------------------- Order"). In addition, the aggregate reasonable estimate of uninsured exposures - -------------------------------------------------------------------------------- or losses under all claims and judgments pending, or to the best knowledge of - -------------------------------------------------------------------------------- SSI as of the date hereof, threatened, pursuant to all SSI Litigation and SSI - -------------------------------------------------------------------------------- Orders, existing on the date hereof, does not exceed $15,000. - ---------------------------------------------------------------------- (k) Taxes(k) Taxes. - ------------------------------------------ (i) Except as set forth on Schedule 3.1(k)(i), each of SSI, each - -------------------------------------------------------------------------------- of its Subsidiaries and any affiliated, consolidated, combined, unitary or - -------------------------------------------------------------------------------- similar group of which any such corporation is or was a member has (A) duly - -------------------------------------------------------------------------------- filed on a timely basis (taking into account any extensions) all federal and all - -------------------------------------------------------------------------------- material state, local, foreign and other returns, declarations, reports, - -------------------------------------------------------------------------------- estimates, information returns and statements ("Returns") required to be filed - -------------------------------------------------------------------------------- or sent by or with respect to it in respect of any Taxes (as hereinafter - -------------------------------------------------------------------------------- defined), (B) duly paid or deposited on a timely basis all Taxes that are due - -------------------------------------------------------------------------------- and payable (except for audit adjustments not material in the aggregate or to - -------------------------------------------------------------------------------- the extent that liability therefor is reserved for in SSI's most recent audited - -------------------------------------------------------------------------------- financial statements) for which SSI or any of its Subsidiaries may be liable, - -------------------------------------------------------------------------------- (C) established reserves that are adequate for the payment of all Taxes not yet - -------------------------------------------------------------------------------- due and payable with respect to the results of operations of SSI and its - -------------------------------------------------------------------------------- Subsidiaries through the date hereof, and (D) complied in all material respects - -------------------------------------------------------------------------------- with all applicable laws, rules and regulations relating to the reporting, - -------------------------------------------------------------------------------- payment and withholding of Taxes and has in all material respects timely - -------------------------------------------------------------------------------- withheld from employee wages and paid over to the proper governmental - ------------------------------------------------------------------------------- authorities all amounts required to be so withheld and paid over. - --------------------------------------------------------------------------- (ii) Schedule 3.1(k)(ii) sets forth (A) the last taxable period - -------------------------------------------------------------------------------- through which the federal income Tax Returns of SSI and any of its Subsidiaries - -------------------------------------------------------------------------------- have been examined by the Internal Revenue Service ("IRS") or otherwise closed - -------------------------------------------------------------------------------- and (B) any affiliated, consolidated, combined, unitary or similar group or - -------------------------------------------------------------------------------- Return in which SSI or any of its Subsidiaries is or has been a member or is or - -------------------------------------------------------------------------------- has joined in the filing. Except to the extent being contested in good faith, - -------------------------------------------------------------------------------- all deficiencies asserted as a result of such examinations and any examination - -------------------------------------------------------------------------------- by any applicable taxing authority have been paid, fully settled or adequately - -------------------------------------------------------------------------------- provided for in SSI's most recent audited financial statements. Except as - -------------------------------------------------------------------------------- adequately provided for in the SSI SEC Documents, no audits or other - ------------------------------------------------------------------------------- administrative proceedings or court proceedings are presently pending with - -------------------------------------------------------------------------------- regard to any Taxes for which SSI or any of its Subsidiaries would be liable, - -------------------------------------------------------------------------------- and no deficiency for any Taxes has been proposed, asserted or assessed pursuant - -------------------------------------------------------------------------------- to such examination against SSI or any of its Subsidiaries by any authority with - -------------------------------------------------------------------------------- respect to any period other than as set forth in Schedule 3.1(k)(ii). - -------------------------------------------------------------------------------- (iii) Except as disclosed on Schedule 3.1(k)(iii), neither SSI nor - -------------------------------------------------------------------------------- any of its Subsidiaries has executed or entered into (or prior to the close of - -------------------------------------------------------------------------------- business on the Closing Date will execute or enter into) with the IRS or any - -------------------------------------------------------------------------------- taxing authority (i) any agreement or other document extending or having the - -------------------------------------------------------------------------------- effect of extending the period for assessments or collection of any income or - -------------------------------------------------------------------------------- franchise Taxes for which SSI or any of its Subsidiaries would be liable or (ii) - -------------------------------------------------------------------------------- a closing agreement pursuant to Section 7121 of the Code, or any predecessor - -------------------------------------------------------------------------------- provision thereof or any similar provision of state, local, foreign or other - -------------------------------------------------------------------------------- income tax law that relates to the assets or operations of SSI or any of its - -------------------------------------------------------------------------------- Subsidiaries. - ------------- (iv) Neither SSI nor any of its Subsidiaries is a party to an - -------------------------------------------------------------------------------- agreement that provides for the payment of any amount that would constitute an - -------------------------------------------------------------------------------- "excess parachute payment" within the meaning of Section 280G of the Code. - -------------------------------------------------------------------------------- (v) Neither SSI nor any of its Subsidiaries has made an election - -------------------------------------------------------------------------------- under Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code - -------------------------------------------------------------------------------- apply to any disposition of a subsection (f) asset (as such term is defined in - -------------------------------------------------------------------------------- Section 341(f)(4) of the Code) owned by SSI or any of its Subsidiaries. - -------------------------------------------------------------------------------- (vi) Except as set forth in SSI SEC Documents or as disclosed on - -------------------------------------------------------------------------------- Schedule 3.1(k)(vi), neither SSI nor any of its Subsidiaries is a party to, is - -------------------------------------------------------------------------------- bound by or has any obligation under any tax sharing or allocation agreement or - -------------------------------------------------------------------------------- similar agreement or arrangement. - ------------------------------------ For purposes of this Agreement, "Taxes" shall mean all federal, state, - -------------------------------------------------------------------------------- county, local, foreign or other taxes, charges, fees, levies, imposts, duties, - -------------------------------------------------------------------------------- licenses or other assessments, together with any interest, penalties, additions - -------------------------------------------------------------------------------- to tax or additional amounts imposed by any taxing authority. - ---------------------------------------------------------------------- (l) Pension and Benefit Plans; ERISA; Employees(l) Pension and - -------------------------------------------------------------------------------- Benefit Plans; ERISA; Employees. - ----------------------------------- (i) All "employee pension plans," as defined in Section 3(2) of - -------------------------------------------------------------------------------- the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), - -------------------------------------------------------------------------------- maintained by SSI or any of its Subsidiaries or any trade or business (whether - -------------------------------------------------------------------------------- or not incorporated) which is under common control, or which is treated as a - -------------------------------------------------------------------------------- single employer, with SSI under Section 414(b), (c), (m) or (o) of the Code - -------------------------------------------------------------------------------- ("SSI ERISA Affiliate") or to which SSI or any of its Subsidiaries or any SSI - -------------------------------------------------------------------------------- ERISA Affiliate contributed or is obligated to contribute thereunder (the "SSI - -------------------------------------------------------------------------------- Pension Plans") intended to qualify under Section 401 of the Code so qualify and - -------------------------------------------------------------------------------- the trusts maintained pursuant thereto are exempt from federal income taxation - -------------------------------------------------------------------------------- under Section 501 of the Code nothing has occurred with respect to the operation - -------------------------------------------------------------------------------- of the SSI Pension Plans that could reasonably be expected to cause the loss of - -------------------------------------------------------------------------------- such qualification or exemption or the imposition of any liability, penalty, or - -------------------------------------------------------------------------------- tax under ERISA or the Code. - --------------------------------- (ii) Except as disclosed in Schedule 3.1(l)(ii), there has been no - -------------------------------------------------------------------------------- "reportable event" as that term is defined in Section 4043 of ERISA and the - -------------------------------------------------------------------------------- regulations thereunder with respect to the SSI Pension Plans subject to Title IV - -------------------------------------------------------------------------------- of ERISA that would require the giving of notice or any event requiring - -------------------------------------------------------------------------------- disclosure under Section 4041(c)(3)(C) or 4063(a) of ERISA. - ------------------------------------------------------------------ (iii) As to the SSI Pension Plans and as to the "employee pension - -------------------------------------------------------------------------------- benefit plans" maintained or contributed to by SSI, its Subsidiaries or by any - -------------------------------------------------------------------------------- SSI ERISA Affiliate within six years prior to the Effective Time subject to - -------------------------------------------------------------------------------- Title IV of ERISA, there has been no event or condition which presents a - -------------------------------------------------------------------------------- material risk of termination, no notice of intent to terminate has been given - -------------------------------------------------------------------------------- under Section 4041 of ERISA and no proceeding has been instituted under Section - -------------------------------------------------------------------------------- 4042 of ERISA to terminate, such that would result in a material liability to - -------------------------------------------------------------------------------- SSI, its Subsidiaries, or SSI ERISA Affiliates; no liability to the Pension - -------------------------------------------------------------------------------- Benefit Guaranty Corporation ("PBGC") has been incurred; no accumulated funding - -------------------------------------------------------------------------------- deficiency, whether or not waived, within the meaning of Section 302 of ERISA or - -------------------------------------------------------------------------------- Section 412 of the Code has been incurred; and the assets of each SSI Pension - -------------------------------------------------------------------------------- Plan equal or exceed the actuarial present value of the benefit liabilities, - -------------------------------------------------------------------------------- within the meaning of Section 4041 of ERISA, under such SSI Pension Plan, based - -------------------------------------------------------------------------------- upon reasonable actuarial assumptions and the asset valuation principles - -------------------------------------------------------------------------------- established by the PBGC. - --------------------------- (iv) There is no violation of ERISA with respect to the filing of - -------------------------------------------------------------------------------- applicable reports, documents, and notices regarding all the "employee benefit - -------------------------------------------------------------------------------- plans," as defined in Section 3(3) of the ERISA and all other employee - -------------------------------------------------------------------------------- compensation and benefit arrangements or payroll practices, including, without - -------------------------------------------------------------------------------- limitation, severance pay, sick leave, vacation pay, salary continuation for - -------------------------------------------------------------------------------- disability, consulting or other compensation agreements, retirement, deferred - -------------------------------------------------------------------------------- compensation, bonus, long-term incentive, stock option, stock purchase, - ------------------------------------------------------------------------------ hospitalization, medical insurance, life insurance and scholarship programs - -------------------------------------------------------------------------------- maintained by SSI or any of its Subsidiaries or to which SSI or any of its - -------------------------------------------------------------------------------- Subsidiaries contributed or is obligated to contribute thereunder (all such - -------------------------------------------------------------------------------- plans, other than the SSI Pension Plans, being hereinafter referred to as the - -------------------------------------------------------------------------------- "SSI Employee Benefit Plans"), or SSI Pension Plans with the Secretary of Labor - -------------------------------------------------------------------------------- and the Secretary of the Treasury or the furnishing of such documents to the - -------------------------------------------------------------------------------- participants or beneficiaries of the SSI Employee Benefit Plans or SSI Pension - -------------------------------------------------------------------------------- Plans. - ------ (v) Except as disclosed on Schedule 3.1(l)(v), the SSI Employee - -------------------------------------------------------------------------------- Benefit Plans and SSI Pension Plans have been maintained in accordance with - -------------------------------------------------------------------------------- their terms and with all provisions of ERISA (including rules and regulations - -------------------------------------------------------------------------------- thereunder) and other applicable Federal and state law, all contributions to the - -------------------------------------------------------------------------------- SSI Employee Benefit Plans and SSI Pension Plans have been timely made pursuant - -------------------------------------------------------------------------------- to their terms, there is no liability for breaches of fiduciary duty in - -------------------------------------------------------------------------------- connection with the SSI Employee Benefit Plans and SSI Pension Plans, there have - -------------------------------------------------------------------------------- been no defaults, violations, actions, suits or claims pending (except ordinary - -------------------------------------------------------------------------------- claims for benefits), or to the knowledge of SSI, threatened respecting the SSI - -------------------------------------------------------------------------------- Employee Benefit Plans and SSI Pension Plans, and neither SSI nor any of its - -------------------------------------------------------------------------------- Subsidiaries has engaged in a "prohibited transaction" within the meaning of - -------------------------------------------------------------------------------- Section 4975 of the Code or Section 406 of ERISA with respect to the SSI - -------------------------------------------------------------------------------- Employee Benefit Plans and SSI Pension Plans. - --------------------------------------------------- (vi) Neither the execution and delivery of this Agreement nor the - -------------------------------------------------------------------------------- consummation of the transactions contemplated hereby will (i) result in any - -------------------------------------------------------------------------------- payment becoming due to any employee or group of employees of SSI or any of its - -------------------------------------------------------------------------------- Subsidiaries; (ii) increase any benefits otherwise payable under any SSI - -------------------------------------------------------------------------------- Employee Benefit Plan or SSI Pension Plan or the profit sharing plan of SSI or - -------------------------------------------------------------------------------- (iii) result in the acceleration of the time of payment or vesting of any such - -------------------------------------------------------------------------------- benefits. Except as disclosed or referenced on Schedule 3.1(l)(vi) or in the - -------------------------------------------------------------------------------- SSI SEC Documents, there are no severance agreements or employment agreements - -------------------------------------------------------------------------------- between SSI or any of its Subsidiaries and any employee of SSI or such - -------------------------------------------------------------------------------- Subsidiary. - ----------- True and correct copies of all such severance agreements and employment - -------------------------------------------------------------------------------- agreements have been provided to BHOO. Except as set forth or otherwise - -------------------------------------------------------------------------------- referenced on Schedule 3.1(l)(vi), neither SSI nor any of its Subsidiaries has - -------------------------------------------------------------------------------- any consulting agreement or arrangement with any person involving compensation - -------------------------------------------------------------------------------- in excess of $5,000, except as are terminable upon one month's notice or less. - -------------------------------------------------------------------------------- (vii) No stock or other security issued by SSI or any of its - -------------------------------------------------------------------------------- subsidiaries forms or has formed a material part of the assets of any funded SSI - -------------------------------------------------------------------------------- Employee Benefit Plan or SSI Pension Plan. - ------------------------------------------------ (viii) Neither SSI nor any of its Subsidiaries nor any SSI ERISA - -------------------------------------------------------------------------------- Affiliate contributes to, or has an obligation to contribute to, and has not - -------------------------------------------------------------------------------- within six years prior to the Effective Time contributed to, or had an - -------------------------------------------------------------------------------- obligation to contribute to, a multiemployer plan within the meaning of Section - -------------------------------------------------------------------------------- 3(37) of ERISA. - ----------------- (ix) Schedule 3.1(l)(ix) contains a true and complete list of all - -------------------------------------------------------------------------------- employees of SSI and their respective job titles, base salaries, annual bonuses, - -------------------------------------------------------------------------------- years of employment and office locations. - ---------------------------------------------- (m) Labor Matters(m) Labor Matters. - ------------------------------------------------------------ (i) Except as set forth in Schedule 3.1(m)(i) hereto, as of the - -------------------------------------------------------------------------------- date of this Agreement, (1) no employees of SSI or any of its Subsidiaries are - -------------------------------------------------------------------------------- represented by any labor organization; (2) no labor organization or group of - -------------------------------------------------------------------------------- employees of SSI or any of its Subsidiaries has made a pending demand for - -------------------------------------------------------------------------------- recognition or certification, and there are no representation or certification - -------------------------------------------------------------------------------- proceedings or petitions seeking a representation proceeding presently pending - -------------------------------------------------------------------------------- or threatened in writing to be brought or filed with the National Labor - -------------------------------------------------------------------------------- Relations Board or any other labor relations tribunal or authority; and (3) to - -------------------------------------------------------------------------------- the knowledge of SSI, there are no organizing activities involving SSI or any of - -------------------------------------------------------------------------------- its Subsidiaries pending with any labor organization or group of employees of - -------------------------------------------------------------------------------- SSI or any of its Subsidiaries. - ------------------------------------ (ii) Except as set forth on Schedule 3.1(m)(ii) hereto, SSI and - -------------------------------------------------------------------------------- each of its Subsidiaries is in compliance with all laws and orders relating to - -------------------------------------------------------------------------------- the employment of labor, including all such laws and orders relating to wages, - -------------------------------------------------------------------------------- hours, collective bargaining, discrimination, civil rights, safety and health, - -------------------------------------------------------------------------------- workers' compensation and the collection and payment of withholding and/or - -------------------------------------------------------------------------------- Social Security Taxes and similar Taxes. - --------------------------------------------- (n) Intangible Property(n) Intangible Property. SSI and its - -------------------------------------------------------------------------------- Subsidiaries possess or have adequate rights to use all trademarks, trade names, - -------------------------------------------------------------------------------- patents, service marks, brand marks, brand names, computer programs, databases, - -------------------------------------------------------------------------------- industrial designs and copyrights necessary for the operation of the businesses - -------------------------------------------------------------------------------- of each of SSI and its Subsidiaries (collectively, the "SSI Intangible - -------------------------------------------------------------------------------- Property"). Except as set forth on Schedule 3.1(n), all of the SSI Intangible - -------------------------------------------------------------------------------- Property is owned by SSI or its Subsidiaries free and clear of any and all - -------------------------------------------------------------------------------- liens, claims or encumbrances, and neither SSI nor any such Subsidiary has - -------------------------------------------------------------------------------- forfeited or otherwise relinquished any SSI Intangible Property. The use of the - -------------------------------------------------------------------------------- SSI Intangible Property by SSI or its Subsidiaries does not conflict with, - -------------------------------------------------------------------------------- infringe upon, violate or interfere with or constitute an appropriation of any - -------------------------------------------------------------------------------- right, title, interest or goodwill, including, without limitation, any - ------------------------------------------------------------------------------ intellectual property right, trademark, trade name, patent, service mark, brand - -------------------------------------------------------------------------------- mark, brand name, computer program, database, industrial design, copyright or - -------------------------------------------------------------------------------- any pending application therefor of any other person and there have been no - -------------------------------------------------------------------------------- claims made and neither SSI nor any of its Subsidiaries has received any notice - -------------------------------------------------------------------------------- of any claim or otherwise knows that any of the SSI Intangible Property is - -------------------------------------------------------------------------------- invalid or conflicts with the asserted rights of any other person or has not - -------------------------------------------------------------------------------- been used or enforced or has been failed to be used or enforced in a manner that - -------------------------------------------------------------------------------- would result in the abandonment, cancellation or unenforceability of any of the - -------------------------------------------------------------------------------- SSI Intangible Property. - -------------------------- (o) Environmental Matters(o) Environmental Matters. - ---------------------------------------------------------------------------- For purposes of this Agreement: - ---------------------------------------- (A) "Environmental Law" means any applicable law regulating or - -------------------------------------------------------------------------------- prohibiting Releases into any part of the natural environment, or pertaining to - -------------------------------------------------------------------------------- the protection of natural resources, the environment and public and employee - -------------------------------------------------------------------------------- health and safety including, without limitation, the Comprehensive Environmental - -------------------------------------------------------------------------------- Response, Compensation, and Liability Act ("CERCLA") (42 U.S.C. Section 9601 et - -------------------------------------------------------------------------------- seq.), the Hazardous Materials Transportation Act (49 U.S.C. Section 1801 et - -------------------------------------------------------------------------------- seq.), the Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et - -------------------------------------------------------------------------------- seq.), the Clean Water Act (33 U.S.C. Section 1251 et seq.), the Clean Air Act - -------------------------------------------------------------------------------- (33 U.S.C. Section 7401 et seq.), the Toxic Substances Control Act (15 U.S.C. - -------------------------------------------------------------------------------- Section 7401 et seq.), the Federal Insecticide, Fungicide, and Rodenticide Act - -------------------------------------------------------------------------------- (7 U.S.C. Section 136 et seq.), and the Occupational Safety and Health Act (29 - -------------------------------------------------------------------------------- U.S.C. Section 651 et seq.) ("OSHA") and the regulations promulgated pursuant - -------------------------------------------------------------------------------- thereto, and any such applicable state or local statutes, and the regulations - -------------------------------------------------------------------------------- promulgated pursuant thereto, as such laws have been and may be amended or - -------------------------------------------------------------------------------- supplemented through the Closing Date. - ------------------------------------------ (B) "Hazardous Material" means any substance, material or waste which - -------------------------------------------------------------------------------- is regulated pursuant to any Environmental Law by any public or governmental - -------------------------------------------------------------------------------- authority in the jurisdictions in which the applicable party or its Subsidiaries - -------------------------------------------------------------------------------- conducts business, or the United States, including, without limitation, any - -------------------------------------------------------------------------------- material or substance which is defined as a "hazardous waste," "hazardous - -------------------------------------------------------------------------------- material," "hazardous substance," "extremely hazardous waste" or "restricted - -------------------------------------------------------------------------------- hazardous waste," "contaminant," "toxic waste" or "toxic substance" under any - -------------------------------------------------------------------------------- provision of Environmental Law; - ---------------------------------- (C) "Release" means any release, spill, effluent, emission, leaking, - -------------------------------------------------------------------------------- pumping, injection, deposit, disposal, discharge, dispersal, leaching or - ------------------------------------------------------------------------------- migration into the indoor or outdoor environment, or into or out of any property - -------------------------------------------------------------------------------- owned, operated or leased by the applicable party or its Subsidiaries; and - -------------------------------------------------------------------------------- (D) "Remedial Action" means all actions, including, without limitation, - -------------------------------------------------------------------------------- any capital expenditures, required by a governmental entity or required under - -------------------------------------------------------------------------------- any Environmental Law, or voluntarily undertaken to (I) clean up, remove, treat, - -------------------------------------------------------------------------------- or in any other way ameliorate or address any Hazardous Materials or other - -------------------------------------------------------------------------------- substance in the indoor or outdoor environment; (II) prevent the Release or - -------------------------------------------------------------------------------- threat of Release, or minimize the further Release of any Hazardous Material so - -------------------------------------------------------------------------------- it does not endanger or threaten to endanger the public health or welfare of the - -------------------------------------------------------------------------------- indoor or outdoor environment; (III) perform pre-remedial studies and - ----------------------------------------------------------------------------- investigations or post-remedial monitoring and care pertaining or relating to a - -------------------------------------------------------------------------------- Release; or (IV) bring the applicable party into compliance with any - ------------------------------------------------------------------------------ Environmental Law. - ------------------- (i) Except as disclosed on Schedule 3.1(o), the operations of SSI - -------------------------------------------------------------------------------- and its Subsidiaries have been and, as of the Closing Date, will be, in - -------------------------------------------------------------------------------- compliance with all Environmental Laws; - ------------------------------------------- (ii) Except as disclosed on Schedule 3.1(o), SSI and its - -------------------------------------------------------------------------------- Subsidiaries have obtained and will, as of the Closing Date, maintain all - -------------------------------------------------------------------------------- permits required under applicable Environmental Laws for the continued - ------------------------------------------------------------------------------ operations of their respective businesses; - ---------------------------------------------- (iii) Except as disclosed on Schedule 3.1(o), as of the date - -------------------------------------------------------------------------------- hereof SSI and its Subsidiaries are not subject to any outstanding orders or - -------------------------------------------------------------------------------- material contracts with any Governmental Entity or other person respecting (A) - -------------------------------------------------------------------------------- Environmental Laws, (B) Remedial Action or (C) any Release or threatened Release - -------------------------------------------------------------------------------- of a Hazardous Material; - --------------------------- (iv) Except as disclosed on Schedule 3.1(o), SSI and its - -------------------------------------------------------------------------------- Subsidiaries have not received any communication alleging, with respect to any - -------------------------------------------------------------------------------- such party, the violation of or liability under any Environmental Law; - -------------------------------------------------------------------------------- (v) Except as disclosed on Schedule 3.1(o), neither SSI nor any of - -------------------------------------------------------------------------------- its Subsidiaries has any contingent liability in connection with the Release of - -------------------------------------------------------------------------------- any Hazardous Material into the indoor or outdoor environment (whether on-site - -------------------------------------------------------------------------------- or off-site); - -------------- (vi) Except as disclosed on Schedule 3.1(o), the operations of SSI - -------------------------------------------------------------------------------- or its Subsidiaries involving the generation, transportation, treatment, storage - -------------------------------------------------------------------------------- or disposal of hazardous waste, as defined and regulated under 40 C.F.R. Parts - -------------------------------------------------------------------------------- 260-270 (in effect as of the date of this Agreement) or any state equivalent, - -------------------------------------------------------------------------------- are in compliance with applicable Environmental Laws; and - ---------------------------------------------------------------- (vii) Except as disclosed on Schedule 3.1(o), to the knowledge of - -------------------------------------------------------------------------------- SSI as of the date hereof, there is not now on or in any property of SSI or its - -------------------------------------------------------------------------------- Subsidiaries any of the following: (A) any underground storage tanks or surface - -------------------------------------------------------------------------------- impoundments, (B) any asbestos-containing materials, or (C) any polychlorinated - -------------------------------------------------------------------------------- biphenyls. - ---------- (p) Opinion of Financial Advisor(p) Opinion of Financial Advisor. - -------------------------------------------------------------------------------- SSI has received the opinion of Simmons & Company International ("Simmons") to - -------------------------------------------------------------------------------- the effect that, as of the date hereof, the consideration to be received by the - -------------------------------------------------------------------------------- holders of SSI Common Stock pursuant to this Agreement is fair from a financial - -------------------------------------------------------------------------------- point of view to such holders. SSI has provided BHOO with a true and complete - -------------------------------------------------------------------------------- copy of SSI's engagement letter with Simmons. - --------------------------------------------------- (q) Vote Required(q) Vote Required. The affirmative vote of the - -------------------------------------------------------------------------------- holders of two-thirds of the outstanding shares of SSI Common Stock is the only - -------------------------------------------------------------------------------- vote of the holders of any class or series of SSI capital stock necessary to - -------------------------------------------------------------------------------- approve this Agreement and the transactions contemplated hereby. - ----------------------------------------------------------------------- (r) Insurance(r) Insurance. - -------------------------------------------------- (i) Schedule 3.1(r) sets forth a list of all policies of fire, - -------------------------------------------------------------------------------- casualty, liability, burglary, fidelity, worker's compensation directors and - -------------------------------------------------------------------------------- officers and other forms of insurance held by SSI or its Subsidiaries that are - -------------------------------------------------------------------------------- material to SSI and material details regarding each, including limits of - -------------------------------------------------------------------------------- liability, deductibles, self insurance retentions and reinsurance requirements. - -------------------------------------------------------------------------------- (ii) All premiums due and payable for the insurance in Schedule - -------------------------------------------------------------------------------- 3.1(r) have been duly paid, and such policies or extensions or renewals thereof - -------------------------------------------------------------------------------- in such amounts will be outstanding and duly in full force without interruption - -------------------------------------------------------------------------------- until the Closing Date. - -------------------------- (iii) SSI maintains insurance coverage reasonably adequate for the - -------------------------------------------------------------------------------- operation of the business of SSI and each of its Subsidiaries (taking into - -------------------------------------------------------------------------------- account the cost and availability of such insurance), and the transactions - -------------------------------------------------------------------------------- contemplated hereby will not adversely affect such coverage. - ------------------------------------------------------------------- (s) Brokers(s) Brokers. Except as disclosed on Schedule 3.1(s) - -------------------------------------------------------------------------------- hereof, no broker, investment banker, or other person is entitled to any - -------------------------------------------------------------------------------- broker's, finder's or other similar fee or commission in connection with the - -------------------------------------------------------------------------------- transactions contemplated by this Agreement based upon arrangements made by or - -------------------------------------------------------------------------------- on behalf of SSI. - -------------------- (t) Certain Indebtedness. Schedule 3.1(t) sets forth an accurate and - -------------------------------------------------------------------------------- complete list of all SSI accounts payable as of April 30, 1998 including the - -------------------------------------------------------------------------------- amount, due date and name of creditor. Schedule 3.1(t) also sets forth an - -------------------------------------------------------------------------------- accurate and complete list of all outstanding notes payable and other - ------------------------------------------------------------------------------- indebtedness as of the date hereof including the principal balance, accrued - -------------------------------------------------------------------------------- interest, payment terms and the name of creditor. Except as set forth on - -------------------------------------------------------------------------------- Schedule 3(t), since April 30, 1998, SSI has not incurred any accounts payable - -------------------------------------------------------------------------------- outside of the ordinary course of its business (consistent with past practices) - -------------------------------------------------------------------------------- in amount or type. - --------------------- (u) Foreign Compliance. Except as set forth on Schedule 3.1(u) hereof, - -------------------------------------------------------------------------------- SSI has furnished to BHOO the documents required to assess the regulatory - -------------------------------------------------------------------------------- compliance of sales or other transfers by SSI or any of its Subsidiaries of - -------------------------------------------------------------------------------- goods, technology or software to Libya. SSI has received no notice of any - -------------------------------------------------------------------------------- investigation or review of any Governmental Entity (other than as expressly set - -------------------------------------------------------------------------------- forth in the foregoing documents) involving a possible violation of applicable - -------------------------------------------------------------------------------- laws, regulations or orders (including the U.S. Export Administration - ----------------------------------------------------------------------------- Regulations, 15 C.F.R. 730-774, the Office of Foreign Assets Control's - -------------------------------------------------------------------------------- sanctions regulations, 31 C.F.R. 500-596) and no such investigation or review - -------------------------------------------------------------------------------- is pending or, to the best of its knowledge, threatened. Further, SSI is not - -------------------------------------------------------------------------------- aware of any conduct by it in Libya or on behalf of Libya or any designated - -------------------------------------------------------------------------------- national of Libya wherever located during the five years prior to the date of - -------------------------------------------------------------------------------- this Agreement that could reasonably be expected to give rise to a violation of - -------------------------------------------------------------------------------- applicable laws, regulations or orders. Since January 1996, SSI and its - -------------------------------------------------------------------------------- Subsidiaries have not contracted to carry out any work in Libya or on behalf of - -------------------------------------------------------------------------------- Libya or any designated national of Libya wherever located. SSI and its - -------------------------------------------------------------------------------- Subsidiaries currently are not engaged in work in Libya (except for one dormant - -------------------------------------------------------------------------------- project on which the customer expects the work to be completed) or on behalf of - -------------------------------------------------------------------------------- Libya or any designated national of Libya wherever located and will not commence - -------------------------------------------------------------------------------- any such work (including not recommencing the foregoing dormant project) without - -------------------------------------------------------------------------------- the prior consent of BHOO. - ------------------------------ (v) Real Property. Schedule 3.1(v) contains an accurate and complete - -------------------------------------------------------------------------------- list of all real property owned or leased by SSI or any of its Subsidiaries - -------------------------------------------------------------------------------- (with the real property being leased identified as such) including the location, - -------------------------------------------------------------------------------- description and any outstanding mortgage or lien on any such real property. - -------------------------------------------------------------------------------- Neither SSI nor any of its Subsidiaries is in material default under any such - -------------------------------------------------------------------------------- lease, and there is not, under any such lease, any event that, with notice or - -------------------------------------------------------------------------------- lapse of time, would constitute a material default by any party to any such - -------------------------------------------------------------------------------- lease. - ------ (w) Equipment. Schedule 3.1(w) contains a list of all equipment owned - -------------------------------------------------------------------------------- by SSI or its Subsidiaries that has a per item book value in excess of $5,000 - -------------------------------------------------------------------------------- (including trade fixtures) and the location of that equipment. - ---------------------------------------------------------------------- (x) Equipment Leased. Schedule 3.1(x) contains a list of all equipment - -------------------------------------------------------------------------------- leases used by SSI or its Subsidiaries involving an annual expense per lease in - -------------------------------------------------------------------------------- excess of $5,000 to which SSI or any of its Subsidiaries is a lessee. None of - -------------------------------------------------------------------------------- SSI or any of its Subsidiaries is in default under any such lease; and to SSI's - -------------------------------------------------------------------------------- knowledge, there is not, under any such lease, any event that, with notice or - -------------------------------------------------------------------------------- lapse of time, would constitute a material default by any party to any such - -------------------------------------------------------------------------------- lease. - ------ (y) Accounts Receivable. Schedule 3.1(y) contains a list of all SSI - -------------------------------------------------------------------------------- accounts receivable as of April 30, 1998, including the aging of each account. - -------------------------------------------------------------------------------- Except as set forth on Schedule 3.1(y), each such account receivable represents - -------------------------------------------------------------------------------- a valid obligation due to SSI, is collectible in the ordinary and usual course - -------------------------------------------------------------------------------- of business and is and will not be subject to any offset or other defenses to - -------------------------------------------------------------------------------- the payment thereof. Since April 30, 1998, there has not been any material - -------------------------------------------------------------------------------- write-off of the accounts receivable set forth on Schedule 3.1(y). - --------------------------------------------------------------------------- (z) Contracts. Schedule 3.1(z) lists the following contracts, - -------------------------------------------------------------------------------- understandings, commitments and agreements (written or oral) of SSI or its - -------------------------------------------------------------------------------- Subsidiaries as of the date hereof: - ---------------------------------------- (i) All contracts, understandings or commitments (other than - -------------------------------------------------------------------------------- leases), whether in the ordinary course of business or not, involving a present - -------------------------------------------------------------------------------- or future obligation to purchase or deliver property, goods or services of an - -------------------------------------------------------------------------------- amount or value in excess of $5,000 each, or for a term in excess of one year; - -------------------------------------------------------------------------------- (ii) All collective bargaining agreements or other contracts or - -------------------------------------------------------------------------------- commitments to or with any labor union, employee representative or group of - -------------------------------------------------------------------------------- employees; - ---------- (iii) All employment contracts, and all other contracts, - -------------------------------------------------------------------------------- agreements or commitments to or with individual directors, officers, employees, - -------------------------------------------------------------------------------- agents, representatives or consultants, for a period in excess of 30 days, or - -------------------------------------------------------------------------------- for a remuneration that exceeds or will exceed in accordance with present - -------------------------------------------------------------------------------- commitments, $5,000 per annum; - --------------------------------- (iv) All sales representative or sales agency agreements; - -------------------------------------------------------------------------------- (v) All guarantees or other agreements exceeding $5,000 - -------------------------------------------------------------------------------- individually or $5,000 in the aggregate that are intended to provide credit - -------------------------------------------------------------------------------- support with respect to the obligations of any third party, including any - -------------------------------------------------------------------------------- partnership or joint venture; - -------------------------------- (vi) All contracts, understanding or commitments that purport to - -------------------------------------------------------------------------------- restrict the right of SSI or any of its Subsidiaries to engage in any line of - -------------------------------------------------------------------------------- business in any geographical location or that conditions such right on the - -------------------------------------------------------------------------------- participation or approval of any third party; - --------------------------------------------------- (vii) All open purchase orders or other contracts or commitments - -------------------------------------------------------------------------------- relating to the purchase or sale of goods or equipment with an invoice value of - -------------------------------------------------------------------------------- $5,000 or more; and - ---------------------- (viii) All (i) customer contracts and licenses entered into or - -------------------------------------------------------------------------------- amended on or after January 1, 1997 and (ii) to the best of SSI's knowledge, all - -------------------------------------------------------------------------------- other contracts in which SSI's or any of its Subsidiary's liability for - -------------------------------------------------------------------------------- consequential damages or lost profits is not expressly waived. - ---------------------------------------------------------------------- There has not been any material default in any obligation to be - -------------------------------------------------------------------------------- performed by SSI or any of its Subsidiaries under any material contract, - -------------------------------------------------------------------------------- commitment or agreement and neither SSI nor any of its Subsidiaries has waived - -------------------------------------------------------------------------------- any material right under any such contract, commitment or agreement. - ----------------------------------------------------------------------------- (aa) Customers and Suppliers. Except as set forth in Schedule 3.1(aa), - -------------------------------------------------------------------------------- to SSI's knowledge, the relationships of SSI and its Subsidiaries with their - -------------------------------------------------------------------------------- respective material customers, distributors and suppliers are satisfactory, and - -------------------------------------------------------------------------------- no material customer, distributor or supplier has terminated, threatened to - -------------------------------------------------------------------------------- terminate or provided SSI or any of its Subsidiaries with notice of its intent - -------------------------------------------------------------------------------- to terminate all or any material portion of its relationship with SSI or any of - -------------------------------------------------------------------------------- its Subsidiaries during the preceding 12-month period. - ------------------------------------------------------------ (ab) Year 2000 Matters. Except as set forth in Schedule 3.1(ab), the - -------------------------------------------------------------------------------- computer software produced or operated by the Company is capable of providing or - -------------------------------------------------------------------------------- is being adapted to provide uninterrupted millennium functionality to record, - -------------------------------------------------------------------------------- store, process and present calendar dates falling on or after January 1, 2000 in - -------------------------------------------------------------------------------- substantially the same manner and with the same functionality as such software - -------------------------------------------------------------------------------- records, stores, processes and presents such calendar dates falling on or before - -------------------------------------------------------------------------------- December 31, 1999. The costs of the adaptations referred to in the prior - -------------------------------------------------------------------------------- sentence will not have a Company Material Adverse Effect. - ----------------------------------------------------------------- 3.2 Representations and Warranties of BHOO3.2 Representations and - -------------------------------------------------------------------------------- Warranties of BHOO. BHOO represents and warrants to SSI as follows: - ------------------------------------------------------------------------------- (a) Organization, Standing and Power(a) Organization, Standing and - -------------------------------------------------------------------------------- Power. BHOO is a corporation duly organized, validly existing and in good - -------------------------------------------------------------------------------- standing under the laws of its state of incorporation, has all requisite power - -------------------------------------------------------------------------------- and authority to own, lease and operate its properties and to carry on its - -------------------------------------------------------------------------------- business as now being conducted, and is duly qualified and in good standing to - -------------------------------------------------------------------------------- do business in each jurisdiction in which the business it is conducting, or the - -------------------------------------------------------------------------------- operation, ownership or leasing of its properties, makes such qualification - -------------------------------------------------------------------------------- necessary, other than in such jurisdictions where the failure so to qualify - -------------------------------------------------------------------------------- would not have a Material Adverse Effect on BHOO. - --------------------------------------------------------- (b) Authority; No Violations, Consents and Approvals(b) Authority; - -------------------------------------------------------------------------------- No Violations, Consents and Approvals. - ------------------------------------------ (i) BHOO has all requisite corporate power and authority to enter - -------------------------------------------------------------------------------- into this Agreement and to consummate the transactions contemplated hereby. The - -------------------------------------------------------------------------------- execution and delivery of this Agreement and the consummation of the - ------------------------------------------------------------------------------ transactions contemplated hereby have been duly authorized by all necessary - -------------------------------------------------------------------------------- corporate action on the part of BHOO. This Agreement has been duly executed and - -------------------------------------------------------------------------------- delivered by BHOO and, assuming this Agreement constitutes the valid and binding - -------------------------------------------------------------------------------- obligation of SSI, constitutes a valid and binding obligation of BHOO - ------------------------------------------------------------------------------- enforceable in accordance with its terms, subject, as to enforceability, to - -------------------------------------------------------------------------------- bankruptcy, insolvency, reorganization and other laws of general applicability - -------------------------------------------------------------------------------- relating to or affecting creditors' rights and to general principles of equity. - -------------------------------------------------------------------------------- (ii) The execution and delivery of this Agreement does not, and - -------------------------------------------------------------------------------- the consummation of the transactions contemplated hereby and compliance with the - -------------------------------------------------------------------------------- provisions hereof will not, conflict with, or result in any violation of, or - -------------------------------------------------------------------------------- default (with or without notice or lapse of time, or both) under, or give rise - -------------------------------------------------------------------------------- to a right of termination, cancellation or acceleration of any obligation or to - -------------------------------------------------------------------------------- the loss of a material benefit under, or give rise to a right of purchase under, - -------------------------------------------------------------------------------- result in the creation of any lien, security interest, charge or encumbrance - -------------------------------------------------------------------------------- upon any of the properties or assets of BHOO under, or otherwise result in a - -------------------------------------------------------------------------------- detriment to BHOO under, any provision of (i) the Articles of Incorporation or - -------------------------------------------------------------------------------- Bylaws of BHOO, (ii) any loan or credit agreement, note, bond, mortgage, - -------------------------------------------------------------------------------- indenture, lease or other agreement, instrument, permit, concession, franchise - -------------------------------------------------------------------------------- or license applicable to BHOO, (iii) any joint venture or other ownership - -------------------------------------------------------------------------------- arrangement or (iv) assuming the consents, approvals, authorizations or permits - -------------------------------------------------------------------------------- and filings or notifications referred to in Section 3.2(c)(iii) are duly and - -------------------------------------------------------------------------------- timely obtained or made, any judgment, order, decree, statute, law, ordinance, - -------------------------------------------------------------------------------- rule or regulation applicable to BHOO or any of their respective properties or - -------------------------------------------------------------------------------- assets, other than, in the case of clause (ii), (iii) or (iv), any such - -------------------------------------------------------------------------------- conflicts, violations, defaults, rights, liens, security interests, charges, - -------------------------------------------------------------------------------- encumbrances or detriments that, individually or in the aggregate, would not - -------------------------------------------------------------------------------- have a Material Adverse Effect on BHOO, materially impair the ability of BHOO to - -------------------------------------------------------------------------------- perform its obligations hereunder or thereunder or prevent the consummation of - -------------------------------------------------------------------------------- any of the transactions contemplated hereby or thereby. - -------------------------------------------------------------- (iii) No consent, approval, order or authorization of, or - -------------------------------------------------------------------------------- registration, declaration or filing with, or permit from any Governmental Entity - -------------------------------------------------------------------------------- is required by or with respect to BHOO in connection with the execution and - -------------------------------------------------------------------------------- delivery of this Agreement by BHOO or the consummation by BHOO of the - -------------------------------------------------------------------------------- transactions contemplated hereby, except for: (A) the filing of the Articles of - -------------------------------------------------------------------------------- Merger with the Secretary of State of the State of Colorado; (B) such filings - -------------------------------------------------------------------------------- and approvals as may be required by any applicable state securities, "blue sky" - -------------------------------------------------------------------------------- or takeover laws or environmental laws; and (C) such filings and approvals as - -------------------------------------------------------------------------------- may be required by any foreign premerger notification, securities, corporate or - -------------------------------------------------------------------------------- other law, rule or regulation. - ---------------------------------- (c) Brokers(c) Brokers. No broker, investment banker or other - -------------------------------------------------------------------------------- person is entitled to any broker's, finder's or other similar fee or commission - -------------------------------------------------------------------------------- in connection with the transactions contemplated by this Agreement based upon - -------------------------------------------------------------------------------- arrangements made by or on behalf of BHOO. - ------------------------------------------------- (d) Financing. Sub will have available to it at the Effective Time, - -------------------------------------------------------------------------------- sufficient funds to acquire all the outstanding shares of SSI Common Stock in - -------------------------------------------------------------------------------- the Merger for the Merger Consideration. - --------------------------------------------- ARTICLE IV ---------- COVENANTS RELATING TO CONDUCT OF BUSINESS OF SSI 4.1 Conduct of Business by SSI Pending the Effective Time4.1 - -------------------------------------------------------------------------------- Conduct of Business by SSI Pending the Effective Time. During the period from - -------------------------------------------------------------------------------- the date of this Agreement and continuing until the Effective Time, SSI agrees - -------------------------------------------------------------------------------- as to itself and its Subsidiaries that (except as expressly contemplated or - -------------------------------------------------------------------------------- permitted by this Agreement, or to the extent that BHOO shall otherwise consent - -------------------------------------------------------------------------------- in writing): - ------------- (a) Ordinary Course(a) Ordinary Course. Each of SSI and its - -------------------------------------------------------------------------------- Subsidiaries will carry on its businesses in the usual, regular and ordinary - -------------------------------------------------------------------------------- course in substantially the same manner as heretofore conducted and shall use - -------------------------------------------------------------------------------- all reasonable efforts to preserve intact its present business organizations, - -------------------------------------------------------------------------------- keep available the services of its current officers and employees, and endeavor - -------------------------------------------------------------------------------- to preserve its relationships with customers, suppliers and others having - -------------------------------------------------------------------------------- business dealings with it. - ----------------------------- (b) Dividends; Changes in Stock(b) Dividends; Changes in Stock. - -------------------------------------------------------------------------------- SSI will not and it will not permit any of its Subsidiaries to: (i) declare or - -------------------------------------------------------------------------------- pay any dividends on or make other distributions in respect of any of its - -------------------------------------------------------------------------------- capital stock or partnership interests, except for the declaration and payment - -------------------------------------------------------------------------------- of dividends from a Subsidiary of SSI to SSI or another Subsidiary of SSI and - -------------------------------------------------------------------------------- except for cash dividends or distributions paid on or with respect to the - -------------------------------------------------------------------------------- capital stock or partnership interests of a Subsidiary of SSI; (ii) split, - -------------------------------------------------------------------------------- combine or reclassify any of its capital stock or issue or authorize or propose - -------------------------------------------------------------------------------- the issuance of any other securities in respect of, in lieu of or in - -------------------------------------------------------------------------------- substitution for shares of SSI capital stock; or (iii) except for the repurchase - -------------------------------------------------------------------------------- by SSI of 800,000 shares of SSI Preferred Stock from Halliburton Company for an - -------------------------------------------------------------------------------- aggregate purchase price not to exceed $2,500,000, repurchase, redeem or - -------------------------------------------------------------------------------- otherwise acquire, or permit any of its Subsidiaries to purchase, redeem or - -------------------------------------------------------------------------------- otherwise acquire, any shares of its capital stock, except as required by the - -------------------------------------------------------------------------------- terms of its securities outstanding on the date hereof or as contemplated by any - -------------------------------------------------------------------------------- existing employee benefit plan. - ---------------------------------- (c) Issuance of Securities; Loans(c) Issuance of Securities; Loans. - -------------------------------------------------------------------------------- Except as provided on Schedule 4.1(c), SSI will not and it will not permit any - -------------------------------------------------------------------------------- of its Subsidiaries to, issue, deliver or sell, or authorize or propose to - -------------------------------------------------------------------------------- issue, deliver or sell, any shares of its capital stock of any class, any Voting - -------------------------------------------------------------------------------- Debt or any securities convertible into, or any rights, warrants or options to - -------------------------------------------------------------------------------- acquire, any such shares, Voting Debt or convertible securities, other than: - -------------------------------------------------------------------------------- (i) the issuance of SSI Common Stock upon the exercise of stock options granted - -------------------------------------------------------------------------------- under the SSI Stock Plan that are outstanding on the date hereof, or in - -------------------------------------------------------------------------------- satisfaction of stock grants or stock based awards made prior to the date hereof - -------------------------------------------------------------------------------- pursuant to the SSI Stock Plan or upon exercise of the SSI Warrants; and (ii) - -------------------------------------------------------------------------------- issuances by a wholly owned Subsidiary of its capital stock to its parent. - -------------------------------------------------------------------------------- Except for loans among SSI and its Subsidiaries, neither SSI nor any of its - -------------------------------------------------------------------------------- Subsidiaries shall make any loan to any person other than the advancement of - -------------------------------------------------------------------------------- routine employee expenses on terms consistent with past practice. - ------------------------------------------------------------------------- (d) Governing Documents(d) Governing Documents. Except as - -------------------------------------------------------------------------------- expressly contemplated hereby or in connection herewith, SSI will not amend or - -------------------------------------------------------------------------------- propose to amend its Articles of Incorporation or Bylaws. - ----------------------------------------------------------------- (e) No Acquisitions(e) No Acquisitions. SSI will not and it will - -------------------------------------------------------------------------------- not permit any of its Subsidiaries to, acquire or agree to acquire by merging or - -------------------------------------------------------------------------------- consolidating with, or by purchasing a substantial equity interest in or a - -------------------------------------------------------------------------------- substantial portion of the assets of, or by any other manner, any business or - -------------------------------------------------------------------------------- any corporation, partnership, association or other business organization or - -------------------------------------------------------------------------------- division thereof. - ------------------ (f) No Dispositions(f) No Dispositions. Other than: (i) - -------------------------------------------------------------------------------- dispositions or proposed dispositions listed on Schedule 4.1(f), (ii) the - -------------------------------------------------------------------------------- disposition (the "PSD Disposition") of SSI's Pipeline Simulation Division to - -------------------------------------------------------------------------------- LICENERGY, Inc. for cash proceeds of at least $1,500,000 pursuant to the Asset - -------------------------------------------------------------------------------- Purchase Agreement dated as of March 1, 1998 among SSI, Bethany, Inc., - -------------------------------------------------------------------------------- Scientific Software-Intercomp UK, Ltd. and LICENERGY, Inc. (the "PSD - ---------------------------------------------------------------------------- Agreement"), (iii) dispositions in the ordinary course of business consistent - -------------------------------------------------------------------------------- with past practice that are not material, individually or in the aggregate, to - -------------------------------------------------------------------------------- SSI and its Subsidiaries taken as a whole, and (iv) product sales in the - -------------------------------------------------------------------------------- ordinary course of business consistent with past practice, SSI will not and it - -------------------------------------------------------------------------------- will not permit any of its Subsidiaries to sell, lease, encumber or otherwise - -------------------------------------------------------------------------------- dispose of, or agree to sell, lease (whether such lease is an operating or - -------------------------------------------------------------------------------- capital lease), encumber or otherwise dispose of, any of its assets. SSI will - -------------------------------------------------------------------------------- not amend or waive any provision of the PSD Agreement, as amended by Letter - -------------------------------------------------------------------------------- Agreement dated May 1, 1998 between SSI and LICENERGY, Inc. - -------------------------------------------------------------------- (g) No Dissolution, Etc(g) No Dissolution, Etc. Except as - -------------------------------------------------------------------------------- otherwise permitted or contemplated by this Agreement, SSI will not authorize, - -------------------------------------------------------------------------------- recommend, propose or announce an intention to adopt a plan of complete or - -------------------------------------------------------------------------------- partial liquidation or dissolution of SSI or any of its Subsidiaries. - ------------------------------------------------------------------------------- (h) Certain Employee Matters(h) Certain Employee Matters. SSI will - -------------------------------------------------------------------------------- not and it will not permit any of its Subsidiaries to: (i) grant any increases - -------------------------------------------------------------------------------- in the compensation of any of its directors, officers or employees; (ii) pay or - -------------------------------------------------------------------------------- agree to pay any pension, retirement allowance or other employee benefit not - -------------------------------------------------------------------------------- required or contemplated by any of the existing SSI Employee Benefit Plans or - -------------------------------------------------------------------------------- SSI Pension Plans as in effect on the date hereof to any director, officer or - -------------------------------------------------------------------------------- employee, whether past or present; (iii) enter into any new, or amend any - -------------------------------------------------------------------------------- existing, employment or severance or termination agreement with any director, - -------------------------------------------------------------------------------- officer or key employee; (iv) become obligated under any new SSI Employee - -------------------------------------------------------------------------------- Benefit Plan or SSI Pension Plan, which was not in existence or approved by the - -------------------------------------------------------------------------------- Board of Directors of SSI prior to or on the date hereof, or amend any such plan - -------------------------------------------------------------------------------- or arrangement in existence on the date hereof if such amendment would have the - -------------------------------------------------------------------------------- effect of enhancing any benefits thereunder; or (v) terminate the employment of - -------------------------------------------------------------------------------- any executive or employee of SSI or any of its Subsidiaries without cause. - -------------------------------------------------------------------------------- (i) Indebtedness; Leases; Capital Expenditures(i) Indebtedness; - -------------------------------------------------------------------------------- Leases; Capital Expenditures. SSI will not, nor will SSI permit any of its - -------------------------------------------------------------------------------- Subsidiaries to, (i) incur any indebtedness for borrowed money (except for - -------------------------------------------------------------------------------- working capital under SSI's existing credit facilities) or guarantee any such - -------------------------------------------------------------------------------- indebtedness or issue or sell any debt securities or warrants or rights to - -------------------------------------------------------------------------------- acquire any debt securities of such party or any of its Subsidiaries or - -------------------------------------------------------------------------------- guarantee any debt securities of others, (ii) enter into any lease (whether such - -------------------------------------------------------------------------------- lease is an operating or capital lease) or create any mortgages, liens, security - -------------------------------------------------------------------------------- interests or other encumbrances on the property of SSI or any of its - -------------------------------------------------------------------------------- Subsidiaries in connection with any indebtedness thereof, or (iii) commit to - -------------------------------------------------------------------------------- aggregate capital expenditures in excess of $10,000. - ---------------------------------------------------------- (j) Notification of Certain Occurrences. SSI will provide prompt - -------------------------------------------------------------------------------- notice to BHOO of what it in good faith believes to be any material occurrence - -------------------------------------------------------------------------------- in its business. - ------------------ (k) Notification of Litigation. SSI will promptly notify BHOO of any - -------------------------------------------------------------------------------- lawsuits, claims, proceedings or investigations that are threatened or commenced - -------------------------------------------------------------------------------- against SSI or any of its Subsidiaries. - --------------------------------------------- (l) Insurance Maintenance. SSI will maintain all its and cause its - -------------------------------------------------------------------------------- Subsidiaries to maintain all their respective policies of insurance in full - -------------------------------------------------------------------------------- force and effect. SSI may obtain a tail policy for the current directors and - -------------------------------------------------------------------------------- officers insurance policy held by SSI with Mt. Hawley Insurance Company, - -------------------------------------------------------------------------------- provided that the premium for such tail policy shall not exceed $55,750. - -------------------------------------------------------------------------------- (m) Agreements. SSI will not enter any agreement which is not - -------------------------------------------------------------------------------- terminable by SSI without penalty on 30 day's (or less) prior notice to the - -------------------------------------------------------------------------------- other party thereto. - ---------------------- (n) Taxes. SSI will not make any tax election or settle or compromise - -------------------------------------------------------------------------------- any material federal, state, local or foreign income tax liability. - ---------------------------------------------------------------------------- 4.2 No Solicitation4.2 No Solicitation. - ---------------------------------------------------------------- (a) SSI agrees that (i) prior to the Effective Time, neither it - -------------------------------------------------------------------------------- nor any of its Subsidiaries will, and each of them will not permit any of its - -------------------------------------------------------------------------------- officers, directors, employees, agents or representatives (including, without - -------------------------------------------------------------------------------- limitation, any investment banker, attorney or accountant retained by it or any - -------------------------------------------------------------------------------- of its Subsidiaries) to, solicit or encourage (including by way of furnishing - -------------------------------------------------------------------------------- confidential or non-public information), directly or indirectly, any inquiry, - -------------------------------------------------------------------------------- proposal or offer (including, without limitation, any proposal or offer to its - -------------------------------------------------------------------------------- stockholders) with respect to a tender offer, merger, consolidation, share - -------------------------------------------------------------------------------- exchange or similar transaction involving, or any purchase of all or a material - -------------------------------------------------------------------------------- part of the assets on a consolidated basis or the capital stock of, SSI (any - -------------------------------------------------------------------------------- such transaction being hereinafter referred to as an "Acquisition Transaction" - -------------------------------------------------------------------------------- and any such proposal or offer being hereinafter referred to as an "Acquisition - -------------------------------------------------------------------------------- Proposal") or engage in any negotiations concerning an Acquisition Proposal; and - -------------------------------------------------------------------------------- (ii) each of them will immediately cease and cause to be terminated any existing - -------------------------------------------------------------------------------- negotiations with any parties conducted heretofore with respect to any of the - -------------------------------------------------------------------------------- foregoing; provided that nothing contained in this Agreement shall prevent SSI - -------------------------------------------------------------------------------- or its Board of Directors from (A) complying with Rule 14e-2 promulgated under - -------------------------------------------------------------------------------- the Exchange Act with regard to an Acquisition Proposal or (B) prior to the - -------------------------------------------------------------------------------- stockholders' meeting referred to in Section 5.3, (x) providing information - -------------------------------------------------------------------------------- (pursuant to a confidentiality agreement in reasonably customary form) to or - -------------------------------------------------------------------------------- engaging in any negotiations or discussions with any person or entity who has - -------------------------------------------------------------------------------- made an unsolicited bona fide Acquisition Proposal to acquire all outstanding - -------------------------------------------------------------------------------- SSI Common Stock that is superior to the Merger and is reasonably capable of - -------------------------------------------------------------------------------- being financed and reasonably likely to be consummated (a "Superior Proposal") - -------------------------------------------------------------------------------- and (y) terminating this Agreement to concurrently enter into a definitive - -------------------------------------------------------------------------------- acquisition agreement with respect to a Superior Proposal, if the Board of - -------------------------------------------------------------------------------- Directors of SSI, after consultation with its outside legal counsel, determines - -------------------------------------------------------------------------------- that the failure to do so would be inconsistent with its fiduciary or other - -------------------------------------------------------------------------------- legal obligations to its stockholders or creditors. - --------------------------------------------------------- (b) Prior to taking any action referred to in Section 4.2(a), if SSI --------------------------------------------------------------------------- intends to participate in any such discussions or negotiations or provide any ------------------------------------------------------------------------------ such information to any such third party, SSI shall give reasonable prior notice ------------------------------------------------------------------------------ to BHOO of each such action. SSI will promptly notify BHOO in writing of any - -------------------------------------------------------------------------------- such requests for such information or the receipt of any Acquisition Proposal, - -------------------------------------------------------------------------------- including the identity of the person or group engaging in such discussions or - -------------------------------------------------------------------------------- negotiations, requesting such information or making such Acquisition Proposal, - -------------------------------------------------------------------------------- and the material terms and conditions of any Acquisition Proposal. - --------------------------------------------------------------------------- (c) Nothing in this Section 4.2 shall permit SSI to enter into any agreement - -------------------------------------------------------------------------------- with respect to an Acquisition Proposal during the term of this Agreement, it - -------------------------------------------------------------------------------- being agreed that during the term of this Agreement, SSI shall not enter into - -------------------------------------------------------------------------------- any agreement with any person that provides for, or in any way facilitates, an - -------------------------------------------------------------------------------- Acquisition Proposal, other than a confidentiality agreement in reasonably - -------------------------------------------------------------------------------- customary form. - ---------------- ARTICLE V --------- ADDITIONAL AGREEMENTSARTICLE VADDITIONAL AGREEMENTS --------------------------------------------------- 5.1 Preparation of the Proxy Statement5.1 Preparation of the Proxy - -------------------------------------------------------------------------------- Statement. SSI will promptly prepare and file with the SEC the Proxy Statement. - -------------------------------------------------------------------------------- SSI will use its best efforts to cause the Proxy Statement to be mailed to - -------------------------------------------------------------------------------- stockholders of SSI at the earliest practicable date. - ------------------------------------------------------------ 5.2 Access to Information5.2 Access to Information. Upon - -------------------------------------------------------------------------------- reasonable notice, SSI will (and will cause each of its Subsidiaries to) afford - -------------------------------------------------------------------------------- to the officers, employees, accountants, counsel and other representatives of - -------------------------------------------------------------------------------- BHOO, access, during normal business hours during the period prior to the - -------------------------------------------------------------------------------- Effective Time, to all its properties, books, contracts, commitments and records - -------------------------------------------------------------------------------- and, during such period, SSI will (and shall cause each of its Subsidiaries to) - -------------------------------------------------------------------------------- furnish promptly to BHOO (a) a copy of each report, schedule, registration - -------------------------------------------------------------------------------- statement and other document filed or received by it during such period pursuant - -------------------------------------------------------------------------------- to SEC requirements and (b) all other information concerning its business, - -------------------------------------------------------------------------------- properties and personnel as such other party may reasonably request. - ----------------------------------------------------------------------------- 5.3 SSI Stockholders Meeting5.3 SSI Stockholders Meeting. SSI will - -------------------------------------------------------------------------------- call a meeting of its stockholders to be held as promptly as practicable after - -------------------------------------------------------------------------------- the date hereof for the purpose of voting upon this Agreement and the Merger. - -------------------------------------------------------------------------------- Subject only to the proviso of Section 4.2, SSI will, through its Board of - -------------------------------------------------------------------------------- Directors, recommend to its stockholders approval of such matters and not - -------------------------------------------------------------------------------- rescind such recommendation and shall use its best efforts to obtain approval - -------------------------------------------------------------------------------- and adoption of this Agreement and the Merger by its stockholders. SSI shall - -------------------------------------------------------------------------------- use all reasonable efforts to hold such meeting as soon as practicable after the - -------------------------------------------------------------------------------- date hereof. - ------------- 5.4 Filings; Other Action5.4 Filings; Other Action. Subject to the - -------------------------------------------------------------------------------- terms and conditions herein provided, BHOO and SSI shall: (a) use their best - -------------------------------------------------------------------------------- efforts to cooperate with one another in (i) determining which filings are - -------------------------------------------------------------------------------- required to be made prior to the Effective Time with, and which consents, - -------------------------------------------------------------------------------- approvals, permits or authorizations are required to be obtained prior to the - -------------------------------------------------------------------------------- Effective Time from, governmental or regulatory authorities of the United - -------------------------------------------------------------------------------- States, the several states and foreign jurisdictions in connection with the - -------------------------------------------------------------------------------- execution and delivery of this Agreement and the consummation of the Merger and - -------------------------------------------------------------------------------- the transactions contemplated hereby and (ii) timely making all such filings and - -------------------------------------------------------------------------------- timely seeking all such consents, approvals, permits or authorizations; (c) - -------------------------------------------------------------------------------- furnish the others with copies of all correspondence, filings and communications - -------------------------------------------------------------------------------- (and memoranda setting forth the substance thereof) between them and their - -------------------------------------------------------------------------------- affiliates and their respective representatives, on the one hand, and any - -------------------------------------------------------------------------------- governmental or regulatory authority or members or their respective staffs, on - -------------------------------------------------------------------------------- the other hand, with respect to this Agreement and the transactions contemplated - -------------------------------------------------------------------------------- hereby; and (d) furnish the others with such necessary information and - -------------------------------------------------------------------------------- reasonable assistance as such other parties and their respective affiliates may - -------------------------------------------------------------------------------- reasonably request in connection with their preparation of necessary filings, - -------------------------------------------------------------------------------- registrations or submissions of information to any governmental or regulatory - -------------------------------------------------------------------------------- authorities. - ------------ 5.5 Repurchase of SSI Preferred Stock5.5 Repurchase of SSI - -------------------------------------------------------------------------------- Preferred Stock. At or prior to the Closing, SSI will cause to be repurchased - -------------------------------------------------------------------------------- and placed in SSI's treasury the 800,000 shares of outstanding SSI Preferred - -------------------------------------------------------------------------------- Stock held by Halliburton Company for an aggregate purchase price not to exceed - -------------------------------------------------------------------------------- $2,500,000 in full satisfaction of the acquisition or termination of all rights, - -------------------------------------------------------------------------------- interests and benefits that Halliburton Company may have under or to SSI - -------------------------------------------------------------------------------- Preferred Stock and any other SSI capital stock, and any other right or interest - -------------------------------------------------------------------------------- Halliburton Company may have in or to SSI or its assets (the "Halliburton - -------------------------------------------------------------------------------- Repurchase"). - ------------- 5.6 Stock Options5.6 Stock Options. Prior to the Closing, SSI - -------------------------------------------------------------------------------- shall enter into an agreement with each holder of an SSI Stock Option with an - -------------------------------------------------------------------------------- exercise price per share less than the Merger Consideration that provides that, - -------------------------------------------------------------------------------- immediately prior to the Effective Time, each SSI Stock Option that is then - -------------------------------------------------------------------------------- outstanding, whether or not then exercisable or vested, shall be canceled by - -------------------------------------------------------------------------------- SSI, and each holder of a canceled SSI Stock Option shall be entitled to receive - -------------------------------------------------------------------------------- from BHOO at the time of such cancellation an amount in cash equal to the - -------------------------------------------------------------------------------- product of (i) the number of shares of SSI Common Stock previously subject to - -------------------------------------------------------------------------------- such option, whether or not then exercisable or vested, and (ii) the excess, if - -------------------------------------------------------------------------------- any, of the Merger Consideration over the exercise price per share applicable to - -------------------------------------------------------------------------------- such option, reduced by any applicable withholding. Also, prior to the Closing, - -------------------------------------------------------------------------------- SSI shall have provided proper notice to the holders of SSI Stock Options so - -------------------------------------------------------------------------------- that, unless exercised prior to the Closing (or a holder has entered into the - -------------------------------------------------------------------------------- agreement described in the immediately preceding sentence), all SSI Stock - -------------------------------------------------------------------------------- Options will expire prior to the Effective Time. - ------------------------------------------------------- 5.7 Other Actions5.7 Other Actions. Except as contemplated by this - -------------------------------------------------------------------------------- Agreement, neither BHOO nor SSI shall, and shall not permit any of its - -------------------------------------------------------------------------------- Subsidiaries to, take or agree or commit to take any action that is reasonably - -------------------------------------------------------------------------------- likely to result in any of its respective representations or warranties - -------------------------------------------------------------------------------- hereunder being untrue in any material respect or in any of the conditions to - -------------------------------------------------------------------------------- the Merger set forth in Article VI not being satisfied. - ---------------------------------------------------------------- 5.8 SSI Debt Repayment5.8 SSI Debt Repayment. (a) As soon as - -------------------------------------------------------------------------------- reasonably practicable following the date hereof and prior to Closing, SSI will - -------------------------------------------------------------------------------- use all reasonable efforts to cause the Lindner and Renaissance Loan Agreement - -------------------------------------------------------------------------------- (and all corresponding promissory notes, security documents, stock warrants and - -------------------------------------------------------------------------------- related instruments) to be amended to provide that (i) the amount owed by SSI to - -------------------------------------------------------------------------------- Lindner (the "Lindner Debt") has been reduced at Closing to no more than (and - -------------------------------------------------------------------------------- that Lindner has forgiven all indebtedness, including accrued interest, of SSI - -------------------------------------------------------------------------------- above) $1,400,000, which will be paid in full at Closing, and (ii) that Lindner - -------------------------------------------------------------------------------- shall have no right to acquire any shares of stock (common or preferred) of SSI - -------------------------------------------------------------------------------- (including, but not limited to, any further rights under the Lindner Warrant). - -------------------------------------------------------------------------------- (b) As soon as reasonably practicable following the date hereof and - -------------------------------------------------------------------------------- prior to Closing, SSI will use all reasonable efforts to cause the Lindner and - -------------------------------------------------------------------------------- Renaissance Loan Agreement (and all corresponding promissory notes, security - -------------------------------------------------------------------------------- documents, stock warrants and related instruments) to be amended to provide that - -------------------------------------------------------------------------------- (i) the amount owed by SSI to Renaissance (the "Renaissance Debt") has been - -------------------------------------------------------------------------------- reduced at Closing to no more than (and that Renaissance has forgiven all - -------------------------------------------------------------------------------- indebtedness, including accrued interest, of SSI above) $1,300,000, plus simple - -------------------------------------------------------------------------------- interest following the Closing of no more than 7% per annum, (ii) the - -------------------------------------------------------------------------------- Renaissance Debt will mature and become payable on July 1, 1999 and (iii) - -------------------------------------------------------------------------------- Renaissance shall have no right to acquire any shares of stock (common or - -------------------------------------------------------------------------------- preferred) of SSI (including, but not limited to, any further rights under the - -------------------------------------------------------------------------------- Renaissance Warrant). - ---------------------- (c) As soon as reasonably practicable following the date hereof and - -------------------------------------------------------------------------------- prior to Closing, SSI will cause the Bank One Debt to be fully paid and - -------------------------------------------------------------------------------- discharged and any security interests or rights of Bank One in SSI or any of its - -------------------------------------------------------------------------------- assets to be fully released and discharged. - ------------------------------------------------- For purposes of this Agreement, "Lindner and Renaissance Loan Agreement" - -------------------------------------------------------------------------------- means that certain Loan Agreement dated April 26, 1996, between SSI, Lindner - -------------------------------------------------------------------------------- Dividend Fund, a series of Lindner Investments ("Lindner"), and Renaissance - -------------------------------------------------------------------------------- Capital Partners II Ltd. ("Renaissance"), providing for (i) a loan by Lindner to - -------------------------------------------------------------------------------- SSI in the original principal amount of $5,000,000, bearing interest at 7% per - -------------------------------------------------------------------------------- annum payable semi-annually on the last days of October and April, evidenced by - -------------------------------------------------------------------------------- that certain Promissory Note dated April 25, 1996, in the original principal - -------------------------------------------------------------------------------- amount of $5,000,000 payable to the order of Lindner, and (ii) a loan by - -------------------------------------------------------------------------------- Renaissance to SSI in the original principal amount of $1,500,000, bearing 7% - -------------------------------------------------------------------------------- interest per annum payable semi-annually on the last days of October and April, - -------------------------------------------------------------------------------- as evidenced by that certain Promissory Note dated April 26, 1996, payable to - -------------------------------------------------------------------------------- the order of Renaissance, in the original principal sum of $1,500,000. - -------------------------------------------------------------------------------- For purposes of this Agreement, "Lindner Warrant" means that certain - -------------------------------------------------------------------------------- Warrant to Purchase Common Stock of SSI dated April 26, 1996 issued by SSI to - -------------------------------------------------------------------------------- Lindner, granting Lindner the right to purchase from SSI 1,500,000 shares of SSI - -------------------------------------------------------------------------------- Common Stock at a price of $3.00 per share. - --------------------------------------------------- For purposes of this Agreement, "Renaissance Warrant" means that certain - -------------------------------------------------------------------------------- Warrant to Purchase Common Stock of SSI dated April 26, 1996 issued by SSI to - -------------------------------------------------------------------------------- Renaissance, granting Renaissance the right to purchase from SSI 450,000 shares - -------------------------------------------------------------------------------- of SSI Common Stock at a price of $3.00 per share. - ------------------------------------------------------------ For purposes of this Agreement, "Bank One Debt" means the amount owed under - -------------------------------------------------------------------------------- that certain Borrower Agreement dated December 17, 1997, between Bank One, - -------------------------------------------------------------------------------- Colorado, N.A., as Lender, and Scientific Software-Intercomp, Inc., as Borrower, - -------------------------------------------------------------------------------- relating to a loan for pre-export working capital, together with a promissory - -------------------------------------------------------------------------------- note dated November 30, 1997, executed by SSI, as payor, and made payable to the - -------------------------------------------------------------------------------- order of Bank One, Colorado N.A. - ------------------------------------- 5.9 Public Announcements5.9 Public Announcements. BHOO and its - -------------------------------------------------------------------------------- Affiliates, on the one hand, and SSI and its Affiliates, on the other hand, will - -------------------------------------------------------------------------------- consult with each other before issuing any press release or otherwise making any - -------------------------------------------------------------------------------- public statements with respect to the transactions contemplated by this - -------------------------------------------------------------------------------- Agreement, and shall not issue any such press release or make any such public - -------------------------------------------------------------------------------- statement prior to such consultation, except as may be required by applicable - -------------------------------------------------------------------------------- law or by obligations pursuant to any listing agreement with any national - -------------------------------------------------------------------------------- securities exchange or transaction reporting system. - --------------------------------------------------------- 5.10 Recording of Cancellation of Indebtedness5.10 Recording of - -------------------------------------------------------------------------------- Cancellation of Indebtedness. SSI, Sub and BHOO agree that any cancellation of - -------------------------------------------------------------------------------- indebtedness resulting from the reduction of the Lindner Debt and Renaissance - -------------------------------------------------------------------------------- Debt (as contemplated by Sections 6.2(g) and (h)) will be recorded prior to the - -------------------------------------------------------------------------------- Closing. - -------- 5.11 Sub Funding Option5.11 Sub Funding Option. If Sub elects to - -------------------------------------------------------------------------------- lend funds to SSI to satisfy SSI's obligations to complete the Halliburton - -------------------------------------------------------------------------------- Repurchase and pay the Lindner Debt prior to Closing, then SSI hereby agrees to - -------------------------------------------------------------------------------- issue a promissory note to Sub in the full amount of the funds loaned to SSI by - -------------------------------------------------------------------------------- Sub (the "Sub Promissory Note"). - ------------------------------------ 5.12 Directors and Officers Indemnification5.12 Directors and - -------------------------------------------------------------------------------- Officers Indemnification. The directors and officers of SSI shall be entitled - -------------------------------------------------------------------------------- to continuing indemnification by the Surviving Corporation following the Closing - -------------------------------------------------------------------------------- to the same extent and subject to the same terms and conditions as provided - -------------------------------------------------------------------------------- therefore by the Articles of Incorporation and Bylaws of SSI in effect on the - -------------------------------------------------------------------------------- date of this Agreement. - -------------------------- 5.13 Incorporation of Sub5.13 Incorporation of Sub. BHOO will - -------------------------------------------------------------------------------- cause the incorporation of Sub as soon as reasonably practicable following the - -------------------------------------------------------------------------------- date hereof and will cause Sub to perform the obligations of Sub provided for in - -------------------------------------------------------------------------------- this Agreement. - ---------------- ARTICLE VI - ---------------- CONDITIONS PRECEDENTARTICLE VI CONDITIONS PRECEDENT - -------------------------------------------------------------------- 6.1 Conditions to Each Party's Obligation to Effect the Merger6.1 - -------------------------------------------------------------------------------- Conditions to Each Party's Obligation to Effect the Merger. The respective - -------------------------------------------------------------------------------- obligation of each party to effect the Merger shall be subject to the - -------------------------------------------------------------------------------- satisfaction prior to the Closing Date of the following conditions: - ---------------------------------------------------------------------------- (a) SSI Stockholder Approval(a) SSI Stockholder Approval. This - -------------------------------------------------------------------------------- Agreement and the Merger shall have been approved and adopted by the affirmative - -------------------------------------------------------------------------------- vote of the holders of two-thirds of the outstanding shares of SSI Common Stock - -------------------------------------------------------------------------------- entitled to vote thereon. - ---------------------------- (b) Other Approvals(b) Other Approvals. All consents, approvals, - -------------------------------------------------------------------------------- permits and authorizations required to be obtained prior to the Effective Time - -------------------------------------------------------------------------------- from any Governmental Entity in connection with the execution and delivery of - -------------------------------------------------------------------------------- this Agreement and the consummation of the transactions contemplated hereby by - -------------------------------------------------------------------------------- BHOO, Sub and SSI shall have been made or obtained (as the case may be), except - -------------------------------------------------------------------------------- where the failure to obtain such consents, approvals, permits, and - --------------------------------------------------------------------------- authorizations would not be reasonably likely to result in a Material Adverse - -------------------------------------------------------------------------------- Effect on BHOO or SSI (assuming the Merger has taken place) or to materially - -------------------------------------------------------------------------------- adversely affect the consummation of the Merger, and no such consent, approval, - -------------------------------------------------------------------------------- permit or authorization shall impose terms or conditions that would have, or - -------------------------------------------------------------------------------- would be reasonably likely to have, a Material Adverse Effect on BHOO or SSI - -------------------------------------------------------------------------------- (assuming the Merger has taken place). Unless otherwise agreed to by BHOO and - -------------------------------------------------------------------------------- Sub, no such consent, approval, permit or authorization shall then be subject to - -------------------------------------------------------------------------------- appeal. - ------- (c) No Injunctions or Restraints(c) No Injunctions or Restraints. - -------------------------------------------------------------------------------- No temporary restraining order, preliminary or permanent injunction or other - -------------------------------------------------------------------------------- order issued by any court of competent jurisdiction or other legal restraint or - -------------------------------------------------------------------------------- prohibition (an "Injunction") preventing the consummation of the Merger shall be - -------------------------------------------------------------------------------- in effect; provided, however, that prior to invoking this condition, each party - -------------------------------------------------------------------------------- shall have complied fully with its obligations under Section 5.4 hereof. - -------------------------------------------------------------------------------- 6.2 Conditions of Obligations of BHOO and Sub6.2 Conditions of - -------------------------------------------------------------------------------- Obligations of BHOO and Sub. The obligations of BHOO and Sub to effect the - -------------------------------------------------------------------------------- Merger are subject to the satisfaction of the following conditions, any or all - -------------------------------------------------------------------------------- of which may be waived in whole or in part by BHOO and Sub: - ------------------------------------------------------------------------ (a) Representations and Warranties(a) Representations and - -------------------------------------------------------------------------------- Warranties. The representations and warranties of SSI set forth in this - -------------------------------------------------------------------------------- Agreement shall be true and correct in all material respects as of the date of - -------------------------------------------------------------------------------- this Agreement and (except to the extent such representations and warranties - -------------------------------------------------------------------------------- speak as of an earlier date) as of the Closing Date as though made on and as of - -------------------------------------------------------------------------------- the Closing Date, except where the failure to be so true and correct (without - -------------------------------------------------------------------------------- giving effect to the individual materiality qualifications and thresholds - -------------------------------------------------------------------------------- otherwise contained in Section 3.1 hereof) (i) would not in the aggregate - -------------------------------------------------------------------------------- constitute a Material Adverse Discovery or (ii) could not reasonably be expected - -------------------------------------------------------------------------------- to have a Material Adverse Effect on SSI or as otherwise contemplated by this - -------------------------------------------------------------------------------- Agreement. - ---------- (b) Performance of Obligations of SSI(b) Performance of Obligations - -------------------------------------------------------------------------------- of SSI. SSI shall have performed in all material respects all obligations - -------------------------------------------------------------------------------- required to be performed by it under this Agreement at or prior to the Closing - -------------------------------------------------------------------------------- Date. - ----- (c) Absence of Certain Action(c) Absence of Certain Action. No - -------------------------------------------------------------------------------- Injunction shall be in effect (i) imposing any limitation upon the ability of - -------------------------------------------------------------------------------- BHOO or any of its Subsidiaries effectively to control the business or - -------------------------------------------------------------------------------- operations of BHOO, SSI or any of their respective Subsidiaries or (ii) - -------------------------------------------------------------------------------- prohibiting or imposing any limitation upon BHOO's or SSI's or any of their - -------------------------------------------------------------------------------- Subsidiaries' ownership or operation of all or any portion of the business or - -------------------------------------------------------------------------------- assets or properties of BHOO or SSI or any of their respective Subsidiaries or - -------------------------------------------------------------------------------- compelling BHOO or SSI or any of their respective Subsidiaries to divest or hold - -------------------------------------------------------------------------------- separate all or any portion of the business or assets or properties of BHOO or - -------------------------------------------------------------------------------- SSI or any of their respective Subsidiaries, or imposing any other limitation - -------------------------------------------------------------------------------- upon any of them in the conduct of their businesses, and no suit or proceeding - -------------------------------------------------------------------------------- by a governmental authority seeking such an Injunction or an Injunction - -------------------------------------------------------------------------------- preventing or making illegal the consummation of any of the Mergers shall be - -------------------------------------------------------------------------------- pending. - -------- (d) Third-Party Consents. SSI shall have obtained all consents, - -------------------------------------------------------------------------------- waivers, approvals and authorizations of third parties with respect to credit - -------------------------------------------------------------------------------- agreements and other material contracts, leases, licenses and other agreements - -------------------------------------------------------------------------------- to which SSI or any of its Subsidiaries is a party, which consents, waiver, - -------------------------------------------------------------------------------- approvals and authorizations are required of such third parties by such - -------------------------------------------------------------------------------- documents, in form and substance reasonably satisfactory to BHOO, except where - -------------------------------------------------------------------------------- the failure to obtain such consent, waiver, approval or authorization could not - -------------------------------------------------------------------------------- reasonably be expected to have a Material Adverse Effect on BHOO or the - -------------------------------------------------------------------------------- Surviving Corporation (assuming of the Merger has taken place). - ----------------------------------------------------------------------- (e) Absence of Litigation. There shall not be pending any material - -------------------------------------------------------------------------------- litigation or proceeding against SSI. - ----------------------------------------- (f) Intellectual Property Assignment. All patents and patent - -------------------------------------------------------------------------------- applications, copyrights, trade secrets and other intellectual property rights - -------------------------------------------------------------------------------- owned or used by SSI that have not heretofore been assigned to SSI by the - -------------------------------------------------------------------------------- employees, consultants and agents of SSI shall have been assigned to SSI or - -------------------------------------------------------------------------------- BHOO's designee. - ----------------- (g) Lindner Debt. Prior to Closing, the Lindner and Renaissance Loan - -------------------------------------------------------------------------------- Agreement (and all corresponding promissory notes, security documents, stock - -------------------------------------------------------------------------------- warrants and related instruments) shall have been amended to provide that (i) - -------------------------------------------------------------------------------- the Lindner Debt has been reduced at Closing to no more than (and that Lindner - -------------------------------------------------------------------------------- has forgiven all indebtedness, including accrued interest, of SSI above) - -------------------------------------------------------------------------------- $1,400,000, which will be paid in full at Closing, and (ii) that Lindner shall - -------------------------------------------------------------------------------- have no right to acquire any shares of stock (common or preferred) of SSI - -------------------------------------------------------------------------------- (including, but not limited to, any further rights under the Lindner Warrant). - -------------------------------------------------------------------------------- (h) Renaissance Debt. Prior to Closing, the Lindner and Renaissance - -------------------------------------------------------------------------------- Loan Agreement (and all corresponding promissory notes, security documents, - -------------------------------------------------------------------------------- stock warrants and related instruments) shall have been amended to provide that - -------------------------------------------------------------------------------- (i) the Renaissance Debt has been reduced at Closing to no more than (and that - -------------------------------------------------------------------------------- Renaissance has forgiven all indebtedness, including accrued interest, of SSI - -------------------------------------------------------------------------------- above) $1,300,000, plus simple interest following the Closing of no more than 7% - -------------------------------------------------------------------------------- per annum, (ii) the Renaissance Debt will mature and become payable on July 1, - -------------------------------------------------------------------------------- 1999 and (iii) Renaissance shall have no right to acquire any shares of stock - -------------------------------------------------------------------------------- (common or preferred) of SSI (including, but not limited to, any further rights - -------------------------------------------------------------------------------- under the Renaissance Warrant). - ---------------------------------- (i) Bank One Debt. At or prior to Closing, the Bank One Debt must be - -------------------------------------------------------------------------------- fully paid and discharged and any security interests or rights of Bank One in - -------------------------------------------------------------------------------- SSI or any of its assets must be fully released and discharged. - -------------------------------------------------------------------------- (j) No Material Adverse Discovery. At and prior to Closing, there - -------------------------------------------------------------------------------- shall not have been any Material Adverse Discovery (as defined in Section - -------------------------------------------------------------------------------- 7.1(c)) or any effect or change that is or, as far as can be reasonably - -------------------------------------------------------------------------------- determined, is reasonably likely to be, materially adverse to the enforcement or - -------------------------------------------------------------------------------- validity of this Agreement. - ------------------------------ (k) Repurchase of SSI Preferred Stock. SSI shall have completed the - -------------------------------------------------------------------------------- Halliburton Repurchase. - ------------------------ (l) Net Working Capital. The "Net Working Capital" of SSI reflected on - -------------------------------------------------------------------------------- an unaudited consolidated balance sheet as of date no earlier than seven days - -------------------------------------------------------------------------------- prior to Closing will be no less than the Net Working Capital amount reflected - -------------------------------------------------------------------------------- on SSI's December 31, 1997 unaudited consolidated balance sheet previously - -------------------------------------------------------------------------------- furnished (the "Unaudited Balance Sheet"), less $500,000; provided, that for - -------------------------------------------------------------------------------- purposes of this Section 6.2(l), Net Working Capital (and any change therein) at - -------------------------------------------------------------------------------- December 31, 1997 and at Closing excludes (i) the assets of SSI's Pipeline - -------------------------------------------------------------------------------- Simulation Division to be sold to LICENERGY, Inc. but includes the proceeds to - -------------------------------------------------------------------------------- be received by SSI from the sale of its Pipeline Simulation Division to the - -------------------------------------------------------------------------------- extent retained, (ii) the Simmons Fee, (iii) any part of the Lindner Debt and - -------------------------------------------------------------------------------- the Renaissance Debt (including any accrued interest thereon) and (iv) the - -------------------------------------------------------------------------------- adjustment amounts set forth in items 2, 3 and 5 of the SSI Acquisition - -------------------------------------------------------------------------------- Purchase Price Adjustment schedule which relates to the SSI Due Diligence Items - -------------------------------------------------------------------------------- attachment to the letter dated May 21, 1998 from BHOO to SSI. - ------------------------------------------------------------------------ (m) PSD Disposition(m) PSD Disposition. The PSD Disposition shall - -------------------------------------------------------------------------------- have been consummated for cash proceeds to SSI of at least $1,500,000. - -------------------------------------------------------------------------------- (n) No Affiliate Indebtedness(n) No Affiliate Indebtedness. - -------------------------------------------------------------------------------- Immediately prior to Closing SSI shall not have any indebtedness or balances due - -------------------------------------------------------------------------------- to or from any of its stockholders or their respective Affiliates. - ---------------------------------------------------------------------------- (o) Cancellation of Indebtedness. SSI shall have recorded any - -------------------------------------------------------------------------------- cancellation of indebtedness resulting from the reduction of the Lindner Debt - -------------------------------------------------------------------------------- and Renaissance Debt (as contemplated by Sections 6.2(g) and (h)). - --------------------------------------------------------------------------- (p) Sub Promissory Note. SSI shall have issued and delivered to Sub - -------------------------------------------------------------------------------- the Sub Promissory Note if Sub elects to lend funds to SSI as contemplated by - -------------------------------------------------------------------------------- Section 5.11. - -------------- BHOO, Sub and SSI acknowledge that the satisfaction of the conditions in - -------------------------------------------------------------------------------- Sections 6.2(g) and (k) and of the provisions of Section 2.2 may require funding - -------------------------------------------------------------------------------- from Sub, however neither BHOO nor Sub is obligated to provide any such funding. - -------------------------------------------------------------------------------- It shall not constitute a failure of the conditions in Section 6.2(g) or Section - -------------------------------------------------------------------------------- 6.2(k), as applicable, if SSI requests Sub to fund up to $1,400,000 for payment - -------------------------------------------------------------------------------- of the Lindner Debt referred to in Section 6.2(g) or up to $2,500,000 for the - -------------------------------------------------------------------------------- Halliburton Repurchase referred to in Section 6.2(k) and (i) Sub elects not to - -------------------------------------------------------------------------------- provide such funding and (ii) the funding of such amounts would, without further - -------------------------------------------------------------------------------- action, result in the conditions in Section 6.2(g) or Section 6.2(k), as - -------------------------------------------------------------------------------- applicable, being completely satisfied. - ------------------------------------------ 6.3 Conditions of Obligations of SSI6.3 Conditions of Obligations - -------------------------------------------------------------------------------- of SSI. The obligation of SSI to effect the Merger is subject to the - -------------------------------------------------------------------------------- satisfaction of the following conditions, any or all of which may be waived in - -------------------------------------------------------------------------------- whole or in part by SSI: - ----------------------------- (a) Representations and Warranties(a) Representations and - -------------------------------------------------------------------------------- Warranties. Each of the representations and warranties of BHOO set forth in - -------------------------------------------------------------------------------- this Agreement shall be true and correct in all material respects as of the date - -------------------------------------------------------------------------------- of this Agreement and (except to the extent such representations and warranties - -------------------------------------------------------------------------------- speak as of an earlier date) as of the Closing Date as though made on and as of - -------------------------------------------------------------------------------- the Closing Date, except where the failure to be so true and correct (without - -------------------------------------------------------------------------------- giving effect to the individual materiality qualifications and thresholds - -------------------------------------------------------------------------------- otherwise contained in Section 3.2 hereof) could not reasonably be expected to - -------------------------------------------------------------------------------- have a Material Adverse Effect on BHOO or as otherwise contemplated by this - -------------------------------------------------------------------------------- Agreement. - ---------- (b) Performance of Obligations of BHOO and Sub(b) Performance of - -------------------------------------------------------------------------------- Obligations of BHOO and Sub. BHOO and Sub shall have performed in all material - -------------------------------------------------------------------------------- respects all obligations required to be performed by them under this Agreement - -------------------------------------------------------------------------------- at or prior to the Closing Date. - -------------------------------------- ARTICLE VII ----------- TERMINATION AND AMENDMENTARTICLE VIITERMINATION AND AMENDMENT ------------------------------------------------------------- 7.1 Termination7.1 Termination. This Agreement may be terminated - -------------------------------------------------------------------------------- and the Merger may be abandoned at any time prior to the Effective Time, whether - -------------------------------------------------------------------------------- before or after approval of the matters presented in connection with the Merger - -------------------------------------------------------------------------------- by the stockholders of SSI: - ------------------------------- (a) by mutual written consent of SSI and BHOO; - ------------------------------------------------------------------- (b) by SSI, Sub or BHOO if (i) the Merger shall not have been - -------------------------------------------------------------------------------- consummated by September 30, 1998 (provided that the right to terminate this - -------------------------------------------------------------------------------- Agreement under this clause (i) shall not be available to any party whose - -------------------------------------------------------------------------------- failure to fulfill any covenant or agreement under this Agreement has been the - -------------------------------------------------------------------------------- cause of or resulted in the failure of the Merger to occur on or before such - -------------------------------------------------------------------------------- date); (ii) any court of competent jurisdiction, or some other governmental body - -------------------------------------------------------------------------------- or regulatory authority shall have issued an order, decree or ruling or taken - -------------------------------------------------------------------------------- any other action permanently restraining, enjoining or otherwise prohibiting the - -------------------------------------------------------------------------------- Merger and such order, decree, ruling or other action shall have become final - -------------------------------------------------------------------------------- and nonappealable; or (iii) any required approval of the SSI stockholders shall - -------------------------------------------------------------------------------- not have been obtained by reason of the failure to obtain the required vote upon - -------------------------------------------------------------------------------- a vote held at a duly held meeting of stockholders or at any adjournment - -------------------------------------------------------------------------------- thereof; - -------- (c) by BHOO or Sub if (i) for any reason SSI fails to use its good - -------------------------------------------------------------------------------- faith best efforts to call and hold a stockholders meeting for the purpose of - -------------------------------------------------------------------------------- voting upon this Agreement and the Merger by July 27, 1998; (ii) SSI shall have - -------------------------------------------------------------------------------- failed to comply in any material respect with any of the covenants or agreements - -------------------------------------------------------------------------------- contained in this Agreement to be complied with or performed by SSI at or prior - -------------------------------------------------------------------------------- to such date of termination (provided such breach has not been cured within 30 - -------------------------------------------------------------------------------- days following receipt by SSI of notice of such breach and is existing at the - -------------------------------------------------------------------------------- time of termination of this Agreement); (iii) any representation or warranty of - -------------------------------------------------------------------------------- SSI contained in this Agreement shall not be true in all material respects when - -------------------------------------------------------------------------------- made (provided such breach has not been cured within 30 days following receipt - -------------------------------------------------------------------------------- by SSI of notice of such breach and is existing at the time of termination of - -------------------------------------------------------------------------------- this Agreement) or on and as of the time of such termination as if made on and - -------------------------------------------------------------------------------- as of such time (except to the extent it relates to a particular date), except - -------------------------------------------------------------------------------- where the failure to be so true and correct (without giving effect to the - -------------------------------------------------------------------------------- individual materiality qualifications and thresholds otherwise contained in - -------------------------------------------------------------------------------- Section 3.1 hereof) could not reasonably be expected to have a Material Adverse - -------------------------------------------------------------------------------- Effect on SSI; or (iv) after the date hereof there has been any Material Adverse - -------------------------------------------------------------------------------- Change or Material Adverse Discovery with respect to SSI, except for general - -------------------------------------------------------------------------------- economic changes or changes that may affect the industries of SSI or any of its - -------------------------------------------------------------------------------- Subsidiaries generally. For purposes of this Agreement "Material Adverse - -------------------------------------------------------------------------------- Discovery" means a discovery of an event, occurrence, fact or circumstance or - -------------------------------------------------------------------------------- combination of events, occurrences, facts or circumstances, in any case existing - -------------------------------------------------------------------------------- on the date hereof or at any time prior to the Closing relating to SSI or the - -------------------------------------------------------------------------------- business of SSI that BHOO learns of, or discovers, prior to the Closing, that, - -------------------------------------------------------------------------------- individually or in the aggregate, adversely affect or could reasonably be - -------------------------------------------------------------------------------- expected to adversely affect SSI or its business (including the results of - -------------------------------------------------------------------------------- operations, financial condition or prospects of its business) or the assets of - -------------------------------------------------------------------------------- SSI, in an amount of $500,000 or greater except (a) for matters described in - -------------------------------------------------------------------------------- reasonable specificity in this Agreement or in SSI's Annual Report on Form 10-K - -------------------------------------------------------------------------------- for the year ended December 31, 1997 as filed with the Securities and Exchange - -------------------------------------------------------------------------------- Commission and (b) for the effects disclosed by SSI to BHOO of accounting of - -------------------------------------------------------------------------------- SSI's Pipeline Simulation Division as a discontinued operation. Operating - -------------------------------------------------------------------------------- losses in the ordinary course of business will not constitute a Material Adverse - -------------------------------------------------------------------------------- Change, or Material Adverse Discovery or Material Adverse Effect unless the - -------------------------------------------------------------------------------- losses result in Net Working Capital not satisfying the provisions of Section - -------------------------------------------------------------------------------- 6.2(l). - ------- (d) by SSI if (i) BHOO and Sub shall have failed to comply in any - -------------------------------------------------------------------------------- material respect with any of the covenants or agreements contained in this - -------------------------------------------------------------------------------- Agreement to be complied with or performed by them at or prior to such date of - -------------------------------------------------------------------------------- termination (provided such breach has not been cured within 30 days following - -------------------------------------------------------------------------------- receipt by BHOO of notice of such breach and is existing at the time of - -------------------------------------------------------------------------------- termination of this Agreement); or (ii) any representation or warranty of BHOO - -------------------------------------------------------------------------------- or Sub contained in this Agreement shall not be true in all material respects - -------------------------------------------------------------------------------- when made (provided such breach has not been cured within 30 days following - -------------------------------------------------------------------------------- receipt by BHOO of notice of such breach and is existing at the time of - -------------------------------------------------------------------------------- termination of this Agreement) or on and as of the time of such termination as - -------------------------------------------------------------------------------- if made on and as of such time (except to the extent it relates to a particular - -------------------------------------------------------------------------------- date), except where the failure to be so true and correct (without giving effect - -------------------------------------------------------------------------------- to the individual materiality qualifications and thresholds otherwise contained - -------------------------------------------------------------------------------- in Section 3.2 hereof) could not reasonably be expected to have a Material - -------------------------------------------------------------------------------- Adverse Effect; - ---------------- (e) by BHOO or Sub if (i) the Board of Directors of SSI shall have - -------------------------------------------------------------------------------- withdrawn or modified, in any manner which is adverse to BHOO or Sub, its - -------------------------------------------------------------------------------- recommendation or approval of the Merger or this Agreement and the transactions - -------------------------------------------------------------------------------- contemplated hereby or shall have resolved to do so, or (ii) the Board of - -------------------------------------------------------------------------------- Directors of SSI shall have recommended to the stockholders of SSI any - -------------------------------------------------------------------------------- Acquisition Proposal or any transaction described in the definition of - ------------------------------------------------------------------------------- Acquisition Proposal, or shall have resolved to do so; - -------------------------------------------------------------- (f) by SSI if SSI shall exercise the right specified in clause (B) of - -------------------------------------------------------------------------------- Section 4.2(a); provided that SSI may not effect such termination pursuant to - -------------------------------------------------------------------------------- this Section 7.1(f) unless and until (i) BHOO receives at least seven business - -------------------------------------------------------------------------------- days' prior written notice from SSI of its intention to effect such termination - -------------------------------------------------------------------------------- pursuant to this Section 7.1(f); (ii) during such period, SSI shall, and shall - -------------------------------------------------------------------------------- cause its respective financial and legal advisors to, consider any adjustment in - -------------------------------------------------------------------------------- the terms and conditions of this Agreement that BHOO and Sub may propose; and - -------------------------------------------------------------------------------- (iii) SSI pays the amounts required by Section 7.2 concurrently with such - -------------------------------------------------------------------------------- termination; or - ---------------- (g) by BHOO or Sub if any Governmental Entity shall have issued any - -------------------------------------------------------------------------------- Injunction or taken any other action permanently imposing, prohibiting or - -------------------------------------------------------------------------------- compelling any of the limitations, prohibitions or compulsions set forth in - -------------------------------------------------------------------------------- Section 6.2(c) and such Injunction or other action shall have become final and - -------------------------------------------------------------------------------- nonappealable. - -------------- 7.2 Effect of Termination7.2 Effect of Termination. - ------------------------------------------------------------------------------ (a) In the event of termination of this Agreement by any party hereto - -------------------------------------------------------------------------------- as provided in Section 7.1, this Agreement shall forthwith become void and there - -------------------------------------------------------------------------------- shall be no liability or obligation on the part of any party hereto except (i) - -------------------------------------------------------------------------------- with respect to this Section 7.2 -and Section 8.1 and (ii) to the extent that - -------------------------------------------------------------------------------- such termination results from the willful breach (except as provided in Section - -------------------------------------------------------------------------------- 8.8) by a party hereto of any of its representations or warranties or of any of - -------------------------------------------------------------------------------- its covenants or agreements contained in this Agreement. - --------------------------------------------------------------- (b) If BHOO, Sub or SSI terminates this Agreement pursuant to Section - -------------------------------------------------------------------------------- 7.1(b) because of the failure of any condition contained in Article VI that is - -------------------------------------------------------------------------------- or was within the reasonable control of SSI or pursuant to Section 7.1(c)(i), - -------------------------------------------------------------------------------- 7.1(e) or 7.1(f) (a "Termination Payment Event"), SSI shall, on the day of such - -------------------------------------------------------------------------------- termination, pay to BHOO a fee of $500,000 in cash (the "Break-up Fee") by wire - -------------------------------------------------------------------------------- transfer of immediately available funds to an account designated by BHOO. The - -------------------------------------------------------------------------------- Break-up Fee will constitute full and complete liquidated damages in - ----------------------------------------------------------------------------- satisfaction of all rights and claims of BHOO, regardless of the negligence, - -------------------------------------------------------------------------------- strict liability, breach of warranty, breach of contract or other fault or - -------------------------------------------------------------------------------- responsibility of any party or person. - ------------------------------------------- (c) If BHOO, Sub or SSI terminates this Agreement for any reason other - -------------------------------------------------------------------------------- than a Termination Payment Event and SSI consummates an Acquisition Transaction - -------------------------------------------------------------------------------- on or before the first anniversary of the date of this Agreement, SSI shall, at - -------------------------------------------------------------------------------- or prior to the closing of such Acquisition Transaction, pay the Break-up Fee to - -------------------------------------------------------------------------------- BHOO by wire transfer of immediately available funds to an account designated by - -------------------------------------------------------------------------------- BHOO. Notwithstanding the immediately preceding sentence, if this Agreement is - -------------------------------------------------------------------------------- terminated by BHOO because of a failure of a condition not in SSI's reasonable - -------------------------------------------------------------------------------- control and SSI consummates an Acquisition Transaction (other than with - -------------------------------------------------------------------------------- Halliburton Company), then the Break-Up Fee will be reduced to (x) $250,000 if - -------------------------------------------------------------------------------- such Acquisition Transaction was for equivalent consideration between $1 and - -------------------------------------------------------------------------------- $1,000,000 less than the consideration offered by Sub pursuant to this Agreement - -------------------------------------------------------------------------------- or (y) $0 if such Acquisition Transaction was for equivalent consideration more - -------------------------------------------------------------------------------- than $1,000,000 less than the consideration offered by Sub pursuant to this - -------------------------------------------------------------------------------- Agreement. - ---------- 7.3 Amendment7.3 Amendment. This Agreement may be amended by the - -------------------------------------------------------------------------------- parties hereto, by action taken or authorized by their respective Boards of - -------------------------------------------------------------------------------- Directors, at any time before or after approval of the matters presented in - -------------------------------------------------------------------------------- connection with the Merger by the stockholders of SSI, but, after any such - -------------------------------------------------------------------------------- approval, no amendment shall be made which by law requires further approval by - -------------------------------------------------------------------------------- such stockholders without such further approval. This Agreement may not be - -------------------------------------------------------------------------------- amended except by an instrument in writing signed on behalf of each of the - -------------------------------------------------------------------------------- parties hereto. - ---------------- 7.4 Extension; Waiver7.4 Extension; Waiver. At any time prior to - -------------------------------------------------------------------------------- the Effective Time, the parties hereto, by action taken or authorized by their - -------------------------------------------------------------------------------- respective Boards of Directors, may, to the extent legally allowed: (i) extend - -------------------------------------------------------------------------------- the time for the performance of any of the obligations or other acts of the - -------------------------------------------------------------------------------- other parties hereto; (ii) waive any inaccuracies in the representations and - -------------------------------------------------------------------------------- warranties contained herein or in any document delivered pursuant hereto; and - -------------------------------------------------------------------------------- (iii) waive compliance with any of the agreements or conditions contained - -------------------------------------------------------------------------------- herein. Any agreement on the part of a party hereto to any such extension or - -------------------------------------------------------------------------------- waiver shall be valid only if set forth in a written instrument signed on behalf - -------------------------------------------------------------------------------- of such party. - ---------------- ARTICLE VIII ------------ GENERAL PROVISIONSARTICLE VIIIGENERAL PROVISIONS ------------------------------------------------ 8.1 Payment of Expenses8.1 Payment of Expenses. Each party hereto - -------------------------------------------------------------------------------- shall pay its own expenses incident to preparing for entering into and carrying - -------------------------------------------------------------------------------- out this Agreement and the consummation of the transactions contemplated hereby, - -------------------------------------------------------------------------------- whether or not the Merger shall be consummated. If the Merger is consummated, - -------------------------------------------------------------------------------- the Surviving Corporation, and not the stockholders of SSI immediately prior to - -------------------------------------------------------------------------------- the Effective Time, shall be responsible for expenses incurred by SSI in - -------------------------------------------------------------------------------- connection with this Agreement and the transaction contemplated hereby. - ------------------------------------------------------------------------------- 8.2 Nonsurvival of Representations, Warranties and Agreements8.2 - -------------------------------------------------------------------------------- Nonsurvival of Representations, Warranties and Agreements. None of the - -------------------------------------------------------------------------------- representations, warranties and agreements in this Agreement or in any - ------------------------------------------------------------------------------- instrument delivered pursuant to this Agreement shall survive the Effective Time - -------------------------------------------------------------------------------- and any liability for breach or violation thereof shall terminate absolutely and - -------------------------------------------------------------------------------- be of no further force and effect at and as of the Effective Time, except for - -------------------------------------------------------------------------------- the agreements contained in Sections 2.1, 2.2, 5.6 and 7.2 and Article VIII. - -------------------------------------------------------------------------------- 8.3 Notices8.3 Notices. Any notice or communication required or - -------------------------------------------------------------------------------- permitted hereunder shall be in writing and either delivered personally, - -------------------------------------------------------------------------------- telegraphed or telecopied or sent by certified or registered mail, postage - -------------------------------------------------------------------------------- prepaid, and shall be deemed to be given, dated and received when so delivered - -------------------------------------------------------------------------------- personally, telegraphed or telecopied or, if mailed, five business days after - -------------------------------------------------------------------------------- the date of mailing to the following address or telecopy number, or to such - -------------------------------------------------------------------------------- other address or addresses as such person may subsequently designate by notice - -------------------------------------------------------------------------------- given hereunder: - ----------------- (a) if to BHOO or Sub, to: - --------------------------------------------- Baker Hughes Incorporated - ------------------------------------- 3900 Essex Lane - --------------------------- Houston, Texas 77027 - -------------------------------- Attention: Eric L. Mattson - ----------------------------------------- Telecopy: (713) 439-8966 - -------------------------------------- with a copy to: - ----------------------- Baker Hughes Solutions - ---------------------------------- 17015 Aldine Westfield - ---------------------------------- Houston, Texas 77073 - ---------------------------------- Attention: Division Legal Counsel - ------------------------------------------------ Telecopy: (713) 625-6895 - -------------------------------------- and a copy to: - ---------------------- J. David Kirkland, Jr. - ----------------------------------- Baker & Botts, L.L.P. - ---------------------------------- 3000 One Shell Plaza - --------------------------------- Houston, Texas 77002 - ---------------------------------- Telecopy: (713) 229-1522 - -------------------------------------- (b) if to SSI, to: - ----------------------------------- Scientific Software-Intercomp, Inc. - ----------------------------------------------- 633 17th, Suite 1600 - --------------------------------- Denver, Colorado 80202 - ------------------------------------ Attention: George Steel - ------------------------------------- Telecopy: (303) 293-0361 - -------------------------------------- with a copy to: - ---------------------------- Roger C. Cohen - -------------------------- Cohen Brame & Smith Professional Corporation - ----------------------------------------------------------- 1700 Lincoln Street, Suite 1800 - --------------------------------------------- Denver, Colorado 80203 - ------------------------------------ Telecopy: (303) 894-0475 - -------------------------------------- 8.4 Interpretation8.4 Interpretation. When a reference is made in - -------------------------------------------------------------------------------- this Agreement to Sections, such reference shall be to a Section of this - -------------------------------------------------------------------------------- Agreement unless otherwise indicated. The table of contents, glossary of - -------------------------------------------------------------------------------- defined terms and headings contained in this Agreement are for reference - -------------------------------------------------------------------------------- purposes only and shall not affect in any way the meaning or interpretation of - -------------------------------------------------------------------------------- this Agreement. Whenever the word "include," "includes" or "including" are used - -------------------------------------------------------------------------------- in this Agreement, they shall be deemed to be followed by the words "without - -------------------------------------------------------------------------------- limitation." Unless the context otherwise requires, "or" is disjunctive but not - -------------------------------------------------------------------------------- necessarily exclusive, and words in the singular include the plural and in the - -------------------------------------------------------------------------------- plural include the singular. Any representations and warranties of SSI that are - -------------------------------------------------------------------------------- qualified by the phrase "to the best knowledge" of a party or phrases with - -------------------------------------------------------------------------------- similar wording shall be interpreted to refer to the knowledge, after reasonable - -------------------------------------------------------------------------------- investigation, of the directors and officers of SSI. - ----------------------------------------------------------- 8.5 Counterparts8.5 Counterparts. This Agreement may be executed - -------------------------------------------------------------------------------- in counterparts, all of which shall be considered one and the same agreement and - -------------------------------------------------------------------------------- shall become effective when counterparts have been signed by each of the parties - -------------------------------------------------------------------------------- and delivered to the other party, it being understood that all parties need not - -------------------------------------------------------------------------------- sign the same counterpart. - ----------------------------- 8.6 Entire Agreement; No Third-Party Beneficiaries8.6 Entire - -------------------------------------------------------------------------------- Agreement; No Third-Party Beneficiaries. This Agreement (together with any - -------------------------------------------------------------------------------- other documents and instruments referred to herein and the confidentiality - -------------------------------------------------------------------------------- agreement dated March 27, 1998 between the parties) (a) constitutes the entire - -------------------------------------------------------------------------------- agreement and supersedes all prior agreements and understandings, both written - -------------------------------------------------------------------------------- and oral, among the parties with respect to the subject matter hereto and (b) - -------------------------------------------------------------------------------- except as provided in Section 5.6, is not intended to confer upon any person - -------------------------------------------------------------------------------- other than the parties hereto any rights or remedies hereunder. - ------------------------------------------------------------------------ 8.7 Governing Law8.7 Governing Law. This Agreement shall be - -------------------------------------------------------------------------------- governed and construed in accordance with the laws of the State of Texas, - -------------------------------------------------------------------------------- without giving effect to the principles of conflicts of law thereof, except to - -------------------------------------------------------------------------------- the extent the provisions of the CBCA are required to be applicable to the - -------------------------------------------------------------------------------- Merger. - ------- 8.8 No Remedy in Certain Circumstances8.8 No Remedy in Certain - -------------------------------------------------------------------------------- Circumstances. Each party agrees that, should any court or other competent - -------------------------------------------------------------------------------- authority hold any provision of this Agreement or part hereof to be null, void - -------------------------------------------------------------------------------- or unenforceable, or order any party to take any action inconsistent herewith or - -------------------------------------------------------------------------------- not to take an action consistent herewith or required hereby, the validity, - -------------------------------------------------------------------------------- legality and enforceability of the remaining provisions and obligations - ------------------------------------------------------------------------------- contained or set forth herein shall not in any way be affected or impaired - -------------------------------------------------------------------------------- thereby, unless the foregoing inconsistent action or the failure to take an - -------------------------------------------------------------------------------- action constitutes a material breach of this Agreement or makes the Agreement - -------------------------------------------------------------------------------- impossible to perform in which case this Agreement shall terminate pursuant to - -------------------------------------------------------------------------------- Article VII hereof. Except as otherwise contemplated by this Agreement, to the - -------------------------------------------------------------------------------- extent that a party hereto took an action inconsistent herewith or failed to - -------------------------------------------------------------------------------- take action consistent herewith or required hereby pursuant to an order or - -------------------------------------------------------------------------------- judgment of a court or other competent authority, such party shall not incur any - -------------------------------------------------------------------------------- liability or obligation unless such party breached its obligations under Section - -------------------------------------------------------------------------------- 5.4 hereof or did not in good faith seek to resist or object to the imposition - -------------------------------------------------------------------------------- or entering of such order or judgment. - -------------------------------------------- 8.9 Assignment8.9 Assignment. Neither this Agreement nor any of - -------------------------------------------------------------------------------- the rights, interests or obligations hereunder shall be assigned by any of the - -------------------------------------------------------------------------------- parties hereto (whether by operation of law or otherwise) without the prior - -------------------------------------------------------------------------------- written consent of the other parties, except that Sub may assign, in its sole - -------------------------------------------------------------------------------- discretion, any or all of its rights, interests and obligations hereunder to - -------------------------------------------------------------------------------- Baker Hughes Incorporated or any direct or indirect Subsidiary of Baker Hughes - -------------------------------------------------------------------------------- Incorporated. Subject to the preceding sentence, this Agreement will be binding - -------------------------------------------------------------------------------- upon, inure to the benefit of and be enforceable by the parties and their - -------------------------------------------------------------------------------- respective successors and assigns. - ------------------------------------- 8.10 Schedules8.10 Schedules. For purposes of this Agreement, - -------------------------------------------------------------------------------- Schedules shall mean the Schedules contained in the Confidential Disclosure - -------------------------------------------------------------------------------- Schedule, dated the date hereof, delivered in connection with this Agreement and - -------------------------------------------------------------------------------- initialed by the parties hereto. - ------------------------------------ - ------ IN WITNESS WHEREOF, each party has caused this Agreement to be signed by its respective officers thereunto duly authorized, all as of the date first written above. BAKER HUGHES OILFIELD OPERATIONS, INC. By: /s/ Joseph F. Donovan ------------------------ Name: Joseph F. Donovan ------------------- Title: Vice President --------------- SCIENTIFIC SOFTWARE-INTERCOMP, INC. By: /s/ George Steel ------------------ Name: George Steel ------------- Title: President and Chief Executive Officer ----------------------------------------- II-2 ANNEX II Simmons & Company International June 15, 1998 Board of Directors Scientific Software-Intercomp, Inc. 633 17th Street, Suite 1600 Denver, Colorado 80202-2699 Members of the Board: You have requested the opinion of Simmons & Company International ("Simmons") as investment bankers as to the fairness, from a financial point of view, to the holders of shares of common stock, no par value (the "Company Common Stock"), of Scientific Software-Intercomp, Inc. (the "Company") of the consideration to be received by such stockholders in the proposed acquisition of the Company by Baker Hughes, Inc. ("Baker Hughes") pursuant to the Agreement and Plan of Merger ("the Agreement") to be executed by Baker Hughes Oilfield Operations, Inc. and the Company (the "Proposed Merger"). As more specifically set forth in the Agreement, in the Proposed Merger each issued and outstanding share of the Company Common Stock will be converted into the right to receive $0.44 in cash. Simmons, as a specialized energy-related investment banking firm, is engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, the management and underwriting of sales of equity and debt to the public, and private placements of equity and debt. In the ordinary course of business, Simmons may actively trade the securities of the Company and Baker Hughes for its own account and for the accounts of customers and, accordingly, may at any time hold a long or short position in such securities. In connection with rendering its opinion, Simmons has reviewed and analyzed, among other things, the following: (i) a draft of the Agreement dated June 14, 1998, (ii) the financial statements and other information concerning the Company, including the Annual Reports on Form 10-K of the Company for each of the years in the four-year period ended December 31, 1997; the amended Annual Report on Form 10-K/A No. 1 of the Company for the year ended December 31, 1997 (including restated financial results for the three years ended December 31, 1995); the Quarterly Report on Form 10-QSB/A of the Company for the quarter ended March 31, 1998; and the Current Reports on Form 8-K of the Company related to events occurring on September 11, 1996; October 9, 1996; September 11, 1997; December 11, 1997; February 10, 1998; March 27, 1998; April 17, 1998; and May 1, 1998, (iii) certain other internal information, primarily financial in nature, concerning the business and operations of the Company furnished by the Company for purposes of Simmons' analysis, (iv) certain publicly available information concerning the trading of, and the trading market for, the Company Common Stock, (v) certain publicly available information with respect to certain other companies that Simmons believes to be comparable to the Company and the trading markets for certain of such other companies' securities, (vi) certain publicly available information concerning the estimates of the future operating and financial performance of the Company and the comparable companies prepared by industry experts unaffiliated with the Company, and (vii) certain publicly available information concerning the nature and terms of certain other transactions considered relevant to the inquiry; and made such other analyses and examinations as we have deemed necessary or appropriate. Simmons has also met with certain other officers and employees of the Company to discuss the foregoing, as well as other matters believed relevant to the inquiry. In arriving at its opinion, Simmons has assumed and relied upon the accuracy and completeness of all financial and other information provided by the Company, or publicly available, and has not attempted independently to verify any of such information. Simmons has not conducted a physical inspection of any of the assets, properties or facilities of the Company, nor has Simmons made or obtained any independent evaluation or appraisal of any of such assets, properties or facilities. In conducting its analysis and arriving at its opinion as expressed herein, Simmons has considered such financial and other factors as it deemed appropriate under the circumstances including, among others, the following: (i) the historical and current financial position and results of operations of the Company, (ii) the business prospects of the Company, (iii) the historical and current markets for the Company Common Stock and for the equity securities of certain other companies believed to be comparable to the Company, and (iv) the nature and terms of certain other acquisition transactions that Simmons believes to be relevant. Simmons has also taken into account its assessment of general economic, market and financial conditions and its experience in connection with similar transactions and securities' valuation generally. Simmons' opinion necessarily is based upon conditions as they exist and can be evaluated on, and on the information made available at, the date hereof. Simmons is acting as financial advisor to the Company in this transaction and will receive a customary contingent fee for its services. Based upon and subject to the foregoing, Simmons is of the opinion, as investment bankers, that the consideration to be received by holders of the Company Common Stock in the Proposed Merger is fair to such holders from a financial point of view. Sincerely, SIMMONS & COMPANY INTERNATIONAL /s/ Ben A. Guill - ------------------- Ben A. Guill Managing Director III-6 ANNEX III COLORADO BUSINESS CORPORATION ACT ARTICLE 113 DISSENTERS' RIGHTS PART I RIGHT OF DISSENT - PAYMENT FOR SHARES 7-113-101.DEFINITIONS. For purposes of this article: (1)"Beneficial shareholder" means the beneficial owner of shares held in a voting trust or by a nominee as the record shareholder. (2)"Corporation" means the issuer of the shares held by a dissenter before the corporate action, or the surviving or acquiring domestic or foreign corporation, by merger or share exchange of that issuer. (3)"Dissenter" means a shareholder who is entitled to dissent from corporate action under section 7-113-102 and who exercises that right at the time and in the manner required by part 2 of this article. (4)"Fair value", with respect to a dissenter's shares, means the value of the shares immediately before the effective date of the corporate action to which the dissenter objects, excluding any appreciation or depreciation in anticipation of the corporate action except to the extent that exclusion would be inequitable. (5)"Interest" means interest from the effective date of the corporate action until the date of payment, at the average rate currently paid by the corporation on its principal bank loans or, if none, at the legal rate as specified in section 5-12-101, C.R.S. (6)"Record shareholder" means the person in whose name shares are registered in the records of a corporation or the beneficial owner of shares that are registered in the name of a nominee to the extent such owner is recognized by the corporation as the shareholder as provided in section 7-107-204. (7)"Shareholder" means either a record shareholder or a beneficial shareholder. 7-113-102. RIGHT TO DISSENT. (1) A shareholder, whether or not entitled to vote, is entitled to dissent and obtain payment of the fair value of the shareholder's shares in the event of any of the following corporate actions: (a)Consummation of a plan of merger to which the corporation is a party if: (i)Approval by the shareholders of that corporation is required for the merger by section 7-111-103 or 7-111-104 or by the articles of incorporation; or (ii)The corporation is a subsidiary that is merged with its parent corporation under section 7-111-104; (b)Consummation of a plan of share exchange to which the corporation is a party as the corporation whose shares will be acquired; (c)Consummation of a sale, lease, exchange, or other disposition of all, or substantially all, of the property of the corporation for which a shareholder vote is required under section 7-112-102 (1); and (d)Consummation of a sale, lease, exchange, or other disposition of all, or substantially all, of the property of an entity controlled by the corporation if the shareholders of the corporation were entitled to vote upon the consent of the corporation to the disposition pursuant to section 7-112-102 (2). (1.3)A shareholder is not entitled to dissent and obtain payment, under subsection(1)of this section, of the fair value of the shares of any class or series of shares which either were listed on a national securities exchange registered under the federal "Securities Exchange Act of 1934", as amended, or on the national market system of the national association of securities dealers automated quotation system, or were held of record by more than two thousand shareholders, at the time of: (a)The record date fixed under section 7-107-107 to determine the shareholders entitled to receive notice of the shareholders' meeting at which the corporate action is submitted to a vote; (b)The record date fixed under section 7-107-104 to determine shareholders entitled to sign writings consenting to the corporate action; or (c)The effective date of the corporate action if the corporate action is authorized other than by a vote of shareholders. (1.8)The limitation set forth in subsection (1.3) of this section shall not apply if the shareholder will receive for the shareholder's shares, pursuant to the corporate action anything except: (a)Shares of the corporation surviving the consummation of the plan of merger or share exchange; (b)Shares of any other corporation which at the effective date of the plan of merger or share exchange either will be listed on a national securities exchange registered under the federal "Securities Exchange Act of 1934", as amended, or on the national market system of the national association of securities dealers automated quotation system or will be held of record by more than two thousand shareholders; (c)Cash in lieu of fractional shares; or (d)Any combination of the foregoing described shares or cash in lieu of fractional shares. (2)(Deleted by amendment, L. 96, p. 1321, 30, effective June 1, 1996.) (2.5)A shareholder, whether or not entitled to vote, is entitled to dissent and obtain payment of the fair value of the shareholder's shares in the event of a reverse split that reduces the number of shares owned by the shareholder to a fraction of a share or to scrip if the fractional share or scrip so created is to be acquired for cash or the scrip is to be voided under section 7-106-104. (3)A shareholder is entitled to dissent and obtain payment of the fair value of the shareholder's shares in the event of any corporate action to the extent provided by the bylaws or a resolution of the board of directors. (4)A shareholder entitled to dissent and obtain payment for the shareholder's shares under this article may not challenge the corporate action creating such entitlement unless the action is unlawful or fraudulent with respect to the shareholder or the corporation. 7-113-103.DISSENT BY NOMINEES AND BENEFICIAL OWNERS. (1) A record shareholder may assert dissenters' rights as to fewer than all the shares registered in the record shareholder's name only if the record shareholder dissents with respect to all shares beneficially owned by any one person and causes the corporation to receive written notice which states such dissent and the name, address, and federal taxpayer identification number, if any, of each person on whose behalf the record shareholder asserts dissenters' rights. The rights of a record shareholder under this subsection (1) are determined as if the shares as to which the record shareholder dissents and the other shares of the record shareholder were registered in the names of difference shareholders. (2)A beneficial shareholder may assert dissenters' rights as to the shares held on the beneficial shareholder's behalf only if: (a)The beneficial shareholder causes the corporation to receive the record not apply if the shareholder's written consent to the dissent not later than the time the beneficial share -corporate action, holder asserts dissenters' rights; and (b)The beneficial shareholder dissents with respect to all shares beneficially owned by the beneficial shareholder. (3)The corporation may require that, when a record shareholder dissents with respect to the shares held by any one or more beneficial shareholders, each such beneficial shareholder must certify to the corporation that the beneficial shareholder and the record shareholder or record shareholders of all shares owned beneficially by the beneficial shareholder have asserted, or will timely assert, dissenters' rights as to all such shares as to which there is no limitation on the ability to exercise dissenters' rights. Any such requirement shall be stated in the dissenters' notice given pursuant to section 7-113-203. PART 2 PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS 7-113-201.NOTICE OF DISSENTERS' RIGHTS. (1) If a proposed corporate action creating dissenters' rights under section 7-113-102 is submitted to a vote at a shareholders' meeting, the notice of the meeting shall be given to all shareholders, whether or not entitled to vote. The notice shall state that shareholders are or may be entitled to assert dissenters' rights under this article and shall be accompanied by a copy of this article and the materials, if any, that, under articles 101 to 117 of this title, are required to be given to shareholders entitled to vote on the proposed action at the meeting. Failure to give notice as provided by this subsection (1) shall not affect any action taken at the shareholders' meeting for which the notice was to have been given, but any shareholder who was entitled to dissent but who was not given such notice shall not be precluded from demanding payment for the shareholder's shares under this article by reason of the shareholder's failure to comply with the provisions of section 7-113-202 (1). (2)If a proposed corporate action creating dissenters' rights under section 7-113-102 is authorized without a meeting of shareholders pursuant to section 7-107-104, any written or oral solicitation of a shareholder to execute a writing consenting to such action contemplated in section 7-107-104 shall be accompanied or preceded by a written notice stating that shareholders are or may be entitled to assert dissenters' rights under this article by a copy of this article, and by the materials, if any, that, under articles 101 to 117 of this title, would have been required to be given to shareholders entitled to vote on the proposed action if the proposed action were submitted to a vote at a shareholders' meeting. Failure to give notice as provided by this subsection (2) shall not affect any action taken pursuant to section 7-107-104 for which the notice was to have been given, but any shareholder who was entitled to dissent but who was not given such notice shall not be precluded from demanding payment for the shareholder's shares under this article by reason of the shareholder's failure to comply with the provisions of section 7-113-202(2). 7-113-202. NOTICE OF INTENT TO DEMAND PAYMENT. (1) If a proposed corporate action creating dissenters' rights under section 7-113-102 is submitted to a vote at a shareholders' meeting and if notice of dissenters' rights has been given to such shareholder in connection with the action pursuant to section 7-113-201 (1), a shareholder who wishes to assert dissenters' rights shall: (a)Cause the corporation to receive, before the vote is taken, written notice of the shareholder's intention to demand payment for the shareholder's shares if the proposed corporate action is effectuated; and (b)Not vote the shares in favor of the proposed corporate action. (2)If a proposed corporate action creating dissenters' rights under section 7-113-102 is authorized without a meeting of shareholders pursuant to section 7-107-104 and if notice of dissenters' rights has been given to such shareholder in connection with the action pursuant to section 7-113-201 (2), a shareholder who wishes to assert dissenters' rights shall not execute a writing consenting to the proposed corporate action. (3) A shareholder who does not satisfy the requirements of subsection (1) or (2) of this section is not entitled to demand payment for the shareholder's shares under this article. 7-113-203.DISSENTERS' NOTICE. (1) If a proposed corporate action creating dissenters' rights under section 7-113-102 is authorized, the corporation shall give a written notice to all shareholders who are entitled to demand payment for their shares under this article. (2)The dissenters' notice required by subsection (1) of this section shall be given no later than ten days after the effective date of the corporate action creating dissenters' rights under section 7-113-102 and shall: (a)State that the corporate action was authorized and state the effective date or proposed effective date of the corporate action; (b)State an address at which the corporation will receive payment demands and the address of a place where certificates for certificated shares must be deposited; (c)Inform holders of uncertificated shares to what extent transfer of the shares will be restricted after the payment demand is received; (d)Supply a form for demanding payment, which form shall request a dissenter to state an address to which payment is to be made; (e)Set the date by which the corporation must receive the payment demand and certificates for certificated shares, which date shall not be less than thirty days after the date the notice required by subsection (1) of this section is given; (f)State the requirement contemplated in section 7-113-103(3), if such requirement is imposed; (g)Be accompanied by a copy of this article. 7-113-204. PROCEDURE TO DEMAND PAYMENT. (1) A shareholder who is given a dissenters' notice pursuant to section 7-113-203 and who wishes to assert dissenters' rights shall in accordance with the terms of the dissenters' notice: (a)Cause the corporation to receive a payment demand, which may be the payment demand form contemplated in section 7-113-203(2)(d), duly completed, or may be stated in another writing; and (b)Deposit the shareholder's certificates for certificated shares. (2)A shareholder who demands payment in accordance with subsection (1) of this section retains all rights of a shareholder, except the right to transfer the shares, until the effective date of the proposed corporate action giving rise to the shareholder's exercise of dissenters' rights and has only the right to receive payment for the shares after the effective date of such corporate action. (3)Except as provided in section 7-113-207 or 7-113-209 (1) (b), the demand for payment and deposit of certificates are irrevocable. (4)A shareholder who does not demand payment and deposit the shareholder's share certificates as required by the date or dates set in the dissenters' notice is not entitled to payment for the shares under this article. 7-113-205.UNCERTIFICATED SHARES. (1) Upon receipt of a demand for payment under section 7-113-204 from a shareholder holding uncertificated shares, and in lieu of the deposit of certificates representing the shares, the corporation may restrict the transfer thereof. (2)In all other respects, the provisions of section 7-113-204 shall be applicable to shareholders who own uncertificated shares. 7-113-206.PAYMENT. (1) Except as provided in section 7-113-208, upon the effective date of the corporate action creating dissenters' rights under section 7-113-102 or upon receipt of a payment demand pursuant to section 7-113-204, whichever is later, the corporation shall pay each dissenter who complied with section 7-113-204, at the address stated in the payment demand, or if no such address is stated in the payment demand, at the address shown on the corporation's current record of shareholders for the record shareholder holding the dissenter's shares, the amount the corporation estimates to be the fair value of the dissenter's shares, plus accrued interest. (2)The payment made pursuant to subsection (1) of this section shall be accompanied by: (a)The corporation's balance sheet as of the end of its most recent fiscal year or, if that is not available, the corporation's balance sheet as of the end of a fiscal year ending not more than sixteen months before the date of payment, an income statement for that year, and, if the corporation customarily provides such statements to shareholders, a statement of changes in shareholders' equity for that year and a statement for that year, which balance sheet and statements shall have been audited if the corporation customarily provides audited financial statements to shareholders, as well as latest available financial statements, if any, for the interim or full-year period, which financial statements need not be audited; (b)A statement of the corporation's estimate of the fair value of the shares; (c)An explanation of how the interest was calculated; (d)A statement of the dissenter's right to demand payment under section 7-113-209; and (e)A copy of this article. 7-113-207.FAILURE TO TAKE ACTION. (1) If the effective date of the corporate action creating dissenters' rights under section 7-113-102 does not occur within sixty days after the date set by the corporation by which the corporation must receive the payment demand as provided in section 7-113-203, the corporation shall return the deposited certificates and release the transfer restrictions imposed on uncertificated shares. (2)If the effective date of the corporate action creating dissenters' rights under section 7-113-102 occurs more than sixty days after the date set by the corporation by which the corporation must receive the payment demand as provided in section 7-113-203, then the corporation shall send a new dissenters' notice, as provided in section 7-113-203, and the provisions of sections 7-113-204 to 7-113-209 shall again be applicable. 7-113-208.SPECIAL PROVISIONS RELATING TO SHARES ACQUIRED AFTER ANNOUNCEMENT OF PROPOSED CORPORATE ACTION. (1) The corporation may, in or with the dissenters' notice given pursuant to section 7-113-203, state the date of the first announcement to news media or to shareholders of the terms of the proposed corporate action creating dissenters' rights under section 7-113-102 and state that the dissenter shall certify in writing, in or with the dissenter's payment demand under section 7-113-204, whether or not the dissenter (or the person on whose behalf dissenters' rights are asserted) acquired beneficial ownership of the shares before that date. With respect to any dissenter who does not so certify in writing, in or with the payment demand, that the dissenter or the person on whose behalf the dissenter asserts dissenters' rights acquired beneficial ownership of the shares before such date, the corporation may, in lieu of making the payment provided in section 7-113-206, offer to make such payment if the dissenter agrees to accept it in full satisfaction of the demand. (2)An offer to make payment under subsection (1) of this section shall include or be accompanied by the information required by section 7-113-206(2). 7-113-209.PROCEDURE IF DISSENTER IS DISSATISFIED WITH PAYMENT OR OFFER. (1) A dissenter may give notice to the corporation in writing of the dissenter's estimate of the fair value of the dissenter's shares and of the amount of interest due and may demand payment of such estimate, less any payment made under section 7-113-206, or reject the corporation's offer under section 7-113-208 and demand payment of the fair value of the shares and interest due, if: (a)The dissenter believes that the amount paid under section 7-113-206 or offered under section 7-113-208 is less than the fair value of the shares or that the interest due was incorrectly calculated; (b)The corporation fails to make payment under section 7-113-206 within sixty days after the date set by the corporation by which the corporation must receive the payment demand; or (c)The corporation does not return the deposited certificates or release the transfer restrictions imposed on uncertificated shares as required by section 7-113-207(1). (2)A dissenter waives the right to demand payment under this section unless the dissenter causes the corporation to receive the notice required by subsection (1) of this section within thirty days after the corporation made or offered payment for the dissenter's shares. PART 3 JUDICIAL APPRAISAL OF SHARES 7-113-301.COURT ACTION. (1) If a demand for payment under section 7-113-209 remains unresolved, the corporation may, within sixty days after receiving the payment demand, commence a proceeding and petition the court to determine the fair value of the shares and accrued interest. If the corporation does not commence the proceeding within the sixty-day period, it shall pay to each dissenter whose demand remains unresolved the amount demanded. (2)The corporation shall commence the proceeding described in subsection (1) of this section in the district court of the county in this state where the corporation's principal office is located or, if the corporation has no principal office in this state, in the district court of the county in which its registered office is located. If the corporation is a foreign corporation without a registered office, it shall commence the proceeding in the county where the registered office of the domestic corporation merged into, or whose shares were acquired by, the foreign corporation was located. (3)The corporation shall make all dissenters, whether or not residents of this state whose demands remain unresolved parties to the proceeding commenced under subsection (2) of this section as in an action against their shares, and all parties shall be served with a copy of the petition. Service on each dissenter shall be by registered or certified mail, to the address stated in such dissenter's payment demand, or if no such address is stated in the payment demand, at the address shown on the corporation's current record of shareholders for the record shareholder holding the dissenter's shares, or as provided by law. (4)The jurisdiction of the court in which the proceeding is commenced under subsection (2) of this section is plenary and exclusive. The court may appoint one or more persons as appraisers to receive evidence and recommend a decision on the question of fair value. The appraisers have the powers described in the order appointing them, or in any amendment to such order. The parties to the proceeding are entitled to the same discovery rights as parties in other civil proceedings. (5)Each dissenter made a party to the proceeding commenced under subsection (2) of this section is entitled to judgment for the amount, if any, by which the court finds the fair value of the dissenter's shares, plus interest, exceeds the amount paid by the corporation, or for the fair value, plus interest, of the dissenter's shares for which the corporation elected to withhold payment under section 7-113-208. 7-113-302.COURT COSTS AND COUNSEL FEES. (1) The court in an appraisal proceeding nine the fair value of commenced under section 7-113-301 shall determine all costs of the proceeding, including the reasonable compensation and expenses of appraisers appointed by the court. The court shall assess the costs against the corporation; except that the court may assess costs against all or some of the dissenters, in amounts the court finds equitable, to the extent the court finds the dissenters acted arbitrarily, vexatiously, or not in good faith in demanding payment under section 7-113-209. (2)The court may also assess the fees and expenses of counsel and experts for the respective parties, in amounts the court finds equitable: (a)Against the corporation and in favor of any dissenters if the court finds the corporation did not substantially comply with the requirements of part 2 of this article; or (b)Against either the corporation or one or more dissenters, in favor of any other party, if the court finds that the party against whom the fees and expenses are assessed acted arbitrarily, vexatiously, or not in good faith with respect to the rights provided by this article. (3)If the court finds that the services of counsel for any dissenter were of substantial benefit to other dissenters similarly situated, and that the fees for those services should not be assessed against the corporation, the court may award to said counsel reasonable fees to be paid out of the amounts awarded to the dissenters who were benefited. SCIENTIFIC SOFTWARE-INTERCOMP, INC. PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR THE SPECIAL MEETING OF SHAREHOLDERS-----JULY 30, 1998 SCIENTIFIC SOFTWARE-INTERCOMP, INC. 633 17TH STREET, SUITE 1600 DENVER, COLORADO 80202 The undersigned hereby appoints George Steel and Roger C. Cohen, and each of them, proxies, each with full power of substitution, to vote all shares of common stock of Scientific Software-Intercomp, Inc. (the "Company") which the undersigned may be entitled to vote at the Special Meeting of Shareholders of the Company to be held on July 30, 1998 at 10:00 a.m., local time, at the principal executive offices of the Company at 633 17th Street, Suite 1600, Denver, Colorado 80202, and/or at any reconvened meeting after any adjournment of the Special Meeting, in the manner indicated on the reverse side, all in accordance with and as more fully described in the Notice of Special Meeting and accompanying Proxy Statement for the meeting, receipt of which is hereby acknowledged. (Continued on reverse side) FOLD AND DETACH HERE _________________ Please mark your votes like this COMMON SHARES THE SHARES REPRESENTED BY THIS PROXY SHALL BE VOTED AS INDICATED BELOW: 1. To approve the Agreement and Plan of Merger dated June 17, 1998 (the "Merger Agreement") between the Company and Baker Hughes Oilfield Operations, Inc., a California corporation ("BHOO") and wholly owned subsidiary of Baker Hughes Incorporated, a Delaware corporation, as set forth in the Proxy Statement, pursuant to which Merger Agreement the Company will merge with and into a Colorado corporation and wholly owned subsidiary of BHOO to be formed prior to the closing (the "Merger") and each share of the Company's Common Stock, no par value, issued and outstanding immediately prior to the Merger will be converted into the right to receive $0.44 in cash, without interest. FOR AGAINST ABSTAIN 2. To vote in their discretion on such other business as may properly come before the Special Meeting or any reconvened meeting after any adjournment thereof. IF YOU DO NOT SPECIFY A CHOICE AS TO THE FOREGOING PROPOSAL OR IF ANY OTHER BUSINESS IS PRESENTED, THIS PROXY SHALL BE VOTED IN ACCORDANCE WITH THE RECOMMENDATIONS OF MANAGEMENT. Please mark, date and sign as your name appears to the left and return in the enclosed envelope. If acting as executor, administrator, trustee or guardian, state your full title and authority when signing. If the signer is a corporation, please sign the full corporate name, by a duly authorized officer. If shares are held jointly, each shareholder named should sign. Date Signature(s) PLEASE SIGN, DATE AND RETURN THIS PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE FOLD AND DETACH HERE SCIENTIFIC SOFTWARE-INTERCOMP, INC. YOUR VOTE IS IMPORTANT TO THE COMPANY PLEASE SIGN AND RETURN YOUR PROXY BY TEARING OFF THE TOP PORTION OF THIS SHEET AND RETURNING IT IN THE ENCLOSED POSTAGE-PAID ENVELOPE * -----END PRIVACY-ENHANCED MESSAGE-----