-----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, RdSOLCTHX2p9xewzFa1KBH27RbHf/38BbWKs0ohhuQZLdwKiazwkQ/pAL1p/gCDN c7xh8cd5YqnlntNVW9LreA== 0000950134-96-002201.txt : 19960517 0000950134-96-002201.hdr.sgml : 19960517 ACCESSION NUMBER: 0000950134-96-002201 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960515 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCIENTIFIC SOFTWARE INTERCOMP INC CENTRAL INDEX KEY: 0000087822 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 840581776 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-04882 FILM NUMBER: 96566971 BUSINESS ADDRESS: STREET 1: 1801 CALIFORNIA ST STE 295 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-Q 1 FORM 10-Q FOR QUARTER ENDED MARCH 31, 1996 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 13(D) THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____ COMMISSION FILE NUMBER 0-4882 SCIENTIFIC SOFTWARE-INTERCOMP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) COLORADO 84-0581776 ------------------------------- ------------------- STATE (OR OTHER JURISDICTION OF (IRS EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 1801 CALIFORNIA STREET, DENVER, COLORADO 80202 ----------------------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE) (303) 292-1111 --------------------------------------------------- (REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE) (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED FROM LAST REPORT). 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 --- --- NUMBER OF SHARES OF COMMON STOCK, NO PAR VALUE OUTSTANDING AT APRIL 30, 1996: 8,633,325 --------------- (This form 10-Q includes 13 pages) 2 INDEX
PAGE ---- PART I. FINANCIAL INFORMATION CONSOLIDATED BALANCE SHEETS AT MARCH 31, 1996 AND DECEMBER 31, 1995 3 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 4 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9 PART II. OTHER INFORMATION 13
-2- 3 SCIENTIFIC SOFTWARE-INTERCOMP, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
March 31, December 31, 1996 1995 -------- ------------ ASSETS Current Assets Cash and cash equivalents ................................................... $ 342 $ 419 Accounts receivable, net of allowance for doubtful accounts of $3,558 and $3,811 ............................................. 5,497 6,614 Work in progress ............................................................ 3,464 3,008 Other current assets ........................................................ 405 423 -------- -------- Total current assets .................................................... 9,708 10,464 -------- -------- Software, net of accumulated amortization and write-down of $31,024 and $30,924 ......................................................... 10,190 10,190 Property and Equipment, net of accumulated depreciation and amortization of $6,397 and $6,223 ....................................... 1,238 1,416 Other Assets .................................................................. 1,815 1,842 -------- -------- 22,951 23,912 ======== ======== LIABILITIES, REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY Current Liabilities Note payable and current portion of long-term obligations ................... 495 382 Note payable to bank ........................................................ 2,870 2,870 Accounts payable ............................................................ 3,155 3,375 Accrued salaries and fringe benefits ........................................ 1,259 1,157 Accrued lease obligations ................................................... 331 375 Deferred maintenance and other revenue ...................................... 2,911 2,712 Other current liabilities ................................................... 2,360 2,684 -------- -------- Total current liabilities ................................................ 13,381 13,555 Accrued Lease Obligations ..................................................... 287 333 Long-Term Obligations ......................................................... 275 284 Convertible Debentures ........................................................ 1,600 1,630 Redeemable Preferred Stock Series A Convertible Preferred Stock, $5 par value; 1,200,000 shares authorized, 800,000 shares issued and outstanding ................................................................. 4,000 4,000 Stockholders' Equity Common stock, no par value; $.10 stated value; 25,000,000 shares authorized, 8,290,000 and 8,256,000 shares issued and outstanding ..................................... 829 825 Paid-in capital ............................................................. 48,944 48,850 Accumulated deficit ......................................................... (45,769) (44,970) Cumulative foreign currency translation adjustment .......................... (596) (595) -------- -------- Total stockholders' equity .............................................. 3,408 4,110 -------- -------- $ 22,951 $ 23,912 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. -3- 4 SCIENTIFIC SOFTWARE-INTERCOMP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Three Months Ended March 31 ---------------------- 1996 1995 ------- ------- REVENUE Consulting and training ........................ $ 2,977 $ 3,895 Licenses and maintenance ....................... 1,808 2,795 Other .......................................... 107 164 ------- ------- 4,892 6,854 ------- ------- COSTS AND EXPENSES Costs of consulting and training ............... 2,518 2,879 Costs of licenses and maintenance, including software amortization of $500 and $1,375 .............................. 1,950 1,897 Contract cost accruals (reversals) ............. (9) -- Costs of other revenue ......................... 64 64 Selling, general and administrative ............ 1,022 1,770 Software research and development .............. 70 77 ------- ------- 5,615 6,687 ------- ------- INCOME FROM OPERATIONS ........................... (723) 167 Other Income (Expense) Interest income (expense) ...................... (63) (50) Foreign exchange gains (losses) ................ (3) (4) ------- ------- Income Before Income Taxes ....................... (789) 113 Provision For Income Taxes ....................... 10 50 ------- ------- NET INCOME (LOSS) ................................ (799) 63 ======= ======= Weighted Average Number of Common and Common Equivalent Shares Outstanding ........... 8,185 8,606 ======= ======= Income (Loss)Per Common and Common Equivalent Share ............................... (.10) .01 ======= =======
The accompanying notes are an integral part of the consolidated financial statements. -4- 5 SCIENTIFIC SOFTWARE-INTERCOMP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Three Months Ended March 31, ------------------ 1996 1995 ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES Net income ............................................................. $ (799) $ 63 ------- ------- Adjustments: Depreciation and amortization ....................................... 644 1,626 Provision for losses on accounts receivable ......................... (253) 69 Changes in operating assets and liabilities: (Increase) decrease in accounts receivable and work in progress ............................................. 914 (360) Increase in other assets ............................................ 45 311 (Decrease) in accounts payable and accrued expenses ................................................. (442) (861) (Decrease) in accrued lease obligations ............................. (90) (311) Increase (decrease) in deferred revenue ............................. 199 (275) ------- ------- Total adjustments ................................................ 1,017 199 ------- ------- Net cash provided by operating activities ........................ 218 262 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Capitalized software costs ............................................. (500) (1,445) Purchases of equipment ................................................. 4 (200) ------- ------- Net cash (utilized in) investing activities ....................... (496) (1,645) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Sales of common stock .................................................. 98 201 Bank borrowings ........................................................ -- 1,150 Proceeds from (repayments of) other obligations ........................ 104 (65) ------- ------- Net cash provided by financing activities ......................... 202 1,286 ------- ------- Effect of exchange rates on cash .......................................... (1) 4 ------- ------- Net (decrease) in cash and cash equivalents ............................... (77) (93) Cash and cash equivalents at beginning of period .......................... 419 588 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................ 342 495 ======= ======= SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the year for: Interest, net of amounts capitalized ................................... 70 57 Income taxes ........................................................... -- --
The accompanying notes are an integral part of the consolidated financial statements. -5- 6 SCIENTIFIC SOFTWARE-INTERCOMP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - UNAUDITED INTERIM INFORMATION This report includes the consolidated financial statements of Scientific Software-Intercomp, Inc., and its wholly- owned subsidiaries. The consolidated balance sheet as of December 31, 1995 is excerpted from the audited financial statements for the year then ended. The consolidated financial statements for the interim periods ended March 31, 1996 and 1995 reflect all normal recurring adjustments which, in the opinion of the Company, are necessary for a fair statement of the results of operations, financial position, and cash flows, as of the dates and for the periods presented. Operating results for the three months ended March 31, 1996 are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. 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 Securities and Exchange Commission. The Notes to Consolidated Financial Statements included in the Company's 1995 Annual Report on Form 10-K should be read in conjunction with these consolidated financial statements. NOTE 2 - BANK CREDIT AGREEMENT. PRIMARY BANK LINE OF CREDIT, OCTOBER 15, 1995 - MARCH 31, 1996. Effective October 15, 1995 the Company renewed its primary bank line of credit to March 31, 1996, which includes a loan agreement with the bank that provides for a revolving credit facility pursuant to which the Company may utilize up to $5.13 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. The Company did not increase its borrowing in 1996. Borrowings and outstanding letters of credit are collateralized by substantially all the Company's assets, excluding those of the Company's Canadian subsidiary. The maximum amount of cash borrowings and letters of credit that may be outstanding at any time is determined by a borrowing base formula related to available collateral. The foreign portion of the credit facility is supported by a $4.5 million guarantee by the Export-Import Bank of the United States (EximBank). As of March 31, 1996 the borrowing base, amounts of short-term cash borrowings and letters of credit outstanding, and credit available under the revolving credit facility were as follows: -6- 7
(In thousands) Revolving credit facility limit (limited by insurance coverage and amounts of qualified receivables) .................... $5,133 ====== Amounts outstanding: Short-term cash borrowings ...................................... $2,870 Letters of credit ............................................... 633 ------ $3,503 ======
The Company at December 31, 1995 was in violation of certain covenants on the note which restricted its borrowing capacity. The bank has waived the violations. Under the terms of the recently completed financing, in April 1996 the Company paid off the existing short term cash borrowing with the proceeds of the financing. (See Management's Discussion and Analysis of Financial Condition and Results of Operations.) PRIMARY BANK LINE OF CREDIT, APRIL 1, 1996 - APRIL 15, 1997. Effective April 1, 1996 the Company completed with its primary lender a $1.5 million revolving credit facility that is available through April 15, 1997. The collateral for the line is the Company's accounts receivable from non-U.S. domiciled customers to the extent necessary to support the line. All receivables not necessary for the line and substantially all other assets except those of the Canadian subsidiary will be collateral for the Lindner and Renaissance senior secured notes. (See Management's Discussion and Analysis of Financial Condition and Results of Operations.) The new credit facility is supported by a $1.5 million guarantee from EximBank. The Company will pay 7% interest on the first $300,000 borrowed under the line and the prime interest rate on the balance. The Company will pay EximBank a fee equal to 1.5% of the guarantee and be required to purchase credit insurance for foreign receivables in the amount guaranteed by EximBank. UNITED KINGDOM LINE OF CREDIT. In January 1995 the Company's United Kingdom subsidiary obtained a bank line of credit of $300,000 for working capital financing for its projects. This line of credit is collateralized by a letter of credit for $300,000 which was issued by the Company's primary bank pursuant to the revolving credit facility described above. Interest related to borrowings on the United Kingdom line of credit is charged at a rate per annum equal to the bank's prime rate of interest plus 1.75%. At March 31, 1996 the United Kingdom subsidiary had approximately $300,000 outstanding under the line of credit. CANADIAN LINE OF CREDIT. The Company's Canadian subsidiary has a bank line of credit of approximately $150,000 for working capital financing of its projects. At March 31, 1996 the Canadian subsidiary had no outstanding borrowings under this arrangement. Interest related to borrowings on the Canadian line of credit is charged at a rate per annum equal to the bank's prime rate of interest plus 1.25%. NOTE 3 - CONTINGENCIES To the knowledge of management, the only claims pending or threatened against the Company or any of its subsidiaries which individually or collectively could have a material adverse effect upon the Company or its financial condition are the following: 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 for the District of Colorado alleging that the Defendants, who include the President and Chief Executive Officer of the Company, its Chief Financial Officer and a former -7- 8 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 seeks to have the Court determine that the lawsuit constitutes a proper class action on behalf of all persons who purchased stock of the Company during the period from May 30, 1994 through July 10, 1995, with certain exclusions. It is the opinion of the Company and its counsel that the claim is without merit and it is the intention of the Company and the other Defendants to vigorously defend the claim. 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 in excess of $200,000. 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 has 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 asserts damages that exceed $1 million without substantiation. In the opinion of management, KEL is asserting these claims in an attempt to avoid its obligations to the Company and any damages KEL may have suffered are more than offset by the money due the Company from KEL. The Company has filed a claim for costs incurred pursuant to a gas pipeline project in India. Depending on the amount collected on a claim by the primary contractor against the ultimate customer the Company could receive up to $1.4 million. No amount has been accrued related to the potential settlement. In 1994 the Company settled a lawsuit against Central Hispano Banco (U.K.) Limited (the "Bank") seeking a declaratory judgment on whether the Company was liable on the Bank's claim of $473,000 representing unpaid rent under a computer lease that was assigned to the Bank by the now bankrupt lessor. The settlement, which is subject to court approval, did not result in a material gain or loss. The Company's long-term services contracts generally include provisions for penalty charges for delay in the completion of contracts. Certain contracts in progress at December 31, 1995 have not been subsequently completed by the scheduled dates. Management believes that the delays were not caused by the Company and that no significant penalties will be incurred. NOTE 4 - INCOME TAXES The Company's income tax expense is primarily due to foreign taxes withheld at the source on sales in some foreign countries. Consequently, these taxes cause the Company's effective tax rate to vary from the Federal statutory rate and the Company incurred a current tax provision in spite of a loss in the current period. -8- 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES OVERALL FINANCIAL POSITION. At March 31, 1996, the Company's working capital ratio was 0.73 to 1, based on current assets of $9.7 million and current liabilities of $13.3 million. The Company's working capital ratio at December 31, 1995, was .77 to 1. In April and May 1996 the Company completed the following financing and restructuring of convertible debentures and bank revolving line of credit: o In April 1996 Lindner Funds, a 14% shareholder in 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 SSI no par value common stock at $3.00 per share for five years. o In April 1996 Renaissance Capital Partners II, Ltd. converted $250,000 of principal of its convertible debentures for 282,218 shares of the Company's no par value common stock and convert the balance of $1,500,000 principal of its convertible debentures into a senior secured note at 7% payable in five years and a non-detachable stock purchase right to acquire 450,000 shares of SSI no par value common stock at $3.00 per share for five years. The terms of the secured note and non-detachable stock purchase right are substantially equal to those issued to Lindner Funds. o Effective April 1, 1996 the Company's primary bank and the Export-Import Bank of the United States restructured and renewed a bank line of credit to April 15, 1997. Under the terms of the agreement, the Company paid off the existing $2,870,000 outstanding on the Company's bank revolving line of credit. The Company's primary bank established a revolving line of credit pursuant to which the Company may 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. The Lindner and Renaissance transactions will be accounted for under APB 14 whereby the notes and the non-detachable warrants will be treated as a single obligation and no separate value is assigned to the warrants. The Company believes with the completion of the financing and restructuring of the convertible debentures and bank revolving line of credit explained above provided that the Company resumes generating cash flow from operations that (a) amounts expected to continue to be available under the Company's revolving credit facility and (b) internally generated funds should provide the Company with sufficient liquidity and working capital to meet its anticipated operating needs. There can be no assurance, however, that the Company will generate sufficient cash flow from operations to meet its future operating needs or be successful in obtaining any additional debt or equity financing. o OTHER EQUITY TRANSACTIONS. In February 1996, the Company and Renaissance agreed to change the conversion feature of the debentures so that the two debentures which aggregate $1,750,000 in principal will be 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 Capital Partners II, Ltd. converted $250,000 of principal of its convertible debentures for 282,218 shares of the Company's no par value common stock and converted the balance of $1,500,000 principal of its convertible debentures into a senior secured note at 7% payable in five years and non-detachable stock purchase rights to acquire 450,000 shares of SSI no par value common stock at $3.00 per share for five years. The terms of the secured note and non-detachable warrants are substantially equal to those issued to Lindner Funds. -9- 10 RESULTS OF OPERATIONS OVERALL OPERATING RESULTS COMPARISON OF THREE MONTHS ENDED MARCH 31, 1996 AND 1995 Total revenue decreased 29% to $4.9 million in the first quarter of 1995 from $6.8 million in the first quarter of 1995. The Company reported lower revenue from consulting and training and also licenses and maintenance. Total consulting revenue decreased 24% to $3.0 million in the first quarter of 1996 from $3.9 million in the first quarter of 1995, primarily as a result of decreased activity on large foreign development and production consulting contracts. Total licenses and maintenance revenue decreased 35% to $1.8 million in the first quarter of 1996 from $2.8 million in the first quarter of 1995 because of decreased revenue in the pipeline and surface facilities and graphical user interface divisions, which are discussed below. Income from operations decreased to a $723,000 loss in the first quarter of 1996 from $167,000 in the first quarter of 1995. The Company's backlog at March 31, 1996 was $10.2 million. REVENUE DEVELOPMENT AND PRODUCTION PRODUCTS AND SERVICES. Total revenue from development and production products and services, which includes The Petroleum WorkBench(TM) software product, decreased 28% to $3.2 million in the first quarter of 1996 from $4.5 million in the first quarter of 1995. Software license and maintenance revenue decreased 30% to $1.0 million in the first quarter of 1996 from $1.5 million in the first quarter of 1995. Consulting revenue decreased 28% to $2.1 million in the first quarter of 1996 from $2.9 million in the first quarter of 1995. The decrease was attributable to decreased activity on a large foreign consulting contract. PIPELINE AND SURFACE FACILITIES PRODUCTS AND SERVICES. Total revenue from pipeline and surface facilities products and services decreased 33% to $1.2 million in the first quarter of 1996 from $1.8 million in the first quarter of 1995. Consulting revenue increased to $750,000 in the first quarter of 1996 from $700,000 in the first quarter of 1995. Software license and maintenance revenue decreased to $400,000 in the first quarter of 1996 from $1.1 million in the first quarter of 1995. The revenue for the first quarter of 1995 included a one time sale of $700,000. GUI PRODUCTS AND SERVICES. Total revenue from graphical user interface ("GUI") products and services decreased 17% to $500,000 in the first quarter of 1996 from $600,000 in the first quarter of 1995. Software license and maintenance revenue increased to $370,000 in the first quarter of 1996 from $200,000 in the first quarter of 1995. Consulting and training revenue decreased to $100,000 in the first quarter of 1996 from $300,000 in the first quarter of 1995. COSTS OF CONSULTING AND COSTS OF LICENSES AND MAINTENANCE Costs of consulting decreased to $2.5 million in the first quarter of 1996 from $2.9 million in the first quarter of 1995. The decrease was attributable to the lower consulting revenue discussed above. Costs of licenses and maintenance were $1.9 million in both the first quarter of 1996 and in the first quarter of 1995. The Company's bad debt expenses were reduced by $25,500 in the current quarter as a result of recovery of previously written off accounts receivable. -10- 11 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES In the first quarter of 1996, selling, general and administrative expenses were $1.0 million from $1.7 million in the first quarter of 1995 due to reduction in selling expenses due to lower revenues. SOFTWARE RESEARCH AND DEVELOPMENT Following is a summary of costs of development and enhancement of the Company's software products for the three months ended March 31, 1996 and 1995, the amounts capitalized in accordance with FASB Statement No. 86, the amounts charged to research and development expense, the portion of capitalized costs amortized and the total amounts expensed and amortized.
Quarter Total Total Ended Software Amount Amount Amount Charges to March 31, Expenditures Capitalized Expensed Amortized Earnings --------- ------------ ----------- -------- --------- -------- (In thousands) 1996 $ 570 $ 500 $ 70 $ 500 $ 570 1995 1,532 1,455 77 1,375 1,452
REDUCTION OF CAPITALIZED SOFTWARE COSTS Early in 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 development 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 has reduced the estimated lives of its capitalized software from 7-13 years to a new life, beginning in 1996, of 5 years. Such reduced life reflects anticipated continued increased 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. Management has also developed a new policy to limit future capitalization of software development costs. It is anticipated that annual amounts of software capitalization will represent a substantially lower percentage of total research and development costs and will approximately equal the annual amortization of capitalized software costs of approximately $2 million per year. In addition, the Company combined four small cost pools into one pool for related products to more correctly follow the future marketing and development strategy for the products. -11- 12 FOREIGN EXCHANGE GAINS (LOSSES) The Company's foreign exchange gains and losses relate principally to the effects of fluctuations in the exchange rate of the British pound on transactions of the Company's subsidiary in the United Kingdom that are denominated in other currencies. In the first quarters of 1996 and 1995, the Company recognized net foreign exchange losses of $3,000 and $4,000, respectively, primarily as a result of strengthening of the British pound in relation to the U.S. dollar. INTEREST INCOME (EXPENSE) The following table summarizes the components of interest income (expense) during the three months ended March 31, 1996 and 1995. The interest capitalized was included as a component of the capitalized cost of software development projects in progress in accordance with FASB Statement No. 34.
Quarter Interest Ended Interest Interest Interest Income March 31, Income Incurred Capitalized (Expense) --------- ------ -------- ----------- --------- (In thousands) 1996 $ 7 $ (95) $ 25 $ (63) 1995 7 (107) 50 (50)
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. NEW ACCOUNTING STANDARD The Company has adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123) as of January 1, 1996. 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 in which no compensation cost is recognized for stock option awards to employees. Had compensation cost for the stock options been determined consistent with the Company's pro forma net loss and loss per share for the period ended March 31, 1996 would have been ($1.1 million) and ($0.13), respectively. SFAS No. 123 also applies to transactions in which an entity issues its equity instruments to acquire goods or services from nonemployees. Accordingly, the implementation of SFAS No. 123 may have a material effect on the Company's financial statements and the pro forma disclosures in the notes thereto in future periods. -12- 13 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. 27 Financial Data Schedule b. Reports on Form 8-K. The Company filed a Form 8-K on January 15, 1996, announcing the appointment of George Steel as its President and Chief Operating Officer. The Company filed a Form 8-K on May 3, 1996 to give notice of the completion of a financing transaction with the conversion of the Renaissance Capital Partners II, Ltd. debentures for shares. The Company filed a Form 8-K on May 14, 1996 announcing the resignation of E. A. Breitenbach, Chairman and Chief Executive Officer, and Ronald J. Hottovy, Chief Financial Officer, and the appointment of George Steel as Chairman, President and Chief Executive Officer, all of which are effective May 15, 1996. SIGNATURES Pursuant to the requirements 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. May 14, 1996 /s/ E. A. Breitenbach Date -------------------------------------------- E. A. Breitenbach, Chairman of the Board of Directors, Chief Executive Officer(a principal executive officer and director) May 14, 1996 /s/ George Steel Date -------------------------------------------- George Steel, President and Chief Operating Officer (a principal executive officer and director) May 14, 1996 /s/ R. J. Hottovy Date -------------------------------------------- R. J. Hottovy, Secretary, Treasurer, Chief Financial Officer, and Principal Accounting Officer -13- 14 EXHIBIT INDEX Exhibit Number Exhibit Description Page - ------- ------------------- ---- 27 Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 342 0 9,055 3,558 0 9,708 7,635 6,397 22,951 13,381 0 829 4,000 0 0 22,951 4,892 4,892 0 5,615 0 0 (63) (789) 10 (799) 0 0 0 (799) (.10) 0
-----END PRIVACY-ENHANCED MESSAGE-----