As filed with the Securities and Exchange Commission on September
22, 1995.
Washington, D.C. 20549
FORM 10-KSB/A No. 1
(Mark One)
[x] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the fiscal year ended
July 31, 1994
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File No. 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 78758
Austin, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number: (512) 837-4712
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.05 per share
(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
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X or No
Check if there is no disclosure of delinquent filers pursuant
to Item 405 of Regulation S-B 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]
<PAGE>
Scientific Measurement Systems, Inc. ("Company") hereby amends
its Annual Report on Form 10-KSB for the fiscal year ended July
31, 1994 with respect to the Items set forth below. The changes
in each case reflect certain corrections or omissions. The only
change relative to Item 7. Financial Statements is to expand the
discussion in footnote 1; to correct an error in a date set forth
in that footnote; and to refer in the date of the auditor's
report to the date of the Subsequent Events footnote.
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Accountants . . . . . . . . . . . . . . . 3
Financial Statements:
Balance Sheet, July 31, 1994 . . . . . . . . . . . . . . . 4
Statement of Income, Years Ended July 31, 1994 and 1993 . . 5
Statement of Changes in Stockholders' Equity, Years Ended July
31, 1994 and 19 . . . . . . . . . . . . . . . . . . . . . . . . 6
Statement of Cash Flows, Years Ended July 31, 1994 and 1993 7
Notes to Financial Statements . . . . . . . . . . . . . . . 8
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND . . . 16
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT
ITEM 10. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . 20
2
<PAGE>
<TABLE>
<CAPTION>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
Statement of Changes in Stockholders' Equity
Years Ended July 31, 1994 and 1993
Common stock
Shares Amount Additional
Paid-In
Capital Accumulated
Deficit
Total
<S> <C> <C> <C> <C> <C>
Balance, July 31, 1992 12,880,355 $644,018 $8,307,199 $(8,042,617) $908,600
Issuance of unregistered
common stock for
services rendered 150,000 7,500 9,000 - 16,500
Net loss - - - (362,808) (362,808)
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 $(8,486,379) $480,919
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
Statement of Income
Years Ended July 31, 1994 and 1993
1994 1993
Contract revenues:
<S> <C> <C>
Tomographic system sales . . . . . . . . . . . . . . . . . $ 498,156 $ 830,916
Research and development . . . . . . . . . . . . . . . . . - 6,440
Scanning services . . . . . . . . . . . . . . . . . . . . . 203,628 493,524
Field services and upgrades . . . . . . . . . . . . . . . . 882,750 505,082
Total revenues . . . . . . . . . . . . . . . . . . 1,584,534 1,835,962
Contract costs . . . . . . . . . . . . . . . . . . . . . . . 925,792 1,051,641
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . 658,742 784,321
Operating costs:
Marketing . . . . . . . . . . . . . . . . . . . . . . . . . 349,445 299,236
Research and development . . . . . . . . . . . . . . . . . 106,833 229,592
General and administrative . . . . . . . . . . . . . . . . 462,491 573,238
Total operating costs . . . . . . . . . . . . . . 918,769 1,102,066
Loss from operations . . . . . . . . . . . . . . . . . . . . (260,027) (317,745)
Other (income) expense:
Interest expense . . . . . . . . . . . . . . . . . . . . . 62,040 64,333
Interest and other income . . . . . . . . . . . . . . . . . (240,694) (19,270)
Other - net . . . . . . . . . . . . . . . . . . . 178,654 45,063
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . $ (81,373) $ (362,808)
Weighted average shares outstanding . . . . . . . . . . . . . 13,030,355 1 2,967.855
Net loss per share . . . . . . . . . . . . . . . . . . . . $ (0.006) $ (0.028)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
Balance Sheet
July 31, 1994
Assets
Current assets:
<S> <C>
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . $ 80,517
Trade accounts receivable, less allowance for
doubtful accounts of $18,000 . . . . . . . . . . . . . . . . . . . 33,468
Costs and earned profits on long-term contracts
in excess of related billings . . . . . . . . . . . . . . . . . . 55,963
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,669
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . 17,930
Total current assets . . . . . . . . . . . . . . . . . . . . . . . 208,547
Property, plant and equipment, at cost . . . . . . . . . . . . . . . . . . . 2,243,789
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . (1,230,205)
1,013,584
Scanning equipment, less accumulated depreciation of $110,763 . . . . . . . . 244,588
Other assets, less accumulated amortization of $15,191 . . . . . . . . . . . 39,596
$ 1,506,315
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59,290
Billing in excess of related costs and earned
profits on long-term contracts . . . . . . . . . . . . . . . . . . 230,414
Current installments of long-term debt . . . . . . . . . . . . . . . . . . 95,910
Borrowings on line of credit . . . . . . . . . . . . . . . . . . . . . . . 30,627
Accrued vacation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,972
Accrued commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,804
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 25,803
Total current liabilities . . . . . . . . . . . . . . . . . . . . 519,820
Long-term debt, less current installments . . . . . . . . . . . . . . . . . . 505,576
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . 1,025,396
Stockholders' Equity:
Common stock, $.05 par value; 40,000,000 shares
authorized; 13,030,355 shares issued and outstanding . . . . . . . 651,518
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . 8,316,199
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,486,798)
Total stockholder's equity . . . . . . . . . . . . . . . . . . . . 480,919
$ 1,506,315
In fiscal 1993, the Company issued $16,500 of common stock to a consultant in lieu of
payment for services rendered.
Cash payments for interest were $62,000 and $64,000 in 1994 and 1993, respectively. No
taxes were paid in 1994 and 1993.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Scientific Measurement Systems, Inc.
Statement of Cash Flows
Years Ended July 31, 1994 and 1993
Operating activities:
<S> <C> <C>
Net loss . . . . . . . . . $(81,373) $(362,808)
Adjustments to reconcile net
loss to net cash from
operating activities:
Depreciation and
amortization . . . . . . . 83,827 127,803
Unregistered common stock
issued for services rendered . . . - 16,500
Changes in operating assets
and liabilities:
Trade accounts receivable 243,688 144,748
Cost and earned profits on
long-term contracts in excess of
related billings . . . . . . . . . 16,224 (23,334)
Inventories . . . . . . . (1,676) (74)
Prepaid expenses and other
current assets . . . . . . . . . . (13,567) 13,191
Billings in excess of
related costs and earned profits on
long-term contracts . . . . . . . . 76,057 138,832
Accounts payable and accrued
expenses . . . . . . . . . . . . . (315,996) 7,722
Net cash flows from operating
activities . . . . . . . . . . . . 7,184 62,580
Investing activities:
Capital expenditures . . . (9,509) (58,459)
Net cash flows from capital
expenditures . . . . . . . . . . . (9,509) (58,459)
Financing activities:
Borrowings on line of credit 338,977 -
Repayments on line of credit (308,350) -
Principal payments on long-
term debt . . . . . . . . . . . . . (85,060) (50,594)
Net cash flows from financing
activities . . . . . . . . . . . . (54,433) (50,594)
7
<PAGE>
Increase in cash and cash
equivalents . . . . . . . . . . . . (56,758) (46,473)
Cash and cash equivalents at
beginning of year . . . . . . . . . 137,275 183,748
Cash and cash equivalents at end of
year . . . . . . . . . . . . . . . $ 80,517 $ 137,275
Supplemental information on non-cash investing and financing activities:
In fiscal 1993, the Company issued $16,500 of common stock to a consultant in
lieu of payment of services rendered.
Cash payments for interest were $62,000 and $64,000 in 1994 and 1993
respectively. No taxes were paid in 1994 and 1993.
</TABLE>
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. The Company's
plan to address long-term cash requirements is to reduce employee
levels and other operating costs to reflect the reduced and
fluctuating levels of system sales, system upgrades and contract
scanning services. The Company is also continuing its sales and
marketing efforts since successful efforts on only one or two
system sales or upgrades can have a significant positive
influence on the Company's ability to meet its long-term cash
requirements. The Company, as funds permit, also seeks to
identify and develop new applications and uses for its technology
in an effort to establish a broader and more reliable stream of
revenue that the Company has experienced in recent years.
During the past four fiscal years ended July 31, the Company
incurred net losses. The Company is currently in a negative
working capital position. Management believes that the Company
has the ability to meet its cash requirements during the fiscal
year ending July 31, 1995 based on revenues generated by the
Company's current backlog combined with further reductions in
operating costs, if necessary. 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
Basis of Accounting - The accompanying financial statements
have been prepared in accordance with generally accepted
accounting principles and assume the Company will continue as a
going concern.
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
9
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
Notes to Financial Statements, Continued
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, 1994 were as follows:
Equipment . . . . . . . . . . . . . . . . . . . . . . .$1,052,335
Furniture and fixtures . . . . . . . . . . . . . . . . 103,259
Building . . . . . . . . . . . . . . . . . . . . . . . 551,788
Land . . . . . . . . . . . . . . . . . . . . . . . . . 536,407
Total . . . . . . . . . . . . . . . . . . . . . . .$2,243,789
On October 5, 1994, the Company sold the land and building (Note
10).
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.
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.
Research and Development - Expenditures for Company-sponsored
research and development are expensed as incurred.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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 provided based on earnings
reported for financial statement purposes. The provision for
income taxes differs from the amounts currently payable because
of timing differences in the recognition of certain income and
expense items for financial reporting and tax reporting purposes.
The Company has adopted Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes" (SFAS 109) 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
10
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
Notes to Financial Statements, Continued
(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 research and development and 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.
11
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
Notes to Financial Statements, Continued
3. LONG-TERM DEBT
Long-term debt consists of the following mortgage notes:
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
The first lien mortgage note is secured by a deed of trust on
the Company's building. The second lien mortgage note is secured
by an inferior deed of trust on the building and an inferior
vendor's lien retained in a warranty deed in favor of a bank.
The bank also retains a security interest in certain accounts
receivable and equipment. The third lien mortgage note is
secured by an inferior deed of trust on the building.
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 October 5, 1994, the Company
has no long term debt.
4. LINE OF CREDIT
In October 1993, the Company entered into a revolving credit
agreement with a bank which permits borrowings up to $200,000
based on certain accounts receivable. Interest is payable
monthly at the bank's prime rate plus 1.5%. The agreement
expires on October 25, 1994 at which time all borrowings are due.
The agreement contains various covenants which, among other
items, require the Company to maintain certain financial ratios.
At July 31, 1994, the Company was in technical default due to the
Company's failure to comply with certain minimum net worth
requirements under the agreement. There are no amounts
12
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
Notes to Financial Statements, Continued
outstanding under this line as of October 21, 1994. Management
is currently negotiating a renewal of this credit facility for
another year.
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
Notes to Financial Statements, Continued
5. STOCKHOLDERS' EQUITY
The Company has authorized 2,000,000 shares of preferred
stock, $0.15 par value. As of July 31, 1994, 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.
14
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
Notes to Financial Statements, Continued
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. The options awarded in fiscal 1993 expire on
August 1, 1998 while those awarded in fiscal 1994 expire on
August 1, 2000.
On September 17, 1992, the Board of Directors approved the
issuance of 150,000 shares of unregistered common stock to a
consultant for services rendered. The stock was issued at fair
market value on the date of issuance. The associated expense is
included in general and administrative expenses for the year
ended July 31, 1993.
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
Notes to Financial Statements, Continued
5. STOCKHOLDERS' EQUITY, CONTINUED
The following table summarizes the status of all options.
OPTIONS EXERCISE PRICE RANGE NUMBER OF SHARES
UNDER OPTION
Outstanding at July
31, 1993 $.1404-$.2850 3,060,468
Granted during FY
1994 $.1500 1,959,482
Cancelled $.2250 (90,000)
$.1406-$.2850 4,929,950
Options for 4,863,283 shares of common stock were exercisable at
July 31, 1994. No options were exercised during fiscal 1993 and
1994.
6. CONTRACT REVENUES
The Company's revenues have been derived from certain major
customers (greater than 10% of total revenues) as follows:
Customer 1994 1993
A 4% 10%
B 23% -
C 30% 7%
D 7% 12%
E 7% 15%
F - 27%
16
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
Notes to Financial Statements, Continued
6. CONTRACT REVENUES, CONTINUED
The Company had export sales of $63,000 and $64,000 to Japan,
$29,000 and $45,000 to Canada during fiscal 1994 and 1993,
respectively. Revenues derived either as a prime contractor or
subcontractor to prime contractors to the U.S. Government were
56% and 67% of total revenues during fiscal 1994 and 1993,
respectively.
Contracts in progress at July 31, 1994 and 1993 consist of the
following:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Costs and estimated earnings $ 444,250 $493,901
Billings 618,701 576,071
(174,451) ( 82,170)
Included in the balance sheet:
Costs and earned profits on long-term
contracts 55,963 72,187
in excess of related billings
Billings in excess of related costs and (230,414) (154,357)
earned (174,451) ( 82,170)
profits on long-term contracts
</TABLE>
Requirements for progress billings are negotiated on an
individual contract basis and, accordingly, vary between
contracts.
On December 31, 1992, the Company collected a settlement for
$501,622 from the Department of the Navy. This amount has been
included in revenue from tomographic system sales in fiscal 1993.
The settlement represents funding of a cost overrun incurred by
the Company on a cost plus fixed fee contract begun in December
1984 for the design, construction, laboratory test and field
demonstration of a remote-operated tomographic analyzer for the
Department of the Navy. Work was stopped on this contract in
fiscal year 1988 due to a lack of funding by the Department of
the Navy; no work has been performed and no costs have been
incurred on this contract by the Company since that time.
7. INCOME TAXES
The Company has adopted Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes" (SFAS 109) during
the fourth quarter and has applied the provisions retroactively
to August 1, 1993. The adoption of SFAS 109 did not have a
material effect on the Company's financial position or results of
operations.
17
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
Notes to Financial Statements, Continued
Temporary differences represent the cumulative taxable or
deductible amounts recorded in the financial statements in
different years than recognized in the tax returns. The
depreciation temporary difference represents tax depreciation in
excess of financial statement depreciation. The accrued expenses
temporary differences represent various expenses accrued for
financial reporting purposes until paid.
18
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
Notes to Financial Statements, Continued
7. INCOME TAXES, CONTINUED
The tax-effected temporary differences and carryforwards that
comprise deferred tax assets at July 31, 1994 are as follows:
Deferred
Tax Asset Deferred Tax
Liability
Accrued expenses . . . . . . . .$ 29,767 $ -
Depreciation . . . . . . . . . . - 55,188
Other . . . . . . . . . . . . . . 6,351 -
Total temporary difference . . 36,118 55,188
Operating loss carryforward . . . 2,830,477 _
Tax credit carryforward . . . . . 144,157 -
Total operating loss and tax
credits . . . . . . . . . . . 2,974,634 -
Deferred tax asset . . . . . . 3,010,752 55,188
Valuation allowance . . . . . . .(2,955,564) -
Net deferred tax assets and
liabilities . . . . . . . . . . .$ 55,188 $ 55,188
At July 31, 1994 the Company had available financial
reporting net operating loss carryforwards of approximately
$8,400,000 and for federal income tax reporting purposes
approximately $8,300,000 of which $250,000 expires in 1998,
$480,000 expires in 1999 with the balance expiring in varying
amounts in 2000 through 2009. The difference between net
operating loss carryforwards for financial reporting purposes and
federal income tax purposes is due primarily to accelerated
depreciation methods used for tax. 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. Accordingly,
the Company has provided a valuation allowance at August 1, 1993
and July 31, 1994 to the extent realization of the deferred tax
assets depends on taxable income in future years. If the Company
is unable to generate sufficient taxable income in the future
19
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
Notes to Financial Statements, Continued
through operating results, increases in the valuation allowance
will be required.
There were no federal or state income taxes paid in 1994 or
1993. There were no significant amounts of income from foreign
sources in 1994 or 1993.
20
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
Notes to Financial Statements, Continued
8. OTHER INCOME
During fiscal 1994, the Company reversed certain royalty
accruals resulting in a charge to other income of approximately
$218,000. Since 1988, the Company had accrued royalties on non-
government CT systems sales based on a cross-licensing agreement.
The Company has canceled this agreement and determined that there
are no amounts payable thereunder.
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 $7,329 and $8,100 are included in
other assets at July 31, 1994 and 1993. 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.
10. SUBSEQUENT EVENTS
On October 5, 1994, the Company sold its land and building 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. The Company is
currently leasing back the building for an initial six month
period, at a monthly lease rate of $14,000.
21
<PAGE>
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT
Each of the following directors is elected for a period of one
year and thereafter until their successors are elected and
qualified. Officers are appointed by and serve at the discretion
of the Board.
J. Neils Thompson, P.E., Chairman of the Board, has been a
director of the Company since March 1980, and Chairman of the
Board since September 1980. He served as President during May -
September 1980. Mr. Thompson has been associated with The
University of Texas at Austin since 1941, and has been a
Professor of Civil Engineering since 1949. He was Director of
the Balcones Research Center from 1946 to 1977, Director of the
Balcones Institute for Research and Development from 1973 to
1977, and Director of the Structural Mechanics Research
Laboratory from 1953 to 1978. He was President of the National
Society of Professional Engineers in 1965-66. He is the author
or co-author of over two hundred technical publications, books,
papers and reports in the fields of concrete, structures, housing
research, sonic boom research, materials and experimental
mechanics.
Dr. Larry Secrest, President and Chief Executive Officer,
joined the Company in January 1986. During the period from 1982
through 1985 he served as an advisor and consultant for strategic
planning and venture management; first, as owner of Secrest &
Associates from September 1982 through September 1984; and
subsequently, as a member of Ozark Research Group, from October
1984 through December 1985. During the period between 1978
through September 1982, Dr. Secrest served in various executive
positions with Standard Meat Company including that of Executive
Vice President from 1980. He has also held positions with Ford
Motor Company, Lear Siegler, and Cooper Industries. Dr. Secrest
holds a B.A. from Tulane University and an M.B.A. from the
Wharton School of Business. He received an interdisciplinary
Ph.D. in Management, Business and Public Affairs from The
University of Texas at Austin in 1971. During 1971-72 he served
as visiting Fulbright Research Professor at Keio University in
Tokyo, Japan. Dr. Secrest was elected as Chairman of the Board
of Hydrolab Corporation in September 1994.
Douglas G. Chaffin served as a director of the Company from
1986 to 1988 and as an Advisory Director from 1988 to 1991, when
he again was elected to the Board of Directors. Since 1988, he
has served as Associate Vice President of First Albany
Corporation, a full-service brokerage firm. He attended
Wentworth Institute in Boston, Massachusetts and Western New
England College in Springfield, Massachusetts. Mr. Chaffin is a
member of Amex Club, Securities Traders Association of
Connecticut, National Association of Securities Traders, and
Hartford Stock Brokers Association. Additionally, he has served
as President of Evergreen Ventures, Inc., a private corporation
22
<PAGE>
active in the hospitality industry. Mr Chaffin is also listed in
Who's Who in the East and Who's Who in the World.
General Robert J. Dixon (USAF, Retired) was elected to the
Board in September 1986. General Dixon retired from the U.S. Air
Force in 1978 with the rank of General. His military assignments
included service as Commander, Tactical Air Command and
Commander-in-Chief of the U.S. Air Force for the Atlantic and
U.S. Readiness Commands as well as Deputy Chief of Staff,
Personnel, for the U.S. Air Force. He served as Chairman of the
Board of Directors, Chief Executive Officer and President of
Fairchild-Republic Company from 1978 to 1983. Since 1983, he has
been engaged in consulting to the aerospace industry as owner of
Confer Associates, Boerne, Texas. He currently serves as a
director of Burdeshaw Associates, Ltd., and a trustee of the Air
Force Aid Society. He is a graduate of Dartmouth College and the
U.S. Air War College.
Dr. Norman Hackerman was elected to the Board in November
1988. Dr. Hackerman served as President of Rice University from
1970 to 1985 and holds the title of President Emeritus and
Distinguished Professor Emeritus of Chemistry at Rice University.
Prior to his service at Rice, Dr. Hackerman served twenty-five
years at The University of Texas at Austin, Texas, where he was
President 1967-70, Vice Chancellor for Academic Affairs 1963 to
1967, and Vice President and Provost 1961-63. He is currently
Professor Emeritus of Chemistry at The University of Texas at
Austin. He received his A.B. and Ph.D. from Johns Hopkins
University. Dr. Hackerman was a member of the National Science
Board 1968-80, and Chairman 1975-80. He was the Editor of the
Journal of the Electrochemical Society from 1969 to 1990. He is
a member of the National Academy of Sciences, the American
Philosophical Society, and the American Academy of Arts and
Sciences and belongs to numerous scientific organizations. He is
author or coauthor of more than 200 publications. Dr. Hackerman
received the American Institute of Chemists Gold Medal in March
1978, the Mirabeau B. Lamar Award of the Association of Texas
Colleges and Universities in 1981, the Distinguished Alumnus
Award from Johns Hopkins University in 1982, and the Edward
Goodrich Acheson Award of the Electrochemical Society in 1984.
Dr. Hackerman serves as Chairman of the Scientific Advisory Board
of the Robert A. Welch Foundation and as a director of the
following companies: American General Series Portfolio Company,
American Capital Asset Management Corporation, Carbon Fuels
Corporation, Medical Polymers, Inc., and Electrosource, Inc. Dr.
Hackerman was presented the National Medal of Science award from
President Clinton on September 30, 1993 for his lifetime of work
in scientific research and policy issues. The Medal is the
highest award this country gives to scientists.
Burton W. Kanter was elected to the Board in August 1985. Mr.
Kanter is a lawyer specializing in federal income tax matters,
formerly attorney-advisor to the Tax Court of the United States,
author of numerous articles in the field of federal income
taxation and a member of the faculty of the University of Chicago
23
<PAGE>
Law School. He was a partner in the Chicago law firm of Kanter &
Eisenberg from May 1979 to January 1986. Since that time, he has
served as counsel to the successor firm of Neal Gerber &
Eisenberg. He is a Director of Logic Devices, Inc., HealthCare
COMPARE Corp., Channel America LPTV Holdings, Inc. and
Power-Cell, Inc., plus many private companies. He is also
Chairman of Walnut Capital Corp., a qualified small business
investment corporation, and Chairman of Chicago Holding, Inc., a
private investment company. Mr. Kanter is a member of the Board
of Directors of various other charitable organizations.
James W. Kenney was elected to the Board in March 1986. He is
currently associated with San Jacinto Securities, Inc. as
Executive Vice President and owner. Previously, he served as a
Senior Vice President of both Rauscher Pierce Refsnes, Dallas,
Texas, and Capital Institutional Services, Inc., Dallas, Texas,
and as Executive Vice President for a full-service securities
brokerage firm that was the managing underwriter for the initial
public offering of the Company in March 1985. In addition, Mr.
Kenney serves as a member of the Board of Directors of Amerishop
Corporation, Consolidated Health Care Associates, Inc., CCC Coded
Communications Corp., Industrial Holdings, Inc., Prism Group,
Inc., Appoint Technologies, Tecnol Medical Products, Inc. and
Tricom Corporation. Mr. Kenney received a B.B.A. in Economics
from the University of Colorado in 1964.
Phillips A. Moore was elected to the Board in January 1987,
and is currently a consultant to PRESBYNET/ECUNET, a project to
develop a global telecommunication system for churches. Until
June 1991, Mr. Moore was Chairman of PSN Corporation, Avon,
Connecticut, a firm that develops and sells comprehensive
electronic communications systems to industry. Prior to that
position, Mr. Moore served as President of NWI, Inc., and as Vice
President, Product Development, for Sony Corporation. He has
extensive experience in high technology product development and
marketing.
Dr. Tom Prud'homme was elected to the Board in November 1990.
Dr. Prud'homme recently became Vice President for Technology of
EnviroTech Measurements and Controls. Prior to that, Dr.
Prud'homme was Vice President for Technology of a division of
Baker, Hughes, Inc. He co-founded a research company 34 years
ago and led the firm through three changes in ownership to a
highly successful instrumentation company. After teaching
mathematics and physics at The University of Texas at Austin, he
was employed as Research Scientist in applied nucleonic
techniques by Magnolia Petroleum Co. (now Mobil Oil Co.). In
1956, he helped establish Texas Nuclear under private ownership
and then served as Chief Scientist and Director of Research.
From 1961 to 1966, Dr. Prud'homme served as Vice President for
Manufacturing and then Vice President for Engineering and
Production of the Texas Nuclear Division of Nuclear-Chicago.
During this time, he designed, tested, commissioned and directed
the manufacture of a commercial atom smasher. From 1966 to 1975,
he served successively as Vice President for Operations, General
24
<PAGE>
Manager, President and CEO of the Texas Nuclear Division, G.D.
Searle & Co. From 1975 to 1987, he was President, Texas Nuclear
Division, Baker International, which became Baker, Hughes, Inc.
During this time, Texas Nuclear maintained profitability and
achieved financial goals in each year. In 1987, he became
Chairman of the Board of Directors, Texas Nuclear Division,
Baker, Hughes, Inc. Dr. Prud'homme is the author of 22
publications and is very active in professional and community
affairs. He serves on a number of Boards of Directors and
Advisory Committees and is an officer of a family-owned business,
Amal Oil Company. Dr. Prud'homme holds a B.S. degree in
Physics/Mathematics from Spring Hill College and M.A. and Ph.D.
degrees from The University of Texas at Austin.
EXECUTIVE OFFICERS
The following information relates to executive officers of the
Company who were not directors during FY 1994:
Officer Position with the
Company Age Year
Became
Officer
Dr. Forrest F.
Hopkins Vice President of
Research and Development 48 1979
Gen. George A.
Edwards, Jr. Vice President of
Administration,
Secretary-Treasurer 65 1988
Keith A. Jezek Vice President of
Operations 30 1992
H. Peter Engel Vice President 57 1993
Walter A. Graeme, Jr. Vice President, Sales
and Marketing 48 1994
Background of Officers
Forrest F. Hopkins, Ph.D., Vice President of Research and
Development, has been a Director or a Vice President of the
Company since July 1979. He chose not to stand for reelection to
the Board in 1986 to permit the addition of other outside
participants. Dr. Hopkins has extensive experience in the
development of tomographic hardware and image reconstruction
algorithms. He received a B.S. in Physics in 1969 and a Ph.D. in
Physics in 1972, both from The University of Texas at Austin.
George A. Edwards, Jr. (Major General, USAF, Retired), Vice
President of Administration and Secretary-Treasurer, has been
with the Company since February 1986 serving first as a
consultant and aerospace advisor and subsequently as Special
Assistant to the President prior to assuming his present position
in February 1988. He retired from the U.S. Air Force in 1984
25
<PAGE>
after a distinguished career which included many key high level
staff management and command assignments. Since 1984, he has
served as Chairman of the Board of Directors of Pilot Research
Associates, consultant to Lockheed Missiles and Space Company,
Inc., Associate of Burdeshaw Associates, Inc., and has been
active in the real estate and home construction business.
General Edwards attended the University of Tennessee and holds a
Bachelors Degree from the University of Maryland and a Masters
Degree from San Francisco State University. He is also a
distinguished graduate of the U.S. Army War College.
Keith A. Jezek joined the Company as Special Projects
Administrator in January 1989 and served successively as Director
of Budgets, Schedules, and Reports and Director of New Business
Development. Mr. Jezek is currently Vice President of
Operations. He holds a Master of Business Administration degree
and a Bachelor of Arts in English degree, both from The
University of Texas at Austin. Mr. Jezek came to the Company
from Dell Computer Corporation where he worked as a Sales
Analyst.
H. Peter Engel, Vice President, joined the Company in February
1993. Previous to joining the Company he was an assistant
professor of Science Education and Coordinator of Adult Education
with the State University of New York at Albany. He held
positions in nuclear engineering and signal processing with the
General Electric Company, Knolls Atomic Power Laboratory in
Schenectady, New York from 1969 to 1984. From 1984 until 1993,
Mr. Engel was employed as Chief Scientist with EG&G at NASA
Kennedy Space Center. He held a post as an NDEA Fellow in
Nuclear Engineering at the University of Arizona, Tucson. He
holds a B.S. degree in Physics/Math and Education Philosophy from
SUNY, and a M.S. Degree in Natural Science from Rensselaer
Polytechnic Institute, Troy, New York. He holds U.S. patents for
a CT System Calibrator and Ultrasonic Transducer Holder assigned
to NASA and GE, respectively. Mr. Engel resigned as Vice
President effective June 14, 1994 to pursue business interests
near his home in Florida. He will continue to serve the Company
as a consultant when required.
Walter A. Graeme, Jr., Vice President, Sales and Marketing,
joined the Company in March 1994. Prior to joining the Company
he was employed by the Dupont Company for 22 years, serving
successively as Technical Representative, Territory Sales
Manager, Senior Business Analyst, Product Manager, Nondestructive
Testing (NDT) Systems and Business Manager, NDT Electronic
Imaging. From 1968 to 1972, he held a position with AETNA Life
and Casualty Co. Mr. Graeme holds a Bachelor of Arts degree in
Economics from St. Francis College and an M.B.A. from Sacred
Heart University in Connecticut. Since 1992, he has served as
Director of the American Society for Nondestructive Testing, a
position he still holds.
26
<PAGE>
Section 16(a) Disclosure
Section 16(a) of the Securities Exchange act of 1934 (the
"Exchange Act") requires the Company's officers and directors,
and persons who own more than 10 percent of a registered class of
the Company's equity securities to file reports of ownership and
changes in ownership with the Securities and Exchange Commission
and the National Association of Securities Dealers Automated
Quotation System ("NASDAQ"). Officers, directors and greater
than 10 percent stockholders are required by SEC regulation to
furnish the Company with copies of all Section 16(a) forms they
file.
Based solely on its review of the copies of such forms
received by it, or written representations from certain reporting
persons that no Forms 5 were required from such persons, the
Company believes that during fiscal 1994, its officers, directors
and greater than 10 percent beneficial owners complied with all
filing requirements of Section 16(a) of the Exchange Act
applicable to them.
ITEM 10. EXECUTIVE COMPENSATION
The following table shows the cash compensation paid by the
Company, as well as certain other compensation, for the Company's
Chief Executive Officer for fiscal years 1992, 1993 and 1994. No
other executive officers were paid compensation in fiscal 1994 in
excess of $100,000.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards
Name and
Principal
Position Year Salary Bonus Other Annual
Compensation(1) Options/SARs
(#)
Larry Secrest,
President and
Chief Executive
<S> <C> <C> <C> <C>
Officer 1994 $ -0- $9,013 521,607
1993 $ -0- $8,478 312,964
1992 $100,859 -0- $8,183 525,000(2)
_____________________
(1) Consists of an automobile allowance of $500 per month
and group hospitalization individual coverage.
(2) Of the total option award, 350,000 represent new
replacement options granted in connection with the
surrender of options for the purchase of 400,000
shares. See "Stock Option Awards" below.
</TABLE>
27
<PAGE>
As of approximately the end of fiscal year 1992, the Chief
Executive Officer, together with certain executive and other
Company personnel, agreed to a reduction in their regular levels
of compensation, in view of the Company's financial position.
Insurance Benefits
The Company provides partial payment of the premiums under a
group hospitalization program with Aetna, which includes term
life insurance for participating employees. All full-time
employees are eligible to participate in the program. Individual
coverage for Dr. Secrest is paid for by the Company, the cost of
which is included in the amounts shown in the Summary
Compensation Table above.
Executive Stock Options
The following table provides information on the stock option
grants during the 1994 fiscal year to the named executive
officers.
Option Grants in Last Fiscal Year Individual Grants
<TABLE>
<CAPTION>
Name
Options/SARs
Granted
(Shares) Percentage of
Total Options/
SARs Granted
to Employees
in Fiscal 1994 Exercise
Price (Per
Share) Expiration
Date
Larry
<S> <C> <C> <C> <C>
Secrest 521,607 35.63% $0.15 8/1/2000
</TABLE>
Stock Option Awards
Effective August 1, 1991, the Company offered certain of its
officers and employees, including Chairman Thompson ("Option
Holders") the opportunity to surrender outstanding options in
exchange for a lesser number of Replacement Options (herein so
called). The Replacement Options were issued as incentive stock
options under the Company's 1990 Stock Option Plan; are
exercisable at $0.1406 per share (the average bid and ask closing
price on August 1, 1991); vest one-third upon grant, and one-
third on each of the next two anniversary dates thereof; are in
tandem with stock appreciation rights; and expire on August 1,
1998. All of the Option Holders, except one, accepted the offer
in full.
Effective March 24, 1994, the Company granted options for the
purchase of common stock to employees who had foregone part of
their normal pay since mid-year calendar 1993. The salary they
28
<PAGE>
had not received and would not receive through June 1994 was
$143,948. Ten options were granted for each dollar of salary the
employee did not receive. Under this formula, 1,439,480 options
were granted. These options were vested immediately (March 24,
1994), and the exercise price was the average of the closing bid
and ask price ($0.15) on the date the options were granted.
The following table provides information concerning option
exercises during and certain options held at the end of the last
fiscal year.
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
<TABLE>
<CAPTION>
Name(a) Shares
Acquired on
Exercise(b) Value
Realized
(c) Number of
Unexercised
Options/SARs at
FY-End
Exercisable/
Unexercisable(d) Value of
Unexercised In-
the-Money
Options/SARs at
FY-End
Exercisable/
Unexercisable(e)
Larry
<S> <C> <C> <C> <S><C>
Secrest -0- -0- 1,359,571/-0- -0-/-0-
</TABLE>
Directors' Compensation
The Company, until late in fiscal year 1992, paid outside
directors $500 plus expenses for each meeting and separate
committee meeting attended in person. However, this arrangement
was suspended in July 1992, subject to reinstatement by the
Board, in view of the Company's financial condition.
In fiscal 1994, the Company granted options for the purchase
of 50,000 shares of common stock to each outside director. This
action was in recognition of the fact that the outside directors
served for almost two years without any compensation. These
options are at an exercise price of $0.15, which is the average
of the closing bid and ask price as of March 24, 1994.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Amendment to be signed
on its behalf by the undersigned, thereunto duly authorized, this
21st day of September, 1995.
SCIENTIFIC MEASUREMENT SYSTEMS,
INC.
(Registrant)
By: /s/Larry Secrest
Dr. Larry Secrest, President
Signature Title Date
*
J. Neils Thompson
/s/Larry Secrest
Dr. Larry Secrest
*
Douglas G.
Chaffin
*
General Robert J.
Dixon
*
Dr. Norman
Hackerman
*
Burton W. Kanter
*
James W. Kenney
*
Phillips A. Moore
Dr. Thomas
Prud'homme Chairman of the
Board of Directors
President, Chief
Executive Officer,
Acting Chief
Financial and
Accounting Officer,
and Director
Director
Director
Director
Director
Director
Director
Director September 21, 1995
September 21, 1995
September 21, 1995
September 21, 1995
September 21, 1995
September 21, 1995
September 21, 1995
September 21, 1995
*By: /s/Larry Secrest
Dr. Larry Secrest
Attorney-in-Fact
30
<PAGE>
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 statements
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 audits. We conducted our audits 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
express above.
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
Austin, Texas
September 16, 1994,
except as to Notes 2, 3 and 10, which are as of October 21, 1994
