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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended July 31, 1995
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from . . . . . . . . . . to . . . . . . . . . . . . .
Commission file number 0-14100
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
(Name of small business issuer in its charter)
TEXAS 74-2048763
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2210 Denton Drive, Suite 106, Austin, Texas 78758
(Address of principal executive offices) (Zip Code)
Issuer's telephone number . . . . . . . . (512) 837-4712
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None Not Applicable
Securities registered under Section 12(g) of the Exchange Act:
$0.05 Par Value Common Stock
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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|_|
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |X|
State issuer's revenues for its most recent fiscal year: $1,384,815
The aggregate market value of the voting stock held by nonaffiliates of the
registrant was approximately $3,387,892 as of October 2, 1995, based upon the
bid price at the close of trading on such date as reported by NASDAQ.
The number of shares or units outstanding of each of the registrant's
classes of securities, as of October 2, 1995 is as follows:
Shares Outstanding as of
Title of Class October 2, 1995
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$0.05 Par Value Common Stock 13,030,355
Transitional Small Business Disclosure Format: Yes |_| No |X|
IN ACCORDANCE WITH RULE 201 OF REGULATION S-T, THIS FORM 10-KSB IS BEING FILED
IN PAPER PURSUANT TO A TEMPORARY HARDSHIP EXEMPTION.
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DOCUMENTS INCORPORATED BY REFERENCE
The information requred by Part III of this Annual Report on Form
10-KSB is incorporated by reference from the Registrant's definitive proxy
statement for the Registrant's 1995 Annual Meeting of Shareholders.
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Item 9 Directors, Executive Officers, Information concerning the Directors and Executive
Promoters and Control Persons; Officers of the Company is incorporated by reference
Compliance with Section 16(a) of the from the Company's definitive Proxy Statement and
Exchange Act related materials in connection with the annual meeting
of shareholders on December 14, 1995. The
incorporated portions consist of all of the disclosures
that appear in that Proxy Statement under the headings
"Nominees for Election as Directors" and "Executive
Officers."
Item 10 Executive Compensation Information concerning the Executive Compensation is
incorporated by reference from the Company's definitive
Proxy Statement and related materials in connection with
the annual meeting of shareholders on December 14,
1995. The incorporated portions consist of all of the
disclosures that appear in that Proxy Statement under the
heading "Executive Compensation."
Item 11 Security Ownership of Certain Information concerning the Security Ownership of
Beneficial Owners and Management Certain Beneficial Owners and Management is
incorporated by reference from the Company's definitive
Proxy Statement and related materials in connection with
the annual meeting of shareholders on December 14,
1995. The incorporated portions consist of all of the
disclosures that appear in that Proxy Statement under the
heading "Security Ownership of Certain Beneficial
Owners and Management."
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INDEX
Page
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PART I...................................................................... 1
ITEM 1. BUSINESS...................................................... 1
ITEM 2. PROPERTIES.................................................... 10
ITEM 3. LEGAL PROCEEDINGS............................................. 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 10
PART II..................................................................... 11
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................................... 11
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................... 12
ITEM 7. FINANCIAL STATEMENTS.......................................... 15
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................... 29
PART III.................................................................... 29
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.... 29
ITEM 10. EXECUTIVE COMPENSATION........................................ 29
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................... 29
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 30
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.............................. 30
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PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Scientific Measurement Systems, Inc. ("Company") was incorporated in Texas
in 1979. The Company has pioneered the development of industrial tomography by
using techniques similar to the medical industry's CAT scanner. The Company is
now a significant producer of Computerized Industrial Tomographic and Digital
Radiographic Systems. The Company's systems have a large number of uses
including nondestructive measurement and evaluation, testing and analysis, and
reverse engineering which can produce computer-aided design and
computer-integrated manufacturing models. These functions are utilized by
industrial companies and government agencies involved in research, aerospace,
aviation, automotive, machinery, oil and gas, steel and advanced materials
manufacture, among others.
NARRATIVE DESCRIPTION OF BUSINESS
The Company was organized to develop and market computed tomographic
systems for government and industry. Tomography was pioneered in
radio-astrophysics in 1957 and was later first commercialized in the medical
X-ray industry, where tomographic systems are popularly known as CAT scanners,
an acronym for "computerized axial tomography."
Industrial tomography (commonly called "CT" or "CIT" for "computerized
industrial tomography") was developed by the Company and others to inspect the
internal and external dimensions and structural densities of objects without
harming, modifying or contacting the objects being examined. The Company's
systems can detect internal features approaching 0.001 of an inch in a wide
range of objects, depending upon density differences between the feature and the
material surrounding it and other factors. Primary applications of the Company's
systems include process and quality control of both batch type as well as
continuously produced products.
The Company has also developed a series of specialized proprietary software
programs for the evaluation and analysis of data generated by its systems. CT
provides information consisting of precise dimensional and density information
as well as flaw and defect characteristics. This information is often
unavailable by any other means of nondestructive inspection.
The Company pioneered industrial tomography and is a leading supplier of
computerized industrial tomography systems and services to the aerospace,
automotive, steel, aviation and defense industries. Principal applications
include non-destructive testing (NDT), dimensional analysis/control and computer
aided design/computer aided manufacturing (CAD/CAM).
As a result of both customer and Company-sponsored, field-proven
evolutionary product development performed over a period of years, the Company
produces a family of modular general purpose computerized industrial tomography
systems which provide precise dimensional and density information, as well as
flaw and defect characteristics, for a wide range of industrial applications.
The Company's Smart Radiography(TM) product line offers the unique combination
of performance, flexibility, and cost-effectiveness needed to meet industry and
government's current and future CT requirements.
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Technology
The Company's typical CT system, the SMARTSCAN(TM), includes a radiation
source, a detector array, an object positioning unit, a computer system with
image processing equipment and a color graphics image display subsystem. At the
option of the customer, the SMARTSCAN(TM) system may be integrated into a
portable, lead-lined cabinet for radiation shielding.
The radiation source is either an X-ray tube, X-ray linear accelerator or a
gamma-ray emitting radioisotope which emits a flux of photons. The photons are
highly collimated (focused) to form a thin fan-shaped beam directed at the
object under analysis. The fan beam is adjustable from 10 to 35 degrees in width
and from 1 to 5 mm in thickness.
High energy photons passing through the object are again highly collimated
upon entering the detector array. Detectors convert the photons into visible
analog light events which are then digitized by the Company's proprietary
electronics.
Scanned data values are computer processed to calculate density matrices.
The object's image is then electronically reconstructed using the density
matrices and passed onward to graphics display routines for analysis and video
display. The image information is analyzed using the Company's proprietary
software programs in order to extract precise density and dimensional
information.
Tomographic images (called tomograms) are developed by rotating the object
in the radiation beam to provide opacity measurements along many interior axes.
A typical scan includes thousands of measurements. Projection data computed over
360 degrees produce a tomogram which is a cross-sectional two-dimensional image.
Three-dimensional images are generated by making successive scans along the
height of the object.
Digital radiograms are developed by a series of attenuation measurements
along a single axis of an object with the object fixed (not rotating) in angle
with respect to the source and detectors.
SMARTSCAN(TM) Capabilities
The Company's SMARTSCAN(TM) systems can perform the full range of
measurements needed for all aspects of digital radiography, tomography, and
laminography. All motions and positions in the system are accurately controlled
by the computer system, with positional information fully preserved throughout
the image-formation process and automatically made available to analysts.
Interactive operation of the SMARTSCAN(TM) is done by a graphical user
interface which can be easily expanded by users to include programmed procedures
that partially or totally automate the scanning and analysis sequence. The
highly developed SMARTSCAN(TM) image analysis software has unique capabilities
in dimensional and density analysis, reverse engineering, and report generation.
Advanced software engineering, including a fourth-generation user language, an
intelligent data base, and an advanced structure for data files, minimizes
learning time for system use.
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SMARTSCAN(TM) Image Types
The Company's SMARTSCAN(TM) systems can take computerized industrial
tomography opacity measurements in either the second generation
(rotate-translate) mode, which is better for large (over 2 feet in diameter) or
highly-opaque objects, or in the third generation (rotate only) mode, which is
more efficient for objects up to 2 feet in diameter. Adjustable collimator
settings, source-to-object distance, and "subpositioning" to form interlaced
sets of data are available on Company systems.
The SMARTSCAN(TM) also produces digital radiograms. These can be used
directly for analysis, to select the cross-sectional planes for tomograms, or in
combination with other radiograms for dual radiography and laminography. In dual
radiography, two radiograms from different angles are used to precisely locate
(in three dimensions) features visible in both images. In addition to its direct
use, this capability permits accurate transfer of coordinates between scans of
the same object in different positions and is also helpful in precision
quantitative analysis using radiograms.
In certain cases, such as the examination of very long objects, the
SMARTSCAN(TM) can take data over a limited angular range. Such data can be
handled by the SMARTSCAN(TM) system to produce tomograms of somewhat reduced
quality, but often still revealing the features of interest.
A related and more powerful technique, laminography, uses several digital
radiograms to resolve internal features throughout the three-dimensional volume
of the object with only limited blurring from overlapping layers. The radiograms
are mathematically filtered by the same methods used for computed tomography and
projected onto a set of surfaces defined by the user. Such surfaces can be
curved to follow interior sections of interest.
Complete resolution of interior detail is possible by taking a stacked set
of tomograms in parallel cross-sectional planes. The SMARTSCAN(TM) strongly
supports the acquisition and analysis of such three-dimensional density maps,
from which users can create synthetic tomograms on vertical or oblique flat or
curved surfaces. SMARTSCAN(TM) software can also find the inside and outside
surfaces of the object, and display them from any chosen point of view.
SMARTSCAN(TM) Analysis Capabilities
In addition to a full range of options for visual inspection,
SMARTSCAN(TM) analysis routines include the most advanced set of dimensional
analysis routines available for tomography. This type of analysis permits the
easy determination of wall thickness and position, diameter and radius sizes,
and features such as area, density, and shape. Special options accurately handle
cases of edges so close together that they cannot be fully resolved. The
dimensional analysis routines can also be used on laminograms and radiograms.
A powerful set of density analysis options makes it easy to find and
characterize flaws in automatic procedures. In addition to histograms and
region-averaging routines, SMARTSCAN(TM) software permits density sampling or
integration based on the features of the particular object, such as samples from
a casting at fixed distance below the surface to detect porosity at the finish
line.
The dimensions, densities and shapes determined by the SMARTSCAN(TM) can be
reported in text files or printouts of any format. This permits "reverse
engineering," in which the dimensions of the parts (after being reduced to
descriptions of lines, arcs and curves) are sent out to computer aided design
and computer aided engineering (CAD/CAE) programs in readable format. Both
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reverse engineering and the other analysis methods are assisted by the ability
to define points, lines and curves on the images either at fixed positions or
fitted to the edges of the object.
SMARTSCAN(TM) Performance
Effective scan times vary depending on object size and radiographic
opacity, source type and energy intensity, slice plane coverage by the detectors
and image quality desired. Image quality is usually represented in terms of the
system's spatial and density resolution.
All of the Company's systems can use a variety of radiation sources. High
energy gamma-ray isotopic and X-ray linear accelerator sources are used for
larger or more opaque objects while lower energy X-ray tubes are used for
smaller or less opaque objects.
Principal Products and Services
Smart Radiography(TM) Product Line
The Company's product line was developed and evolved over nine years of
extensive research, development and customer experience. The product line
consists of the following family of versatile, general-purpose systems:
o The SMS SMARTSCAN(TM) - the latest in the Company's product line,
this family of low cost scanners offers a range of resolution and
object handling capability to meet the customers' needs with an
off-the-shelf product. SMARTSCAN(TM) systems are typically
cabinetized, and can accommodate objects measuring up to two feet
in diameter, three feet in height and weighing up to 220 pounds.
o The SMS Model 102 - a high resolution system for the examination
of objects measuring up to three feet in diameter and weighing up
to 500 lbs.
o The SMS Model 201 - a very flexible, advanced system for the
examination of objects measuring up to five feet in diameter and
weighing up to 5,000 lbs.
Gauging Products
o High Speed Sheet Steel Gauge and Inspection System - a system
which will precisely measure during production the thickness,
width, contour and temperature of sheet steel moving at 40 mph at
temperatures ranging from 1200 to 1600 degrees Fahrenheit.
Manufacture and Production
Manufacture of each of the systems involves assembly of electronic and
mechanical components, system integration with computer hardware and software,
final checkout and diagnostic testing. Major computer subsystems,
electromechanical components and subassemblies are customarily manufactured by
outside vendors.
The Company has produced and delivered industrial CT systems to a variety
of government and commercial customers, both in the United States and abroad.
Prior to fiscal year 1995, the Company delivered five SMS Model 201 systems to
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customers including EG&G Florida, Inc., General Motors Corporation, Rockwell
International Corporation and the U. S. Air Force San Antonio Air Logistics
Center at Kelly Air Force Base. These systems, which range in price from $1.5
million to $2 million each, are used for a variety of purposes, including
inspection of critical components of the Space Shuttle.
The Company also produced and delivered numerous SMS Model 101B+ systems
(the predecessor to the SMARTSCAN(TM) product) prior to fiscal year 1995,
ranging in price from $500,000 to $950,000, to Martin Marietta Energy Systems,
Pratt & Whitney Canada, the Swiss Federal Laboratories for Materials Testing and
Research (EMPA), BP America, a division of British Petroleum, EG&G Mound Applied
Technologies, Inc., and Allied Signal, Inc. Uses of these systems include
applications in advanced materials, inspection of jet engine turbine blades, and
various non-destructive evaluation techniques.
Also prior to fiscal year 1995, the Company delivered a $2 million SMS
Model 102 system to Ishikawajima-Harima Heavy Industries, Inc., a leading
Japanese industrial concern. This sale represented the Company's first foreign
sale. Two of the Company's SMARTSCAN(TM) systems were delivered to NASA-Lewis
Research Center and to Morton International, Inc. in fiscal year 1994. Also in
fiscal year 1994, orders were received from oil companies in China and Canada
for the SMARTSCAN(TM) for use in oil exploration and research and an SMS Model
201 system was upgraded and delivered to the Idaho National Engineering
Laboratory for use in the inspection of toxic waste containers.
In fiscal year 1995, the Company produced and shipped the Chinese and
Canadian systems mentioned above, and received additional orders for
SMARTSCAN(TM) systems from UNOCAL, GM, Lockheed Martin, and Allied Signal, all
of which are scheduled for completion and installation in fiscal year 1996.
Scanning Services
The inspection and measurement capabilities for the Company's products are
available to both government and industry through the Company's Scanning
Services Division. The services are provided by the Company, using Company-owned
systems and software. Quality control of the wall thickness of turbine blades
used in jet aircraft engines and geometry acquisition for reverse engineering
are a significant source of scanning services business. Scanning services also
are playing an increasing role in the development of new composite and ceramic
materials for use in automotive and aerospace industries. The Company provides
these services on a contract, hourly or per part basis. The Director of Scanning
Services has responsibilities that include bidding, management, marketing, and
client liaison for scanning services.
Operations and Maintenance Services
With respect to certain systems previously delivered, the Company also
provides ongoing services under maintenance contracts with terms of up to five
years. Additionally, the Company provides field services to customers through
the sale of hardware and software upgrades. Revenues from field services has
become an increasingly important source of revenues as the number of systems in
operation has grown.
Research and Development
Company-sponsored research and development expenses totalled approximately
$67,000 and $107,000 for the years ended July 31, 1995 and 1994, respectively.
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The primary thrust of research and development efforts during the past
three years was to achieve drastic increases in the speed of data acquisition
and image processing. These were identified as the improvements that would most
significantly expand the implementation of the Company's CT technology in
industry. The first activity involved completion of a successful evaluation of
state-of-the-art area detection systems, which offer data acquisition rates of
10 to 100 times the rates achievable with the linear detector systems used in
the Company's previous systems. The new detectors have been successfully
incorporated into the new SMS SMARTSCAN(TM) systems.
The second area of substantial achievement was funded internally and
involved incorporating newly available computing hardware into the SMARTSCAN(TM)
systems. The specific components included advanced SUN SPARC workstations and
the newest Analogic array processor. Based on the improvements in speed of the
workstation, as compared to the older MicroVAX II minicomputer utilized in the
previous systems, and the ability to use simultaneously up to 15 of the new
array processors in parallel, an increase in image reconstruction and processing
speed by approximately a factor of 10 has been realized.
Additionaly, a new large scale area detector has been optimized for
detailed examination and inspection of large toxic and radioactive waste
containers. The first of these detector systems was successfully incorporated
into an existing SMS Model 201 system located at the Idaho National Engineering
Laboratory. Furthermore, the Company has expended substantial effort toward the
development of a new Graphical User Interface (GUI) for use in the Company's
products. The GUI helps provide for user friendly operation of the Company's
systems.
Also during the past two years, new capability has been developed in the
three dimension (3D) imaging of samples. 3D reconstruction programs have been
implemented which supplement the conventional two dimensional reconstruction
programs used previously. This advance in 3D inspection has been utilized in
three major market/application areas: (1) rapid prototyping, where 3D data from
CT can be input into devices which produce actual solid models corresponding to
theoretical models in a computer; (2) the inspection of various radioactive
waste containers, which often hold a complex assortment of articles; and (3) the
characterization of oil cores, facilitating reservoir evaluation and
optimization of drilling patterns.
Marketing
The Company markets its products and services through direct sales contacts
with existing customers, responses to inquiries generated by advertising and
articles in trade magazines and technical publications, trade shows and through
equipment demonstrations and personal contacts. The Company's SMARTSCAN(TM)
systems are intended to be standardized, customer-oriented commercial products
designed for volume production.
The Company's marketing efforts are distributed across a wide range of
industries. Representative areas are:
o Aviation/Aerospace. The Company believes that tomography offers a
cost-effective method for analysis prior to utilization, as well as
in-service inspection of critical components, including turbine blades,
turbine disks, rotors, fuel valves and structural components.
o Automotive. Tomography can be used for quality control and reliability
analysis of automotive components, such as engine parts, gears, shafts
and supports and can assist in computer integrated manufacturing
("CIM"). The Company believes that its technology is capable of being
used in on-line automotive production applications to detect structural
flaws and provide dimensional analysis.
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o Oil and Gas. Tomography is widely used in the oil industry to measure
fluid flow properties in rock samples from oil and gas reservoirs.
o Castings. Numerous industries other than Aviation/Aerospace and
Automotive utilize castings composed of various metals, alloys and
ceramics. In many of these cases, dimensional accuracy and porosity are
critical. The Company believes that tomography is particularly suited
to accurate dimensional measurement and detection of flaws in such
products.
As an emerging new technology, computerized industrial tomography is not
widely used in any of the Company's target markets at present. To date, the use
of computerized industrial tomography has been limited primarily to research and
development and contract scanning service activities and there can be no
assurance as to the ultimate cost and effectiveness of such technology for any
of the applications described above.
The Company is represented in Japan by KBK, a leading high technology
engineering/trading firm, pursuant to an exclusive marketing agreement covering
sales of the Company's products in Japan. The agreement, which is terminable by
either party on 90 days notice, provides for a commission to KBK upon sales of
Company products. The Company has made one system sale which is covered by this
agreement under which KBK was the contractual buyer. In France, Italy, and
China, the Company is represented by Mecaserto, Gammatom, and ICT, Inc.,
respectively, all recognized as leading suppliers of NDT equipment, systems and
services. Furthermore, the Company has signed an agreement with a representative
to sell the Company's products in Singapore. Domestically, the Company is
represented by Test Equipment Distributors, Inc. (T.E.D.), located in Detroit,
Michigan. T.E.D. represents the Company's products and services in a 20 state
region including the upper Midwest and Northeast industrial belt.
In fiscal 1995, the Company appointed Eberline Radiometrie Group of Thermo
Electron Instruments, Inc. (Eberline) as its exclusive worldwide representative
for the Company's patented Tomographic Sheet Profile Gauge. Eberline is the
leading European producer of industrial gauges.
Payment Terms
The Company utilizes several different types of billing arrangements and
payment terms, depending upon the type of product or service sold, and upon
whether the customer is a private or a governmental entity. With respect to
system sales, the Company in some cases has been successful in obtaining a
substantial payment from the customer at the time the order is obtained, with
subsequent receipt of progress payments as certain milestones on the contract
are met. This type of payment structure is not uncommon in the capital equipment
and government markets. The Company is of the opinion that future sales
contracts will have similar terms although there is no assurance that the
Company will be able to secure such terms on future contracts.
As described elsewhere herein, the Company's pricing and payment terms with
respect to scanning services are to enter into open purchase orders to perform
tomographic analysis of a specified number and class of objects for a unit
price, turnkey fixed fee or hourly rate.
Substantial Competition and Technology Changes
The non-destructive evaluation industry is highly competitive, and the
Company faces competition from companies with substantially greater financial
and technological resources and greater production capacity and experience than
the Company. Such other companies include but are not limited to, ARACOR, Inc.,
and Bio-Imaging Research, Inc., each of which makes or is capable of making
competitive products utilizing tomographic or other technology. The principal
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elements of competition in the tomographic industry, in the opinion of
management, are the ability: (i) to produce high quality images of a variety of
target objects; (ii) to manipulate and analyze collected data; (iii) to
demonstrate to customers that the costs of using the technology are reasonable
compared to the benefits realized; (iv) system throughput; and (v) comparative
cost.
The Company believes that its competitive position is negatively impacted
by its relative lack of financial resources and working capital. The Company
seeks to negotiate contracts with a view toward obtaining a significant advance
payment or periodic progress payments, as described above. The Company believes,
however, that its competitive position is benefitted by the quality of the
Company's technology, and the Company's ability through its products to perform
tests with speed, accuracy and minute precision not generally available through
competing products. Accordingly, many of the Company's customers and prospective
customers are faced with a decision of whether to obtain products that are less
precise and less sophisticated than those of the Company, or to obtain the
Company's products with potentially more stringent payment terms than are
available through the Company's competition.
Employees
At September 30, 1995, the Company employed 14 full-time employees, of whom
four were engaged in research and development, one in engineering, two in
scanning services, two in sales and marketing, one in field services, three in
administrative, clerical and support services, and one in manufacturing. When
necessary, temporary labor in the form of part-time employment or contract labor
is utilized to meet increased demand for the production of the Company's
systems.
None of the Company's employees are represented by a union or covered by a
collective bargaining agreement. All employees of the Company have entered into
an agreement with the Company by which they have agreed to keep all information
with regard to the business of the Company confidential and to assign to the
Company any inventions made by them relating to the Company's business while
employed by the Company. The Company has not experienced a strike or work
stoppage and believes that its relations with its employees are adequate.
Governmental Regulation
The detector systems incorporated within the Company's products utilize
X-ray and linear accelerator equipment and radioactive isotope sources. Various
governmental agencies, such as the U.S. Nuclear Regulatory Commission, the
Federal Aviation Administration, the U.S. Department of Transportation and state
health departments regulate the sale, use, disposal, labeling and shipment of
radioactive material and the use of X-ray and linear accelerator equipment.
There are also federal, state and local regulations covering the occupational
safety and health of the Company's employees. The Company believes that it is in
compliance with all applicable governmental requirements.
The primary aspect of the equipment or protocol associated with the
Company's products or activities which require licensing is the use of isotopic,
X-ray and linear accelerator radiation sources. As required by State of Texas
regulations, the Company has had its SMARTSCAN(TM) product line certified by the
Texas Bureau of Radiation Control as a product for commercial sale, utilizing
isotopic sources. Use of the systems in-house or at a customer facility requires
the operating party to obtain a license from the appropriate state agency or
federal agency (U.S. Nuclear Regulatory Commission) regulating the use of
radiation producing systems. The Company and all of its customers operating its
systems in the field have been able to obtain such licenses in a timely and
efficient manner.
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Patents and Other Rights
Pursuant to a 1981 assignment agreement (the "Assignment"), the Company
received an assignment of and exclusive rights to use certain technical and
proprietary know-how and two patents expiring in 1998. The Assignment to the
Company was made by Lon Morgan and E. C. George Sudarshan (the "Assignors"),
both of whom were founders or former affiliates of the Company. The Assignment
was for a term continuing through the patent expiration dates, but was subject
to early termination under certain circumstances described below. The Assignment
required the Company to make royalty payments to the Assignors of an aggregate
of one percent of the Company's sales that were related to products or
technology based on the rights subject to the Assignment, subject to a $10,000
annual minimum royalty. On July 1, 1993, the Company reassigned ownership of the
technical and proprietary know-how and the patents to the Assignors in return
for a payment of money by the Company, a mutual release and the cancellation of
the royalty commitment described above and the grant to the Company of a
perpetual, non-exclusive royalty-free license to the patents and the technical
and proprietary know-how.
On September 27, 1994, SMS, and co-owner Bethlehem Steel were awarded U.S.
Patent No. 5,351,703, entitled "Online Tomographic Gauging of Hot Sheet Metal."
The patent was filed in August 1992. The sheet steel gauge was developed by the
Company in collaboration with Bethlehem Steel and the National Science
Foundation's Small Business Innovation Research program, and has been in
operation at Bethlehem Steel for approximately four years. The steel gauge
provides the steel manufacturing industry, for the first time, with the ability
to inspect fully certain steel products as the products are being produced and,
thus, provides the manufacturers with automated feedback for process control.
PCT and EP foreign patent applications have been filed and are pending.
Corresponding Canadian, Taiwanese, and Korean patent applications also are
pending for this invention.
On March 21, 1995, the Company was awarded U.S. Patent No. 5,400,381
entitled, "Process for Analyzing the Contents of Containers." This very broad
patent covers a highly cost effective method for determining free liquid content
in radioactive waste drums. There are approximately 2,000,000 drums within the
Department of Energy (DOE) complex which require inspection per DOE and Nuclear
Regulatory Commission regulations. The Company is working with the DOE to
modernize its inspection procedures to include the patented technology. A second
specialized use for the same method is being considered by major auto companies
for production-line characterization of fluid distribution within sealed
systems.
The Company has also completed work on a new patent application for a CT
system designed especially for oil core scanning. The new design provides more
capabilities than the medical CT systems that the oil industry has widely
adopted for measuring fluid flow properties in rock cores. The new design
provides higher energy and higher resolution scanning on cores that can be
horizontally or vertically mounted to provide information on the effects of
gravity on the fluid flow process. The same imaging capabilities of the new
system have been sold by the Company for "vertical-only" core scanners in China,
Canada, and the U.S.
Financial History
The Company completed its initial public offering in March 1985. As of
October 2, 1995, the Company had the following equity securities outstanding
(exclusive of employees' and directors' stock options):
Common Stock, $0.05 par value......................... 13,030,355 shares
9
<PAGE>
ITEM 2. PROPERTIES
The Company currently subleases approximately 10,300 square feet of office
and manufacturing space in an industrial park located in north Austin, Texas.
Lease costs are $0.42 per square foot, or approximately $4,300 per month.
Beginning October 20, 1995, the Company will lease this same space, including an
additional adjacent 3,500 square feet, for an initial three year term. The
Company has negotiated in the lease contract two renewal options, each for three
years. Lease costs for the initial three year period are $0.55 per square foot,
or approximately $7,600 per month. Management believes that this space should be
adequate for all of the Company's activities for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending lawsuits and is not aware of any
such proceedings known to be contemplated by governmental authorities or others.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Prior to May 13, 1993, the Company's Common Stock was traded in the
over-the-counter "Small Cap" Market and was quoted on the automated quotation
system of the National Association of Securities Dealers ("NASDAQ") under the
symbol SCMS. On May 13, 1993 the Common Stock was delisted from the NASDAQ
"Small Cap" Market for failure to meet, among other requirements, the minimum
bid price requirement of $1.00 per share. After May 13, 1993 the Common Stock
has been traded over-the-counter on the NASD OTC Bulletin Board under the symbol
"SCMS."
The following table shows the quarterly range of high and low bid
quotations for the Common Stock for the past two fiscal years, as reported by
the NASD OTC Bulletin Board.
Common Stock
------------
Fiscal Year Ended High Low
---- ---
July 31, 1994
First Quarter.................................. $ 0.19 $ 0.11
Second Quarter................................. 0.22 0.05
Third Quarter.................................. 0.14 0.11
Fourth Quarter................................. 0.15 0.09
10
<PAGE>
July 31, 1995
First Quarter.................................. 0.10 0.08
Second Quarter................................. 0.10 0.06
Third Quarter.................................. 0.09 0.08
Fourth Quarter................................. $ 0.08 $ 0.07
The bid quotations for the Common Stock at the close of trading on October
2, 1995 was $0.26 per share.
The total number of shares of Common Stock outstanding as of October 2,
1995 was 13,030,355, and the total number of holders of Common Stock of record
as of such date was approximately 733.
The holders of the Company's Common Stock are entitled to receive dividends
from funds legally available therefor, when and as declared by the Board of
Directors. No cash dividends have been paid or are anticipated in the
foreseeable future, since the Company intends to retain earnings, if any, for
use in its business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table sets forth items from the Company's statement of operations
as a percentage of total revenues and as a percentage change from the prior
year:
<TABLE>
<CAPTION>
Year Ended July 31,
-----------------------------------------------------------------------------------
1995 1994
-------------------------------------- --------------------------------------
Dollar % of % Change Dollar % of % Change
Amount Total from Prior Amount Total from Prior
(000s) Revenue Year (000s) Revenue Year
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Contract revenues:
System sales .......................... $ 603 43.5% 21.1% $ 498 31.4% -40.51%
Scanning services ..................... 278 20.1% 36.3% 204 12.9% -58.70%
Field services and upgrades ........... 504 36.4% -42.9% 883 55.7% 74.90%
------- ------- ------- ------- ------- -------
Total revenues ...................... 1,385 100.0% -12.6% 1,585 100.0% -13.70%
Contract costs .......................... 1,243 89.8% 34.2% 926 58.4% -12.00%
------- ------- ------- ------- ------- -------
Gross profit ............................ 142 10.3% -78.5% 659 41.6% -15.90%
------- ------- ------- ------- ------- -------
Operating costs:
Marketing ............................. 311 22.5% -10.9% 349 22.0% 16.70%
Research and development .............. 67 4.8% -37.4% 107 6.8% -53.50%
General and administrative ............ 500 36.1% 8.0% 463 29.2% -19.20%
------- ------- ------- ------- ------- -------
Total operating costs ................ 878 63.4% -4.5% 919 58.0% -16.60%
------- ------- ------- ------- ------- -------
Loss from operations .................... (736) -53.1% -183.1% (260) -16.4% 18.20%
------- ------- ------- ------- ------- -------
Other (income) expense:
Interest expense ...................... 36 2.6% -41.9% 62 3.9% -3.10%
Interest and other income ............. (23) -1.7% -90.5% (241) -15.2% 1168.40%
Loss on sale of asset ................. 8 0.6% NM 0 0.0% 0.00%
------- ------- ------- ------- ------- -------
Other - net ......................... 21 1.5% NM (179) -11.3% NM
------- ------- ------- ------- ------- -------
Net loss ................................ $ (757) -54.7% -834.6% $ (81) -5.1% 77.70%
======= ======= ======= ======= ======= =======
</TABLE>
NM- Not meaningful
Results of Operations
11
<PAGE>
In fiscal 1995, total contract revenues decreased 12.6% compared to the
prior year. Increases in systems and scanning services revenues for the fiscal
year were offset by a 42.9% decline in field services and upgrades revenues.
This significant drop in field services and upgrades revenues is due to a large,
non-recurring upgrade contract in fiscal 1994. Increased systems revenues in
fiscal 1995 compared with fiscal 1994 is due to commencement in fiscal 1995 in
the production of one more unit than was produced in fiscal 1994. In fiscal
1996, revenues should increase from all sources if the Company successfully
completes, during the 1996 fiscal year, all of the Company's current backlog.
Gross margin as a percentage of revenues decreased from 41.6% in fiscal
1994 to 10.3% in fiscal 1995. Causing this decrease were (i) less favorable
revenue mix, (ii) lower overall volume leading to greater unabsorbed overhead
costs, (iii) competitive pressures on pricing, and (iv) an increase in occupancy
costs. In early fiscal 1995, the Company sold its land and building which
previously served as the Company's operating facility. Since that time, the
Company has leased premises, initially in the same building and more recently in
smaller industrial space. Lease costs in fiscal 1995 were higher than
depreciation charges for the building in fiscal 1994, thus increasing the
occupancy component of overhead costs for the year. Management expects that
gross margin as a percentage of revenues for fiscal year 1996 should more
closely approximate fiscal 1994 levels.
For the fifth consecutive year, total operating costs decreased compared to
the year earlier period. Management has worked aggressively to cut operating
costs in all areas in light of the Company's continued drop in revenues.
Marketing costs and research and development costs decreased, while general and
administrative costs grew slightly in fiscal 1995 compared to fiscal 1994.
Marketing costs decreased mainly because of lower commission accruals based on
lower overall revenues; research and development costs dropped due to a
decreased level of development activity on the Company's SMARTSCAN(TM) product
now that the product has moved primarily into the production stage. General and
administrative costs increased in fiscal 1995 compared to fiscal 1994 mostly due
to professional costs associated with the Company's contemplated acquisition
during the fiscal year, which acquisition is now terminated. Accordingly, all
related acquisition costs were expensed during the period instead of
capitalized.
For fiscal 1996, management anticipates that marketing costs will increase
notably in absolute dollar amounts as commissions are accrued on heightened
overall Company revenues. Excluding the effect of the NIST contract described
below, research and development costs are expected to decrease in fiscal 1996
compared to fiscal 1995, while general and administrative costs are expected to
increase modestly.
Liquidity and Capital Resources
As of July 31, 1995, the Company had negative net working capital of
$552,000 compared to negative net working capital of $311,000 at July 31, 1994.
The decrease is the result of losses from operations.
The Company used cash flows from operations of $575,000 in fiscal 1995.
This amount compares unfavorably with $7,000 of cash flows generated from
operations in fiscal 1994. This decrease is the result of losses from
operations. Recurring capital expenditures for the year were $1,000 compared to
$10,000 in fiscal 1994. Capital expenditures for fiscal 1996 are expected to
increase to approximately $25,000, as new equipment is placed in service in the
Company's scanning services division. The large inflow from investing activities
for fiscal 1995 is the result of the sale of the Company's land and building on
October 5, 1994. The sale of the land and building allowed the Company to retire
all of its long term debt and, net of associated expenses and mortgages, to
generate approximately $350,000 in working capital while realizing a loss of
$8,000.
12
<PAGE>
In May and June 1995, the Company borrowed a total of $100,000 from two
individuals pursuant to unsecured demand notes, due in one year if no demand is
made sooner. The funds permitted the Company to sustain activities at
approximately then current levels during a period of severe working capital
shortages. The main sources of liquidity available to the Company as of October
6, 1995 were approximately $10,000 in cash and $475,000 in accounts receivable.
The Company had a $200,000 line of credit with a local bank whereby the Company
could borrow funds for its working capital needs collateralized by certain
approved trade accounts receivable. This facility expired on October 25, 1995,
at which time $80,000 remained outstanding. On October 26, 1995 the bank
converted this outstanding amount into a 120 day term note.
Total backlog as of October 6, 1995 was $2,500,000, compared to $800,000 as
of one year earlier, consisting of $1,700,000 for system sales and $800,000 for
field services, upgrades and scanning services. Several orders were received
late in fiscal 1995 for the Company's SMARTSCAN(TM) product. All backlog is
scheduled for production in fiscal 1996.
Even though the Company is currently in a negative net working capital
position, management believes that the Company has the ability to meet its cash
requirements during the fiscal year ending July 31, 1996 based on revenues
generated by the Company's current backlog. Historically, the Company has relied
upon contract progress payments as a means of financing the production and
delivery of systems. Recently, the Company has accepted in certain instances
contracts not providing for such payments. Consequently, only about half of the
contracts which comprise the Company's current backlog contain contract
financing provisions. The Company therefore may need to implement additional
actions, such as negotiating more favorable terms with vendors and accelerating
collections of the Company's receivables, in order to produce and deliver its
current backlog. If these measures are not adequate, then the Company may
require supplemental working capital financing. Management is in discussions
with several different potential sources of these funds; however, there can be
no assurance that these discussions will prove successful.
A further challenge to the Company's liquidity is the notification in
September 1995 by the National Institute of Standards and Technology (NIST) that
the Company, along with its team members General Electric, General Motors, and
EG&G, was awarded an Advanced Technology Program (ATP) grant for the development
of a "Fast, Volumetric X-ray Scanner for Three-Dimensional Characterization of
Critical Objects." Total project funds are estimated at $7,659,000. ATP funds
committed to this project total $3,753,000. The ATP funds are "cost sharing"
funds, budgeted to match expenditures by the industrial partners. Pursuit of
this project would require incremental funding for the Company's portion of the
industrial cost share. Management is engaged in discussions with several sources
of financing for this project as well.
The ability of the Company to meet its long term cash requirements is
dependent on any one or a combination of the following: returning to profitable
operations through increased system sales; securing new sources of cash; further
reducing operating costs and curtailing company operations; or developing new
business activities.
13
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Page
Reports of Independent Accountants.......................................... 16
Financial Statements:
Balance Sheet, July 31, 1995 and 1994..................................... 18
Statement of Operations, Years Ended July 31, 1995 and 1994............... 19
Statement of Changes in Stockholders' Equity (Capital Deficit), Years Ended
July 31, 1995 and 1994.................................................... 20
Statement of Cash Flows, Years Ended July 31, 1995 and 1994............... 21
Notes to Financial Statements............................................. 22
14
<PAGE>
BDO Seidman, LLP
Report of Independent Accountants
To the Board of Directors and Shareholders
of Scientific Measurement Systems, Inc.
We have audited the accompanying balance sheet of Scientific Measurement
Systems, Inc. (the "Company") as of July 31, 1995, and the related statements of
operations, changes in stockholders' equity (capital deficit) and cash flows for
the year then ended. These financial statements are the are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Scientific Measurement Systems,
Inc. at July 31, 1995, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
/s/BDO Seidman, LLP
Austin, Texas
September 15, 1995, except for Note 4
which is as of October 26, 1995
15
<PAGE>
Price Waterhouse LLP
Report of Independent Accountants
To the Board of Directors and Shareholders
of Scientific Measurement Systems, Inc.
In our opinion, the accompanying balance sheet and the related statement of
income, of changes in stockholders' equity and of cash flows present fairly, in
all material respects, the financial position of Scientific Measurement Systems,
Inc. at July 31, 1994, and the results of its operations and its cash flows for
each of the two years in the period ended July 31, 1994 in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above. We have not audited the
financial statements of the Company for any period subsequent to July 31, 1994.
The Company's revenues have declined and the Company has incurred recurring net
losses. Additionally, the Company has a working capital deficit of approximately
$311,000 at July 31, 1994. Management's plans to mitigate the effect of these
conditions are discussed in Note 1 to the financial statements.
/s/Price Waterhouse LLP
PRICE WATERHOUSE LLP
Austin, Texas
September 16, 1994
except as to Notes 2,3 and 10 which are as of October 21, 1994
16
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
Balance Sheet
July 31, 1995 and 1994
<TABLE>
<CAPTION>
Assets 1995 1994
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................... $ 25,185 $ 80,517
Trade accounts receivable, less allowance for
doubtful accounts of $0 in 1995 and $18,000 in 1994 ...... 192,473 33,468
Costs and earned profits on long-term contracts
in excess of related billings ............................ 77,679 55,963
Inventories ................................................. 14,125 20,669
Prepaid expenses and other current assets ................... 31,300 17,930
----------- -----------
Total current assets ........................................ 340,762 208,547
----------- -----------
Property, plant and equipment, at cost ........................... 1,156,620 2,243,789
Less accumulated depreciation ............................... (1,139,805) (1,230,205)
----------- -----------
16,815 1,013,584
----------- -----------
Scanning equipment, less accumulated depreciation of $150,714
and $110,763 respectively ..................................... 204,637 244,588
Other assets, less accumulated amortization of $18,323 and
$15,191 respectively .......................................... 54,511 39,596
----------- -----------
$ 616,725 $ 1,506,315
=========== ===========
Liabilities and Stockholders' Equity (Capital Deficit)
------------------------------------------------------
Current liabilities:
Accounts payable ............................................ $ 411,705 $ 59,290
Billings in excess of related costs and earned
profits on long-term contracts ........................... 168,857 230,414
Current installments of long-term debt ...................... -- 95,910
Borrowings on line of credit ................................ 80,000 30,627
Notes payable ............................................... 100,000 --
Accrued vacation ............................................ 41,366 39,972
Accrued commissions ......................................... 71,705 37,804
Other accrued liabilities ................................... 19,354 25,803
----------- -----------
Total current liabilities ............................... 892,987 519,820
----------- -----------
Long-term debt, less current installments ........................ -- 505,576
Total liabilities ....................................... 892,987 1,025,396
----------- -----------
Stockholders' Equity (Capital Deficit):
Common stock, $.05 par value; 40,000,000 shares
authorized; 13,030,355 shares issued and outstanding ..... 651,518 651,518
Additional paid-in capital .................................. 8,316,199 8,316,199
Deficit ..................................................... (9,243,979) (8,486,798)
----------- -----------
Total stockholders' equity (capital deficit) ............ (276,262) 480,919
----------- -----------
$ 616,725 $ 1,506,315
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
Statement of Operations
Years Ended July 31, 1995 and 1994
1995 1994
---- ----
Contract revenues:
Tomographic system sales .............. $ 602,586 $ 498,156
Scanning services ..................... 277,772 203,628
Field services and upgrades ........... 504,457 882,750
------------ ------------
Total revenues .................... 1,384,815 1,584,534
Contract costs ............................. 1,242,611 925,792
------------ ------------
Gross profit ............................... 142,204 658,742
------------ ------------
Operating costs:
Marketing ............................. 310,591 349,445
Research and development .............. 66,500 106,833
General and administrative ............ 500,759 462,491
------------ ------------
Total operating costs ............. 877,850 918,769
------------ ------------
Loss from operations ....................... (735,646) (260,027)
------------ ------------
Other (income) expense:
Interest expense ...................... 36,078 62,040
Interest and other income ............. (22,633) (240,694)
Loss on sale of asset ................. 8,090 --
------------ ------------
Other - net .............................. 21,535 (178,654)
------------ ------------
Net loss ................................... $ (757,181) $ (81,373)
============ ============
Weighted average shares outstanding ........ 13,030,355 13,030,355
============ ============
Net loss per share .................... $ (0.059) $ (0.006)
============ ============
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
Statement of Changes in Stockholders' Equity (Capital Deficit)
Years Ended July 31, 1995 and 1994
<TABLE>
<CAPTION>
Common stock Additional
------------------------- Paid-in
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance, July 31, 1993 ........... 13,030,355 $ 651,518 $ 8,316,199 $(8,405,425) $ 562,292
Net loss ......................... -- -- -- (81,373) (81,373)
----------- ----------- ----------- ----------- -----------
Balance, July 31, 1994 ........... 13,030,355 651,518 8,316,199 (8,486,798) 480,919
=========== =========== =========== =========== ===========
Net loss ......................... -- -- (757,181) (757,181)
----------- ----------- ----------- ----------- -----------
Balance, July 31, 1995 ........... 13,030,355 $ 651,518 $ 8,316,199 $(9,243,979) $ (276,262)
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
Statement of Cash Flows
Years Ended July 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Operating activities:
Net loss ................................................... $(757,181) $ (81,373)
Adjustments to reconcile net loss to net cash from operating
activities:
Depreciation and amortization ............................ 59,973 83,827
Loss on sale of asset .................................... 8,090 --
Changes in operating assets and liabilities:
Trade accounts receivable ................................ (141,401) 243,688
Allowance for doubtful accounts .......................... (17,604) --
Cost and earned profits on long-term contracts in
excess of related billings ............................. (21,716) 16,224
Inventories .............................................. 6,544 (1,676)
Prepaid expenses and other current assets ................ (13,371) (13,567)
Other assets ............................................. (17,820) --
Billings in excess of related costs and earned profits on
long-term contracts .................................... (61,557) 76,057
Accounts payable and accrued expenses .................... 381,261 (315,996)
--------- ---------
Net cash (used for) provided by operating activities ............ (574,782) 7,184
--------- ---------
Investing activities:
Capital expenditures ....................................... (1,026) (9,509)
Sale of land and building .................................. 972,589 --
--------- ---------
Net cash flows provided by (used for) investing activities ...... 971,563 (9,509)
--------- ---------
Financing activities:
Borrowing from notes payable ............................... 100,000 --
Borrowings on line of credit ............................... 246,703 338,977
Repayments on line of credit ............................... (197,330) (308,350)
Principal payments on long-term debt ....................... (601,486) (85,060)
--------- ---------
Net cash used for financing activities .......................... (452,113) (54,433)
--------- ---------
Decrease in cash and cash equivalents ........................... (55,332) (56,758)
Cash and cash equivalents at beginning of year .................. 80,517 137,275
--------- ---------
Cash and cash equivalents at end of year ........................ $ 25,185 $ 80,517
========= =========
</TABLE>
Supplemental information on non-cash investing and financing activities:
Cash payments for interest were $36,000 and $62,000 in 1995 and 1994,
respectively. No taxes were paid in 1995 and 1994.
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
Notes to Financial Statements
1. THE COMPANY
Scientific Measurement Systems, Inc., ("the Company") is a research,
manufacturing and service company and is primarily engaged in the design,
development, assembly and marketing of radiographic/tomographic scanning systems
used for nondestructive examination of the interior structure of various
materials, and in providing contract services with respect thereto. All
operations of the Company are domestically based.
During the past five fiscal years ended July 31, the Company incurred net
losses. Even though the Company is currently in a negative net working capital
position, management believes that the Company has the ability to meet its cash
requirements during the fiscal year ending July 31, 1996 based on revenues
generated by the Company's current backlog. Historically, the Company has relied
upon contract progress payments as a means of financing the production and
delivery of systems. Recently, the Company has accepted in certain instances
contracts not providing for such payments. Consequently, only about half of the
contracts which comprise the Company's current backlog contain contract
financing provisions. The Company therefore may need to implement additional
actions, such as negotiating more favorable terms with vendors and accelerating
collections of the Company's receivables, in order to produce and deliver its
current backlog. If these measures are not adequate, then the Company may
require supplemental working capital financing. Management is in discussions
with several different potential sources of these funds; however, there can be
no assurance that these discussions will prove successful.
The ability of the Company to meet its long term cash requirements is
dependent on any one or a combination of the following: returning to profitable
operations through increased system sales; securing new sources of cash; further
reducing operating costs and curtailing company operations; or developing new
business activities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventories - Inventories are stated at lower of cost (specific
identification) or market and consists primarily of parts to be used in the
manufacture of tomographic scanning systems.
Property, Plant and Equipment - Property, plant and equipment is stated at
cost. Depreciation and amortization for financial statement purposes are
provided by the straight-line method over estimated useful lives of two to five
years for equipment and furniture and fixtures and 31.5 years for the building.
Maintenance and repairs are charged to expense as incurred.
The major classes of property, plant and equipment as of July 31,1995 and
1994 were as follows:
1995 1994
---- ----
Equipment ................................ $1,052,335 $1,052,335
Furniture and fixtures ................... 104,285 103,259
Building ................................. 0 551,788
Land ..................................... 0 536,407
---------- ----------
Total ........................... $1,156,620 $2,243,789
========== ==========
On October 5, 1994, the Company sold the land and building (Note 10).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Scanning Equipment - Scanning equipment is stated at cost. Depreciation for
financial statement purposes are provided by the straight-line method over
estimated useful lives of five to ten years.
21
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
Notes to Financial Statements, Continued
Patent Rights - The Company holds patent rights related to procedures for
tomographic examinations which are being amortized using the straight-line
method over their remaining lives of twelve and one-half years to seventeen
years.
Research and Development - Expenditures for Company-sponsored research and
development are expensed as incurred.
Loss Per Share - Loss per share is computed based on the weighted average
number of shares outstanding during the year. Stock options and warrants are not
included in the computation of loss per share as their effect is anti-dilutive.
Cash and Cash Equivalents - For purposes of reporting cash flows, cash and
cash equivalents include cash and interest bearing deposits.
Income Taxes - Income taxes are calculated using the liability method
specified by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" (SFAS 109).
The Company adopted SFAS No. 109, "Accounting for Income Taxes" during
fiscal 1994 and has applied the provisions retroactively to August 1, 1993. The
adoption of SFAS 109 changes the Company's method of accounting for income taxes
from the deferred method (Accounting Principles Board Opinion No. 11,
"Accounting for Income Taxes") to the liability method. Previously the Company
deferred the past tax effects of timing differences between financial reporting
and taxable income. The liability method requires the recognition of deferred
tax liabilities and assets for the expected future tax consequences of temporary
differences between tax bases and financial reporting bases of assets and
liabilities. The adoption of SFAS 109 did not have a material effect on the
Company's financial position or results of operations.
Contract Revenues - Revenues for tomographic system sales are accounted for
under the percentage-of-completion method of accounting in which revenues and
gross profits are recognized as work is performed based on the relationship
between actual costs incurred and total estimated costs at completion. Revenues
and gross profit are adjusted for revisions in estimated total contract costs
and contract value in the accounting period in which the revisions are made.
Estimated losses are recorded in the period such losses are identified. The
Company recognizes revenue and costs under scanning services contracts as the
related services are performed and costs are incurred. Revenues under field
services maintenance contracts are recognized on a straight-line basis over the
term of the contract; related costs are expensed when incurred. Contract costs
include all direct labor, material, subcontract costs and allocations of
indirect overhead.
22
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
Notes to Financial Statements, Continued
3. LONG-TERM DEBT
Long-term debt at July 31, 1994 consists of the following mortgage notes:
1994
----
First lien mortgage note payable to a corporation due
in equal monthly installments of $6,137 through
October 2000 when the balance of $237,546 is due.
The monthly payments include interest at a fixed
rate of 10.5% per annum........................................ $ 457,952
Second lien mortgage note payable to a bank which
matured July 22, 1994.......................................... 56,615
Third lien mortgage note payable to the City of Austin
under its Industrial Expansion and Retention Loan
(IERL) Program. The mortgage note is payable in equal
monthly installments of $1,242 through January 1997 when
the unpaid balance is due. The monthly payments include
interest at a fixed rate of 3% per annum....................... 86,919
---------
601,486
Less - Current installments.................................... (95,910)
---------
$ 505,576
---------
On October 5, 1994, the Company sold its land and building (Note 10). The
proceeds of the sale were used to retire all of the Company's mortgage notes. As
of July 31, 1995, the Company has no long term debt.
4. LINE OF CREDIT
In October 1994 the Company entered into a revolving credit agreement with
a bank which permitted borrowings up to $200,000 based on certain accounts
receivable. Interest was payable monthly at the bank's prime rate plus 1.5%. The
agreement expired on October 25, 1995 at which time $80,000 remained
outstanding. The agreement contained various covenants which, among other items,
require the Company to maintain certain financial ratios. At July 31, 1995, the
Company was in technical default due to the Company's failure to comply with
certain minimum net worth requirements under the agreement. On October 26, 1995
the bank converted this outstanding amount into a 120 day term note.
5. NOTES PAYABLE
Notes payable of $100,000 at July 31, 1995 consist of one-year unsecured demand
debentures accruing interest at prime rate.
23
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
Notes to Financial Statements, Continued
6. STOCKHOLDERS' EQUITY
The Company has authorized 40,000,000 shares of common stock, $0.05 par
value. As of July 31, 1995, 13,030,355 shares were issued and is outstanding.
Additionally, the Company has authorized 2,000,000 shares of preferred stock,
$0.15 par value. As of July 31, 1995, none has been issued or is outstanding.
The Company currently has two existing incentive stock option plans. The
first, effective August 24, 1989 ("the 1989 Plan") is administered by a Stock
Option Committee (the "Stock Option Committee") which consists of not less than
three members of the Board of Directors. The 1989 Plan reserves 2,500,000 shares
of the Company's common stock and provides for the grant of incentive stock
options, non-qualifying stock options and stock appreciation rights ("SARs") to
certain key employees of the Company who serve as officers of the Company, to
consultants engaged by the Company, and to certain other individuals. Options
and SARs will be awarded at the discretion of the Stock Option Committee.
The 1989 Plan prohibits the grant of options thereunder after August 24,
1999. The Stock Option Committee also determines the expiration dates of options
granted provided that all options must be exercised within 7 years of the date
of grant (5 years to any optionee who is the owner of 10% of the Company). The
price at which options may be exercised is determined by the Stock Option
Committee but in no event may the price be less than the fair market value of
the underlying common stock on the date of grant. In the case of an optionee who
is the owner of 10% or more of the total combined voting power of all classes of
stock of the Company, the option price must be at least 110% of the fair value
of the underlying common stock on the date of grant.
Because the 1989 Plan was not submitted for approval of the shareholders
within twelve months of its adoption by the Board of Directors, the options
granted under it do not qualify as incentive stock options. It is the intention
of the Board of Directors not to award further options under the 1989 Plan. As
of July 31, 1994, there were no options outstanding under the 1989 Plan.
On February 16, 1990, the Board of Directors approved the 1990 Stock Option
Plan ("1990 Plan"). The 1990 Plan is identical in all but one respect to the
1989 Plan. The sole variation is that the 1990 Plan prohibits the grant of
options thereunder after February 16, 2000, rather than August 24, 1999.
During fiscal 1993, the Board of Directors approved awards of 1,003,468
options under the 1990 Plan. During fiscal 1994, the Board of Directors also
approved awards of 1,959,482 options of which 697,623 options were awarded under
the 1990 plan while 1,261,859 options were not awarded pursuant to any formal
plan. All options were granted at fair market value at date of issuance.
Although granted at fair market value, the majority of these options were issued
to directors and employees in recognition of significant salary reductions
during the year. Certain options vested immediately and others vest over a
period of two years. There were no options awarded under the plan in fiscal
1995. The options awarded in fiscal 1993 expire on August 1, 1998 while those
awarded in fiscal 1994 expire on August 1, 2000.
As of July 31, 1995, 4,929,950 shares of common stock were under option,
with exercise prices ranging from $0.1404 - $0.2850. All of these options were
exercisable at July 31, 1995. No options were exercised during fiscal 1994 and
1995.
24
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
Notes to Financial Statements, Continued
7. CONTRACT REVENUES
The Company's revenues have been derived from certain major customers
(greater than 10% of total revenues) as follows:
Customer 1995 1994
- -------- ---- ----
A................................... 1% 23%
B................................... 7% 30%
C................................... 14% 7%
D................................... 13% 0%
The Company had export sales of $41,000 and $63,000 to Japan, $354,000 and
$28,000 to Canada, and $213,000 and $0 to China during fiscal 1995 and 1994,
respectively. Revenues derived either as a prime contractor or subcontractor to
prime contractors to the U.S. Government were 38% and 56% of total revenues
during fiscal 1995 and 1994, respectively.
Contracts in progress at July 31, 1995 and 1994 consist of the following:
1995 1994
---- ----
Costs and estimated earnings....................... $ 867,131 $ 444,250
Billings........................................... 958,308 618,701
---------- -----------
(91,178) (174,451)
========== ===========
Included in the balance sheet:
Costs and earned profits on long-term contracts
in excess of related billings............... 77,679 55,963
Billings in excess of related costs and earned
profits on long-term contracts.............. (168,857) (230,414)
---------- -----------
$ (91,178) $ (174,451)
========== ===========
Requirements for progress billings are negotiated on an individual contract
basis and, accordingly, vary between contracts.
8. INCOME TAXES
The Company adopted Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" (SFAS 109) during the fourth quarter of fiscal
1994 and has applied the provisions retroactively to August 1, 1993. The
adoption of SFAS 109 did not have a material effect on the Company's financial
position or results of operations.
25
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
Notes to Financial Statements, Continued
8. INCOME TAXES, CONTINUED
Temporary differences represent the cumulative taxable or deductible
amounts recorded in the financial statements in different years than recognized
in the tax returns. The depreciation temporary difference represents tax
depreciation in excess of financial statement depreciation. The accrued expenses
temporary differences represent various expenses accrued for financial reporting
purposes until paid.
The tax-effected temporary differences and carryforwards that comprise
deferred tax assets at July 31, 1995 are as follows:
Deferred Tax
Asset
(Liability)
------------
Accrued expenses .......................................... $ 40,973
Depreciation .............................................. (67,972)
Other ..................................................... 366
-----------
Total temporary difference ........................... (26,633)
Operating loss carryforward ............................... 3,090,991
Tax credit carryforward ................................... 144,157
-----------
Total operating loss and tax credits ................. 3,208,515
-----------
Valuation allowance ....................................... (3,208,515)
-----------
Net deferred tax assets and liabilities ................... $ -0-
===========
At July 31, 1995 the Company had available for federal income tax reporting
purposes approximately $9,000,000 of which $250,000 expires in 1998, $480,000
expires in 1999 with the balance expiring in varying amounts in 2000 through
2009. The Company uses accelerated depreciation for federal income tax purposes.
Also, the Company had approximately $30,000 of investment tax credit
carryforwards and approximately $110,000 of research and development tax credit
carryforwards expiring from 1996 to 2001. Under the Tax Reform Act of 1986, as
amended, an annual limitation will be placed on the amount of net operating loss
and tax credit carryforwards which may be utilized if there are substantial
changes in the ownership of the Company.
SFAS 109 requires the recording of a valuation allowance when it is "more
likely than not that some portion or all of the deferred tax assets will not be
realized." It further states that "forming a conclusion that a valuation
allowance is not needed is difficult when there is negative evidence such as
cumulative losses in recent years." The ultimate realization of this deferred
income tax asset depends upon the ability to generate sufficient taxable income
in the future.
9. RELATED PARTY TRANSACTIONS
In 1981, the Company purchased from various stockholders certain technology
and patent rights related to the procedures for tomographic examinations. The
cost of such rights, net of accumulated amortization, of $6,557 and 7,329 are
included in other assets at July 31, 1995 and 1994. During fiscal 1993, the
Company reassigned ownership of the patents to the stockholders in return for
cancellation of the Company's royalty commitment and issuance to the Company of
a perpetual, non-exclusive, royalty free license to the patents.
26
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
Notes to Financial Statements, Continued
10. SALE OF BUILDING AND LAND
On October 5, 1994, the Company sold its land and building to an unrelated
third party for $1,060,000. Proceeds from the sale were used to retire all
mortgage notes outstanding, in the aggregate amount of $600,000. Net of all
related expenses and retirement of mortgage notes, the Company generated
approximately $350,000 cash from the transaction, while realizing a loss of
$8,000.
11. LEASES
Subsequent to year end, the Company entered into a lease agreement for
office and manufacturing space. The lease is for an initial three year period,
with two three year options to renew the lease at then market prices.
Future minimum payments, by fiscal year and in the aggregate, under the
above-mentioned lease consist of the following:
1996........................................................... $ 71,634
1997........................................................... 91,573
1998........................................................... 91,573
1999........................................................... 19,939
----------
Total minimum lease payments ............................. $ 274,719
==========
27
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
Notes to Financial Statements, Continued
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Price Waterhouse acted as the Company's Certified Public Accountant for the
fiscal years ending July 31, 1990 through 1994. On December 8, 1994 Price
Waterhouse advised the Company that it would decline to stand for re-election.
The Company retained BDO Seidman, LLP to act as the Company's Certified Public
Accountant on July 26, 1995.
None of Price Waterhouse's reports on the Company's financial statements
during the two years prior to the Company's retention of BDO Seidman, LLP
contained any adverse opinions or any disclaimer of opinion, nor had they been
qualified or modified as to uncertainty, audit scope, or accounting principles.
Until their decision not to stand for reelection, there had been no disagreement
between Price Waterhouse and the Company on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which would, if not resolved, have caused Price Waterhouse to make a reference
to the subject matter of the disagreement in connection with its report.
During the time that Price Waterhouse served as accountant for the Company,
Price Waterhouse was satisfied that the Company had internal controls necessary
for the Company to develop reliable financial statements and was always willing
to rely on management's representations and financial statements.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Information concerning the Directors and Executive Officers of the Company
is incorporated by reference from the Company's definitive Proxy Statement and
related materials in connection with the annual meeting of shareholders on
December 14, 1995. The incorporated portions consist of all of the disclosures
that appear in that Proxy Statement under the headings "Nominees for Election as
Directors" and "Executive Officers."
ITEM 10. EXECUTIVE COMPENSATION
Information concerning the Executive Compensation is incorporated by
reference from the Company's definitive Proxy Statement and related materials in
connection with the annual meeting of shareholders on December 14, 1995. The
incorporated portions consist of all of the disclosures that appear in that
Proxy Statement under the heading "Executive Compensation."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning the Security Ownership of Certain Beneficial Owners
and Management is incorporated by reference from the Company's definitive Proxy
Statement and related materials in connection with the annual meeting of
shareholders on December 14, 1995. The incorporated portions consist of all of
the disclosures that appear in that Proxy Statement under the heading "Security
Ownership of Certain Beneficial Owners and Management."
28
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report.
Page
1. Financial Statements:
Reports of Independent Accountants.................................. 16
Balance Sheet, July 31, 1995 ....................................... 18
Statement of Income, Years Ended July 31, 1995 and 1994 ............ 19
Statement of Changes in Stockholders' Equity, Years Ended
July 31, 1995 and 1994......................................... 20
Statement of Cash Flows, Years Ended July 31, 1995 and 1994......... 21
Notes to Financial Statements....................................... 22
29
<PAGE>
2. Exhibits:
<TABLE>
<CAPTION>
Page Number if Incorporated by
Number Description Filed Herein Reference to
------ ----------- ------------ ------------
<S> <C> <C>
3.1 Restated Articles of Incorporation Exhibit 3.1 to the Registration
Statement on Form S-18
effective March 5, 1985
(File No. 2-94269-FW)
3.1A Amendment to Articles of Incorporation Exhibit 3.1A to the Annual
Report on Form 10-K for the
Fiscal Year Ended July 31,
1991
3.2 By-laws Exhibit 3.2 to the Registration
Statement on Form S-18
effective March 5, 1985
(File No. 2-94269-FW)
3.2A Amendment to By-laws Exhibit 3.2A to the Annual
Report on Form 10-K for the
Fiscal Year Ended July 31,
1991
4.1 Form of Common Stock Certificate Exhibit 4.1 to the Registration
Statement on Form S-18
effective March 5, 1985
(File No. 2-94269-FW)
10.8 Form of Employee Agreement (Non- Exhibit 10.10 to the
Disclosure) Registration Statement on Form
S-1 effective September 9,
1986
(File No. 33-6220)
10.9 1983 Incentive Stock Option Plan Exhibit 10.18 to the
Registration Statement on Form
S-18 effective March 5, 1985
(File No. 2-94269-FW)
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Page Number if Incorporated by
Number Description Filed Herein Reference to
------ ----------- ------------ ------------
<S> <C> <C>
10.10 Letter agreements dated November 20, Exhibit 10.14 to the Company's
1987 and October 7, 1988 between the Annual Report on Form 10-K
Registrant and Bethlehem Steel for the fiscal year ended July
Corporation for the development and sale 31, 1988
of a tomographic system. Portions of
these letter contracts have been omitted
and filed separately with the Commission
together with an application for
confidential treatment
10.11 1990 Incentive Stock Option Plan Exhibit A to Proxy Statement
for 1990 Annual Meeting of
Shareholders filed October 29,
1990
10.12 Mutual License Agreement dated May 5, _____ N/A
1993 between the Registrant and
Bethlehem Steel Corporation
10.13 Frost National Bank letter dated October _____ N/A
25, 1995 regarding Term Note
10.14 Notes dated May 8, 1995, May 31, 1995 N/A
and June 16, 1995 in the principal
amounts of $50,000, $30,000 and $10,000
respectively, all payable by Registrant to
Mr. Howard L. Burris, Jr.
16.0 Letter on Change in Certifying _____ N/A
Accountant
24.1 Consents of Independent Accountants _____ N/A
25.1 Power of Attorney _____ N/A
</TABLE>
(b) Reports on Form 8-K.
None filed during the last quarter of the period.
(c) Exhibits.
The exhibits described in Item 13(a)(2), above, and identified as being
filed herewith, are filed as a part of this report.
31
<PAGE>
POWER OF ATTORNEY TO SIGN AMENDMENTS
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below does hereby constitute and appoint Larry Secrest and J. Neils Thompson,
and each of them, with full power to act without the other, his true and lawful
attorney-in-fact and agent for him and in his name, place and stead, in any and
all capacities, to sign any or all amendments to the Scientific Measurements
Systems, Inc. Form 10-KSB, Annual Report, for year ending July 31, 1994, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises in order to effectuate the same as fully, to all intents
and purposes, as they or he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agents, or any of them, may
lawfully do or cause to be done by virtue hereof.
This Power of Attorney has been assigned below by the following persons in
the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ J. Neils Thompson Chairman of the October 27, 1995
- ------------------------- Board of Directors
J. Neils Thompson
President, Chief Executive Officer,
/s/ Larry Secrest Acting Chief Financial and October 27, 1995
- ------------------------- Accounting Officer, and Director
Dr. Larry Secrest
Director October , 1995
- -------------------------
Douglas G. Chaffin
Director October , 1995
- -------------------------
Dr. Norman Hackerman
/s/ Burt Kanter Director October 26, 1995
- -------------------------
Burton W. Kanter
/s/ James Kenny Director October 27, 1995
- -------------------------
James W. Kenney
/s/ Phillips Moore Director October 25, 1995
- -------------------------
Phillips A. Moore
- ------------------------- Director October , 1995
Dr. Thomas Prud'homme
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d), the Securities Act of
1934, the Registrant has duly caused this Form 10-KSB, Annual Report, for the
year ending July 31, 1995, to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Austin, and State of Texas, on the
27th day of October, 1995.
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
By: /s/ Larry Secrest /s/ J. Neils Thompson
---------------------- ----------------------
Dr. Larry Secrest, J. Neils Thompson,
President, Chief Executive Officer, and Chairman of the Board
Acting Chief Financial and Accounting Officer
33
<PAGE>
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ J. Neils Thompson Chairman of the October 27, 1995
- ------------------------- Board of Directors
J. Neils Thompson
President, Chief Executive Officer,
/s/ Larry Secrest Acting Chief Financial and October 27, 1995
- ------------------------- Accounting Officer, and Director
Dr. Larry Secrest
/s/ Douglas Chaffin Director October 25, 1995
- -------------------------
Douglas G. Chaffin
Director October , 1995
- -------------------------
Dr. Norman Hackerman
/s/ Burt Kanter Director October 26, 1995
- -------------------------
Burton W. Kanter
/s/ James Kenny Director October 25, 1995
- -------------------------
James W. Kenney
/s/ Phillips Moore Director October 27, 1995
- -------------------------
Phillips A. Moore
- ------------------------- Director October , 1995
Dr. Thomas Prud'homme
34
MUTUAL LICENSE AGREEMENT
THIS AGREEMENT is made and entered into by and between Bethlehem Steel
Corporation ("Bethlehem") and Scientific Measurement Systems, Inc. ("SMS").
WHEREAS Bethlehem and SMS have developed profile gaging and flat rolled
gage technology under a Letter Agreement dated November 20, 1987, and Amendments
thereto;
WHEREAS Bethlehem and SMS are desirous of maximizing the financial benefits
to each from the manufacture, use, and/or sale of technology so developed; and
WHEREAS various meetings and agreements have occurred subsequent to the
Letter Agreement for the purpose of defining the interests of each party;
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
1. Terms used herein are defined as follows:
"Development Period": the period covered by the November 20, 1987,
Letter Agreement and subsequent Amendments from November 20, 1987 to May 6,
1993.
"Contract Period": the period beginning upon the execution date of this
Agreement and ending on either the tenth anniversary thereof or the date of
expiration of the last to expire of the Joint Patents (as defined below),
whichever shall occur last.
"Flat Rolled Gage": a device for measuring cross-sectional dimensions
of flat rolled steel product during the manufacture of the product which
incorporates tomographic techniques.
"Profile Gage": a device for measuring dimensions of any steel product
during manufacturing which incorporates tomographic techniques.
"Bethlehem Patents": patents and applications owned or controlled by
Bethlehem based on inventions made by Bethlehem employees during the Development
Period and directed to Profile Gages.
"SMS Patents": patents and applications owned or controlled by SMS
based on inventions made by SMS employees during the Development Period and
directed to Profile Gages.
"Joint Patents": patents and applications owned or controlled by
Bethlehem and SMS based on inventions made jointly by one or more Bethlehem
employees and one or more SMS employees during the Development Period directed
to Flat Rolled and Profile Gages.
"Selling Price": the invoice price of the Gage, Lo.b. plant of
manufacture plus or minus any returns or adjustments.
36
<PAGE>
2. Bethlehem and SMS shall jointly pay the cost of preparing, filing,
prosecuting, and maintaining Joint Patents. The costs win be split from the date
they were incurred starting March 31, 1992, and forward. The approximate amount
of those fees to date are $12,500.00. This amount shall be split subject to
review of itemized invoices concerning the work done for this amount of money.
Subsequently, Bethlehem agrees to transfer this patent work and all files and
documentation related thereto from the firm currently handling these matters to
the law firm of Shaffer & Culbertson in Austin, Texas.
3. SMS shall have the exclusive, perpetual, royalty-free right and license
to make, have made by others, use and sell equipment and license others, under
any Bethlehem, SMS and Joint Patents developed during the Development Period for
gages other than Flat Rolled Gages.
4. Bethlehem shall have the exclusive, perpetual, royalty-free right and
license to make, have made by others, use and sell equipment and license others,
under any Bethlehem, SMS and Joint Patents developed during the Development
Period for Flat Rolled Gages.
5. Subject to the provisions noted in paragraphs 6 through 9 below,
Bethlehem agrees to assign and hereby does assign to SMS Bethlehem's exclusive
right and license to make, have made, and sell Flat Rolled Gages to third
parties and license purchasers to use Flat Rolled Gages under any Bethlehem
Patents, SMS Patents, and Joint Patents. This shall include the right of SMS to
develop a business relationship, including but not limited to joint ventures or
sublicenses as permitted in paragraph 10, with a third party for the sole
purpose of making and selling Flat Rolled Gages to Bethlehem or any other
person.
6. Bethlehem retains the exclusive, perpetual, royalty-free right and
license to make, have made by others, and use Flat Rolled Gages and Profile
Gages within Bethlehem Company facilities under any Bethlehem, SMS and Joint
Patents and related technologies and software developed or used by SMS or
Bethlehem during the Development Period and SMS will be given the opportunity to
negotiate an acceptable sales agreement with Bethlehem.
7. During the Contract Period, SMS will use its best efforts to develop the
capability to manufacture and sell Flat Rolled Gages, and Bethlehem wig provide
a reasonable amount of assistance to SMS for marketing Flat Rolled Gages in the
form of permitting and assisting visits by potential customers to Sparrows
Point, joint technical papers, and other assistance as reasonably required. SMS
further agrees not to use Bethlehem's name in any advertising without first
obtaining Bethlehem's written approval as to the proposed text.
8. SMS agrees to pay Bethlehem a license fee equal to ten percent (10%) of
the Selling Price of all Flat Rolled Gages sold to purchasers other than
Bethlehem during the Contract Period. Such fees shall accrue whenever the Flat
Rolled Gages are delivered to the purchaser and shall be paid to Bethlehem at
the end of the calendar year in which they accrue. Bethlehem agrees to reduce
the license fee downward to an appropriate level if SMS can reasonably
demonstrate that the fee is seriously restricting commercialization of Flat
Rolled Gages. Should SMS become a non-exclusive licensee as provided herein, a
non-exclusive license fee equal to that paid by the lowest non-exclusive
licensee will be paid.
That is, SMS will not pay more in license fees than any other licensee.
9. If SMS has not sold at least one Flat Roiled Gage to a third party wi@
three years or two Flat Rolled Gages to third parties within five years of the
execution date of this Agreement, Bethlehem may, after giving SMS ninety (90)
days prior written notice (with opportunity to cure within 75 days) of
Bethlehem's election to do so, make SMS's exclusive license, as defined in
Paragraph 5, nonexclusive. In such event, SMS and Bethlehem will still be bound
37
<PAGE>
by paragraphs 7 and 8 for the Contract Period, and both Bethlehem and SMS shall
thereafter be free to license others as provided in paragraphs 3 and 4.
10. This Agreement and any rights and licenses granted hereunder shall not
be assigned by either party without the prior written consent of the other
party, except that this Agreement may be assigned by either party without such
consent to any corporation which shall succeed to substantially all of its
business and property or to its subsidiaries or by Bethlehem to any of the
Bethlehem Companies, subject only to the condition that such successor or other
Bethlehem Company shall agree in writing to be bound by the obligations of its
assignor under this Agreement. The term "Bethlehem Companies" shall mean and
include Bethlehem Steel Corporation, a Delaware corporation, its successors and
assigns, all companies now or hereafter wholly or partially owned, directly or
indirectly, by said Bethlehem Steel Corporation or by its successors or assigns,
and the successors and assigns of any or all such companies. Subject as
aforesaid, this Agreement shall be binding upon and inure to the benefit of the
parties hereunto and their respective successors and assigns.
11. Nothing herein contained shall be construed as creating a partnership
or joint venture by or among the parties hereto.
12. Bethlehem shall not be responsible for either the satisfactory
performance of, or any alleged infringements of Letters Patent owned by third
parties caused by any Flat Rolled Gage made or sold by SMS or their agents. The
parties are jointly obligated to defending the joint patents and prosecuting
infringements of the Joint Patents. The parties are obligated to notify each
other of infringements of the Joint Patents.
13. This Agreement shall be subject to mandatory binding arbitration. Any
controversy or claim arising out of, or relating to, this Agreement, or the
breach thereof, including any dispute relating to patent validity or
infringement arising under this Agreement, shall be settled by arbitration in
accordance with the Patent Arbitration Rules of the American Arbitration
Association, and judgment upon the award rendered by the arbitrator(s) may be
entered in any court having jurisdiction thereof. The parties agree further that
the arbitration will take place in Washington, D.C. and that New York law will
govern.
14. Notices under this Agreement shall be deemed to have been sufficiently
given three days following the date such notice is enclosed in a sealed envelope
addressed as follows:
If to Bethlehem: Bethlehem Steel Corporation
Director of Research
Homer Research Laboratories
Bethlehem, Pennsylvania 18016
If to SMS: Scientific Measurement Systems, Inc.
CEO
2209 Donley Drive
Austin, Texas 78758
and deposited as registered mail, postage prepaid, in a station of the United
States Postal Service.
15. This Mutual License Agreement constitutes the entire understanding and
agreement between the parties hereto and respect to the subject matter hereof,
supersedes and integrates all prior understandings and agreements with respect
thereof and may not be altered, amended, or modified in any manner except by
written agreement of the parties.
38
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Mutual License
Agreement to be properly executed and delivered as of the date last indicated
below.
BETHLEHEM STEEL CORPORATION SCIENTIFIC MEASUREMENT SYSTEMS,INC.
By: /s/ W. N. Bargeron By: /s/ Larry Secrest
------------------------- -------------------------
Date: May 5, 1993 Date: May 5, 1993
39
Frost National Bank
Member: Cullen/Frost Bankers. A Family of Texas Banks
October 25, 1995
Larry Secrest
Scientific Measurement Systems, Inc.
2209 Donley Dr.
Austin, TX 78758
Dear Mr. Secrest:
This letter will evidence the agreement between The Frost National Bank ("Frost"
or "Bank"), and Scientific Measurement Systems, Inc. ("Company" or "Borrower")
for a loan in the principal amount of Eighty Thousand Dollars ($80,000)
representing a term renewal of the Company's revolving line of credit.
Such term loan to be structured as follows:
Amount $80,000 Term Loan ("the Loan")
Term: 120 days, maturing February 22, 1996
Interest Rate: 11% fixed calculated on the basis of a year of 360 days
Advances: None.
Repayment: Interest only due monthly; outstanding principal and accrued,
unpaid interest due in full at maturity
Collateral: First priority lien on all Accounts Receivable
Collateral Maintenance Agreement: The "Loan" will be subject to the eligible
accounts receivable being equal to or in excess of $100,000.00. Eligible
accounts receivable are defined as contract and/or scanning receivables as those
billed in domestic trade of Borrower and remaining unpaid 60 days or less from
their respective invoice dated (30 Days Past Due). Eligible receivables do not
include receivables due from affiliated or related entities. In addition, the
entire amount of an account receivable with 10% (or greater) of the balance
outstanding 90 days from original invoice will be excluded.
Frost National Bank, Post Office Box 1727 Austin, Texas 78787-1787
41
<PAGE>
Conditions to the Commitment:
For the term of the loan (and any renewals or other extensions), the following
conditions shall apply:
1. Company will pay 100% of all fees for present and future lien filings,
title searches or other expenses of the Bank.
2. company will provide monthly unaudited financial statements (including
balance sheets, income statements and other financial statements as may be
required by the Bank), within 30 days of each month end.
3. Company will provide quarterly 10Q reports and annual 10K reports when
filed by Borrowers.
4. Company will deliver to the Bank all additional documents and instruments
requested by the Bank from time to time in connection with the loan
including without limitation appropriate corporate resolutions, security
agreements, and financing statements as may be reasonably requested by the
Bank.
5. Company will deliver to the Bank all additional documents and instruments
requested by the Bank from time to time in connection with the loan
including without limitation appropriate corporate resolutions, security
agreements, and financing statements as may be reasonably requested by the
Bank.
6. Bank will not initially require but shall retain the right to require that
Borrower establish a lock box cash collateral account for the collection of
accounts receivable.
NOTICE TO BORROWER
For the purpose of this notice, the term "Written Agreement" shall include the
document set forth above, together with each and every other document relating
to and/or securing the same loan transaction, regardless of the date of
execution.
THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES
AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
42
<PAGE>
Please acknowledge your acceptance to this agreement by affixing your signing in
the space provided below. Should you have any questions regarding this matter,
please contact me at (512) 473-4844.
Sincerely,
/s/ Kerry L. Wiggins
Kerry L. Wiggins
Senior vice President
ACCEPTANCE:
Scientific Measurement Systems, Inc.
By: /s/ Larry Secrest
------------------------
Larry Secrest, President
Date: October 27, 1995
43
NOTE
Date: May 8, 1995
Maker: Scientific Measurement Systems, Inc.
Payee: Howard L. Burris, Jr.
Place for Payment (include county): 98 San Jacinto Boulevard, Suite 350
Austin, Travis County, Texas 78701
Principal Amount: Fifty Thousand Dollars ($50,000.00)
Annual Interest Rate on Unpaid
Principal from Date of Funding: The Prime Rate as set forth from
time to time in The Wall Street
Journal.
Term of Payment (principal and interest): The entire principal amount plus
accrued interest shall be paid on demand, and if no demand previously has been
made, on the one-year anniversary date hereof.
Annual Interest on Matured, Unpaid Amounts: Twelve percent (12%) per annum
Maker promises to pay to the order of Payee at the place for payment, and
according to the terms of payment the principal amount plus interest at the
rates stated above. All unpaid amounts shall be due by final scheduled payment
date.
On default in the payment of this Note or in the performance of any
obligation in any instrument securing or collateral to it, this Note and all
obligations in all instruments securing or collateral to it shall become
immediately due at the election of Payee. Maker and each surety, endorser, and
guarantor waive all demands for payment, presentations for payment, notices of
intention to accelerate maturity, protests and notices of protest.
If this Note or any instrument securing of collateral to it is given to an
attorney for collections or enforcement, or if suit is brought for collection or
enforcement, or if it is collected or enforced through probate, bankruptcy, or
other judicial proceeding, then Maker shall pay Payee reasonable attorney's fees
in addition to other amounts due.
Nothing in this Note shall authorize the collection of interest in excess
of the highest rate allowed by law.
Each Maker is responsible for the entire amount of this Note.
This Note is unsecured.
45
<PAGE>
The terms Maker and Payee and other nouns and pronouns include the plural if
more than one.
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
By: /s/ J. Neils Thompson
--------------------------------
Printed Name: J. Neils Thompson
Address: 2210 Denton Drive, Suite 106
Austin, Texas 78758
46
<PAGE>
NOTE
Date: May 31, 1995
Maker: Scientific Measurement Systems, Inc.
Payee: Howard L. Burris, Jr.
Place for Payment (include county): 2210 Denton Drive, Suite 106
Austin, Travis County, Texas 78701
Principal Amount: Thirty Thousand Dollars ($30,000.00)
Annual Interest Rate on Unpaid
Principal from Date of Funding: The Prime Rate as set forth from
time to time in The Wall Street
Journal.
Term of Payment (principal and interest): The entire principal amount plus
accrued interest shall be paid on demand, and if no demand previously has been
made, on the one-year anniversary date hereof.
Annual Interest on Matured, Unpaid Amounts: Twelve percent (12%) per annum
Maker promises to pay to the order of Payee at the place for payment, and
according to the terms of payment the principal amount plus interest at the
rates stated above. All unpaid amounts shall be due by final scheduled payment
date.
On default in the payment of this Note or in the performance of any
obligation in any instrument securing or collateral to it, this Note and all
obligations in all instruments securing or collateral to it shall become
immediately due at the election of Payee. Maker and each surety, endorser, and
guarantor waive all demands for payment, presentations for payment, notices of
intention to accelerate maturity, protests and notices of protest.
If this Note or any instrument securing of collateral to it is given to an
attorney for collections or enforcement, or if suit is brought for collection or
enforcement, or if it is collected or enforced through probate, bankruptcy, or
other judicial proceeding, then Maker shall pay Payee reasonable attorney's fees
in addition to other amounts due.
Nothing in this Note shall authorize the collection of interest in excess
of the highest rate allowed by law.
Each Maker is responsible for the entire amount of this Note.
This Note is unsecured.
47
<PAGE>
The terms Maker and Payee and other nouns and pronouns include the plural
if more than one.
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
By: /s/ J. Neils Thompson
-------------------------
Printed Name: J. Neils Thompson
Address: 2210 Denton Drive, Suite 106
` Austin, Texas 78758
48
<PAGE>
NOTE
Date: June 16, 1995
Maker: Scientific Measurement Systems, Inc.
Payee: Howard L. Burris, Jr.
Place for Payment (include county): 2210 Denton Drive, Suite 106
Austin, Travis County, Texas 78701
Principal Amount: Ten Thousand Dollars ($10,000.00)
Annual Interest Rate on Unpaid
Principal from Date of Funding: The Prime Rate as set forth from
time to time in The Wall Street
Journal.
Term of Payment (principal and interest): The entire principal amount plus
accrued interest shall be paid on demand, and if no demand previously has been
made, on the one-year anniversary date hereof.
Annual Interest on Matured, Unpaid Amounts: Twelve percent (12%) per annum
Maker promises to pay to the order of Payee at the place for payment, and
according to the terms of payment the principal amount plus interest at the
rates stated above. All unpaid amounts shall be due by final scheduled payment
date.
On default in the payment of this Note or in the performance of any
obligation in any instrument securing or collateral to it, this Note and all
obligations in all instruments securing or collateral to it shall become
immediately due at the election of Payee. Maker and each surety, endorser, and
guarantor waive all demands for payment, presentations for payment, notices of
intention to accelerate maturity, protests and notices of protest.
If this Note or any instrument securing of collateral to it is given to an
attorney for collections or enforcement, or if suit is brought for collection or
enforcement, or if it is collected or enforced through probate, bankruptcy, or
other judicial proceeding, then Maker shall pay Payee reasonable attorney's fees
in addition to other amounts due.
Nothing in this Note shall authorize the collection of interest in excess
of the highest rate allowed by law.
Each Maker is responsible for the entire amount of this Note.
This Note is unsecured.
49
<PAGE>
The terms Maker and Payee and other nouns and pronouns include the plural
if more than one.
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
By: /s/ J. Neils Thompson
----------------------------
Printed Name: J. Neils Thompson
Address: 2210 Denton Drive, Suite 106
Austin, Texas 78758
50
Price Waterhouse LLP
December 15, 1994
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Sirs,
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
We have read item 4 of Scientific Measurement Systems, Inc.'s Form 8-K dated
December 13, 1994 and are in agreement with the statements contained in
paragraphs 4(a)-(f) therein.
Your very truly,
/s/ Price Waterhouse LLP
52
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 33-29344) of
Scientific Measurement Systems, Inc. (the Company) of our report dated September
16, except as to Notes w,e and 10, which are as of October 21, 1994, appearing
on page 17 of this Form 10-KSB.
/s/Price Waterhouse LLP
Austin, Texas
October 25, 1995
54
<PAGE>
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 33-29344) of
Scientific Measurement Systems, Inc. (the Company) of our report dated September
15, appearing on page 16 of this Form 10-KSB.
/s/BDO Seidman, LLP
Austin, Texas
October 30, 1995
55
POWER OF ATTORNEY TO SIGN AMENDMENTS
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below does hereby constitute and appoint Larry Secrest and J. Neils Thompson,
and each of them, with full power to act without the other, his true and lawful
attorney-in-fact and agent for him and in his name, place and stead, in any and
all capacities, to sign any or all amendments to the Scientific Measurements
Systems, Inc. Form 10-KSB, Annual Report, for year ending July 31, 1994, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises in order to effectuate the same as fully, to all intents
and purposes, as they or he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agents, or any of them, may
lawfully do or cause to be done by virtue hereof.
This Power of Attorney has been assigned below by the following persons in
the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ J. Neils Thompson Chairman of the October 27, 1995
- ------------------------- Board of Directors
J. Neils Thompson
President, Chief Executive Officer,
/s/ Larry Secrest Acting Chief Financial and October 27, 1995
- ------------------------- Accounting Officer, and Director
Dr. Larry Secrest
Director October , 1995
- -------------------------
Douglas G. Chaffin
Director October , 1995
- -------------------------
Dr. Norman Hackerman
/s/ Burt Kanter Director October 26, 1995
- -------------------------
Burton W. Kanter
/s/ James Kenny Director October 27, 1995
- -------------------------
James W. Kenney
/s/ Phillips Moore Director October 25, 1995
- -------------------------
Phillips A. Moore
- ------------------------- Director October , 1995
Dr. Thomas Prud'homme
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<ARTICLE> 5
<CIK> 0000087814
<NAME> SCIENTIFIC MEASUREMENT SYSTEMS INC/TX
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1995
<PERIOD-END> JUL-31-1995
<CASH> 25,185
<SECURITIES> 0
<RECEIVABLES> 192,473
<ALLOWANCES> 0
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0
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<TOTAL-LIABILITY-AND-EQUITY> (276,262)
<SALES> 1,384,815
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