-----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, QCUyrExsXzFfAswXyXMJXyCK8Lk8WcSW4hcE8RVqtzzikVynrpf8xgPoy1+5fwZA 3TomyYM+a42doRQ6rEKU8w== 0000087822-98-000028.txt : 19980714 0000087822-98-000028.hdr.sgml : 19980714 ACCESSION NUMBER: 0000087822-98-000028 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980702 DATE AS OF CHANGE: 19980713 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCIENTIFIC SOFTWARE INTERCOMP INC CENTRAL INDEX KEY: 0000087822 STANDARD INDUSTRIAL CLASSIFICATION: 7372 IRS NUMBER: 840581776 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-04882 FILM NUMBER: 98663778 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 10-K/A 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K/A NO. 2 [X] Annual Report Pursuant to Section 13 or 15 (d) of the Securities Act of 1934 for fiscal year ended DECEMBER 31, 1997 [ ] Transitional Report Pursuant to Section 13 or 15 (d) of the Securities Act of 1934 COMMISSION FILE NUMBER 0-4882 SCIENTIFIC SOFTWARE-INTERCOMP, INC. (Exact name of Registrant as specified in its charter) Colorado 84-0581776 - - - ----------------------------------------------- ------------------------------- State (or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 633 17th Street, Denver, Colorado 80202 - - - -------------------------------------------------------------------------------- (Address of principal executive offices including zip code) (303) 292-1111 - - - -------------------------------------------------------------------------------- (Registrant's telephone number including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of each class: Common Stock, no par value Name of each exchange on which registered: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ ] Yes [X] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy of information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. [X] The approximate market value of stock held by non-affiliates is $1,175,501 based upon 6,717,151 shares held by such persons and the close price of $.175 on March 31, 1998. The number of shares outstanding of the Registrant's no par value Common Stock at March 31, 1998 was 8,917,151. DOCUMENTS INCORPORATED BY REFERENCE None
INDEX Page PART I 5 EXPLANATION OF AMENDMENT TO FORM 10-K FOR 1997 5 ITEM 1. BUSINESS 5 THE COMPANY 5 General 5 History 7 Strategy 7 PRODUCTS, SERVICES AND CUSTOMERS 9 Exploration and Production Products, Services and Customers 9 Pipeline Simulation Products, Services and Customers 10 Research and Development 11 MARKETING, SALES AND CUSTOMER SUPPORT 12 Marketing Strategy 12 Sales Staff, Locations and Customer Support 12 BACKLOG 12 COMPETITION 13 GEOGRAPHIC AND BUSINESS LINE DATA 13 Geographic Revenue Data 13 Business Line Data 14 PROPRIETARY RIGHTS 14 EMPLOYEES 14 SALE OF THE COMPANY 15 MANAGEMENT 16 Directors and Executive Officers 16 ITEM 2. PROPERTIES 18 ITEM 3. LEGAL PROCEEDINGS 18 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18 PART II 19 ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S 19 COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 23 CONDITION AND RESULTS OF OPERATIONS General 23 FINANCIAL POSITION 24 Results of Operations 27 Revenue 27 Foreign Revenue 28 Backlog 29 Costs of Consulting and Training and Costs of Licenses and Maintenance 30 Selling, General and Administrative Expenses 31 Recovery of Accounts Receivable 32 Software Research and Development 32 Settlement of Class Action 32 Interest Income (Expense) 33 Foreign Exchange Losses 33 Disposal of Kinesix Division 33 Sale of the Assets of the Pipeline Business Line 34 Year 2000 Issue 34 STATEMENT OF CASH FLOWS 34 FORWARD-LOOKING INFORMATION 36 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 37 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON 74 ACCOUNTING AND FINANCIAL DISCLOSURE PART III 74 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE MANAGEMENT 74 ITEM 11. EXECUTIVE COMPENSATION 75 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND 82 MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 82 PART IV 83 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS 83 ON FORM 8-K
PART I BASIS OF PRESENTATION EXPLANATION OF SECOND AMENDMENT TO 1997 FORM 10-K As previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 1997, the Company has received extensive comment letters from the Staff of the Securities and Exchange Commission ("SEC") on its Form 10-K for the year ended December 31, 1995 and 1997, as well as other periodic SEC reports, and the financial statements included therein. As a result of procedures undertaken by the Company in responding to such comment letters, as well as the separate SEC investigation of the Company's disclosures and financial statements for the years ended December 31, 1995, 1994 and 1993 which was concluded as to the Company in September 1997, the Company determined to restate the Company's financial statements for the years ended December 31, 1995, 1994 and 1993. The audited restated 1995 financial statements were filed with the Company's 1997 Form 10-K/A No. 1, in which it was disclosed that the Company intended to file the audited restated 1994 and 1993 financial statements upon the completion thereof. The audited restatement of the 1994 and 1993 financial statements is now complete and this second amendment to the 1997 Form 10-K includes such financial statements. The restatement adjustments for the 1995, 1994 and 1993 audited restatement adjustments are primarily attributable to the correction of items previously reflected in revenues which did not meet the criteria for recognition of revenue. See Note 2 of the Notes to the Consolidated Financial Statements presented elsewhere herein for a further discussion of the restatement adjustments to the 1995, 1994 and 1993 financial statements, including a table presenting certain amounts as restated compared to the corresponding amounts as originally reported. Such restatements also reflect for comparability purposes the disposition by the Company of the Kinesix division effective September 3, 1996. See Note 11 of the Notes to Consolidated Financial Statements presented elsewhere herein. Financial disclosures contained in this amended filing of the 1997 Form 10-K reflect, where appropriate, changes to conform to the restated financial statements included herein and to the Company's responses to the SEC Staff's comment letters. General information in the original 1997 Form 10-K that is not related to the foregoing changes was presented as of the April 15, 1998 original filing date or earlier, as indicated. Unless otherwise stated, such general information has not been updated in this amended filing. ITEM 1. BUSINESS THE COMPANY GENERAL Scientific Software-Intercomp, Inc. (the "Company") develops and markets sophisticated software for the development and production and pipeline and surface facilities areas of the worldwide oil and gas industry and provides associated interdisciplinary technical support services, consulting and training. As discussed below, the Company sold the assets of its Pipeline Simulation Business effective May 1, 1998. On June 17, 1998, the Company entered into an agreement and plan of merger pursuant to which a subsidiary of Baker Hughes Incorporated ("Baker") will acquire the Company, subject to customary conditions as well as the approval of the Company's common shareholders. See Note 14 of the Notes to Consolidated Financial Statements for a further discussion of the pending acquisition of the Company by Baker. The Company's Exploration and Production business lines consist of the Exploration and Production Consulting (E&P Consulting) business line and the Exploration and Production Technology (E&P Technology) business line. E&P Technology markets computer-aided production software which provides oil and gas industry professionals with a comprehensive set of powerful cost-effective tools to describe, simulate and predict oil and gas production from reservoirs under alternative simulated development plans. These predictions are used to determine optimal development plans for maximizing recoverable reserves, thereby reducing oil and gas finding costs per equivalent barrel. The consulting services of E&P Consulting include integrated field development studies, 4-D seismic reservoir management, reserves audits, certifications and valuations, reservoir simulation, enhanced oil recovery and well performance studies and regional stratigraphic and petrophysical evaluations. The Company's Pipeline Simulation Business markets software for the simulation and monitoring of oil and gas pipelines, as well as software for various related applications including engineering design, leak detection, optimization of transportation efficiency and pipeline dispatcher training. The Pipeline Simulation Business consulting services include implementation of real time system projects, leak sensitivity analysis and design studies, operator training and product training courses, real time system tuning and optimization and expert witness testimony. During 1997, the Company's management and Board of Directors formulated and implemented a plan to improve the Company's financial performance through a merger, alliance or sale of the Company and to divest the Company of underperforming assets. As part of this plan, the Company sold the assets of the Pipeline Simulation Business to LICEnergy A/S, Inc. of Denmark (LIC) effective May 1, 1998 as discussed in Note 10 of the Notes to Consolidated Financial Statements. The consulting and training services are the single largest element of the Company's business, comprising 52% of the Company's total revenues in 1997. In the E&P Consulting business, consultants typically use the Company's products to carry out their project work, but software sales are generally standalone and do not generally result from the Consulting services. E&P Consulting revenues represented 55% of total Exploration and Production revenues in 1997. In the Pipeline Simulation Business, consulting services and sales of software are quite tightly linked. Consulting services in that division may include the integration of the Company's off-the-shelf software and sometimes may involve various degrees of customization; consulting and training revenues totaled 60% of the revenues of the Pipeline Simulation Business in 1997. Since its formation in 1968, the Company believes that it has established a reputation for technical excellence of its software products and consulting services in reservoir description, simulation and monitoring. In the late 1980s, the Company recognized the need to provide an integrated system of E&P Technology products that could be more broadly utilized by the oil and gas industry. Also, the availability of increasingly powerful and affordable computers enables the Company's E&P Technology software products to operate on UNIX -based workstations and personal computers, and more recently on Windows-based personal computers, with capabilities historically available only on mainframe computers. The Company has developed Petroleum WorkBench , an integrated software system that allows effective access to the Company's high technology stand-alone products. In 1997, new modules of Petroleum WorkBench were released which increased the technical breadth of this software package. These developments have had the effect of significantly expanding the market for the Company's software products from its historical market of research experts and technical specialists using mainframe computers to include non-expert industry professionals, such as petroleum engineers and geologists, using workstations or personal computers. These developments have also increased the functionality and ease of use of the Company's products to the oil and gas industry by lowering hardware costs and reducing the need to utilize these experts in order to take advantage of the Company's technology. The Company's objective is to be a leading provider of high technology computing solutions and quality consulting services in each of its industry areas. The Company's long range goal is to offer a fully integrated set of software products on personal computers that will permit non-expert professionals to describe, simulate, monitor and manage the complete range of reservoir development and production activities. The Company's executive offices are located at 633 17th Street, Suite 1600, Denver, Colorado 80202 and its telephone number is (303) 292-1111. HISTORY The Company, a Colorado corporation, was formed in 1968 and, since that time, has developed and marketed sophisticated applications software together with computer-related consulting services, principally for reservoir description and reservoir and pipeline simulation. The Company believes that it has established a reputation for technical excellence of its software products and consulting services in reservoir description, simulation and monitoring. In June 1983, the Company acquired Intercomp Resource Development and Engineering, Inc. ("IRDE"), which had developed additional software products for reservoir simulation. In January 1984, the Company acquired CRC Bethany International, Inc. ("CRC"), a wholly owned subsidiary of Crutcher Resources Corporation. The acquisition of CRC provided the Company with software systems that modeled real-time data, collected and stored by Supervisory Control and Data Acquisition ("SCADA") systems installed on oil and gas pipelines. Several trends, including lower oil and gas prices, have driven the oil and gas industry to reduce the risk and cost, and to increase the effectiveness, of development and production activities. This has led many energy companies to reduce budgets, and to reduce the employment of research and technical experts in the various petroleum industry disciplines, in favor of non-expert industry professionals. The Company recognized the need to provide an integrated system of products for use by these non-experts. By 1991, the Company had developed Petroleum WorkBench which provides the industry with broader access to sophisticated engineering solutions. Management believes that these developments, coupled with the availability of increasingly powerful and affordable personal computers, has opened a significant market for Petroleum WorkBench. STRATEGY RECENT STRATEGY DEVELOPMENTS. During the period of December 1995 and January 1996, the Company determined that the cumulative effects of the releases of Windows 95, and Windows NT and new more powerful pentium-based PC's had significantly changed the broad market for corporate computing systems and software. During 1995, the Company successfully released the Windows version of the WorkBench product, constituting a major breakthrough for the Company. The reaction from the marketplace was very positive and the Company made a decision to fundamentally change its emphasis to the personal computer market, instead of the previous strategy of providing products for all segments of computer hardware mainframe, minicomputer, and personal computer markets. This decision was also encouraged by positive reaction from clients in the second half of 1995 to "WBserv," a personal computer application that allows for transfer of computationally intensive operations to servers and minicomputers. It then became apparent to the Company that the access point of software users would be based on desktop 32 bit technology. While extremely large and complex software such as that of the Company previously could not have operated on other than mainframe or minicomputer machines, the personal computers which have become available along with the continued enhancements of Distributed Computer Environments (DCE) makes it today possible to operate the software from a desktop PC. With the acceptance of the Company's Windows interface, which encompasses core software products plus graphical and interactive features of a Windows environment, the Company identified that the personal computer market would not only be another market for the Company's products--it would be the primary market. Accordingly, the Company decided to focus its future market and development activities on this new primary market. The Windows enhancement of the WorkBench software required little change to the code of the application software. In January 1996, Mr. George Steel, the Company's new chief executive officer, took a strategic view of the situation in which the Company found itself. He felt that the creeping environmental changes had reached a point that required rapid action and in fact presented the Company with a significant opportunity in the market place. This recognition resulted in changes in management strategy to focus primarily on the personal computer market in the future. Essentially, this focus led to a different kind of software environment, in which most of the Company's software would be marketed as part of an integrated product, which includes significant non-technical software. Mr. Steel also introduced several other management strategies. Previously, the Company had been striving to achieve aggressive revenue targets, much of which entailed making new sales to new customers, many in widely dispersed international markets and in marketplaces with widely diverging computing platform environments. Mr. Steel's strategy was for the Company to focus on high quality performance in serving existing customers on Windows/PC platforms and thus to make acceptable profits. Mr. Steel believed that these significant changes in strategy were necessary to enable acceptable profitability performance and an adequate rate of return in future periods. Cost reductions were necessary, primarily staff reductions and reductions in the total of planned development expenditures in comparison to expenditure levels in 1995 and prior years. Rapid change was necessary and these strategies led to a narrowing of the computer platforms on which the Company's WorkBench product would be offered. The Company's strategy is to provide complete, high technology, computing solutions and other services for the development and production of oil and gas reservoirs and the pipeline transportation of oil and gas. The following sections discuss in detail how the Company is executing this overall strategy. INTEGRATION OF HIGH TECHNOLOGY PRODUCTS. Since its formation, the Company has developed a series of software products designed to describe, simulate and monitor oil and gas reservoirs, and to simulate and monitor oil and gas pipelines and surface facilities. These products include nearly all facets of technology necessary for field management and field monitoring in the oil and gas industry. The Company has begun integrating these products, which increases the functionality and ease of use of the high technology solutions provided by the Company's products. The Company's first integrated product, Petroleum WorkBench, includes six of the Company's major stand-alone E&P Technology products. It is the Company's intention to continue integrating its stand-alone products until the full breadth of the Company's technology is included within one integrated, easily accessible product, that will allow non-expert professionals working individually or in asset teams to work in multiple disciplines, using the same database and applications software. EXPANSION OF MARKETING EFFORTS AND CUSTOMER BASE. The Company believes that by continuing the integration and accessibility of its software, the market for its software and related consulting services can be expanded to increase sales to non-expert industry professionals. The Company intends to intensify its marketing efforts to this larger market, in addition to continuing to market its products to its established customer base of expert users. COMPLETE RANGE OF SERVICES. The Company believes that offering a complete range of consulting and training services is a critical component of its business. It intends to continue enhancing and expanding the range of consulting services to meet the growing requirements of its customers. The Company also believes that providing sophisticated and comprehensive consulting services promotes and advances acceptance and awareness of its products. TECHNICAL LEADERSHIP. The Company intends to continue developing new software products and enhancing existing software products, both internally and through jointly-funded development efforts, to respond to developments by competitors and changes in technology. The Company also intends to continue to attract and retain highly-skilled professionals in computer software programming and various petroleum industry disciplines in order to provide for the development and enhancement of its products and services. The Company intends to continue to evaluate, and, if attractive, acquire or license products and technologies which it believes are important to achieving its strategy. BAKER ACQUISITION. The Company believes that its prospective acquisition by Baker, as discussed in Note 14 of the Notes to Consolidated Financial Statements, will better enable it to carry out the above described strategy. PRODUCTS, SERVICES AND CUSTOMERS EXPLORATION AND PRODUCTION PRODUCTS, SERVICES AND CUSTOMERS The Company's products and related consulting services address the development and production areas of reservoir description and simulation. The Company's reservoir description products provide for the analysis of well logs and core, the use of seismic data, analysis of pressure and performance of wells, and mapping and analysis of the basic geology and reservoir rock parameters. Reservoir description data is then input into mathematical reservoir simulators offered by the Company to predict future production performance under various simulated development scenarios after matching historical performance. Use of reservoir simulation provides more accurate forecasts of oil and gas recovery and assists in the determination of how reservoirs should be optimally developed. The primary products being marketed by the Company are: Reservoir Description. This module has the capability of log and core analysis to calculate rock and fluid properties; and geological cross-section, mapping and contouring capability. Interpret/2 (well test analysis). Used to analyze pressure and flow tests of a well to predict reservoir flow capability and other formation parameters such as the location of barriers in the reservoir. WPM (well productivity model). Used to analyze and simulate the productivity of a well under various alternative completion practices, such as hydraulic fracturing and artificial lift, so that the optimum economics for the well can be achieved. PVT (pressure-volume-temperature characterization of hydrocarbon fluids). Used to analyze laboratory tests of oil and gas samples gathered from a reservoir to determine the accuracy of the data and to construct equations for use of the data. SimBest II (reservoir simulator for oil, water and gas). Used to model the behavior of an oil and gas reservoir in order to predict the results of various types of reservoir development options, such as in-fill drilling, water floods and gas injection, in order to determine the optimal development plan for the reservoir. The simulator calculates the flow of oil, water and gas in three dimensions through a complex reservoir, including the flow through the wellbores to the surface. COMP III, COMP 4, Comp5 (compositional reservoir simulators for oil, water and gas). Used when the complex fluid behavior in the reservoir requires that oil and gas be defined more precisely by their molecular components such as methane, ethane and propane. These simulators are most often used to simulate and determine the optimum development of gas reservoirs and oil reservoirs undergoing high pressure gas injection. The Company will be releasing in early 1998 a new compositional simulator, named Comp5, which combines features and functionality of COMP III and COMP 4. Comp5 will also be interfaced to the Petroleum WorkBench, thus combining the benefits of compositional simulation and of integrated reservoir management. THERM (thermal reservoir simulator). Used when modeling thermal enhanced oil recovery processes such as steam injection and in-situ combustion. This is the most complex simulator because it also includes mathematical simulation of such thermodynamic factors as heat combustion and combustion reaction kinetics. This simulator is used to predict optimum recovery using thermal enhanced recovery processes for reservoir development. AHM (adaptive history matching system for use with reservoir simulators). Used to help match a reservoir's historical production of oil, gas and water. A final calibrated (history matched) model can then be used to simulate future production under various hypothetical operating scenarios. This software includes such displays as color 3-D and 4-D (showing the passage of time) maps and simulated color visualizations of fluids flowing through the reservoir. PETROLEUM WORKBENCH (an integrated set of high technology products for reservoir management). This integrated set of products is used to perform reservoir description, simulation, and monitoring on a workstation or personal computer. Expert or non-expert professionals can use this integrated set of products to select optimal reservoir development plans using the highest technology more quickly and efficiently than with non-integrated and individually designed products. By delivering in a Microsoft Windows 95/NT PC-based integrated environment advanced petroleum technology originally developed for Unix workstations, the Petroleum WorkBench makes this technology accessible to a much larger market of professionals. The current release of the Petroleum WorkBench includes technology and applications for well core and log analysis; well test design and interpretation (Interpret/2); reservoir simulation (SimBest II) with graphical pre- and post-processing; production decline analysis; well performance modeling (WPM). This is combined with various graphical display capabilities, including mapping and cross-sections. In 1997, the Company released a new module for geostatistical modeling, WBgeos. In early 1998, a new release will extend the graphical pre- and post-processor and the network interface, WBserv, for reservoir simulation to handle compositional simulation. WBgeos. A new add-on module released in the fourth quarter of 1997 which extends the reservoir modeling capabilities of the Petroleum WorkBench to include modern geostatistical technology. An alternative to traditional mapping of reservoir properties using contours (hand-drawn or computer-generated), geostatistics provide a better representation of the variation of these properties between wells, resulting in reservoir models more faithful to the real reservoir geology. As WBgeos is fully integrated to the reservoir simulation module in the WorkBench, higher quality geologic models can be readily simulated, yielding more efficient history matching and more reliable reservoir performance predictions. WBserv. The client/server option for the Petroleum WorkBench which allows engineers and geoscientists to use high-performance Unix workstations for compute-intensive applications like reservoir simulation while operating all interactive and graphical software in a desktop Windows 95/NT environment. With this network feature provided through a dedicated client/server module, a smaller number of high-end workstations can efficiently handle the needs of a team of users, a department, or an entire company spread across several geographic locations, resulting in lower Information Services capital and operating costs. Simultaneously, users remain in a familiar Windows computing environment, eliminating the need for users to be trained on workstations and their unfriendly Unix and X-Windows software systems, while benefiting from the high-performance computing this computer hardware offers. In addition, the Company has specialized simulators for gas producers and/or gas utilities: Omega (gas storage reservoir simulator) and Omnet (reservoir simulator for multiple gas storage reservoirs and surface network facilities and pipelines). The Company also provides consulting and training, on the use and application of the Company's products and technology to a client's reservoir management needs. The Company provides consulting services in the areas of geophysics, 4D seismic monitoring, geology, petrophysics, reservoir engineering and production and completion engineering. The Company has designed cost-effective exploitation methods, production and injection operations, and enhanced oil recovery schemes. The Company also performs reserve evaluations; special simulation techniques for artificial lift, horizontal drilling and massive hydraulic fracturing; and designs and recommends development plans for an entire oil field. PIPELINE SIMULATION PRODUCTS, SERVICES AND CUSTOMERS The Company's software and related services for the pipeline and surface facilities area simulate and monitor oil and gas pipelines and surface facilities, such as compressor stations, tank farms and pumping stations, for applications including engineering design, leak detection, real time modeling, optimization of transportation efficiency and pipeline operator training. The systems are used in either "real time" or "off-line" mode. In the real time mode, data is continuously collected by a SCADA system from various points along a pipeline, or from surface facilities, and used by the software for simulation and monitoring purposes. In the off-line mode, real-time data is not used and is replaced by user-provided data for engineering or training purposes. The Company's historical focus in this area has been on providing simulation and monitoring software to operators of large and complex pipelines and surface facilities. The primary software products marketed by the Company in this area include: TGNET (transient gas pipeline network simulator). Used off-line by pipeline engineers to study portions of gas pipeline networks in order to simulate the design and operation of the pipeline system. TLNET (transient liquid pipeline network simulator). Like TGNET, used off-line for liquid pipeline design and operations studies. MNET (multiphase pipeline network steady state simulator). Like TGNET, used off-line for pipeline design and operations studies for the simultaneous flow of oil, gas and/or water. INTERACT (interactive pipeline network simulators). Used by pipeline engineers to plan future flows and to train pipeline dispatchers. INTERACT is comprised of two separate software products for gas and liquid. PIPELINE MONITOR I and II (leak detection and pipeline management software for intermediate complexity pipeline networks). Real time system used continuously by the pipeline operating staff to detect leaks and to manage pipeline operations. Versions are available for both oil and gas pipelines. ON-LINE SYSTEM (pipeline leak detection and management software). A series of software modules that can be integrated to provide leak detection plus additional options such as product batch tracking in liquid systems and compressor utilization for complex gas pipeline networks. The software operates continuously in real time, often with full backup computers, to manage complex pipeline operations. During 1997, the Company's management and Board of Directors formulated and implemented a plan to improve the Company's financial performance through a merger, alliance or sale of the Company and to divest the Company of underperforming assets. As part of this plan, the Company sold the assets of the Pipeline Simulation Business to LICEnergy A/S, Inc. of Denmark (LIC) effective May 1, 1998 as discussed in Note 10 of the Notes to Consolidated Financial Statements. RESEARCH AND DEVELOPMENT The Company is committed to the continued enhancement of its petroleum industry software and to the development of software and services having new or related applications. The Company's objective is to develop products that are considered to be high quality and technically advanced that will meet the needs of the company's customers and enable them to grow and develop their reserves more cost effectively. In E&P Technology, a new version of Petroleum WorkBench was released in 1997 with the addition of a geostatistics module. Additional enhancements including conversion to an open architecture and updates to other modules are planned. The Company will be releasing in early 1998 a new compositional simulator named Comp5, which will replace Comp III. Development and upgrade of black oil and thermal is ongoing. In the Pipeline area, a new version of TGNET was released in 1Q 1998. During the years ended December 31, 1997, 1996, 1995, 1994 and 1993 the Company spent $3.4 million, $2.9 million, $5.5 million, $4.9 million and $4.3 million, respectively, for development of new products and the improvement and enhancement of existing products. MARKETING, SALES AND CUSTOMER SUPPORT MARKETING STRATEGY The Company's marketing strategy is to create customer awareness of existing and new products and to publicize its technical expertise through participation at technical meetings and conferences, publication of scientific papers, presentation of technical proposals to existing and potential customers, and sponsorship of product focus groups. The Company continually surveys the market and analyzes the products and services offered by the Company and its competitors in order to identify new developments, market trends and changing preferences and requirements of the market place. The Company will develop marketing plans specifically tailored for its products that identify the appropriate distribution channels to reach the target market or market segment and will permit the effective promotion of the products. The Company supports its customers by providing complete consulting, technical and training services by experts in computer systems and the various technical applications disciplines for all product areas. SALES STAFF, LOCATIONS AND CUSTOMER SUPPORT The Company sells its products, consulting and other services on a worldwide basis primarily through its direct sales force. Since sales of the Company's products require technical interaction with customers, members of the sales force generally are technically qualified as well as having significant sales and marketing experience. In addition, sales and marketing personnel are actively supported by technical personnel and senior management of the Company. Sales/support personnel are located in each of the Company's offices in Denver, Houston, Calgary, London, and Beijing, People's Republic of China. Local sales agents are utilized principally in countries in which local representation is necessary or appropriate. The Company markets certain of its products through local agents in certain foreign countries. The Company provides installation and product training, on-site consulting and 24-hour telephone availability of systems and technical experts as part of its customer support services. BACKLOG The Company's backlog at December 31, 1997, 1996, 1995, 1994 and 1993 was $4.2 million, $6.7 million, $9.5 million, $8.8 million and $10.6 million, respectively, of which 76% of the 1997 amount is expected to be earned by December 31, 1998. Approximately 19% of year-end backlog for 1997 relates to Pipeline Simulation projects that were transferred with the sale of the Pipeline Simulation assets on May 1, 1998 as discussed in Note 10 of the Notes to Consolidated Financial Statements. Levels of backlog have declined in proportion to declines in annual revenue. End of year backlogs vary depending on the timing of major sales, but approximate to between 3 and 5 months of revenue. COMPETITION The market for most of the products and services offered by the Company is highly competitive, although the number of competitors generally is limited. The principal competitive factors faced by the Company are product functionality, product obsolescence and competitors' worldwide marketing capability. Sales of the Company's products and services would be adversely affected should competitors introduce new products with better functionality, performance, price or other competitive characteristics. The principal competitors in the licensing and sale of development and production software are GeoQuest, a division of Schlumberger; Landmark, a subsidiary of Halliburton Company; and a number of smaller competitors. The competition in the licensing and sale of Pipeline Simulation software is fragmented with individual companies often marketing only one or two products. Significant competitors in software licensing and supply of related services of real time, on-line products in the leak detection and real-time modeling areas are Stoner and Associates and LIC. GEOGRAPHIC AND BUSINESS LINE DATA GEOGRAPHIC REVENUE DATA The following table sets forth the Company's consolidated revenues by geographic area for 1997, 1996, 1995, 1994 and 1993:
1997 1996 1995 1994 1993 ------- ------- ------- ------- ------- (In thousands) United States $ 3,536 $ 4,239 $ 6,542 $ 6,002 $ 7,935 Foreign: Far East 2,415 3,849 4,191 2,724 1,701 Middle East 682 912 1,265 1,510 2,018 Canada 1,142 880 924 882 1,434 Europe 2,559 3,548 4,476 4,214 6,502 Central and South America 1,693 2,861 2,299 3,454 3,252 Africa 88 2,318 1,755 3,428 2,028 Other 277 397 0 0 0 ------- ------- ------- ------- ------- Total Foreign 8,856 14,765 14,910 16,212 16,935 ------- ------- ------- ------- ------- Total Revenue $12,392 $19,004 $21,452 $22,214 $24,870 ======= ======= ======= ======= =======
Revenue derived from foreign sources amounted to 71%, 78%, 70%, 73% and 68% of total revenues for 1997, 1996, 1995, 1994 and 1993, respectively. Foreign revenue is subject to a number of factors such as political instability, changes in protective tariffs, tax policies, and export-import controls. See Note 8 of the Notes to Consolidated Financial Statements for information on foreign and domestic operations and the Company's United States export revenue. Much of the Company's business is conducted with large, established U.S. and foreign companies (sometimes acting as government contractors), governments and national petroleum companies of foreign governments. Qualifying foreign receivables are insured, subject to a deductible loss amount, under an insurance policy with the Foreign Credit Insurance Association, an agency of the United States Export-Import Bank. The Company performs credit evaluations when considered necessary and generally does not require collateral. BUSINESS LINE DATA The following table sets forth the percentage of total revenue contributed by each of the Company's classes of products and services for 1997, 1996, 1995, 1994 and 1993:
For the year ended December 31, --------------------------------- 1997 1996 1995 1994 1993 ----- ----- ----- ----- ----- Exploration and Production Consulting and training 46% 55% 50% 49% 48% Licenses and Maintenance 32% 22% 26% 28% 21% Other 2% 1% 2% 2% 1% ----- ----- ----- ----- ----- Total 80% 78% 78% 79% 70% Pipeline Simulation Consulting and training 8% 13% 13% 13% 17% Licenses and Maintenance 11% 9% 8% 7% 12% Other 1% *% 1% *% 1% Total 20% 22% 22% 20% 30% Other *% *% *% 1% *% Total 100% 100% 100% 100% 100% ===== ===== ===== ===== ===== *Less than 1%.
During 1997, 1995, 1994 and 1993, there was no single customer that accounted for 10% or more of the Company's revenue and the loss of which would have a material adverse effect on the Company's business. During 1996, the Company derived $2.3 million, or 12% of its consolidated revenue from the National Nigerian Petroleum Corporation. PROPRIETARY RIGHTS The Company has protected its proprietary computer software by restricting access to the underlying source code through technical means and by requiring its customers to enter into licensing arrangements that are protective of the Company's intellectual property rights in such software. For enforcement of its rights in the software, the Company relies upon laws relating to trade secrets and the misappropriation of confidential business information, as well as unfair competition laws, which are generally recognized in both state and international judicial proceedings. Additionally, the Company obtains federal and international protection of its computer software through federal copyright and the international copyright protection afforded by the Berne Convention with reciprocal copyright protection in over 75 countries. To date, the Company has not sought to patent any of its computer software. While the Company does not rule out obtaining patent protection for computer software at some future time, the present procedure for obtaining patent protection would require the Company to secure a patent in the United States and all foreign countries where the software might be utilized, even though the patentability of software in some foreign countries remains questionable and in the process of patenting the software in the United States the Company would be required to fully disclose the source code to the public through its patent application. In addition, the Company requires all employees and consultants who have access to its proprietary information and software to execute confidentiality agreements. EMPLOYEES As of December 31, 1997, the Company employed 88 persons full-time in all locations. As of May 31, 1998, the Company had 51 full-time employees. The Company also engages technical consultants as required to carry out project work. SALE OF THE COMPANY On June 17, 1998, the Company executed an Agreement and Plan of Merger (the "Merger Agreement") between the Company and Baker Hughes Oilfield Operations, Inc. ("BHOO"), a wholly owned subsidiary of Baker Hughes Incorporated, pursuant to which BHOO will acquire the Company by virtue of a merger of the Company with and into a wholly owned subsidiary of BHOO to be formed prior to the closing (the "Merger"). In the Merger, each share of the Company's Common Stock issued and outstanding immediately prior to the consummation of the Merger will be converted into the right to receive $0.44 in cash. In connection with the Merger, the Company's senior secured lenders, Lindner Dividend Funds ("Lindner") and Renaissance Capital Partners II, Ltd. ("Renaissance") have agreed to accept discounted terms of $1.4 million and $1.3 million respectively in satisfaction of the outstanding $6.5 million principal plus accrued interest and other obligations owed by the Company to the lenders. Halliburton has agreed to accept $2.5 million in cash in exchange for its $4.0 million preferred stock holding in the Company. The Merger Agreement supersedes a March 27, 1998 letter agreement regarding the acquisition of the Company by Baker Hughes Incorporated or any of its subsidiaries. Completion of the Merger is subject to customary conditions as well as the approval of the Company's common shareholders. Closing is expected in the third quarter of 1998. Except for historical information contained herein, the statements in this report are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties which may cause the Company's actual results in future periods to differ materially from forecasted results. Those risks and uncertainties include, among others, the financial strength and competitive pricing environment of the oil and gas service industry, product demand, market acceptance and new product development. Those and other risks are described in the Company's filings with the SEC. MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth the names, ages and positions of the executive officers and the members of the Board of Directors of the Company as of December 31, 1997. All directors are normally elected for a term of one year and serve until their successors are elected and qualified. However, due to delays in resolving issues associated with the Company's financial statements as discussed in Note 2 of the Notes to Consolidated Financial Statements, the Company has not completed a proxy statement and held a shareholder meeting for the election of directors since 1994.
Name Age Position - - - ------------------------- --- --------------------------------------------------- George Steel 51 Chief Executive Officer, President and Director Barbara J. Cavallo 52 Financial Controller Edward F. Frazier 52 Corporate Secretary, Vice President Human Resources Robert G. Parish, Ph.D. 56 Executive Vice President- E&P Consulting Dag G. Heggelund, Ph.D. 35 Vice President - WorkBench Development J. Marc Sofia 38 Vice President-E&P Technology William B. Nichols, Ph.D. 69 Director Edward O. Price, Jr. 68 Chairman, Director Jack L. Howard 35 Director
There are no family relationships among any of the executive officers or directors of the Company. Mr. Steel joined the Company in January, 1996, and was elected President, Chief Operating Officer and member of the Board of Directors, effective January 15, 1996. He was elected Chairman of the Board of Directors in May, 1996 and in December, 1997, with the approval of the Board of Directors, he chose to step down as Chairman but to continue his responsibilities as President, Chief Executive Officer and as a Director of the Company. Mr. Steel has extensive technical and managerial experience in the international petroleum industry. He served as General Manager of Snyder Oil Company's affiliate, Command Petroleum, in the Bay of Bengal, India. Prior to that, he served as Vice President of Snyder's Julesburg Rocky Mountain Business Unit. Mr. Steel joined Geophysical Services, Inc. (GSI), the geophysical subsidiary of Texas Instruments, in 1969. In 1992, after GSI had become part of Halliburton Company, he was appointed President of their geophysical subsidiary, Halliburton Geophysical Services. He has a B.S. degree in Natural Science from St. Andrews in Scotland. Ms. Cavallo is a Certified Public Accountant in Texas and has over eighteen years financial management experience in the oil service industry. She joined the Company in October 1993 and is currently responsible for the consolidation of financial information for each of the operating divisions and the Company in total. Prior to joining SSI, Ms. Cavallo was associated with Highland Resources, Western Oceanic, Inc., and Oceaneering International, Inc., all in Houston. She received her Bachelor of Science degree in Accounting from Illinois State University and holds memberships in the National Certified Public Accountants Association, Texas Certified Public Accountants Association, Houston Chapter of Texas CPAs. Mr. Frazier joined the Company in September, 1981, and was elected Corporate Secretary in May, 1996. He has extensive managerial experience in all aspects of compensation, employee benefits and pension plans for employees in the United States, Canada and the United Kingdom. Prior to joining SSI, Mr. Frazier served with Coopers & Lybrand for ten years in Florida and Colorado in human resource management positions. He was associated with the Small Business Administration in Florida from 1967-1972, where he was involved in training and management development programs. Mr. Frazier has a B.S. degree in Business Administration from Florida Atlantic University. Mr. Frazier resigned from the Company and his position as Corporate Secretary and Vice President on January 23, 1998. Dr. Parish joined the Company in April, 1982 as Vice President of Technical Products in Europe and as of December 31, 1997 was Managing Director of SSI UK, Ltd., the Company's United Kingdom subsidiary. He was responsible for the E&P Consulting business line. He served as Division Vice President, Exploration and Production Products, from March, 1987 to October, 1990. From February, 1985 to March, 1987, he was Managing Director of the Company's U.K. subsidiary. Dr. Parish has over twenty years experience in mathematical modeling and software engineering. He graduated from London University with a B.Sc. with honors in mathematics in 1963, and from North Carolina State University with a Ph.D. in statistics in 1969. Dr. Parish's employment with the Company was terminated in April 1998. Dr. Heggelund joined the Company in February 1993, as Product Manager for the Petroleum WorkBench and was promoted to Vice President in February 1996. Prior to joining the Company, he founded and was President of Technological Software Development Inc. Dr. Heggelund holds M.S. and Ph.D. degrees in Petroleum Engineering from Texas A&M University. He was Vice President, Petroleum WorkBench Development, until resigning from the Company on February 27, 1998. Mr. Sofia joined the Company in October 1985 as a senior engineer. He was promoted to manager in 1992 and to Vice President of the E&P Technology business line in May 1996. Mr. Sofia heads a team of professionals responsible for the development, marketing, sales, and technical support of the Company's E&P technology. Mr. Sofia joined Petro-Canada in September 1982 where he was involved in project engineering, well test interpretation, and reservoir engineering activities. He received a Bachelor's degree in Mechanical Engineering from McGill University in Montreal in 1982. Dr. Nichols was employed by Hercules Incorporated in research and development for thirty-five years until his retirement in 1989. For the last ten years he held various managerial positions. He received his B.S. degree from Massachusetts Institute of Technology in 1950, and M.S. and Ph.D. degrees from California Institute of Technology in 1954 and 1957, respectively, all in chemical engineering. Dr. Nichols was elected to the Board of Directors of the Company in 1989. Mr. Price was employed by Chevron Oil Company and Saudi Aramco for over thirty-seven years until his retirement in 1990. For the last eleven years he held various executive positions with Saudi Aramco in Dhahran, Saudi Arabia, including Vice President of Petroleum Engineering and Vice President of Exploration and Production. Prior to that time he held various management positions in Chevron's operations in the U.S., Australia and Iran. He is currently a private investor and consultant and is a director of First National Bank, Mexia, Texas; Paragon Wireline Services; Advanced Reservoir Technologies and Middle East Services. He received B.S. degrees in both petroleum engineering and geological engineering from Texas A&M University in 1951 and completed course work for an M.S. degree from the same school in 1953. Mr. Price was elected to the Board of Directors of the Company in 1993. Mr. Price was elected Chairman of the Company in December, 1997. Mr. Jack Howard is a principal and fund manager of Mutual Securities, Santa Rosa, California, a division of Cowles, Sabol & Co., Inc., whose clients have a substantial holding in the Common Stock of the Company. Mr. Howard, is also a director of Gateway Industries and Roses Holdings. He has been a stockbroker for 12 years, specializing in locating, researching, and accumulating undervalued securities in businesses which were statistically inexpensive in relation to their cash flow and/or potential. He is a member of the management team of Steel Partners, a private investment fund. Mr. Howard is CFO of Roses and acting President of Gateway Industries. Mr. Howard was elected a Director of the Company in December, 1997. ITEM 2. PROPERTIES All of the Company's operations are conducted in leased space as follows:
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. ITEM 3. LEGAL PROCEEDINGS To the knowledge of management, there are no claims pending or threatened against the Company or any of its subsidiaries which individually or collectively could have a material adverse effect upon the Company, its financial condition, results of operations or cash flows. Securities and Exchange Commission Investigation. On September 11, 1997, the Company resolved the investigation by the Securities and Exchange Commission ("SEC") of the Company's disclosures and financial statements for the years ended December 31, 1993, 1994 and 1995. Without admitting or denying any of the allegations of the SEC, the Company settled the matter by consenting to the entry of a permanent injunction prohibiting future violations by the Company of Section 17(a) of the Securities Act of 1933, and Sections 10 (b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder and to an order to restate the Company's financial statements for the years ended December 31, 1993, 1994 and 1995. The SEC staff has advised the Company that, with the entry of the permanent injunction, the investigation into this matter as to the Company has been concluded. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders. PART II ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock was traded on the Nasdaq National Market ("NNM") under the symbol "SSFT" until July 11, 1995, when the Company's stock was delisted from NNM as a result of the Company's failure to remain current in its public reporting obligations. Since July 11, 1995 the Company's Common Stock has traded in the over-the-counter market. The following are high and low prices of sales of the Company's Common Stock for the periods indicated during which the Company's Common Stock was traded on NNM, and the range of high and low closing bid quotations for the Company's Common Stock during the periods after July 11, 1995, as reported in the "pink sheets" maintained by the National Quotation Bureau, Inc. Such quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
Quarter Ended Prices ------------- High Low ------ ----- 1998 First Quarter First Quarter $ .20 $.125 1997 First Quarter First Quarter .9375 .41 Second Quarter .70 .45 Third Quarter .82 .45 Fourth Quarter .80 .125 1996 First Quarter First Quarter 3.75 2.38 Second Quarter 2.88 1.63 Third Quarter 1.88 .75 Fourth Quarter .94 .23 1995 First Quarter 6.63 5.88 Second Quarter 5.88 3.00 Third Quarter 3.38 1.75 Fourth Quarter 3.38 2.63 1994 First Quarter 8.13 4.50 Second Quarter 6.00 4.00 Third Quarter 7.13 4.13 Fourth Quarter 7.25 4.88 1993 First Quarter 4.13 3.13 Second Quarter 4.00 2.75 Third Quarter 4.00 3.13 Fourth Quarter 4.75 3.00
At March 31, 1998, the Company had approximately 450 stockholders of record. The Company has not paid dividends on its Common Stock for several years and does not intend to pay dividends on its Common Stock in the foreseeable future. The payment of dividends on the Company's Common Stock is also prohibited under the Company's current revolving credit facility. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA(1)
1997 1996 1995 1994 1993 (Restated (Restated (Restated - Note 2) - Note 2) - Note 2) (In thousands, except per share data) STATEMENT OF OPERATIONS DATA: Revenue: Consulting and training $ 6,491 $ 12,863 $ 13,530 $14,131 $16,211 Licenses and Maintenance 5,597 5,864 7,356 7,647 8,158 Other 304 277 566 436 501 Total revenue 12,392 19,004 21,452 22,214 24,870 Costs and expenses: Costs of consulting and training 8,204 8,414 9,720 10,489 12,464 Costs of licenses and maintenance 2,356 3,636 5,103 5,137 2,144 Costs of other revenue 199 190 340 261 278 Selling, general and administrative 3,886 6,604 10,768 8,753 7,810 Recovery of accounts receivable - (1,568) - - - Provision for sale of Pipeline assets(4) 2,200 - - - - Research and development 919 890 780 793 1,139 Reduction in capitalized software costs - - 13,926 - - Total costs and expenses 17,764 18,166 40,637 25,433 23,835 Income (loss) from operations (5,372) 838 (19,185) (3,219) 1,035 Other (expense) (54) (1,308) (348) (467) (805) Income (loss) before income taxes (5,426) (470) (19,533) (3,686) 230 Credit (provision) for income taxes (20) 60 (200) (260) (375) Income (loss) from continuing operations (5,446) (410) (19,733) (3,946) (145) Discontinued operations Income (loss) from operations of Kinesix division(3) - (878) (5,164) 581 630 Loss on disposal of Kinesix division(3) - (478) - - - Net income (loss) $ (5,446) $ (1,766) $(24,897) $(3,365) $ 485 =========== =========== ========= ======== ======== Income (loss) per common share: Continuing operations $ (0.61) $ (0.05) $ (2.41) $ (.61) $ (.03) Discontinued operations - (0.16) (.63) .09 .14 Net income (loss) $ (0.61) $ (0.21) $ (3.04) $ (.52) $ .11 =========== =========== ========= ======== ======== Diluted(5) $ - $ - $ - $ - $ .09 =========== =========== ========= ======== ======== OTHER FINANCIAL DATA: Revenue E&P Consulting $ 5,491 $ 9,766 $ 10,091 $10,711 $11,526 E&P Technology 4,436 4,935 6,796 6,777 5,876 Pipeline Simulation 2,465 4,303 4,565 4,726 7,468 Total Revenue $ 12,392 $ 19,004 $ 21,452 $22,214 $24,870 =========== =========== ========= ======== ======== BALANCE SHEET DATA: Working capital $ (247) $ 2,270 $ (3,092) $ 3,441 $ 2,763 Total assets 14,878 22,708 24,186 44,774 44,147 Long-term obligations, net of current portion 7,172 7,147 2,519 3,073 10,030 Redeemable convertible preferred stock 4,000 4,000 4,000 4,000 4,000 Stockholders' equity (deficit) $ (2,483) $ 3,037 $ 4,110 $28,409 $18,987 - - - ----------------------------------------- ----------- ----------- --------- -------- --------
(1)The above table sets forth a summary of selected consolidated financial data for the Company as of December 31, 1997, 1996, 1995, 1994 and 1993 and for each of the years then ended. Such data is derived from the audited consolidated financial statements presented elsewhere herein and should be read in conjunction with such financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations." As discussed under the "Explanation of Second Amendment to 1997 Form 10-K" caption above, the Company has received extensive comment letters from the Staff of the SEC on various periodic SEC reports and the Company's financial statements included therein. As a result of procedures undertaken by the Company in responding to such comment letters, as well as the separate SEC investigation of the Company's disclosures and financial statements which was concluded as to the Company in September 1997, the Company has restated its financial statements for the years ended December 31, 1995, 1994 and 1993. With respect to selected consolidated financial data as of December 31, 1995, 1994 and 1993 and for each of the years then ended, such data reflects such restatements. See Note 2 of the Notes to Consolidated Financial Statements for a further discussion of the restatement adjustments to the 1995, 1994 and 1993 financial statements, including a table presenting certain amounts as restated compared to the corresponding amounts as originally reported. Such restatements also reflect for comparability purposes the disposition by the Company of the Kinesix division effective September 3, 1996. See Note 11 of the Notes to Consolidated Financial Statements presented elsewhere herein. Certain of the restated 1994 and 1993 amounts set forth in the above table reflect adjustments to the corresponding unaudited amounts as reported in the Company's 1997 Form 10-K/A No. 1, wherein it was disclosed that the 1994 and 1993 audited restatement was still in progress at the time of the filing thereof. Such adjustments, which are primarily attributable to additional items as ascertained in the audit of the 1994 and 1993 restated financial statements which were previously reflected in revenue but did not at the time of revenue recognition meet the criteria therefor, are included in the restatement adjustments discussed in Note 2 of the Notes to Consolidated Financial Statements. (2) Except for historical information contained herein, the statements in this report are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties which may cause the Company's actual results in future periods to differ materially from forecasted results. Those risks and uncertainties include, among others, the financial strength and competitive pricing environment of the oil and gas service industry, product demand, market acceptance, and new product development. Those and other risks are described in the Company's filings with the SEC. (3) On October 9, 1996, the Company announced the execution of final contracts for the previously announced sale of the net assets and business of its graphical user interface segment, otherwise known as the Kinesix division, to a group including the former President of the Kinesix division. The sale of this segment of the Company's business was part of management strategy to narrow the focus of the Company's activities to its primary market of the oil and gas industry. The consideration to the Company in the transaction was $410,000 including cash of $376,000 which was received by the Company in October 1996, a note receivable for $32,000, and the purchaser's assumption of liabilities totaling $59,000. The measurement date for accounting for the disposal was August 26, 1996, the date on which management decided to sell the Kinesix division and the disposal date was September 3, 1996, the effective date of the transaction. The transaction resulted in a loss on disposal of $478,000, which included estimated losses to be incurred by the Kinesix division from the measurement date to the date of disposal of $66,000. From the measurement date to the balance sheet date of September 30, 1996, the Company incurred a net loss of $66,000 in operating the Kinesix division, which was charged to a reserve that was recorded in accounting for the loss on disposal. Loss from operation of the discontinued segment from January 1, 1996 to the measurement date was $878,000, including recognition of an expense of $674,000 related to an award against the Company by the American Arbitration Association, which is discussed in Note 11 to the Consolidated Financial Statements. (4) During 1997, the Company's management and Board of Directors formulated and implemented a plan to improve the Company's financial performance through a merger, alliance or sale of the Company and to divest the Company of underperforming assets. As part of this plan, the Company announced on January 5, 1998 an intent to sell the Pipeline Simulation assets. These assets as of December 31, 1997 were estimated to have a net carrying value of $3.9 million. On May 1, 1998, the Company sold the assets of the Pipeline Simulation business line to LIC, resulting in consideration to the Company of $1.5 million in cash and the assumption by LIC of current obligations of $145,000. Based on fair market value estimates, the Company recorded in 1997 a provision of $2.2 million to write down the carrying amounts of the Pipeline assets to estimated fair value less cost to sell. The Pipeline Simulation business line recorded sales of $2.5 million, $4.3 million, $4.6 million, $5.1 million and $8.2 million and contributed a net loss of $1.3 million, $.4 million, $1.4 million, $2.6 million and $.4 million in 1997, 1996, 1995, 1994 and 1993, respectively, excluding the provision for the loss of sale of Pipeline assets recorded in 1997. (5) See Note 3 of the Notes to Consolidated Financial Statements for a discussion of the Company's policy regarding the presentation of diluted income (loss) per common share. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7.1 GENERAL The Company develops and markets sophisticated software for the development and production and pipeline and surface facilities areas of the worldwide oil and gas industry and for graphical user interface applications. The following discussion is management's assessment of the Company's historical financial performance and condition. This discussion should be read in conjunction with the Consolidated Financial Statements of the Company and the related Notes thereto. The Company's financial statements have been prepared on the assumption that the Company will continue as a going concern. As discussed in Note 1 of the Notes to Consolidated Financial Statements contained herein, the Company has experienced recurring losses from operations and has a significant accumulated shareholders' deficit, which raises substantial doubt about the Company's ability to continue as a going concern. The Company's plans in this regard are discussed below and in Note 1 of the Notes to Consolidated Financial Statements. As discussed in Note 14 of the Notes to Consolidated Financial Statements, on June 17, 1998, the Company entered into an agreement and plan of merger pursuant to which a subsidiary of Baker Hughes Incorporated ("Baker") will acquire the Company, subject to customary conditions as well as the approval of the Company's common shareholders. The acquisition does not include the Company's Pipeline Simulation Business assets which were sold separately to LIC on May 1, 1998 as discussed in Section 7.3.12 below. It is currently expected that the closing of the acquisition will occur in the third quarter of 1998. The Company recognizes software license revenue on delivery provided that a legally-binding licensing agreement containing all material terms has been executed, there are no remaining significant obligations and that collection of the resulting receivable is probable. In a contract where the remaining obligations are insignificant such as installation, training and testing, the allocable revenue is deferred and recognized upon completion of performance. The Company does not recognize any software revenue until all significant vendor obligations are met. Software maintenance revenue is recognized on a straight-line basis over the term of the contract. Certain combined software and service contracts are accounted for using the percentage of completion method with contract revenue recognized based on: (a) value-added output measures of progress for the software portion of the contract after meeting certain specified contractual criteria, and having used the installed software in completing specifications for the engineering services on the project, which have been accepted by the client, and (b) input measures of work performed on an hours-to-hours basis for the services portion of the contract. Fixed-price contract revenue is recognized using the percentage of completion method, calculated on the ratio of labor hours incurred to total projected labor hours. Losses on contracts accounted for using the percentage of completion method are recognized at the time they are identified. See Note 3 of Notes to Consolidated Financial Statements. As discussed under the "Explanation of Second Amendment to the 1997 Form 10-K" caption above, the Company has received extensive comment letters from the Staff of the SEC on various periodic reports of the Company filed with the SEC, and the Company's financial statements included therein. As a result of procedures undertaken by the Company in responding to such comment letters, as well as the separate SEC investigation of the Company's disclosures and financial statements for the years ended December 31, 1995, 1994 and 1993 which was concluded as to the Company in September 1997, the Company has restated the Company's financial statements for the years ended December 31, 1995, 1994 and 1993, which are presented elsewhere herein. See Note 2 of the Notes to the Consolidated Financial Statements for a further discussion of the restatement adjustments to the 1995, 1994 and 1993 financial statements, including a table presenting certain amounts as restated compared to the corresponding amounts as originally reported. Such restatement also reflects for comparability purposes the disposition by the Company of the Kinesix division effective September 3, 1996. See Note 11 of the Notes to Consolidated Financial Statements. Including the restatement of revenues from continuing operations to reclassify in loss from discontinued operations the $2.0 million, $3.2 million and $4.0 million in revenues attributable to the Kinesix Division for 1995, 1994 and 1993, respectively, total revenues for 1995, 1994 and 1993 have been reduced from the amounts previously reported by $2.6 million, $3.3 million and $4.2 million, respectively. In addition, the 1995, 1994 and 1993 restatements resulted in a reduction (increase) of the net loss from the amounts previously reported by $27,000, $60,000 and $165,000, respectively. 7.2 FINANCIAL POSITION AND FINANCING AGREEMENTS At December 31, 1997, the Company's working capital ratio was .96 to 1, based on current assets of $5.9 million and current liabilities of $6.2 million. The Company's working capital was 1.27 to 1 at December 31, 1996 based on current assets of $10.8 million and current liabilities of $8.5 million. At December 31, 1995, the Company's working capital was .77 to 1, based on current assets of $10.5 million and current liabilities of $13.6 million. At December 31, 1994, the Company's working capital was 1.37 to 1, based on current assets of $12.7 million and current liabilities of $9.3 million. The Company's working capital at December 31, 1993 was 1.25 to 1, based on current assets of $13.9 million and current liabilities of $11.1 million. On June 30, 1994, the Company sold 2.0 million newly issued shares of Common Stock in a public offering from which the Company received net proceeds of $8.1 million, net of related costs of approximately $270,000. The Company used the proceeds from the public offering to repay its bank indebtedness of $5.1 million, to reduce accounts payable and to increase working capital. In July 1994, the underwriters of the public offering exercised an overallotment option, resulting in the sale by the Company of 383,000 additional newly issued shares of common stock, from which the Company received net proceeds of approximately $1.6 million. Simultaneously with completion of the public offering, Renaissance Capital Partners II, Ltd. ("Renaissance") converted $1.75 million in principal amount of convertible debentures (see Note 4 of Notes to Consolidated Financial Statements) into 653,846 shares of Common Stock, which Renaissance sold in the public offering. As a result of the Renaissance conversion, the Company reduced paid-in capital by $119,000 for unamortized debt issuance costs related to the converted debentures. In 1995, the Company received net proceeds of approximately $1.0 million from the sale of newly issued Common Stock in connection with the exercise of stock options. In addition, the Company has obtained the following financing and restructuring of convertible debentures and bank revolving line of credit: - - - - In April 1996 Lindner Funds ("Lindner"), whose parent company, Ryback Management Corporation, was then a 14% shareholder and is currently a 19% shareholder of the Company, invested $5 million in the Company in exchange for a senior secured note at 7% payable in five years and non-detachable warrants to purchase 1.5 million shares of the Company's Common Stock at an exercise price of $3.00 per share for five years. - - - - In April 1996 Renaissance Capital Partners II, Ltd. ("Renaissance") converted $250,000 of principal of its convertible debentures for 282,218 shares of the Company's Common Stock and converted the balance of $1.5 million principal of its convertible debentures into a senior secured note at 7% payable in five years and non-detachable warrants to purchase 450,000 shares of the Company's Common Stock at an exercise price of $3.00 per share for five years. The terms of the secured note and non-detachable stock purchase right are substantially the same as for those issued to Lindner Funds. - - - - The Lindner and Renaissance transactions were accounted for under Accounting Principles Board Opinion No. 14, Accounting for Convertible Debt and ----------------------------------- Debt Issued with Stock Purchase Warrants, by accounting for the notes and the - - - -------------------------------------------- non-detachable warrants as a single obligation with no separate value assigned to the warrants. - - - - Effective April 1, 1996 Bank One and the Export-Import Bank of the United States ("Exim Bank") restructured and renewed a bank line of credit for the Company to April 15, 1997. Bank One established a revolving line of credit pursuant to which the Company could utilize up to $1.5 million for (a) short-term borrowings for working capital purposes and (b) the issuance of letters of credit for bid guarantees, performance bonds and advance payment guarantees. Under the terms of the bank credit agreement, in April 1996 the Company repaid the $2.9 million balance then owed pursuant to the previous line of credit, using proceeds from the Lindner and Renaissance Senior Secured Notes. In October 1996, The Company repaid the $750,000 balance owed pursuant to the bank credit agreement as of September 30, 1996. Effective April 16, 1997 the Company and Bank One agreed to extend the revolving credit facility through October 15, 1997. Due to the Company's improved cash position and decreased need for credit at that time, the revolving credit facility was decreased from $1.5 million to $.9 million. The collateral for the line is the Company's accounts receivables from non-U.S. domiciled customers to the extent necessary to collateralize the line. All receivables not necessary for the line and substantially all other assets except those of the Canadian subsidiary are collateral for the Lindner and Renaissance senior secured notes. On October 30, 1997, the Company and Bank One agreed to change the terms of the April 16, 1997 agreement to: 1. Extend the maturity date to November 30, 1997, 2. Change the interest rate from the bank's prime rate of interest to the bank's prime rate of interest plus one (1) percentage point, and 3. Limit the principal amount of the line of the revolving credit facility to $650,000. On November 30, 1997, the Company and Bank One agreed to extend the maturity date to August 15, 1998 and to reduce the principal amount of the line of the revolving credit facility to $230,000 after March 15, 1998. The credit line of $230,000 would remain available only to secure certain standby letters of credit. Subsequently, Bank One agreed that the revolving credit facility could remain at $650,000 in consideration of the Company's agreement to repay the principal outstanding balance on May 1, 1998. On May 1, 1998, the Company paid off the loan balance of $382,000 with interest. The credit facility is supported by a guarantee from Exim Bank which reduces down as the credit line reduces and expires in full on August 15, 1998. The Company pays Exim Bank a fee equal to 1.5% of the guarantee and is required to purchase credit insurance for foreign receivables at a cost of $.38 per hundred dollars of the amount of the insured receivables. As of December 31, 1997 the balances of the revolving credit facility, amounts of short-term cash borrowings and letters of credit outstanding, and credit available under the revolving credit facility were as follows:
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 ========
The Company has completed the financing and restructuring of the convertible debentures and the bank revolving line of credit described above. The Company anticipates that it will have negative cash flow from operations in the second and third quarters of 1998. Although the proceeds from the sale of the Pipeline Simulation Business in May 1998 have improved the cash position of the Company by $1.5 million, the Company may not be able to meet all of its anticipated short-term (less than one year) operating needs. At this time the Company does not anticipate that it will be successful in obtaining any required additional debt or equity financing. At December 31, 1997, the Company was in violation of identical financial covenants with respect to its notes payable to Bank One, Lindner and Renaissance, for which the Company has received waivers from Lindner and Renaissance for the reporting period. The covenants violated require that the Company's tangible net worth, as it and other covenant terms are defined in the covenants, exceed $(3 million); its net liabilities to net worth ratio not exceed 3 to 1; its current ratio exceed 1 to 1; and that the Company has positive annual cash flow at the end of the most recent fiscal year. As of December 31, 1997, the Company's tangible net worth, net liabilities to net worth ratio, current ratio, and annual cash flow, as defined under the covenants, were approximately $(5.8 million), 7.42 to 1, .96 to 1, and $(5.4 million), respectively. As of December 31, 1997, the Company continues to classify the notes payable to Lindner and Renaissance as long-term obligations since both Lindner and Renaissance have waived the financial covenant violations for the reporting period and indicated that they would not require repayment of the debt on demand. The Company's note payable to Bank One is classified as a short-term liability as of December 31, 1997 and was repaid in full on May 1, 1998. In addition, the Company has not made its interest payment due in October 1997 on the Lindner and Renaissance debt. Lindner and Renaissance have taken no action with respect to such defaults, and such defaults will be remedied by the agreements of Lindner and Renaissance discussed in Note 14 of the Notes to Consolidated Financial Statements if the pending sale of the Company to Baker discussed in Note 14 is completed. The term of a bank line of credit of the Company's United Kingdom subsidiary ended in May 1996 and the outstanding balance of $300,000 was repaid along with accrued interest. The term of a bank line of credit of the Company's Canadian subsidiary ended in May 1996. There were no outstanding borrowings under this facility. 7.3 RESULTS OF OPERATIONS 7.3.1 REVENUE The following table sets forth revenues by business line for 1997, 1996, 1995, 1994 and 1993 (in thousands):
For the year ended December 31, 1997 1996 1995 1994 1993 ----------- ----------- ---------- ---------- ---------- (Restated) (Restated) (Restated) See Note 2 to the financial statements E&P Consulting $ 5,491 $ 9,766 $ 10,091 $ 10,711 $ 11,526 E&P Technology 4,436 4,935 6,796 6,777 5,876 Pipeline Simulation 2,465 4,303 4,565 4,726 7,468 ----------- ----------- ---------- ---------- ---------- Total Revenue $ 12,392 $ 19,004 $ 21,452 $ 22,214 $ 24,870 =========== =========== ========== ========== ==========
Comparison of 1997 to 1996 Total revenues decreased 35% to $12.4 million in 1997 from $19.0 million in 1996. All business lines of the Company experienced a decline in revenues due to a decreased level of sales. Revenue in E&P Consulting decreased 44% to $5.5 million in 1997 compared to $9.8 million in 1996. Revenues in 1996 included revenue of $2.3 million recognized upon collection of the final settled contract amount of $3.9 million related to a foreign consulting project with respect to which the work was performed and revenue in the amount of $1.6 million was recognized prior to 1996 but then was reserved as a bad debt in the fourth quarter of 1995 as collection of the $1.6 million receivable was at that time not deemed probable. (See section 7.3.6). Revenue in 1997 declined as a result of the decrease in the number of billable personnel caused by personnel attrition resulting from the competitive market for experienced personnel. During 1997, the Company initiated steps to replace the personnel who had left the Company. Revenues in E&P Technology decreased 10% to $4.4 million in 1997 compared to $4.9 million in 1996. The Company introduced new products and product upgrades to existing software in 1997, but increasing competition and high investment by the Company's two principal competitors limited sales. Revenues in Pipeline Simulation, the assets of which were sold to LIC on May 1, 1998 as discussed in Section 7.3.12 below, decreased 42% to $2.5 million in 1997 compared to $4.3 million in 1996. Sales declined partly as the result of increasing competitive price and market share pressure, and partly as the result of delays in the completion of several major projects Comparison of 1996 to 1995 Total revenues decreased 12% to $19.0 million in 1996 from $21.5 million in 1995. Most of the decline in revenue was in the E&P Technology business line. Revenue in E&P Consulting decreased 3% to $9.8 million in 1996 compared to $10.1 million in 1995. Revenues in 1996 included revenue of $2.3 million recognized upon collection of a foreign receivable for work performed prior to 1996 and recognized as revenue in those periods, however, was subsequently written off to bad debt during 1995 as collection of the receivable was no longer anticipated by the Company. (See section 7.3.6) Revenues in E&P Technology decreased 28% to $4.9 million in 1996 compared to $6.8 million in 1995. The decrease was primarily attributable to the significant non-recurring sale in 1995 of 30 copies of the Company's Petroleum WorkBench software to a major U.S. oil and gas company. Revenues in Pipeline Simulation decreased 4% to $4.3 million in 1996 compared to $4.5 million in 1995, with sales of the Company's upgraded software product released in March 1996, TGNET Windows, offsetting a reduction in project revenues. Comparison of 1995 to 1994 Total revenues decreased 3% to $21.5 million in 1995 from $22.2 million in 1994 primarily due to a decrease in E&P Consulting revenues. Total revenues from product sales and related services of the Company's Exploration and Production businesses remained approximately flat, reporting $16.9 million revenues in 1995 compared to $17.5 million in 1994. E&P revenues were $16.9 million in 1995 compared with $17.5 million in 1994. Software license and maintenance revenue increased to $6.3 million in 1995 from $6.2 million in 1994. Revenue from The Petroleum WorkBench, a subset of the E&P software products, increased 7% to $4.5 million in 1995 from $4.2 million in 1994, mainly due to the sale of 30 copies of the software to a major US oil and gas company. Revenue from stand-alone software products decreased 28% to $1.8 million in 1995 from $2.5 million in 1994. Consulting and training revenue decreased 8% to $10.1 million in 1995 from $11.0 million in 1994. Total Pipeline Simulation Business revenues decreased 4% to $4.5 million in 1995 from $4.7 million in 1994. Consulting and training revenue was $2.7 million in 1995 and 1994. Software license and maintenance revenue decreased 11% to $1.6 million in 1994 from $1.8 million in 1995 due to a general slowdown in the Pacific Rim market. The Company released its TGNET Windows product in March, 1996. Comparison of 1994 to 1993 Total revenues decreased 11% to 22.2 million in 1994 from $24.9 million in 1993. The decrease was primarily due to delays in the award of foreign consulting projects in the consulting and training services in the Exploration and Production and the Pipeline Simulation Businesses. Total E&P revenues were flat at $17.5 million in 1994 and $17.4 million in 1993. Software license and maintenance revenue increased 19% to $6.2 million in 1994 from $5.2 million in 1993. Revenue from the Petroleum WorkBench increased 121% to $4.2 million in 1994 from $1.9 million in 1993 as the product became more established in the marketplace. Consulting and training revenue decreased 8% to $11.0 million in 1994 from $12.0 million in 1993. The decrease was primarily attributable to delay in award of several foreign consulting projects. Total Pipeline Simulation Business revenues decreased 37% to $4.7 million in 1994 from $7.5 million in 1993. Consulting and training revenue decreased 36% to $2.7 million in 1994 from $4.2 million in 1993. In 1993, the Pipeline Simulation Business had higher consulting revenue due to completion work on the final stages of several of the significant combined software and services contracts that were initiated in 1991. Software license and maintenance revenue increased marginally. The Company's number of days' revenues outstanding in accounts receivable (DRO) has historically been relatively high due to the nature and terms of many of the Company's revenue contracts and due to the relatively slow-paying nature of several of the foreign entities with which the Company has done business. The Company has taken measures in this regard to improve contractual payment terms and to improve business processes to reduce the DRO. As a result, DRO has decreased from 1995 to 1997. 7.3.2 FOREIGN REVENUE Revenue derived from foreign sources during 1997, 1996, 1995, 1994 and 1993 is set forth below:
Revenue From Foreign Percentage of Sources Total Revenue --------------- -------------- (In thousands) 1997 $ 8,856 71% 1996 14,765 78% 1995 (Restated)* 14,910 70% 1994 (Restated)* 16,212 73% 1993 (Restated)* 16,935 68% *See Note 2 to the financial statements
Management believes that foreign revenue will continue to be an important factor in the Company's business. See "Business Geographic and Business Line Data" for information regarding the particular geographic areas in which the Company generated foreign source revenue during these periods. Levels of export revenues are subject to a number of factors, including market changes, competitive pressures, political instability, changes in protective tariffs, tax policies and export-import controls. Comparison of Foreign Revenues for 1997, 1996, 1995, 1994 and 1993. Foreign revenues have continued to grow as a percentage of total revenue since the early 1990's when oil and gas companies started to spend a larger part of their budget in non-USA exploration and development. The Company expects that foreign revenues will vary on an annual basis as significant projects are started and completed, but will probably now remain in the order of 70% to 80% of total revenues. In 1995, the Company's foreign operations experienced an aggregate loss from operations of $9.8 million, which was primarily attributable to the portion of the 1995 write-down of capitalized software and bad debt provision allocable to foreign operations. See Note 13 of the Notes to Consolidated Financial Statements. The Company's loss from foreign operations in 1994 was primarily attributable to a bad debt provisions of $1.4 million. U. S. export revenues as presented in Note 8 of the Notes to Consolidated Financial Statements were generated primarily through non-recurring software sales in the Pipeline Simulation and E&P Technology business lines and through large Pipeline Simulation consulting projects. The nature of these export revenues can result in significant variations from year to year. In the Far East, U.S. export revenues have predominantly been Pipeline projects, with major revenue milestones on significant projects occurring in 1996 and 1994. Central/South America projects have generally been E&P Consulting projects. As financial performance on these projects has often been unsatisfactory, the Company has de-emphasized this market. Accordingly, revenues have declined since 1996. U.S. export revenues in Europe, which result primarily from Pipeline projects, decreased in 1997 as the Company focused its Pipeline resources in other parts of the world. U.S. export revenues in Canada are generally small, non-recurring Pipeline projects and thus revenues are quite variable. In addition, the Company does not cover the Canada market with permanent sales staff. The principal reduction in U.S. export revenues between 1994 and 1995 occurred in the Far East ($1.4 million) and Central and Southern America ($0.5 million). During the course of 1994 the Company's U.K. office became substantially responsible for generating revenues from the Far East and therefore U.S. export revenues declined. The increase in U.S. export revenues between 1993 and 1994 was primarily attributable to the Far East region ($0.9 million) as a result of increased software sales from the E&P Businesses and greater project revenues from the Pipeline Simulation Business. 7.3.3 BACKLOG Backlog at December 31, 1997, 1996, 1995, 1994 and 1993 was $4.2 million, $6.7 million, $9.5 million, $8.8 million and $10.6 million, respectively. 76% of the backlog at December 31, 1997 is expected to be earned by December 31, 1998. Approximately 19% of year-end backlog for 1997 related to Pipeline projects which were transferred with the sale of the assets of the Pipeline Simulation Software effective May 1, 1998. Levels of backlog have declined in proportion to declines in annual revenue. End of year backlogs vary depending on the timing of major sales, but approximate to between 3 and 5 months of revenue. 7.3.4 COSTS OF CONSULTING AND TRAINING AND COSTS OF LICENSES AND MAINTENANCE In the second quarter of 1996, management took steps to reduce overhead, non-billable staff personnel, and other costs, and to further emphasize direct accountability for profitability and cash performance at the operating level. These measures resulted in lower expenses in 1997. However, revenues in Consulting and Training declined.
Costs as % of Revenue --------------------------------------------- 1997 1996 Net Change 1995 Net Change ----- ----- ----------- ----- ----------- 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)%
Costs as % of Revenue --------------------------------------------- 1995 1994 Net Change 1993 Net Change ----- ----- ----------- ----- ----------- Costs of Consulting and Training 72% 74% 2% 77% 3% Costs of Licenses and Maintenance 69% 67% (2%) 26% (41%) Costs of Other Revenues 60% 60% - 55% (5%)
Comparison of 1997 to 1996. Costs of consulting and training as a percentage of revenues increased to 126% in 1997 from 65% in 1996 primarily due to the following reasons: (i) in 1996, revenues included $2.3 million resulting from the collection of the full $3.8 million contract amount for a foreign project for which most of the project costs were incurred prior to 1996 and for which the $1.6 million in revenue recognized in 1995 was reserved in 1995 as a bad debt; and (ii) 1997 revenues decreased to $6.5 million without a corresponding decrease in costs that are fixed in nature. Costs of licenses and maintenance as a percentage of revenues decreased from 1996 to 1997 as a result of cost reduction efforts beginning in the second half of 1996 which were focused on employees in the E&P Technology business line who did not have direct customer responsibilities. Comparison of 1996 to 1995 Costs of consulting and training as a percentage of revenues decreased from 1995 to 1996 primarily due to the $1.6 million in costs incurred in 1995 with respect to the above-discussed foreign project, an additional $2.3 million of revenue for which was recognized in 1996, without significant additional project costs, upon the collection in 1996 of the full contract amount. Costs of licenses and maintenance as a percentage of revenues decreased from 69% in 1995 to 62% in 1996 primarily due to control of costs at the E&P Technology business line level. Comparison of 1995 to 1994 Costs of consulting and training decreased to $9.7 million in 1995 from $10.5 million in 1994. Costs of consulting and training were 72% of consulting and training revenue in 1995 and 74% in 1994. The decreased percentage was partly the result of reduction in the number of the Company's consulting staff. Costs of licenses and maintenance was $5.1 million in both 1995 and 1994 and included an increase in software amortization to $5.4 million in 1995 from $3.6 million in 1994. Other costs of licenses and maintenance decreased to $1.0 million in 1995 from $1.4 million, partly as a result of staff reductions made in light of lower revenue. Comparison of 1994 to 1993 Costs of consulting and training decreased to $10.5 million in 1994 from $12.5 million in 1993. The decrease resulted primarily from the lower level of consulting activity in 1994 due to timing of work on large foreign consulting contracts. Costs of consulting and training were 74% of consulting and training revenue in 1994 and 77% in 1993. Costs of licenses and maintenance increased to $5.1 million in 1994 from $2.1 million in 1993, including an increase in software amortization to $3.6 million in 1994 from $3.4 million in 1993. Costs of licenses and maintenances was $5.1 million in 1994 by comparison to an adjusted cost of $2.1 million in 1993. The adjusted cost resulted from the separation in 1993 of the Pipeline group into Kinesix products and Pipeline products and services. The unadjusted costs in 1993 were approximately $4.9 million Costs of licenses and maintenance were 67% of license and maintenance revenue in 1994 and 26% in 1993. 7.3.5 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Comparison of 1997 to 1996. In the second quarter of 1996, management took steps to reduce overhead, personnel, and other costs. These measures resulted in lower costs in 1997 compared to 1996. Selling, General and Administrative expense decreased $2.7 million or 41% to $3.9 million in 1997 from $6.6 million in 1996. Selling costs were reduced by $2.4 million and General Administrative costs were reduced by $0.3 million as the result of reductions in staffing in the second quarter of 1996 and throughout 1997. Comparison of 1996 to 1995. Selling, general and administrative expense decreased $4.2 million or 39% to $6.6 million in 1996 from $10.8 million in 1995. As a result of increased receivable collection efforts, the provision for bad debts decreased from $2.6 million in 1995, which included the reserve of a $1.6 million receivable for a foreign project, to $.4 million in 1996. General Administrative costs were reduced by $0.5 million in 1996 as the result of reductions in staffing in the third quarter of 1995. For a discussion of certain non-recurring charges for 1995, see Note 13 of the Notes to Consolidated Financial Statements. Comparison of 1995 to 1994 Selling, general and administrative costs increased to $10.8 million in 1995 from $8.8 million in 1994. This increase was attributable to the following factors: (a) an increase in selling and marketing costs to $6.4 million in 1995 from $5.6 million in 1994 as a result of the Company increasing its sales and marketing activities, including increased costs for further market penetration of the WorkBench product, and (b) an increase in general and administrative costs to $2.9 million in 1995 from $2.2 million in 1994, partly as a result of higher legal and audit costs. Comparison of 1994 to 1993 Selling, general and administrative costs increased to $8.8 million in 1994 from $7.8 million in 1993. The Company increased its sales and marketing activities for the purpose of further market penetration of the WorkBench and the Company's other products. 7.3.6 RECOVERY OF ACCOUNTS RECEIVABLE In 1996 the Company received payments totaling $3.9 million related to the final settled contract amount for a foreign consulting project. The payments included $1.6 million related to an account receivable that had been reserved for at December 31, 1995 pursuant to the Company's recent practice of generally increasing the allowance for doubtful accounts by the amount of any accounts receivable that have aged more than six months. The receipt of the $1.6 million has been reported as a reduction of expenses in the statement of operations under the caption "Recovery of accounts receivable." The remaining amount of $2.3 million was reported as revenue in 1996. See Section 7.3.1. 7.3.7 SOFTWARE RESEARCH AND DEVELOPMENT The following table summarizes total costs of development and enhancement of the Company's software products for the year ended December 31, 1997, 1996, 1995, 1994 and 1993. The Company's software development and enhancement costs are accounted for in accordance with SFAS Statement No. 86.
For the year ended December 31, 1997 1996 1995 1994 1993 ------ ------ ------- ------ ------ (In thousands) Software expenditures: Capitalized software costs $2,483 $1,963 $ 4,766 $4,105 $3,149 Costs charged to research and development expense 919 890 780 793 1,139 Total software expenditures $3,402 $2,853 $ 5,546 $4,898 $4,288 ====== ====== ======= ====== ====== Software expenses charged to earnings Research and development expense $ 919 $ 890 $ 780 $ 793 $1,139 Amortization of capitalized software 2,196 1,894 4,292 3,646 3,395 Reduction of capitalized software costs - - 13,926 - - ------ ------ ------- ------ ------ Total software expenses Recognized $3,115 $2,784 18,998 $4,439 $4,534 ======
The Company has continued its commitment to the development and enhancement of its software products. The Company has continued its commitment to the development and enhancement of its software products and expects significant product upgrades to be released in 1998, although operating losses in recent quarters and the lack of further equity investment will necessarily reduce the Company's future software development expenditures. In 1996, management reduced the level of software development expenditures by comparison to prior years because sales of software had not reached the projected levels. 7.3.8 SETTLEMENT OF SECURITIES CLASS ACTION LAWSUIT In October 1995, a class action lawsuit was filed in the United States District Court of the District of Colorado alleging that the Defendants, which included the Company, the former President and Chief Executive Officer of the Company, its former Chief Financial Officer and a former Executive Vice President, violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder in issuing financial reports for the first three quarters of 1994 which failed to comply with generally accepted accounting principles with respect to revenues recognized from the Company's contracts with value added resellers. The Defendants and the Plaintiff initially reached agreement during 1996 for settlement of the claim involving the payment of $1.1 million in cash to be provided by the Company's liability insurer in a court-supervised escrow account, and the Company's issuance of warrants to purchase Common Stock exercisable at the market price of the stock at the time of completion of the settlement, with the number of warrants to be such that their aggregate value was $900,000. Subsequently, the settlement agreement was modified to eliminate the warrants and to provide for an additional $525,000 in cash, to be paid by the Company. The Company concluded that the foregoing settlement was in its best interests in view of the uncertainties of litigation, the substantial costs of defending the claim and the material amount of management time which would be required for such defense. The Company recorded a $900,000 loss contingency in 1996 relating to the proposed agreement for settlement of the claim in accordance with Question 1 of SAB Topic 5:Y. In May 1997, the final approval of the fairness of the settlement was granted by the Court. The Company paid $525,000 in cash and reversed a net $315,000 of the loss contingency reserve of $900,000 after applying additional incurred legal costs. 7.3.9 INTEREST INCOME (EXPENSE) The following table summarizes the components of interest income (expense) for 1997, 1996, 1995, 1994 and 1993. The capitalized interest was included as a component of the capitalized cost of software development projects in progress in accordance with SFAS Statement No. 34.
For the year ended December 31, 1997 1996 1995 1994 1993 ------ ------ ------ ------ ------ (In thousands) Interest income $ 76 $ 34 $ 35 $ 21 $ 17 Interest incurred (657) (522) (606) (754) (966) Interest capitalized 100 165 109 350 285 Net interest (expense) $(481) $(323) $(462) $(383) $(664) ====== ====== ====== ====== ======
7.3.10 FOREIGN EXCHANGE LOSSES The Company is subject to risks associated with its various transactions in foreign currencies, primarily the British Pound and the Canadian Dollar, but the Company currently does not believe that such risks are material. The Company continually monitors its risks and uses forward rates in the setting of exchange rates in the costing and pricing for significant projects to minimize risk. During 1997 and 1995, the Company reported net foreign exchange gains of $13,000 and $114,000, respectively. During 1996, 1994 and 1993 the Company reported net foreign exchange losses of $85,000, $84,000 and $141,000, respectively. 7.3.11 DISPOSAL OF KINESIX DIVISION On October 9, 1996, the Company announced the execution of final contracts for the previously announced sale of the net assets and business of its graphical user interface segment, otherwise known as the Kinesix Division, to a group including the former President of the Kinesix Division. The sale of this segment of the Company's business was part of management strategy to narrow the focus of the Company's activities to its primary market of the oil and gas industry. The consideration to the Company in the transaction was $410,000, including cash of $376,000 which was received by the Company in October 1996, a note receivable for $32,000, and the purchaser's assumption of liabilities totaling $59,000. The measurement date for accounting for the disposal was August 26, 1996, the date on which management decided to sell the Kinesix Division and the disposal date was September 3, 1996, the effective date of the transaction. The transaction resulted in a loss on disposal of $478,000, which included estimated losses to be incurred by the Kinesix Division from the measurement date to the date of disposal of $66,000. From the measurement date to the balance sheet date of September 30, 1996, the Company incurred a net loss of $66,00 in operating the Kinesix Division, which was charged to a reserve that was recorded in accounting for the loss on disposal. Loss from operation of the discontinued segment from January 1, 1996 to the measurement date was $878,000, including recognition of an expense of $674,000 related to the Consolidated Financial Statements to an award against the Company by the American Arbitration Association. 7.3.12 SALE OF THE ASSETS OF THE PIPELINE BUSINESS LINE During 1997, the Company's management and Board of Directors formulated and implemented a plan to improve the Company's financial performance through a merger, alliance or sale of the Company and to divest the Company of underperforming assets. As part of this plan, the Company announced on January 5, 1998 an intent to sell the Pipeline Simulation assets. These assets as of December 31, 1997 were estimated to have a net carrying value of $4.3 million. As discussed in Note 10 of the Notes to Consolidated Financial Statements, on March 2, 1998, the Company announced the signing of a definitive binding agreement to sell the assets of the Pipeline Simulation business line to LIC. The transaction closed on May 1, 1998 resulting in consideration to the Company of $1.5 million in cash and the assumption by LIC of current obligations of $145,000. Based on fair market value estimates, the Company recorded a provision of $2.2 million to write down the carrying amounts of the Pipeline assets to estimated fair value less cost to sell. The Pipeline Simulation business line recorded sales of $2.5 million, $4.3 million, $4.5 million, $4.7 million and $7.5 million and contributed a net loss of $1.3 million, $.4 million, $1.4 million, $2.5 million and $.4 million in 1997, 1996, 1995, 1994 and 1993, respectively, excluding the provision for the loss of sale of Pipeline assets recorded in 1997. 7.3.13 YEAR 2000 ISSUE Many computer systems experience problems handling dates beyond the year 1999. Therefore, some computer hardware and software will need to be modified prior to the year 2000 in order to remain functional. The Company is assessing the internal readiness of its computer systems and the compatibility of its software products for handling the year 2000. Generally, the Company's software requires prediction through future time periods and as such major changes to the software are not required. The Company plans to devote the necessary resources to resolve all significant year 2000 issues in a timely manner. Costs associated with the year 2000 assessment and correction of problems noted are expensed as incurred. Based on management's current assessment, it does not believe that the cost of such actions will have a material effect on the Company's results of operations or financial condition. 7.4 STATEMENT OF CASH FLOWS 7.4.1 CASH FLOWS FROM OPERATING ACTIVITIES Comparison of 1997 to 1996. In 1997, net cash of $1.2 million was provided by operating activities. Net accounts receivable balances as a percentage of revenues declined from 30% in 1996 to 14% in 1997. In 1996, net cash of $1.8 million was provided by operating activities. The most significant reason was the receipt of $3.9 million related to a foreign consulting contract. See Section 7.3.6. Comparison of 1996 to 1995. In 1996, net cash of $1.8 million was provided by operations compared to net cash provided by operations of $2.7 million in 1995. Comparison of 1995 to 1994 In 1995, net cash of $2.7 million was provided by operations compared to net cash used in operations of $.6 million in 1994. Comparison of 1994 to 1993 In 1994, net cash of $.6 million was used in operations compared to net cash provided by operations of $1.7 in 1993. 7.4.2 CASH FLOWS FROM INVESTING ACTIVITIES Net cash of $2.6 million and $2.3 million was utilized in investing activities in 1997 and 1996 respectively. For the years 1997 and 1996, respectively, the Company incurred total software development and enhancement costs of $3.4 million and $2.9 million, of which $2.5 million and $2.0 million was capitalized and $.9 million and $.9 million was charged to expense as research and development costs. Net cash utilized in investing activities was $2.3 million in 1996 compared to $4.9 million in 1995. The Company incurred total software development and enhancement costs of $2.9 million and $5.5 million, of which $2.0 million and $4.8 million was capitalized and $.9 million and $.8 million was charged to expense as research and development costs, in the years of 1996 and 1995, respectively. Net cash utilized in investing activities was $4.9 million in 1995 compared to $5.2 million in 1994. The Company incurred total software development and enhancements costs of $5.5 million and $4.9 million, of which $4.8 million and $4.1 million was capitalized and $.8 million and $.8 million was charged to expense as research and development costs, in the years of 1995 and 1994, respectively. Net cash utilized in investing activities was $5.2 million in 1994 compared to $3.5 million in 1993. The Company incurred total software development and enhancements costs of $4.9 million and $4.3 million, of which $4.1 million and $3.1 million was capitalized and $.8 million and $1.1 million was charged to expense as research and development costs, in the years of 1994 and 1993, respectively. 7.4.3 CASH FLOWS FROM FINANCING ACTIVITIES In 1997, net cash of $.4 million was provided by financing activities which consisted primarily of cash of $.4 million received from the Company's borrowing against the Bank One revolving credit facility. In 1996, net cash of $1.9 million was provided by financing activities which consisted primarily of cash of $5.0 million received from the Lindner Funds financing in April 1996, offset in part by the use of part of such funds for full repayment of bank line of credit borrowings outstanding of $3.1 million, followed by additional borrowing of $750,000 under the new bank line of credit. The $750,000 was repaid in October 1996. The Company also used $1.9 million of the funds received in the Lindner Funds financing to reduce accounts payable. In 1995, net cash of $2.0 million was provided by financing activities which consisted primarily of cash of $2.6 million received from the Company's borrowing against Bank One revolving credit facility. In 1994, net cash of $6.3 million was provided by financing activities which consisted of $10.7 million of cash from the sale of the Company's stock and $1.1 million of cash from the Company's borrowing against revolving credit facility less $5.1 million repayment against the revolving credit facility. In 1993, net cash of $1.2 million was provided by financing activities which consisted of $0.5 million of cash from the Company's borrowing against revolving credit facility and $0.9 million of cash from the Company's issuance of a $1.0 million 7-year convertible debenture discussed in Note 4. 7.4.4 USE OF ESTIMATES AND ASSUMPTIONS The preparation of financial statements requires that management make certain estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingencies as of the date of the financial statements and the reported amounts of revenue, expenses, gains and losses during the reporting period. Actual results may vary from estimates and assumptions that were used in preparing the financial statements for any period, which may require adjustments that affect the results of operations in later periods. See Note 3 of the Notes to Consolidated Financial Statements contained herein. 7.4.5 INFLATION The Company's results of operations have not been affected by inflation and management does not expect inflation to have a significant effect on its operations in the future. 7.5 FORWARD-LOOKING INFORMATION From time to time, the Company or its representatives have made or may make forward-looking statements, orally or in writing. Such forward-looking statements may be included in, but not limited to, press releases, oral statements made with the approval of an authorized executive officer or in various filings made by the Company with the Securities and Exchange Commission. Words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project or projected", or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). The Company wishes to ensure that such statements are accompanied by meaningful cautionary statements, so as to maximize to the fullest extent possible the protections of the safe harbor established in the Reform Act. Accordingly, such statements are qualified in their entirety by reference to and are accompanied by the following discussion of certain important factors that could cause actual results to differ materially from such forward-looking statements. Investors should also be aware of factors that could have a negative impact on the Company's prospects and the consistency of progress in the areas of revenue generation, profitability, liquidity, and generation of capital resources. These include: (i) technological and market conditions in the oil and gas industry and software industry, (ii) possible inability of the Company to attract investors for its equity securities or otherwise raise adequate funds from any source, (iii) increased governmental regulation, (iv) unexpected increases in competition, (v) possible inability to retain key employees, (vi) unfavorable outcomes to litigation to which the Company may become a party. The risks identified here are not all inclusive. Furthermore, reference is also made to other sections of this report that include additional factors that could adversely impact the Company's business and financial performance. Moreover, the Company operates in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for Management to predict all of such risk factors, nor can it assess the impact of all such risk factors on the Company's business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS INDEPENDENT AUDITORS' REPORT 38 INDEPENDENT AUDITORS' REPORT 39 CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1997,1996 40 1995 (Restated), 1994 (Restated) AND 1993 (Restated) CONSOLIDATED STATEMENTS OF OPERATIONS FOR 42 THE YEARS ENDED DECEMBER 31, 1997,1996, 1995 (Restated), 1994 (Restated) AND 1993 (Restated) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) 43 FOR THE YEARS ENDED DECEMBER 31, 1997,1996, 1995 (Restated), 1994 (Restated) AND 1993 (Restated) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR 44 THE YEARS ENDED DECEMBER 31, 1997,1996, 1995 (Restated), 1994 (Restated) AND 1993 (Restated) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 46 CONSOLIDATED FINANCIAL STATEMENT SCHEDULE 74 All other schedules have been omitted because they are not applicable or the required information is shown in the consolidated financial statements or the notes thereto.
INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Scientific Software-Intercomp, Inc. Denver, Colorado We have audited the accompanying consolidated balance sheets of Scientific Software-Intercomp, Inc. and subsidiaries (the Company) as of December 31, 1997, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the years then ended. Our audits also included the financial statement schedule II as of and for the years ended December 31, 1997, 1996 and 1995. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1997, 1996 and 1995, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. In our opinion, the related financial statement schedule II, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about the entity's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from this uncertainty. As discussed in Note 2 to the financial statements, certain errors resulting in an overstatement of previously reported revenues and expenses for the year ended December 31, 1995 were discovered by the Company. Accordingly, the 1995 financial statements have been restated to correct the errors. /s/ Ehrhardt Keefe Steiner & Hottman PC April 7, 1998, except Note 2 for which the date is May 28, 1998, and except Notes 1 and 14 for which the date is June 17, 1998. Denver, Colorado INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Scientific Software-Intercomp, Inc. Denver, Colorado We have audited the accompanying consolidated balance sheets of Scientific Software-Intercomp, Inc. and subsidiaries (the Company) as of December 31, 1994 and 1993, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the years then ended. Our audits also included the financial statement schedule II as of and for the years ended December 31, 1994 and 1993. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1994 and 1993, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. In our opinion, the related financial statement schedule II, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about the entity's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from this uncertainty. As discussed in Note 2 to the financial statements, certain errors resulting in an overstatement of previously reported revenues and expenses for the year ended December 31, 1994 and 1993 were discovered by the Company. Accordingly, the 1994 and 1993 financial statements have been restated to correct the errors. /s/ Ehrhardt Keefe Steiner & Hottman PC July 1, 1998 Denver, Colorado
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) 1997 1996 1995 1994 1993 (Restated - (Restated - (Restated - Note 2) Note 2) Note 2) ASSETS Current assets Cash and cash equivalents $ 705 $ 1,870 $ 413 $ 602 $ 135 Accounts receivable, net of allowance for doubtful accounts of $881, $690, $3,301, $4,417, and $831 1,678 5,609 6,728 4,806 9,514 Work in progress (unbilled revenue) 1,707 2,785 2,210 4,778 2,377 Pipeline assets held for sale, net of provision of $2.2 million 1,350 - - - - Assets of discontinued division - - 704 1,614 1,145 Other current assets 502 530 410 933 722 Total current assets 5,942 10,794 10,465 12,733 13,893 Software, net of accumulated amortization and write-down of $36,798, $42,837, $40,943, $22,724 and $19,246 7,334 9,604 9,535 22,972 22,514 Property and equipment, net of accumulated depreciation and amortization of $4,261, $5,218, $5,839, $5,305, and $4,892 248 823 1,277 1,711 1,229 Assets of discontinued division - - 795 4,890 4,334 Other assets 1,354 1,487 2,114 2,468 2,177 $ 14,878 $ 22,708 $ 24,186 $ 44,774 $ 44,147 ========= ========= ============= ============= ============= LIABILITIES, REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities Current portion of senior secured notes payable $ - $ - $ 382 $ 286 $ 652 Line of credit 382 - 2,870 1,000 - Accounts payable 842 1,389 3,261 2,605 3,119 Accrued salaries and fringe benefits 729 1,070 1,003 1,248 2,680 Accrued lease obligations 5 260 375 570 403 Deferred maintenance and other revenue 2,101 2,421 2,472 1,839 2,159 Accrued royalties 698 731 589 485 761 Accrual for costs to complete a contract 72 200 189 18 20 Accrued taxes 153 282 161 260 363 Accrued litigation liabilities - 1,574 - - - Liabilities of discontinued division - - 515 434 640 Other current liabilities 1,207 597 1,740 547 333 Total current liabilities 6,189 8,524 13,557 9,292 11,130 Accrued lease obligations 61 79 333 720 1,128 Long-term obligations 611 568 557 603 5,402 Convertible debentures - - - - 3,500 Senior secured notes payable 6,500 6,500 1,629 1,750 - Redeemable preferred stock Series A redeemable convertible preferred stock, $5 par value; 1,200,000 shares authorized, 800,000 shares issued and outstanding 4,000 4,000 4,000 4,000 4,000 Commitments and contingencies Stockholders' equity (deficit) Common stock, no par value; $.10 stated value; 25,000,000 authorized, 8,878,000; 8,840,000; 8,256,000; 8,064,000; and 4,667,000 shares issued and outstanding 888 884 825 806 467 Paid-in capital 49,489 49,474 48,850 48,233 35,860 Accumulated deficit (52,182) (46,736) (44,970) (20,073) (16,708) Cumulative foreign currency translation adjustment (678) (585) (595) (557) (632) Total stockholders' equity (deficit) (2,483) 3,037 4,110 28,409 18,987 $ 14,878 $ 22,708 $ 24,186 $ 44,774 $ 44,147 ========= ========= ============= ============= ============= 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 1994 1993 -------- -------- ------------- ------------- ------------- (Restated - (Restated - (Restated - Note 2) Note 2) Note 2) Revenue Consulting and training $ 6,491 $12,863 $ 13,530 $ 14,131 $ 16,211 Licenses and maintenance 5,597 5,864 7,356 7,647 8,158 Other 304 277 566 436 501 -------- -------- ------------- ------------- ------------- 12,392 19,004 21,452 22,214 24,870 -------- -------- ------------- ------------- ------------- Costs and Expenses Costs of consulting and training 8,204 8,414 9,720 10,489 12,464 Costs of licenses and maintenance 2,356 3,636 5,103 5,137 2,144 Costs of other revenue 199 190 340 261 278 Selling, general, and administrative 3,886 6,604 10,768 8,753 7,810 Recovery of accounts receivable - (1,568) - - - Provision for sale of Pipeline assets 2,200 - - - - Software research and development 919 890 780 793 1,139 Reduction for capitalized software costs - - 13,926 - - -------- -------- ------------- ------------- ------------- Total costs and expenses 17,764 18,166 40,637 25,433 23,835 -------- -------- ------------- ------------- ------------- Income (Loss) from Operations (5,372) 838 (19,185) (3,219) 1,035 Other Income (Expense) Loss contingency (expense) reversal 414 (900) - - - Interest income 76 34 35 21 17 Interest expense (557) (357) (497) (404) (681) Foreign exchange gains (losses) 13 (85) 114 (84) (141) -------- -------- ------------- ------------- ------------- Income (Loss) Before Income Taxes (5,426) (470) (19,533) (3,686) 230 Income Taxes (Provision) Credit (20) 60 (200) (260) (375) -------- -------- ------------- ------------- ------------- Income (Loss) from continuing operations (5,446) (410) (19,733) (3,946) (145) Discontinued operations: Income (Loss) from operation of Kinesix division - (878) (5,164) 581 630 Loss on sale of Kinesix division - (478) - - - Net income (loss) $(5,446) $(1,766) $ (24,897) $ (3,365) $ 485 ======== ======== ============= ============= ============= Weighted Average Number of Common Shares Outstanding Basic 8,859 8,556 8,178 6,468 4,521 Income (Loss) Per Share: Continuing operations $ (0.61) $ (0.05) $ (2.41) $ (.61) $ (.03) Discontinued operations - (0.16) (.63) .09 .14 Net income (loss) $ (0.61) $ (0.21) $ (3.04) $ (.52) $ .11 ======== ======== ============= ============= ============= Diluted - - - - 5,678 Continuing operations - - - - (.02) Discontinued operations - - - - .11 Net income (loss) - - - - $ .09 ======== ======== ============= ============= ============= 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 ------ ------- -------- ------------- ------------- --------------- (Restated - (Restated - Note 2) Note 2) Balance, December 31, 1992 4,461 $ 446 $ 35,269 $ (17,193) $ (555) $ 17,967 Stock sold for cash 16 2 46 - - 48 Compensation, services and vendor payments 190 19 545 - - 564 Foreign currency translation adjustment - - - - (77) (77) Net income - - - 485 - 485 ------ ------- -------- ------------- ------------- --------------- Balance, December 31, 1993 4,667 467 35,860 $ (16,708) $ (632) $ 18,987 Stock sold for cash 2,667 267 10,471 - - 10,738 Conversion of convertible debentures into Common Stock 654 65 1,566 - - 1,631 Compensation and services 76 7 336 - - 343 Foreign currency translation adjustment - - - - 75 75 Net (loss) - - - (3,365) - (3,365) ------ ------- -------- ------------- ------------- --------------- Balance, December 31, 1994 8,064 806 48,233 (20,073) (557) 28,409 Stock sold for cash 65 6 224 230 Compensation and services 127 13 393 - - 406 Foreign currency translation adjustment - - - - (38) (38) Net (loss) - - - (24,897) - (24,897) ------ ------- -------- ------------- ------------- --------------- Balance, December 31, 1995 8,256 825 48,850 (44,970) (595) 4,110 Stock sold for cash 3 5 5 Conversion of convertible debentures into Common Stock 282 29 210 239 Compensation, services and vendors 299 30 409 439 Foreign currency translation adjustment 10 10 Net (loss) (1,766) (1,766) ------------- --------------- Balance, December 31, 1996 8,840 884 49,474 (46,736) (585) 3,037 Compensation, services and vendors 38 4 15 19 Foreign currency translation Adjustment (93) (93) Net (loss) (5,446) (5,446) ------------- --------------- Balance, December 31, 1997 8,878 $ 888 $ 49,489 $ (52,182) $ (678) $ (2,483) The accompanying notes are an integral part of the consolidated financial statements.
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) For the Year Ended December 31, 1997 1996 1995 1994 1993 (Restated - (Restated - (Restated - Note 2) Note 2) Note 2) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $(5,446) $(1,766) $ (24,897) $ (3,365) $ 485 Adjustments: Depreciation and amortization 2,670 2,653 4,845 4,293 3,832 Reduction in capitalized software costs - - 13,926 - - Contract cost accruals (reversals) - - - - (333) Changes in allowance for doubtful accounts (163) (1,057) 2,649 4,864 165 Stock issued for compensation - 30 - - 27 Loss contingency provision (reversal) (414) 900 - - - Provision for sale of Pipeline assets 2,200 - - - - Changes in operating assets and liabilities: (Increase) decrease in accounts receivable and work in progress 3,689 1,747 (2,021) (2,497) 342 (Increase) decrease in other assets 161 245 892 (12) (1,125) Decrease in accounts payable and accrued expenses (1,442) (479) (2,584 (2,701) (1,134) Decrease in accrued lease obligations (273) (369) (582) (241) (332) Increase (decrease) in deferred revenue 186 (51) 633 (320) (341) Net cash provided by (used in) continuing operations 1,168 1,853 (7,139) (21) 1,586 Net cash provided by (used in) discontinued operations - (28) 9,920 (547) 53 Net cash provided by (used in) operating activities 1,168 1,825 2,781 (526) 1,639 CASH FLOWS FROM INVESTING ACTIVITIES Capitalized software costs (2,483) (1,963) (4,766) (4,105) (3,149) Purchases of equipment (139) (288) (133) (1,140) (333) Net cash used in investing activities (2,622) (2,251) (4,899) (5,245) (3,482) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from sale of stock - 5 230 10,738 48 Net borrowing activity on line of credit 382 (2,870) 2,029 1,104 531 Repayments of bank borrowings - (262) - (5,132) (212) Proceeds from Senior Secured Notes - 5,000 - - - Proceeds from issuance of convertible debentures - - - - 921 Repayments of other obligations - - (292) (397) (44) Net cash provided by financing activities 382 1,873 1,967 6,313 1,244 Effect of exchange rates on cash (93) 10 (38) (75) 77 Net increase (decrease) in cash and equivalents (1,165) 1,457 (189) 467 (522) Cash and cash equivalents at beginning of year 1,870 413 602 135 657 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 705 $ 1,870 $ 413 $ 602 $ 135 ======== ======== ============= ============= ============= SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the year for: Interest $ 175 $ 388 $ 497 $ 437 $ 511 Foreign taxes 106 79 238 166 264 NON-CASH INVESTING AND FINANCING ACTIVITIES Obligations incurred in purchases of equipment - - - - 93 Conversion of convertible debenture to Common Stock - 250 - - - Conversion of accrued liabilities to equity 19 409 - - - Software and equipment purchased for stock - - - - 48 Accrued compensation and services paid in Stock - - 406 343 449 - - - ---------------------------------------------- -------- -------- ------------- ------------- ------------- The accompanying notes are an integral part of the consolidated financial statements.
NOTE 1 -BASIS FOR PREPARATION OF FINANCIAL STATEMENTS BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared on a going concern basis which contemplates the realization of assets and liquidation of liabilities in the ordinary course of business. The Company has suffered a significant loss from continuing and discontinued operations of $5,446 million in 1997 resulting in an accumulated deficit of $52,182 million at December 31, 1997. As discussed in Note 14 below, on June 17, 1998 the Company entered into an agreement and plan of merger pursuant to which a subsidiary of Baker Hughes Incorporated is to acquire the Company which would result in the acquisition of the Company's ongoing Exploration and Production Consulting (E&P Consulting) and Exploration and Production Technology (E&P Technology) businesses, subject to certain conditions. Closing of the acquisition is expected in the third quarter of 1998. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities except for the provision for the sale of the Pipeline Simulation business line that might be necessary should the Company be unable to continue in existence. NOTE 2 - RESTATEMENT OF FINANCIAL STATEMENTS As previously disclosed in various periodic reports of the Company filed with the Securities and Exchange Commission ("SEC"), the Company has received extensive comment letters from the Staff of the SEC on its Form 10-K for the year ended December 31, 1995, as well as other periodic SEC reports, and the financial statements included therein. The Company has also received a subsequent comment letter from the SEC Staff on its Form 10-K for the year ended December 31, 1997. As a result of procedures undertaken by the Company in responding to such comment letters, as well as the separate SEC investigation of the Company's disclosures and financial statements for the years ended December 31, 1995, 1994 and 1993 which was concluded as to the Company in September 1997, the Company has restated its financial statements for the years ended December 31, 1995, 1994 and 1993. Such adjustments are primarily attributable to the correction of items previously reflected in revenues which did not meet the criteria for recognition as revenue. Specifically, the transactions which were restated did not have a valid contract, or the software was not shipped, or a side letter existed which allowed the customer to defer payment based on a future contingent event. In addition, the December 31, 1995, 1994 and 1993 financial statements presented herein have been restated to reflect for comparability purposes the disposition by the Company of the Kinesix Division effective September 3, 1996 as discussed in Note 11 below. The December 31, 1995 financial statements included herein have been restated from those included in the previously filed reports as follows:
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) Loss per share (3.05) .01 - (3.04) Total Assets 23,912 274 - 24,186 Stockholders Equity $ 4,110 - - $ 4,110
NOTE 2 - RESTATEMENT OF FINANCIAL STATEMENTS (CONTINUED) The December 31, 1994 financial statements included herein have been restated from those included in the previously filed reports as follows:
As previously '94 Restate '94 Restated reported Adjustments Kinesix Financials --------------- ------------- --------- -------------- Revenue Consulting and training $ 15,038 $ 432 $ (1,339) $ 14,131 Licenses and maintenance 12,431 (2,838) (1,946) 7,647 Profit (Loss) from Operations (4,163) 1,525 (581) (3,219) Loss from continuing operations (4,890) 1,525 (581) (3,946) Net Loss (4,890) 1,525 - (3,365) Loss per share from continuing operations (.75) .23 (.09) (.61) Loss per share (.75) .32 (.09) (.52) Total Assets 44,544 106 124 44,774 Stockholders Equity $ 28,436 (27) - $ 28,409
The December 31, 1993 financial statements included herein have been restated from those included in the previously filed reports as follows:
As previously '93 Restate '93 Restated reported Adjustments Kinesix Financials --------------- ------------- --------- -------------- Revenue Consulting and training $ 17,696 $ (46) $ (1,439) $ 16,211 Licenses and maintenance 12,111 (1,244) (2,709) 8,158 Income from Operations 2,892 (1,227) (630) 1,035 Income from continuing operations 1,712 (1,227) (630) (145) Net Income 1,712 (1,227) - 485 Income per share from continuing operations .32 (.23) (.12) (.03) Income per share .32 (.09) (.12) .11 Total Assets 45,903 (1,591) (165) 44,147 Stockholders Equity 20,539 (1,387) (165) 18,987 Beginning Accumulated Deficit $ (16,868) $ (325) $ - $ (17,193)
NOTE 3 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS Scientific Software-Intercomp, Inc. ("the Company") develops and markets sophisticated software for the development and production and pipeline and surface facilities areas of the worldwide oil and gas industry. The Company also provides consulting and technical support services in each of these areas. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Scientific Software-Intercomp, Inc. ("the Company") and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated through consolidation. NOTE 3 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE The Company recognizes software license revenue pursuant to the American Institute of Certified Public Accountants Statement of Position ("SOP") 91-1 on delivery provided that a legally-binding licensing agreement containing all material terms has been fully executed, there are no remaining significant obligations and that collection of the resulting receivable is probable. In a contract where the remaining obligations are insignificant such as installation, training and testing, the allocable revenue is deferred and recognized upon completion of all obligations. The Company does not recognize any software revenue until all significant vendor obligations are met. Software maintenance revenue is recognized on a straight-line basis over the term of the contract. The Company adopted SOP 97-2 which was effective December 17, 1997. Pursuant to SOP 97-2, the Company enters into contracts separate of the software license agreements for all training and services related to the software sale. Beginning in 1991 the Company entered into certain combined software and service contracts pursuant to which the Company provides off-the-shelf software, combined with pipeline engineering services, relating to leak detection and operations analysis of pipeline networks. The engineering services provided pursuant to these contracts include analysis of the characteristics of the client's specific pipeline network and entering these characteristics into the Company's software. The Company also markets the off-the-shelf software for use by clients, as is, without the services included in these contracts. The Company measures progress-to-completion for combined software and services contracts on a value added output basis for the off-the-shelf software portion of the contracts when: (1) a license for the off-the-shelf software has been executed that is enforceable for the customary price of the Company's off-the-shelf software, (2) the off-the-shelf software has been installed on the project computer, and (3) the installed off-the-shelf software has been used for completing and providing to the client specifications for the engineering services on the project, which have been accepted by the client. The Company measures progress-to-completion for the engineering services portion of the contracts based on labor hours incurred. This accounting policy for contract revenue does not apply if programming changes must be made to the software. Contract costs are recognized based on the percentage of completion applied to total estimated project costs, resulting in a constant gross margin percentage over the term of the contract. Revenue earned in performance of time and material contracts is recognized at contractual rates as labor hours and associated costs are incurred. Fixed-price contract revenue is recognized using the percentage of completion method, calculated based on the ratio of labor hours incurred to total projected labor hours. Revenue accrued under time and material contracts is classified as work in progress on the Consolidated Balance Sheet if contractual milestones for billing have not been reached. Such amounts are later billed in accordance with applicable contract terms. The work in progress amounts at December 31, 1997 are expected to be billed and collected by December 31, 1998 except for those contracts in progress that will be assumed under the pending Pipeline asset sale agreement. Anticipated losses on contracts accounted for using the percentage of completion method are recognized at the time they are identified. Costs incurred for specific anticipated contracts are deferred when recoverability of the costs from the anticipated contract is determined to be probable. The Company's work-in-progress balance represents revenue earned and recognized for which billing milestones have not yet been reached. The revenue on these contracts is recognized using the percentage of completion method, and related qualifying software development costs are capitalized if the Company retains ownership and the right to market the developed software. NOTE 3 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Work in progress at December 31, 1994 includes $301,000 related to fixed price contracts for the development of software that is funded by others. The revenue on these contracts is recognized using the percentage of completion method, and related qualifying software development costs are capitalized if the Company retains ownership and the right to market the developed software. In accordance with Statement of Financial Accounting Standard (SFAS) 68 issued by the Financial Accounting Standards Board (FASB), the funded software development revenues do not include revenue for funded development software projects where the Company had a contractual obligation to refund all or part of the funding. For such contracts the Company records receipt of funds by recognizing an obligation to repay. CAPITALIZED SOFTWARE COSTS Capitalized software is stated at the lower of cost or net realizable value. The Company capitalizes costs of purchased software and qualifying internal costs of developing and enhancing its software products after the determination of technological feasibility, which includes the completion of a detail program design in accordance with paragraph 4a of SFAS No. 86. Development costs incurred prior to the determination of technological feasibility are expensed as research and development expense as incurred. At each balance sheet date, the Company records a writedown for any software products equal to the excess, if any, of unamortized cost over net realizable value. Net realizable value is the estimated future gross revenue for a product reduced by the estimated future costs of completion and disposal, including the costs of performing maintenance and customer support. Amortization of capitalized software costs is determined each year based on the greater of: (1) the amount computed using the ratio of current year gross revenue to the sum of current and anticipated future gross revenue for that product or (2) straight-line amortization. Through 1995, the Company amortized the capitalized software development costs of its stand-alone software products and related enhancements over a 13-year period and capitalized software development costs of Petroleum WorkBench and Sammi were amortized over a seven-year period. As discussed below, commencing January 1, 1996, the Company amortized all its capitalized software costs over a five-year period. At each balance sheet date, the unamortized capitalized costs of software products are compared to their estimated net realizable values on a product-by-product basis. Net realizable value is the estimated future gross revenue for a product reduced by the estimated future costs of completion and disposal, including the cost of performing maintenance and customer support. The carrying amount of a software product is written down by the amount, if any, by which the unamortized capitalized costs of a computer software product exceeds its net realizable value. The reduced amount of capitalized software costs that have been written down to net realizable value at the close of an annual fiscal period is considered to be the cost for subsequent accounting purposes, and the amount of the write-down is not subsequently restored. NOTE 3 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In the fourth quarter of 1995, the Company recorded a $17.9 million write-down of its software products, including an approximately $4.0 million write-down attributable to products of the Kinesix division disposed of in 1996 as discussed in Note 11, and changed the amortization period for all its software products to five years, commencing January 1, 1996. Various conditions and circumstances existing at December 31, 1995 made this write-down necessary, including the cumulative effects on the marketplace of the releases of Windows 95, Windows NT, and new, more powerful Pentium-based personal computers, which the Company concluded had changed the broad market for corporate computer systems and software. During 1995, the Company successfully released the Windows version of its WorkBench product, which incorporates the Company's core software products plus graphical and interactive features of a Windows environment, constituting a major breakthrough for the Company. The reaction from the marketplace was positive and by the last quarter of 1995, circumstances were in place that justified a fundamental decision for the Company to change its strategic emphasis to the personal computer market, instead of the previous emphasis of providing products for all segments of computer hardware mainframe, minicomputer, and personal computer markets. The circumstances existing in the fourth quarter of 1995 also included the positive reaction from clients in the latter part of 1996 to "WB Serve", a personal computer application that allows for the seamless transfer of compute intensive operations to servers and minicomputers. Circumstances existing in the fourth quarter of 1995 indicated that the access point of software users would be based on desktop 32 bit technology. The computing capacity of desktop computers had far surpassed any level that the Company had contemplated in any of its evaluations of capitalized software costs at previous balance sheet dates, and far surpassed the computing capacity of desktop computers that the majority of the computing industry had predicted. While previously, extremely large and complex software such as that of the Company could not have operated on other than mainframe or minicomputers, the personal computers that had then become available along with the continued enhancements of Distributed Compute Environments (DCE) made it possible to operate such software from desktop personal computers. Based on the foregoing circumstances that were in place at the end of 1995, under the leadership of its new president, Mr. George Steel, in January 1996 the Company concluded that the personal computer market would not only be another market for the Company's products--it would be the primary market. Accordingly, the Company decided to focus its future market and development activities on this new primary market. In connection with this shift in market direction, Mr. Steel also introduced several other specific management strategies. Previously, the Company had been striving to achieve aggressive revenue targets, many of which entailed making sales to new customers, many in widely dispersed international markets and in marketplaces with widely diverging computing platform environments. Mr. Steel's strategy was for the Company to focus on high quality performance in serving existing customers on Windows personal computer platforms. A significant effect of the above was to decrease the levels of revenue targeted and strived for. Cost reductions were necessary, primarily staff reductions and reductions in the level of planned development expenditures. Rapid change was necessary and these new strategies would result in a narrowing of the computer platforms on which the Company's products would be offered. Essentially, the entire Company was downsized and refocused. The overall effect of these new strategies resulted in lower projected future revenue streams that required the write-down of $17.9 million to the Company's capitalized software. Commencing January 1, 1996, the Company amortizes all its capitalized software costs over a five-year period. In the current environment of accelerating technological change, development languages and tools have changed significantly. It is now possible to create new and advanced code for the graphical and interactive aspects of software at a fraction of the time previously required. The Company decided to reduce the useful life used for amortization to five years to recognize the rapid change of these aspects of the software, which is common for software companies that provide software to the personal computer markets. The Company will continue to evaluate developments in technology and the marketplace in future periods for circumstances that might require additional reduction in the amortization period used for capitalized software costs. NOTE 3 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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, 1992 $ 31,552 $ 7,059 $ 38,611 1993 additions 2,406 743 3,149 --------------- ---------- --------- Balance December 31, 1993 33,958 7,802 41,760 1994 additions 2,768 1,337 4,105 Allocations to WorkBench (9,850) 9,850 - Retirements (167) - (167) --------------- ---------- --------- Balance December 31, 1994 26,707 18,989 45,696 1995 additions 3,245 1,521 4,766 --------------- ---------- --------- Balance, December 31, 1995 29,968 20,510 50,478 1996 additions 1,661 302 1,963 --------------- ---------- --------- Balance, December 31, 1996 31,629 20,812 52,441 1997 additions 1,224 1,259 2,483 --------------- ---------- --------- Balance, December 31, 1997 32,853 22,071 54,924 Pipeline Software Held for Sale (10,792) - (10,792) Net Balance, December 31, 1997 $ 22,061 $ 22,071 $ 44,132 =============== ========== ========= Accumulated Amortization: Balance December 31, 1992 $ 14,042 $ 1,809 $ 15,851 1993 amortization expense 2,370 1,025 3,395 --------------- ---------- --------- Balance December 31, 1993 16,412 2,834 19,246 1994 amortization expense 1,166 2,480 3,646 Retirements (167) - (167) --------------- ---------- --------- Balance December 31, 1994 17,410 5,314 22,724 1995 amortization expense 1,542 2,750 4,292 Reduction of capitalized software costs (net of a $4 million reduction attributable to the Kinesix Division - see Note 11) 8,197 5,729 13,926 --------------- ---------- --------- Balance, December 31, 1995 27,150 13,793 40,943 1996 amortization expense 603 1,291 1,894 --------------- ---------- --------- Balance, December 31, 1996 27,753 15,084 42,837 1997 amortization expense 789 1,407 2,196 Balance, December 31, 1997 28,542 16,491 45,033 Pipeline Software Accum. Amortization (8,235) - (8,235) --------------- ---------- --------- Net Balance, December 31, 1997 $ 20,307 $ 16,491 $ 36,798 =============== ========== ========= Software, net Balance, December 31, 1993 $ 17,546 $ 4,968 $ 22,514 Software, net Balance, December 31, 1994 $ 9,297 $ 13,675 $ 22,972 Software, net Balance, December 31, 1995 $ 2,818 $ 6,717 $ 9,535 Software, net Balance, December 31, 1996 $ 3,876 $ 5,728 $ 9,604 Software, net Balance, December 31, 1997 $ 1,754 $ 5,580 $ 7,334
NOTE 3 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The Company's working capital and cash requirements will continue to be influenced by the level of software research and development costs. During the years ended December 31, 1997, 1996, 1995, 1994 and 1993, the level of software research and development costs was, in the aggregate, $3.4 million, $2.8 million, $5.5 million, $4.9 million and $4.3 million, respectively. To reduce internal capital requirements for software development projects, the Company pursues opportunities to fund software research and development costs through development projects with oil and gas industry partners, government agencies and others. In this type of funded development project, participating companies or other entities provide all or a portion of the funds required to develop or enhance a software product in exchange for access to the resulting software at discounted or nominal prices with the Company retaining ownership and licensing rights to the product. In accordance with generally accepted accounting principles, the Company generally records as consulting revenue amounts received from these third parties and capitalizes the qualifying portion of related costs incurred as software development costs in accordance with SFAS No. 86. During 1995, the Company accounted for a funded software development project whereby the Company was obligated to repay the funds if the Company was not successful in its efforts to develop a product which met the specification of the third party. The Company recorded a liability and expensed the costs as incurred in accordance with SFAS No. 68. The Company capitalized interest costs of $100,000, $165,000, $109,000, $350,000 and $285,000 during the years ended December 31, 1997, 1996, 1995, 1994 and 1993, respectively, as part of the cost of software development projects in progress. PROPERTY AND EQUIPMENT Property and equipment are stated at cost, and depreciation is provided on a straight-line basis over the estimated useful lives of these assets. Maintenance and repairs are charged to expense as incurred. The cost and accumulated depreciation of property and equipment sold or otherwise disposed of are retired from the accounts and the resulting gain or loss is included in profit or loss in the period realized. Total depreciation expense was $474,000, $742,000, $568,000, $647,000 and $614,000 for the years ended December 31, 1997, 1996, 1995, 1994 and 1993, respectively. The Company assigns the following useful lives to Property and Equipment : Computer Software and Equipment: 3 to 5 years Leasehold Improvements: The lesser of 7 to 10 years or the remaining term of the lease. Office Furniture and Equipment: 3 to 10 years NOTE 3 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Following are the components of property and equipment:
December 31, 1997 1996 1995 1994 1993 -------- ------ ------ ------ ------ (In thousands) - - - ------------------------------------ Property and leasehold improvements $ 442 $ 450 $ 428 $ 401 $ 356 Office furniture and equipment 789 828 2,389 2,369 2,312 Computer equipment 4,776 4,763 4,299 4,246 3,453 -------- ------ ------ ------ ------ 6,007 6,041 7,116 7,016 6,121 Pipeline Assets Held For Sale (1,498) - - - - -------- ------ ------ ------ ------ $ 4,509 $6,041 $7,116 $7,016 $6,121 ======== ====== ====== ====== ====== Accumulated depreciation $ 5,519 $5,218 $5,839 $5,305 $4,892 Pipeline Accumulated Depreciation (1,258) - - - - $ 4,261 $5,218 $5,839 $5,305 $4,892 ======== ====== ====== ====== ====== Property and equipment, net of accumulated depreciation $ 248 $ 823 $1,277 $1,711 $1,229 ======== ====== ====== ====== ======
FOREIGN CURRENCY TRANSLATION Gains and losses from the effects of exchange rate fluctuations on transactions denominated in foreign currencies are included in results of operations. Assets and liabilities of the Company's foreign subsidiaries are translated into U.S. dollars at period-end exchange rates, and their revenue and expenses are translated at average exchange rates for the period. Deferred taxes have not been allocated to the cumulative foreign currency translation adjustment included in stockholders' equity because there is no intent to repatriate earnings of the foreign subsidiaries. INCOME TAXES The Company accounts for income taxes whereby deferred tax liabilities or assets are provided in the financial statements by applying the provisions of applicable tax laws to measure the deferred tax consequences of temporary differences that will result in net taxable or deductible amounts in future years as a result of events recognized in the financial statements in the current or preceding years. The types of differences between the tax basis of assets and liabilities and their financial reporting amounts that give rise to significant portions of the temporary differences include: software development expenditures capitalized for books and deducted currently for taxes and related amortization, depreciation of property and equipment, amortization of rental obligations, losses accrued for book purposes, the recognition of software license revenues, and goodwill determined for tax purposes that is not deductible. Investment tax credits are recognized using the flow-through method. Foreign subsidiaries are taxed according to applicable laws of the countries in which they do business. The Company has not provided U.S. income taxes that would be payable on remittance of the cumulative undistributed earnings of foreign subsidiaries because such earnings are intended to be reinvested for an indefinite period of time. At December 31, 1997, 1996, 1995, 1994 and 1993 the undistributed earnings of the foreign subsidiaries were not significant. NOTE 3 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INCOME (LOSS) PER SHARE Income (loss) per share, which is calculated in accordance with SFAS No. 128, Earnings per Share, is computed based on the weighted average number of common shares outstanding during each period. Diluted income per share assumes the effects of conversion of dilutive potential common shares. No potential common shares are included in the computation of diluted loss per share when a loss from continuing operations exists, and thus diluted income (loss) per share is not presented for 1997, 1996, 1995 and 1994. For 1993, diluted income per share assumes the effects of conversion of all potentially dilutive securities, including the convertible securities and outstanding stock options. CASH EQUIVALENTS For purposes of the consolidated financial statements, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. On occasion the Company will have balances in excess of the federally insured amount. LOAN ORIGINATION FEES AND COSTS Fees and direct costs incurred for the origination of loans are deferred and amortized over the contractual lives of the loans. DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS Carrying amounts of financial instruments including cash, cash equivalents, accounts receivable, accounts payable and accrued expenses, approximates fair value as of December 31, 1997, 1996, 1995, 1994 and 1993 due to their relative short maturity. Carrying amounts of debt issued approximates fair value as interest rates on these instruments approximates market interest rates at December 31, 1997, 1996, 1995, 1994 and 1993. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue, expenses, gains and losses during the reporting period. Use of estimates is significant with regard to capitalized software costs and the related amortization. Actual results may vary from estimates and assumptions that were used in preparing the financial statements for any period, which may require adjustments that affect the results of operations in later periods. PRIOR PERIOD RECLASSIFICATION Certain reclassifications of prior period balances have taken place to allow for proper comparison to the current period presentation. NOTE 3 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130), which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS No. 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Also, in June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131), which supersedes Statement of Financial Accounting Standards No. 14, "Financial Reporting for Segments of a Business Enterprise." SFAS No. 131 establishes standards for the way that public companies report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. SFAS No. 131 defines operating segments as components of a company about which separate financial information is available, that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. SFAS Nos. 130 and 131 are effective for financial statements for periods beginning after December 15, 1997 and requires comparative information for earlier years to be restated. Because of the recent issuance of the standards, management has been unable to fully evaluate the impact, if any, the standards may have on future financial statement disclosures. Results of operations and financial position, however, will be unaffected by implementation of these standards. NOTE 4 - FINANCING ARRANGEMENTS, LONG-TERM OBLIGATIONS AND NOTE PAYABLE UNITED STATES CREDIT AGREEMENTS Under the terms of the then existing bank credit agreement, in April 1996 the Company repaid the $2.9 million balance then owed pursuant to the previous line of credit, using proceeds from the Lindner and Renaissance Senior Secured Notes discussed below. In October 1996, the Company repaid the $750,000 balance owed pursuant to the new bank credit agreement at September 30, 1996. Effective April 16, 1997 the Company and Bank One agreed to extend the revolving credit facility through October 15, 1997. Due to the Company's improved cash position and decreased need for credit at that time, the revolving credit facility was decreased from $1.5 million to $.9 million. The collateral for the line is the Company's accounts receivables from non-U.S. domiciled customers to the extent necessary to collateralize the line. All receivables not necessary for the line and substantially all other assets except those of the Canadian subsidiary are collateral for the Lindner Dividend Fund ("Lindner") and Renaissance Capital Partners II, Ltd. ("Renaissance") senior secured notes. On October 30, 1997, the Company and Bank One agreed to change the terms of the April 16, 1997 agreement to: 1. Extend the maturity date to November 30, 1997, 2. Change the interest rate from the bank's prime rate of interest to the bank's prime rate of interest plus one (1) percentage point, and 3. Limit the principal amount of the line of the revolving credit facility to $650,000. NOTE 4 - FINANCING ARRANGEMENTS, LONG-TERM OBLIGATIONS AND NOTE PAYABLE (CONTINUED) On November 30, 1997, the Company and Bank One agreed to extend the maturity date to August 15, 1998 and to reduce the principal amount of the line of the revolving credit facility to $230,000 after March 15, 1998. The credit line of $230,000 would remain available only to secure certain standby letters of credit. Subsequently, Bank One agreed that the revolving credit facility could remain at $650,000 in consideration of the Company's agreement to repay the principal outstanding balance on May 1, 1998. The credit facility is supported by a guarantee from EximBank which reduces down as the credit line reduces and expires in full on August 15, 1998. The Company pays to EximBank an annual fee equal to 1.5% of the amount of the guarantee and is required to purchase credit insurance of foreign receivables at a cost of $.38 per hundred dollars of the amount of the insured receivables. The Company has not made a determination as to the filing of claims for insurance recoveries for uncollected foreign receivables. As of December 31, 1997, the amounts of short-term cash borrowings and letters of credit outstanding, and credit available under the revolving credit facility were as follows:
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. NOTE 4 - FINANCING ARRANGEMENTS, LONG-TERM OBLIGATIONS AND NOTE PAYABLE (CONTINUED) In addition, the Company has not made its interest payment due October, 1997 on the Lindner and Renaissance debt. Lindner and Renaissance have taken no action with respect to such defaults, and such defaults will be remedied by the agreements of Lindner and Renaissance discussed in Note 14 below if the pending sale of the Company to Baker discussed in Note 14 is completed. UNITED KINGDOM LINE OF CREDIT The term of a bank line of credit of the Company's United Kingdom subsidiary ended in May 1996 and the outstanding balance of $300,000 was repaid along with accrued interest. CANADIAN LINE OF CREDIT The term of a bank line of credit of the Company's Canadian subsidiary ended in May 1996. There were no outstanding borrowings under this facility. RENAISSANCE CONVERTIBLE DEBENTURES In 1992 the Company sold a $2.5 million 7-year convertible debenture to Renaissance Capital Partners II, Ltd. ("Renaissance") which bore interest at 11% per annum and was convertible into Common Stock of the Company at a conversion price of $2.50 per share. Interest was payable monthly with principal payments of $25,000 commencing October 1, 1995. In 1993 the Company sold a $1.0 million 7-year convertible debenture to Renaissance which bore interest at 11% per annum, payable monthly, and was convertible into Common Stock of the Company at a conversion price of $3.25 per share. Simultaneously with completion of the Company's 1994 public offering of Common Stock discussed below the Company agreed to change the conversion price of the $2.5 million and $1.0 million convertible debentures to $2.67, the average conversion price of both debentures. Renaissance then converted $1.75 million in principal amount of the $2.5 million convertible debentures into 653,846 shares of Common Stock. The outstanding balance of $1.75 million consisted of a balance of $750,000 on the original $2.5 million debenture and the $1 million debenture, all of which was convertible at $2.67 per share. The Company reduced paid-in capital by $119,000 for unamortized debt issuance costs related to the converted debentures. In February 1996, the Company and Renaissance agreed to change the conversion feature of the debentures so that the two debentures totaling $1.75 million in principal were convertible at $2.39 into 732,218 shares of the Company's no par Common Stock and made other minor changes in the debentures. In April 1996, Renaissance converted $250,000 of principal of the convertible debentures into 282,218 shares of the Company's Common Stock at a conversion rate of $.89 per share, which was the fair market value of a share of the Company's Common Stock on the date of conversion, and converted the balance of $1.5 million of principal of the convertible debentures into a senior secured note at 7% payable in five years and non-detachable five-year warrants to acquire 450,000 shares of the Company's Common Stock at an exercise price of $3.00 per share. The terms of the secured note and non-detachable stock purchase right are substantially the same as for those issued to Lindner Funds discussed below. The financing agreement with Renaissance with respect to the senior secured note requires that the Company satisfy certain financial covenants regarding operating results and financial condition. As discussed above, the Company is not in compliance with the loan covenants at December 31, 1997. Renaissance is also entitled to appoint an individual to participate in an advisory capacity to the Company's Board of Directors as long as $850,000 in principal amount of the senior secured note is outstanding. See Note 14 below for a discussion of the agreement by Renaissance to accept a discounted amount in satisfaction of the Company's obligation to Renaissance if the pending acquisition of the Company by Baker is completed. NOTE 4 - FINANCING ARRANGEMENTS, LONG-TERM OBLIGATIONS AND NOTE PAYABLE (CONTINUED) 1994 PUBLIC OFFERING OF COMMON STOCK On June 30, 1994 the Company sold 2.0 million newly issued shares of Common Stock in a public offering from which the Company received net proceeds of $8.1 million, net of related costs of approximately $270,000. The Company used the proceeds from the public offering to repay its bank indebtedness of $5.1 million, to reduce accounts payable and to increase working capital. In July 1994 the underwriters of the public offering exercised an overallotment option, resulting in the sale by the Company of 383,000 additional newly issued shares of Common Stock, from which the Company received net proceeds of approximately $1.6 million. Simultaneously with completion of the public offering, Renaissance Capital Partners II, Ltd. ("Renaissance") converted $1.75 million in principal amount of convertible debentures into shares of common stock which Renaissance sold in the public offering. As a result of the Renaissance conversion, the Company reduced paid-in capital by $119,000 for unamortized debt issuance costs related to the converted debentures. LINDNER FINANCING In April 1996 Lindner Dividend Funds ("Lindner"), then a 14% shareholder in the Company and, at December 31, 1997, a 20% shareholder, invested $5 million in the Company in exchange for a senior secured note at 7% payable in five years and non-detachable warrants to purchase 282,218 shares of the Company's Common Stock at an exercise price of $3.00 per share for five years. Also see Note 14 below. LONG-TERM OBLIGATIONS The components of long-term obligations are as follows:
December 31, 1997 1996 1995 1994 1993 ----- ----- ------ ------ ------ Note payable to bank due January, 1995 $ - $ - $ - $ - $5,028 Accrued lease costs 66 339 708 1,290 1,531 Deferred compensation 640 632 659 690 482 ----- ----- ------ ------ ------ 706 971 1,367 1,980 7,041 Less current portion 34 324 477 657 511 $ 672 $ 647 $ 890 $1,323 $6,530 ===== ===== ====== ====== ======
NOTE 5 - INCOME TAXES The components of the provisions for income taxes are as follows:
December 31, 1997 1996 1995 1994 1994 ------ ----- ------ ------ ------ Current: U.S. Federal $ - $ 12 $ - $ - $ (5) Foreign - 46 (200) (255) (354) State (20) 2 - (5) (16) $ (20) $ 60 $(200) $(260) $(375) ====== ===== ====== ====== ======
Following is a summary of United States and foreign pretax accounting income (loss):
For the year ended December 31, 1997 1996 1995 1994 1993 -------- ------ --------- -------- ------ United States $(4,156) $(473) $ (9,861) $(2,206) $(373) Foreign (1,270) 3 (9,672) (1,480) 603 $(5,426) $(470) $(19,533) $(3,686) $ 230 ======== ====== ========= ======== ======
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:
December 31, 1997 1996 1995 1994 1993 -------- ------ -------- -------- ------ Taxes at U.S. Federal $ - $(160) $(5,108) $ 1,071 $(710) statutory rate Federal alternative - minimum tax - 12 (753) 157 (5) Foreign pretax (income) loss) - - - 8 242 State income taxes (20) 2 - - (16) Foreign withholding and other foreign taxes - - 46 (200) (255) (354) U.S. net operating loss carry forward and Valuation allowances - - 245 5,861 (1,331) 569 Other, net - - (85) - 90 (101) $ (20) $ 60 $ (200) $ (260) $(375) ======== ====== ======== ======== ======
NOTE 5 - INCOME TAXES (CONTINUED) The components of deferred taxes in the balance sheets, which were fully eliminated by a valuation allowance, were as follows:
December 31, 1997 1996 1995 1994 1993 --------- -------- -------- --------- -------- (In thousands Taxable temporary differences: Capitalized software $ (3,758) $(3,649) $(3,770) $(10,132) $(7,031) (3,758) (3,649) (3,770) (10,132) (7,031) --------- -------- -------- --------- -------- Deductible temporary differences: Tax basis in excess of book basis of property and equipment 200 98 98 80 390 Allowance for doubtful accounts 334 91 179 1,644 173 Rent expense 25 89 134 328 373 Contract expense accruals - 59 119 - - Change in method of revenue recognition 60 Vacation pay and bonuses 110 202 175 184 356 Accrued contingent liabilities 105 567 35 33 - Provision for sale of Pipeline assets 836 - - - - --------- -------- -------- --------- -------- 1,610 1,106 740 2,269 1,352 Carryovers: Net operating losses 9,061 6,397 7,503 6,815 6,053 Research and other credits 3,200 3,704 3,344 2,917 2,325 12,261 10,101 10,847 9,732 8,378 --------- -------- -------- --------- -------- Net deferred tax asset 10,113 7,558 7,817 1,869 2,699 Valuation allowance (10,113) (7,558) (7,817) (1,869) (2,699) --------- -------- -------- --------- -------- $ 0 $ 0 $ 0 $ 0 $ 0 ========= ======== ======== ========= ========
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
NOTE 5 - INCOME TAXES (CONTINUED) In addition, the Company has net operating loss carryforwards for U.K. and Canadian income tax purposes of approximately $23 million and $1.6 million, respectively. Utilization of the Company's net operating loss carryforwards may be subject to limitations as a result of provisions of the Internal Revenue Code relating to the utilization of such losses after a change in ownership of the Company. See Note 14 below for a discussion of the pending acquisition of the Company by a subsidiary of Baker Hughes Incorporated. NOTE 6 - CAPITAL STOCK REDEEMABLE PREFERRED STOCK In April 1990, Halliburton Company ("Halliburton"), a major oil and gas services supplier, invested $3.0 million in a subordinated convertible debenture of the Company and received non-exclusive rights to market certain of the Company's new products and to incorporate them into Halliburton's product line. During June 1990, following approval by the Company's shareholders for the issuance of 600,000 shares of Series A redeemable preferred stock, par value $5.00 per share, the debenture was exchanged for 600,000 shares of Series A convertible preferred stock. The preferred stock was convertible into 600,000 shares of Common Stock. In September 1990 Halliburton invested an additional $1.0 million in a convertible debenture of the Company. In August 1991 the Company's shareholders authorized an additional 600,000 shares of preferred stock and Halliburton exchanged the $1.0 million debenture for 200,000 shares of such stock which were convertible into 200,000 shares of Common Stock. Redemption would have been at the greater of $5.00 per common share equivalent or the then market price for the Common Stock. In the consolidated balance sheets the preferred stock has been classified outside stockholders' equity in accordance with Rule 5-02.28 of Regulation S-X, which requires that preferred stock for which redemption may be required under any conditions beyond control of the issuer be classified outside of permanent equity. In 1994 the Company and Halliburton agreed to amend the conversion and redemption provisions of the 800,000 shares of the Company's preferred stock held by Halliburton. As amended, the preferred stock is convertible into 300,000 shares of the Company's Common Stock instead of 800,000 shares prior to the amendment. The Company continues to have the right to redeem the preferred stock at any time and also is obligated to do so on the tenth anniversary of the amendment if the preferred stock is still held by Halliburton. The preferred stock continues to not be entitled to receive or accrue dividends unless the Company pays dividends on its Common Stock, and, as before the amendment, no interest accrues on the mandatory redemption amount. Also, the joint venture of the Company and Halliburton for the development and marketing of reservoir monitoring technology and services was terminated and the Company received a non-exclusive license for the use of certain reservoir monitoring technology patents. Also see Note 14 below. STOCK OPTION PLANS The Board of Directors, at its discretion, may grant options to purchase shares of the Company's Common Stock to key employees, officers, and non-employee members of the Board of Directors. Prior to 1984 the options were non-statutory and either vested over a three-year period or were exercisable at any time for a five or ten-year period after the date of grant or at the date of amendment of the options. In 1984 the Company established an incentive stock option plan for key employees, pursuant to which options to purchase up to 350,000 shares of Common Stock were reserved for grant. NOTE 6 - CAPITAL STOCK (CONTINUED) In 1993 the Company adopted a stock option plan for non-employee directors. Pursuant to the plan, each non-employee director is granted an option to purchase 5,000 shares of Common Stock upon initial election to the board. Exercise prices are set at the fair market value of the Common Stock on the date of the grant. Upon re-election to the Board, for each year to be served, each non-employee director is granted an option to purchase 2,500 shares of Common Stock at an exercise price set at the fair market value on the date of the grant. Pursuant to this plan, options to purchase 5,000 shares at an exercise price of $.128 were issued in 1997; 10,000 options to purchase shares at an exercise price of $1.38 and 10,000 options to purchase shares at an exercise price of $.50 were issued in 1996. Following is a summary of stock option activity for:
Option Price (equal to Market Number Value at Date of Grant) ----------------------- of Weighted Shares Per Share Average Total ----------- --------------------- -------- ------------ Balance at December 31, 1992 854,388 $2.00 to $4.88 $ 4.15 $ 3,548,000 Grants 219,500 . 3.38 to 4.15 3.73 819,000 Expirations (32,500) 3.50 to 3.75 3.93 (128,000) Exercises (12,000) 2.00 to 3.50 2.92 (35,000) ----------- ------------ Balance at December 31, 1993 1,029,388 2.00 to 4.88 4.08 4,204,000 Grants 105,000 . 4.50 to 7.13 5.72 601,000 Expirations (50,109) . 3.13 to 4.88 4.11 (206,000) Exercises (285,019) 2.00 to 4.88 3.74 (1,067,000) ----------- ------------ Balance at December 31, 1994 799,262 2.00 to 7.13 4.42 3,532,000 Grants 95,000 . 2.25 to 5.00 2.49 236,000 Expirations (175,387) 2.00 to 6.38 4.11 (721,000) Exercises (63,750) 2.00 to 4.88 3.50 (223,000) ----------- ------------ Balance at December 31, 1995 655,125 2.00 to 7.13 4.31 2,824,000 Grants 814,209 . 2.25 to 5.00 1.47 1,197,000 Expirations (382,834) 50 to 7.125 4.08 (1,562,000) Exercises (2,500) 2.25 2.25 (6,000) Balance at December 31, 1996 1,084,000 50 to 6.375 2.27 2,453,000 Grants 896,000 .1275 to 2.000 1.02 914,000 Expirations (369,376), .50 to 4.875 2.77 (1,024,000) Exercises - - - - - ----------- ------------ Balance at December 31, 1997 1,610,624 $.1275 to $6.375 $ 1.45 $ 2,343,000 =========== ============ Number of shares exercisable: December 31, 1993 871,000 $2.00 to $4.88 $ 4.17 $ 3,632,000 =========== ============ December 31, 1994 661,000 $2.00 to $7.13 $ 4.33 $ 2,862,000 =========== ============ December 31, 1995 545,000 $2.00 to $7.13 $ 4.52 $ 2,463,000 =========== ============ December 31, 1996 480,000 $1.91 to $6.375 $ 3.17 $ 1,522,000 =========== ============ December 31, 1997 1,547,624 $.1275 to $6.375 $ 1.48 $ 2,290,000 =========== ============
Exercise prices of substantially all outstanding non-statutory options and all outstanding incentive stock options were set at the fair market value of the stock at the date of grant. No accounting recognition is given to options granted at exercise prices equal to fair market value at date of grant until they are exercised at which time the proceeds received by the Company are credited to Common Stock and paid-in capital. NOTE 6 - CAPITAL STOCK (CONTINUED) In February 1997 the Company entered into a stock option agreement granting to its Chief Executive Officer the right to purchase 600,000 shares of the Company's Common Stock through February 10, 2002. The exercise prices are 150,000 shares at $.50 per share, 150,000 shares at $1.00 per share, 150,000 shares at $1.50 per share, and 150,000 shares at $2.00 per share. An option previously granted to the Company's Chief Executive Officer to purchase 100,000 shares of the Company's Common Stock at an exercise price of $2.875 per share was canceled. STOCK BASED COMPENSATION The Company adopted SFAS No. 123, Accounting for Stock-Based Compensation, as of January 1, 1996, and such adoption is reflected with respect to the presentation herein of 1995 amounts. SFAS No. 123 allows for the Company to account for its stock option plans in accordance with Accounting Principles Board Opinion No. 25, under the intrinsic value method. The Company issued 896,000, 814,209 and 95,000 stock options to employees, directors and consultants during 1997, 1996 and 1995, respectively. The per-share weighted-average fair value of stock options granted in 1997, 1996 and 1995 was 855,000, 997,000, and 236,000, respectively. The following table sets forth certain information regarding stock options outstanding as of December 31, 1997:
Weighted- Average Weighted- Exercise Range of Number of Weighted- Average Number of Price of Exercise Options Average Remaining Options Exercisable Prices Outstanding Exercise Price Contractual Life Exercisable Options - - - --------------- ----------- --------------- ---------------- ----------- ------------ .1275 to $.50 484,000 $ .49 3.84 yrs. 461,000 $ .49 .51 to $1.00 280,000 $ .83 4.06 yrs. 250,000 $ .85 1.01 to $2.00 578,709 $ 1.72 3.99 yrs. 573,709 $ 1.72 2.01 to $6.375 267,915 $ 3.29 4.72 yrs. 262,915 $ 3.31 1,610,624 1,547,624 =========== ===========
The following table summarizes the difference between the fair value and intrinsic value methods and the proforma net loss and loss per share amounts for the years indicated had the Company adopted the fair value based method of accounting for stock-based compensation.
Year Ended (In thousands) December 31, December 31, December 31, 1997 1996 1995 --------------- -------------- -------------- 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: NOTE 6 - CAPITAL STOCK (CONTINUED)
Year Ended (In thousands) December 31, December 31, December 31, 1997 1996 1995 -------------- ------------- ------------- 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 The Company has a stock purchase plan, which was adopted in 1991, under which employees and consultants to the Company can elect to receive shares of Common Stock as payment for compensation, services and expenses. In 1997, 1995 and 1994, the Company did not issue any shares pursuant to this plan. In 1996 and 1993, the Company issued 18,000 shares and 30,000 shares, respectively, of its Common Stock pursuant to this plan. In addition, the Company issued separately as compensation to its former chief executive officer 15,000 shares of Common Stock in 1996 and 14,000 shares of Common Stock in 1993 in connection with the acquisition of a small technological software development company. The Company also has a noncontributory employee stock purchase plan for employees to purchase Common Stock through payroll deductions. No purchases were made under the employee stock purchase plan during 1997, 1996 and 1995. In 1994 and1993, the Company issued 3,000 shares, respectively, of its Common Stock pursuant to the employee stock purchase plan. NOTE 7 - RETIREMENT AND COMPENSATION PLANS The Company maintains a qualified target benefit retirement plan that covers substantially all of its U.S. employees. Such plan is a defined contribution plan and Company contributions, which subject to certain limitations the Company may satisfy through the issuance of its Common Stock, are based on percentages of employee compensation and are allocated to individual accounts for each employee. Employees may voluntarily supplement the Company's contribution to their accounts in amounts up to 10% of salary. Amounts charged to expense for Company contributions were $254,000, $182,000, $146,000, $221,000 and $228,000 in 1997, 1996, 1995, 1994 and 1993, respectively. In 1997, 1996, 1995, 1994 and 1993 the Company issued 2,000 shares, 179,000 shares, 78,000 shares, 17,000 shares and 53,000 shares, respectively, of its Common Stock pursuant to the target benefit retirement plan. The Company also has a non-contributory employee stock ownership plan that covers substantially all of its U.S. employees. Company contributions are determined by the Board of Directors and can be made in stock or cash. The Board of Directors determined that no contribution would be made for 1997 and 1996. In 1995, the Company accrued $125,000 contribution, which was paid in 1996 with approximately 56,000 shares of Common Stock. In 1995, the Company issued 39,000 shares of its Common Stock in satisfaction of a $200,000 contribution accrued in 1994. In 1993 the Company accrued a contribution of $180,000, which was paid in 1994 with approximately 37,000 shares of Common Stock. In 1993, the Company issued 47,000 shares of its Common Stock in satisfaction of a $159,000 contribution in 1992. The Company has similar retirement benefit plans, including employee stock ownership programs, covering employees of its foreign subsidiaries. The amount charged to expense for these plans was $139,000, $148,000, $229,000, $226,000 and $213,000 in 1997, 1996, 1995, 1994 and 1993, respectively, of which $27,000, $42,000, $56,000, $73,000 and $52,000 is included in accrued salaries and benefits at December 31, 1997, 1996, 1995, 1994 and 1993, respectively. The Company issued 36,000 shares, 31,000 shares, 10,000 shares, 19,000 shares and 57,000 shares of its Common Stock pursuant to these plans in 1997, 1996, 1995, 1994 and 1993, respectively. 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, 1993 ------------------------------------ (In Thousands) Consolidated ------------ U.S. U.K. Canada Total -------- ------ -------- -------- Revenue $13,466 $8,940 $ 2,464 $24,870 Income (loss) from continuing operations (421) 279 (3) (145) Identifiable assets 36,739 4,659 2,749 44,147
For the Year Ended December 31, 1994 ------------------------------------ (In Thousands) Consolidated ------------ U.S. U.K. Canada Total -------- ------ -------- -------- Revenue $12,689 $8,020 $ 1,505 $22,214 Income (loss) from continuing operations (3,881) 323 (388) (3,946) Identifiable assets 35,333 7,088 2,353 44,774
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
NOTE 8 - INFORMATION ABOUT OPERATIONS (CONTINUED) In 1995, the Company's foreign operations experienced an aggregate loss from operations of $9.8 million, which was primarily attributable to the write-down of capitalized software and bad debt provision allocable to foreign operations. See Note 13 below. The Company's loss from foreign operations in 1994 was primarily attributable to a bad debt provision of $1.4 million. U.S. export revenues by geographic area were as follows:
For the Years Ended December 31, 1997 1996 1995 1994 1993 ------ ------ ------ ------ ------ (In thousands) Far East $1,154 $1,512 $1,014 $2,315 $1,379 Central and South America 1,693 2,848 2,088 2,655 3,252 Europe - 909 810 914 585 Canada & Other 66 206 181 917 552 $2,913 $5,475 $4,093 $6,801 $5,768 ====== ====== ====== ====== ======
During 1997, 1995, 1994 and 1993, there was no single customer that accounted for 10% or more of the Company's revenue, the loss of which would have a material adverse effect on the Company's business. During the year ended December 31, 1996, the Company derived $2.3 million, or 12%, of its consolidated revenue from National Nigerian Petroleum Corporation. CONCENTRATIONS OF CREDIT RISK Most of the Company's clients are large, established U.S. and foreign companies (sometimes acting as government contractors), governments, and national oil and gas companies of foreign governments. Qualifying foreign receivables are insured, subject to a deductible loss amount, under an insurance policy with the Foreign Credit Insurance Association, an agency of the United States Export-Import Bank. The Company performs credit evaluations of its customers' financial condition when considered necessary and generally does not require collateral. At December 31, 1997, accounts receivable, net of doubtful accounts and work in progress, related to the following customer groups:
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 =============== ======== ======
NOTE 8 - INFORMATION ABOUT OPERATIONS (CONTINUED)
December 31, 1995: Companies $2,041 $5,105 $ 7,146 Governments and national petroleum companies 137 1,598 1,735 Government contractors 57 0 57 $2,235 $6,703 $ 8,938 ====== ====== ======= December 31, 1994: Companies $1,004 $4,725 $ 5,729 Governments and national petroleum companies 71 3,320 3,391 Government contractors 462 2 464 $1,537 $8,047 $ 9,584 ====== ====== ======= December 31, 1993: Companies $2,019 $4,565 $ 6,584 Governments and national petroleum companies 2 4,325 4,327 Government contractors 613 367 980 $2,634 $9,257 $11,891 ====== ====== =======
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, $1,400,000, $1,400,000 and $1,400,000 during 1997, 1996, 1995, 1994 and 1993, respectively. NOTE 10 - SALE OF THE ASSETS OF THE PIPELINE BUSINESS LINE During 1997, the Company's management and Board of Directors designed and implemented a plan to improve the Company's financial performance through a merger, alliance or sale of the Company and to divest the Company of underperforming assets. As part of this plan, the Company announced on January 5, 1998 an intent to sell the Pipeline Simulation assets. These assets as of December 31, 1997 were estimated to have a net carrying value of $4.3 million. NOTE 10 - SALE OF THE ASSETS OF THE PIPELINE BUSINESS LINE (CONTINUED) On March 2, 1998, the Company announced the signing of a definitive binding agreement to sell the assets of the Pipeline Simulation business line to LIC. The transaction which is expected to close on May 1, 1998 will result in consideration to the Company of $1.5 million in cash and the assumption by LIC of current obligations up to a maximum of $230,000. Based on fair market value estimates, the Company recorded a provision of $2.2 million to write down the carrying amounts of the Pipeline assets to estimated fair value less cost to sell. The Pipeline Simulation business line recorded sales of $2.5 million, $4.3 million and $4.6 million and contributed a net loss of $1.3 million, $.4 million and $1.4 million in 1997, 1996 and 1995, respectively, excluding the provision for the loss of sale of Pipeline assets recorded at December 31, 1997. Following is the schedule detail of assets and liabilities associated with the sale.
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 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, 1995, 1994 and 1993, the Company had no recorded insurance recoveries for uncollected foreign receivables. CLAIM FOR INDIAN GAS PIPELINE PROJECT COSTS Included in accounts receivable and long term assets for 1993 and 1994 were $175,000 and $470,000, totaling $645,000, related to a claim for costs incurred pursuant to a gas pipeline project in India for which the Company was a subcontractor. A dispute occurred between the contractor, a French and Japanese consortium, and the Indian customer, the national gas utility, over the amount to be paid to the consortium and in turn the amount to be paid to the Company by the consortium. In 1991 a settlement agreement was entered into by the Company with the consortium providing that, depending upon the amount collected by the consortium from the customer, the Company would receive on a proportionate basis up to $1.4 million. The Company was informed that thereafter very prolonged negotiations occurred between the consortium and the customer including negotiations on a government-to-government level. Current management understands that prior senior management believed as late as 1995, on the basis of a 1995 meeting with the consortium, that collection of the $645,000 was likely to occur in 1995 and accordingly prior senior management determined that no provision was required through fiscal 1993. The 1991 settlement agreement between the Company and the consortium also provided for the Company to perform additional work on the project for which it was subsequently paid $1,100,000, and the consortium also subsequently paid the Company $100,000 for assistance in preparing the consortium's claim against the Indian customer. In early 1996 in connection with the delayed completion of the audit of the Company's financial statements for 1994, management concluded that since collection of the $645,000 had not occurred in 1995, the 1994 financial statements should contain a full provision against such amount. Subsequently in 1996 in connection with the completion of the audit for 1995, management concluded that the $645,000 should be written off. The Company has recently been informed that the consortium may have settled its claim against the Indian customer but the Company has not been able to verify that a settlement has occurred, and has also not learned the terms of any settlement, and therefore the Company is not yet able to determine the amount the Company may receive. The WOLF CLASS ACTION LAWSUIT settlement was completed on May 23, 1997. The KINESIX EUROPE Arbitration was settled in February 1997. The SECURITIES AND EXCHANGE COMMISSION INVESTIGATION, as it pertained to the Company, was completed on September 11, 1997. The Company has received extensive SECURITIES AND EXCHANGE COMMISSION (SEC) COMMENT LETTERS. Following is a description of these issues: MARSHALL WOLF, ON HIS BEHALF AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED VS. E. A. BREITENBACH, R. J. HOTTOVY, JIMMY L. DUCKWORTH, AND SCIENTIFIC SOFTWARE-INTERCOMP, INC. On October 5, 1995, a claim was filed in the United States District Court of the District of Colorado alleging that the Defendants, who included the former President and Chief Executive Officer of the Company, its former Chief Financial Officer and a former Executive Vice President, violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10(b)-5 promulgated thereunder in issuing financial reports for the first three quarters of the Company's 1994 fiscal year which failed to comply with generally accepted accounting principles with respect to revenues recognized from the Company's contracts with value added resellers. The Plaintiff sought to have the Court determine that the lawsuit constituted a proper class action on behalf of all persons who purchased stock of the Company during the period from May 20, 1994 through July 10, 1995, with certain exclusions, and the Company did not contest whether the claim constituted a proper class action. NOTE 12 - CONTINGENCIES (CONTINUED) The Defendants and the Plaintiff initially reached agreement for settlement of the claim involving the payment of $1.1 million in cash, to be provided by the Company's liability insurer in a court-supervised escrow account, and the Company's issuance of warrants to purchase Common Stock exercisable at the market price of the stock at the time of completion of the settlement, with the number of warrants to be such that their aggregate value was $900,000. Subsequently, the settlement agreement was modified to eliminate the warrants and to provide for an additional $525,000 in cash, to be paid by the Company. The Company concluded that the foregoing settlement was in its best interests in view of the uncertainties of litigation, the substantial costs of defending the claim and the material amount of management time which would be required for such defense. The Company recorded a $900,000 loss contingency in the second quarter of 1996 relating to the proposed agreement for settlement of the Marshall Wolf claim in accordance with Question 1 of SEC Staff Accounting Bulletin Topic 5:Y. On May 23, 1997, the final approval of the fairness of the settlement was granted by the Court. The Company paid $525,000 in cash and reversed a net $315,000 of the loss contingency reserve of $900K after applying additional incurred legal costs. ARBITRATION NUMBER 70T 181 0038 96 D; KINESIX, A DIVISION OF SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND KINESIX (EUROPE) LTD., AN ENGLISH COMPANY - HOUSTON, TEXAS. The Company, through Kinesix, a Division of the Company, entered into a Territory Distributor Agreement with Kinesix (Europe) Ltd. ("KEL"), an unaffiliated entity located in London, U.K. The Distributor Agreement required under most circumstances a decision from the American Arbitration Association ("AAA") before its termination could be effective. On March 4, 1996 the Company commenced arbitration seeking declaration of termination of the Distributor Agreement and money due the Company for receivables outstanding as of December 31, 1995 of $296,000 for which the Company had fully provided an allowance for doubtful accounts. Thereafter, KEL in writing advised its customer base that it had ceased to trade in Kinesix products. As a result of this action by KEL and pursuant to the Distributor Agreement, the Company had declared the Distributor Agreement terminated without the requirement of arbitration. In the interim, on April 1, 1996 KEL filed an answer and counterclaim with the AAA and asserted damages that exceed $1 million without substantiation. On October 1, 1996, a panel of the AAA made an award in favor of KEL against the Company in the aggregate amount of $674,000 and the Company recorded an accrual for the loss contingency in the third quarter of 1996 in accordance with SFAS No. 5. Such award was totally unanticipated by the Company and its counsel. On October 21, 1996, the Company filed a petition in a Texas state court seeking to have the award vacated on the grounds that the arbitrators erroneously denied the Company's request for a postponement of the arbitration hearing which prejudiced the Company in view of the claimant's failure to meet its obligation to disclose material testimony to be given at the hearing and that the arbitrators made a gross mistake of law in failing to apply a release and waiver given by the claimant following its knowledge of the complained of acts of the Company. The award in favor of KEL was settled in February 1997 for $575,000. The Company recognized an expense for the amount of the $674,000 award, which has been included in the loss from operation of the discontinued Kinesix Division for the year ended December 31, 1996, and included a liability of $674,000 in the December 31, 1996 balance sheet as part of other current liabilities. The Company recorded a credit to expense of $99,000 in the first quarter of 1997, representing the difference between $575,000 and the previously accrued amount of $674,000. SECURITIES AND EXCHANGE COMMISSION INVESTIGATION. On September 11, 1997, the Company resolved the investigation by the Securities and Exchange Commission ("SEC") of the Company's disclosures and financial statements for the years ended December 31, 1993, 1994 and 1995. Without admitting or denying any of the allegations of the SEC, the Company settled the matter by consenting to the entry of a permanent injunction prohibiting future violations by the Company of Section 17(a) of the Securities Act of 1933, and Sections 10 (b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder and to an order to restate the Company's financial statements for the years ended December 31, 1993, 1994 and 1995. The SEC staff has advised the Company that, with the entry of the permanent injunction, the investigation into this matter as to the Company has been concluded. SECURITIES AND EXCHANGE COMMISSION COMMENT LETTERS. The Company has received extensive comment letters from the Staff of the Securities and Exchange Commission ("SEC") on its Forms 10-K for the year ended December 31, 1995 and 1997 and on its Forms 10-Q for the quarters ended March 31, 1996 and June 30, 1996 and the financial statements included therein. See Note 14 for a discussion of the Company's responses to such comment letters. NOTE 13 - CERTAIN NON-RECURRING CHARGES In January 1996 the Company appointed George Steel as president and chief operating officer. Following this change, Mr. Steel and management undertook a review of the Company's policies regarding capitalized software costs, bad debt reserves and expense accruals. As a result of this review, the Company made the following adjustments in the fourth quarter of 1995, which are discussed under corresponding subheadings below.
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) ============== =========== ============== ============== ==========
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS REDUCTION OF CAPITALIZED SOFTWARE COSTS The Company concluded that it had not been realizing an adequate return on its capitalized software development costs; that the rate of technological change applicable to the Company's software products was accelerating; and that accordingly the value of its capitalized software was impaired. As a result the Company made a one-time reduction of the carrying value of capitalized software costs by $17,917,000 effective December 31, 1995. The $17,917,000 capitalized software development cost reduction was determined by an evaluation of each of the Company's principal software products. The evaluation included a projection of the future revenue streams from the products with those projected revenue streams adjusted using historical variance factors derived from previous forecasts. The revenue streams were also reduced to reflect normal costs of developing, maintaining and marketing software in order to project a reasonable return to the Company on its software investment. In addition to the one-time reduction of capitalized software development costs, the Company reduced the estimated useful lives of its capitalized software from 7-13 years to a new life, beginning in 1996, of 5 years. Such a reduction in useful life reflects the anticipated increase in technological change along with an anticipated continued requirement of the Company to expend significant funds for software development in order to remain competitive in its marketplace. As part of the downsizing and refocusing of the Company, management began allocating reduced amounts of funds to software development activities by comparison to past years. Management estimates that resources to be allocated to software development will be in the range of $2 million to $3 million annually in the immediate term. Since this approximates the current rate of annual amortization expense, management does not expect the net carrying value of capitalized software to increase significantly in the foreseeable future. NOTE 13 - CERTAIN NON-RECURRING CHARGES (CONTINUED) INCREASE IN BAD DEBT RESERVE PROVISION During late 1995 and early 1996 the Company established a policy that required stringent review of accounts receivable over six months old. As a result of this new policy, in the fourth quarter of 1995 the Company increased its 1995 provision for doubtful accounts by $2,537,000, The Company determined that the chance was remote that it would be able to collect accounts receivable of $3,455,000 and thus as of December 31, 1995 had written off such amounts. The corresponding provision for doubtful accounts of $3,301,0000 almost entirely consists of transactions recognized in 1995, including $1,561,000 from a foreign consulting project and $487,000 from a software sale on which the payments have been significantly delayed. The $1,561,000 was collected by the Company in the third and fourth quarters of 1996 after renewed efforts to collect the outstanding balance. EXPENSE ACCRUALS AND OTHER ADJUSTMENTS Also in the fourth quarter of 1995, the Company made various expense accruals and other adjustments totaling $1,625,000. A total of $853,000 for various expense accruals was comprised primarily of non-recurring audit and legal fees in the amounts of $351,000 and 170,000, respectively, which were primarily attributable to adjustments to reflect obligations for prior services rendered by the Company's auditors and legal counsel, the re-audit of the Company's 1994 financial statements by new auditors after the resignation of the Company's prior auditors in June 1995 after performing a substantial amount of audit work with respect to the 1994 financial statements, and various legal and regulatory matters for which the Company required the services of legal counsel. As a result of the Company's review of the status of various consulting and software contracts, the Company accrued a liability as of December 31, 1995 for the reimbursement of $200,000 in funds provided by a third party for a funded development project for which all features to be provided by the Company were not then developed and for which the party in the fourth quarter of 1995 demanded reimbursement. Further, in the fourth quarter of 1995 the Company recorded a $130,000 provision for costs to complete a Pipeline Simulation project which as a result of project tests in October 1995 the customer indicated that further work was necessary to complete the project, and accrued $70,000 for costs to complete a project for which the customer demanded in the fourth quarter of 1995 additional work on certain aspects of the project. The Company also wrote off in the fourth quarter of 1995 $272,000 in capitalized software costs attributable to a Pipeline Simulation software product which the Company concluded that it could not fund to completion as a result of strategic product line decisions and the reduced availability of internally-generated funds, and $100,000 in unbillable costs attributable to a project in Spain with respect to which correspondence from the vendor beginning in the fourth quarter of 1995 indicated that payments would not be made. 1996 AND 1997 STAFF REDUCTION PLANS In 1996, the Company took steps to reduce costs and implemented a staff reduction plan pursuant to which the Company terminated in 1996 ten employees who were in the E&P Technology and administrative employee groups. As of December 31, 1996, the Company had accrued severance costs in the total amount of $101,000 for such plan and was included in selling, general and administrative expense, and paid in 1996. In 1997, the Company implemented a second staff reduction plan pursuant to which the Company terminated in 1997 eight employees who were employees in the E&P Technology and administrative employee groups. The Company accrued termination costs in the total amount of $172,000, all of which was included in selling, general and administrative expense, and none of which was paid as of December 31, 1997. NOTE 14 - SUBSEQUENT EVENTS ACQUISITION OF THE COMPANY On June 17, 1998, the Company entered into an agreement and plan of merger pursuant to which a subsidiary of Baker Hughes Incorporated will acquire the Company, subject to certain conditions. The acquisition does not include the separate sale of the assets of the Company's Pipeline Simulation Business to LIC as discussed in Note 10, which sale closed on May 1, 1998. The agreement and plan of merger provides that the shareholders of the Company's Common Stock would receive $.44 per share in consideration for the acquisition. In connection with the acquisition, the Company's senior secured lenders, Lindner and Renaissance have agreed to accept discounted payments of $1.4 million and $1.3 million respectively in satisfaction of the outstanding $6.5 million principal plus accrued interest and other obligations owed by the Company to the lenders. Halliburton has agreed to accept $2.5 million in cash in exchange for its $4.0 million preferred stock holding in the Company. The acquisition is subject to customary conditions as well as the approval of the Company's common shareholders. Closing of the acquisition is expected in the third quarter of 1998. SEC COMMENT LETTERS The Company believes that it completed in June 1998 the process of providing responses to the SEC comment letters referred to in Note 12, as well as an additional SEC comment letter received by the Company in June 1998. With the filing of the audited restated 1994 and 1993 financial statements included herein and discussed in Note 2 with the SEC as part of an amendment to the Company's 1997 Annual Report on Form 10-K, the Company believes that all financial accounting and disclosure issues raised in the SEC comment letters will be resolved. FINANCIAL STATEMENT SCHEDULES
SCHEDULE II SCIENTIFIC SOFTWARE-INTERCOMP, INC. VALUATION RESERVES Deductions Additions (Write-offs of Balance at Charged to Previously Balance at Beginning Costs and Reserved End of of Period Expenses Amounts) Period ----------- ---------------- ------------ ----------- Allowance for doubtful accounts: Year Ended December 31, 1997 $ 690,000 $ 308,000 $ (117,000) $ 881,000 =========== ================ ============ =========== Allowance for doubtful accounts: Year Ended December 31, 1996 $ 3,301,000 $ (1,057,000) $(1,554,000) $ 690,000 =========== ================ ============ =========== Allowance for doubtful accounts: Year Ended December 31, 1995 $ 4,417,000 $ 2,649,000 $(3,765,000) $ 3,301,000 =========== ================ ============ =========== Allowance for doubtful accounts: Year Ended December 31, 1994 $ 831,000 $ 5,452,000 $(1,866,000) $ 4,417,000 =========== ================ ============ =========== Allowance for doubtful accounts: Year Ended December 31, 1993 $ 682,000 $ 165,000 $ (16,000) $ 831,000 =========== ================ ============ ===========
Note: In 1996, the net credit to bad debt expense of $1,057,000 consists of expense charges of $541,000 reduced by credits to bad debt expense for recovery of accounts previously reserved of $1,598,000. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. During the Company's two most recent fiscal years and through the date of the filing of this report, there have been no changes in and disagreements with the Company's accountants on matters of accounting and financial disclosure. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information regarding the Company's directors and executive officers is set forth in Part 1 Item 1 of this report under the caption "Management." Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934, requires the Company's officers and directors and persons who own more than 10% of a registered class of the Company's equity securities to file reports of ownership on Form 3 and changes in ownership on Form 4 or 5 with the Securities and Exchange Commission. Such officers, directors, and 10% shareholders are also required by Commission rules to furnish the Company with copies of all Section 16(a) reports they file. Based solely on its review of the copies of such forms received by it or written representations from certain reporting persons, the Company believes that, during the year ended December 31, 1997, all Section 16(a) filing requirements applicable to its officers, directors, and 10% stockholders were satisfied on a timely basis. In making these statements, the Company has relied upon the written representation of its officers and directors. ITEM 11. EXECUTIVE COMPENSATION The following table summarizes the total compensation awarded to, earned by, or paid for services rendered to the Company in all capacities during 1997, 1996 and 1995, respectively, by the "Named Executive Officers" who include (i) the Company's President and Chief Executive Officer, (ii) each of the Company's three most highly compensated executive officers other than its Chief Executive Officer who were serving as officers of the Company as of December 31, 1997 and whose annual salary and bonus for 1997 exceeded $100,000, and (iii) the two individuals who would have been in the group of three most highly compensated officers other than the Chief Executive Officer as of December 31, 1997 but for the fact that they were not serving as executive officer at that time.
SUMMARY COMPENSATION TABLE Long-Term Compensation ------------------------------------------- Awards Payouts ------------------------ Annual Compensation Restricted ------------------------------- Other Annual Stock All Other Name and Salary Bonus Compensation Award(s) Options/ Compensation Principal Position Year ($) ($) ($) ($) SARs(#) ($) Total - - - -------------------------- ---- -------- ------- ------------- -------- --------- ------------- ------- George Steel(1) 1997 199,999 0 0 0 600,000 0 199,999 President and 1996 162,500 0 0 0 110,000 0 162,500 Chief Executive Officer 1995 0 0 0 0 0 0 0 - - - -------------------------- ---- -------- ------- ------------- -------- --------- ------------- ------- Robert G. Parish(2) 1997 156,992 0 0 0 25,000 0 156,992 Executive Vice President, 1996 146,485 28,074 0 0 7,000 0 174,559 Exploration & 5,715(3) Production 1995 142,876 0 0 0 10,000 7,641(4) 156,232 Consulting - - - -------------------------- Gordon L. Scheig 1997 76,750 0 52,195 0 25,000 0 128,945 Vice President, 1996 70,625 0 100,500 0 6,000 0 171,125 Sales - America 1995 75,000 3,637 29,096 0 0 0 107,733 Peter C. Colonomos 1997 89,999 0 23,204 0 0 0 113,203 Vice President, 1996 71,242 6,090 33,902 0 0 0 111,234 E&P Consulting 1995 0 0 0 0 0 0 0 Sales-South America Dag G. Heggelund 1997 112,625 0 0 0 25,000 0 112,625 Vice President, 1996 101,708 5,000 0 0 10,000 0 106,708 WorkBench 1995 87,176 4,550 5,750 0 7,500 0 97,476 Development (1) George Steel joined the Company January 15, 1996. (2) Robert G. Parish was terminated on April 17, 1998. (3) Executive perquisite allowance. (4) U.K. auto allowance. (5) Peter C. Colonomos resigned from the Company in January 1998. (6) Dag G. Heggelund resigned from the Company in February 1998.
Executive Compensation Policies The Company's policy regarding base salaries for senior executives recognizes each individual's levels of responsibility, and his contribution toward the success of his respective area of responsibilities and to the Company in general. All senior executives have significant experience in the oil and gas industry and most have advanced degrees. Accordingly, the Company uses oil and gas industry data and professional association data, as well as data from companies included in the Standard & Poor's Energy Composite Index used to prepare the Performance Table below, to ensure that base salaries are competitive within the Company's industry. Due to the Company's current financial performance and condition, which raise doubt as to whether the Company will be able to continue as a going concern, the Company does not at this time have a general policy for increases in executive compensation or bonuses which are linked to the Company's financial performance and does not expect to establish such a policy until such time as the Company is able to return to profitability and financial stability. Prior thereto, any executive compensation increases will be granted only in the event of material increases in an executive's responsibilities and performances based upon an evaluation of each individual executive. In addition to the base salary and bonus plan, the Company established guidelines in 1991 for the award of stock options to senior executives and other key employees. These guidelines are reviewed each year by management to determine if additional stock options should be granted to senior executives and key contributors. Stock options with respect to an aggregate of 625,000 shares were issued to senior executives during 1997. Included in such option grants was the issuance to George Steel, the Company's Chief Executive Officer, of an option to acquire 600,000 shares in exchange for a previously issued option as described under the "Stock Option Repricing/Exchange" caption below. The foregoing restructuring of Mr. Steel's stock option was approved in light of the adverse effect on the market price for the Company's Common Stock of circumstances in the Company occurring prior to Mr. Steel's employment and for the purpose of providing for him an incentive with respect to the Company's subsequent performance. Edward O. Price, Jr., member of the Compensation Committee William B. Nichols, Member of the Compensation Committee Compensation of Directors For attendance at Board of Directors meetings during the year ended December 31, 1997, Edward O. Price, Jr. and William B. Nichols were compensated in the amount of $4,000 each. Directors did not receive any option grants during 1997 other than Jack L. Howard who, upon becoming a Director during 1997, received an option to purchase 5,000 shares of Common Stock at $.128 per share, representing the public trading market price of the Common Stock at that time. The following table summarizes the individual grants of stock options made during the last completed fiscal year to each of the Named Executive Officers.
Option/SAR Grants in Last Fiscal Year Individual Grants ----------------- Number of Percent of Exercise Expiration Grant Date securities total or base date(1) present underlying options/SARs price VALUE $(2) Options/SARs granted to ($/Sh) Name granted (#) employees in fiscal year (a) (b) (c) (d) (e) (f) - - - ------------------- ------------- ------------- ---------- ----------- ------------ George Steel 150,000 16.7% $ .50 2/10/02 $ 63,000 ------------- ------------- ---------- ----------- ------------ 150,000 16.7% $ 1.00 2/10/02 61,000 ------------- ------------- ---------- ----------- ------------ 150,000 16.7% $ 1.50 2/10/02 60,000 ------------- ------------- ---------- ----------- ------------ 150,000 16.7% $ 2.00 2/10/02 59,000 ------------- ------------- ---------- ----------- ------------ Robert G. Parish 25,000 2.8% $ .50 7/21/98 15,000 ------------- ------------- ---------- ----------- ------------ Gordon L. Scheig 25,000 2.8% $ .50 2/10/02 12,000 ------------- ------------- ---------- ----------- ------------ Peter C. Colonomos 25,000 2.8% $ .50 4/20/98 12,000 ------------- ------------- ---------- ----------- ------------ 3,000 .3% $ .63 4/20/98 2,000 ------------- ------------- ---------- ----------- ------------ Dag G. Heggelund 25,0000 2.8% $ .50 6/2/98 12,000 - - - ------------------- ------------- ------------- ---------- ----------- ------------ (1)Employee options generally have five year terms, but terminate 95 days after the termination of employment. The employment of Robert G. Parish, Peter C. Colonomos and Dag G. Heggelund terminated in April, January and February of 1998, respectively. (2)Based on the Black-Scholes option-pricing model using the assumptions for 1997 set forth in Note 6 of the Notes to Consolidated Financial Statements.
The following table sets forth certain information regarding the stock options held as of December 31, 1997 by the Named Executive Officers: AGGREGATED FISCAL YEAR END OPTIONS VALUES
Number of Unexercised Options at Fiscal Year End (#) ------------------- Name Exercisable Unexercisable ----------- ------------- George Steel 610,000 0 Gordon L. Scheig 31,000 0 Peter C. Colonomos 0 0 Robert G. Parish 78,500 2,500 Dag G. Heggelund 42,500 0
There were no exercises of stock options by any of the Named Executive Officers during the last completed fiscal year. Based on the closing bid quotation of $.125 per common share on December 31, 1997, none of the unexercised options held by the Named Executive Officers was in-the-money as of December 31, 1997. STOCK OPTION REPRICING/EXCHANGE The Company's Board of Directors authorized the grant to George Steel effective January 3, 1997 of an option to acquire in the aggregate 600,000 shares of the Company's common stock at exercise prices of (i) $.50 per share, which was the per share fair market value of the Company's common stock on the date of the grant, with respect to 150,000 shares, (ii) $1.00 per share with respect to 150,00 shares, (iii) $1.50 per share with respect to 150,000 shares, and (iv) $2.00 per share with respect to 150,000 shares. The option agreement for this grant provided for the cancellation of the option to acquire 100,000 shares of the Company's common stock at an exercise price of $2.875 per share granted to Mr. Steel in January 1996. The following table sets forth certain information regarding all repricings of options held by any executive officer of the Company during the last ten fiscal years: Ten Year Option Repricings
Securities Length of underlying Market price of Exercise price original number of stock at time of at time of New exercise Option term Name Date options/SARs repricing or repricing or price ($) Remaining repriced or amendment ($) amendment ($) at date of amended (#) repricing or Amendment (a) (b) (c) (d) (e) (f) (g) - - - -------------------- --------- ------------- ------------------ ---------------- ------------- ------------- George Steel, President and Chief Executive Officer 01/03/97 100,000 $ .50 $ 2.875 * 4 years --------- ------------- ------------------ ---------------- ------------- -------------
*See the discussion immediately above for applicable exercise prices with respect to the option for which the original option was exchanged. The Company does not have any defined benefit or actuarial plan under which benefits are determined primarily by final compensation (or average final compensation) and years of service. Employment, Termination of Employment and Change-In-Control Arrangements In connection with the commencement in January, 1996 of the employment of George Steel as President of the Company the Company agreed that if there is a change in control of the Company and if as a result thereof the employment of Mr. Steel is terminated without cause or he resigns his employment, the Company will (a) pay to him as severance one year's salary at the time of his employment termination, (b) reimburse him for any loss realized on the sale of his home in Denver, Colorado which he purchased in connection with the commencement of his employment if such sale is necessitated as a result of a change in his place of employment, (c) reimburse him for all out-of-pocket expenses reasonably incurred for the relocation of his residence to Scotland (Mr. Steel's place of birth) if such relocation occurs, and (d) include him and his dependents within the Company's medical benefits plan for one year following such employment termination. In November, 1997, in order to obtain the continued services of Mr. Steel as President and Chief Executive Officer of the Company, the Company agreed that his annual compensation would continue at the rate of $200,000 per year, which was his initial rate of compensation when first employed, and that to the extent he had accepted a lesser rate of compensation during prior periods, the underpayment would be restored. The Company also agreed that if Mr. Steel's employment with the Company continued until at least June 1, 1998, he would receive upon any subsequent termination of his employment, other than a termination for cause, a severance payment of $50,000. Such $50,000 severance payment will not however be paid if Mr. Steel receives the one year's annual salary severance payment described above applicable to a change of control. It is not known at this time how the acquisition of the Company by Baker, if completed, will affect Mr. Steel's employment and accordingly the application of the foregoing severance arrangements is uncertain. Compensation Committee Interlocks and Insider Participation The members of the Compensation Committee of the Company's Board of Directors are Edward O. Price, Jr. and William B. Nichols. No member of the Compensation Committee was at any time during 1997 or at any other time an officer or employee of the Company. No executive officer of the Company serves as a member of the Board of Directors or compensation committee of any entity which has one or more executive officers serving as a member of the Company's Board of Directors or Compensation Committee. Performance Table The following table compares the Company's cumulative total stockholder return on its Common Stock for the period from December 31, 1992 to December 31, 1997 with the Standard & Poor's 500 Stock Index ("S&P 500") and the Standard & Poor's Energy Composite Index ("S&P Energy Composite") over the same period. The S&P Energy Composite has been used because a significant portion of the Company's products are used primarily by the energy industry. This comparison assumes the investment of $100 on December 31, 1992 and the reinvestment of all dividends. Comparison of Cumulative Total Return Among Scientific Software-Intercomp, Inc., the S&P 500 and the S&P Energy Composite
12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 --------- --------- --------- --------- --------- --------- Scientific Software-Intercomp, Inc. $ 100 $ 118.33 $ 166.67 $ 66.67 $ 40.67 $ 3.33 --------- --------- --------- --------- --------- --------- S&P 500 $ 100 $ 110.08 $ 111.53 $ 153.45 $ 188.68 $ 251.62 --------- --------- --------- --------- --------- --------- S&P Energy Composite $ 100 $ 115.73 $ 120.17 $ 157.13 $ 197.64 $ 247.54 - - - ----------------------------------- --------- --------- --------- --------- --------- ---------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information as of May 6, 1998 with respect to the Common Stock of the Company owned by each person who is known by the Company to beneficially own five percent or more of the outstanding Common Stock, by each Director of the Company, by each Named Executive Officer of the Company as described in Item 11 above, and by all Directors and Named Executive Officers of the Company as a group. On May 6, 1998 there were 9,046,804 shares of the Company's Common Stock outstanding, which were held by approximately 450 shareholders of record.
Number of Shares Beneficially % Beneficial Name and Address of Beneficial Owner Owned(6) Ownership(6) George Steel(1)(2) 610,000(7) 6.3% Gordon L. Scheig(1) 47,036(8) * Peter C. Colonomos, Ph.D.(1)(3) 2,928(9) * Dag G. Heggelund, Ph.D.(1)(3) 42,500(10) * Robert G. Parish, Ph.D.(1)(4) 121,315(11) 1.3% William B. Nichols, Ph.D.(2) 88,741(12) * Edward O. Price, Jr.(2) 15,500(13) * Jack L. Howard(2) 63,000(14) * All Named Executive Officers and Directors as a group (8) individuals 993,244 10.1% Renaissance Capital Partners II, Ltd. Renaissance Capital Group, Inc. Managing General Partner 8080 N. Central Expressway Suite 210-LB 59 Dallas, TX 75206-1857 Vance M. Arnold, Executive Vice President 847,218(15) 8.9% Ryback Management Corporation(16) 7711 Carondelet Avenue, Suite 700 St. Louis, MO 63105 Eric Ryback, President 3,230,000(17) 30.6 *Amount represents less than one percent. (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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (CONTINUED) (1) Consists of exercisable options to acquire 610,000 shares of Common Stock. (2) Includes exercisable options to acquire 31,000 shares of Common Stock. (3) Dr. Colonomos holds no options to acquire shares of Common Stock. (4) Includes exercisable options to acquire 42,500 shares of Common Stock. (5) Includes exercisable options to acquire 78,500 shares of Common Stock. (6) Includes exercisable options to acquire 20,000 shares of Common Stock. (7) Includes exercisable options to acquire 12,500 shares of Common Stock. (8) Includes exercisable options to acquire 5,000 shares of Common Stock. (9) Includes exercisable warrants to require 450,000 shares of Common Stock. (10) Ryback Management Corporation controls the Lindner Funds, a senior secured creditor of the Company. (11) Includes exercisable warrants to acquire 1,500,000 shares of Common Stock. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Other than the Company's compensation of its executive officers for their services as such, and the transactions with Lindner Funds (which is controlled by Ryback Management Corporation, a greater than 5% shareholder of the Company) described in the Notes to Consolidated Financial Statements, the Company was not a party to any transaction or series of similar transactions since January 1, 1997 (or which is currently proposed) in which the amount involved exceeded $60,000 and in which any director, executive officer or 5% shareholder of the Company (or a member of the immediate family of the foregoing) had a material interest. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K a) 1. Financial Statements. The following financial statements are filed as a part of this Form 10-K: The Index to Consolidated Financial Statements is set out in Item 8 herein. 2. Financial Statement Schedules. The following financial statement schedules are filed as a part of this Form 10-K: The Index to Consolidated Financial Statements is set out in Item 8 herein.
3. Exhibits ------------------------------------------------------------------------------------ 2.1 Agreement and Plan of Merger dated June 17, 1998 between the Company and Baker Hughes Oilfield Operations, Inc. (filed as Exhibit B to the Company's Report on Form 8-K dated June 17, 1998 and incorporated herein by reference.) 3.1 Articles of Incorporation of the Company dated February 8, 1968, (filed as Exhibit 3.1 to the Company's Report on Form 10-K for the year ended December 31, 1984, and incorporated herein by reference). 3.2 Articles of Amendment to the Articles of Incorporation of the Company dated May 28, 1982 (filed as Exhibit 3.2 to the Company's Report on Form 10-K for the year ended December 31, 1984, and incorporated herein by reference). 3.3 Articles of Amendment to the Articles of Incorporation of the Company dated June 7, 1984 (filed as Exhibit 3.1 to the Company's Registration Statement on Form S-3, Registration No. 2-95792, and incorporated herein by reference). 3.4 Certificate of Correction to the Articles of Amendment to the Articles of Incorporation of the Company dated October 23, 1985 (filed as Exhibit 3.4 to the Company's Report on Form 10-K for the year ended December 31, 1985, and incorporated herein by reference). 3.5 Articles of Amendment to Articles of Incorporation of the Company dated August 9, 1991 (filed as Exhibit 3.1 to the Company's Report on Form 8-K dated August 27, 1991, and incorporated herein by reference). 3.6 Articles of Amendment to Articles of Incorporation of the Company dated June 21, 1990 (filed as Exhibit 2.1 to the Company's Report on Form 10-Q for the quarter ended June 30, 1990, and incorporated herein by reference). 3.7 Bylaws of the Company (filed as Exhibit 3.5 to the Company's Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference). 3.8 Amendment to the Bylaws of the Company (filed as Exhibit 3.1 to the Company's Report on Form 10-Q for the quarter ended June 30, 1990, and incorporated herein by reference). 3.9 Articles of Amendment to Articles of Incorporation of the Company dated August 9, 1991 (filed as Exhibit 3.1 on Form 8-K dated August 27, 1991, and incorporated herein by reference). 3.10 Articles of Amendment to Articles of Incorporation of the Company dated December 14, 1994 increasing the number of shares of authorized stock (filed as Exhibit 3.10 to the Company's Report on Form 10-K/A for the year ended December 31, 1994, and incorporated herein by reference). 4.1 Convertible Debenture Loan Agreement for $2,500,000 dated September 30, 1992 between Renaissance Capital Partners II, Ltd. and Scientific Software- Intercomp, Inc. (filed as Exhibit 4.1 to the Company's Form 8-K dated October 19, 1992 and incorporated herein by reference). 4.2 First Amendment to the Convertible Debenture Loan Agreement for an additional $1,000,000, dated September 15, 1993, between Renaissance Capital Partners II, Ltd. and Scientific Software-Intercomp, Inc. (filed as Exhibit 4.1 to the Company's Form 8-K dated October 19, 1992 and incorporated herein by reference). 4.3 Form of Stockholder Lock-up Agreement (filed as Exhibit 4.5 to the Company's Form S-1 dated May 9, 1994 and incorporated herein by reference). 4.4 Letter Agreement Dated May 5, 1994 between Renaissance Capital Partners II, Ltd. and Scientific Software-Intercomp, Inc., regarding conversion of debentures (filed as Exhibit 4.6 to the Company's Form S-1 dated May 9, 1994 and incorporated herein by reference). 10.1 Form of Stock Option Agreement for stock options issued under the informal Non-Qualified Stock Option Plan (filed as Exhibit 4.6 to the Company's Form S-1 dated May 9, 1994 and incorporated herein by reference). 10.2 Employees Stock Ownership Plan and Trust as restated on January 1, 1989 (filed as Exhibit 10.28 to the Company's Form S-1 dated May 9, 1994 and incorporated herein by reference). 10.3 Target Benefit Plan as restated on January 1, 1989 (filed as Exhibit 10.29 to the Company's Form S-1 dated May 9, 1994 and incorporated herein by reference). 10.4 First Interstate Bank of Denver, N.A. Defined Contribution Master Plan and Trust Agreement (filed as Exhibit 10.30 to the Company's Form S-1 dated May 9, 1994 and incorporated herein by reference). 10.5 Adoption Agreement #001 Nonstandardized Code Section 401(K) Profit Sharing Plan dated July 1, 1990 (filed as Exhibit 10.31 to the Company's Form S-1 dated May 9, 1994 and incorporated herein by reference). 10.6 Scientific Software-Intercomp, Inc. Deferred Compensation Plan (filed as Exhibit 10.33 to the Company's Form S-1 dated May 9, 1994 and incorporated herein by reference). 10.7 Business Loan Agreement for $6.5 million dated September 20, 1994, between Bank One, Boulder, N.A. and Scientific Software-Intercomp, Inc., including Working Capital Guarantee Agreement dated September 29, 1994, between Bank One, Boulder, N.A. and Export-Import Bank of the United States referred to as "Exhibit B" (filed as Exhibit 10.37 to the Company's Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by reference). 10.8 Promissory Note of Scientific Software-Intercomp, Inc. to Bank One, Boulder, N.A. for $5,000,000, dated September 20, 1994 (filed as Exhibit 10.38 to the Company's Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by reference). 10.9 Promissory Note of Scientific Software-Intercomp, Inc. to Bank One, Boulder, N.A. for $1,500,000, dated September 20, 1994 (filed as Exhibit 10.39 to the Company's Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by reference). 10.10 Change in Terms Agreement between Scientific Software-Intercomp, Inc. to Bank One, Boulder, N.A., dated May 30, 1995, extending maturity to July 15, 1995 relating to original Business Loan Agreement in the amount of $6.5 million, dated September 20, 1994 (filed as Exhibit 10.41 to the Company's Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by reference). 10.11 Change in Terms Agreement between Scientific Software-Intercomp, Inc. to Bank One, Boulder, N.A., dated July 15, 1995, extending maturity to August 15, 1995 relating to original Business Loan Agreement in the amount of $6.5 million, dated September 20, 1994 (filed as Exhibit 10.42 to the Company's Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by reference). 10.12 Change in Terms Agreement between Scientific Software-Intercomp, Inc. to Bank One, Boulder, N.A., dated August 15, 1995, extending maturity to September 15, 1995 relating to original Business Loan Agreement in the amount of $6.5 million, dated September 20, 1994(filed as Exhibit 10.43 to the Company's Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by reference). 10.13 Change in Terms Agreement between Scientific Software-Intercomp, Inc. to Bank One, Boulder, N.A., dated September 15, 1995, extending maturity to September 30, 1995 relating to original Business Loan Agreement in the amount of $6.5 million, dated September 20, 1994 (filed as Exhibit 10.44 to the Company's Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by reference). 10.14 Change in Terms Agreement between Scientific Software-Intercomp, Inc. to Bank One, Boulder, N.A., dated September 30, 1995, extending maturity to October 15, 1995 relating to original Business Loan Agreement in the amount of $6.5 million, dated September 20, 1994 (filed as Exhibit 10.45 to the Company's Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by reference). 10.15 Business Loan Agreement for $5.13 million dated October 15, 1995, renewing maturity to March 30, 1996, between Bank One, Boulder, N.A. and Scientific Software-Intercomp, Inc., including Working Capital Guarantee Agreement dated September 21, 1995, between Bank One, Boulder, N.A. and Export- Import Bank of the United States referred to as "Exhibit B" (filed as Exhibit 10.46 to the Company's Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by reference). 10.16 Change in Terms Agreement between Scientific Software-Intercomp, Inc. to Bank One, Boulder, N.A., dated November 15, 1995, in the amount of 500,000.00 relating to original Business Loan Agreement in the amount of 5.13 million, dated October 15, 1995 (filed as Exhibit 10.47 to the Company's Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by reference). 10.17 Letter of Commitment From Lindner Funds dated March 29 ,1996 evidencing the commitment to provide the Company with a loan of $5 million (filed as Exhibit 10.33 to the Company's Report on Form 10-K for the year ended December 31, 1995, and incorporated herein by reference). 10.18 Letter of Commitment from Renaissance Capital Group, Inc. dated April 4, 1996 to restructure its convertible debentures (filed as Exhibit 10.34 to the Company's Report on Form 10-K for the year ended December 31, 1995, and incorporated herein by reference). 10.19 Letter of Commitment from Bank One dated April 8, 1996 to restructure and extend a revolving line of credit in the amount of $1.5 million through April 15, 1997 (filed as Exhibit 10.35 to the Company's Report on Form 10-K for the year ended December 31, 1995, and incorporated herein by reference). 10.20 Loan Agreement dated April 26, 1996 by and between Scientific Software- Intercomp, Inc. and Lindner Dividend Fund, and Renaissance Capital Partners II, Ltd. to provide the Company with Loans in the amount of $5 million and $1.5 million, respectively. 10.21 Letter Agreement dated March 30, 1998 between the Company and Lindner Funds (filed as Exhibit C to the Company's Report on Form 8-K dated March 27, 1998 and incorporated herein by reference.) 10.22 Letter Agreement dated March 30, 1998 between the Company and Renaissance Partners II, Ltd. (filed as Exhibit D to the Company's Report on Form 8-K dated March 27, 1998 and incorporated herein by reference.) 10.23 Letters dated March 27, 1998 and March 30, 1998 regarding agreement With Halliburton Company (filed as Exhibit E to the Company's Report on Form 8-K dated March 27, 1998 and incorporated herein by reference.) 10.24 Asset Purchase Agreement dated March 1, 1998 by and among Scientific Software-Intercomp, Inc., SSI Bethany, Inc., Scientific Software-Intercomp U.K., Ltd. and LICENERGY, Inc. 10.25 Letter Agreement dated April 30, 1998 between the Company and LICENERGY, INC. (filed as Exhibit A to the Company's report on Form 8-K dated May 1, 1998 and incorporated herein by reference.) 10.26 Stock Option Agreement dated January 3, 1997 between the Company and George Steel (filed as Exhibit 10.26 to the Company's 1997 Annual Report on Form 10-K/A No. 1 and incorporated herein by reference.) 10.27 Description of Employment Arrangement effective February 1996 between the Company and George Steel(filed as Exhibit 10.27 to the Company's 1997 Annual Report on Form 10-K/A No. 1 and incorporated herein by reference.) 10.28 Letter Agreement dated November 26, 1997 between the Company and George Steel regarding Continued Employment(filed as Exhibit 10.28 to the Company's 1997 Annual Report on Form 10-K/A No. 1 and incorporated herein by reference.) 10.29 Change in Terms Agreement dated March 30, 1998 between the Company and Bank One, Colorado, N.A. 10.30 Loan Agreement dated March 30, 1998 between the Company and Bank One, Colorado, N.A. 10.31 Promissory Note of the Company dated April 30, 1998 payable to Bank One, Colorado, N.A. in the amount of $300,000. 10.32 Change in Terms Agreement dated April 15, 1998 between the Company and Bank One, Colorado, N.A. 10.33 Change in Terms Agreement dated October 30, 1997 between the Company and Bank One, Colorado, N.A. 10.34 Change in Terms Agreement dated November 30, 1997 between the Company and Bank One, Colorado, N.A. 16.1 Letters re: Change in Certifying Accountant (filed as exhibits to the Company's Form 8-K dated June 30, 1995 and incorporated herein by reference. 21 Subsidiaries of the Company 27 Financial Data Schedule
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SCIENTIFIC SOFTWARE-INTERCOMP, INC. July 1, 1998 /s/ George Steel ---------------- George Steel Member of the Board of Directors, President and Chief Executive Officer (a principal executive officer and director) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. /s/ George Steel July 1, 1998 - - - -------------------------------------------------------- George Steel President and Chief Executive Officer and Director /s/ Barbara J. Cavallo July 1, 1998 Financial Controller /s/ William B. Nichols July 1, 1998 - - - -------------------------------------------------------- William B. Nichols, Director /s/ Edward O. Price, Jr. July 1, 1998 - - - -------------------------------------------------------- Edward O. Price, Jr., Chairman of the Board of Directors /s/ Jack L. Howard July 1, 1998 - - - -------------------------------------------------------- Jack L. Howard, Director EX-21 2 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT The registrant owns all of the outstanding capital stock of the following corporations:
CORPORATION STATE OR PROVINCE OF INCORPORATION - - - -------------------------------------------- ---------------------------------- Intercomp Resource Development & Province of Alberta, Canada Engineering, (Canada) Ltd. In-Situ Research and Engineering Ltd. Province of Alberta, Canada Microcomp Management Ltd. Province of Alberta, Canada IRAD Development Ltd. Province of Alberta, Canada 247011 Alberta Limited Province of Alberta, Canada Scientific Software-Intercomp (U.K.) Limited United Kingdom Scientific Software Texas, Inc. Texas SSI Bethany, Inc. Texas
EX-27 3
5 1000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 705 0 2559 881 0 5942 4509 4261 14878 6189 0 4000 0 888 0 (2483) 12392 12392 0 17764 13 414 (481) (5426) 20 (5446) 0 0 (5446) (1) 0 0 EX-10.24 4 EXHIBIT 10.24 ASSET PURCHASE AGREEMENT TABLE OF CONTENTS Page ---- ARTICLE I DEFINITIONS 1 ARTICLE II TERMS OF PURCHASE AND SALE 4 2.1 Sale of Assets 5 2.2 The Closing 5 2.3 Purchase Price and Payment 5 2.4 Closing Documents 5 ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER 6 3.1 Organization 6 3.2 Authority 7 3.3 Execution and Delivery 7 3.4 Binding Agreement 7 3.5 Title to the Assets 7 3.6 Outstanding Obligations 7 3.7 Contracts 7 3.8 Intellectual Property 7 3.9 Violation of Laws 8 3.10 Taxes 8 3.11 Bankruptcy 8 3.12 No Brokers 8 3.13 No Claims 8 3.14 Accuracy of Disclosures 9 3.15 Investment Company 9 3.16 Insurance 9 3.17 No Undisclosed Material Liabilities 9 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER 9 4.1 Organization 9 4.2 Execution and Delivery 9 4.3 Binding Agreement 10 4.4 Litigation 10 4.5 No Brokers 10 ARTICLE V COVENANTS OF SELLER 10 5.1 Access to the Company 10 5.2 Governmental Approvals 10 5.3 Notice of Changes 11 5.4 Maintain Assets and Operations 11 5.5 Litigation and Claims 11 ARTICLE VI CONDITIONS TO PURCHASER'S OBLIGATIONS 12 6.1 Performance by Seller 12 6.2 Seller's Certificate 12 6.3 Governmental Approvals 12 6.4 Deliveries 12 6.5 Contract Assurances 12 ARTICLE VII CONDITIONS TO SELLER'S OBLIGATIONS 13 7.1 Performance by Purchaser 13 7.2 Purchaser's Certificate 13 7.3 Deliveries 13 ARTICLE VIII TERMINATION PRIOR TO CLOSING 13 8.1 Termination 13 8.2 Effect on Obligations 13 8.3 Survival 13 ARTICLE IX INDEMNIFICATION 14 ARTICLE X MISCELLANEOUS 14 10.1 Entire Agreement 14 10.2 Successors and Assigns 14 10.3 Expenses 14 10.4 Taking of Necessary Action 14 10.5 Invalidity 15 10.6 Counterparts 15 10.7 Headings 15 10.8 Construction and References 15 10.9 Modification and Waiver 15 10.10 Notices 15 10.11 Public Announcements 16 10.12 Governing Law; Interpretation 16 10.13 Personnel 16 10.14 Noncompetition 17 10.15 Records 17 10.16 Sublease of U.K. Office 17 Exhibit A - List of Assets Exhibit B - List of Assumed Obligations Exhibit C - Deleted Exhibit D - Deleted Exhibit E - Form of Assignment and Bill of Sale Exhibit F - List of Claims Exhibit G - List of Insurance Exhibit H - List of Employees Exhibit I - Deleted Exhibit J - List of Encumbrances to be Released at Closing Exhibit K - Form of Assumption Agreement ASSET PURCHASE AGREEMENT This Asset Purchase Agreement (this "Agreement") dated as of March 1, 1998, by and among SCIENTIFIC SOFTWARE-INTERCOMP, INC., a Colorado corporation ("SSI"), SSI BETHANY, INC., a Texas corporation ("SSI-Bethany") and SCIENTIFIC SOFTWARE-INTERCOMP U.K., LTD., a corporation organized under the laws of the United Kingdom ("SSI-UK") (SSI, SSI-Bethany and SSI-UK are hereinafter collectively called "Seller"), whose address for purposes of this Agreement is 633 Seventeenth Street, Suite 1600, Denver, Colorado 80202 and LICENERGY, INC., a Texas corporation ("Purchaser"), whose address is 13831 Northwest Freeway, Suite 235, Houston, Texas 77040. Seller and Purchaser are sometimes hereinafter collectively referred to as the "Parties". R E C I T A L S: - - - - - - - - A. Seller is the owner of the hereinafter described assets utilized by the Pipeline Simulation Division of SSI ("P&F Division"); and B. Seller desires to sell to Purchaser, and Purchaser desires to buy from Seller, such assets, all in accordance with the terms of this Agreement. AGREEMENT NOW, THEREFORE, in consideration of the mutual representations, warranties, covenants and agreements herein contained, and upon the terms and subject to the conditions hereinafter set forth, the parties do hereby agree as follows: ARTICLE I DEFINITIONS Capitalized terms used in this Agreement shall have the meanings given to them in this Article I, unless defined elsewhere in this Agreement. "Accounts Payable" shall mean those accounts payable more particularly described in Part I of Exhibit B attached hereto. ---------- "Affiliate" shall mean with respect to any Person, an individual or entity that, directly or indirectly, controls, is controlled by or is under common control with such Person. "Applicable Employee Obligations" shall mean (i) that portion of the P&F Division's accrued employee sick leave and accrued annual leave liabilities (as described in Part II of Exhibit B attached hereto) that is attributable to those --------- employees of Seller that Purchaser elects to offer employment to pursuant to Section 10.13 hereof, (ii) the accrued but unpaid sales commissions more particularly described in Part III of Exhibit B attached hereto, and (iii) all --------- severance liabilities (including accrued vacation) incurred by Seller in connection with those technical employees of Seller that Purchaser elects not to offer employment to pursuant to Section 10.13 hereof. "Assets" shall mean all of the following described properties, rights, interests and assets: (a) the software more particularly described in Part I of Exhibit A --------- attached hereto (the "Software"); (b) those contracts more particularly described in Part IIa. of Exhibit ------- A attached hereto and those maintenance contracts more particularly described in Part IIb. of Exhibit A attached hereto (collectively, the "Contracts"); ---------- (c) all new software and/or consulting contracts, purchase orders and maintenance agreements entered into by SSI's P&F Division between March 1, 1998 and the Closing Date (collectively, the "New Contracts"); (d) the computers, furniture, furnishings and other personal property more particularly described in Part III of Exhibit A attached hereto (the --------- "Personal Property"); (e) all work in progress, monies, rents, revenues, fees, accounts receivable, profits, deposits, products, benefits and proceeds from or attributable to the Software, the Contracts, the New Contracts or the Personal Property including, but not limited to, those projected billed and unbilled accounts receivable more particularly described in Part IV of Exhibit A attached --------- hereto (such accounts receivable described in Part IV of Exhibit A being --------- hereinafter called the "Accounts Receivable"), provided that there shall be specifically excluded from the Assets and Accounts Receivable and reserved by Seller (i) those accounts receivable listed on Part V of Exhibit A attached --------- hereto, (ii) all accounts receivable billed by Seller up through the Closing Date with respect to any Contract not identified in Part IV of Exhibit A and --------- (iii) any previously billed accounts receivable that relate to the Software and that are not included in the Accounts Receivable; (f) all of SSI's right, title and interest in and to that certain License Agreement dated September 13, 1996, by and between SSI and Kinesix Corporation and the right to acquire all of SSI's right, title and interest in and to the license for Stanford's MINOS optimization software; (g) the benefit and the right to enforce all covenants, warranties, guarantees and indemnities relating to the Software, the Contracts, the New Contracts, the Personal Property or the Accounts Receivable and all security for the payment or performance thereof; (h) the Contract Rights and the Claims; (i) the Incidental Rights; and (j) each and every right, privilege and appurtenance in anywise incident or appertaining to any of the properties, rights or interest described in (a) through (h) above. "Assumed Obligations" shall mean the Accounts Payable, the Applicable Employee Obligations, the UPRC Obligation, the Warranty Obligations and all obligations accruing under the Contracts and the New Contracts from and after the Closing Date, to the extent such liabilities and obligations are not liabilities or obligations which Seller has agreed to pay, be responsible for or indemnify Purchaser against pursuant to the terms of this Agreement. "Business Day" shall mean any day other than Saturday, Sunday or other day on which federally chartered commercial banks in Houston, Texas are authorized by law to close. "Claims" shall mean all claims (including insurance and condemnation claims) and causes of action of Seller against others with respect to the Assets. "Closing" shall have the meaning such term is given in Section 2.2 hereof. "Closing Date" shall have the meaning such term is given in Section 2.2 hereof. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Contract Rights" shall mean all rights, titles, interests, benefits and remedies in, to and under the Contracts and the New Contracts which under the terms of the Contracts and the New Contracts are provided or stipulated to inure to or be for the benefit of Seller, together with all other rights, titles, interests, benefits and remedies of Seller in, to and under the Contracts and the New Contracts. "Default" shall mean, as to any party to this Agreement, a default by such party in the performance of any of its material obligations hereunder and the continuation of such default for a period of five (5) Business Days after written notice is delivered m. Each of the parties that comprise Seller is duly qualified or licensed to do business and is in good standing as a foreign corporation in every jurisdiction in which the conduct of its business or the ownership or leasing of its Assets requires it to be so qualified or licensed. 3.2 AUTHORITY. Each of the parties that comprise Seller has all --------- requisite corporate power and authority to carry on its business as presently conducted, to enter into this Agreement, and to perform its obligations hereunder. The consummation of the transactions contemplated by this Agreement will not (i) violate, or be in conflict with, (a) any provision of its charter, bylaws or governing documents, or any agreement or instrument to which it is a party or by which it is bound or (b) any Law applicable to Seller or the Assets, or (ii) require the consent, authorization or approval of any third party. 3.3 EXECUTION AND DELIVERY. The execution, delivery and performance of ---------------------- this Agreement and the transactions contemplated hereunder, have been duly and validly authorized by all requisite corporate action on the part of Seller. 3.4 BINDING AGREEMENT. This Agreement constitutes as of the date ------------------ hereof and all documents and instruments required hereunder to be executed and delivered by Seller at Closing will constitute on the Closing Date, valid, legal and binding obligations of Seller enforceable against Seller in accordance with their respective terms, except as such enforceability may be limited by or subject to (a) any bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to creditors' rights generally, (b) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law) and (c) public policy. 3.5 TITLE TO THE ASSETS. Except for those Encumbrances disclosed on ------------------- Exhibit J hereto that shall be released at Closing, Seller has good and -------- marketable title to and is possessed of the Assets, free and clear of all ------ Encumbrances. ---- 3.6 OUTSTANDING OBLIGATIONS. Except to the extent included within the ----------------------- Assumed Obligations, all rentals, fees, payments and obligations due and payable or performable on or prior to the Closing Date under or on account of the Assets have been or will be duly paid, performed or provided for prior to the Closing Date. 3.7 CONTRACTS. Each Contract is presently valid, subsisting and in --------- full force and effect, no default now exists thereunder, Seller has not received or given any notice of default or claimed default thereunder, and, except as disclosed on Exhibit F attached hereto, Seller has no knowledge of any existing --------- event or circumstance which with notice or passage of time or both could constitute a default thereunder. The Assets are currently being operated, maintained, and marketed in compliance with all terms and provisions of the Contracts applicable thereto. 3.8 INTELLECTUAL PROPERTY. Seller owns, or is licensed or otherwise --------------------- has the right to use, all patents, patent rights, trademarks, trademark rights, trade names, trade name rights, service marks, service mark rights, copyrights and other proprietary intellectual property rights and computer programs that constitute the Software. Part I of Exhibit A attached hereto is a true and --------- complete list of all of the Software and other intellectual property rights owned by Seller and utilized by its P&F Division. No claims are pending or, to the knowledge of Seller, threatened that Seller is infringing or otherwise adversely affecting the rights of any Person with regard to any Software. To the knowledge of Seller, no Person is infringing the rights of Seller with respect to any Software. Except for those Encumbrances disclosed on Exhibit J --------- hereto that shall be released at Closing, all of the Software that is owned by Seller is owned free and clear of all Encumbrances and all Software that is licensed by Seller is licensed pursuant to valid and existing license agreements and such interests are not subject to any Encumbrances other than those under the applicable license agreements. The consummation of the transactions contemplated by this Agreement will not result in the loss of any Software. 3.9 VIOLATION OF LAWS. Seller, the Assets and Seller's ownership, ----------------- maintenance, operation and marketing of the Assets are not in violation of any Law applicable thereto; Seller has made, filed, obtained and/or paid all filings, reports, permits, licenses, certificates, approvals and fees required under applicable Law with respect to the Assets and Seller's ownership, maintenance, operation and marketing of the Assets; and Seller has no knowledge, and has not received any notice, of violation or claimed violation of any such Law. 3.10 TAXES. All ad valorem, property, sales, gross receipts, excise, ----- use, severance, employee, income, franchise and other taxes, as well as all assessments and other governmental charges, penalties, interest and fines, which have become due and payable prior to the Closing Date on or with respect to Seller's business, the Assets, or Seller's ownership or operation of the Assets, or which have been collected by Seller in connection with the Assets on behalf of some governmental entity, have been properly paid or provision has been made for the proper payment thereof prior to becoming delinquent; and all returns and reports with respect to such matters have been duly and timely filed. 3.11 BANKRUPTCY. There are no bankruptcy, reorganization, or ---------- arrangement proceedings pending, being contemplated by or to the actual knowledge of Seller threatened against Seller. 3.12 NO BROKERS. Except for the fee payable by Seller to Simmons & ---------- Company, no broker or finder has acted for or on behalf of Seller in connection with this Agreement or the transactions contemplated by this Agreement, and no broker or finder is entitled to any brokerage or finder's fee, or to any commission, based in any way on agreements, arrangements or understandings made by or on behalf of Seller. 3.13 NO CLAIMS. Except as shown on Exhibit F hereto, there are no --------- --------- claims, demands or suits, actions, proceedings or investigations pending or, to Seller's knowledge, threatened before any court or governmental agency which might result in a material impairment or loss of Seller's title to any part of the Assets or the value thereof or which might materially hinder or impede the consummation of this Agreement or the operation, maintenance or marketing of any of the Assets, and Seller shall promptly notify Purchaser of any such matters arising or threatened prior to Closing. 3.14 ACCURACY OF DISCLOSURES. All information and disclosures, ------------------------- including the lists of Software, Contracts, Personal Property and Accounts Receivable, set forth in this Agreement or in any exhibits hereto or furnished by Seller to Purchaser in connection herewith are accurate and complete in all material respects. 3.15 INVESTMENT COMPANY. Seller (i) is not an investment company or a ------------------ company controlled by an investment company within the meaning of the Investment Company Act of 1940, as amended and (ii) is not subject in any respect to the provisions of said act. 3.16 INSURANCE. Exhibit G lists all policies of risk insurance and all --------- --------- performance bonds and other performance security held or obtained by Seller pertaining to the Assets or Seller's business relating to the Assets. Seller is not a co-insurer under any policies of insurance listed on Exhibit G, except to --------- the extent of the amount of deductible listed on Exhibit G applicable to such --------- policies. No notice has been received from any insurance company that has issued a policy insuring Seller with respect to any portion of the Assets (or Seller's business relating thereto), or any board of fire underwriters (or other body exercising similar functions) claiming any defects or deficiencies, requiring the performance of any material repairs, replacements, alterations or other work or requiring any changes in Seller's operations with respect to the Assets. 3.17 NO UNDISCLOSED MATERIAL LIABILITIES. Seller is not a party to or ----------------------------------- bound by (i) any agreement, contract or commitment limiting the freedom of Seller to own, operate, sell, transfer or otherwise dispose of any Asset or to compete with any Person or in any geographic area or (ii) any agreement, contract or commitment that Seller expects, or with the exercise of reasonable business judgment would expect, to have a material adverse effect on the value of any of its Assets, other than agreements, contracts or commitments expected to result in a loss in the ordinary course of Seller's business. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser hereby represents and warrants to Seller as follows: 4.1 ORGANIZATION. Purchaser is a corporation duly organized, validly ------------ existing and in good standing under the laws of the State of Texas and has all requisite corporate power and authority to carry on its business as it is now being conducted and to execute, deliver and perform this Agreement and to consummate the transactions contemplated hereby. 4.2 EXECUTION AND DELIVERY. The execution, delivery and performance of ---------------------- this Agreement and the transactions contemplated hereunder, have been duly and validly authorized by all requisite corporate action on the part of Purchaser. The consummation of the transactions contemplated by this Agreement will not require the consent, authorization or approval of any third party. 4.3 BINDING AGREEMENT. This Agreement constitutes as of the date ------------------ hereof and all documents and instruments required to be executed and delivered by Purchaser at Closing will constitute on the Closing Date valid, legal and binding obligations of Purchaser, enforceable against Purchaser in accordance with their respective terms, except as such enforceability may be limited by or subject to (a) any bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to creditors' rights generally, (b) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law) and (c) public policy. 4.4 LITIGATION. There is no legal, judicial, administrative, ---------- governmental, arbitration or other action or proceeding or governmental investigation pending against Purchaser or, to Purchaser's knowledge, threatened against Purchaser, which seeks to enjoin or obtain damages in respect of the consummation of the transactions contemplated hereby. 4.5 NO BROKERS. No broker or finder has acted for or on behalf of ---------- Purchaser in connection with this Agreement or the transactions contemplated by this Agreement, and no broker or finder is entitled to any brokerage or finder's fee, or to any commission, based in any way on agreements, arrangements or understandings made by or on behalf of Purchaser. ARTICLE V COVENANTS OF SELLER Seller covenants and agrees with Purchaser as follows: 5.1 ACCESS TO THE COMPANY. Seller shall afford to Purchaser and to the --------------------- employees, agents, lenders, investors and authorized representatives of Purchaser and to its counsel and accountants (collectively, the "Representatives"), such reasonable access to the Assets, employees, officers, offices, equipment, files, agreements, documents and books and records of the P&F Division (including, without limitation, computer programs, tapes, and other records), and the opportunity to make notes, abstracts and copies therefrom, as may be requested by Purchaser in order that Purchaser may have full opportunity to make such reasonable investigations as it shall desire with respect to the Assets in connection with the transactions contemplated hereby. 5.2 GOVERNMENTAL APPROVALS. Seller shall use its best efforts, and ---------------------- shall cooperate with Purchaser, to obtain all permits, approvals, filings and consents necessary or required to be obtained or made for the consummation by Seller of the transactions contemplated by this Agreement under any applicable federal law or the applicable laws of any state or foreign government having jurisdiction over the transactions contemplated hereby. 5.3 NOTICE OF CHANGES. Seller shall promptly inform Purchaser in ------------------ writing if Seller becomes aware of any change that shall have occurred or that shall have been threatened (or any development that shall have occurred or that shall have been threatened involving a prospective change) in the financial condition, results of operations, business or Assets of the P&F Division that is or with the exercise of reasonable business judgment would be expected to have a material adverse effect on the condition of the P&F Division or the Assets, provided that such notification requirement shall not include notice of losses incurred by the P&F Division in the ordinary course of its business. Seller shall promptly inform Purchaser in writing if any representation or warranty made by Seller in this Agreement shall cease to be accurate. 5.4 MAINTAIN ASSETS AND OPERATIONS. During the period from the date of ------------------------------ this Agreement through the Closing Date, Seller shall carry on the P&F Division business in the usual, regular and ordinary course in a good and diligent manner consistent with sound business practices and in compliance with all of its contractual commitments and all applicable Laws. Seller shall use all reasonable efforts to maintain and preserve its business organization in tact, retain its present employees and consultants and maintain its relationship with suppliers, customers and others having business relations with it. Seller shall, unless otherwise consented to in writing by Purchaser, (i) maintain and keep the Assets in their present condition and working order, ordinary wear and tear and depreciation excepted, (ii) maintain in full force and effect all policies of insurance, performance bonds or other performance security covering the Assets or Seller's business relating to the Assets now maintained by Seller, (iii) preserve in full force and effect all Contracts, Contract Rights, Claims and Incidental Rights and shall not modify, terminate, compromise or release any of same, (iv) not enter into any new agreements or commitments affecting or relating to any of the Assets (including any New Contracts, but specifically excluding the renewal of any maintenance contracts described in Part IV of Exhibit A hereto which shall not require Purchaser's consent), (v) --------- not bill customers under the maintenance contracts described in Part IIb. of Exhibit A attached hereto prior to the billing date specified for each such ------- maintenance contract in the last column of Part IIb. of Exhibit A, (vi) not - --------- reallocate any resources currently dedicated to the performance of work under - the Contracts, (vii) not incur, or agree to incur, any contractual obligation or liability (absolute or contingent) with respect to the Assets, except current liabilities incurred in the ordinary course of business, (viii) not encumber, sell, mortgage, release, abandon or otherwise dispose of any of the Assets, except items of personal property replaced by equivalent property or consumed in normal operations, (ix) cause all liabilities of Seller incurred with respect to or affecting the Assets to be paid in the ordinary course of business, and (x) maintain in good order and condition all files, books, records, documents and papers of Seller relating to or evidencing the Assets and continue to maintain all accounting procedures and books of account with respect to the Assets in accordance with GAAP. 5.5 LITIGATION AND CLAIMS. Seller shall promptly inform Purchaser in --------------------- writing of any litigation, or of any claim or controversy or contingent liability of which Seller becomes aware that might reasonably be expected to become the subject of litigation, against Seller or affecting any of the Assets. ARTICLE VI CONDITIONS TO PURCHASER'S OBLIGATIONS The obligations of Purchaser to purchase the Assets shall be subject to the satisfaction (or waiver by Purchaser) on or prior to the Closing Date of all of the following conditions: 6.1 PERFORMANCE BY SELLER. The representations and warranties of ---------------------- Seller set forth in this Agreement shall be true and correct at and as of the Closing Date in all material respects. Seller shall have performed and complied in all material respects with all covenants, agreements and conditions required by this Agreement to be performed by or complied with by Seller prior to or at Closing. 6.2 SELLER'S CERTIFICATE. Purchaser shall have received a certificate -------------------- dated as of the Closing Date, executed by a duly authorized officer of Seller, to the effect that the representations and warranties made under Article III hereof are true at and as of the Closing Date. 6.3 GOVERNMENTAL APPROVALS. Purchaser shall have received all ----------------------- consents, approvals and authorizations that Purchaser may be required to obtain under applicable Law in connection with the acquisition of the Assets. 6.4 DELIVERIES. Seller shall have delivered, or caused to be ---------- delivered, to Purchaser each of the items set forth in Section 2.4(a) and (c) hereof. 6.5 CONTRACT ASSURANCES. Purchaser shall have received for each of the ------------------- Contracts (specifically excluding, however, the maintenance contracts described in Part IIb. of Exhibit A) for which Purchaser requests it, customer estoppel --------- letters or other assurances reasonably satisfactory to Purchaser to the effect that (i) the Contracts are currently effective, (ii) the customers are not aware of any outstanding material claims or material unsatisfied obligations for work completed thereunder (provided that any such letter shall expressly state that the customer in no way waives any rights or claims under the Contract as a result of its response in the letter) and (iii) the customers under such Contracts consent to the assignment thereof to Purchaser and agree to continue to comply with and honor the existing terms of the Contracts after Purchaser acquires the Assets. ARTICLE VII CONDITIONS TO SELLER'S OBLIGATIONS The obligations of Seller to sell the Assets shall be subject to the satisfaction (or waiver by Seller) on or prior to the Closing Date of all the following conditions: 7.1 PERFORMANCE BY PURCHASER. The representations and warranties of ------------------------ Purchaser set forth in this Agreement shall be true and correct at and as of the Closing Date in all material respects. Purchaser shall have performed and complied in all material respects with all covenants, agreements and conditions required by this Agreement to be performed by or complied with by Purchaser prior to or at Closing. 7.2 PURCHASER'S CERTIFICATE. Seller shall have received a certificate ----------------------- dated as of the Closing Date, executed by a duly authorized officer of Purchaser, to the effect that the representations and warranties made under Article IV are true at and as of the Closing Date. 7.3 DELIVERIES. Purchaser shall have delivered, or caused to be ---------- delivered, to Seller each of the items set forth in Section 2.4(b) and (c) hereof. ARTICLE VIII TERMINATION PRIOR TO CLOSING 8.1 TERMINATION. This Agreement may be terminated at any time prior to ----------- the Closing (a) by the mutual written consent of Purchaser and Seller, (b) by Purchaser in writing if Seller shall be in Default and such Default shall not have been cured or remedied, (c) by Seller in writing if Purchaser shall be in Default and such Default shall not have been cured or remedied or (d) by either Seller or Purchaser in writing, if there shall be in effect an order of a court of competent jurisdiction prohibiting the consummation of the transactions contemplated hereby. 8.2 EFFECT ON OBLIGATIONSError! Bookmark not defined.. Termination of ------------------------------------------------- this Agreement pursuant to this Article shall terminate all obligations of the parties hereunder, except for the obligations under Section 10.3 hereof and except for the continuing obligations of SSI and Purchaser under the existing Confidentiality Agreement between SSI and Purchaser; provided, however, that -------- ------- termination pursuant to clauses (b) or (c) of Section 8.1 hereof shall not relieve any Defaulting party from any liability to the other party hereto, it being expressly agreed that such other party may pursue any and all remedies it may have against the Defaulting party as a result of such Default, including an action for damages. 8.3 SURVIVAL. All of the representations, warranties, covenants and -------- indemnities of the Parties as described in this Agreement, to the extent not fully performed prior to Closing, shall survive the Closing. ARTICLE IX INDEMNIFICATION Seller agrees to indemnify, defend and hold Purchaser and its directors, officers, shareholders and controlling Persons harmless from and against any and all losses, liabilities, damages, costs and expenses (collectively, the "Indemnified Liabilities") that Purchaser and its directors, officers, shareholders and controlling Persons may incur or become subject to arising out of or due to (i) any inaccuracy of any representation or the breach of any warranty, covenant, undertaking or other agreement of Seller contained in this Agreement, (ii) any act or omission of Seller prior to the Closing Date or (iii) except for the Assumed Obligations, any and all claims, demands and causes of action against Seller or the Assets relating to or arising out of any facts or circumstances occurring prior to the Closing Date. ARTICLE X MISCELLANEOUS 10.1 ENTIRE AGREEMENT. This Agreement and the other agreements ----------------- contemplated hereby constitute the sole understanding of the parties with respect to the matters provided for herein and supersede any previous agreements and understandings between the parties with respect to the subject matter hereof. No amendment, modification or alteration of the terms or provisions of this Agreement shall be binding unless the same shall be in writing and duly executed by Seller and Purchaser. 10.2 SUCCESSORS AND ASSIGNS. The terms and conditions of this ------------------------ Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. Purchaser shall have the right to assign this Agreement to any Affiliate of Purchaser. Except as permitted in the immediately preceding sentence, this Agreement may not be assigned by any party without the prior written consent of the other party hereto. 10.3 EXPENSES. Whether or not the transactions contemplated by this -------- Agreement are consummated, other than as expressly provided for herein, each of the parties hereto shall pay the fees and expenses of its respective counsel, accountants and other experts, and all other expenses incurred by such party incident to the negotiation, preparation and execution of this Agreement and consummation of the transactions contemplated hereby. 10.4 TAKING OF NECESSARY ACTION. After Closing, each of the parties -------------------------- hereto agrees to take or cause to be taken all action and to do or cause to be done all things reasonably requested by the other party to consummate and make effective the transactions contemplated by this Agreement. If monies are received by either party hereto which, under the terms hereof, belong to the other party, the same shall be immediately paid over to such other party. Each party shall cooperate with the other in good faith to help the other satisfy its obligations hereunder. 10.5 INVALIDITY. If any term or other provision of this Agreement is ---------- invalid, illegal, or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the extent possible. 10.6 COUNTERPARTS. This Agreement may be executed in one or more ------------ counterparts, each of which shall for all purposes be deemed to be an original and all of which shall constitute the same instrument. 10.7 HEADINGS. The headings of the Sections and paragraphs of this -------- Agreement are included for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction hereof or thereof. 10.8 CONSTRUCTION AND REFERENCES. Words used in this Agreement, ----------------------------- regardless of the number or gender specifically used, shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine or neuter, as the context shall require. Unless otherwise specified, all references to this Agreement to Sections, paragraphs or clauses are deemed references to the corresponding Sections, paragraphs or clauses in this Agreement, and all references to this Agreement to Schedules are references to the corresponding Schedules attached to this Agreement. 10.9 MODIFICATION AND WAIVER. Any of the terms or conditions of this ----------------------- Agreement may be waived in writing at any time by the party which is entitled to the benefits thereof. No wavier of any of the provisions of this Agreement shall be deemed to or shall constitute a waiver of any other provisions hereof (whether or not similar). 10.10 NOTICES. Any notice, request, instruction or other document to ------- be given hereunder by any party hereto to any other party shall be in writing and delivered personally, via telecopy (with receipt confirmed) or by registered or certified mail, postage prepaid, if to Seller, to: Scientific Software-Intercomp, Inc. 633 Seventeenth Street, Suite 1600 Denver, Colorado 80202 Attention: George Steel, President Fax: 303-293-0361 with copies to: Roger C. Cohen Cohen, Brame & Smith 1700 Lincoln Street, Suite 1800 Denver, Colorado 80203 Fax: 303-894-0475 if to the Purchaser, to: LICENERGY, Inc. 13831 Northwest Freeway, Suite 235 Houston, Texas 77040 Attention: Chief Executive Officer Fax: 713-895-8383 with copies to: Mark K. Boling 1177 West Loop South, Suite 500 Houston, Texas 77027 Fax: 713-622-3254 or at such other address for a party as shall be specified by like notice. Any notice which is delivered personally in the manner provided herein shall be deemed to have been duly given to the party to whom it is directed upon actual receipt by such party (or its agent for notices hereunder). Any notice which is addressed and mailed in the manner herein provided shall be conclusively presumed to have been duly given to the party to which it is addressed at the close of business, local time of the recipient, on the third day after the day it is so placed in the mail. Any notice which is sent by telecopy shall be deemed to have been duly given to the party to which it is addressed upon telephonic confirmation of the same as provided herein. A copy of any notices delivered by telecopy shall promptly be mailed in the manner herein provided to the party to which such notice was given. 10.11 PUBLIC ANNOUNCEMENTS. Neither Seller nor Purchaser shall make -------------------- any public statements, including, without limitation, any press releases, with respect to this Agreement and the transactions contemplated hereby without the prior written consent of the other party (which consent may not be unreasonably withheld), except as may be required by law. Notwithstanding anything contained in the previous sentence to the contrary, Purchaser shall not be required to obtain Seller's prior written consent to any such public statements that are made in connection with the public stock offering of LICENERGY, A/S. 10.12 GOVERNING LAW; INTERPRETATION. This Agreement shall be construed ----------------------------- in accordance with and governed by the laws of the State of Texas. 10.13 PERSONNEL. As of the Closing Date, Seller shall have withheld --------- for each payment made to any of Seller's employees whose work relates to the Assets the amount of all taxes, including, but not limited to, income tax, F.I.C.A., workmen's compensation and other deductions required to be withheld and shall have paid the same over to the proper governmental authority. Attached hereto as Exhibit H is a complete list of all persons currently ---------- employed by, or under contract as a consultant for Seller's P&F Division. Purchaser may, but shall have no obligation to, offer employment to any of Seller's employees whose work relates to the Assets. Seller shall indemnify and hold Purchaser harmless from and against any and all liability arising (i) under any pension plan, welfare plan, or benefit policy or arrangement maintained or sponsored by Seller for its employees and (ii) with respect to any employees hired by Purchaser, from any claims for employee injuries or health problems occurring or commencing prior to Closing which are related to their work in connection with the Assets. Seller warrants and represents that it is not party to any collective bargaining agreement covering or relating to the employees of Seller whose work relates to the Assets. 10.14 NONCOMPETITION. In consideration for Purchaser's execution of -------------- this Agreement, Seller agrees that neither Seller nor any Affiliate of Seller shall, for a period of five (5) years following the Closing (the "Noncompetition Period"), directly or indirectly, engage or participate in any business that is in competition in any manner whatsoever with the business that was conducted by the P&F Division (the "Competing Business"). Seller further covenants and agrees that during the Noncompetition Period Seller shall not, and shall cause its Affiliates not to, (i) directly or indirectly, on its own behalf or on behalf of other Persons, solicit, divert or appropriate or attempt to solicit, divert or appropriate, to or for a Competing Business any Person who is a customer of Seller's P&F Division, or (ii) directly or indirectly, on its own behalf or on behalf of other Persons, solicit or take away, or attempt to solicit or take away, any employees of Seller that Purchaser hires pursuant to Section 10.13 hereof; provided, however, except for the restriction contained in (ii) above, the restrictions contained in this Section 10.14 shall not apply to any third party that acquires all or substantially all of the remaining assets or acquires all of the stock of SSI. 10.15 RECORDS. All of the books, records, files, contracts and other ------- documents and materials described in the definition of "Incidental Rights" that are to be transferred to Purchaser at Closing (collectively, the "Records") shall be the original copies thereof, except that Seller shall retain the original copies of its accounting records. Purchaser shall afford Seller reasonable access to the Records as requested by Seller. If Purchaser desires to dispose of any such Records, Purchaser shall so notify Seller and Seller shall have the right, at its option, to take delivery of such Records (at Seller's expense). If Seller elects not to receive such Records or fails to respond to Purchaser's notice within thirty (30) days after receipt thereof, then Purchaser may dispose of such Records within its discretion. 10.16 SUBLEASE OF U.K. OFFICE. Seller and Purchaser recognize that ----------------------- Purchaser is interested in subleasing a portion of SSI-UK's office space to accommodate those employees of Seller that Purchaser elects to hire pursuant to Section 10.13 hereof. Seller and Purchaser hereby agree that, so long as Seller is not prohibited from doing so, at Closing, Seller and Purchaser shall enter into a sublease agreement, in form mutually satisfactory to Seller and Purchaser, whereby Purchaser shall sublease a portion of SSI-UK's office space for a prorated rental, all as more particularly set forth in such sublease agreement. IN WITNESS WHEREOF, each of the parties hereto have caused this Agreement to be executed on its behalf as of the date first above written. SELLER: SCIENTIFIC SOFTWARE-INTERCOMP, INC. By: /s/ George Steel ------------------ Name: George Steel ------------- Title: President/CEO ------------- SSI BETHANY, INC. By: /s/ George Steel ------------------ Name: George Steel ------------- Title: President/CEO ------------- SCIENTIFIC SOFTWARE-INTERCOMP U.K., LTD. By: /s/ George Steel ------------------ Name: George Steel ------------- Title: President/CEO ------------- PURCHASER: LICENERGY, INC. By: /s/ John Hochstein -------------------- Name: John Hochstein --------------- Title: President --------- LICENERGY, A/S hereby joins in the execution of this Agreement to unconditionally guarantee the performance of all obligations of LICENERGY, INC. and its Affiliates (in the event of an assignment of this Agreement to any such Affiliate) under the terms of this Agreement. In the event of a default by LICENERGY, INC. (or its Affiliate) in the performance of any such obligations, recovery may be had against LICENERGY, A/S without requiring the prosecution of the claim against LICENERGY, INC. (or its Affiliate). LICENERGY, A/S By: /s/ Gregers Larnaes --------------------- Name: Gregers Larnaes ---------------- Title: Chairman of the Board ------------------------ By: /s/ Charles Nicholas Keating, Jr. ------------------------------------- Name: Charles Nicholas Keating, Jr. -------------------------------- Title: Director -------- EX-10.29 5 EXHIBIT 10.29 EXHIBIT 10.29 CHANGE IN TERMS AGREEMENT Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials $1,200,000.00 04-15-1997 42 7979623550 410 ------------- ---------- -- ---------- --- References in the shaded area are for Lender's use only and do not limit the applicability of the document to any particular loan or item. Borrower: SCIENTIFIC SOFTWARE - INTERCOMP, INC. A Lender: BANK ONE, COLORADO, N.A. COLORADO CORPORATION DOWNTOWN BOULDER BANKING CENTER 1801 CALIFORNIA ST. - SUITE 295 2696 SOUTH COLORADO BLVD. DENVER, CO 80202-2699 DENVER, CO 80222 Principal Amount: $1,200,000.00 Date of Agreement: March 30, 1996 DESCRIPTION OF EXISTING INDEBTEDNESS. A PROMISSORY NOTE DATED SEPTEMBER 20, 1994, IN THE ORIGINAL PRINCIPAL AMOUNT OF $5,000,000.00. DESCRIPTION OF CHANGE IN TERMS. THE MATURITY DATE WILL NOW BE APRIL 15, 1997. SEE BELOW FOR NEW INTEREST RATE. SEE BELOW FOR NEW PAYMENT SCHEDULE. THIS LINE OF CREDIT IS NOW CAPPED AT $1,200,000.00. PROMISE TO PAY. SCIENTIFIC SOFTWARE - INTERCOMP, INC., A COLORADO CORPORATION ("Borrower") promises to pay to BANK ONE, COLORADO, N.A. ("Lender"), or order, in lawful money of the United States of America, the principal amount of One Million Two Hundred Thousand & 00/100 Dollars ($1,200,000.00) or so much as may be outstanding, together with interest on the unpaid outstanding principal balance of each advance. Interest shall be calculated from the date of each advance until repayment of each advance. PAYMENT. Borrower will pay this loan in one payment of all outstanding principal plus all accrued unpaid interest on April 15, 1997. In addition, Borrower will pay regular monthly payments of accrued unpaid interest beginning June 15, 1996, and all subsequent interest payments are due on the same day of each month after that. Interest on this Agreement in computed on a 365/360 simple interest basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. Unless otherwise agreed or required by applicable law, payments will be applied first to accrued unpaid interest, then to principal, and any remaining amount to any unpaid collection costs and late charges. VARIABLE INTEREST RATE. The interest rate on this Agreement is subject to change from time to time based on changes in an index which is the LENDER'S PRIME RATE (the "Index"). PRIME RATE IS THE LENDER'S BASE LENDING RATE AS ANNOUNCED BY THE LENDER FROM TIME TO TIME AT ITS SOLE DISCRETION. AT ANY GIVEN TIME, THE LENDER MAY MAKE LOANS, AT, ABOVE, OR BELOW ITS PRIME RATE. Lender will tell Borrower the current index rate upon Borrower's request. Borrower understands that Lender may make loans based on other rates as well. The interest rate change will not occur more often than each DAY. The index currently is 8.250% per annum. The interest rate to be applied to the unpaid principal balance of this Agreement will be at a rate equal to the index, resulting in an initial rate of 8.250% per annum. NOTICE: under no circumstances will the interest rate on this Agreement be more than the maximum rate allowed by applicable law. PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full prepayment of this Agreement, Borrower understands that Lender is entitled to a minimum interest charge of $25.00. Other than Borrower's obligation to pay any minimum interest charge, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments of accrued unpaid interest. Rather, they will reduce the principal balance due. DEFAULT. Borrower will be in default if any of the following happens: (a) Borrower fails to make any payment when due. (b) Borrower breaks any promise Borrower has made to Lender, or Borrower fails to comply with or to perform when due any other term, obligation, covenant, or condition contained in this Agreement or any agreement related to this Agreement, or in any other agreement or loan Borrower has with Lender. (c) Borrower defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's ability to repay this Note or perform Borrower's obligations under this Note or any of the Related Documents. (d) Any representation or statement made or furnished to Lender by Borrower or on Borrower's behalf is false or misleading in any material respect either now or at the time made or furnished. (e) Borrower becomes insolvent, a receiver is appointed for any part of Borrower's property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest. This includes a garnishment of any of Borrower's accounts with Lender. (g) Any of the events described in this default section occurs with respect to any guarantor of this Agreement. (h) A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the indebtedness is impaired. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Agreement and all accrued unpaid interest immediately due, without notice, and then Borrower will pay that amount. Upon default, including failure to pay upon final maturity, Lender, at its option, may also, if permitted under applicable law, do one or both of the following: (a) increase the variable interest rate on this Agreement to 25.000% per annum,* and (b) add any unpaid accrued interest to principal and such sum will bear interest therefrom until paid at the rate provided in this Agreement (including any increased rate). The interest rate will not exceed the maximum rate permitted by applicable law. Lender may hire or pay someone else to help collect this Agreement if Borrower does not pay. Borrower also will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. If not prohibited by applicable law, Borrower also will pay any court costs, in addition to all other sums provided by law. This Agreement has been delivered to Lender and accepted by Lender in the State of Colorado. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of BOULDER County, the State of Colorado. Lender and Borrower hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by either Lender or Borrower against the other. This Agreement shall be governed by and construed in accordance with the laws of the State of Colorado. RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA, Keogh, and trust accounts. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on this Agreement against any and all such accounts. LINE OF CREDIT. This Agreement evidences a revolving line of credit. Advances under this Agreement, as well as directions for payment from Borrower's accounts, may be requested orally or in writing by Borrower or by an authorized person. Lender may, but need not, require that all oral requests be confirmed in writing. Borrower agrees to be liable for all sums either: (a) advanced in accordance with the instructions of an authorized person or (b) credited to any of Borrower's accounts with Lender. The unpaid principal balance owing on this Agreement at any time may be evidenced by endorsements on this Agreement or by Lender's internal records, including daily computer print-outs. Lender will have no obligation to advance funds under this Agreement if: (a) Borrower or any guarantor is in default under the terms of this Agreement or any agreement that Borrower or any guarantor has with Lender, including any agreement made in connection with the signing of this Agreement; (b) Borrower or any guarantor ceases doing business or is insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit, modify or revoke such guarantor's guarantee of this Agreement or any other loan with Lender, or (d) Borrower has applied funds provided pursuant to this Agreement for purposes other than those authorized by Lender. CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms of the original obligation or obligations, including all agreements evidenced or securing the obligation(s), remain unchanged and in full force and effect. Consent by Lender to this Agreement does not waive Lender's right to strict performance of the obligation(s) as changed, nor obligate Lender to make any future change in terms. Nothing in this Agreement will constitute a satisfaction of the obligation(s). It is the intention of Lender to retain as liable parties all makers and endorsers of the original obligation(s), including accommodation parties, unless a party is expressly released by Lender in writing. Any maker or endorser, including accommodation makers, will not be released by virtue of this Agreement. If any person who signed the original obligation does not sign this Agreement below, then all persons signing below acknowledge that this Agreement is given conditionally, based on the representation to Lender that the non-signing party consents to the changes and provisions of this Agreement or otherwise will not be released by it. This waiver applies not only to any initial extension, modification or release, but also to all such subsequent actions. MISCELLANEOUS PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Agreement without losing them. Borrower and any other person who signs, guarantees or endorses this Agreement, to the extent allowed by law, waive presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Agreement, and unless otherwise expressly stated in writing, no party who signs this Agreement, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan, or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS AGREEMENT, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE AGREEMENT AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE AGREEMENT. BORROWER: SCIENTIFIC SOFTWARE - USTERCOMP, INC., A COLORADO CORPORATION By:_____________________________________ RONALD J. HOTTOVY, Secretary Variable Rate, Line of Credit. LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.20b(c) 1996 ProServices, Inc. All rights reserved. (CO-D20 E3.20 P3.20 SCI_LJ04.LN CS.OVL) EX-10.30 6 EXHIBIT 10.30 BANK ONE, COLORADO, N.A. LOAN AGREEMENT Borrower: SCIENTIFIC SOFTWARE - INTERCOMP, INC. A Lender: BANK ONE, COLORADO, N.A. COLORADO CORPORATION DOWNTOWN BOULDER BANKING CENTER 1801 CALIFORNIA ST. - SUITE 295 2696 SOUTH COLORADO BLVD. DENVER, CO 80202-2699 DENVER, CO 80222 THIS LOAN AGREEMENT between SCIENTIFIC SOFTWARE-INTERCOMP, INC., A COLORADO CORPORATION ("Borrower") and BANK ONE, COLORADO, N.A. ("Lender") is made and executed on the following terms and conditions. Borrower has received prior commercial loans from Lender of has applied to Lender for a commercial loan or loans and other financial accommodations, including those which may be described on any exhibit or schedule attached to this Agreement. All such loans and financial accommodations, together with all future loans and financial accommodations from Lender to Borrower, are referred to in this Agreement individually as the "Loan" and collectively as the "Loans." Borrower understands and agrees that: (a) In granting, renewing, or extending any Loan, Lender is relying upon Borrower's representations, warranties, and agreements, as set forth in this Agreement; (b) the granting, renewing, or extending of a Loan by Lender at all times shall be subject to Lender's sole judgment and discretion; and (c) all such Loans shall be and shall remain subject to the following terms and conditions of this Agreement. TERM. This Agreement shall be effective as of March 30, 1996 and shall continue thereafter until all indebtedness of Borrower to Lender has been performed in full and the parties terminate this Agreement in writing. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar amounts shall mean amounts in lawful money of the United States of America. AGREEMENT. The word "Agreement" means this Loan Agreement, as this Loan Agreement may be amended or modified from time, together with all exhibits and schedules attached to this Loan Agreement from time to time. ACCOUNT. The word "Account" means a trade account, account receivable, or other right to payment for goods or services rendered owing to borrower (or to a third party grantor acceptable to Lender). ACCOUNT DEBTOR. The words "Account Debtor" mean the person or entity obligated upon an Account. ADJUSTED NET INCOME. The words "Adjusted Net Income" mean net income after taxes plus depreciation, amortization, lease expense, and interest expense. ADVANCE. The word "Advance" means a disbursement of Loan funds under this Agreement. BORROWER. The word "borrower" means SCIENTIFIC SOFTWARE-INTERCOMP, INC., A COLORADO CORPORATION. The word "Borrower" also includes, as applicable, all subsidiaries and affiliates of Borrower as provided below in the paragraph titled "Subsidiaries and Affiliates" BORROWING BASE. The words "Borrowing Base" mean, as determined by Lender from time to time, the lesser of $1,500,000.00, the value of the export working capital guarantee made by Export-Import Bank of the U.S. or 90% of Borrower's eligible export accounts receivable, as calculated on a Borrowing Base and Compliance Certificate in the form attached as Exhibit "A". BUSINESS DAY. The words "Business Day" mean a day on which commercial banks are open for business in the State of Colorado. CERCLA. The word "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended. CASH FLOW. The words "Cash Flow" mean net income after taxes, and exclusive of extraordinary gains and income, plus depreciation and amortization, less any amounts of R&D capitalized on the balance sheet. COLLATERAL. The word "Collateral" means and includes without limitation all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, deed of trust, assignment, pledge chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever whether created by law, contract, or otherwise. DEBT. The word "Debt" means all of Borrower's liabilities. ELIGIBLE ACCOUNTS. The words "Eligible Foreign Accounts" mean, at any time, only those accounts which are insured by export credit insurance acceptable to Lender, backed by letters of credit or from sales funded by the Export-Import Bank of the U.S. or a multilateral institution such as the World Bank or United Nations. The net amount of any Eligible Account against which Borrower may borrow shall exclude all returns, discounts, credits, and offsets of any nature. Unless otherwise agreed to by Lender in writing, Eligible Accounts do not include: (a) Accounts with respect to which the Account Debtor is an officer, an employee or agent of Borrower. (b) Accounts with respect to which the Account Debtor is a subsidiary of, or affiliated with or related to Borrower or its shareholders, officers, or directors. (c) Accounts with respect to which goods are placed on consignment, guaranteed sale, or other terms by reason of which the payment by the Account Debtor may be conditional. (d) Accounts with respect to which Borrower is or may become liable to the Account Debtor for goods sold or services rendered by the Account Debtor to Borrower. (e) Accounts which are subject to dispute, counterclaim, or setoff. (f) Accounts with respect to which the goods have not been shipped or delivered, or the services have not been rendered, to the Account Debtor, except for fees for maintenance services, and except for partially completed milestone performance contracts. (g) Accounts of any Account debtor who has filed or has had filed against it a petition in bankruptcy or an application for relief under any provision of any state or federal bankruptcy, insolvency, or debtor-in-relief acts; or who has had appointed a trustee, custodian, or received for the assets of such Account Debtor; or who has made an assignment for the benefit of creditors or has become insolvent or fails generally to pay its debts (including its payrolls) as such debts become due. (h) Accounts with respect to which the Account Debtor is the United States Government or any department or agency of the Untied States. (i) Accounts which are unpaid more than 90 days after the customer's acceptance or 150 days after invoice or shipment, whichever occurs earlier. (j) Accounts with respect to which the Account Debtor is in a country where Eximbank will not provide coverage for the financing of export transactions, as set forth in the schedule published from time to time by Eximbank, called the "Country Limitation Schedule", which sets forth on a country by country basis whether and under what conditions Eximbank will provide coverage for the financing of export transactions to the countries listed therein. ERISA. The word "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. EVENT OF DEFAULT. The words "Event of Default" mean and include any of the Events of Default set forth below in the section titled "EVENTS OF DEFAULT." GRANTOR. The word "Grantor" means and includes each and all the persons or entities granting a Security interest in any Collateral for the Indebtedness, including without limitations all Borrowers granting such a Security Interest. GUARANTOR. The word "Guarantor" means and includes without limitation, each and all of the guarantors, sureties, and accommodation parties in connection with any indebtedness. INDEBTEDNESS. The word "Indebtedness" means and includes without limitation all Loans, together with all other obligations, debts and liabilities of Borrower to Lender, or any one or more of them, as well as all claims by Lender against Borrower, or any one or more of them; whether now or hereafter existing, voluntary or involuntary, due or not due, absolute or contingent, liquidated or unliquidated; whether Borrower may be liable individually or jointly with others; whether Borrower may be obligated as a guarantor, surety, or otherwise; whether recovery upon such Indebtedness may be or hereafter may become barred by any statute of limitations; and whether such Indebtedness may be or hereafter may become otherwise unenforceable. LENDER. The word "Lender" means BANK ONE, COLORADO, N.A., its successors and assigns. LINE OF CREDIT. The words "Line of Credit" mean the credit facility described in this Section titled "LINE OF CREDIT" below. LIQUID ASSETS. The words "Liquid Assets" mean Borrower's cash on hand, plus government obligations with maturities less than 365 days, plus Borrower's receivables. LOAN. The word "Loan" or "Loans" means and includes any and all commercial loans and financial accommodations from Lender to Borrower, whether now or hereafter existing, and however evidenced, including without limitation: (1) a 300,000.00 revolving Line of Credit to finance working capital needs related to export sales, at an interest rate of Bank One, Colorado, N.A. Prime Rate minus 1.25%; and (2) a $1,200,000.00 revolving Line of Credit to finance working capital needs related to export sales and issue U.S. Dollar and foreign currency standby letters of credit to support international sales. NOTE. The word "Note" means Borrower's and any cosigners' promissory note or notes, if any, evidencing Borrower's Loan obligations in favor of Lender, as well as any substitute, replacement or refinancing note or notes therefor. RELATED DOCUMENTS. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. SECURITY AGREEMENT. The words "Security Agreement" mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security interest. SECURITY INTEREST. The words "Security Interest" mean and include without limitation any type of collateral security, whether in the form of a lien charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. SARA. The word "SARA" means the Superfund Amendments and Reauthorization Act of 1986 as now or hereafter amended. SUBORDINATED DEBT. The words "Subordinated Debt" mean indebtedness and liabilities of Borrower which have been subordinated by written agreement to indebtedness owed by Borrower to Lender in form and substance acceptable to Lender. TANGIBLE NET WORTH. The words "Tangible Net Worth" mean Borrower's total assets excluding all intangible assets (i.e., goodwill, trademarks, patents, copyrights, organizational expenses, and similar intangible items, but including leaseholds and leasehold improvements) less total Debt. WORKING CAPITAL. The words "Working Capital" mean Borrower's current assets, excluding prepaid expenses, less Borrower's current liabilities. LINE OF CREDIT. Lender agrees to make advances to Borrower and issue standby letters of credit on Borrower's behalf from time to time from the date of this Agreement to the maturity date of any line of credit, provided the aggregate amount of such Advances or issued standby letters of credit outstanding at any time does not exceed the Borrowing Base. For Borrowing Base purposes, standby letters of credit denominated in foreign currencies will be marked up by 20% to cover currency fluctuations unless hedged with a forward option currency contract. Any letters of credit prior to the date of shipment of the Items covered by the subject letter of credit are excluded from the borrowing availability. Disbursements shall not be made to finance the cost of manufacturing or selling of those Items which are to be sold on terms other than those set forth in Item (7) the Loan Authorization Agreement (Exhibit B, and also referred to as Annex A). Disbursements shall not be made (a) except for the purpose of enabling the Borrower to finance the cost of manufacturing or selling the Items, and (b) after the Availability Date set forth in item (10) of the Authorization Agreement. Within the foregoing limits, Borrower may borrow, partially or wholly prepay, and reborrow under this Agreement as follows. CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make any Advance to or for the account of Borrower and to issue standby letters of credit under this Agreement is subject to the following conditions precedent, with all documents, instruments, opinions, reports, and other items required under this Agreement to be in form and substance satisfactory to Lender: (a) Lender shall have received evidence that this Agreement and all Related Documents have been duly authorized, executed, and delivered by Borrower to Lender. (b) Lender shall have received such documents, and, if an Event of Default has occurred, such opinion of counsel or supplemental opinion as Lender may request. (c) The security interests in the Collateral shall have been duly authorized, created, and perfected with first lien priority and shall be in full force and effect. (d) All guaranties required by Lender for the Lines of Credit shall been executed by each Guarantor, delivered to Lender, and be in full force and effect. (e) Lender shall have received a 90% guarantee acceptable to Lender from the Export-Import Bank of the U.S. for Lender's export revolving line of credit to Borrower. (f) Lender, at its option and for its sole benefit, shall have conducted an inspection of Borrower's Accounts, Inventory, books, records, and operations, and Lender shall be satisfied as to their condition. (g) Borrower shall have paid or will pay to Lender all fees, costs and expenses specified in this Agreement and the Related Documents as are then due and payable. Lender will not impose any charge on Borrower in connection with this Loan Agreement and the Note(s) other than reasonable fees charged by the Lender in accordance with normal commercial lending practices. (h) There shall not exist at the time of any Advance a condition which would constitute an Event of Default under this Agreement. MAKING LOAN ADVANCES. Advances under the credit facility are restricted solely to the export revolving line of credit guaranteed by the Export-Import Bank of the U.S. Advances, as well as directions for payment from Borrower's accounts, may be requested orally or in writing by authorized persons. Lender may, but need not, require that all oral requests be confirmed in writing. Each Advance shall be conclusively deemed to have been made at the request of and for the benefit of Borrower (a) when credited to any deposit account of Borrower maintained with Lender or (b) when advanced in accordance with the instructions of an authorized person. Lender, at its option, may set a cutoff time, after which all requests for Advances will be treated as having been requested on the next succeeding Business Day. MANDATORY LOAN REPAYMENTS/ADDITIONAL COLLATERAL. If at any time the aggregate principal amount of the outstanding Advances plus issued standby letters of credit shall exceed the applicable Borrowing Base, Borrower, immediately upon written or oral notice from Lender shall either (a) pay to Lender an amount equal to the difference between the outstanding principal balance of the Advances plus issued letters of credit and the Borrowing Base or (b) furnish additional security to Lender, in form and amount satisfactory to Lender and the Export-Import Bank of the U.S. LOAN ACCOUNT. Lender shall maintain on its books a record of account in which Lender shall make entries for each Advance and such other debits and credits as shall be appropriate with the credit facility. Lender shall provide Borrower with periodic statements of Borrower's accounts, which statements will be considered to be correct and conclusively binding on Borrower unless Borrower notifies Lender to the contrary with thirty (30) days after Borrower's receipt of any such statement which Borrower deems to be incorrect. OPERATING ACCOUNT. Borrower shall utilize a regular operating account with Lender. COLLATERAL. To secure payment of the Lines of Credit and performance of all other Loans, obligations and duties owed by Borrower to lender, Borrower (and others, if required) shall grant to Lender Security Interests in such property and assets as Lender may require (the "Collateral"), including without limitation Borrower's present and future Accounts, contract rights, general intangibles, proprietary software, equipment, inventory and assignment of credit insurance. Lender's Security Interests in the Collateral shall be continuing liens and shall include the proceeds and products of the Collateral, including without limitation the proceeds of any insurance. With respect ot the Collateral, Borrower agrees and represents and warrants to Lender: PERFECTION OF SECURITY INTERESTS. Borrower agrees to execute such financing statements and to take whatever other actions are requested by Lender to perfect and continue Lender's Security Interests in the Collateral. Upon request of Lender, Borrower will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Borrower will note Lender's interest upon any all chattel paper if not delivered to Lender for possession by Lender. Contemporaneous with the execution of this Agreement, Borrower will execute one or more UCC financing statements and any similar statements as may be required by applicable law, and will file such financing statements and all such similar statements in the appropriate location or locations. Borrower hereby appoints Lender as its irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect or to continue any Security Interest. Lender may, at any time, and without further authorization from Borrower, file a carbon, photograph, facsimile, or other reproduction of any financing statement for use as a financing statement. Borrower will reimburse Lender for all expenses for the perfection, termination, and the continuation of the perfection of Lender's security interest in the Collateral. Borrower promptly will notify Lender of any change in Borrower's name including any change to the assumed business names of Borrower. Borrower also will promptly notify Lender of any change in Borrower's Employer Identification Number. Borrower further agrees to notify Lender in writing prior to any change in address or location of Borrower's principal governance office or should Borrower merge or consolidate with any other entity. COLLATERAL RECORDS. Borrower does not, and at all times hereafter shall, keep correct and accurate records of the Collateral, all of which records shall be available to Lender or Lender's representative upon demand for inspection and copying at any reasonable time. With respect to the Accounts, Borrower agrees to keep and maintain such records as Lender may require, including without limitation information concerning Eligible Accounts and Account balances and agings. With respect to Inventory and Work in Progress, Borrower agrees to keep and maintain such records as Lender may require, including without limitation records itemizing and describing the kind, type, quality and quantity of Inventory and Work in Progress, Borrower's costs and selling prices, and the monthly withdrawals and additions to Inventory and Work in Progress: The following is an accurate and complete list of all locations at which Borrower keeps or maintains business records concerning Borrower's Accounts, Inventory and Work in Progress: 1801 California Street, Suite 295, Denver, Colorado 80202; 10333 Richmond Avenue, Suite 1000, Houston, Texas 77042. COLLATERAL SCHEDULES. Concurrently with the execution and delivery of this Agreement, Borrower shall execute and deliver to Lender schedules of Accounts and Eligible Accounts, in form and substance satisfactory to the Lender. Thereafter Borrower shall execute and deliver to Lender such supplemental schedules of Eligible Accounts and such other matters and information relating to the Accounts as Lender may request. REPRESENTATIONS AND WARRANTIES CONCERNING ACCOUNTS. With respect to the Accounts, Borrower represents and warrants to Lender: (a) Each Account represented by Borrower to be an Eligible Account for purposes of this Agreement, conforms to the requirements of the definition of an Eligible Account; (b) All Account information listed on schedules delivered to Lender will be true and correct, subject to immaterial variance; (c) Borrower has good and marketable title to Accounts due and collectible outside the United States; such accounts support exports originating from the United States; and proceeds from the collection of such accounts are remitted to the United States on a bi-monthly basis; (d) Lender, its assigns, or agents shall have the right at any time and at Borrower's expense to inspect, examine, and audit Borrower's records and to confirm with Account Debtors the accuracy of such Accounts. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender as of the date of this Agreement and as of the date of each disbursement of Loan proceeds: ORGANIZATION. Borrower is a corporation which is duly organized, validly existing, and in good standing where incorporated. Borrower has the full power and authority to own its properties and to transact the business in which it is presently engaged or presently proposes to engage. Borrower also is duly qualified as a foreign corporation and is in good standing in all states in which the failure to so qualify would have a material adverse effect on its businesses or financial condition. AUTHORIZATION. The execution, delivery, and performance of this Agreement and all Related Documents by Borrower, to the extent to be executed, delivered or performed by Borrower, have been duly authorized by all necessary action by Borrower within two (2) days after the date of this Agreement; do not require the consent or approval of any other person, regulatory authority or governmental body; and do not conflict with, result in a violation of, or constitute a default under (a) any provision of its articles of incorporation, operating agreement, or any other agreement or other instrument binding upon Borrower or (b) any law, governmental regulation, court decree, or order applicable to Borrower. FINANCIAL INFORMATION. Each financial statement of Borrower supplied to Lender truly and completely disclosed Borrower's financial condition as of the date of the statement, and there has been no material adverse change in Borrower's financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements. LEGAL EFFECT. This Agreement constitutes, and any instrument or agreement required hereunder to be given by Borrower when delivered will constitute, legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms. PROPERTIES. Except as contemplated by this Agreement or as previously disclosed in Borrower's financial statements or in writing to Lender and as accepted by Lender, and except for property tax liens for taxes not presently due and payable, Borrower owns and has good title to all of Borrower's properties free and clear of all Security interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower's properties are titled in Borrower's legal name, and Borrower has not used, or filed a financing statement under, any other name for at least the last five 5) years. LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrowers financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing. TAXES. To the best of Borrower's knowledge, all tax returns and reports of Borrower that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided. LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interest on or affecting any of the Collateral directly or indirectly securing repayment of Borrower's Loan and Note, that would be prior or that may in any way be superior to Lender's Security Interests and rights in and to such Collateral. BINDING EFFECT. This Agreement, the Note and all Security Agreements directly or indirectly securing repayment of Borrower's Loan and Note are binding upon Borrower as well as upon Borrower's successors, representatives and assigns, and are legally enforceable in accordance with their respective terms. COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely for business or commercial related purposes. EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower may have any liability complies in all material respects with all applicable requirements of law and regulations, and (i) no Reportable Event nor Prohibited Transaction (as defined in ERISA) has occurred with respect to any such plan, (ii) Borrower has not withdrawn from any such plan or initiated steps to do so, and (iii) no steps have been taken to terminate any such plan. INVESTMENT COMPANY ACT. Borrower is not an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. PUBLIC UTILITY HOLDING COMPANY ACT. Borrower is not a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Compete Act of 1935 as amended. REGULATIONS G, T AND U. Borrower is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of the Regulations G, T and U of the Board of Governors of the Federal Reserve System). LOCATION OF BORROWER'S OFFICES AND RECORDS. The chief place of business of Borrower and the office or offices where Borrower keeps its records concerning the Collateral is located at 1801 California Street, Suite 295, Denver, Colorado 80202. Additional records are kept at 10333 Richmond Avenue, Suite 1000, Houston, Texas 77042. INFORMATION. All information heretofore or contemporaneously herewith furnished by Borrower to Lender for the purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all information hereafter furnished by or on behalf of Borrower to Lender will be true and accurate in every material respect on the date as of which such information is dated or certified; and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading. SURVIVAL OF REPRESENTATION AND WARRANTIES. Borrower understands and agrees that Lender is relying upon the above representations and warranties in extending Loan Advances to Borrower. Borrower further agrees that the foregoing representations and warranties shall be continuing in nature and shall remain in full force and effect until such time as Borrower's Loan and Note shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur. AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while this Agreement is in effect, Borrower will: DEPOSIT ACCOUNTS. Borrower will maintain all material deposit accounts with Lender. EXPORT-IMPORT BANK OF THE U.S. GUARANTY. At the request of Lender, either orally or in writing, comply with any requirement imposed on Lender by the Export-Import Bank of the U.S. in connection with their Guaranty. LITIGATION. Promptly inform Lender in writing of (a) all material adverse changes in Borrower's financial condition, ad (b) all litigation and claims and all threatened litigation and claims affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor. FINANCIAL RECORDS. Maintain its books and records in accordance with generally accepted accounting principles, applied on a consistent basis and permit Lender to examine and audit Borrower's books and records at all reasonable times. FINANCIAL STATEMENTS. Furnish Lender with: (a) as soon as available, but in no event later than 120 days after the end of each fiscal year, Borrower's annual CPA audited financial statement and Form 10-K for the year ended; (b) within 45 days after the end of each quarter, Borrower's quarterly financial statements prepared as Form 10-Q; (c) within 30 days after the end of each month, Borrower's internally prepared financial statements, agings of receivables and payables, and Borrowing Base and Compliance Certificate in the form attached as Exhibit A; (e) within 30 days after the end of each month, Borrower's shipment and credit insurance premium paid report. All financial reports required to be provided under this Agreement shall be prepared in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. RECONCILIATION AND OTHER STATEMENTS. The Borrower shall submit to the Lender monthly written accounts receivable reconciliation statements covering the collateral. ADDITIONAL INFORMATION. Furnish such additional information and statements, lists of assets and liabilities, inventory schedules, budgets, forecasts, tax returns, and other reports whit respect to Borrower's or Guarantors' financial condition and business operations as Lender may request from time to time. FINANCIAL COVENANTS AND RATIOS. Comply with the following covenants and ratios: TANGIBLE NET WORTH. Maintain a minimum Tangible Net Worth of not less than - - - -$3,000,000.00 on a quarterly basis. NET WORTH RATIO. Maintain a ratio of Total Liabilities to Tangible net Worth of less than 3.00 to 1.00 on a quarterly basis. CURRENT RATIO. Maintain a ratio of Current Assets to Current Liabilities in excess of 1.0 to 1.00 on a quarterly basis. CASH FLOW REQUIREMENTS. Maintain a positive cash flow at the end of each fiscal year. Except as provided above, all computations made to determine compliance with the requirements contained in this paragraph shall be made in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. FEES AND CHARGES. In addition to all other agreed upon fees and charges, pay the following: 1) any fees charged by the Export-Import Bank of the U.S. for providing its guarantee to Lender; 2) cost of an annual field examination, not to exceed $3,000.00 per examination; 3) standard Letter of Credit fees as established by the International Division of Bank One, Boulder, N.A. INSURANCE. Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower's properties and operations, in form, amounts, coverages and with insurance companies reasonably acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days' prior written notice to Lender. In connection with all policies covering assets in which Lender holds or is offered a security for loans, Borrower will provide Lender with such loss payable or other endorsements as Lender may require. INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (a) the name of the insurer; (b) the risks insured; (c) the amount of the policy; (d) the properties insured; (e) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (f) the expiration date of the policy. OTHER AGREEMENTS. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other creditor and notify Lender immediately in writing of any default in connection with any other such agreements. LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's and its subsidiaries (as defined in the paragraph below entitled Subsidiaries and Affiliates) business operations, unless specifically consented to the contrary by Lender in writing. TAXES, CHARGES AND LIENS. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrowers properties, income, or profits. Provided however, Borrower will not be required to pay and discharge any such assessment, tax, charge, levy, lien or claim so long as (a) the legality of the same shall be contested in good faith by appropriate proceedings, and (b) Borrower shall have established on its books adequate reserves with respect to such contested assessment, tax, charge, levy, lien, or claim in accordance with generally accepted accounting practices. Borrower, upon demand of Lender, will furnish to Lender evidence of payment of the assessments, taxes, charges, levies, liens and claims and will authorize the appropriate governmental official to deliver to Lender at any time a written statement of any assessments, taxes, charges, levies, liens and claims against Borrower's properties, income, or profits. PERFORMANCE. Perform and comply with all terms, conditions, and provisions set forth in this Agreement and in all other instruments and agreements between Borrower and Lender in a timely manner, and promptly notify Lender if Borrower learns of the occurrence of any event which constitutes an Event of Default under this Agreement. OPERATIONS. Substantially maintain its present executive and management personnel; conduct is business affairs in a reasonable and prudent manner and in compliance with all applicable federal, state and municipal laws, ordinances, rules and regulations respecting its properties, charters, businesses and operations, including without limitation, compliance with the Americans With Disabilities Act and with all minimum funding standards and other requirements of ERISA and other laws applicable to Borrower's employee benefit plans. INSPECTION. The Borrower shall permit a representative of the Lender to make reasonable inspections at any time during normal business hours of the Borrower's facilities, activities, books and records, and cause its officers and employees to give full cooperation and assistance in connection therewith, so that Lender can determine whether the Borrower has maintained the Collateral Value at in accordance with the terms of this Agreement. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense. When any such inspection is characterized by Lender as a "field examination", Lender will limit such field examination to one a year and Borrower will pay Lender a fee related to its costs of any such field examination in an amount not to exceed $3,000.00 per examination. Such Information that the Lender obtains shall remain confidential and will not be disclosed to third parties. ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all respects with all environmental protection federal, state and local laws, statutes, regulations and ordinances; not cause or permit to exist, as a result of an intentional or unintentional action or omission on its part or on the part of any third party, or property owned and or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower's part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources. ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests. NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender: CAPITAL EXPENDITURES. Make or contract to make capital expenditures, including leasehold improvements, in any fiscal quarter in excess of $200,000.00. INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the normal course of business and indebtedness to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money, including capital leases, except (i) debt to Renaissance Capital Partners II, Ltd. in the form of convertible debentures (ii) $45,000,000 in long term debt to Lindner Dividend Fund and (iii) short-term debt up to $300,000.00 incurred by Scientific Software-Intercomp (U.K.), Ltd. for working capital purposes or otherwise (b) sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower's assets, except for financing instruments sold in relation to Grantor sales or licensing of Grantor's proprietary software, or (c) sell with recourse any of Borrower's accounts, except to Lender and except liens for taxes not yet due or deposits or pledges in connection with or to secure payment of workmen's compensation, unemployment insurance or other social security or in connection with the good faith contest of any tax lien. CONTINUITY OF OPERATIONS. (a) Engage or enter into any agreement to engage in any business activities substantially different than those in which Borrower is presently engaged, or (b) cease or enter into any agreement to cease operations, liquidate, merge, transfer, acquire or consolidate with any other entity, change ownership, dissolve or transfer or sell Collateral out of the ordinary course of business, or (c) pay any dividends on Borrower's stock (other than dividends payable in its stock) or purchase or retire any of Borrower's outstanding shares with cash. LOANS, ACQUISITIONS, INVESTMENTS AND GUARANTIES. (a) Make, or permit to exist, any investment, by loan, stock or security purchase or otherwise, in any subsidiary or other entity of any kind, except in its existing subsidiaries as defined below in the paragraph entitled "Subsidiaries and Affiliates", and except investments in U.S. Government obligations or investment grade marketable securities, or (b) incur any obligation as surety or guarantor, except by indorsement of instruments for deposit, endorsement of financing instruments related to sales on Borrower's behalf or collection in the ordinary course of business and except for the guaranty of Borrower's Canadian subsidiary, IRDE, and its financing arrangement with the Export Development Corporation. SALES OF ASSETS. Dispose of, sell, lease or transfer all or substantially all of its assets, other than sales of inventory in the ordinary course of business. TRANSFER OF CONTROLLING EQUITY INTEREST. The Borrower shall not transfer, purchase or redeem, or permit any subsidiary to transfer or purchase, any shares of the Borrower's capital stock resulting in a controlling equity interest unless such transfer, purchase or redemption is effected solely from the proceeds of and within a reasonable time after the issuance to third parties by the Borrower or its subsidiary of capital stock which is in addition to the capital stock of the Borrower or its subsidiary, as the case may be, outstanding on the date of the Loan Agreement. CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (a) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender; (b) Borrower becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (c) there occurs a material adverse change in Borrower's financial condition in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; (d) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any other loan with Lender. RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA, Keogh, and trust accounts. Borrower authorizes Lender, to the extent permitted by applicable law to charge or setoff all sums, owing on the indebtedness against any and all such accounts. However, the Lender's right of setoff will be limited to Borrower's pro-rata share of any joint venture equity interest. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when due on the loans. OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or to perform when due any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents, or failure of Borrower to comply with or to perform any other term, obligation, covenant or condition contained in any other agreement between Lender and Borrower ten (10) days after receiving written notice from Lender demanding cure of such default. If the cure requires more than ten (10) days, Borrower shall immediately initiate steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter shall continue and complete all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's or any Grantor's ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents. FALSE STATEMENTS. Any warranty, representation, or statement made or furnished to Lender by or on behalf of Borrower or any Grantor under this Agreement or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished. DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any Security Agreement to create a valid and perfected Security interest) at any time and for any reason. INSOLVENCY. Any dissolution or termination of Borrower's existence as a going business, insolvency, appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. CREDITOR OR FORFEITURE PROCEEDING. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower, any creditor of any Grantor against any collateral securing the indebtedness, or by any governmental agency. This includes a garnishment, attachment, or levy on or of any of Borrower's deposit accounts with Lender. CHANGE IN OWNERSHIP. Any single change in ownership of twenty-five percent (25%) or more of the common stock of Borrower. ADVERSE CHANGE. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the indebtedness is impaired. EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where otherwise provided in this Agreement or the related documents, all commitments and obligations of Lender under this agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make Loan Advances or disbursements), and, at Lender's option, all indebtedness immediately will become due and payable all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the "insolvency" subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents of available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender's rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender's right to declare a default and to exercise its rights and remedies. NOTICE IN EVENT OF FILING OF ACTION FOR DEBTOR'S RELIEF. The Borrower shall promptly notify the Lender in writing of the occurrence of any of the following: (1) the Borrower begins or consents in any manner to any proceeding or arrangement for its liquidation in whole or in part or to any other proceeding or arrangement whereby any of its assets are subject generally to the payment of its liabilities or whereby any receiver, trustee, liquidator the like is appointed for it or any for appointment as a debtor-in-possession under Title 11 of the U.S. Code); (2) the Borrower fails to obtain the dismissal or stay on appeal within thirty (30) calendar days of the commencement of any proceeding arrangement referred to in (1) above; (3) the Borrower begins any other procedure for the relief of financially distressed or insolvent debtors, or such procedure has been commenced against it, whether voluntarily or involuntarily, and such procedure has not been effectively terminated, dismissed or stayed within thirty (30) calendar days after the commencement thereof, or (4) the Borrower begins any procedure for its dissolution, or a procedure therefore has been commenced against it. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: AMENDMENTS. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. APPLICABLE LAW. This Agreement has been delivered to Lender and accepted by Lender in the State of Colorado. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of Boulder County, the State of Colorado. Lender and Borrower hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by either Lender or Borrower against the other. This Agreement shall be governed by and construed in accordance with the laws of the State of Colorado. CAPTION HEADINGS. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. MULTIPLE PARTIES. All obligation of Borrower under this Agreement shall be joint and several, and all references to Borrower shall mean each and every Borrower. This means that each of the persons signing below is responsible for all obligations in this Agreement. COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's out-of-pocket expenses, including reasonable attorneys' fees, incurred in connection with the preparation, execution, enforcement and collection of this Agreement or in connection with the Loans made pursuant to this Agreement. Lender may pay someone else to help collect the Loans and to enforce this Agreement, and Borrower will pay that amount. This includes, subject to any limits under applicable law, Lender's attorney' fees and Lender's legal expenses, whether or not there is a lawsuit, including attorney's fees for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also will pay any court costs, in addition to all other sums provided by law. NOTICES. All notices required to be given under this Agreement shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by Applicable law, if there is more than one Borrower, notice to any Borrower will constitute notice to all Borrowers. For notice purposes, Borrower agrees to keep Lender informed at all times of Borrower's current address(es). SEVERABILITY. If a court of competent jurisdiction finds any provision of the Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. SUBSIDIARIES AND AFFILIATES. To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word "Borrower" as used herein shall include all subsidiaries of Borrower, with the exception of its Canadian subsidiary, IRDE. Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any subsidiary of Borrower. SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on behalf of Borrower shall bind its successors and assigns and shall inure to the benefit of Lender, its successors and assigns. Borrower shall not, however, have the right to assign its rights under this Agreement or any interest therein, without the prior written consent of Lender. SURVIVAL. All warranties, representations, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement shall be considered to have been relied upon by Lender and will survive the making of the Loan and delivery to Lender of the Related Documents, regardless of any investigation made by Lender or on Lender's behalf. TIME IS OF THE ESSENCE. Time is of the essence in the performance of this Agreement. WAIVER. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision of any other provision of this Agreement. No prior waiver by Lender, nor any course for dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a waiver of any of Lender's rights or of any obligations of Borrower or of any Grantor as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent in subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT, AND BORROWER AGREWES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF MARCH 30, 1996. BORROWER: SCIENTIFIC SOFTWARE-INTERCOMP, INC. A Colorado Corporation By:___________________________________________ Ronald J. Hottovy, Vice President/Secretary LENDER: BANK ONE, COLORADO, N.A. By:____________________________________ Eric R. Long, Assistant Vice President EX-10.31 7 EXHIBIT 10.31 PROMISSORY NOTE Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials $300,000.00 04-30-1996 04-15-1997 42 7979623550 ----------- ---------- ---------- -- ---------- 410 --- References in the shaded area are for Lender's use only and do not limit the applicability of the document to any particular loan or item. Borrower: SCIENTIFIC SOFTWARE - INTERCOMP, INC. A Lender: BANK ONE, COLORADO, N.A. COLORADO CORPORATION DOWNTOWN BOULDER BANKING CENTER 1801 CALIFORNIA ST. - SUITE 295 2696 SOUTH COLORADO BLVD. DENVER, CO 80202-2699 DENVER, CO 80222 Principal Amount: $300,000.00 Initial Rate: 7.000% Date of Note: April 30, 1996 PROMISE TO PAY. SCIENTIFIC SOFTWARE - INTERCOMP, INC., A COLORADO CORPORATION ("Borrower") promises to pay to BANK ONE, COLORADO, N.A. ("Lender"), or order, in lawful money of the United States of America, the principal amount of Three Hundred Thousand & 00/100 Dollars ($300,000.00) or so much as may be outstanding, together with interest on the unpaid outstanding principal balance of each advance. Interest shall be calculated from the date of each advance until repayment of each advance. PAYMENT. Borrower will pay this loan in one payment of all outstanding principal plus all accrued unpaid interest on April 15, 1997. In addition, Borrower will pay regular monthly payments of accrued unpaid interest beginning June 15, 1996, and all subsequent interest payments are due on the same day of each month after that. Interest on this Note is computed on a 365/360 simple interest basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. Unless otherwise agreed or required by applicable law, payments will be applied first to accrued unpaid interest, then to principal, and any remaining amount to any unpaid collection costs and late charges. VARIABLE INTEREST RATE. The Interest rate on this Note is subject to change from time to time based on changes in an index which is the LENDER'S PRIME RATE (the "Index). PRIME RATE IS THE LENDER'S BASE LENDING RATE AS ANNOUNCED BY THE LENDER FROM TIME TO TIME AT ITS SOLE DISCRETION. AT ANY GIVEN TIME, THE LENDER MAY MAKE LOANS, AT, ABOVE, OR BELOW ITS PRIME RATE. Lender will tell Borrower the current index rate upon Borrower's request. Borrower understands that Lender may make loans based on other rates as well. The interest rate change will not occur more often than each DAY. The Index currently is 8.250% per annum. The Interest rate to be applied to the unpaid principal balance of this Note will be at a rate of 1.250 percentage points under the Index, resulting in an initial rate of 7.000% per annum. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full prepayment of this Note, Borrower understands that Lender is entitled to a minimum Interest charge of $25.00. Other than Borrower's obligation to pay any minimum interest charge, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments of accrued unpaid interest. Rather, they will reduce the principal balance due. DEFAULT. Borrower will be in default if any of the following happens (a) Borrower fails to make any payment when due. (b) Borrower breaks any promise Borrower has made to Lender, or Borrower fails to comply with or to perform when due any other term, obligation, covenant, or condition contained in this Note or any agreement related to this Note, or in any other agreement or loan Borrower has with Lender. (c) Borrower defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's ability to repay this Note or perform Borrower's obligations under this Note or any of the Related Documents. (d) Any representation or statement made or furnished to Lender by Borrower or on Borrower's behalf is false or misleading in any material respect either now or at the time made or furnished. (e) Borrower becomes insolvent, a receiver is appointed for any part of Borrower's property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest. This includes a garnishment of any of Borrower's accounts with Lender. (g) Any of the events described in this default section occurs with respect to any guarantor of this Note. (h) A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the indebtedness is impaired. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, without notice, and then Borrower will pay that amount. Upon default, including failure to pay upon final maturity, Lender, at its option, may also, if permitted under applicable law, do one or both of the following: (a) increase the variable interest rate on this Note to 25.000% per annum,* and (b) add any unpaid accrued interest to principal and such sum will bear interest therefrom until paid at the rate provided in this Note, (including any increased rate). The interest rate will not exceed the maximum rate permitted by applicable law. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower also will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic state or injunction), appeals, and any anticipated post-judgment collection services. If not prohibited by applicable law, Borrower also will pay any court costs, in addition to all other sums provided by law. THIS NOTE HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY LENDER IN THE STATE OF COLORADO. IF THERE IS A LAWSUIT, BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THE COURTS OF BOULDER COUNTY, THE STATE OF COLORADO. LENDER AND BORROWER HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER LENDER OR BORROWER AGAINST THE OTHER. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF COLORADO. * 5.00% OVER THE INDEX RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA and Keogh accounts, and trust accounts. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on this Note against any and all such accounts. LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under this Note, as well as directions for payment from Borrower's accounts, may be requested orally or in writing by Borrower or by an authorized person. Lender may, but need not, require that all oral requests be confirmed in writing. Borrower agrees to be liable for all sums either: (a) advanced in accordance with the instructions of an authorized person or (b) credited to any of Borrower's accounts with Lender. The unpaid principal balance owing on this Note at any time may be evidenced by endorsements on this Note or by Lender's internal records, including daily computer print-outs. Lender will have no obligation to advance funds under this Note if: (a) Borrower or any guarantor is in default under the terms of this Note or any agreement that Borrower or any guarantor has with Lender, including any agreement made in connection with the signing of this Note; (b) Borrower or any guarantor ceases doing business or is insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit, modify or revoke such guarantor's guarantee of this Note or any other loan with Lender, or (d) Borrower has applied funds provided pursuant to this Note for purposes other than those authorized by Lender. GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan, or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE. BORROWER: SCIENTIFIC SOFTWARE - INTERCOMP, INC., A COLORADO CORPORATION By:_____________________________________ RONALD J. HOTTOVY, Secretary EX-10.32 8 EXHIBIT 10.32 CHANGE IN TERMS AGREEMENT Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials $900,000.00 10-15-1997 42 7979623550 410 ----------- ---------- -- ---------- --- References in the shaded area are for Lender's use only and do not limit the applicability of the document to any particular loan or item. Borrower: SCIENTIFIC SOFTWARE - INTERCOMP, INC. A Lender: BANK ONE, COLORADO, N.A. COLORADO CORPORATION DOWNTOWN BOULDER BANKING CENTER 1801 CALIFORNIA ST. - SUITE 295 2696 SOUTH COLORADO BLVD. DENVER, CO 80202-2699 DENVER, CO 80222 Principal Amount: $900,000.00 Date of Agreement: April 15, 1997 DESCRIPTION OF EXISTING INDEBTEDNESS. A PROMISSORY NOTE DATED SEPTEMBER 20, 1994, IN THE ORIGINAL PRINCIPAL AMOUNT OF $5,000,000.00. DESCRIPTION OF CHANGE IN TERMS. THE MATURITY DATE WILL NOW BE OCTOBER 15, 1997. SEE BELOW FOR NEW INTEREST RATE. THIS LINE OF CREDIT IS NOW CAPPED AT $900,000.00. PROMISE TO PAY. SCIENTIFIC SOFTWARE - INTERCOMP, INC., A COLORADO CORPORATION ("Borrower") promises to pay to BANK ONE, COLORADO, N.A. ("Lender"), or order, in lawful money of the United States of America, the principal amount of Nine Hundred Thousand & 00/100 Dollars ($900,000.00) or so much as may be outstanding, together with interest on the unpaid outstanding principal balance of each advance. Interest shall be calculated from the date of each advance until repayment of each advance. PAYMENT. Borrower will pay this loan in one payment of all outstanding principal plus all accrued unpaid interest on October 15, 1997. In addition, Borrower will pay regular monthly payments of accrued unpaid interest beginning May 15, 1997, and all subsequent interest payments are due on the same day of each month after that. Interest on this Agreement is computed on a 365/360 simple interest basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. Unless otherwise agreed or required by applicable law, payments will be applied first to accrued unpaid interest, then to principal, and any remaining amount to any unpaid collection costs and late charges. VARIABLE INTEREST RATE. The interest rate on this Agreement is subject to change from time to time based on changes in an index which is the LENDER'S PRIME RATE (the "Index"). PRIME RATE IS THE LENDER'S BASE LENDING RATE AS ANNOUNCED BY THE LENDER FROM TIME TO TIME AT ITS SOLE DISCRETION. AT ANY GIVEN TIME, THE LENDER MAY MAKE LOANS, AT, ABOVE, OR BELOW ITS PRIME RATE. Lender will tell Borrower the current index rate upon Borrower's request. Borrower understands that Lender may make loans based on other rates as well. The interest rate change will not occur more often than each DAY. The Index currently is 8.500% per annum. The interest rate to be applied to the unpaid principal balance of this Agreement will be at a rate equal to the Index, resulting in an initial rate of 8.500% per annum. NOTICE: Under no circumstances will the interest rate on this Agreement be more than the maximum rate allowed by applicable law. PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full prepayment of this Agreement, Borrower understands that Lender is entitled to a minimum interest charge of $25.00. Other than Borrower's obligation to pay any minimum interest charge, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments of accrued unpaid interest. Rather, they will reduce the principal balance due. DEFAULR. Borrower will be in default if any of the following happens: (a) Borrower fails to make any payment when due. (b) Borrower breaks any promise Borrower has made to Lender, or Borrower fails to comply with or to perform when due any other term, obligation, covenant, or condition contained in this Agreement or any agreement related to this Agreement, or in any other agreement or loan Borrower has with Lender. (c) Borrower defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's ability to repay this Note or perform Borrower's obligations under this Note or any of the Related Documents. (d) Any representation or statement made or furnished to Lender by Borrower or on Borrower's behalf is false or misleading in any material respect either now or at the time made or furnished. (e) Borrower becomes insolvent, a receiver is appointed for any part of Borrower's property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest. This includes a garnishment of any of Borrower's accounts with Lender. (g) Any guarantor dies or any of the other events described in this default section occurs with respect to any guarantor of this Agreement. (h) A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the indebtedness is impaired. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Agreement and all accrued unpaid interest immediately due, without notice, and then Borrower will pay that amount. Upon default, including failure to pay upon final maturity, Lender, at its option, may also, if permitted under applicable law, do one or both of the following: (a) increase the variable interest rate on this Agreement to 25.000% per annum, and (b) add any unpaid accrued interest to principal and such sum will bear interest therefrom until paid at the rate provided in this Agreement (including any increased rate). The interest rate will not exceed the maximum rate permitted by applicable law. Lender may hire or pay someone else to help collect this Agreement if Borrower does not pay. Borrower also will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. If not prohibited by applicable law, Borrower also will pay any court costs, in addition to all other sums provided by law. THIS AGREEMENT HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY LENDER IN THE STATE OF COLORADO. IF THERE IS A LAWSUIT, BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THE COURTS OF BOULDER COUNTY, THE STATE OF COLORADO. LENDER AND BORROWER HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER LENDER OR BORROWER AGAINST THE OTHER. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF COLORADO. RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA and Keogh accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on this Agreement against any and all such accounts. LINE OF CREDIT. This Agreement evidences a revolving line of credit. Advances under this Agreement, as well as directions for payment from Borrower's accounts, may be requested orally or in writing by Borrower or by an authorized person. Lender may, but need not, require that all oral requests be confirmed in writing. Borrower agrees to be liable for all sums either: (a) advanced in accordance with the instructions of an authorized person or (b) credited to any of Borrower's accounts with Lender. The unpaid principal balance owing on this Agreement at any time may be evidenced by endorsements on this Agreement or by Lender's internal records, including daily computer print-outs. Lender will have no obligation to advance funds under this Agreement if: (a) Borrower or any guarantor is in default under the terms of this Agreement or any agreement that Borrower or any guarantor has with Lender, including any agreement made in connection with the signing of this Agreement; (b) Borrower or any guarantor ceases doing business or is insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit, modify or revoke such guarantor's guarantee of this Agreement or any other loan with Lender, or (d) Borrower has applied funds provided pursuant to this Agreement for purposes other than those authorized by Lender. CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms of the original obligation or obligations, including all agreements evidenced or securing the obligation(s), remain unchanged and in full force and effect. Consent by Lender to this Agreement does not waive Lender's right to strict performance of the obligation(s) as changed, nor obligate Lender to make any future change in terms. Nothing in this Agreement will constitute a satisfaction of the obligation(s). It is the intention of Lender to retain as liable parties all makers and endorsers of the original obligation(s), including accommodation parties, unless a party is expressly released by Lender in writing. Any maker or endorser, including accommodation makers, will not be released by virtue of this Agreement. If any person who signed the original obligation does not sign this Agreement below, then all persons signing below acknowledge that this Agreement is given conditionally, based on the representation to Lender that the non-signing party consents to the changes and provisions of this Agreement or otherwise will not be released by it. This waiver applies not only to any initial extension, modification or release, but also to all such subsequent actions. MISCELLANEOUS PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Agreement without losing them. Borrower and any other person who signs, guarantees or endorses this Agreement, to the extent allowed by law, waive presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Agreement, and unless otherwise expressly stated in writing, no party who signs this Agreement, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan, or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS AGREEMENT, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE AGREEMNT AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE AGREEMENT. BORROWER: SCIENTIFIC SOFTWARE - INTERCOMP, INC., A COLORADO CORPORATION By:_____________________________________ GEORGE STEEL, President Variable Rate, Line of Credit. LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.22b(c) 1997 CFI ProServices, Inc. All rights reserved. (CO-D20 E3.22a SCI_JB05LN C5.OVL) EX-10.33 9 EXHIBIT 10.33 CHANGE IN TERMS AGREEMENT Principal Amount Date of Agreement: $650,000.00 October 30, 1997 Borrower: Lender: Scientific Software-Intercomp, Inc., Bank One, Colorado, N.A. A Colorado corporation 1125 17th Street 633 17th Street, Suite 1600 Denver, CO 80202 Denver, CO 80202 DESCRIPTION OF EXISTING INDEBTEDNESS: A PROMISSORY NOTE DATED SEPTEMBER 20, 1994 IN THE ORIGINAL PRINCIPAL AMOUNT OF $5,000,000.00, AS MODIFIED BY A (1) CHANGE IN TERMS AGREEMENT, DATED MAY 31, 1995, CHANGING THE MATURITY DATE TO JULY 15, 1995; (2) CHANGE IN TERMS AGREEMENT, DATED JULY 15, 1995, CHANGING THE MATURITY DATE TO AUGUST 15, 1995; (3) CHANGE IN TERMS AGREEMENT, DATED AUGUST 15, 1995, CHANGING THE MATURITY DATE TO SEPTEMBER 15, 1995 AND CHANGING THE PRINCIPAL AMOUNT TO $4,500,000.00; (4) CHANGE IN TERMS AGREEMENT, DATED SEPTEMBER 15, 1995, CHANGING THE MATURITY DATE TO SEPTEMBER 30, 1995; (5) CHANGE IN TERMS AGREEMENT, DATED SEPTEMBER 30, 1995, CHANGING THE MATURITY DATE TO OCTOBER 15, 1995; (6) CHANGE IN TERMS AGREEMENT, DATED OCTOBER 15, 1995, CHANGING THE MATURITY DATE TO MARCH 30, 1996; (7) CHANGE IN TERMS AGREEMENT, DATED MARCH 30, 1996, CHANGING THE MATURITY DATE TO APRIL 15, 1997 AND CHANGING THE PRINCIPAL AMOUNT TO $1,200,000.00; AND (8) CHANGE IN TERMS AGREEMENT, DATED APRIL 15, 1997, CHANGING THE MATURITY DATE TO OCTOBER 15, 1997 AND CHANGING THE PRINCIPAL AMOUNT TO $900,000.00 (COLLECTIVELY, THE "PROMISSORY NOTE"). ----------------- DESCRIPTION OF CHANGE IN TERMS: (1) The maturity date will now be November 30, 1997; (2) the interest rate is changed as set forth below in the paragraph entitled "VARIABLE INTEREST RATE;" and (3) the principal amount of this line of credit loan is capped at $650,000.00. PROMISE TO PAY. Borrower promises to pay to Lender, or order, in lawful money of the United States of America, the principal amount of Six Hundred Fifty Thousand and 00/100 Dollars ($650,000.00), or so much as may be outstanding, together with interest on the unpaid outstanding principal balance of each advance. Interest shall be calculated from the date of each advance until repayment of each advance. PAYMENT. Borrower will pay this loan in one payment of all outstanding principal plus all accrued unpaid interest on November 30, 1997. In addition, Borrower will pay a payment of accrued unpaid interest on November 15, 1997. VARIABLE INTEREST RATE. The interest rate on this Agreement is subject to change from time to time based on changes in an index which is the LENDER'S PRIME RATE (the "Index"). PRIME RATE IS LENDER'S BASE LENDING RATE AS ANNOUNCED ----- BY LENDER FROM TIME TO TIME AT ITS SOLE DISCRETION. AT ANY GIVEN TIME, LENDER MAY MAKE LOANS AT, ABOVE OR BELOW ITS PRIME RATE. Lender will tell Borrower the current Index rate upon Borrower's request. Borrower understands that Lender may make loans based on other rates as well. The interest rate change will not occur more often than each DAY. The Index currently is 8.50% per annum. The interest rate to be applied to the unpaid principal balance of this Agreement, including current outstanding balances, will be at the rate of one (1) percentage point over the Index, resulting in an initial rate of 9.50% per annum. NOTICE: Under no circumstances will the interest rate on this Agreement be more than the maximum rate allowed by applicable law. CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms of the Promissory Note remain in full force and effect, including without limitation, conditions constituting events of default, Lender's rights upon default and offset rights. In addition, all agreements evidencing or securing the obligation(s) remain unchanged and in full force and effect, including that Loan Agreement dated March 30, 1996 (the "Loan Agreement"), as such may have -------------- been modified by written agreement between Borrower and Lender. Consent by Lender to this Agreement does not waive Lender's right to restrict performance of the obligation(s) as changed, nor obligate Lender to make any further change in terms. Nothing in this Agreement will constitute a satisfaction of the obligation(s). It is the intention of Lender to retain as liable parties all makers and endorsers of the original obligation(s), including accommodation parties, unless a party is expressly released by Lender in writing. Any maker or endorser, including accommodation makers, will not be released by virtue of this Agreement. If any person who signed the original obligation does not sign this Agreement below, then all persons signing below acknowledge that this Agreement is given conditionally, based on the representation to Lender that the non-signing party consents to the changes and provision of this Agreement or otherwise will not be released by it. This waiver applies not only to any initial extension, modification or release, but also to all such subsequent actions. FORBEARANCE. Borrower acknowledges that it is not currently in compliance with all of the covenants of the Loan Agreement. Lender's forbearance in declaring a default is in Lender's sole discretion and in no way shall Lender's forbearance constitute a waiver or forbearance of any right or remedy Lender may have, including but not limited to, the right or remedy it may have to declare a default or to protect any of the collateral encumbered by commercial security agreements. Nothing contained herein shall be construed as a waiver or forbearance of any right or remedy of Lender based upon any default or failure of Borrower to pay or perform any and all terms and conditions of the Promissory Note, this Agreement, the Loan Agreement, or any security agreement, whether such default exists as of the date hereof or occurs hereafter. RELEASE. Borrower hereby absolutely and unconditionally releases and forever discharges Lender, its agents, directors, officers, employees, assigns, attorneys, and Banc One Corporation ("Banc One") and all of Banc One's --------- subsidiaries and entities, (collectively, the "Released Parties") from any and ---------------- all actions, causes of action, suits, debts, defenses, sums of money, controversies, claims, counterclaims and demands, of any kind whatsoever, in law or in equity, whether presently known or unknown, which Borrower may have or ever had against the Released Parties as of the date hereof. RATIFICATION. Borrower ratifies, affirms, reaffirms, acknowledges, confirms and agrees that the Promissory Note and this Agreement and each and every other document and instrument which evidences or secures the payment of loans to Lender, including the Loan Agreement, represent a valid and enforceable, collectible obligation of Borrower, and Borrower further acknowledges that there are no existing claims, events or rights of set off with respect to any of the aforementioned instruments or documents, and further acknowledges and represents that as of the date of the execution of this Agreement, no event has occurred and no condition exists which constitutes a default by Lender under the Loan Agreement or other documents, either with or without notice or lapse of time. MISCELLANEOUS PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Agreement without losing them. Obligations of Borrower under this Agreement are joint and several. Borrower and any other person who signs, guarantees or endorses this Agreement, to the extent allowed by law, waive presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Agreement, and unless otherwise expressly stated in writing, no party who signs this Agreement, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan, or release any party or guarantor or collateral; or impair, fail to realize upon or prefect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. If there is any conflict between the terms of this Agreement and the terms of the Promissory Note or any other Change in Terms Agreements, the terms of this Agreement shall control. PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISION OF THIS AGREEMENT. BORROWER AGREES TO THE TERMS OF THIS AGREEMENT AND ACKNOWLSDGES RECEIPT OF A COMPLETED COPY OF THIS AGREEMENT. Borrower: SCIENTIFIC SOFTWAE-INTERCOMP, INC., A Colorado corporation By:__________________________ George Steel, President EX-10.34 10 EXHIBIT 10.34 CHANGE IN TERMS AGREEMENT Principal Amount Date of Agreement: $650,000.00 November 30, 1997 Borrower: Lender: Scientific Software-Intercomp, Inc., Bank One, Colorado, N.A. A Colorado corporation 1125 17th Street 633 17th Street, Suite 1600 Denver, CO 80202 Denver, CO 80202 DESCRIPTION OF EXISTING INDEBTEDNESS: A PROMISSORY NOTE DATED SEPTEMBER 20, 1994 IN THE ORIGINAL PRINCIPAL AMOUNT OF $5,000,000.00, AS MODIFIED BY A (1) CHANGE IN TERMS AGREEMENT, DATED MAY 31, 1995, CHANGING THE MATURITY DATE TO JULY 15, 1995; (2) CHANGE IN TERMS AGREEMENT, DATED JULY 15, 1995, CHANGING THE MATURITY DATE TO AUGUST 15, 1995; (3) CHANGE IN TERMS AGREEMENT, DATED AUGUST 15, 1995, CHANGING THE MATURITY DATE TO SEPTEMBER 15, 1995 AND CHANGING THE PRINCIPAL AMOUNT TO $4,500,000.00; (4) CHANGE IN TERMS AGREEMENT, DATED SEPTEMBER 15, 1995, CHANGING THE MATURITY DATE TO SEPTEMBER 30, 1995; (5) CHANGE IN TERMS AGREEMENT, DATED SEPTEMBER 30, 1995, CHANGING THE MATURITY DATE TO OCTOBER 15, 1995; (6) CHANGE IN TERMS AGREEMENT, DATED OCTOBER 15, 1995, CHANGING THE MATURITY DATE TO MARCH 30, 1996; (7) CHANGE IN TERMS AGREEMENT, DATED MARCH 30, 1996, CHANGING THE MATURITY DATE TO APRIL 15, 1997 AND CHANGING THE PRINCIPAL AMOUNT TO $1,200,000.00; AND (8) CHANGE IN TERMS AGREEMENT, DATED APRIL 15, 1997, CHANGING THE MATURITY DATE TO OCTOBER 15, 1997 AND CHANGING THE PRINCIPAL AMOUNT TO $900,000.00, (9) CHANGE IN TERMS AGREEMENT, DATED OCTOBER 30, 1997, CHANGING THE MATURITY DATE TO NOVEMBER 30, 1997 AND CHANGING THE PRINCIPAL AMOUNT TO $650,000.00 (COLLECTIVELY, THE "PROMISSORY NOTE"). DESCRIPTION OF CHANGE IN TERMS: (1) The maturity date will now be August 15, 1998; (2) Borrower shall make monthly interest only payments; (3) a principal reduction payment sufficient to reduce the outstanding principal amount to zero shall be due and payable on March 15, 1998; (4) as of March 15, 1998, $230,000.00 shall remain available under the loan to secure that certain standby letter of credit in the amount of $2,000.00, which expires on July 4, 1998, and that certain standby letter of credit in the amount of $226,000.00, which expires on August 4, 1998. Promise to pay. Borrower promises to pay to Lender, or order, in lawful money of the United States of America, the principal amount of Six Hundred Fifty Thousand and 00/100 Dollars ($650,000.00), or so much as may be outstanding, together with interest on the unpaid outstanding principal balance. PAYMENT. Borrower will continue to pay this loan by making regular monthly payments of accrued unpaid interest on the 15th day of each month. A principal reduction payment sufficient to reduce the outstanding principal amount to zero shall be due and payable on March 15, 1998, after which time the loan shall be non-revolving and only available to secure that certain standby letter of credit in the amount of $2,000.00, which expires on July 4, 1998, and that certain standby letter of credit in the amount of $226,000.00, which expires on August 4, 1998. VARIABLE INTEREST RATE. The interest rate on this Agreement is subject to change from time to time based on changes in an index which is the LENDER'S PRIME RATE (the "Index"). PRIME RATE IS LENDER'S BASE LENDING RATE AS ANNOUNCED BY LENDER FROM TIME TO TIME AT ITS SOLE DISCRETION. AT ANY GIVEN TIME, LENDER MAY MAKE LOANS AT, ABOVE OR BELOW ITS PRIME RATE. Lender will tell Borrower the current Index rate upon Borrower's request. Borrower understands that Lender may make loans based on other rates as well. The interest rate change will not occur more often than each DAY. The Index currently is 8 1/2 % per annum. The interest rate to be applied to the unpaid principal balance of this Agreement, including current outstanding balances, will be at the rate of one (1) percentage point over the Index, resulting in an initial rate of 9 1/2 % per (2) annum. NOTICE: Under no circumstances will the interest rate on this (3) Agreement be more than the maximum rate allowed by applicable law. CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms of the Promissory Note remain in full force and effect, including without limitation, conditions constituting events of default, Lender's rights upon default and offset rights. In addition, all agreements evidencing or securing the obligation(s) remain unchanged and in full force and effect, including that Loan Agreement dated March 30, 1996 (the "Loan Agreement"), as such may have been modified by written agreement between Borrower and Lender. Consent by Lender to this Agreement does not waive Lender's right to restrict performance of the obligation(s) as changed, nor obligate Lender to make any further change in terms. Nothing in this Agreement will constitute a satisfaction of the obligation(s). It is the intention of Lender to retain as liable parties all makers and endorsers of the original obligation(s), including accommodation parties, unless a party is expressly released by Lender in writing. Any maker or endorser, including accommodation makers, will not be released by virtue of this Agreement. If any person who signed the original obligation does not sign this Agreement below, then all persons signing below acknowledge that this Agreement is given conditionally, based on the representation to Lender that the non-signing party consents to the changes and provision of this Agreement or otherwise will not be released by it. This waiver applies not only to any initial extension, modification or release, but also to all such subsequent actions. FORBEARANCE. Borrower acknowledges that it is not currently in compliance with all of the covenants of the Loan Agreement. Lender's forbearance in declaring a default is in Lender's sole discretion and in no way shall Lender's forbearance constitute a waiver or forbearance of any right or remedy Lender may have, including but not limited to, the right or remedy it may have to declare a default or to protect any of the collateral encumbered by commercial security agreements. Nothing contained hereof shall be construed as a waiver or forbearance of any right or remedy of Lender based upon any default or failure of borrower to pay or perform any and all terms and conditions of the Promissory Note, this Agreement, the Loan Agreement, or any security agreement, whether such default exists as of the date hereof or occurs hereafter. RELEASE. Borrower hereby absolutely and unconditionally releases and forever discharges Lender, its agents, directors, officers, employees, assigns, attorneys, and Banc One Corporation ("Banc One") and all of Banc One's subsidiaries and entities, (collectively, the "Released Parties") from any and all actions, causes of action, suits, debts, defenses, sums of money, controversies, claims, counterclaims and demands, of any kind whatsoever, in law or in equity, whether presently known or unknown, which Borrower may have or ever had against the Released Parties as of the date hereof. RATIFICATION. Borrower ratifies, affirms, reaffirms, acknowledges, confirms and agrees that the Promissory Note and this Agreement and each and every other document and instrument which evidences or secures the payment of loans to Lender, including the Loan Agreement, represent a valid and enforceable, collectible obligation of Borrower, and Borrower further acknowledges that there are no existing claims, events or rights of set off with respect to any of the aforementioned instruments or documents, and further acknowledges and represents that as of the date of the execution of this Agreement, no event has occurred and no condition exists which constitutes a default by Lender under the Loan Agreement or other documents, either with or without notice or lapse of time. MISCELLANEOUS PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Agreement without losing them. Obligations of Borrower under this Agreement are joint and several. Borrower and any other person who signs, guarantees or endorses this Agreement, to the extent allowed by law, waive presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Agreement, and unless otherwise expressly stated in writing, no party who signs this Agreement, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan, or release any party or guarantor or collateral; or impair, fail to realize upon or prefect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. If there is any conflict between the terms of this Agreement and the terms of the Promissory Note or any other Change in Terms Agreements, the terms of this Agreement shall control. PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISION OF THIS AGREEMENT. BORROWER AGREES TO THE TERMS OF THIS AGREEMENT AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS AGREEMENT. Borrower: SCIENTIFIC SOFTWARE-INTERCOMP, INC., A Colorado corporation By:__________________________ George Steel, President -----END PRIVACY-ENHANCED MESSAGE-----