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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, 1996
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, 78758
TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
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
NONE REGISTERED
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: $3,165,067
The aggregate market value of the voting stock held by nonaffiliates of the
registrant was approximately $11,535,646 as of October 3, 1996, 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 3, 1996 is as follows:
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SHARES OUTSTANDING AS OF
TITLE OF CLASS OCTOBER 3, 1996
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$0.05 Par Value Common Stock.......................... 16,876,868
</TABLE>
Transitional Small Business Disclosure Format: Yes [_] No [X]
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DOCUMENTS INCORPORATED BY REFERENCE
The information required 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 1996 Annual Meeting of Shareholders.
ITEM 9
Directors, Executive Information concerning the Directors
Officers, Promoters and and Executive Officers of the
Control Persons; Compliance Company is incorporated by reference
with Section 16(a) of the from the Company's definitive Proxy
Exchange Act Statement and related materials in
connection with the annual meeting
of shareholders on December 12,
1996. 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 12, 1996. 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 Information concerning the Security
Certain Beneficial Owners Ownership of Certain Beneficial
and Management 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 12, 1996.
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."
ITEM 12
Certain Relationships and Information concerning Certain
Related Transactions Relationships and Related
Transactions is incorporated by
reference from the Company's
definitive Proxy Statement and
related materials in connection with
the annual meeting of shareholders
on December 12, 1996. The
incorporated portions consist of all
of the disclosures that appear in
that Proxy Statement under the
heading "Certain Relationships and
Related Transactions."
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INDEX
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PAGE
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PART I.................................................................... 1
Item 1. BUSINESS........................................................ 1
Item 2. PROPERTIES...................................................... 8
Item 3. LEGAL PROCEEDINGS............................................... 8
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 9
PART II................................................................... 9
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS............................................................ 9
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............................................. 10
Item 7. FINANCIAL STATEMENTS............................................ 12
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE............................................... 23
PART III.................................................................. 24
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.................. 24
Item 10. EXECUTIVE COMPENSATION......................................... 24
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT........................................................ 24
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 24
Item 13. EXHIBITS AND REPORTS ON FORM 8-K............................... 25
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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.
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
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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.
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
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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
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:
. 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.
. 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.
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. 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
. 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 1996, the Company delivered five SMS Model 201 systems to
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 1996,
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 1996, 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 1996, the Company received orders from UNOCAL, GM, Lockheed
Martin, Allied Signal, Bridgestone Tire (Japan), Continental Tire (Germany),
Fiat (Italy), and EMPA (Switzerland) for systems ranging in price from
$300,000 to $1,250,000.
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
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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 totaled approximately
$5,000 and $67,000 for the years ended July 31, 1996 and 1995, respectively.
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.
Additionally, 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.
In February 1996 a joint venture comprised of the Company, General Motors,
General Electric, and EG&G, began work on a grant from the U.S. Department of
Commerce National Institute of Standards and Technology ("NIST") under their
Advanced Technology Program. The objective of the program is to develop very
fast scanning technology capable of scanning 100 times faster than current
systems. The Company expects the resulting technology to be protected by
patents and believes that this technology, if successful, will generate
significantly greater demand for the Company's products. The Company is the
project leader of the consortium and has sole commercializing rights for the
new technology in the industrial market excluding medical applications. See
Note 8 to Notes to Financial Statements.
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.
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The Company's marketing efforts are distributed across a wide range of
industries. Representative areas are:
. 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.
. 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.
. Oil and Gas. Tomography is widely used in the oil industry to measure
fluid flow properties in rock samples from oil and gas reservoirs.
. 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.
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. 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 elements of competition in the tomographic industry, in the opinion
of
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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, 1996, the Company employed 23 full-time employees, of whom
two were engaged in research, two in software development, three in
engineering, three in scanning services, two in sales and marketing, one in
field services, six in administrative, clerical and support services, and four
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.
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
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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 3, 1996, the Company had the following equity securities outstanding
(exclusive of employees' and directors' stock options):
<TABLE>
<S> <C>
Common Stock, $0.05 par value.............................. 16,876,868 shares
</TABLE>
ITEM 2. PROPERTIES
The Company currently leases approximately 13,900 square feet of office and
manufacturing space in an industrial park located in Austin, Texas. The
Company is leasing this space for an initial three-year term expiring in
October, 1998 at $7,600 per month. Management believes that this space should
be adequate for all of the Company's activities through fiscal 1998.
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.
8
<PAGE>
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.
<TABLE>
<CAPTION>
COMMON STOCK
-------------
FISCAL YEAR ENDED HIGH LOW
----------------- ------ ------
<S> <C> <C>
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
July 31, 1996
First Quarter.............................................. 0.37 0.04
Second Quarter............................................. 0.32 0.20
Third Quarter.............................................. 1.63 0.21
Fourth Quarter............................................. 1.13 $ 0.69
</TABLE>
The bid quotations for the Common Stock at the close of trading on October
3, 1996 was $0.81 per share.
The total number of shares of Common Stock outstanding as of October 3, 1996
was 16,876,868, and the total number of holders of Common Stock of record as
of such date was approximately 635.
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.
9
<PAGE>
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,
-------------------------------------------------------
1996 1995
--------------------------- ---------------------------
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........... $1,923 60.8 % 218.8 % $ 603 43.5 % 21.1 %
Scanning services...... 564 17.8 % 102.9 % 278 20.1 % 36.3 %
Field services and
upgrades.............. 678 21.4 % 34.5 % 504 36.4 % (42.9)%
------ ----- ------ ------ ----- ------
Total revenues...... 3,165 100.0 % 128.5 % 1,385 100.0 % (12.6)%
Contract costs.......... 2,189 69.1 % 76.1 % 1,243 89.8 % 34.2 %
------ ----- ------ ------ ----- ------
Gross profit............ 976 30.9 % 587.3 % 142 10.3 % (78.5)%
------ ----- ------ ------ ----- ------
Operating costs:
Marketing.............. 259 8.2 % (16.7)% 311 22.5 % (10.9)%
Research and
development........... 5 0.2 % (92.5)% 67 4.8 % (37.4)%
General and
administrative........ 424 13.4 % (15.2)% 500 36.1 % 8.0 %
------ ----- ------ ------ ----- ------
Total operating
costs.............. 688 21.8 % (21.6)% 878 63.4 % (4.5)%
------ ----- ------ ------ ----- ------
Income (loss) from
operations............. 288 9.1 % 139.1 % (736) (53.1)% (183.1)%
------ ----- ------ ------ ----- ------
Other (income) expense:
Interest expense....... 23 0.7 % (36.1)% 36 2.6 % (41.9)%
Interest and other
income................ (12) (0.4)% (47.8)% (23) (1.7)% (90.5)%
Loss on sale of asset.. 0 0.0 % (100.0)% 8 0.6 % NM
------ ----- ------ ------ ----- ------
Other--net............ 11 0.3 % (47.6)% 21 1.5 % NM
------ ----- ------ ------ ----- ------
Net income (loss)....... $ 277 8.8 % 136.6 % $ (757) (54.7)% (834.6)%
====== ===== ====== ====== ===== ======
</TABLE>
- --------
NM--Not meaningful
FISCAL 1996 RESULTS OF OPERATIONS
Total revenues increased 128% in 1996 compared to the prior year. All areas
of the business increased significantly from 1995 including system sales
increases of 218%, scanning services increases of 103%, and field services and
upgrade increases of 34%. Significant improvements during 1995 to decrease the
time required to scan objects resulted in systems sales increases in 1996.
Newly available computing hardware with improvements in speed of the
workstation resulted in field services and upgrade revenue increases in 1996.
The Company's marketing efforts in automotive and aircraft engines yielded
large scanning service revenue increases in 1996.
Gross margin as a percentage of revenues increased from 10% in 1995 to 30%
in 1996. Such increase primarily resulted from much higher revenues leading to
greater absorbed overhead costs and from large revenue increases in scanning
services which yields higher margins than system sales and upgrades.
Total operating costs as a percentage of revenues decreased to 22% in 1996
from 63% in 1995. All operating costs decreased both in absolute amounts and
as a percentage of revenues primarily because of spreading fixed operating
costs over much higher levels of revenues and reductions in employees in all
departments. Certain research and development employees were either charged to
contracts in 1996 or were reimbursed under the NIST contract in 1996 resulting
in insignificant research and development costs in 1996.
10
<PAGE>
FISCAL 1995 RESULTS OF OPERATIONS
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.
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.
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.
LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 1996, the Company had negative net working capital of $81,520
compared to negative net working capital of $522,000 at July 31, 1995.
The Company generated $451,000 from net financing activities in 1996 to fund
capital expenditures of $26,000, capitalized product development costs
associated with the NIST contract of $260,000, and cash used in operating
activities of $146,000. Such financing activities included proceeds from
issuance of common stock and exercise of stock options and borrowings from
private sources which are due in fiscal 1997. The Company's net working
capital position has improved significantly during fiscal 1996 and with a
backlog of approximately $3,500,000 at September 30, 1996 management believes
that the Company has the ability to meet its cash requirements during fiscal
year 1997. However, the NIST contract requires significant funds by the
Company during fiscal 1997 and management is in discussions with sources of
financing for this project. See Note 8 to Notes to Financial Statements.
11
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants.........................................
Financial Statements:
Balance Sheet, July 31, 1996 and 1995...................................
Statement of Operations, Years Ended July 31, 1996 and 1995.............
Statement of Changes in Stockholders' Equity (Capital Deficit), Years
Ended July 31, 1996 and 1995...........................................
Statement of Cash Flows, Years Ended July 31, 1996 and 1995.............
Notes to Financial Statements...........................................
</TABLE>
12
<PAGE>
[LETTERHEAD OF BDO SEIDMAN, LLP]
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT
Scientific Measurement Systems, Inc.
Austin, Texas
We have audited the accompanying balance sheets of Scientific Measurement
Systems, Inc. (the "Company") as of July 31, 1996 and 1995, and the related
statements of operations, changes in stockholders' equity (capital deficit)
and cash flows for each of the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits of these financial statements 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, 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 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, 1996 and 1995, and the results of its operations and
its cash flows for each of the years then ended in conformity with generally
accepted accounting principles.
/s/ BDO Seidman, LLP
Austin, Texas
September 25, 1996
13
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
JULY 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Current
Cash and cash equivalents............................ $ 45,042 $ 25,185
Trade accounts receivable............................ 306,187 192,473
Research grant receivable............................ 247,072 --
Costs and earned profits on long-term contracts in
excess of related billings.......................... 808,825 77,679
Inventories.......................................... 14,125 14,125
Prepaid expenses and other current assets............ 83,281 31,300
---------- ----------
Total current assets............................... 1,504,532 340,762
---------- ----------
Property and equipment, at cost........................ 1,177,192 1,156,620
Less accumulated depreciation.......................... (1,148,916) (1,139,805)
---------- ----------
28,276 16,815
---------- ----------
Scanning equipment, less accumulated depreciation of
$190,665 and $150,714, respectively................... 170,080 204,637
Other assets, less accumulated amortization of $21,457
and $18,323, respectively............................. 52,181 54,511
Other prepaids......................................... 33,309 --
---------- ----------
$1,788,378 $ 616,725
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable..................................... $ 436,108 $ 411,705
Payable to research consortium members............... 267,587 --
Billings in excess of related costs and earned
profits on long-term contracts...................... 292,812 168,857
Borrowings on line of credit......................... 92,073 80,000
Notes payable........................................ 379,609 100,000
Accrued vacations.................................... 46,174 41,366
Accrued commissions.................................. 56,762 71,705
Other accrued liabilities............................ 14,927 19,354
---------- ----------
Total liabilities.................................. 1,586,052 892,987
---------- ----------
Commitments (See Notes 7 and 8)
Stockholders' equity (capital deficit)
Common stock, $.05 par value; 40,000,000 shares
authorized; 16,584,007 and 13,030,355 shares issued
and outstanding, respectively....................... 829,200 651,518
Additional paid-in capital........................... 8,339,675 8,316,199
Accumulated deficit.................................. (8,966,549) (9,243,979)
---------- ----------
Total stockholders' equity (capital deficit)....... 202,326 (276,262)
---------- ----------
$1,788,378 $ 616,725
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Contract revenues
Tomographic system sales............................. $1,922,698 $ 602,586
Scanning services.................................... 564,213 277,772
Field services and upgrades.......................... 678,156 504,457
---------- ----------
3,165,067 1,384,815
Direct contract costs.................................. 2,188,660 1,242,611
---------- ----------
Gross profit........................................... 976,407 142,204
---------- ----------
Operating costs:
Marketing............................................ 259,477 310,591
Research and development............................. 4,964 66,500
General and administrative........................... 424,003 500,759
---------- ----------
Total operating costs.................................. 688,444 877,850
---------- ----------
Income (loss) from operations.......................... 287,963 (735,646)
---------- ----------
Other (income) expense:
Interest expense..................................... 22,843 36,078
Interest and other income............................ (12,310) (22,633)
Loss on sale of asset................................ -- 8,090
---------- ----------
Total other (income) expense........................... 10,533 21,535
---------- ----------
Net income (loss)...................................... $ 277,430 $ (757,181)
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
STATEMENT OF OPERATIONS, CONT.
<TABLE>
<CAPTION>
JULY 31,
-----------------------
1996 1995
----------- -----------
<S> <C> <C>
Earnings per common share:
Primary:
Earnings (loss) per share........................... $ 0.01 $ (0.06)
=========== ===========
Weighted average number of shares................... 17,106,679 13,030,355
=========== ===========
Fully diluted:
Earnings (loss) per share........................... $ 0.01 $ (0.06)
=========== ===========
Weighted average number of shares................... 17,106,679 13,030,355
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-------------------
ADDITIONAL
PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- -------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE AT AUGUST 1,
1994................... 13,030,355 $651,518 $8,316,199 $(8,486,798) $ 480,919
Net loss................ -- -- -- (757,181) (757,181)
---------- -------- ---------- ----------- ---------
BALANCE AT JULY 31,
1995................... 13,030,355 651,518 8,316,199 (9,243,979) (276,262)
Issuance of common stock
and stock options
exercised.............. 3,553,652 177,682 23,476 -- 201,158
Net income.............. -- -- -- 277,430 277,430
---------- -------- ---------- ----------- ---------
BALANCE AT JULY 31,
1996................... 16,584,007 $829,200 $8,339,675 $(8,966,549) $ 202,326
========== ======== ========== =========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)...................................... $ 277,430 $ (757,181)
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation and amortization........................ 58,065 59,973
Loss on sale of asset................................ -- 8,090
Changes in operating assets and liabilities:
Trade accounts receivable.......................... (360,786) (141,401)
Allowance for doubtful accounts.................... -- (17,604)
Costs and earned profits on long-term contracts in
excess of related billings........................ (731,146) (21,716)
Inventories........................................ -- 6,544
Prepaid expenses and other current assets.......... (57,845) (13,371)
Other assets....................................... (804) (17,820)
Billings in excess of related costs and earned
profits on long-term contracts.................... 123,955 (61,557)
Accounts payable and accrued expenses.............. 285,113 381,261
---------- ----------
Net cash used for operating activities................. (406,018) (574,782)
---------- ----------
INVESTING ACTIVITIES:
Capital expenditures................................. (25,965) (1,026)
Sale of land and buildings........................... -- 972,589
---------- ----------
Net cash provided by (used for) investing activities... (25,965) 971,563
---------- ----------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock............... 122,066 --
Proceeds from exercise of stock options.............. 79,092 --
Borrowing from notes payable......................... 258,609 100,000
Borrowings on line-of-credit......................... 92,073 246,703
Repayments on borrowings............................. (100,000) (197,330)
Principal payments on long-term debt................. -- (601,486)
---------- ----------
Net cash provided by (used for) financing activities... 451,840 (452,113)
---------- ----------
Increase (decrease) in cash and cash equivalents....... 19,857 (55,332)
Cash and cash equivalents at beginning of year......... 25,185 80,517
---------- ----------
Cash and cash equivalents at end of year............... $ 45,042 $ 25,185
========== ==========
</TABLE>
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING AND FINANCING ACTIVITIES:
Cash payments for interest were $8,000 and $36,000 in 1996 and 1995,
respectively. No taxes were paid in 1996 and 1995.
18
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
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.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECLASSIFICATION
Certain amounts previously reported have been reclassified to conform to
current year presentation.
INVENTORIES
Inventories are stated at lower of cost (specific identification) or market
and consist primarily of parts to be used in the manufacture of tomographic
scanning systems.
PROPERTY AND EQUIPMENT
Property 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. Maintenance and repairs are charged to expense as incurred.
The major classes of property and equipment as of July 31, 1996 and 1995 were
as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Equipment............................................. $1,072,907 $1,052,335
Furniture and fixtures................................ 104,285 104,285
---------- ----------
$1,177,192 $1,156,620
========== ==========
</TABLE>
FINANCIAL INSTRUMENTS
In 1995, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 107, Disclosure About Fair Value of Financial Instruments, which
requires disclosure of fair value information about certain financial
instruments. The carrying amount of the Company's financial instruments,
consisting of cash, receivables, and accounts payable approximates their fair
value.
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.
19
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONT.
RESEARCH AND DEVELOPMENT
Expenditures for Company-sponsored research and development are expensed as
incurred.
EARNINGS (LOSS) PER SHARE
Primary earnings per share amounts are computed based on the weighted average
number of shares outstanding. Fully diluted earnings per share amounts are
based on an increased number of shares that would be outstanding assuming
conversion of the common stock options. Stock options and warrants are not
included in the computation of loss per share for 1995 since their effect would
be anti-dilutive.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash
and interest bearing deposits.
INCOME TAXES
The Company follows the liability method of accounting for income taxes as
required by Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes. This method provides deferred income taxes based on enacted
income tax rates in effect on the dates on which temporary differences between
the financial reporting and tax bases of assets and liabilities are expected to
reverse. The effect on deferred tax assets and liabilities of a change in
income tax rates is recognized in the period in which the change is determined.
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.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (SFAS No. 121). SFAS No.
121 requires, among other things, that impairment losses on assets to be held,
and gains or losses from assets that are expected to be disposed of, be
included as a component of income from continuing operations. The Company will
adopt SFAS No. 121 in fiscal year 1997 and its implementation is not expected
to have a material effect on the financial statements.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). SFAS No. 123 encourages entities to adopt the
fair value method in place of the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), for
all arrangements under which employees receive shares of stock or other equity
instruments of the employer or the employer incurs liabilities to employees in
amounts based on the price of its stock. The Company does not anticipate
adopting the fair value method encouraged by SFAS No. 123 and will continue to
account for such transactions in accordance with APB No. 25. However, the
Company will be required to provide additional disclosures beginning in fiscal
year 1997 providing proforma effects as if the Company had elected to adopt
SFAS No. 123.
20
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. LINE OF CREDIT
In July 1996, the Company entered into a one year line of credit agreement,
guaranteed by the Eximbank, which permits borrowing up to $1,250,000 secured
by certain foreign accounts receivable, inventories, and property and
equipment. Interest is payable monthly at the Bank's prime rate plus 2%. As of
July 31, 1996, the Company has borrowed $92,073 against the line of credit.
2. NOTES PAYABLE
Note payable of $379,609 at July 31, 1996 consist of the following:
In June 1996, the Company borrowed $25,000 from a Director accruing
interest at 11% per annum with all outstanding principal and accrued
interest due December 1996.
In July 1996, the Company obtained $233,608 in exchange for a Promissory
Note accruing interest at 18% per annum. The note is secured by domestic
accounts receivable, inventories, and property and equipment. Interest is
due September 30, 1996, and all outstanding principal and accrued interest
will be due December 31, 1996.
In December 1995, the Company converted an accounts payable of $52,000
into a note payable providing for monthly payments of $4,333 including
interest calculated at 8%. The note is due December 31, 1996. The note
balance at July 31, 1996 is $41,000.
The Company has a $80,000 note payable to a bank due January 22, 1997.
The note accrues interest at a rate of 10.25% per year.
3. STOCKHOLDERS' EQUITY
The Company has authorized 40,000,000 shares of common stock, $0.05 par
value. Additionally, the Company has authorized 2,000,000 shares of preferred
stock, $0.15 par value. As of July 31, 1996, no preferred stock has been
issued or is outstanding.
On February 16, 1990, the Board of Directors approved the 1990 Stock Option
Plan ("1990 Plan"). The 1990 Plan is administered by a Stock Option Committee
which consists of not less than three members of the Board of Directors. The
1990 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,
and to certain other individuals. Options and SARs will be awarded at the
discretion of the Stock Option Committee.
The 1990 Plan prohibits the grant of options thereunder after February 16,
2000. 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.
During fiscal 1994, the Board of Directors 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.
The options awarded in fiscal 1993 expire on August 1, 1998 while those
awarded in fiscal 1994 expire on August 1, 2000.
21
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS, CONT.
As of July 31, 1996, 4,080,975 shares of common stock were under option, with
exercise prices ranging from $0.1404 to $0.2850; 3,870,975 of these options
were exercisable at July 31, 1996. No options were exercised during fiscal
1995.
The following table details the change in options outstanding for 1996.
<TABLE>
<CAPTION>
EXERCISE NUMBER OF SHARES
OPTIONS PRICE RANGE UNDER OPTION
------- ------------ ----------------
<S> <C> <C>
Options at July 31, 1995....................... $0.08--$0.24 4,929,950
Options granted................................ $0.08--$0.24 775,000
Options exercised.............................. $0.08--$0.24 (1,327,753)
Options expired or terminated.................. $0.08--$0.24 (296,222)
----------
4,080,975
==========
</TABLE>
4. CONTRACT REVENUES
The Company's revenues have been derived from certain major customers
(greater than 10% of total revenues) as follows:
<TABLE>
<CAPTION>
CUSTOMER 1996 1995
-------- ---- ----
<S> <C> <C>
A............................................................. 12% 1%
B............................................................. 0% 14%
C............................................................. 1% 13%
D............................................................. 20% 5%
E............................................................. 17% 0%
</TABLE>
The Company had export revenues of $82,000 and $41,000 to Japan, $-0- and
$354,000 to Canada, $22,000 and $213,000 to China, and $230,000 and $-0- to
Italy during fiscal 1996 and 1995, respectively. Revenues derived either as a
prime contractor or subcontractor to prime contractors to the U. S. Government
were 47% and 38% of total revenues during fiscal 1996 and 1995, respectively.
Contracts in progress consist of the following:
<TABLE>
<CAPTION>
JULY 31,
--------------------
1996 1995
---------- --------
<S> <C> <C>
Costs and estimated earnings............................. $2,090,674 $867,131
Billings................................................. 1,574,661 958,308
---------- --------
$ 516,013 (91,178)
========== ========
Included in the balance sheet:
Costs and earned profits on long-term contracts in
excess of related billings............................ $ 808,825 $ 77,679
Billings in excess of related costs and earned profits
on long-term contracts................................ (292,812) (168,857)
---------- --------
$ 516,013 $(91,178)
========== ========
</TABLE>
Requirements for progress billings are negotiated on an individual contract
basis and, accordingly, vary between contracts.
22
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS, CONT.
5. INCOME TAXES
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.
The tax effects of significant items comprising the Company's net deferred
tax assets are as follows:
<TABLE>
<CAPTION>
JULY 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Accrued expenses...................................... $ 36,443 $ 40,973
Other................................................. -- 366
----------- -----------
Total current deferred income tax asset............. 36,443 41,339
----------- -----------
Depreciation.......................................... -- (67,972)
Operating loss carryforward........................... 2,933,343 3,090,991
Tax credit carryforward............................... 137,066 144,157
----------- -----------
3,106,852 3,208,515
Valuation allowance................................... (3,106,852) (3,208,515)
----------- -----------
Total net deferred income tax asset................... $ -- $ --
=========== ===========
</TABLE>
At July 31, 1996 the Company had available for federal income tax reporting
purposes approximately $9,000,000 of net operating loss carryforwards 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 $137,000 of tax credit carryforwards expiring from 1996 to 2001.
The Company utilized $157,647 of deferred tax benefit in 1996 attributable to
the application of the net operating loss carryforward current taxable income.
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 "formimg 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.
There was a 100% valuation allowance for the years ended July 31, 1996 and
1995.
6. 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 $5,784 and $6,557 are
included in other assets at July 31, 1996 and 1995. 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.
In March 1996, two Directors converted promissory notes of $10,000 and
$90,000 into 176,933 and 1,604,341 shares, respectively. Also in March, an
officer of the Company converted unreimbursed expenses of $6,000 into 100,000
shares of stock.
23
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS, CONT.
7. LEASES
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. Lease expense for 1996 and
1995 was $71,634 and $111,198, respectively.
Future minimum payments, by fiscal year and in the aggregate for leases of
office and manufacturing space and equipment consist of the following.
<TABLE>
<S> <C>
1997.......................................................... $104,258
1998.......................................................... 96,990
1999.......................................................... 17,906
--------
Total minimum lease payments................................ $219,154
========
</TABLE>
8. RESEARCH AND DEVELOPMENT GRANT
In February 1996, the Company and other consortium members were awarded a
grant from the U. S. Department of Commerce National Institute of Standards and
Technology ("NIST") under their Advanced Technology Program. Total funding for
this program will be $7,660,000 over a three year period with NIST contributing
49% or $3,753,000 of the total. The objective of the program is to develop
scanning technology that is capable of scanning 100 times faster than current
systems. The Company is the project leader of a consortium that includes
General Motors, General Electric, and EG&G. The Company has sole
commercialization rights, except for medical applications, for the new
technology. For approximately 30 advanced detector panels that will be produced
by the consortium, the Company has agreed to reimburse General Electric for
their costs not reimbursed by NIST approximating $1,526,000 over a three year
period. The Company will invest an additional $1,219,000 in the project. During
1996, the Company incurred $87,186 under the project net of reimbursement from
NIST.
9. 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.
24
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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 12, 1996. 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 12, 1996.
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 12, 1996. 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."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning Certain Relationships and Related Transactions is
incorporated by reference from the Company's definitive Proxy Statement and
related materials in connection with the annual meeting of shareholders on
December 12, 1996. The incorporated portions consist of all of the disclosures
that appear in that Proxy Statement under the heading "Certain Relationships
and Related Transactions."
25
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. Financial Statements:
Report of Independent Accountants....................................... 13
Balance Sheet, July 31, 1996............................................ 14
Statement of Income, Years Ended July 31, 1996 and 1995.................
Statement of Changes in Stockholders' Equity, Years Ended July 31, 1996
and 1995............................................................... 17
Statement of Cash Flows, Years Ended July 31, 1996 and 1995............. 18
Notes to Financial Statements........................................... 21
</TABLE>
26
<PAGE>
2. Exhibits:
<TABLE>
<CAPTION>
PAGE NUMBER IF INCORPORATED BY
NUMBER DESCRIPTION FILED HEREIN REFERENCE TO
------ ----------- -------------- -----------------------------------
<C> <S> <C> <C>
3.1 Restated Articles of Exhibit 3.1 to the Registration
Incorporation Statement on Form S-18 effective
March 5, 1985 (File No. 2-94269-
FW)
3.1A Amendment to Articles of Exhibit 3.1A to the Annual Report
Incorporation 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 Exhibit 4.1 to the Registration
Certificate Statement on Form S-18 effective
March 5, 1985 (File No. 2-94269-
FW)
10.8 Form of Employee Exhibit 10.10 to the Registration
Agreement (Non- Statement on Form S-1 effective
Disclosure) September 9, 1986 (File
No. 33-6220)
10.9 1983 Incentive Stock Exhibit 10.18 to the Registration
Option Plan Statement on Form S-18 effective
March 5, 1985 (File No. 2-94269-
FW)
10.10 Letter agreements dated Exhibit 10.14 to the Company's
November 20, 1987 and Annual Report on Form 10-K for
October 7, 1988 between the fiscal year ended July 31, 1988
the Registrant and
Bethlehem Steel
Corporation for the
development and sale 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 Exhibit A to Proxy Statement for
Option Plan 1990 Annual Meeting of
Shareholders filed October 29,
1990
10.12 Mutual License Agreement Exhibit 10.12 to the Company's
dated May 5, 1993 Annual Report on Form 10-KSB for
between the Registrant the fiscal year ended July 31,
and Bethlehem Steel 1995
Corporation
10.13 Frost National Bank Exhibit 10.13 to the Company's
letter dated October Annual Report on Form 10-KSB for
25, 1995 regarding Term the fiscal year ended July 31,
Note 1995
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
PAGE NUMBER IF INCORPORATED BY
NUMBER DESCRIPTION FILED HEREIN REFERENCE TO
------ ----------- -------------- ----------------------------
<C> <S> <C> <C>
10.14 Notes dated May 8, 1995, Exhibit 10.14 to the
May 31, 1995 and June Company's Annual Report on
16, 1995 in the Form 10-KSB for the fiscal
principal amounts of year ended July 31, 1995
$50,000, $30,000 and
$10,000 respectively,
all payable by
Registrant to Mr.
Howard L. Burris, Jr.
10.15 Note dated June 5, 1996, -- N/A
in the principal amount
of $25,000 payable to
Thomas Prud'homme
10.16 Note dated July 12, -- N/A
1996, in the principal
amount of $233,608.70
payable to Ulster
Investments, Ltd. and
related loan documents
10.17 Volumetric Computed -- N/A
Tomography Consortium
Collaboration Agreement
dated December 1995
10.18 Volumetric Computed -- N/A
Tomography Consortium
Commercialization
Agreement dated
December 1995
10.19 U.S. Department of -- N/A
Commerce National
Institute of Standards
and Technology (NIST)
Financial Assistance
Award dated January 19,
1996
10.20 Line of Credit dated -- N/A
June 15, 1996 with
Wells Fargo HSBC Trade
Bank, N.A.
10.21 Note dated January 25, -- N/A
1996 to Jenkens &
Gilchrist, P.C. in the
principal amount of
$52,000
24.1 Consent of Independent -- N/A
Accountants
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.
28
<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, 1996, TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE CITY OF AUSTIN, AND STATE OF TEXAS, ON THE
28TH DAY OF OCTOBER, 1996.
Scientific Measurement Systems, Inc.
By: /s/ Dr. Larry Secrest /s/ Gary S. Kofnovec
_____________________________________ _____________________________________
Dr. Larry Secrest, Gary S. Kofnovec Chief Financial and
President and Chief Executive Accounting Officer
Officer
POWER OF ATTORNEY TO SIGN AMENDMENTS
KNOW ALL BY THESE PRESENTS, that each person whose signature appears below
does hereby constitute and appoint Larry Secrest 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, 1996, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agents 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 been signed below by the
following persons in the capacities and on the dates indicated.
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/ Dr. Larry Secrest President and Chief October 28,
- ------------------------------------- Executive Officer 1996
DR. LARRY SECREST
/s/ Gary S. Kofnovec Chief Financial and October 28,
- ------------------------------------- Accounting Officer 1996
GARY S. KOFNOVEC
/s/ Howard L. Burris Director October 28,
- ------------------------------------- 1996
HOWARD L. BURRIS
/s/ Douglas G. Chaffin Director October 28,
- ------------------------------------- 1996
DOUGLAS G. CHAFFIN
29
<PAGE>
SIGNATURE TITLE DATE
/s/ Dr. Norman Hackerman Director October 28,
- ------------------------------------- 1996
DR. NORMAN HACKERMAN
/s/ Burton W. Kanter Director October 28,
- ------------------------------------- 1996
BURTON W. KANTER
/s/ James W. Kenney Director October 28,
- ------------------------------------- 1996
JAMES W. KENNEY
/s/ Phillips A. Moore Director October 28,
- ------------------------------------- 1996
PHILLIPS A. MOORE
/s/ Dr. Thomas Prud'homme Director October 28,
- ------------------------------------- 1996
DR. THOMAS PRUD'HOMME
/s/ Nancy R. Woodward Director October 28,
- ------------------------------------- 1996
NANCY R. WOODWARD
30
<PAGE>
EXHIBIT 10.15
[LETTERHEAD OF SCIENTIFIC MEASUREMENT SYSTEMS, INC. APPEARS HERE]
MEMO
To: Dr. Tom Prud'homme
From: Keith Jezek
Subject: Bridge Loan to Company
Date: June 5, 1996
This memo acknowledges SMS' receipt of $25,000 from you. This loan is to be
repaid no later than 90 days from the date written above. Terms of the loan are
that SMS will cause to be issued to you 3,600 shares of its common stock and it
will pay interest on the loan at an amount of 11% per annum, payable at the
retirement of the note.
/s/ TOM PRUD'HOMME 6/5/96
/s/ LARRY SECREST 6/5/96
<PAGE>
EXHIBIT 10.16
PROMISSORY NOTE
---------------
$233,608.70 July 12, 1996
Due: December 31, 1996
FOR VALUE RECEIVED, the undersigned ("Maker" ) promises to pay to the order
of Ulster Investments Limited ("Lender"), its successors and assigns, at its
principal office c/o Antigua International Trust Limited at High Street - P.O.
Box 1302, St. John's, Antigua, West Indies, or such other place as the holder
may designate in writing from time to time, the principal sum of Two Hundred
Thirty Three Thousand Six Hundred Eight and 70/100 Dollars ($233,608.70), in
lawful money of the United States, together with interest from the date hereof
on the unpaid principal balance outstanding from time to time at an annual rate
equal to eighteen percent (18%) per annum (the "Interest Rate").
Interest payable on this Note will be calculated on the basis of the actual
number of calendar days elapsed but computed as if each year consisted of three
hundred and sixty (360) days. Interest shall be payable on any overdue amount of
principal and/or interest at a rate per annum equal to eighteen percent (18%).
---------
In no event shall interest be payable at a rate higher than that permitted by
any applicable law. Should Lender receive any payment that is or would be in
excess of that permitted to be charged under then applicable law, then such
payment shall automatically be applied to reduce the principal sum outstanding
under this Note.
This Note is subject to the terms and provisions of that certain Loan and
Securities Purchase Agreement (the "Loan Agreement"), dated of even date
herewith, between Maker and Lender, and this Note and the holder hereof are
entitled to all the benefits provided for in the Loan Agreement, or which are
referred to therein, to which Loan Agreement reference is made for a statement
of the terms and conditions under which this indebtedness was incurred and is to
be repaid and under which the due date of this Note my be accelerated. The
provisions of the Loan Agreement are hereby incorporated herein by reference
with the same force and effect as if fully set forth herein. This Note is
secured by a Security Agreement (the "Security Agreement") dated of even date
herewith, between Maker and Lender, and the rights granted Lender thereunder and
under the Loan Agreement are cumulative and in addition to any rights Lender may
have hereunder.
Interest only shall be due and payable on September 30, 1996, and all
outstanding principal and accrued and unpaid interest shall be due and payable
on December 31, 1996, unless due earlier in accordance with the terms of the
Loan Agreement. All payments on this Note shall be applied first to the payment
of any costs of collection that may be due hereunder and to any costs or
advances to which Lender is entitled to reimbursement under the Security
Agreement, then to the payment of accrued interest, and the balance shall be
applied to principal.
<PAGE>
This Note may be prepaid in full or in part at any time without premium or
penalty. All prepayments shall be applied first to the payment of any costs of
collection that may be due hereunder, then to the payment of unpaid interest, if
any, and the balance shall be applied to principal.
If all or any portion of the indebtedness evidenced hereby is not paid when
due, or in the event of the occurrence of any Event of Default (as defined in
the Loan Agreement), Lender or other holder without notice or demand, may
declare the indebtedness evidenced hereby immediately due and payable and may
immediately exercise any right of setoff and enforce any lien or security
interest securing payment hereof.
Time is of the essence. No delay or omission on the part of the holder in
exercising any right hereunder shall operate as a waiver of such right or of any
other remedy under this Note. A waiver on any occasion shall not be construed as
a bar to or waiver of any such right or remedy on a future occasion.
Maker and any endorsers, sureties, guarantors and all other persons liable
for all or any part of the indebtedness evidenced by this Note, jointly and
severally, waive valuation and appraisement, presentment for payment, protest,
notice of protest, dishonor, notice of dishonor, demand, notice of nonpayment
and the benefit of all laws now or hereafter enacted affording any right to a
stay of execution or extension of time for payment or exempting any property of
such person from levy and sale upon execution of any judgment obtained by the
holder under this Note. Such parties hereby consent, without affecting their
liability, to extension or alteration of the time or terms of payment hereof,
any renewal, any release of any or all part of the security given for the
payment hereof, any acceptance of additional security of any kind, and any
release of, or resort to, any party liable for payment hereof, and such parties
shall remain bound in the same capacities as prior thereto upon each such event.
This Note represents a loan delivered and to be performed in Antigua, West
Indies and shall be construed, interpreted and governed by the internal laws of
Antigua, West Indies without reference to (i) its judicially or statutorily
pronounced rules regarding conflict of law or choice of law; (ii) where any
instrument is executed or delivered; (iii) where performance required by any
instrument is made or required to be made; (iv) where any breach of any
provision of any instrument occurs or any cause of action otherwise accrues; (v)
where any action or other proceeding is instituted or pending; (vi) the
nationality, citizenship, domicile, principal place of business, or
jurisdiction, organization or domestication of any party; (vii) whether the laws
of the forum jurisdiction would otherwise apply the laws of a jurisdiction other
than Antigua, West Indies; or (viii) any combination of the foregoing.
Maker agrees that the obligation to pay all principal, interest and other
amounts owing hereunder is absolute and unconditional under all circumstances.
In the event of any litigation in connection with this Note, Maker waives all
rights to a trial by jury and agrees not to assert any counterclaim, defense,
offset or abatement of any nature.
2
<PAGE>
Maker agrees to pay the holder hereof all out-of-pocket expenses and costs
of collection, including, but not limited to, reasonable attorneys' fees,
incurred by the holder hereof in enforcing or attempting to enforce this Note
whether or not a suit is commenced; and such costs, fees and expenses shall be
deemed to be added to the principal amount due under this Note.
This Note may not be changed or modified in any way, nor may any provision
hereof be waived, except by a written duly executed by the holder hereof.
This Note will inure to the benefit of Lender, its legal representatives,
successors, transferees and assigns.
IN WITNESS WHEREOF, Maker has caused this Note to be executed on its behalf
by its duly authorized officer on the day and year first above written.
SCIENTIFIC MEASUREMENT SYSTEMS, INC.,
a Texas corporation
By: /s/ Larry Secrest
-----------------------------
By:
------------------------
Attest:
/s/ Gary Kaufman
- ------------------------
Chief Financial Officer
3
<PAGE>
SECURITY AGREEMENT
DATED JULY 12, 1996
BY AND BETWEEN
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
AND
ULSTER INVESTMENTS LIMITED
<PAGE>
TABLE OF CONTENTS
-----------------
ARTICLE I. SECURITY INTEREST............................................... 1
1.1 Collateral................................................. 1
----------
ARTICLE II. REPRESENTATIONS AND COVENANTS OF BORROWER....................... 3
2.1 Authorization.............................................. 3
-------------
2.2 Title to Collateral........................................ 3
-------------------
2.3 Disposition or Encumbrance of Collateral................... 3
----------------------------------------
2.4 Validity of Accounts....................................... 3
--------------------
2.5 Maintenance of Equipment, Fixtures
----------------------------------
and Inventory; Location.................................... 4
-----------------------
2.6 Notation on Chattel Paper.................................. 4
-------------------------
2.7 Protection of Collateral................................... 4
------------------------
2.8 Insurance.................................................. 4
---------
2.9 Compliance with Law........................................ 5
-------------------
2.10 Books and Records; Access.................................. 5
-------------------------
2.11 Notice of Default.......................................... 5
-----------------
2.12 Additional Documentation................................... 5
------------------------
2.13 Principal Executive Office................................. 6
--------------------------
2.14 Name of Borrower........................................... 6
----------------
2.15 Power of Attorney.......................................... 6
-----------------
ARTICLE III. COLLECTION OF ACCOUNTS.......................................... 6
ARTICLE IV. ASSIGNMENT OF INSURANCE.......................................... 7
ARTICLE V. EVENTS OF DEFAULT................................................. 7
ARTICLE VI. RIGHTS AND REMEDIES ON DEFAULT................................... 7
6.1 Acceleration of Obligations................................ 7
---------------------------
6.2 Deal with Collateral....................................... 7
--------------------
6.3 Realize on Collateral...................................... 7
---------------------
6.4 Access to Property......................................... 7
------------------
6.5 Other Rights............................................... 8
------------
ARTICLE VII. MISCELLANEOUS................................................... 8
7.1 No Liability on Collateral................................. 8
--------------------------
7.2 No Waiver.................................................. 8
---------
7.3 Remedies Cumulative........................................ 8
-------------------
7.4 Governing Law.............................................. 8
-------------
7.5 Expenses................................................... 9
--------
7.6 Successors and Assigns..................................... 9
----------------------
7.7 Recitals................................................... 9
--------
i
<PAGE>
SECURITY AGREEMENT
------------------
This SECURITY AGREEMENT is made by Scientific Measurement Systems, Inc., a
Texas corporation ("Borrower"), as of this 12th day of July, 1996 in favor of
Ulster Investments Limited, an Antigua, West Indies corporation ("Lender").
RECITALS:
---------
A. Lender has agreed to make loans in the aggregate amount of $233,608.70
pursuant to (i) that certain Loan and Securities Purchase Agreement (the "Loan
Agreement") of even date herewith, between Borrower and Lender, and (ii) that
certain promissory note of even date herewith in favor of Lender (the "Note").
B. As a condition to said loans, Lender requires that Borrower grant to
Lender a security interest in its assets in accordance with this Security
Agreement.
C. Borrower has determined that the execution, delivery and performance of
this Security Agreement is in the best interests of Borrower.
AGREEMENT:
----------
In consideration of the foregoing, and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
Borrower hereby agrees as follows:
ARTICLE I. SECURITY INTEREST
- ----------------------------
1.1 COLLATERAL. As security for the payment to the Lender of the Note and
----------
all liabilities, obligations and indebtedness of Borrower to Lenders, due or to
become due, direct or indirect, absolute or contingent, joint or several,
howsoever created, arising or evidenced, now existing under, or hereafter any
time created pursuant to, the Loan Agreement, the Note or any other agreement or
understanding whatsoever (all such notes, liabilities, obligations and
indebtedness collectively referred to as the "Secured Obligations"), Borrower
hereby grants to Lender a security interest in all of the assets and property of
the Borrower (the "Collateral") including, but not limited to, the following
described property:
(a) ACCOUNTS. the proceeds of and each and every right of Borrower to
--------
the payment of money, whether such right to payment now exists or hereafter
arises, whether such right to payment arises out of a sale, lease or other
disposition of goods or other property by Borrower, out of a rendering of
services by Borrower, out of a loan by Borrower, out of the overpayment of
taxes or other liabilities of the Borrower, or otherwise arises under any
contract or agreement, whether such right to payment is or is not already
earned by performance, and howsoever such right to payment may be
evidenced, together with all other rights and interests (including all
liens and security interests) which Borrower may at any time have by law or
agreement against any account
<PAGE>
debtor or other obligor obligated to make any such payment or against any
of the property of such account debtor or other obligor; all including, but
not limited to, all present and future debt instruments, chattel papers and
accounts of Borrower;
(b) CHATTEL PAPER. Any writing or writings evidencing both a monetary
-------------
obligation and a security interest in or a lease of specific goods now
owned or hereafter acquired;
(c) EQUIPMENT AND FIXTURES. Goods used or bought for use primarily in
----------------------
Borrower's business, whether or not an interest therein arises under real
property law, now owned or hereafter acquired by Borrower;
(d) GENERAL INTANGIBLES. Any personal property other than goods,
-------------------
accounts, contract rights, chattel paper, documents, instruments and money,
including, but not limited to, things in or choices of actions, licenses,
rights of all types under leases and license agreements and all
manufacturing and processing rights, patents, patent rights, licenses,
trademarks, trade names and copyrights now owned or hereafter acquired;
(e) INVENTORY. All personal property now owned or hereafter acquired
---------
by Borrower which is held for sale or lease, or furnished or to be
furnished under contracts of service, or held as raw materials, work in
process or materials used or consumed or to be used or consumed in
Borrowers business, and all returned or repossessed goods;
(f) LEASEHOLD IMPROVEMENTS. All improvements made by Borrower to any
----------------------
leasehold of Borrower, including, but not limited to, all structures,
buildings, accessions, accessories, attachments, parts, equipment and
repairs now or hereafter attached, affixed or made to any leasehold of
Borrower, whether or not an interest therein arises under real property
law;
(g) PROPERTY IN POSSESSION OF LENDER. Property of every kind and
---------------------------------
description in which Borrower has or may acquire any interest, now or
hereafter at any time in the possession or control of Lender for any
reason, including, without limitation, instruments, money, documents or
other property deposited with or delivered to Lenders as collateral, for
safekeeping or for collection or exchange for other property; and all
dividends and distributions on, or other rights in connection with such
property;
(h) CUSTOMER AND MAILING LISTS. All lists and compilations (whether
--------------------------
compiled in writing, magnetic tape or discs or otherwise) pertaining to
actual or potential customers, subscribers or others in which Borrower has
or may acquire an interest;
(i) PROCEEDS. All property received upon the sale, exchange,
--------
collection or other disposition of collateral or proceeds of collateral
(including, but not limited to, insurance payable by reason of loss or
damage to the collateral) whether cash or non-cash
2
<PAGE>
proceeds, including, but not limited to, Inventory, Equipment or Fixtures
acquired with cash proceeds; and
(j) PRODUCTS. Goods manufactured, processed, assembled or commingled
--------
with any of the foregoing collateral;
together with (i) all substitutions and replacements for and proceeds of any and
all of the foregoing property, and in the case of all tangible Collateral, all
accessions, accessories, attachments, parts, equipment and repairs now or
hereafter attached or affixed to or used in connection with any such goods, and
(ii) all warehouse receipts, bills of lading and other documents of title now or
hereafter covering such assets.
ARTICLE II. REPRESENTATIONS AND COVENANTS OF BORROWER
- -----------------------------------------------------
Borrower represents, warrants and covenants that:
2.1 AUTHORIZATION. The execution, delivery and performance of this
-------------
Security Agreement have been duly authorized by all necessary action and do not
and will not (a) require any consent or approval of the stockholders of any
entity, or the consent of any governmental entity, or (b) violate any provision
of any indenture, contract, agreement or instrument to which it is a party or by
which is bound.
2.2 TITLE TO COLLATERAL. Borrower has good and marketable title to all of
-------------------
the collateral and none of the collateral is subject to any lien, except for (i)
the security interests set forth in Exhibit A attached hereto, and (ii) the
---------
security interests created in connection with this Security Agreement.
2.3 DISPOSITION OR ENCUMBRANCE OF COLLATERAL. Borrower will not encumber,
----------------------------------------
sell or otherwise transfer or dispose of the Collateral without the prior
written consent of the Lender, except as provided in this Section 2.3 and except
for the liens permitted by Section 2.2 above. Until an Event of Default (as
defined in Article V below) has occurred and is continuing, Borrower may sell
Inventory in the ordinary course of business and may sell Equipment and Fixtures
which in the judgment of Borrower have become obsolete or unusable in the
ordinary course of Borrower's business.
2.4 VALIDITY OF ACCOUNTS. Borrower warrants that all Accounts, Chattel
--------------------
Paper and Instruments are bona fide existing obligations created by the sale
and actual delivery of goods or the rendition of services to customers in the
ordinary course of business, which Borrower then owns free and clear of any
liens other than the security interests set forth in Exhibit A attached hereto
---------
and the security interests created by this Security Agreement, and which are
then unconditionally owing to the Borrower without defenses, offset or
counterclaim, and that all shipping or delivery receipts, invoice copies and
other documents furnished to Lender in connection therewith will be genuine, and
that the unpaid principal amount of any Chattel Paper or instrument and any
security therefor is and will be as represented to Lender on the date hereof.
3
<PAGE>
2.5 MAINTENANCE OF EQUIPMENT. FIXTURES AND INVENTORY; LOCATION. Borrower
---------------------------------------------------------
will maintain the Equipment, Fixtures and Inventory or cause the Equipment,
Fixtures and Inventory to be maintained in good condition and repair. At the
time of attachment and perfection of the security interest granted pursuant
hereto and thereafter, all Inventory, Equipment and Fixture collateral will be
located and will be maintained only at the locations set forth in Exhibit B
---------
attached hereto. Such Collateral will not be removed from such locations unless,
prior to any such removal, Borrower has given written notice to the Lender of
the location or locations to which Borrower desires to remove the Collateral,
the Lender has given its written consent to such removal, and Borrower has
delivered to Lender acknowledgment copies of financing statements filed where
appropriate to continue the perfection of Lender's security interest in the
Collateral prior in right to all other interests except for the security
interests set forth in Exhibit A attached hereto. The security interest of
---------
Lender attaches to all of the Collateral wherever located and Borrower's failure
to inform Lender of the location of any item or items of collateral shall not
impair Lender's security interest therein. Until an Event of Default has
occurred and is continuing, Borrower may sell Inventory in the ordinary course
of business and may sell Equipment and Fixtures which in the judgment of
Borrower have become obsolete or unusable in the ordinary course of business.
2.6 NOTATION ON CHATTEL PAPER. For purposes of the security interest
-------------------------
granted pursuant to this Security Agreement, Lender has been granted a direct
security interest in all Chattel Paper and such Chattel Paper is not claimed
merely as Proceeds of Inventory. Upon the Lender's request, Borrower will
deliver to the Lender the originals of all Chattel Paper. Borrower will not
execute any copies of Chattel Paper other than those which are clearly marked as
a copy. If Lender permits any Chattel Paper to be left in the possession of
Borrower, Borrower will deliver to Lender upon request proof satisfactory to
Lender of the existence of any such Chattel Paper and will affix or permit
Lender to affix any such Chattel Paper with a legend reflecting the Lender's
security interest therein.
2.7 PROTECTION OF COLLATERAL. All expenses of protecting, storing,
------------------------
warehousing, insuring, handling and shipping the Collateral, all costs of
keeping the Collateral free of any liens prohibited by this Security Agreement
and of removing the same if they should arise, and any and all excise, property,
sales and use taxes imposed by any state, federal or local authority on any of
the Collateral or in, respect of the sale thereof, shall be borne and paid by
Borrower. in the event that Borrower fails to promptly pay such expenses when
due, Lender may at its option, but shall not be required to, pay such expenses,
whereupon Lender shall be entitled to reimbursement thereof.
2.8 INSURANCE. Borrower will procure and maintain, or cause to be procured
---------
and maintained, insurance issued by responsible insurance companies insuring the
Collateral against damage and loss by theft, fire, collision (in the case of
motor vehicles), and such other risks as are usually carried by owners of
similar properties or as may be requested by Lender in an amount equal to the
fair market value thereof and, in any event, in an amount sufficient to avoid
the application of any coinsurance provisions. All such insurance shall contain
an agreement by the insurer to provide Lender with 30 days' prior notice of
cancellation and an agreement that
4
<PAGE>
the interest of Lender shall not be impaired or invalidated by any act or
neglect of Borrower nor by the occupation of the premises wherein such
Collateral is located for purposes more hazardous than are permitted by said
policy. Borrower will maintain, with financially sound and reputable insurers,
insurance with respect to its properties and business against such casualties
and contingencies of such types (which may include, without limitation, public
and product liability, larceny, embezzlement, or other criminal misappropriation
insurance) and in such amounts as may from time to time be required by Lender
and will cause the Lender to be listed therein as additional insureds. Borrower
will deliver evidence of such insurance and the policies of insurance or copies
thereof to Lender upon request.
2.9 COMPLIANCE WITH LAW. Borrower will not use the Collateral, or
--------------------
knowingly permit the Collateral to be used, for any unlawful purpose or in
violation of any federal, state or municipal law.
2.10 BOOKS AND RECORDS; ACCESS.
--------------------------
(a) Borrower will permit the Lender or its designees to examine
Borrower's books and records with respect to the Collateral and make
extracts therefrom and copies thereof at any time and from time to time,
and Borrower will furnish such information and reports to the Lender
regarding the Collateral as the Lender may from time to time request.
Borrower will also permit the Lender or its designees to inspect the
Collateral at any time and from time to time as the Lender may reasonably
request.
(b) Lender shall have authority, at any time, to place, or require
Borrower to place, upon Borrower's books and records relating to Accounts,
Chattel Paper, Instruments and other rights to payment covered by the
security interest granted hereby a notation or legend stating that such
Accounts, Chattel Paper, Instruments and other rights to payment are
subject to a security interest of Lender.
2.11 NOTICE OF DEFAULT. Immediately upon any officer of Borrower becoming
-----------------
aware of the existence of any Event of Default, Borrower will give notice to the
Lender that such Event of Default exists, stating the nature thereof, the period
of existence thereof, and what action Borrower proposes to take with respect
thereto.
2.12 ADDITIONAL DOCUMENTATION. Borrower will execute, from time to time,
------------------------
such financing statements, assignments, and other documents covering the
Collateral, including Proceeds, as Lenders may request in order to create,
evidence, perfect, maintain or continue their security interest in the
Collateral as a first priority interest as to all other interests except those
security interests set forth in Exhibit A (including additional Collateral
---------
acquired by Borrower after the date hereof), and Borrower will pay the cost of
filing the same or reimburse Lender for filing costs in all public offices in
which Lender may deem filing to be appropriate as well as the costs of any lien
searches which Lender may request; and will notify Lender promptly upon
acquiring any additional Collateral. Upon request, Borrower will deliver to
Lender all Borrower's Instruments and Chattel Paper.
5
<PAGE>
2.13 PRINCIPAL EXECUTIVE OFFICE. The location of the principal
--------------------------
executive office of Borrower is set forth in Exhibit B attached hereto and will
---------
not be changed without the prior written consent of the Lender. Borrower
warrants that its books and records concerning its Accounts and Chattel Paper
are located at its principal executive office.
2.14 NAME OF BORROWER. Borrower's true name is as set forth in Exhibit B
---------------- ---------
attached hereto. Borrower has not used any other name within the past five (5)
years except those described in Exhibit B attached hereto. Neither Borrower nor
---------
any predecessor in title to any of the Collateral has, since June 1, 1996,
executed any financing statements or security agreements presently effective as
to the Collateral except those described on Exhibit A attached hereto.
---------
2.15 POWER OF ATTORNEY. Borrower appoints the Lender or any other person
-----------------
whom the Lender may from time to time designate, as Borrower's attorney with
power, after the occurrence and during the continuance of an Event of Default,
to endorse Borrower's name on any checks, notes, acceptances, drafts, or other
forms of payment or security that may come into Lender's possession, to sign
Borrower's name on any invoice or bill of lading relating to any Collateral, on
drafts against customers, on schedules and confirmatory assignments of Accounts,
Chattel Paper, Instruments or other Collateral, on notices of assignment,
financing statements under the UCC and other public records, on verifications of
Accounts and on notices to customers, to notify the post office authorities to
change the address for delivery of Borrower's mail to an address designated by
the Lender to receive and open all mail addressed to Borrower, to send requests
for verification of Accounts, Chattel Paper, Instruments or other Collateral to
customers and to do all things necessary to carry out this Security Agreement.
Borrower ratifies and approves all acts of the attorney taken within the scope
of the authority granted. Neither the Lender nor the attorney will be liable for
any acts of commission or omission nor for any error in judgment or mistake of
fact or law. This power, being coupled with an interest, is irrevocable so long
as any Secured Obligation remains unpaid. Borrower waives presentment and
protest of all instruments and notice thereof, notice of default and dishonor
and all other notices to which Borrower may otherwise be entitled.
ARTICLE III. COLLECTION OF ACCOUNTS
- -----------------------------------
Except as otherwise provided in this Article III, Borrower shall continue
to collect, at its own expense, all amounts due or to become due to Borrower
under the Accounts. In connection with such collections, Borrower may take (and,
at the Lender's direction, shall take) such action as Borrower or the Lender may
deem necessary or advisable to enforce collection of the Accounts; provided,
however, that the Lender shall have the right, at any time upon written notice
to Borrower of its intention to do so, to notify the account debtors under any
Accounts of the assignment of such Accounts to Lender and to direct such account
debtors to make payment of all amounts due or to become due to Borrower
thereunder directly to Lender. Upon such notification and at the expense of the
Borrower, the Lender shall have the right to enforce collection of such Accounts
and to adjust, settle, or compromise the amount of payment thereof in the same
manner and to the same extent as Borrower might have done.
6
<PAGE>
ARTICLE IV. ASSIGNMENT OF INSURANCE
- -----------------------------------
Borrower hereby assigns to Lender, as additional security for payment of
the Secured Obligations, any and all monies due or to become due under, and any
and all other rights of Borrower with respect to, any and all policies of
insurance covering the Collateral, and Borrower hereby directs the issuer of any
such policy to pay any such monies directly to Lender. After the occurrence and
during the continuation of an Event of Default, Lender may (but need not) in its
own name or in Borrower's name execute and deliver proofs of claim, receive such
monies. endorse checks and the instrument representing such monies and settle or
litigate any claim against the issuer of any such policy.
ARTICLE V. EVENTS OF DEFAULT
- ----------------------------
The occurrence of any Event of Default as defined in the Loan Agreement
shall constitute an Event of Default hereunder (an "Event of Default").
ARTICLE VI. RIGHTS AND REMEDIES ON DEFAULT
- ------------------------------------------
Upon the occurrence of an Event of Default, and at any time thereafter
until such Event of Default is cured to the satisfaction of the Lender, and in
addition to the rights granted to the Lender under Articles III and IV hereof
and under the Loan Agreement, the Lender may exercise any one or more of the
following rights and remedies:
6.1 ACCELERATION OF OBLIGATIONS. Declare any and all Secured Obligations
----------------------------
to be immediately due and payable, and the same shall thereupon become
immediately due and payable without further notice or demand.
6.2 DEAL WITH COLLATERAL. In the name of Borrower or otherwise, demand,
--------------------
collect, receive and receipt for, compound, compromise, settle and give
acquittance for and prosecute and discontinue any suits or proceedings in
respect of any or all of the Collateral.
6.3 REALIZE ON COLLATERAL. Take any action which the Lender may deem
---------------------
necessary or desirable in order to realize on the Collateral, including, without
limitation, the power to perform any contract, to endorse in the name of
Borrower any checks, drafts, notes, or other instruments or documents received
in payment or on account of the Collateral.
6.4 ACCESS TO PROPERTY. Enter upon and into and take possession of all or
------------------
such part or parts of the properties of Borrower, including lands, plants,
buildings, machinery, equipment and other property as may be necessary or
appropriate in the judgment of the Lender, to permit or enable the Lender to
store, lease, sell or otherwise dispose of or collect all or any part of the
Collateral, and use and operate said properties for such purposes and for such
length of time as the Lender may deem necessary or appropriate for said purposes
without the payment of any compensation to Borrower therefor. Borrower shall
provide the Lender with all information and
7
<PAGE>
assistance requested by the Lender to facilitate the storage, leasing, sale or
other disposition or collection of the Collateral after an Event of Default.
6.5 OTHER RIGHTS. Exercise any and all other rights and remedies available
------------
to it by law, in equity or by agreement, including rights and remedies under the
UCC or any other applicable law, or under this Security Agreement or the Loan
Agreement and, in connection therewith, the Lender may require Borrower to
assemble the Collateral and make it available to the Lender at a place to be
designated by the Lender, and any notice of intended disposition of any of the
Collateral required by law shall be deemed reasonable if such notice is mailed
or delivered to Borrower at its address as shown on Lender's records at least
five (5) days before the date of such disposition.
ARTICLE VII. MISCELLANEOUS
- --------------------------
7.1 NO LIABILITY ON COLLATERAL. It is understood that Lender does not in
--------------------------
any way assume any of Borrower's obligations under any of the Collateral.
Borrower hereby agrees to indemnify Lender against all liability arising in
connection with or on account of any of the Collateral, except for any such
liabilities arising on account of Lender's gross negligence or willful
misconduct.
7.2 NO WAIVER. Lender shall not be deemed to have waived any of its
---------
rights hereunder or under any other agreement, instrument or paper signed by
Borrower unless such waiver is in writing and signed by the Lender. No delay or
omission on the part of Lender in exercising any right shall operate as a waiver
of such right or any other right. A waiver on any one occasion shall not be
construed as a bar to or waiver of any right or remedy on any future occasion.
7.3 REMEDIES CUMULATIVE. All rights and remedies of Lender shall be
-------------------
cumulative and may be exercised singularly or concurrently, at its option, and
the exercise or enforcement of any one such right or remedy shall not bar or be
a condition to the exercise or enforcement of any other.
7.4 GOVERNING LAW. The parties hereto acknowledge that the principal place
-------------
of business of the Lender is Antigua, West Indies and this Agreement, the Note,
the Loan Agreement, the Joinder Agreement, and each other document executed
pursuant hereto shall be deemed to have been delivered, are to be performed
within and shall each be deemed to be a contact made under, construed and
interpreted in accordance with and governed by the internal laws of the Antigua,
West Indies (without reference to (i) its judicially or statutorily pronounced
rules regarding conflict of law or choice of law; (ii) where any instrument is
executed or delivered; (iii) where performance required by any instrument is
made or required to be made; (iv) where any breach of any provision of any
instrument occurs or any cause of action otherwise accrues; (v) where any action
or other proceeding is instituted or pending; (vi) the nationality, citizenship,
domicile, principal place of business, or jurisdiction, organization or
domestication
8
<PAGE>
of any party; (vii) whether the laws of the forum jurisdiction would otherwise
apply the laws of a jurisdiction other than Antigua, West Indies; or (viii) any
combination of the foregoing.
7.5 EXPENSES. The Borrower agrees to pay the reasonable attorneys' fees
--------
and legal expenses incurred by Lender in the exercise of any right or remedy
available to it under this Security Agreement, whether or not suit is commenced,
including, without limitation, attorneys' fees and legal expenses incurred in
connection with any appeal of a lower court's order or judgment.
7.6 SUCCESSORS AND ASSIGNS. This Security Agreement shall be binding upon
----------------------
and inure to the benefit of the successors and assigns of Borrower and Lender.
7.7 RECITALS. The above Recitals are true and correct as of the date
--------
hereof and constitute a part of this Security Agreement.
IN WITNESS WHEREOF, Borrower has caused the execution of this Security
Agreement by its duly authorized representative as of the day and the year first
above written.
Scientific Measurement Systems, Inc., a Texas
Corporation
By: /s/ LARRY SECREST
-------------------------------------------
Its: President and CEO
-------------------------------------
Attest:
/s/ GARY KAUFMAN
- -------------------------------
Chief Financial Officer
9
<PAGE>
EXHIBIT A
---------
1. Security interests arising under existing loans from The Frost National
Bank with respect to domestic accounts receivable.
2. Security interests of Wells Fargo HSBC TradeBank, N.A. in "contract
collateral" as defined in the Exim Guaranteed Loan Agreement dated June 15,
1996 by and between the Borrower and Wells Fargo HSBC TradeBank, N.A.
<PAGE>
EXHIBIT B
---------
Scientific Measurement Systems, Inc.
2210 Denton Drive
Austin, Texas 78758
<PAGE>
JOINDER AGREEMENT
-----------------
THIS JOINDER AGREEMENT (the "Agreement") is entered into by and among
Scientific Measurement Systems, Inc., a Texas corporation (the "Company"),
Howard L. Burris, Jr., a resident of Texas ("Investor"), and Ulster Investments
Limited ("Ulster").
RECITALS:
--------
WHEREAS, the Company and Ulster have this date entered into that certain
Loan and Securities Purchase Agreement, together with the Promissory Note and
Security Agreement contemplated therein; and
WHEREAS, by virtue of that certain Registration Rights Agreement entered
into as of May 8, 1995 by and among the Company and Burris, the Company granted
registration rights to Burris, a copy of which agreement is attached hereto and
incorporated by reference; and
WHEREAS, concurrent with the transactions contemplated by the Loan and
Securities Purchase Agreement, the Company and Burris desire to grant
registration rights to Ulster comparable to rights previously granted to Burris;
and
WHEREAS, the parties desire by virtue of this Agreement to evidence the
terms and conditions upon which such registration rights will be granted to
Ulster;
NOW THEREFORE, it is hereby agreed as follows:
1. By the execution of this Agreement, each party hereto agrees that Ulster
shall be deemed a party to the Registration Rights Agreement and to be an
"Investor" as defined in such agreement, to the same extent as Burris is at
present a party thereto with registration rights thereunder.
2. The undersigned hereby agree with respect to the registration rights
granted to Burris and Ulster that those rights shall be pari passu, and shall be
subject, if required, to a curtailment or cut-back pro rata based on the total
number of shares each Investor then wishes to register.
3. For purposes of this Agreement, the term "Registerable Securities" as
set forth in Section 3(a) of the Registration Rights Agreement, shall, with
respect to Ulster, include all shares of Common Stock issuable to Ulster
pursuant to all transactions contemplated by the Loan and Securities Purchase
Agreement.
4. The registration rights granted hereunder to Ulster are subject to the
provisions of Section 1.6(a) of the Loan and Securities Purchase Agreement.
Ulster further agrees that Burris may be granted registration rights under the
terms of the Registration Rights Agreement with
<PAGE>
respect to shares issuable to him in connection with a proposed transfer to the
Company of a scanner system.
EXECUTED the 12th day of July, 1996, to be effective as of such date.
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
By: /s/ LARRY SECREST
-------------------------------------
Printed Name: Larry Secrest
---------------------------
Title: President and CEO
----------------------------------
INVESTORS:
/s/ HOWARD L. BURRIS, JR.
----------------------------------------
Howard L. Burris, Jr.
ULSTER INVESTMENTS LIMITED
By: /s/ BRIAN STUART-YOUNG
-------------------------------------
Printed Name: Brian Stuart-Young
---------------------------
Title: Antiqua International Trust
Limited
Director
---------------------------------
2
<PAGE>
REGISTRATION RIGHTS AGREEMENT
-----------------------------
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is entered into as of
May 8, 1995 (the "Effective Date") by and among Scientific Measurement Systems,
Inc., a Texas corporation (the "Company"), and Howard L. Burris, Jr., a resident
of Texas (hereinafter referred to as "Investor").
RECITALS:
---------
Concurrent with the signing of this Agreement, the Company and the Investor
are signing the Conversion Agreement (the "Conversion Agreement") providing for
the conversion of certain promissory notes executed by the Company, payable to
Investor, into shares of the Company's common stock ("Common Stock").
THEREFORE, for and in consideration of the covenants herein contained and
other good and valuable consideration the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
1. OPTIONAL REGISTRATIONS. If (and on each occasion that) the Company
----------------------
proposes to register any of its shares of Common Stock or securities convertible
into or exchangeable for Common Stock under the Securities Act of 1933 (the
"Securities Act") (other than a registration solely to implement an employee
benefit plan or a transaction to which Rule 145 or any other similar rule of the
Security and Exchange Commission ("SEC") is applicable), and if, in connection
therewith the Company may lawfully register the Common Stock of the Investor,
the Company will give written notice to the Investor or Investors who are
recorded on the Company's stock transfer records as holding outstanding
Registrable Securities (as hereinafter defined) (the "Holders") of such proposal
not later than forty-five (45) days prior to the anticipated filing date of such
registration, and will include in such registration and effect the registration
under the Securities Act of all Registrable Securities that such Holders may
request in writing by notice delivered to the Company within twenty (20) days
after receipt by such Holder of the notice given by the Company; provided,
--------
however, that in connection with any such offering by the Company of any of its
- -------
securities, no such registration of Registrable Securities shall be required if
the managing underwriter, if any, for the Company advises the Company in
writing that including all or part of the Registrable Securities in such
offering will materially and adversely affect the proposed offering and
jeopardize the Company's ability to sell its securities pursuant to the
registration statement due to the absolute number of Registrable Securities
being included in such offering. If such managing underwriter advises the
Company that, in its opinion, part of the Registrable Securities may be included
in such offering without materially and adversely affecting the proposed
offering, then the Company shall be obligated to include such limited number of
Registrable Securities in such offering, which Registrable Securities shall be
taken from those owned and held by a group consisting of the Holders and other
holders of Common Stock having registration rights that are pari passu with
those of the Holders, and such limitation shall be imposed upon the Holders and
such other holders pro rata on the basis of the total number of Registrable
Securities owned by the Holders and such other holders or obtainable by them
upon
<PAGE>
the exercise of rights with respect to other securities owned by them. All
expenses of such registration and offering (including the Company's attorneys'
fees) shall be borne by the Company, except that the Holders shall bear
underwriting commissions and discounts attributable to their Registrable
Securities being registered and the fees and expenses of separate counsel, if
any, for such Holders. The Investor shall be entitled to an unlimited number of
registrations under Section 1 of this Agreement.
If the Company elects to terminate any registration filed under this
Section 1, the Company will have no obligation to register the securities sought
to be included by Investor in such registration. Additionally, each Investor
included in any underwritten registration shall be entitled at any time to
withdraw such Registrable Securities from such registration prior to its
effective date in the event that such Investor shall disapprove of any of the
terms of the related underwriting agreement.
2. Registration on Form S-3.
------------------------
(a) If any Holder requests that the Company file a registration
statement on Form S-3 (or any successor form to Form S-3) for a public offering
of shares of the Registrable Securities the reasonably anticipated aggregate
price to the public of which would exceed $250,000, and the Company is a
registrant entitled to use form S-3 to register the Registrable Securities for
such an offering, the Company shall use its best efforts to cause such
Registrable Securities to be registered for the offering on such form; provided,
---------
however, that the Company shall not be required to effect more than one
- --------
registration pursuant to this Section 2 in any twelve-month period. The Company
will (i) promptly give written notice of the proposed registration to all other
Holders and (ii) as soon as practicable, use its best efforts to effect such
registration (including, without limitation, the execution of an undertaking to
file post-effective amendments, appropriate qualification under applicable blue
sky or other state securities laws and appropriate compliance with applicable
regulations issued under the Securities Act and any other governmental
requirements or regulations) as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Registrable
Securities as are specified in such request, together with all or such portion
of the Registrable Securities of any Holder or Holders joining in such request
as are specified in a written request received by the Company within thirty (30)
days after receipt of such written notice from the Company. If the registration
is for a public offering involving an underwriting, the substantive provisions
of Section 1 shall be applicable to each registration initiated under this
Section 2. All expenses of such registration and offering (including the
Company's attorneys' fees) shall be borne by the Company, except that the
Holders shall bear underwriting commissions and discounts attributable to their
Registrable Securities being registered and the fees and expenses of separate
counsel, if any, for such Holders. The Investor shall be entitled to an
unlimited number of registrations under Section 2 of this Agreement.
(b) Notwithstanding the foregoing, the Company shall not be obligated
to take any action pursuant to this Section 2: (i) in any particular
jurisdiction in which the Company would be required to execute a general consent
to service of process in effecting such registration, qualification or
compliance unless the Company is already subject to service in such jurisdiction
and except as may be required by the Securities Act; (ii) if the Company, within
ten (10) days of
2
<PAGE>
the receipt of the request of the Holder, gives notice of its bona fide
intention to effect the filing of a registration statement with the SEC within
ninety (90) days of receipt of such request (other than with respect to a
registration statement relating to a Rule 145 transaction, an offering solely to
employees or any other registration which is not appropriate for the
registration of Registrable Securities); (iii) during the period starting with
the date sixty (60) days prior to the filing of, and ending on a date three (3)
months following the effective date of, a registration statement (other than
with respect to a registration statement relating to a Rule 145 transaction, an
offering solely to employees or any other registration which is not appropriate
for the registration of Registrable Securities), provided that the Company is
actively employing in good faith all reasonable efforts to cause such
registration statement to become effective; (iv) if the Company shall furnish to
such Holder a certificate signed by the President of the Company stating that in
the good faith judgment of the Board of Directors, it would be seriously
detrimental to the Company or its stockholders for registration statements to be
filed in the near future or for any disclosure to be made that, in the opinion
of the Board of Directors duly advised by counsel, is required to be made in
connection with the sale of Registrable Securities pursuant to such
registration, provided that the Company's obligation to use its best efforts to
file a registration statement shall be deferred for a period not to exceed
ninety (90) days from the receipt of the request to file such registration by
such Holder, and provided, further, that the Company shall not exercise its
right under this clause to defer such obligation more than once in any twelve-
month period.
3. Registrable Securities. For purposes of this Agreement, the term
----------------------
"Registrable Securities" shall mean both of the following:
(a) the Common Stock issued to Investor pursuant to the Conversion
Agreement; and
(b) any Common Stock issued or issuable with respect to the Common
Stock identified in Section 3(a) by way of a stock dividend or stock split or in
connection with a combination of shares, recapitalization, merger, consolidation
or other reorganization.
However, the meaning of the term "Registrable Securities" shall not include any
shares of Common Stock that have at any time been sold in a registered public
offering or pursuant to Rule 144. Subject to compliance with applicable federal
and state securities laws and to Section 12 of this Agreement, the registration
rights granted under this Agreement may be assigned by the Investor, provided
that notice of such transfer and assignment, together with the name and address
of the transferee, is given to the Company.
4. Procedure for Registration. Whenever the Company is required under this
--------------------------
Agreement to register Registrable Securities, it agrees to do the following:
(a) Use its best efforts to prepare promptly for filing with the SEC a
registration statement and such amendments and supplements to said registration
statement and the prospectus as may be necessary to keep the registration
statement effective and to comply with the provisions of the Securities Act for
the period necessary to complete the proposed public offering (but in no event
more than 120 days);
3
<PAGE>
(b) Furnish to each Holder such copies of each preliminary and final
prospectus and such other documents as each Holder may reasonably request to
facilitate the disposition of such Holder's Registrable Securities;
(c) Enter into any underwriting agreement with provisions reasonably
required by the proposed underwriter for the Holders, if any; and
(d) Use all reasonable efforts to register or qualify the Registrable
Securities covered by the registration statement under the securities or "blue-
sky" laws of such jurisdictions as any Holder may reasonably request, although
the Company will not be required to register in any states that require it to
qualify to do business or subject itself to general service of process, and the
Company will not be required to register in more states than is necessary to
permit the sale of the securities.
5. Limitation On Sales. In connection with any underwritten offering by
-------------------
the Company in which some or all of the Investors participate, the Investors
shall, if requested by the managing underwriter or underwriters thereof, agree
not to sell any of their Registrable Securities or any other securities of the
Company owned by the Investors in any transaction other than pursuant to such
underwritten offering for a period beginning sixty (60) days prior to the date
the Company and the underwriter reasonably expect the registration statement to
become effective, and for such period after the effective date of the
registration statement as is agreed upon by the underwriters and Company.
6. Delayed Offering. The Company may delay any underwritten offering when,
----------------
in its good faith judgment, a condition or pending transaction exists the
disclosure of which would reasonably be expected to have a material adverse
effect on the Company. The Company may delay or withdraw any offering for any
reason.
7. Indemnification. The Company will indemnify each Investor who holds
---------------
Registrable Securities, and each of its officers, directors and partners and
each other person, if any, who controls such person within the meaning of
Section 15 of the Securities Act, against any losses, claims, damages, expenses,
or liabilities to which such persons may become subject under the Securities
Act, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any registration statement or
any preliminary prospectus or final prospectus or amendment or supplement
thereto on the effective date thereof, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading; and
will reimburse such persons for any legal or any other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the Company will not
-------- -------
be liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in such registration statement,
or any preliminary prospectus or final prospectus or amendment or supplement
thereto, in reliance upon and in conformity with
4
<PAGE>
written information furnished to the Company through an instrument duly executed
by such person specifically for use in the preparation thereof.
It shall be a condition precedent to the obligation of the Company to
include in any registration statement any Registrable Securities, that the
Company shall have received an undertaking, satisfactory to the Company, from
each Holder of such Registrable Securities, to indemnify and hold harmless (in
the same manner and to the same extent as set forth in the preceding paragraph)
the Company, each director of the Company, each officer of the Company who shall
sign such registration statement and any person who controls the Company within
the meaning of the Securities Act, with respect to any statement or omission
from such registration statement, any preliminary prospectus or final prospectus
contained therein, or any amendment or supplement thereto, if such statement or
omission was made in reliance upon and in conformity with information furnished
to the Company through an instrument duly executed by the Holder specifically
for use in the preparation of such registration statement, preliminary
prospectus or final prospectus or such amendment or supplement thereto.
Promptly after receipt by an indemnified party of notice of the
commencement of any action involving a claim referred to in the preceding
paragraphs such indemnified party will, if a claim in respect thereof is to be
made against an indemnifying party, give written notice to the latter of the
commencement of such action. In case any such action is brought against an
indemnified party, the indemnifying party will be entitled to participate in and
to assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party for any legal or
other expenses incurred by the latter in connection with the defense thereof.
8. Rule 144 Requirements. For so long as the Company is subject to the
---------------------
reporting requirements of the Securities and Exchange Act of 1934, the Company
will use its best efforts to file with the SEC such information as the SEC may
require and will use its best efforts to make available Rule 144.
9. Obligations in a Registration. Any Investor owning Common Stock
-----------------------------
included in any registration agrees to furnish such information regarding such
person and the securities sought to be registered as the Company may reasonably
request in connection with the registration, qualification or compliance.
10. Limitations on Subsequent Registration Rights. The Company shall not,
---------------------------------------------
without the prior written consent of the Investor holding securities
representing at least a majority of the then outstanding Common Stock subject to
this Agreement enter into any agreement granting any (a) subsequent purchaser or
prospective holder of any securities of the Company, registration rights with
respect to such securities unless such registration rights are subordinate to
and do not override or conflict with the registration rights granted Investor in
this Agreement and (b) other stockholder registration rights that conflict with
this Agreement.
5
<PAGE>
11. Restrictions on Public Sale by the Company. The Company agrees not to
------------------------------------------
effect any public sale or other distribution of its Common Stock or securities
convertible into or exchangeable for Common Stock, during the period commencing
on the seventh (7th) day prior to, and ending on the ninetieth (90th) day
following, the effective date of any underwritten registration pursuant to this
Agreement, except in connection with any such underwritten registration.
12. Transfer of Registration Rights. The rights granted Investor under
-------------------------------
this Agreement may be assigned to a transferee or assignee in connection with
any transfer or assignment of Registrable Securities by an Investor provided
that (a) such transfer may otherwise be effected in accordance with applicable
securities laws, and (B) such assignee or transferee acquires at least twenty-
five percent (25%) of the Common Stock then owned by such Investor (subject to
appropriate adjustment(s) for stock splits, dividends, subdivisions,
combinations, and recapitalizations).
13. Complete Agreement. This Agreement together with the Conversion
------------------
Agreement contains the entire agreement of the parties with respect to the
subject matter hereof and supersedes any prior written or oral agreements. This
Agreement may not be modified without the written consent of the parties hereto.
14. Term. This Agreement shall terminate as to any Investor upon the
----
written consent of such Investor, and shall terminate with respect to all
Investors upon the date which is five (5) years from the Effective Date.
15. Severability. If any provision of this Agreement is held to be
------------
illegal, invalid, or unenforceable under present or future laws, such provision
shall be fully severable and this Agreement shall be construed and enforced as
if such illegal, invalid, or unenforceable provision had never comprised a part
hereof and the remaining provisions hereof shall remain in full force and effect
and shall not be affected by the illegal, invalid, or unenforceable provision or
by its severance herefrom. Furthermore, in lieu of each illegal, invalid, or
unenforceable provision there shall be added automatically as part of this
Agreement a provision as similar in terms to such illegal, invalid, or
unenforceable provision as may be possible and be legal, valid, and enforceable.
16. Governing Law. This Agreement will be governed by and construed in
-------------
accordance with Texas law, excluding choice of law and conflicts of law
principles.
17. Mutual Drafting. This Agreement is the joint product of the Company,
---------------
and Investor, whom has been represented by counsel. Each provision of this
Agreement has been subject to the mutual consultation, negotiation and agreement
of the parties and their counsel, and this Agreement shall not be construed for
or against any of the parties.
18. Good Faith Performance. Each of the parties to this Agreement agrees to
----------------------
act in good faith to accomplish the purposes of this Agreement and to fulfill
all of the covenants and conditions contained herein.
6
<PAGE>
Executed March 8, 1996 to be effective as of the Effective Date.
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
By: /s/ LARRY SECREST
--------------------------------------------
Printed Name: Larry Secrest
Title: President and CEO
INVESTOR:
/s/ HOWARD L. BURRIS, JR.
-----------------------------------------------
Howard L. Burris, Jr.
7
<PAGE>
EXHIBIT 10.17
VOLUMETRIC COMPUTED TOMOGRAPHY CONSORTIUM
COLLABORATION AGREEMENT
-----------------------
This Collaboration Agreement (this "Agreement") is entered into as of the
---------
date of the last signature below, by and among the Participants identified in
Exhibit A (each a "Participant") and, collectively, the "Participants").
- --------- ----------- ------------
RECITALS:
---------
A. The Participants have been selected for participation in the Advanced
Technology Program administered by the National Institute of Standards and
Technology ("NIST") as a "joint venture" to conduct certain specified research
----
regarding a volumetric computed tomography system for characterizing critical
objects three dimensionally in automotive applications as more fully described
in the Statement of Work (the "SOW") attached as Exhibit B (the "Project").
--- --------- -------
B. The Participants intend to enter into a Cooperative Agreement with NIST
(the "Cooperative Agreement") setting forth, among other things, the terms and
---------------------
conditions under which NIST will fund a portion of the work required in
connection with the Project in accordance with the rules of the Advanced
Technology Program.
C. The Participants wish to enter into this Agreement to define their
respective roles and responsibilities with respect to the Project and the
Cooperative Agreement.
Therefore, the Participants agree as follows:
Article 1- Definitions
----------------------
The following capitalized terms used in this Agreement shall have the meanings
defined in this Article:
1.1 "Imaging System" means any volumetric tomography and/or real time
--------------
radiography system for industrial measurement and/or inspection which employs
area detector arrays. Imaging System shall not include any such system for
medical applications.
1.2 "Intellectual Property Rights" as used with respect to a particular
----------------------------
Participant, means all patent rights and/or copyrights (but specifically
excluding trademarks and trade secrets) owned or controlled by said Participant
(in the sense of having the right to grant rights or licenses hereunder without
accounting to third parties) pertaining to Imaging Systems, or any component
part thereof, or any method for manufacturing or using the same. "Project
Intellectual Property Rights. means patents and patent applications in all
countries covering
-1-
<PAGE>
Subject Inventions, as well as copyrights in all countries covering Project
Works. "Background Intellectual Property Rights" means all Intellectual Property
Rights which are not Project Intellectual Property Rights.
1.3 "Project Works" means works of authorship (including but not limited to
-------------
computer software) which are first created during the term of this Agreement and
in the performance of work in connection with the Project.
1.4 "Subject Invention" means any invention which is conceived or first
-----------------
actually reduced to practice in the performance of work in connection with the
Project.
Article 2 - Collaborative Efforts
---------------------------------
2.1 Collaboration. The Participants agree to use reasonable efforts to work
-------------
together, to cooperate and to collaborate with each other to achieve the
objectives set forth in the Cooperative Agreement. Such cooperation and
collaboration shall be conducted under the name of "Volumetric Computed
Tomogaphy Consortium" (the "Consortium").
----------
2.2 Obligations of Participants. Each Participant agrees to individually
---------------------------
expend reasonable efforts in accordance with the Cooperative Agreement and this
Agreement to perform those tasks assigned to it under the SOW, and to contribute
(or cause to be contributed) funds or in-kind services in the amounts set forth
for that Participant in Exhibit C attached hereto.
---------
2.3 Relationship of the Participants. The Consortium is a contractual
--------------------------------
relationship among the Participants, and is not an entity with separate legal
existence. Nothing in this Agreement or the Cooperative Agreement shall
constitute, create, give effect to, or imply, a joint venture, partnership,
agency relationship, formal business organization or any type of permanent
arrangement of any kind. Except as specifically provided herein, no Participant
shall have the right to make commitments of any kind for or on behalf of any
other Participant without the prior written consent of such other Participant.
2.4 Justice Department Filing. As soon as practicable following the
-------------------------
effective date of this Agreement, but in no event later than ninety [90] days
following such date, the Project Manager (as defined below) shall prepare a
Notice of Joint Research and Development Venture, which all Participants shall
sign, and which the Project Manager shall file on behalf of the Participants in
accordance with the provisions of the National Cooperative Research and
Production Act.
2.5 Prohibited Activities. No Party will utilize the Consortium for any
---------------------
activities prohibited under the National Cooperative Research and Production Act
(NCRPA), including, without limitation, any of the following prohibited
activities:
(a) the exchange of information among competitors or among sellers or
purchasers of services or products, relating to costs, sales,
profitability, prices, marketing, or distribution of any product,
process, material or service that is not reasonably
-2-
<PAGE>
required to conduct the research and development that is the purpose
of the Consortium;
(b) the entry into any agreement or the engagement in any other conduct
restricting, requiring, or otherwise involving the production or
marketing by any Party of any product, process, or service other than
those produced by the Consortium; and
(c) the entry into any agreement or the engagement in any other conduct:
(i) to restrict or require the sale, licensing, or sharing of
inventions or developments not developed through the Consortium,
or
(ii) to restrict or require participation by a Party in other research
and development activities where such restriction or requirement
is not reasonably required to prevent misappropriation of
proprietary information contributed by a Party or which results
from Consortium activity.
Article 3 - Terminal, or Withdrawal of Participants
---------------------------------------------------
3.1 Termination. Subject to Paragraphs 3.3, 3.4 and 3.5 below, the
-----------
Consortium's termination of a Participant's further participation in the
Consortium may only be undertaken by unanimous consent of the Management
Committee (as defined below) for unsatisfactory performance on the part of such
Participant and its failure to remedy such unsatisfactory performance within a
reasonable time after receiving notice thereof from the Management Committee,
provided that the representative on the Management Committee of the Participant
whose termination is being considered shall not have a vote for this purpose.
Notwithstanding the Consortium's termination of a Participant, the remaining
Participants shall have the right to continue the Consortium and the Project
without the terminated Participant.
3.2 Withdrawal. Subject to Paragraphs 3.3, 3.4 and 3.5 below, a Participant
----------
may withdraw from the Consortium by providing written notice to the Management
Committee no less than sixty days prior to the date of intended withdrawal.
Notwithstanding the withdrawal of a Participant, the remaining Participants
shall have a right to continue the Consortium and the Project without the
withdrawing Participant.
3.3 Obligations of Terminated or Withdrawing Participant. The terminated
----------------------------------------------------
or withdrawing Participant will negotiate a transition plan with the Management
Committee, and will work in good faith with such Management Committee with
respect to transferring unfinished work with respect to the Project to the
other Participants or a prospective new participant selected by the Management
Committee in its sole discretion. Any costs associated with transferring
unfinished work shall be borne by the terminated or withdrawing Participant.
The terminated or withdrawing Participant hereby agrees that upon such
termination or withdrawal the party or parties designated by the Management
Committee to replace said Participant shall have a paid-up, nonexclusive,
irrevocable license under said Participant's Project Intellectual
-3-
<PAGE>
Property Rights to the extent (and only the extent) necessary to complete the
tastes said Participant under this Agreement or the Cooperative Agreement.
3.4 Effect of Cooperative Agreement on Termination or Withdrawal. Anything
------------------------------------------------------------
to the contrary herein notwithstanding, the termination or withdrawal of a
Participant must be in accordance with the terms and conditions of the
Cooperative Agreement, and to the extent such terms and conditions conflict with
the provisions of this Article 2, the terms and conditions of the Cooperative
Agreement shall control.
3.5 Rights and Obligations Surviving Withdrawal. In the event of the
-------------------------------------------
termination or withdrawal of a Participant as provided in this Article 2, the
terminating or withdrawing Participant shall continue to (a) have the rights and
obligations set forth in Articles 6 (Property), 7 (Proprietary Information) and
8 (Patents and Copyrights) accruing prior to such termination or withdrawal, and
(b) be bound by any nondisclosure and/or limited use obligations undertaken
pursuant to Article 7 (Proprietary Information), and (c) be bound by any rights
granted or obligations undertaken by said Participant concerning the practical
application of the Subject Inventions and/or Project Works pursuant to this
Agreement or any separate agreement among the parties, and (d) be liable for its
share (i.e., its own cost share contribution which is accrued prior to such
termination or withdrawal) of any obligations of the Consortium entered into or
incurred prior to the date of such termination or withdrawal, and (e) be liable
for the costs of transferring said Participant's unfinished work pursuant to
Paragraph 3.3.
Article 4 - Management
----------------------
4.1 Project Manager. The Manager of the Project (the "Project Manager")
---------------
shall be Scientific Measurement Systems, Inc. ("SMS"), a Texas corporation. The
Project Manager shall be the single point of contact to NIST, representing the
Participants and the Management Committee referred to below. The Project Manager
shall perform the day-to-day management and administration of the Project in
accordance with this Agreement and the Cooperative Agreement.
4.2 Authorizing With Respect to Cooperative Agreement. The Participants
-------------------------------------------------
hereby authorize the Project Manager to negotiate with NIST on their behalf the
terms and conditions of the Cooperative Agreement, subject to final review and
written approval of such terms and conditions by each Participant prior to its
execution. The Project Manager has provided to each Participant a copy of the
Cooperative Agreement, attached hereto as Exhibit D. By executing this
Collaboration Agreement, each Participant grants to the Project Manager a power
of attorney which authorizes the Project Manager to execute the Cooperative
Agreement attached as Exhibit D on behalf of that Participant and further agrees
to be bound by the terms and conditions of the Cooperative Agreement as if such
Cooperative Agreement had been executed by such Participant in its individual
capacity.
-4-
<PAGE>
4.3 Management Committee.
---------------------
(a) Composition. A Consortium Management Committee (the "Management
----------- ----------
Committee") shall be created and shall consist of one representative from each
- ---------
Participant. Each Participant shall nominate an alternative representative, who
in the case of absence of the designated representative, shall act on behalf of
that Participant. Exhibit E lists the current Management Committee member and
---------
alternate for each Participant. Each Participant may replace its representative
or alternate at any time by giving written notice to the Management Committee.
(b) Management Committee Meetings. Meetings of the Management
-----------------------------
Committee shall be held at least quarterly, but should circumstances so require,
a meeting may be convened at any time at the request of any Participant.
Participants shall be provided with reasonable notice of all meetings and may
attend such meetings by telephone conference equipment or other electronic
medium. The Project Manager shall serve as permanent chairman of the Management
Committee and, as such, shall coordinate all Management Committee meetings and
shall chair such meetings.
(c) Decision Making. The Management Committee shall oversee the
---------------
conduct of the Project in all respects. The Management Committee will work in
good faith to obtain a consensus on all matters brought before it with SMS and
General Electric Company ("GE") each having two votes, and each other
Participant having one vote. If a consensus cannot be obtained, and unless
unanimous consent is required as provided elsewhere in this Agreement or the
Cooperative Agreement, a majority of the possible six votes shall be sufficient
to approve a matter. A quorum shall consist of five of the possible six votes
being represented, by presence at the meeting either in person or by
teleconference. Notwithstanding the foregoing, no increase or decrease to a
Participant's share of funding or in-kind contributions to the Project, no
amendment or modification to a Participant's Statement of Work, nor any changes
to the Cooperative Agreement or this Agreement which affect such Participant may
be made without such Participant's prior written consent.
Article 5 - Disbursement of Funds
---------------------------------
5.1 Participant Invoices. Each Participant shall submit monthly invoices
--------------------
directly to the Project Manager by the fifteenth day of the following month for
charges incurred in the month in question. Such invoices shall include charges
for such Participant's subcontractors, as appropriate. These invoices shall
conform to NIST requirements with appropriate cost breakdowns.
5.2 Invoices to NIST. The Project Manager shall prepare and submit monthly
----------------
invoices to NIST which shall include appropriate cost breakdowns as required.
Such invoices will be submitted by the Project Manager by the last day of the
following month for charges incurred in a particular month, and will include
charges of each Participant and all subcontractors, as appropriate. It is
anticipated that NIST will issue payment by check directly
-5-
<PAGE>
to the Project Manager for 49.0% of the total invoice, subject to the NIST
funding limitations set forth in the Cooperative Agreement.
5.3 Payments to Participants. As soon as practicable after receipt of
------------------------
monthly payments from NIST, the Project Manager shall reimburse the
Participants. In the event that NIST does not reimburse 49.0% of the
Consortium's billed costs, each Participant will share proportionately in the
shortfall (i.e., in accordance with that Participant's share of the total cost
billed) unless any particular Participant is specifically responsible. In such a
case, the disallowance will be deducted from the responsible Participant's costs
and the reimbursement adjusted accordingly.
5.4 Overages. The Participants agree that budgeted costs (and therefore
--------
commitment levels) as stated in Exhibit C shall not be exceeded on an annual
---------
basis except as mutually agreed in writing. In the event cost variances are
incurred, they shall be incurred at the risk of the originating Participant. If
these overages are deemed allowable by NIST, the originating Participant shall
receive the NIST payments associated therewith.
5.5 Documentation of Costs. Each Participant acknowledges and agrees that
----------------------
in accordance with the terms and conditions of the Cooperative Agreement, NIST
will have right of access to sufficient records and information of each
Participant to insure full accountability of all funding under such Cooperative
Agreement. Each Participant is responsible for assuring that adequate
documentation supporting all claims to NIST is retained and is accessible in the
event of an audit.
Article 6 - Property
--------------------
6.1 Acquisition. Hardware or software may be acquired or constructed under
-----------
this Agreement as needed to accomplish the SOW.
6.2 Ownership. Subject to any rights the United States government may have
---------
under the Cooperative Agreement, upon the conclusion or termination of this
Agreement the title to, and possession of, all Project hardware or software
shall be as follows:
(a) Early Termination. In the event that this Agreement is terminated
-----------------
prior to successful completion of the Project, the parties agree that
each Participant shall have title to, and possession of, that portion
of the "bread board" apparatus and/or "demonstrator" apparatus which
said Participant contributed as part of its cost share contribution,
and SMS shall have title to, and possession of, (a) all other portions
of said "bread board" apparatus and/or "demonstrator" apparatus
developed prior to termination, as well as (b) any and all acceptable
detector panels produced by Project funded production runs. In the
event of such an early termination, each Participant shall have title
to, and possession of, any purchased software which forms part of its
"in kind" contribution to the Project, and SMS shall have title to, and
possession of, all other software purchased for the Project.
-6-
<PAGE>
(b) Completion of the Project. Upon successful completion of the Project,
-------------------------
GE shall have title to, and possession of, the "bread board" apparatus
to be developed in the first phase of the Project (including any copies
of purchased software used therewith), and SMS shall have title to, and
possession of, (a) the "demonstrator" apparatus to be developed in the
second phase of the Project (including any copies of purchased software
used therewith), as well as (b) any and all acceptable detector panels
produced by Project funded production runs.
6.3 Prototype Even Period.
----------------------
A. Options of GM and GE. Upon completion or other termination of the
--------------------
Project, the parties agree that GE and/or GM shall have an option, exercisable
upon written notice to SMS received within sixty [60] days after such completion
or other termination, to have SMS maintain the "bread board" apparatus or the
"demonstrator" apparatus from the Project and make such apparatus available to
GE and/or GM for testing and/or evaluation purposes during a period of time
("Prototype Evaluation Period"). The Probe Evaluation Period shall begin upon
receipt of such notice and end upon the earliest of:
(1) the second anniversary of such completion or other termination, or
(2) the delivery of at least one commercial Imaging System to each of
GE and GM, or
(3) the delivery of one commercial Imaging System to either GE or GM,
where the other party fails to fulfill the requirements of
paragraph 6.3 B2 below; or
(4) SMS' delivery of the twelfth commercial Imaging System.
B. Conditions of Options. The option granted to GM and GE above shall be
---------------------
subject to the following:
1. Maximum Usage Available
-----------------------
(a) GE and GM may each obtain through exercise of its respective option
up to twenty-five percent (25%) of the total availability of the
apparatus, up to a combined total for both GE and GM of fifty percent
(50%) of the total availability of the apparatus.
(b) Should either GE or GM elect to exercise its option for less than
25% of total availability of the apparatus, or fail to timely exercise
its option for any amount of use, then SMS shall provide prompt written
notification to the other party of such election or failure. The other
party may then elect within thirty (30) days of receipt of such notice
to increase the amount of use exercised under its option to include
that available usage not exercised by the first party. For
-7-
<PAGE>
example, should GM exercise its option for the full 25% of total usage
and GE its exercise option for 10% of total usage. SMS would notify GM
of GE's election and that an additional 15% of total apparatus usage
was available. GM could then exercise by written notice to SMS within
30 days thereafter an additional option for up to an additional 15% of
the total apparatus usage.
2. Minimum Use Required
--------------------
(a) Subject to paragraph 6.3 B2(b) below, no options exercised by GM
and/or GE under paragraph 6.3A above shall be effective unless the
apparatus usage elected by GM and/or GE at the conclusion of the
process outlined in that paragraph 6.3A meets or exceeds forty percent
(40%) of total apparatus usage. The expiration of the options on this
basis shall not be effective, however, until thirty days following
written notice by SMS to GM and GE of any shortfall in the 40% minimum
commitment and the failure of GM and/or GE to commit to additional
usage to make up such shortfall. For example, under the scenario
addressed in paragraph 6.3 B1(b) above, should GM exercise its option
for 25% of total usage and GE elects to exercise its option for only
10% of total usage. GM would need to exercise its additional option for
at least an additional 5% of the total usage in order for the options
of GE and GM to be successfully exercised. Should GM fail to exercise
the additional option for 5%, SMS shall provide written notification of
the 5% shortfall to both GM and GE and provide a cure period of 30
days. Should neither party provide written agreement to make up the
shortfall within such 30 day period, the usage options would not vest
and neither GM nor GE would be entitled to any guaranteed level of
apparatus usage.
(b) Notwithstanding the minimum usage addressed in paragraph 6.3 B2(a)
above, if during the Prototype Evaluation Period, either GE or GM takes
delivery of a commercial Imaging System from SMS, that party shall be
relieved from its minimum usage commitment addressed in paragraph 6.3
B2(a) above. In such event, the other party shall retain its rights to
usage of the apparatus if it exercised options for at less 40% of the
total usage under the procedure outlined in paragraph 6.3 B1 above. If
the other Party exercised options for usage which is less than 40% of
the total apparatus usage, then the other Party shall retain its option
for continued usage only under one of the following conditions:
(i) Said other party assumes all or part of the apparatus usage
previously committed to by the first party so that the combined
apparatus usage of (1) the first party prior to its procurement of
the commercial Imaging System, and (2) the revised committed usage
by said other party equals at least 40% of the total apparatus
usage;
(ii) In the event that said other party has already ordered for
delivery within one year, but has not yet taken delivery of a
commercial Imaging
-8-
<PAGE>
System from SMS, then it shall retain its option so long as it has
either already committed to a minimum of 20% of the total apparatus
usage under paragraph 6.3 B1 above, or has assumed all or part of
the apparatus usage previously committed to by the first party
prior to its procurement of the commercial Imaging System, and (2)
the revised committed usage by such other party equals at least 20%
of the total apparatus usage.
Should such other party fail to take one of the actions identified in
(i) or (ii) above, the Evaluation Period shall expire in accordance
with paragraph 6.3 A3 above, thereby ending the other party's right to
guaranteed apparatus usage.
C. Compensation For Apparatus Availability. In the event either or both GE
---------------------------------------
and GM exercise their options for use as provided above, GE and/or GM shall pay
to SMS, as reasonable compensation for such availability, SMS' direct costs plus
reasonable overhead (determined in accordance with generally accepted accounting
practices, consistently applied) in maintaining such apparatus for testing and
evaluation during both the tims of actual usage and any unused time within said
party's minimum usage commitment.
D. Coordinated Usage of Apparatus. Subject to the options, if any,
------------------------------
exercised by GE and/or GM under this paragraph 6.3, SMS shall have the right to
use such apparatus at all other times for its own business purposes. GE, GM and
SMS shall cooperate in the scheduling of their respective testing or evaluation
to meet the reasonable needs of all three parties.
6.4 Obligations Upon Termination or Withdrawal. At no charge to the other
------------------------------------------
Participants, a Participant who is terminated or withdraws from the Consortium
before the conclusion of the Project or the termination of this Agreement shall
make hardware and software developed, acquired or constructed under this
Agreement by such Participant available for the purposes of the Project until
the Project is concluded or this Agreement is terminated, provided that the
Management Committee first determines that such hardware or software is required
to complete the Project.
Article 7 - Proprietary Information
-----------------------------------
7.1 Definition. For purposes of this Agreement, "Proprietary Information"
----------
means trade secrets or confidential commercial or financial information of a
Participant, whether developed outside of the Project or in connection with the
Project.
7.2 Disclosure. Nothing herein shall be construed to require the disclosure
----------
or exchange of Proprietary Information among the Participants. All such
disclosures of Proprietary Information shall be voluntary in nature and shall be
made by one Participant to another only upon execution of a non-disclosure
agreement between the applicable Participants at or before the time such
Proprietary Information is to be disclosed. For disclosures of GM Proprietary
Information to another Participant, and for disclosures of another Participant's
Proprietary Information to GM, the form of the non-disclosure agreement shall be
as set forth in Exhibit G, unless otherwise mutually agreed by the involved
Participants.
-9-
<PAGE>
7.3 Additional Requirements. Any additional requirements with respect to
-----------------------
disclosing and protecting Proprietary Information shall be addressed in the
Cooperative Agreement, or a separate written agreement among the Participants
involved.
Article 8 - Patents and Copyrights
----------------------------------
8.1 Ownership of Subject Inventions. A Subject Invention shall be
-------------------------------
considered a "Sole Subject Invention" of a Participant (i.e., solely owned by
----------------------
that Participant) if under the patent laws of the United States, inventorship
resides solely in the employees, agents or contractors of that Participant. A
Subject Invention shall be deemed to be a "Joint Subject Invention" (i.e.,
-----------------------
jointly owned in equal shares by the involved Participants) if under the patent
laws of the United States, inventorship resides in one or more employees, agents
or contractors of more than one Participant. Each Participant's ownership (if
any) of a Subject Invention shall be subject to (a) the rights (if any) of the
United States government in said Subject Invention pursuant to the Cooperative
Agreement, and (b) the rights and licenses expressly granted under this
Agreement or any separate agreement pertaining to the practical application of
Subject Inventions and/or Project Works.
8.2 Disclosure and Reporting of Subject Inventions. Each Participant shall
----------------------------------------------
disclose, as promptly as practical, to the Project Manager in writing an Subject
Inventions of which said Participant becomes aware. The Project Manager shall
have responsibility for reporting such Subject Inventions to NIST pursuant to
the Cooperative Agreement; however, any follow up reporting (e.g., as to
decisions on filing patent applications) shall be the responsibility of the
Participant(s) owning that Subject Invention.
8.3 Resolution of Ownership Disputes. In the event of a dispute among two
--------------------------------
or more Participants concerning whether a particular Subject Invention is a Sole
Subject Invention of one Participant, or a Sole Subject Invention of another
Participant, or a Joint Subject Invention of two or more Participants, the
Participants shall use reasonable efforts to resolve the dispute among the
involved Participants in accordance with the patent laws of the United States;
however, failing such resolution, the Participants agree that the unresolved
dispute shall be resolved in accordance with the provisions of Article 10
(Disputes).
8.4 Patent Decisions and Expenses. The United States government may have
-----------------------------
certain rights in Subject Inventions pursuant to the Cooperative Agreement. As
among the Participants, decisions on obtaining intellectual property protection
and enforcement of Subject Inventions shall be in the sole discretion of the
owner(s) of the Subject Invention in question, and the expenses of the same are
to be paid by said owner(s) equally. In the case of Joint Subject Inventions,
any joint owner may elect to not pursue patenting of the same by giving notice
to the other joint owner(s), and the other joint owner(s) shall have the right
to pursue patenting without the first joint owner. In such case, the other joint
owner(s) shall assume an responsibility for decisions, expenses and government
reporting on the assigned Subject Invention. If and when the joint owners all
decide not to pursue patenting, they shall make any required notification of
such decision to the United States government, with a copy to each other
Participant.
-10-
<PAGE>
8.5 Copyrights. Subject to (a) the rights of the United States government
----------
as set forth in the Cooperative Agreement, and (b) the rights and licenses
expressly granted under this Agreement or any separate agreement pertaining to
the practical application of Subject Inventions and/or Project Works, the
copyrights for any Project Works shall be owned by the Participant(s) whose
employees, agents or contractors were the authors of the specific Project Works,
with equal joint ownership where the employees, agents or contractors of more
than one Participant were joint authors.
8.6 Publication. Except as set forth in Paragraph 8.7, each Participant
-----------
reserves the right to copyright, publish, disclose, disseminate and use, in
whole or in part, data and information generated or developed by such
Participant in the performance of work in connection with the Project. At least
sixty [60] days prior to the schedule date for publication or public disclosure,
the publishing Participant shall provide a copy of the manuscript which is the
subject of publication or presentation to the Management Committee for its
review. Within such sixty [60] day period, the Management Committee shall review
such manuscript and render its suggestions or comments, if any, to the
publishing Participant. The publishing Participant shall not be bound to
incorporate the Management Committee's suggestions and comments and, except as
set forth in Paragraph 8.7 below, the publishing Participant's decision as to
what the manuscript shall contain shall be final.
8.7 Restrictions on Publication. Notwithstanding Paragraph 8.6 above, if
---------------------------
the Management Committee lets reason to believe a manuscript reveals a
potentially patentable invention, or discloses another Participant's
Confidential Background Information or any Confidential Project Information, the
Program Manager shall immediately notify the publishing Participant of that
fact. In cases where one or more potentially patentable inventions are
disclosed, the publishing Participant agrees to delay such publication,
submission or public presentation until a U.S. patent application has been filed
or for a period not to exceed one hundred eighty tl80] days, whichever occurs
first. In the event another Participant's Confidential Background Information or
any Confidential Project Information is disclosed, the publishing Participant
shall edit such manuscript to delete such Confidential Information prior to any
submission or presentation of the manuscript. No manuscript shall be published
by any Participant disclosing potentially patentable inventions or such
Confidential Information without the prior approval of the Participant or
Participants whose potentially patentable invention or Confidential Information
is included in such manuscript.
8.8 Rights for Performance of Project. Each Participant agrees to grant,
---------------------------------
and hereby grants, to each other Participant a royalty-free, nonexclusive,
irrevocable license under said Participant's Intellectual Property Rights to the
extent (and only the extent) which is reasonably necessary for said other
Participant to perform its worn in connection with the Project under this
Agreement or under the Cooperative Agreement. The Participants acknowledge that
GM does not have any Background Intellectual Property Rights which are necessary
for the performance of the Project.
8.9 Preferred Customers: Practical Application. Upon successful completion
------------------------------------------
of the Project, SMS agrees to manufacture and offer for sale the Imaging
System(s) developed under
-11-
<PAGE>
the Project. The Participants agree that GM shall be a preferred customer for
Imaging Systems manufactured by SMS following completion of the Project, with
the consequence that such preferred customer shall be entitled, upon written
notice SMS received not later than the Project completion or termination, to
purchase from SMS up to one-quarter [1/4] of the first twelve [12] Imaging
Systems manufactured by SMS at a price which is the lowest of (a) SMS' direct
cost and reasonable overhead (according to generally accepted accounting
practices, consistently applied) plus a ten percent [10%] fee, or (b) the most
favorable price on which SMS offers a substantially similar Imaging System for
sale to any person (other than GE) for non-automotive applications, or (c) three
percent [3%] less than the most favorable price on which SMS offers a
substantially similar Imaging System for sale to any person (other than GE) for
automotive applications. In consideration thereof, GM agrees to grant, and
hereby grants, to SMS a paid up, irrevocable, worldwide, nonexclusive license
under GM's Project Intellectual Property Rights for the practical application of
all Subject Invention and/or Project Works owned or controlled by GM in the
field of Imaging Systems, together with the right to grant to the purchasers of
such Imaging Systems a sublicense to use the same with the purchased Imaging
Systems.
8.10 Rights of Other Participants. Except as expressly set forth in
----------------------------
Paragraphs 3.3 (Obligations of Terminated or Withdrawing Participant) or 8.8
(Rights for Performance of Project) or 8.9 (Preferred Customers), nothing
contained in this Agreement shall be construed, by implication, estoppel or
otherwise, to grant to any Participant any right or license in respect of the
other Participants' Intellectual Property Rights, or any other patents,
copyrights, trade secrets or trademarks of said other Participants. Rather any
such licenses shall be granted only pursuant to one or more separate written
agreements.
8.11 Limitation on Licensing Joint Subject Inventions. Except as expressly
------------------------------------------------
set forth in Paragraphs 3.3 (Obligations of Terminated or Withdrawing
Participant) or 8.8 (Rights for Performance of Project) or 8.9 (Preferred
Customers), for a period of five [5] years from the date of this Agreement, no
owner of a Joint Subject Invention shall license that Joint Subject Invention to
any unaffiliated third party without the prior written consent of each of the
other joint owners. For all purposes herein, a party shall be deemed an
"unaffiliated third party" unless the joint owner Participant desiring to
license said Joint Subject Invention owns at least 20% of the voting shares of
stock or other ownership interests of such third party. As an exception to the
foregoing, a joint owner may grant a license to one or more of its vendors to
manufacture its Joint Subject Invention and/or to practice such Joint Subject
Invention, respectively, in each case solely for the purpose of supplying that
joint owner's own internal needs and the needs of its subsidiaries and
affiliates (i.e., excluding unaffiliated third parties), but not for any other
purpose.
8.12 Government Use License. Pursuant to the terms of the Cooperative
----------------------
Agreement, the United States may reserve a nonexclusive, nontransferable,
irrevocable paid-up license to practice or have practiced Subject Inventions
and/or Project Works for or on behalf of the United States, but shall not in the
exercise of such license publicly disclose any confidential information relating
to the subject matter of such license. Nothing in this Agreement shall be
construed as adversely affecting the United States' rights under the Cooperative
Agreement.
-12-
<PAGE>
Article 9 - Liability, Insurance
--------------------------------
9.1 Disclaimer of Joint and Several Liability. Joint and several liability
-----------------------------------------
shall not attach to the Participants; no Participant is responsible for the
actions of any other Participant, but is only responsible for those tasks
assigned to it in the SOW and for its own and its subcontractors' compliance
with the terms and conditions of the Cooperative Agreement. Each Participant
shall be responsible for any loss, cost, damage, claim or other charge to the
extent arising out of or is caused by the actions of that Participant or its
employees or agents or contractors. No Participant shall be liable for any loss,
cost, damage, claim or other charge that arises out of or is caused by the
actions of any other Participant or its employees or agents or contractors.
9.2 Participant's Own Personnel and Property. Each Participant shall assume
----------------------------------------
the risk of any damage to or loss of its own property, as well as the risk of
personal injury or death of its employees, agents and contractors arising out of
the performance of such Participant's work contemplated by this Agreement, and
each Participant agrees to release, defend and indemnify the other Participants
from and against any and all losses and/or liabilities (including but not
limited to attorneys' fees and other litigation costs) arising out of any such
property damage or loss, or personal injury or death for which the indemnifying
Participant has assumed the risk hereunder, notwithstanding the negligence,
strict liability, or breach of warranty of said other Participant or of said
other Participant's employees, agents or contractors, except to the extent (and
only the extent) to which such losses or liabilities have been determined by
final, nonappealable judgment to have been caused by the gross negligence or
wilful misconduct of that particular indemnitee.
9.3 Use of Project Results. Each Participant ("Participant User") shall
----------------------
assume the risk of its use of anything (including but not limited to technical
information, Subject Inventions, Project Works and/or equipment) developed by or
provided to said Participant User in connection with the Project ("Project
Results"), and each Participant User agrees to defend and indemnify each other
Participant from and against any and all losses and/or liabilities (including
but not limited to attorneys' fees and other litigation costs) for any damage to
or loss of third party property, and/or the personal injury or death of any
third party, arising out of such Participant User's use of Project Results,
except to the extent (and only the extent) to which such losses or liabilities
have been determined by final, nonappealable judgment to have been caused by the
gross negligence or wilful misconduct of said other Participant.
9.4 Notice and Defense. Each Participant obligates itself to notify the
------------------
other Participants promptly and in writing of any lawsuit threatened or filed
against said Participant which might give rim to the indemnities of this
Article. Each indemnified Participant shall provide such reasonable assistance
and cooperation as may be requested by the indemnifying Participant in
connection with the defense or prosecution of any such lawsuit.
9.5 Settlements and Compromises. No Participant shall settle or compromise
---------------------------
any claims or lawsuit relating to the liabilities and/or losses addressed in
this Article without the
-13-
<PAGE>
written consent of the other involved Participants if the settlement or
compromise obliges such other Participant(s) to make any payment, or to part
with any property, or to assume any obligation, or to grant any licenses or
other rights, or to be subject to any injunction by reason of such settlement or
compromise.
9.6 Indemnity Effectiveness. The releases and indemnities provided pursuant
-----------------------
to this Article shall be effective to the maximum extent, scope and amount
permitted by the applicable law. Such releases and indemnities under this
Article shall not, however, be applicable to defeat or limit, in an action by a
specific Participant-purchaser against a specific Participant-seller, any claim
for breach of express warranty or for products liability in respect of a
specific commercial product (specifically not including materials or products
sold between the Participants in the performance of the Project) which is
manufactured by said Participant-seller and sold by it directly to said
Participant-purchaser.
9.7 Consequential Damages. No Participant shall be liable to any other
---------------------
Participant for indirect, incidental and/or consequential damages (such as loss
of profits, etc., but excluding personal injury or property damage covered by
the indemnities of this Article) arising out of the execution or performance of
this Agreement, regardless of the cause and notwithstanding the negligence,
strict liability, or breach of warranty of said Participant.
9.8 Insurance. Each Participant shall obtain and maintain appropriate
---------
public liability and casualty insurance, or adequate levels of self insurance,
to insure against any liability caused by that Participant's activity under this
Agreement and/or the Cooperative Agreement. Within ninety [90] days after this
Agreement has been signed by all the Participants, each Participant who is not
entirely self insured for matters relating to this Agreement shall obtain from
its relevant insurers, and deliver to the other Participants, a written waiver
of subrogation for the benefit of the other Participants under each and every
purchased insurance policy which said Participant has which is relevant to said
Participant's activity under this Agreement. Such a written waiver will also be
obtained and promptly delivered for each relevant new or renewal policy obtained
by either Participant during the term of this Agreement. In lieu of obtaining
such a waiver for a particular policy of its purchased insurance, a Participant
may instead arrange to have the other Participants named as additional insureds
on said policy. Each Participant shall be responsible for its own self insurance
retention's and for all deductible amounts under its purchased insurance.
9.9 Disclaimers of Warranty. Except as otherwise expressly set forth
-----------------------
herein, EACH PARTICIPANT EXPRESSLY DISCLAIMS ANY AND ALL WARRANTIES (EXPRESS,
IMPLIED, STATUTORY OR OTHERWISE), INCLUDING BUT NOT LIMITED TO WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO (A) SAID
PARTICIPANT'S PERFORMANCE, AND (B) ANY PRODUCT OR ASSOCIATED DATA PROVIDED BY
SAID PARTICIPANT FOR USE IN THE PROJECT, (C) ANY PRODUCT OR ASSOCIATED DATA
ATTEMPTED TO BE DEVELOPED IN THE PROJECT.
-14-
<PAGE>
Article 10- Disputes
--------------------
10.1 Dispute Under this Agreement. Any disagreement, claim or dispute
----------------------------
between or among Participants arising from or in connection with the Project or
this Agreement shall be submitted as soon as practicable after such dispute
arises to senior executives from each Participant for discussion and possible
resolution. If within ninety days after their discussion, such executives are
unable to resolve the matter, any involved Participant may resort to any
available legal remedy.
10.2 Other Disputes. Any disputes which arise between the Participants and
--------------
NIST arising from or in connection with the Project or the Cooperative Agreement
shall be settled in accordance with the dispute resolution provisions of the
Cooperative Agreement. For the purposes of the Cooperative Agreement, the Joint
Venture Representative shall be an individual selected by the involved
Participants in consultation with, and subject to, the approval of the
Management Committee. The resolution of such dispute and any and all findings of
fact or law thereunder shall be binding on the involved Participant or
Participants; provided, however, that if a Participant is adversely affected by
any such decision and in good faith disagrees with it, and if the Management
Committee elects not to direct the Program Manager to take action against NIST
with respect to such decision on behalf of the involved Participants, the
Program Manager shall promptly notify the affected Participant and the
Participant shall have a right, to the extent permissible under the Cooperative
Agreement, to take appropriate action against NIST. All cost of any such action
or of any appeal prosecuted by the Participant shall be paid by that
Participant.
Article 11 - Notices
--------------------
Any notice or request with reference to this Agreement shall be made by
first class mail postage prepaid, telex, or facsimile to the addresses shown in
Exhibit F. Any party may change its official address by giving written notice
- ---------
under this Article to each other Party.
Article 12 - General Provisions
-------------------------------
12.1 Remedies. Unless otherwise expressly provided herein, the rights and
--------
remedies of the Participants hereunder are in addition to, and not in limitation
of, other rights and remedies under this Agreement, at law or in equity, and the
exercise of one right or remedy shall not be deemed a waiver of any other right
or remedy.
12.2 Execution and Counterparts. The Participants agree that this Agreement
--------------------------
may be executed in counterparts, and that it is the intent of the Participants
that any copy signed by a party shall be fully enforceable against such party.
12.3 Entire Agreement. This Agreement, including the exhibits attached
----------------
hereto, together with the Cooperative Agreement, constitutes the entire
agreement between the parties
-15-
<PAGE>
regarding the subject matter herein, and supersedes any previous understanding,
commitments or agreements, oral or written.
12.4 Termination. This Agreement shall cease and terminate upon the first
-----------
to occur of the following events or dates:
(a) cancellation of the Project funding by NIST, or termination of the
Cooperative Agreement, unless within sixty [60] days thereafter the
Management Committee unanimously votes to continue the Project with
alternative funding or with a reduced funding;
(b) full performance of all Project obligations under the Cooperative
Agreement; or
(c) mutual agreement of all Participants.
12.5 Surviving Rights and Obligations. Termination of this Agreement shall
--------------------------------
not:
(a) release any Participant from any claim of any other Participant or
NIST accrued hereunder prior to the effective date of such
termination; or
(b) affect any Participant's rights or obligations under Article 6, 7, 8,
9, 10 or 11 or under Paragraphs 2.5 or 3.5.
12.6 Amendments. No amendment or modification of this Agreement shall be
----------
valid unless made in writing and signed by all Participants.
12.7 Assignment. This Agreement shall not be assigned by any Participant
----------
without the express written consent of the other Participants, which consent
shall not be unreasonably withheld. This consent shall be granted routinely in
connection with a Participant's change of its name or a sale of the
Participant's business or the operating unit of such business responsible for
the Project unless such event materials affects any other Participant.
12.8 Effective Date. This Agreement shall be effective as of the date on
--------------
which the last of the Participants signs this Agreement or a counterpart hereof.
12.9 Force Majeure. No Participant shall be liable, in respect to any delay
-------------
in completion of work hereunder or of the non-performance of any term or
condition of this Agreement directly or indirectly resulting from delays by acts
of God; acts of the public enemy; strikes; lockouts; epidemic and riots; power
failure; water shortage or adverse weather conditions; or other causes beyond
the control of the Participants. In the event of any of the foregoing, the time
for performance shall be equitably and immediately adjusted. The Participants
shall resume the completion of work under this Agreement as soon as possible
subsequent to any delay due to force majeure.
-16-
<PAGE>
12.10 Governing Law. This Agreement shall be governed by and interpreted in
-------------
accordance with the laws of New York, not including any conflicts of law rules
which may direct the application of the laws of any other jurisdiction.
12.11 Headings. Article and section headings contained in this Agreement
--------
are included for convenience only and form no part of the agreement among the
Participants.
12.12 Precedence. Should there be any conflict between the terms and
----------
conditions of this Agreement and the Cooperative Agreement, the Cooperative
Agreement shall take precedence, except to the extent (and only the extent)
that said Cooperative Agreement might be construed as creating a partnership or
other legal entity contrary to Paragraph 2.3 (Relationship of the Participants).
12.13 Severability. If any provision of this Agreement is declared invalid
------------
by any court or government agency, all other provisions shall remain in full
force and effect.
12.14 Use of Names. No Participant shall use in any advertising,
------------
promotional or sales literature the name of any other Participant without prior
written consent.
12.15 Waivers. Waiver by any Participant of any breach or failure to comply
-------
with any provision of this Agreement by another Participant shall not be
construed as, or constitute, a continuing waiver of such provision or a waiver
of any other breach of or failure to comply with any other provision of this
Agreement.
In Witness Whereof, the Participants have caused this Agreement to be
executed by their duly authorized officers or representatives on the dates shown
below.
SCIENTIFIC MEASUREMENT SYSTEMS, INC. GENERAL ELECTRIC COMPANY
By: /s/ LARRY SECREST By: /s/ WILLIAM D. ROUSE
------------------------------- --------------------------
Name: Larry Secrest Name: William D. Rouse
------------------------------- --------------------------
Title: President Title: Organization Leader
------------------------------- --------------------------
Date: December 26, 1995 Date: 12-22-95
------------------------------- --------------------------
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<PAGE>
GENERAL MOTORS CORPORATION EG&G, INC.
By: /s/ THOMAS G. STEPHENS By: /s/ FRED B. PARKS
------------------------------- -------------------------
Name: Thomas G. Stephens Name: Fred B. Parks
------------------------------- -------------------------
Title: Vice President Executive Vice President
------------------------------- Title: and Chief Operating
Officer
Date: 11/29/95 -------------------------
-------------------------------
Date: December 22, 1995
-------------------------
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<PAGE>
Exhibits
--------
Exhibit A: Participants to the Agreement.
Exhibit B: Statement of Work.
Exhibit C: Contributions of the Participants.
Exhibit D: Cooperative Agreement.
Exhibit E: Management Committee Members and Alternates.
Exhibit F: Names and Addresses for Notices.
-19-
<PAGE>
Exhibit A
Participants
------------
Scientific Measurement Systems, Inc.
General Electric Company
General Motors Corporation
EG&G, Inc.
-20-
<PAGE>
Exhibit B
Statement of Work
-----------------
This statement of responsibilities and general scope of work shall
constitute the baseline for the work to be performed by Scientific Measurement
Systems, Inc. (SMS), General Electric Company through its Corporate Research and
Development Division (GECRD), and its General Electric Aircraft Engines Division
(GEAE), EG&G, Inc. (EG&G), and General Motors Corporation (GM), by their
exertion of reasonable efforts. A matrix of participation by task is shown
below, followed by task descriptions. Each task and subtask will be participated
in by all parties listed in this matrix, unless more specific participation is
referenced within the task description.
<TABLE>
<CAPTION>
=======================================================================
Participation Matrix SMS GECRD GEAE EG&G GM
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Task 1. System Development X X X X X
- -----------------------------------------------------------------------
Task 2. Detector Development X X X X
- -----------------------------------------------------------------------
Task 3. Scatter Reduction X X X
- -----------------------------------------------------------------------
Task 4. Image Reconstruction X X X
- -----------------------------------------------------------------------
Task 5. 3D Data Display and X X X
Analysis
- -----------------------------------------------------------------------
Task 6. Critical Applications X X X X
Demonstrations
- -----------------------------------------------------------------------
Task 7. Project Management X X X
=======================================================================
</TABLE>
Task Descriptions:
Task 1.0 - System Development
. System requirements, including imaging performance, analysis of 3D CT images,
and cost of system, will be specified in detail.
. GM and GEAE will design and create the quality standards which will be used
to evaluate system performance throughout the project. The standards will
include selected part-specific standards, e.g., a particular automotive
engine head with simulated defects manufactured into it.
. GE/CRD and SMS will develop a computing strategy and perform benchmark
evaluations of various equipment. Since large amounts of data must be
acquired and processed, these evaluations will take in account overall
systems performance, including data flow.
-21-
<PAGE>
. A system model will be developed. This will be continually modified based
upon data derived from the breadboard and development systems.
. A breadboard system, which will integrate the key system components,
including detectors, area collimators, exact reconstruction paths, will be
implemented at GEAE's facility in Ohio. The purpose of the system will be to
evaluate and modify designs, identify potential system bottlenecks, and to
provide a go-no go decision point for the project within the first fifteen
months. To speed this process, existing equipment and lab space, will be used
as much as possible.
. A technology demonstrator, based on what was learned with the breadboard
system, will be designed and built at SMS's facilities in Texas. This system
will demonstrate system growth and speed capabilities as well as image
quality approaching that of 2D CT.
Task 2.0 - Detector Development
. GE/CAD, together with EG&G, shall develop and test a flat panel amorphous
silicon photodiode array for both the breadboard and demonstrator systems.
. GE/CRD shall assist GEAE and SMS in using and evaluating the panel. The
breadboard system will be used for performing basic experiments as to choice
of scintillator material, thickness and physical configuration. Choice of
scintillator will be determined by how well it optically matches the
photodiode array, how efficient it is, and how great and long is its
afterglow. The system's resolution will be effected by scintillator
thickness, optical crosstalk, and whether the detector can be focally aligned
to the X-ray source. Readout speed and system noise will be measured, and
strategies to optimize the performance will be developed.
. The technology demonstrator system will feature a significant increase in
detector size. Scale up problems such as tilting together scintillators,
detector readout speed, massive data handling and system throughput will have
to be resolved.
Task 3.0 - Scatter Reduction
. GE/CRD and GEAE will develop standard techniques for measuring scatter, and
estimating its effect on reconstruction.
. GE/CRD will design an area collimator, based on photoetching glass with a
grid pattern,depositing (CVD) tungsten on the glass, and etch the glass away.
The remaining tungsten grid is stacked on others, to make a focally-aligned
area collimator. This technique will be evaluated in the breadboard system.
. Alternative techniques such as one dimensional collimation and simple
software scatter removal techniques will be evaluated.
-22-
<PAGE>
. Estimates will be made of the remaining scatter, and an evaluation of how
this effects the delectability of low density indications and geometry
detection will be determined.
Task 4.0 - Image Reconstruction
. SMS will evaluate existing exact algorithm reconstruction codes to determine
which parts of it are suitable for multiprocessor implementations. Bench
marking will be done on selected processors. Total system throughput,
reliability and accuracy, will be determined.
. SMS will provide codes suitable for distributed processing. It is expected
that the target system will consist of several dozen DSP's in a multi-card
arrangement. No special purpose processors will be used.
. Reconstruction algorithms will be evaluated using actual quality indicators
as well as mathematical phantoms.
. The exact algorithm will be extended by GECRD to the large part case, i.e.,
the part is taller than the detector. The resultant algorithm will be coded
and evaluated on the demonstrator system.
Task 5.0 - 3D Data Display and Analysis
. This system will evaluate commercial 3D data display and analysis software
and hardware packages, and perform selective product evaluations. Methods to
smoothly handle the movement, display and analysis of very large images (134
MB per part), must be developed to permit volumetric inspection of parts.
. Commercial reverse CAD products will be evaluated. Currently available
reverse CAD products are too slow and require extensive manual intervention
by a highly skilled CAD operator. One of the main project goals is to fully
automate the generation of useful CAD models from 3D X-ray data. The project
will work with vendor's and design engineers' requirements to do this for
limited classes of parts (such as automotive engine heads).
Task 6.0 - Critical Application Demonstrations
Several critical applications have been chosen to demonstrate how fast 3D CT
imaging will solve some critical industrial needs.
. Fully automated reverse CAD will be demonstrated for selected automobile
castings. The parts will be scanned and converted to point-cloud format. A
complete CAD model will be generated for the parts. The model will be
evaluated by comparing it to coordinate measuring machine results as well as
cutups. SMS and GM will collaborate on this task.
-23-
<PAGE>
. Jet engine turbine blades will be inspected for residual core and hole
drilling. Fully automated reverse CAD for these, will also be demonstrated.
These are particularly challenging pieces as they have very complex internal
geometry and are made of very dense materials. SMS, GECRD, and GEAE will
collaborate on this task.
. X-ray metrology methods and standards will be developed to facilitate
implementation of the 3D CT technology in industry. These methods will
include advanced approaches for defining edge characteristics and extracting
geometric information from 3D data. This task is one in which participation
by NIST researchers will be encouraged, particularly given their role in
establishing new standards. SMS, GM, GEAE, and GECRD will collaborate on this
task.
Task 7.0 - Project Management
-24-
<PAGE>
Exhibit C
Contributions of the Participants
---------------------------------
<TABLE>
<CAPTION>
=================================================================
Company Total Program NIST-ATP Cost Shared
Activity Funding Activity Activity
(3 years)
- -----------------------------------------------------------------
<S> <C> <C> <C>
SMS $2,507,325 $1,437,126 $1,070,199
- -----------------------------------------------------------------
GECRD $2,993,912 $1,467,017 $1,526,895*
- -----------------------------------------------------------------
GEAE $1,254,223 $ 625,858 $ 628,365
- -----------------------------------------------------------------
GM $ 400,000 $ 0 $ 400,000
- -----------------------------------------------------------------
EG&G $ 258,265 $ 126,550 $ 131,715
=================================================================
TOTALS $7,413,725 $3,656,551 $3,757,174
=================================================================
</TABLE>
<TABLE>
<CAPTION>
=================================================================
Company Total Program NIST-ATP Cost Shared
Activity Funding Activity Activity
(Year One)
- -----------------------------------------------------------------
<S> <C> <C> <C>
SMS $ 445,098 $ 267,098 $ 178,000
- -----------------------------------------------------------------
GECRD $1,458,012 $ 714,426 $ 743,586*
- -----------------------------------------------------------------
GEAE $ 324,648 $ 161,999 $ 162,649
- -----------------------------------------------------------------
GM $ 100,000 $ O $ 100,000
- -----------------------------------------------------------------
EG&G $ 81,700 $ 40,033 $ 41,667
=================================================================
TOTALS $2,409,458 $1,183,556 $1,225,902
=================================================================
</TABLE>
<TABLE>
<CAPTION>
=================================================================
Company Total Program NIST-ATP Cost Shared
Activity Funding Activity Activity
(Year Two)
- -----------------------------------------------------------------
<S> <C> <C> <C>
SMS $ 844,129 $ 487,123 $ 357,006
- -----------------------------------------------------------------
GECRD $ 976,505 $ 478,487 $ 598,018*
- -----------------------------------------------------------------
GEAE $ 435,536 $ 217,332 $ 218,204
- -----------------------------------------------------------------
GM $ 150,000 $ O $ 150,000
- -----------------------------------------------------------------
EG&G $ 85,999 $ 42,140 $ 43,859
=================================================================
TOTALS $2,492,169 $1,225,082 $1,267,087
=================================================================
</TABLE>
*SMS will pay this amount
-25-
<PAGE>
<TABLE>
<CAPTION>
=================================================================
Company Total Program NIST-ATP Cost Shared
Activity Funding Activity Activity
(Year Three)
- -----------------------------------------------------------------
<S> <C> <C> <C>
SMS $1,218,098 $ 670,368 $ 547,730
- -----------------------------------------------------------------
GECRD $ 559,395 $ 274,103 $ 285,292*
- -----------------------------------------------------------------
GEAE $ 444,089 $ 221,600 $ 222,489
- -----------------------------------------------------------------
GM $ 150,000 $ O $ 150,000
- -----------------------------------------------------------------
EG&G $ 90,566 $ 44,377 $ 46,189
=================================================================
TOTALS $2,462,148 $1,210,448 $1,251,700
=================================================================
</TABLE>
*SMS will pay this amount
-26-
<PAGE>
Exhibit D
Cooperative Agreement
---------------------
[Attach a copy of Cooperative Agreement]
-27-
<PAGE>
Exhibit E
Management Committee Members and Alternates
-------------------------------------------
Members Alternates
------- ----------
Scientific Measurement Systems, Inc.
Forrest Hopkins Hunter Ellinger
Scientific Measurement Systems, Inc. Scientific Measurement Systems, Inc.
2210 Denton Drive Suite 106 2210 Denton Drive Suite 106
Austin, Texas 78758 Austin, Texas 78758
Phone: 521-837-4712 Phone: 512-837-4712
Fax: 512-837-9082 Fax: 512-837-9082
General Electric Company
General Electric Aircraft Engines General Electric Corp. Research & Devel.
Tom Birdwell Jeff Eberhard
One Neuman Way MD-8 1 Research Circle
Cincinnati, Ohio 45215 Niskayuna, NY 12309
Phone: 513-552-4754 Phone:
Fax: 513-552-4857 Fax:
General Motors Corporation
Mr. James E. Hetzner To be designated
GM Powertrain Group
General Motors Corporation
Casting Operations, Advanced Development Lab
1629 N. Washington Avenue
Saginaw, MI 48605
Phone: 517-757-0015
Fax: 517-757-1484
EG&G, Inc.
Dr. Richard Scarlet Dr. Enno Ho1zenkaempfer
EG&G, Inc. EG&G, Inc.
1001 Depot Road 2175 Mission College Blvd.
Boxborough, MA 01719 Santa Clara, CA 95054
Phone: 508-263-7721 Phone: 408-565-0876
Fax: 508-263-8282 Fax: 408-565-0793
-28-
<PAGE>
Exhibit F
Names and Addresses for Notices
-------------------------------
Scientific Measurement Systems, Inc.
Forrest Hopkins
Scientific Measurement Systems, Inc.
2210 Denton Drive Suite 106
Austin, Texas 78758
General Electric Company
Tom Birdwell
General Electric Aircraft Engines
One Neuman Way MD-8
Cincinnati, Ohio 45215
with a copy to:
Jeff Eberhard
General Electric Research and Development
address
General Motors Corporation
James E. Hetzner
GM Powertrain Group
General Motors Corporation
Casting Operations, Advanced Development Lab
1629 N. Washington Avenue
Saginaw, MI 48605
EG&G, Inc.
Mr. Andres Buser
EG&G, Inc.
2175 Mission College Blvd.
Santa Clara, CA 95054
with a copy to:
Dr. Richard Scarlet
EG&G, Inc.
1001 Depot Road
Boxborough, MA 01719
-29-
<PAGE>
Exhibit G
VOLUMETRIC TOMOGRAPHY CONSORTIUM
NON-DISCLOSURE AGREEMENT
------------------------
This Agreement, effective as of ____________, 199_, is by and between
GENERAL MOTORS CORPORATION, having a place of business at _______________,
Michigan ("GM"), and _______________________________, having a place of business
at ______________________ ("Other Participant").
RECITALS:
---------
A. GM and Other Participant, together with others, are partial to a
Collaboration Agreement under which they will conduct joint research on a
Volumetric Computed Tomography System for characterizing critical objects three
dimensionally in automotive applications (the "Project") in conjunction with the
National Institute of Standards and Technology's ATP Program.
B. In connection with their specific work on the Project described in Task
______ of the Statement of Work for the Project, each ("Discloser") of GM and
Other Participant desires to share with the other ("Recipient") certain specific
Proprietary Information of the Discloser which the Recipient desires to receive
and use in confidence for the specific purpose ("Purpose") of performing
Recipient's work on the Project.
C. The specific type of Proprietary Information to be disclosed by GM is as
follows: ____________________________________________________________________,
and the Specific type of Proprietary Information to be disclosed by Other
Participant is as follows: ____________________________________________________.
D. Unless extended by the mutual written agreement of the parties, all
disclosures pursuant to this Agreement shall be me during the period of ______,
199_ to _______, 199_.
NOW, THEREFORE, GM and Other Participant agree as follows:
1. As used herein, the term "Proprietary Information" means trade secrets
or confidential commercial, technical and/or financial information of the
Discloser whether developed outside of the Project or in connection with the
Project, except information which the Recipient can show:
(a) was in the public domain prior to the Recipient's receipt of the same
hereunder, or which subsequently becomes part of the public domain (by
publication or otherwise) other than by the wrongful act of the
Recipient; or
-30-
<PAGE>
(b) was developed by the Recipient and in the Recipient's possession prior
to the Recipient's receipt of the same from said Discloser hereunder;
or
(c) was rightfully received by the Recipient from a third person who did
not acquire the same directly or indirectly from said Discloser, and
who did not require or no longer requires the Recipient to hold the
same in confidence; or
(d) is independently developed by or for the Recipient by someone who had
no access to the proprietary information received from said Discloser
hereunder;
it being understood that specific information received hereunder shall not be
deemed to be within any of the above exceptions merely because the same is
embraced by more general information within one of said exceptions, nor shall
any combination of features be considered within any of said exceptions merely
because the individual features, separately considered, are within said
exceptions.
2. With respect to all Discloser's Proprietary Information which is
initially disclosed in writing marked "[DISCLOSER'S NAME] PROPRIETARY" or which,
if initially orally disclosed and identified as proprietary, is confirmed to
Recipient in such a writing within ten [10]] business days after its initial
disclosure hereunder, Recipient agrees that (a) Recipient will use reasonable
efforts (which shall be not less than the same degree of care as Recipient uses
with respect to its own Proprietary Information) to prevent the disclosure of
the same to third persons, and (b) Recipient will use the same exclusively for
the Purpose, unless and until Discloser authorizes any other disclosure or use
in writing. Further, Recipient will only disclose Proprietary Information within
its company to those of its employees who have a need to know the sane for the
Purpose, and who have agreed to be bound by the use and disclosure restrictions
contained herein.
3. Each Recipient's obligations under this Agreement with respect to a
particular increment of the Discloser's Proprietary Information shall continue
for a period which is either (a) _____ [__] years after Recipient's initial
receipt of said increment hereunder, or (b) _____ [__] years after the
completion or other termination of the Project, whichever of (a) or (b) is
longer.
4. Nothing in this Agreement shall be construed to prohibit or restrict
Recipient's use or disclosure of information received from a third party who
Recipient reasonably believes did not receive such information (directly or
indirectly) from Discloser.
5. This Agreement shall be governed by and interpreted in accordance with
the laws of New York, not including any conflicts of law rules which may direct
the application of the laws of any other jurisdiction.
-31-
<PAGE>
IN WITNESS WHEREOF, each of GM and the Other Participant have caused this
Agreement to be executed by its duly authorized representative.
GENERAL MOTORS CORPORATION [OTHER PARTICIPANT]
By: /s/ THOMAS G. STEPHENS By:
---------------------------- ----------------------------
Name: Thomas G. Stephens Name:
---------------------------- ----------------------------
Title: Vice President Title:
---------------------------- ----------------------------
Date: 11/29/95 Date:
---------------------------- ----------------------------
-32-
<PAGE>
EXHIBIT 10.18
Final Draft: 12-20-95
---------------------
COMMERCIALIZATION AGREEMENT
---------------------------
This Commercialization Agreement (this "Commercialization Agreement") is
---------------------------
entered into as of the date of the last signature below (the "Effective Date"),
--------------
by and among SCIENTIFIC MEASUREMENT SYSTEMS, INC., a Texas corporation ("SMS"),
GENERAL ELECTRIC COMPANY, a New York corporation ("GE"), and EG&G, INC., a
Massachusetts corporation ("EG&G"), each of which is hereafter referred to as a
"Party," and all of which are collectively referred to as the "Parties".
----- -------
RECITALS:
---------
A. The Parties are some of the parties to a separate Volumetric Computed
Tomography Consortium Collaboration Agreement ("Collaboration Agreement") under
-----------------------
which the Parties and General Motors Corporation ("GM") have undertaken a
collaboration (the "Consortium") to participate in the Advanced Technology
Program administered by the National Institute of Standards and Technology
("NIST") to conduct certain specified research regarding a volumetric computed
----
tomography system for characterizing critical objects three dimensionally in
automotive applications as more fully described in the Statement of Work
attached to the Collaboration Agreement (the "Project").
-------
B. The Parties and GM intend to enter into a Cooperative Agreement with
NIST (the "Cooperative Agreement") setting forth, among other things, the terms
---------------------
and conditions under which NIST will fund a portion of the work required in
connection with the Project in accordance with the rules of the Advanced
Technology Program.
C. The Parties wish to enter into this Commercialization Agreement to
define their respective roles and responsibilities with respect to fostering the
practical application of certain technologies expected to be developed in the
Project.
Therefore, the Parties agree as follows:
Article 1 - Definitions
-----------------------
The following capitalized terms used in this Agreement shall have the
meanings defined in this Article:
1.1 "Background Technology," as used with respect to a particular Party,
---------------------
means inventions, processes, apparatus, compositions, techniques, and related
technical information, pertaining to Imaging Systems, or any component part
thereof, or any method for manufacturing or using the same, which are (a) owned
or controlled by said Party (in the sense of having the right to grant rights or
licenses hereunder without accounting to third parties) and (b) first developed
prior to the effective date or, if developed during the term of the
Collaboration Agreement, did not form part of that Party's work effort in
connection with the Project.
1
<PAGE>
1.2 "Background Works" as used with respect to a particular Party,
----------------
means works of authorship (including but not limited to computer software)
pertaining to Imaging Systems, or any component part thereof, which are first
created prior to the Effective Date or, if created during the term of the
Collaboration Agreement, did not form part of that Party's work effort in
connection with the Project.
1.3 "Confidential Background Information" as used with respect to a
-----------------------------------
designated Participant, means all information owned or controlled by said
Participant relating to Imaging Systems, or any component part thereof, or any
method for manufacturing or using the same, provided such information was
developed by said Participant prior to the effective date or, if developed
during the term of this Agreement, did not form part of that Participant's
assigned work effort in connection with the Project, which said Participant
discloses or otherwise makes available to another Participant ("recipient")
pursuant to the terms of this Agreement, except information which the recipient
can show:
(a) was in the public domain prior to the recipient's receipt of the same
hereunder, or which subsequently becomes part of the public domain (by
publication or otherwise) other than by the wrongful act of the
recipient; or
(b) was developed by the recipient and in the recipient's possession prior
to the recipient's receipt of the same from said Participant hereunder;
or
(c) was rightfully received by the recipient from a non-participant who
did not acquire the same directly or indirectly from said Participant,
and who did not require or no longer requires the recipient to hold the
same in confidence; or
(d) is independently developed by or for the recipient by someone who had
no access to the confidential information received from said
Participant hereunder;
it being understood that specific information received hereunder shall not be
deemed to be within any of the above exceptions merely because the same is
embraced by more general information within one of said exceptions, nor shall
any combination of features be considered within any of said exceptions merely
because the individual features, separately considered, are within said
exceptions.
1.4 "Confidential Project Information" as used with respect to a particular
--------------------------------
Participant, means all information relating to an Imaging System, or any
component part thereof, or any method for manufacturing or using the same, which
information is first developed by or for said Participant during the term of
this Agreement and in the performance of work in connection with the Project,
which the developing Participant discloses or otherwise makes available to
another Participant ("recipient") pursuant to the terms of this Agreement,
except information which the recipient can show:
(a) was in the public domain prior to the recipient's receipt of the same
hereunder, or which subsequently becomes part of the public domain (by
publication or otherwise) other than by the wrongful act of the
recipient; or
2
<PAGE>
(b) was developed by the recipient and in the recipient's possession prior
to the recipient's receipt of the same from said Participant
hereunder; or
(c) was rightfully received by the recipient from a non-participant who did
not acquire the same directly or indirectly from said Participant, and
who did not require or no longer requires the recipient to hold the
same in confidence; or
(d) is independently developed by or for the recipient by someone who had
no access to the confidential information received from said
Participant hereunder;
it being understood that specific information received hereunder shall not be
deemed to be within any of the above exceptions merely because the same is
embraced by more general information within one of said exceptions, nor shall
any combination of features be considered within any of said exceptions merely
because the individual features, separately considered, are within said
exceptions.
1.5 "Intellectual Property Rights" as used with respect to a particular
----------------------------
Participant, means all patent rights, trade secret rights and/or copyrights (but
specifically excluding trademarks) owned or controlled by said Participant (in
the sense of having the right to grant rights or licenses hereunder without
accounting to third parties) pertaining to Imaging Systems, or any component
part thereof, or any method for manufacturing or using the same. Intellectual
Property Rights includes, but is not limited to, patents and patent applications
in all countries covering Subject Inventions, as well as copyrights in all
countries covering Project Works.
1.6 The term "Apollo Technology" means technology licensed from GE to EG&G
-----------------
pursuant to their Research and Development Agreement, dated August 3, 1994,
generally including both (a) GE and/or EG&G technology, existing on August 3,
1994, in amorphous silicon panels (which panels comprise an amorphous silicon
photosensor array deposited on a glass substrate, a scintillator layer and a
sealed protective cover) and photosensors included therein, and improvements to
such panels and/or photosensors made by GE and/or EG&G during the term of said
Research and Development Agreement, and (b) GE and/or EG&G technology, existing
on August 3, 1994, for interconnecting, switching, interfacing and packaging
such panels and/or photosensors, and improvements to the same made by GE and/or
EG&G during the term of said Research and Development Agreement. In the event of
any conflict between this definition and the corresponding definitions contained
in said Research and Development Agreement, the latter definitions shall
control.
1.7 The terms "Imaging System," "Intellectual Property Rights," "Project
-------------- ---------------------------- -------
Works" and "Subject Invention" shall have the same meanings as defined in the
- ----- -----------------
Collaboration Agreement.
1.8 The term "SMS Exclusive Fields" means the following fields for using
--------------------
Imaging Systems which incorporate the Apollo Technology: casting applications,
automotive applications, aircraft engine applications, aerospace applications,
hazardous waste drum inspection applications, and other environmental
applications.
3
<PAGE>
1.9 The term "GEMS Exclusive Fields" means the following fields for using
---------------------
Imaging Systems: explosive detection applications.
1.10 The term "Non-Exclusive Fields" means all fields for using Imaging
--------------------
Systems, except SMS Exclusive Fields and GEMS Exclusive Fields.
Article 2 - Licenses for Imaging Systems
----------------------------------------
2.1 Licenses to GE. SMS agrees that it shall grant, and hereby grants, to
--------------
GE a paid-up, perpetual, worldwide, irrevocable license under SMS' Intellectual
Property Rights:
(a) to use Background Technology, Subject Inventions, Confidential
Background Information, Confidential Project Information, Background
Works and Project Works to manufacture, have manufactured, offer for
sale, sell, import and/or use Imaging Systems, as well as any component
part thereof, which license shall include the right to grant (directly
or indirectly) the necessary sublicenses to purchasers of said Imaging
Systems for such purchasers to use said Imaging Systems for their
intended purpose(s), without accounting to SMS; and
(b) to perform, display, reproduce, distribute, copy, and use any and all
Background Works and Project Works which constitute part of said
Imaging Systems, including the right to grant (directly or indirectly)
to purchasers of said Imaging Systems the sublicenses necessary for
such purchasers to use said Imaging Systems for their intended
purpose(s), without accounting to SMS.
Subject to the rights of the United States under the Collaboration
Agreement and/or the Cooperative Agreement: (1) The licenses granted in this
Paragraph shall be exclusive in the GEMS Exclusive Fields. (2) The licenses
granted in this Paragraph shall be nonexclusive in the Non-Exclusive Fields.
(3) The licenses granted in this Paragraph shall not apply to any of the SMS
Exclusive Fields during the period of SMS' exclusive therein pursuant to
Paragraph 2.2, but shall thereafter shall be nonexclusive in those SMS
Exclusive Fields.
2.2 Licenses to SMS. GE agrees that it shall grant, and hereby grants, to
---------------
SMS a paid-up, perpetual, worldwide, irrevocable license under GE's Intellectual
Property Rights:
(a) to use Background Technology, Subject Inventions, Confidential
Background Information, Confidential Project Information, Background
Works and Project Works as reasonably necessary to manufacture, have
manufactured, offer for sale, sell, import and/or use Imaging Systems,
as well as any component part thereof (other than detector array
panels and the associated read out electronics), which license shall
include the right to grant (directly or indirectly) the necessary
sublicenses to purchasers of said Imaging Systems for such purchasers
to use said Imaging Systems for their intended purpose(s), without
accounting to GE or EG&G; and
4
<PAGE>
(b) to perform, display, reproduce, distribute, copy, and use any and all
Background Works and Project Works which constitute part of said
Imaging Systems, which license shall include the right to grant
(directly or indirectly) to the purchasers of said Imaging Systems the
sublicenses necessary for such purchasers to use said Imaging Systems
for their intended purpose(s), without accounting to GE or EG&G.
Subject to the rights of GE in Paragraph 2.3, and the rights of the United
States under the Collaboration Agreement and/or the Cooperative Agreement:
(1) The licenses granted in this Paragraph shall be exclusive in the SMS
Exclusive Fields until five [5] years after the end of the Collaboration
Agreement and shall thereafter be nonexclusive in such SMS Exclusive Fields.
(2) The licenses granted in this Paragraph shall be nonexclusive in the
Non-Exclusive Fields. (3) The licenses granted in this Paragraph shall not
apply to any of the GEMS Exclusive Fields.
Nothing in this Paragraph shall be construed as granting a license to SMS
to manufacture detector array panels and/or associated read out electronics
incorporating the Apollo Technology, which rights of manufacture reside with
GE and/or with EG&G, pursuant to the Research and Development Agreement between
GE and EG&G, dated August 3, 1994.
2.3 Supply for GE's Use and Certain GE Vendors. Notwithstanding any
------------------------------------------
exclusivity of SMS' license under Paragraph 2.2, the Parties agree that GE
shall have the right to manufacture, or have manufactured, and repair or have
repaired, Imaging Systems for GE's own internal use for the manufacture and
repair of components of gas turbine or other products sold directly by GE. The
Parties also agree that GE shall have the right to manufacture, or have
manufactured, repair or have repaired, and sell Imaging Systems to GE's vendors
of components and services, to the extent (and only the extent) necessary for
such vendors' internal use in manufacturing and repairing, to GE's order, such
components of gas turbines or other products sold directly by GE. SMS agrees to
provide reasonable consultation to GE, under terms and conditions (including
consulting fees) to be negotiated, to assist GE in exercising its rights under
this Paragraph 2.3.
2.4 Development of Markets. During the exclusive period set forth in
----------------------
Paragraph 2.2, if GE decides that it wishes to enter into any market for selling
Imaging Systems within an SMS Exclusive Field, GE may do so only if the parties
agree to have SMS be the supplier of said Imaging Systems. If SMS is unwilling
to be such supplier on mutually acceptable reasonable terms, then GE may enter
such market without SMS. Conversely, if during said exclusivity period, SMS
determines that a given market within the SMS Exclusive Fields will not be
adequately satisfied by SMS using its own resources, SMS shall offer to GE an
opportunity to cooperate with SMS in jointly meeting that market. If GE is
unwilling to provide such cooperation on mutually acceptable, reasonable terms,
then SMS may seek the cooperation of one or more third parties to meet that
market, provided that such third parties do not compete with GE in the area of
CT and/or x-ray medical diagnostic imaging.
5
<PAGE>
Article 3 - Supply of Imaging Systems and Components
----------------------------------------------------
3.1 Supply of Detector Array Panels and Read Out Electronics. If requested
--------------------------------------------------------
by SMS, GE and EG&G will use reasonable efforts to supply suitable detector
array panels and associated read out electronics for SMS' use in manufacturing
and selling Imaging Systems in the SMS Exclusive Fields and the Non-Exclusive
Fields.
3.1.1 Detector Array Panels. Until such time as EG&G has established
---------------------
sustained commercial production of detector array panels, GE agrees that
GE's Corporate Research & Development Department (GE-CRD) will use its best
efforts to conduct a reasonable number of runs (with a reasonable number of
panels per run) in its facility to manufacture suitable detector array
panels for SMS, under GE-CRD's customary terms and conditions for such
runs, including the payment by SMS of GE-CRD's costs, plus a reasonable
fixed fee. Once EG&G has established sustained commercial production of
detector array panels, EG&G (as manufacturing licensee of GE's detector
array technology) agrees that it shall supply, or cause to be supplied, to
SMS a reasonable number of any detector array panels which SMS may order
from EG&G or EG&G's manufacturer of such detector array panels, for SMS'
use in manufacturing and selling Imaging Systems in the SMS Exclusive
Fields and the Non-Exclusive Fields. Such order may be for any size up to
the largest size and for any sampling geometries (e.g., pixel sizes) then
being manufactured commercially by or for EG&G. The price and other terms
for such supply shall be no less favorable to SMS than those under which
EG&G supplies the same or substantially similar panels in similar
quantities to its most favored purchasers at the time in question.
3.1.2 Read Out Electronics. GE agrees that it shall supply, or cause to be
--------------------
supplied, to SMS a reasonable number of read out electronics which SMS may
order from GE or GE's manufacturer of such read out electronics, for SMS'
use in manufacturing and selling Imaging Systems in the SMS Exclusive
Fields and the Non-Exclusive Fields. The specifications for such
electronics shall be as mutually agreed. The price and other terms for such
supply shall be no less favorable to SMS than those under which GE or its
manufacturer supplies the same or substantially similar electronics in
similar quantities to its most favored purchasers at the time in question.
3.2 Preferred Customer For Imaging Systems. Upon successful completion of
--------------------------------------
the Project, SMS agrees to manufacture and offer for sale the Imaging System(s)
developed under the Project. SMS agrees that GE shall be a preferred customer
for Imaging Systems manufactured by SMS following completion of the Project,
with the consequence that GE shall be entitled, upon written notice to SMS
received not later than the Project completion or termination, to purchase from
SMS up to one-quarter [1/4] of the first twelve [12] Imaging Systems
manufactured by SMS at a price which is the lowest of (a) SMS' direct cost and
reasonable overhead (accordingly to generally accepted accounting practices,
consistently applied) plus a ten percent [10%] fee, or (b) the most favorable
price on which SMS offers a substantially similar Imaging System to any person
(other than GM) for non-aircraft engine applications, or (c) three percent [3%]
less than the most favorable price on which SMS offers a substantially similar
Imaging System for sale to any person (other than GM) for aircraft engine
applications.
6
<PAGE>
Article 4 - Proprietary Information
-----------------------------------
4.1 Confidentiality. Except as reasonably required for the performance of
---------------
tasks under the Collaboration Agreement or the Cooperative Agreement, or for the
exercise of a Party's rights and licenses expressly granted under this
Commercialization Agreement or the Collaboration Agreement, each Party agrees
that (a) said Party shall maintain in confidence and prevent the disclosure to
others of all of the other Party's proprietary information which is initially
disclosed in writing marked "[DISCLOSER'S NAME] PROPRIETARY" or which, if
initially orally disclosed and identified as proprietary, is confirmed to
Recipient in such a writing within ten [10] business days after its initial
disclosure hereunder (including but not limited to both the Confidential Project
Information and all of the other Parties' Confidential Background Information
received by said Party hereunder), and (b) said Party shall not use the same for
any other purpose. Each Party's obligations under this Paragraph with respect to
a particular increment of the other Party's proprietary information shall
continue for a period which is either (1) ten [10] years after said Party's
initial receipt of said increment hereunder, or (2) ten [10] years after the
completion or other termination of the Project, whichever of (1) or (2) is
longer.
4.2 Permitted Disclosures. Notwithstanding anything to the contrary in this
---------------------
Article, any Party may disclose the other Party's Confidential Background
Information and/or Confidential Project Information (a) as may be required by
law so long as said Party secures whatever confidentiality protections are
available under said law, and (b) to third parties (such as contractors and
project consultants) as may reasonably be required to perform its tasks or
exercise its rights and licenses expressly granted under this Agreement or any
separate agreement pertaining to the practical application of Subject
Inventions and/or Project Works, and/or (c) to other third parties (such as
management consultants and parent companies) as may reasonably be required for
the oversight of the disclosing Party's business activities, provided that, in
cases (b) and (c), such third parties undertake with said Party written
obligations of confidentiality which are at least equivalent to those
undertaken by said Party hereunder, and obligations of limited use which are
reasonably appropriate for the situation. A Party may also disclose in any
patent application filed on said Party's Subject Invention another Party's
Confidential Background Information and/or Confidential Project Information
to the extent (and only the extent) as is reasonably necessary for said patent
application to comply with the patent laws of the country or countries in which
such patent application is to be filed. Any disclosures made as required by law
or in connection with a patent application under this Paragraph shall be
preceded by reasonable notice to the other Party, in order to allow that other
Party an opportunity to either contest the disclosure or determine if
alternative means are available to meet the requirement without disclosing the
information in question.
Article 5 - Liability, Insurance
--------------------------------
5.1 Disclaimer of Joint and Several Liability. Joint and several liability
-----------------------------------------
shall not attach to the Parties; no Party is responsible for the actions of any
other Party, but is only responsible for its own commercialization activities
under this Agreement. Each Party shall be responsible for any loss, cost,
damage, claim or other charge that arises out of or is caused by the actions of
that Party or its employees or agents or contractors. No Party shall be liable
for any loss, cost, damage, claim or other charge that arises out of or is
caused by the actions of any other Party or its employees or agents or
contractors.
7
<PAGE>
5.2 Party's Own Personnel and Property. Each Party shall assume the risk of
----------------------------------
any damage to or loss of its own property, as well as the risk of personal
injury or death of its employees, agents and contractors arising out of the
activities contemplated by this Agreement, and each Party agrees to release,
defend and indemnify the other Parties from and against any and all losses
and/or liabilities (including but not limited to attorneys' fees and other
litigation costs) arising out of any such property damage or loss, or personal
injury or death for which the indemnifying Party has assumed the risk hereunder,
notwithstanding the negligence, strict liability, or breach of warranty of said
other Party or of said other Party's employees, agents or contractors.
5.3 Use of Project Results. Each Party ("Party User") shall assume the risk
----------------------
of its use of anything (including but not limited to technical information,
Subject Inventions, Project Works and/or equipment, as well as any consultation
provided pursuant to Paragraph 3.2) developed by or provided to said Party User
in connection with the Project ("Project Results"), and each Party User agrees
to defend and indemnify each other Party from and against any and all losses
and/or liabilities (including but not limited to attorneys' fees and other
litigation costs) for any damage to or loss of third party property, and/or the
personal injury or death of any third party, arising out of such Party User's
use of Project Results, except to the extent (and only the extent) to which such
losses or liabilities have been determined by final, nonappealable judgment to
have been caused by the gross negligence or wilful misconduct of said other
Party.
5.4 Notice and Defense. Each Party obligates itself to notify the other
------------------
Parties promptly and in writing of any lawsuit threatened or filed against said
Party which might give rise to the indemnities of this Article. Each indemnified
Party shall provide such reasonable assistance and cooperation as may be
requested by the indemnifying Party in connection with the defense or
prosecution of any such lawsuit.
5.5 Settlements and Compromises. No Party shall settle or compromise any
---------------------------
claims or lawsuit relating to the liabilities and/or losses addressed in this
Article without the written consent of the other involved Parties if the
settlement or compromise obliges such other Party(s) to make any payment, or to
part with any property, or to assume any obligation, or to grant any licenses
or other rights, or to be subject to any injunction by reason of such settlement
or compromise.
5.6 Indemnity Effectiveness. The indemnities provided pursuant to this
-----------------------
Article shall be effective to the maximum extent, scope and amount permitted by
the applicable law.
5.7 Consequential Damages. Excluding intentional and knowing breach of the
---------------------
obligations of Article 4 (Proprietary Information), no Party shall be liable to
any other Party for indirect, incidental and/or consequential damages (such as
loss of profits, etc., but excluding personal injury or property damage covered
by the indemnities of this Article) arising out of the execution or performance
of this Agreement, regardless of the cause and notwithstanding the negligence,
strict liability, or breach of warranty of said Party.
5.8 Insurance. Each Party shall obtain and maintain appropriate public
---------
liability and casualty insurance, or adequate levels of self insurance, to
insure against any liability caused by that Party's activities under this
Agreement and/or the Cooperative Agreement. Within ninety [90] days after this
8
<PAGE>
Agreement has been signed by all the Parties, each Party who is not entirely
self insured for matters relating to this Agreement shall obtain from its
relevant insurers, and deliver to the other Parties, a written waiver of
subrogation for the benefit of the other Parties under each and every purchased
insurance policy which said Party has which is relevant to said Party's
activities under this Agreement. Such a written waiver will also be obtained
and promptly delivered for each relevant new or renewal policy obtained by
either Party during the term of this Agreement. In lieu of obtaining such a
waiver for a particular policy of its purchased insurance, a Party may instead
arrange to have the other Parties named as additional insureds on said policy.
Each Party shall be responsible for its own self insurance retentions and for
all deductible amounts under its purchased insurance.
5.9 Disclaimers of Warranty. Except as otherwise expressly set forth
-----------------------
herein, EACH PARTY EXPRESSLY DISCLAIMS ANY AND ALL WARRANTIES (EXPRESS, IMPLIED,
STATUTORY OR OTHERWISE), INCLUDING BUT NOT LIMITED TO WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO (A)
SAID PARTY'S PERFORMANCE, AND (B) ANY PRODUCT OR ASSOCIATED DATA PROVIDED BY
SAID PARTY HEREUNDER.
Article 6 - Disputes
--------------------
6.1 Disputes Under this Agreement. Any disagreement, claim or dispute
-----------------------------
between or among Parties arising from or in connection with the Project or this
Agreement shall be submitted as soon as practicable after such dispute arises to
senior executives from each Party for discussion and possible resolution. If
within ninety days after their discussion, such executives are unable to resolve
the matter, any involved Party may resort to any available legal remedy.
Article 7 - Notices
-------------------
Any notice or request with reference to this Agreement shall be made by
first class mail postage prepaid, telex, or facsimile to the addresses shown
below:
Scientific Measurement Systems, Inc.
Forrest Hopkins
Scientific Measurement Systems, Inc.
2210 Denton Drive Suite 106
Austin, Texas 78758
Phone: (512) 837-4712
Fax: (512) 837-9082
General Electric Company
General Electric Aircraft Engines
Tom Birdwell
One Neuman Way MD-8
Cincinnati, Ohio 45215
Fax: 513-552-4857
9
<PAGE>
EG&G Inc.
Andras Buser
EG&G, Inc.
EG&G Optoelectronics Group
2175 Mission College Blvd.
Santa Clara, CA 95054
Fax: 408-565-0777
Article 8 - General Provisions
------------------------------
8.1 Remedies. Unless otherwise expressly provided herein, the rights and
--------
remedies of the Parties hereunder are in addition to, and not in limitation of,
other rights and remedies under this Agreement, at law or in equity, and the
exercise of one right or remedy shall not be deemed a waiver of any other right
or remedy.
8.2 Execution and Counterparts. The Parties agree that this Agreement may
--------------------------
be executed in counterparts, and that it is the intent of the Parties that any
copy signed by a party shall be fully enforceable against such party.
8.3 Entire Agreement. This Agreement, including the exhibits attached
----------------
hereto, together with the Cooperative Agreement and the Collaborative Agreement,
constitutes the entire agreement among the Parties regarding the subject matter
herein, and supersedes any previous understanding, commitments or agreements,
oral or written.
8.4 Termination. This Agreement shall cease and terminate upon the first to
-----------
occur of the following events or dates, except that in the case of a termination
under event (a), the nonbreaching Parties may elect to terminate this Agreement
only as to the breaching Party, with the Agreement to remain in effect for the
other Parties unless otherwise agreed by said other Parties:
(a) at the option of and upon written notice by the nonbreaching Parties,
upon a Party's failure to cure any material breach within a reasonable
period (not less than thirty [30] days) after such Party's receipt of
written notice of the details of such breach; or
(b) December 31, 2005; or
(c) mutual agreement of all Parties.
8.5 Surviving Rights and Obligations. Termination of this Agreement shall
--------------------------------
not:
(a) release any Party from any claim of any other Party accrued hereunder
prior to the effective date of such termination; or
(b) affect any Party's rights or obligations under Articles 2, 4, 5 or 6,
10
<PAGE>
which rights and obligations shall survive termination of this Agreement.
8.6 Amendments. No amendment or modification of this Agreement shall be
----------
valid unless made in writing and signed by all Parties.
8.7 Assignment. This Agreement shall not be assigned by any Party without
----------
the express written consent of the other Parties, which consent shall not be
unreasonably withheld. This consent shall be granted routinely in connection
with a Party's change of its name or a sale of the Party's business or the
operating unit of such business responsible for the Project unless such event
materially affects any other Party.
8.8 Effective Date. This Agreement shall be effective as of the date on
--------------
which the last of the Parties signs this Agreement or a counterpart hereof.
8.9 Force Majeure. No Party shall be liable, in respect to any delay in
-------------
completion of work hereunder or of the non-performance of any term or condition
of this Agreement directly or indirectly resulting from delays by acts of God;
acts of the public enemy; strikes; lockouts; epidemic and riots; power failure;
water shortage or adverse weather conditions; or other causes beyond the control
of the Parties. In the event of any of the foregoing, the time for performance
shall be equitably and immediately adjusted. The Parties shall resume the
completion of work under this Agreement as soon as possible subsequent to any
delay due to force majeure.
8.10 Governing Law. This Agreement shall be governed by and interpreted in
-------------
accordance with the laws of New York, not including any conflicts of law rules
which may direct the application of the laws of any other jurisdiction.
8.11 Headings. Article and section headings contained in this Agreement
--------
are included for convenience only and form no part of the agreement among the
Parties.
8.l2 Precedence. Should there be any conflict between the terms and
----------
conditions of (a) this Agreement and (b) the Collaboration Agreement and (c) the
Cooperative Agreement, the order of precedence shall be the Cooperative
Agreement over the other two, and this Agreement over the Collaboration
Agreenment, as to all matters expressly addressed in this Agreement.
8.13 Severability. If any provision of this Agreement is declared invalid
------------
by any court or government agency, all other provisions shall remain in full
force and effect.
8.14 Use of Names. No Party shall use in any advertising, promotional or
------------
sales literature the name of any other Party without prior written consent.
8.15 Waivers. Waiver by any Party of any breach or failure to comply with
-------
any provision of this Agreement by another Party shall not be construed as, or
constitute, a continuing waiver of such provision or a waiver of any other
breach of or failure to comply with any other provision of this Agreement.
11
<PAGE>
8.16 Acquisition of SMS. In the event that all or a portion of SMS is
------------------
acquired by a third party who competes with GE in the area of CT and/or x-ray
medical diagnostic imaging at any time during the first ten [10] years after the
termination of the Collaboration Agreement, the licenses granted by GE to SMS
under Paragraph 2.2 hereof shall be terminated unless SMS and said third party
can establish, to GE's reasonable satisfaction, that none of the Apollo
Technology wi11 be communicated to or used by said third party.
In Witness Whereof, the Parties have caused this Agreement to be executed
by their duly authorized officers or representatives on the dates shown below.
SCIENTIFIC MEASUREMENT SYSTEMS GENERAL ELECTRIC COMPANY
By: /s/ LARRY SECREST By: /s/ WILLIAM D. ROUSE
----------------------------- -------------------------------
Name: Larry Secrest Name: William D. Rouse
--------------------------- -------------------------------
Title: President & CEO Title: Organization Leader
-------------------------- ------------------------------
Date: 12-22-95 Date: 12-22-95
--------------------------- -------------------------------
EG&G, INC.
By: /s/ FRED B. PARKS
------------------------
Name: Fred B. Parks
------------------------
Title: Executive Vice President
and Chief Operating Officer
------------------------
Date: December 22, 1995
------------------------
12
<PAGE>
EXHIBIT 10.19
- --------------------------------------------------------------------------------
FORM CD-451 U.S. DEPARTMENT OF COMMERCE [_] GRANT [X] COOPERATIVE
(REV. 10-93) AGREEMENT
DAO 203-26 --------------------------------
AMENDMENT TO FINANCIAL ASSISTANCE AWARD ACCOUNTING CODE
*** SEE BELOW
- --------------------------------------------------------------------------------
RECIPIENT NAME AWARD NUMBER
Scientific Measurement Systems, Inc. 7ONANB5Hl148
- --------------------------------------------------------------------------------
STREET ADDRESS AMENDMENT NUMBER
2209 Donley Drive Ol
--------------------------------
EFFECTIVE DATE
January 19, 1996
- --------------------------------------------------------------------------------
CITY, STATE, ZIP CODE EXTEND WORK COMPLETION TO
Austin, TX 78758 -0-
- --------------------------------------------------------------------------------
DEPARTMENT OF COMMERCE OPERATING UNIT
NATIONAL INSTITUTE OF STANDARDS AND TECHNOLOGY, GRANTS OFFICE
BUILDING 301, ROOM B129, GAITHERSBURG, MARYLAND 20899-0001
- --------------------------------------------------------------------------------
PREVIOUS TOTAL
COSTS ARE REVISED AS FOLLOWS: ESTIMATED COSTS ADD DEDUCT ESTIMATED COST
- --------------------------------------------------------------------------------
FEDERAL SHARE OF COST $3,753,156.00 $-0- $-0- $3,753,156.00
- --------------------------------------------------------------------------------
RECIPIENT SHARE OF COST $3,906,346.00 $-0- $-0- $3,906,346.00
- --------------------------------------------------------------------------------
TOTAL ESTIMATED COST $7,659,502.00 $-0- $-0- $7,659,502.00
- --------------------------------------------------------------------------------
REASON(S) FOR AMENDMENT
PROJECT TITLE: `Fast, Volumetric X-ray Scanner for Three Dimensional
Characterization of Critical Objects'
This cooperative agreement is amended to: (1) remove Special Award Condition No.
9 entitled, `Contingency.' A fully executed Joint Venture Agreement, the
notification to the Department of Justice (DOJ) and the Federal Trade Commission
(FTC) of the formation of the Joint Venture, and the budget information were
received on January 16, 1996, and approved; (2) correct the street address in
Special Award Condition No. 1; and (3) add Special Award Condition No. 9
entitled, `Requirement To Announce Federally Funded Projects or Programs.'
- --------------------------------------------------------------------------------
This Amendment approved by the Grants Officer is issued in triplicate and
constitutes an obligation of Federal funding. By signing the three documents,
the Recipient agrees to comply with the Amendment provisions checked below and
attached, as well as previous provisions incorporated into the Award. Upon
acceptance by the Recipient, two signed Amendment documents shall be returned to
the Grants Officer and the third document shall be retained by the Recipient. If
not signed and returned by the Recipient within 15 days of receipt, the Grants
Officer may declare this Amendment null and void.
[_] Special Award Conditions
[_] Line Item Budget
[_] Other(s):
-------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
**ACCOUNTING CODE: CC 51505329 Ob. Cl. 4110 Req. No. 5150-6246 $0.00
150/JBoudreaux B-AE93-Y-H-F-N-A-48-05000 EIN: 74-2048763
- --------------------------------------------------------------------------------
SIGNATURE OF DEPARTMENT OF COMMERCE TITLE DATE
GRANTS OFFICER
Lisa K. Jandovitz /s/ Lisa K. Jandovitz Grants Officer 1/30/96
- --------------------------------------------------------------------------------
TYPED NAME AND SIGNATURE OF TITLE DATE
AUTHORIZED RECIPIENT 0FFICIAL
Forrest Hopkins /s/ Forrest Hopkins Vice President of Research & Dev. 2/2/96
- --------------------------------------------------------------------------------
ELECTRONIC FORM 3
<PAGE>
SPECIAL AWARD CONDITIONS
ADVANCED TECHNOLOGY PROGRAM - JOINT VENTURE
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
COOPERATIVE AGREEMENT NO. 7ONANB5H1l48
AMENDMENT - 0l
Correct the following:
1. RECIPIENT JOINT VENTURE ADMINISTRATOR CONTACT
The Recipient Joint Venture Administrator Contact's name, title, address, and
telephone number are:
(Technical) Dr. Forrest Hopkins
(512) 837-4712
(Administrative) Mr. Keith Jezek, (512) 837-4712
Scientific Measurement Systems, Inc.
2210 Denton, Suite 106
Austin, TX 78758
Add the following:
9. REQUIREMENT TO ANNOUNCE FEDERALLY FUNDED PROJECTS OR PROGRAMS
In accordance with Section 508 of Public Law 103-333, when issuing statements,
press releases, requests for proposals, bid solicitations and other documents
describing projects or programs funded in whole or in part with Federal money,
all grantees receiving Federal funds, including but not limited to State and
local governments and recipients of Federal research grants, shall clearly state
(1) the percentage of the total costs of the program or project which will be
financed with Federal money, (2) the dollar amount of Federal funds for the
project or program, and (3) percentage and dollar amount of the total costs of
the project or program that will be financed by nongovernmental sources.
ALL OTHER TERMS AND CONDITIONS REMAIN IN EFFECT
<PAGE>
- --------------------------------------------------------------------------------
FORM CD-450 U.S. DEPARTMENT OF COMMERCE [_] GRANT [X] COOPERATIVE
(REV. 10-93) AGREEMENT
DAO 203-26 --------------------------------
FINANCIAL ASSISTANCE AWARD ACCOUNTING CODE
*** SEE BELOW
- --------------------------------------------------------------------------------
RECIPIENT NAME AWARD NUMBER
Scientific Measurement Systems, Inc. 7ONANB5Hl148
- --------------------------------------------------------------------------------
STREET ADDRESS FEDERAL SHARE OF COST
2209 Donley Drive $3,753,156.00
- --------------------------------------------------------------------------------
CITY, STATE, ZIP CODE RECIPIENT SHARE OF COST
Austin, TX 78758 $3,906,346.00
- --------------------------------------------------------------------------------
AWARD PERIOD TOTAL ESTIMATED COST
September 1, 1995 - August 31, 1998 $7,659,502.00
- --------------------------------------------------------------------------------
DEPARTMENT OF COMMERCE OPERATING UNIT
NATIONAL INSTITUTE OF STANDARDS AND TECHNOLOGY, GRANTS OFFICE
BUILDING 301, ROOM B129, GAITHERSBURG, MARYLAND 20899-0001
- --------------------------------------------------------------------------------
AUTHORITY
Authorized by Section 5131 of P.L. 100-418, codified at 15 U.S.C. 278n, as
modified by P.l. 102-245, the Final Rule 15 CFR Part 295, and Program
Announcement ATP 95-02.
- --------------------------------------------------------------------------------
PROJECT TITLE
'Fast, Volumetric X-ray Scanner for Three Dimensional Characterization of
Critical Objects'
- --------------------------------------------------------------------------------
This Award approved by the Grants Officer is issued in triplicate and
constitutes an obligation of Federal funding. By signing the three documents,
the Recipient agrees to comply with the Award provisions checked below and
attached. Upon acceptance by the Recipient, two signed Award documents shall be
returned to the Grants Officer and the third document shall be retained by the
Recipient. If not signed and returned by the Recipient within 15 days of
receipt, the Grants Officer may declare this Award null and void.
[X] Department of Commerce Financial Assistance Standard Terms and Conditions
[X] Special Award Conditions
[X] Line Item Budget
[_] 0MB Circular A-21, Cost Principles for Educational Institutions
[_] 0MB Circular A-87, Cost Principles for State and Local Governments
[X] 0MB Circular A-110, Grants and Agreements with Institutions of Higher
Education, Hospitals, and Other Nonprofit Organizations Uniform
Administrative Requirements
[_] 0MB Circular A-122, Cost Principles for Nonprofit Organizations
[_] 15 CFR Part 24, Uniform Administrative Requirements for Grants and
Cooperative Agreements to State and Local Governments
[_] CFR Part 29a, Audit Requirements for State and Local Governments
[_] 15 CFR Part 29b, Audit Requirements for Institutions of Higher Education and
Nonprofit Organizations
[X] 48 CFR Part 31, Contract Cost Principles and Procedures
[X} Other(s): General Terms and Conditions Advanced Technology Program - Joint
----------------------------------------------------------------
Venture
- --------------------------------------------------------------------------------
**ACCOUNTING CODE: CC 51505329 Ob.Cl. 4110 Req.No. 5150-6246 $1,211,334.00
- --------------------------------------------------------------------------------
B-AE93-Y-C-F-N-A-48-05000 E.I.N. 150 J. Boudreaux
- --------------------------------------------------------------------------------
SIGNATURE OF DEPARTMENT OF COMMERCE TITLE DATE
GRANTS OFFICER
Lisa K. Jandovitz /s/ Lisa K. Jandovitz Grants Officer 9/26/95
- --------------------------------------------------------------------------------
TYPED NAME AND SIGNATURE OF TITLE DATE
AUTHORIZED RECIPIENT 0FFICIAL
- --------------------------------------------------------------------------------
ELECTRONIC FORM 3
<PAGE>
SPECIAL AWARD CONDITIONS
ADVANCED TECHNOLOGY PROGRAM - JOINT VENTURE
COOPERATIVE AGREEMENT NO. 7ONANB5H11148
1. RECIPIENT JOINT VENTURE ADMINISTRATOR CONTACT
The Recipient Joint Venture Administrator Contact's name, title, address, and
telephone number are:
(Technical) Dr. Forrest Hopkins
(512) 837-4712
(Administrative) Mr. Keith Jezek (512) 8374712
Scientific Measurement Systems, Inc.
2209 Donley Drive
Austin, TX 78758
2. JOINT VENTURE MEMBERS
The organizations named below have been approved as joint venture members to
conduct research described herein. Any changes or new members must be approved
in writing by the Grants Officer:
GE Corporate Research and Development
General Motors
General Electric-Aircraft Engines
EG&G Reticon
Scientific Measurement Systems, Inc.
3. GRANTS OFFICER
The Grants Officer's name, address, and telephone number are:
Lisa K. Jandovitz
National Institute of Standards and Technology
Bldg. 301, Room B129
Gaithersburg, MD 20899-0001
(301) 975-5044
4. GRANTS SPECIALIST
The Grants Specialist's name, address, and telephone number are:
Gwendolyn Simpson
National Institute of Standards and Technology
Bldg. 301, Room B129
Gaithersburg, MD 20899-0001
(301) 975-6672
5. PROJECT MANAGEMENT
a. The Technical Project Manager's name, address, and telephone number are:
Jack Boudreaux
National Institute of Standards and Technology
Bldg. 101, Room A625
Gaithersburg, MD 20899-0001
(301) 975-3560
b. The Business Project Manager's name, address, and telephone number are:
Michael Daum
National Institute of Standards and Technology
Bldg. 101, Room A303
Gaithersburg, MD 20899-0001
(301) 975-45487
6. PROJECT DESCRIPTION
All research shall be conducted in accordance with the Recipient's proposal
dated February 28, 1995 and revised budget NIST Form 1263 dated September 22,
1995.
7. FUNDING LIMITATIONS
The scope of work and budget incorporated into this award covers a three-year
----------
period (referred to as the "project period") for a total amount of $3,753,156.00
-------------
in Federal funds. However, Federal funding available at this time is limited to
$1,211,334.00 for the first year period (referred to as the "budget period").
- -------------
Receipt of any additional funding up to the level projected under this award is
contingent upon the availability of funds from Congress, satisfactory
performance, and will be at the sole discretion of the Agency. The Recipient may
not obligate, incur any expenditures, nor engage in any commitments which
involve any amount in excess of the Federal amount presently available. No legal
liability will exist or result on the part of the Federal Government for payment
of any portion of the remaining funds which have not been made available under
the award. The notice of availability or non-availability of additional funding
for the second and third year(s) will be made in writing only by the Grants
------ ----- ------
Officer. This written notification shall be made prior to or no later than 30
- -------
days after the expiration of each year's activities.
<PAGE>
8. COST SHARE
For the first year period, the cost sharing ratio applicable to this award is
the Recipient's contribution of 51% ($1,260.776.00) and NIST's contribution of
49% ($1,211,334). Recipients must meet or exceed the cost share ratio on a
quarterly financial reporting basis.
9. CONTINGENCY:
No cost shall be charged to this cooperative agreement until a Joint Venture
(JV) Agreement has been submitted to and approved by the Grants Officer in
writing. This cooperative agreement will be terminated for cause, and no cost
will be paid under this award if the Recipient fails to submit a NIST accepted
fully executed JV Agreement, a copy of the notification to the Department of
Justice and Federal Trade Commission within 90 days from the date of receipt
of this cooperative agreement. The JV Agreement must include, but not be
limited to, terms which designate an organization to serve as the Administrator
which has power of attorney to enter into this cooperative agreement for and on
behalf of the entire Joint Venture; provide protection of intellectual property
and providing a Government Use License; and address liability of the Joint
Venture members.
Also, pending budget and administrative issues must be resolved within this 90
90 day period.
Special Award Conditions/ATP-JV/07-95
<PAGE>
EXHIBIT 10.20
PROMISSORY NOTE
---------------
$1,250,000.00 Houston, Texas June 15, 1996
FOR VALUE RECEIVED, the undersigned, SCIENTIFIC MEASUREMENT SYSTEMS, INC.,
a Texas corporation ("Maker"), hereby promises to pay to the order of WELLS
FARGO HSBC TRADE BANK, N.A., a national banking association ("Payee"), at its
offices at 1000 Louisiana, Houston, Harris County, Texas, in lawful money of the
United States of America, the principal sum of ONE MILLION TWO HUNDRED FIFTY
THOUSAND AND NO/100 DOLLARS ($1,250,000.00), or so much thereof as may be
advanced and outstanding hereunder, together with interest on the outstanding
principal balance from day to day remaining, at a varying rate per annum which
shall from day to day be equal to the lesser of (a) the Maximum Rate
(hereinafter defined) or (b) the sum of the Prime Rate (hereinafter defined) of
Payee in effect from day to day plus two percent (2.0%), and each change in the
rate of interest charged hereunder shall become effective, without notice to
Maker, on the effective date of each change in the Prime Rate or the Maximum
Rate, as the case may be; provided, however, if at any time the rate of interest
specified in clause (b) preceding shall exceed the Maximum Rate, thereby causing
the interest rate hereon to be limited to the Maximum Rate, then any subsequent
reduction in the Prime Rate shall not reduce the rate of interest hereon below
the Maximum Rate until the total amount of interest accrued hereon equals the
amount of interest which would have accrued hereon if the rate specified in
clause (b) preceding had at all times been in effect. All past due principal
and interest on this Note shall bear interest at the Default Rate (hereinafter
defined).
Principal of and interest on this Note shall be due and payable as follows:
(a) Accrued and unpaid interest on this Note shall be due and payable
monthly, on the first (1st) day of each month commencing on July 1, 1996,
and upon the maturity of this Note, however such maturity may be brought
about; and
(b) All outstanding principal of this Note and all accrued interest
thereon shall be due and payable on June 15, 1997.
Principal of this Note shall be subject to mandatory prepayment at the
times described in Sections 2.03 and 2.06 of the Agreement (hereinafter
defined).
Interest on the indebtedness evidenced by this Note shall be computed on
the basis of a year of 360 days and the actual number of days elapsed (including
the first day but excluding the last day) unless such calculation would result
in a usurious rate in
<PAGE>
which case interest shall be calculated on the basis of a year of 365 or 366
days, as the case may be.
As used in this Note, the following terms shall have the respective
meanings indicated below:
"Agreement" means that certain Exim Guaranteed Loan Agreement dated as
---------
of June 15, 1996 between Maker and Payee, as the same may be amended or
modified from time to time.
"Default Rate" shall mean the lesser of (a) the sum of the Prime Rate
------------
plus five percent (5%) or (b) the Maximum Rate.
"Maximum Rate" means the maximum rate of nonusurious interest
------------
permitted from day to day by applicable law, including as to Article 5069-
1.04, Vernon's Texas Civil Statutes (and as the same may be incorporated by
reference in other Texas statutes), but otherwise without limitation, that
rate based upon the "indicated rate ceiling" and calculated after taking
into account any and all relevant fees, payments, and other charges in
respect of this Note which are deemed to be interest under applicable law.
"Prime Rate" shall mean that variable rate of interest per annum
----------
established by Payee from time to time as its prime rate which shall vary
from time to time. Such rate is set by Payee as a general reference rate
of interest, taking into account such factors as Payee may deem
appropriate, it being understood that many of Payee's commercial or other
loans are priced in relation to such rate, that it is not necessarily the
lowest or best rate charged to any customer and that Payee may make various
commercial or other loans at rates of interest having no relationship to
such rate.
This Note (a) is the Note provided for in the Agreement and (b) is secured
as provided in the Agreement. Payment of this Note is guaranteed by, among other
things, the Export-Import Bank of the United States pursuant to the EXIM
Guaranty (as defined in the Agreement).
Notwithstanding anything to the contrary contained herein, no provisions of
this Note shall require the payment or permit the collection of interest in
excess of the Maximum Rate. If any excess of interest in such respect is
herein provided for, or shall be adjudicated to be so provided, in this Note or
otherwise in connection with this loan transaction, the provisions of this
paragraph shall govern and prevail, and neither Maker nor the sureties,
guarantors, successors or assigns of Maker shall be obligated to pay the excess
amount of such interest, or any other excess sum paid for the use, forbearance
or detention of sums loaned pursuant hereto. If for any reason interest in
excess of the Maximum Rate shall be deemed charged, required or permitted by
-2-
<PAGE>
any court of competent jurisdiction, any such excess shall be applied as a
payment and reduction of the principal of indebtedness evidenced by this Note;
and, if the principal amount hereof has been paid in full, any remaining excess
shall forthwith be paid to Maker. In determining whether or not the interest
paid or payable exceeds the Maximum Rate, Maker and Payee shall, to the extent
permitted by applicable law, (a) characterize any non-principal payment as an
expense, fee, or premium rather than as interest, (b) exclude voluntary
prepayments and the effects thereof, and (c) amortize, prorate, allocate, and
spread in equal or unequal parts the total amount of interest throughout the
entire contemplated term of the indebtedness evidenced by this Note so that the
interest for the entire term does not exceed the Maximum Rate.
Upon the occurrence of any Event of Default, as such term is defined in the
Agreement, the holder hereof may, at its option, (a) declare the entire unpaid
principal of and accrued interest on this Note immediately due and payable
without notice, demand or presentment, all of which are hereby waived, and
upon such declaration, the same shall become and shall be immediately due and
payable, (b) foreclose or otherwise enforce all liens or security interests
securing payment hereof, or any part hereof, (c) offset against this Note any
sum or sums owed by the holder hereof to Maker, (d) exercise its rights under
the EXIM Guaranty and (e) take any and all other actions available to Payee
under this Note, the Agreement, the Loan Documents (as such term is defined in
the Agreement) at law, in equity or otherwise. Failure of the holder hereof to
exercise any of the foregoing options shall not constitute a waiver of the right
to exercise the same upon the occurrence of a subsequent Event of Default.
If the holder hereof expends any effort in any attempt to enforce payment
of all or any part or installment of any sum due the holder hereunder, or if
this Note is placed in the hands of an attorney for collection, or if it is
collected through any legal proceedings, Maker agrees to pay all costs,
expenses, and fees incurred by the holder, including all reasonable attorneys'
fees.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF TEXAS AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. THIS
NOTE IS PERFORMABLE IN HARRIS COUNTY, TEXAS.
Maker and each surety, guarantor, endorser, and other party ever liable for
payment of any sums of money payable on this Note jointly and severally waive
notice, presentment, demand for payment, protest, notice of protest and non-
payment or dishonor, notice of acceleration, notice of intent to accelerate,
notice of intent to demand, diligence in collecting, grace, and all other
formalities of any kind, and consent to all extensions without notice for any
period or periods of time and partial payments, before or after maturity, and
any impairment of any collateral securing this Note, all without prejudice to
the holder. The holder shall similarly have the right to deal in any way, at any
time,
-3-
<PAGE>
with one or more of the foregoing parties without notice to any other party, and
to grant any such party any extensions of time for payment of any of said
indebtedness, or to release or substitute part or all of the collateral securing
this Note, or to grant any other indulgences or forbearances whatsoever, without
notice to any other party and without in any way affecting the personal
liability of any party hereunder.
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
By: /s/ LARRY SECREST
-----------------------------------------
Larry Secrest
Chairman
-4-
<PAGE>
SECURITY AGREEMENT
THIS SECURITY AGREEMENT dated as of June 15, 1996 (this "Agreement"), is
by and between SCIENTIFIC MEASUREMENT SYSTEMS, INC., a Texas corporation (the
"Debtor") and WELLS FARGO HSBC TRADE BANK, N.A., a national banking association
("Secured Party").
R E C I T A L S:
---------------
A. Debtor and Secured Party have entered into that certain Exim Guaranteed
Loan Agreement of even date herewith (such Loan Agreement, as the same may be
amended or modified from time to time, is referred to herein as the "Loan
Agreement").
B. Secured Party has conditioned its obligations under the Loan Agreement
upon, among other things, the execution and delivery of this Agreement by
Debtor.
NOW THEREFORE, in consideration of the premises and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
ARTICLE I
Security Interest
-----------------
Section 1.01. Security Interest. Debtor hereby grants to Secured Party a
-----------------
security interest in the following property, whether now owned or existing or
hereafter arising or acquired and wherever arising or located (such property
being hereinafter sometimes called the "Collateral"):
(a) all of its (i) accounts, accounts receivable, contract rights and
general intangibles, (ii) inventory, including raw materials, work-in-
process, finished goods and other tangible property, (iii) chattel paper,
documents, instruments, general intangibles and patents, and (iv) all
products and proceeds thereof, all whether now owned or hereafter acquired,
which arise from or in connection with or are related in any manner to (A)
that certain Purchase Order No. 1713260 between Bridgestone LTD and Debtor,
(B) that certain Purchase Order No. 45065147/01/444 between Continental AG
and Debtor, (C) that certain Purchase Order No. 23U50346 between Swiss
Federal Labs for Materials, Testing and Research and Debtor and (D) that
certain Purchase Order No. 60681/71 between Fiat SpA and Debtor.
(b) all of its accounts, contract rights, funds on deposit with
Secured Party and general intangibles, whether now owned or hereafter
acquired, including, without
<PAGE>
limitation, all accounts receivable, lease receivables and note
receivables, all cash, notes, drafts, acceptances, instruments and chattel
paper arising therefrom, all returned and repossessed goods arising from or
relating to any such accounts, or other proceeds of any sale, lease or
other disposition of inventory, all tax refunds of whatever nature, and all
tradenames, trademarks, patents and other licenses and all proceeds
(including insurance proceeds) and products thereof;
(c) all of its inventory, whether now owned or hereafter acquired,
including, without limitation, all raw materials, goods in process,
finished goods and other tangible personal property held for sale or lease
or furnished or to be furnished under contracts for service or used or
consumed in Debtor's trade or business and all additions, accessions,
substitutions, attachments and replacements thereto and all contracts with
respect thereto and all documents of title evidencing or representing any
part thereof and all products and proceeds (including insurance proceeds)
thereof; and
(d) all of its machinery, equipment, furniture, fixtures and
personalty (including, without limitation, all tradenames, trademarks,
patents and other licenses) of every nature and description, whether now
owned or hereafter acquired, and all appurtenances and additions thereto
and substitutions and replacements therefor, wheresoever located, including
all tools, parts and accessories used in connection therewith, and all
products and proceeds thereof (including insurance proceeds).
The Collateral described in paragraph (a) is referred to in this Agreement
as the "Contract Collateral". The domestic accounts receivable of Debtor are
referred to in this Agreement as the "Other Lender Collateral". Frost National
Bank is referred to in this Agreement as the "Other Lender".
Section 1.02. Obligations. The Collateral shall secure the following
-----------
obligations, indebtedness, and liabilities (all such obligations, indebtedness,
and liabilities being hereinafter sometimes called the "Obligations"):
(a) the obligations and indebtedness of Debtor to Secured Party
evidenced by that certain promissory note in the original principal amount
of $1,250,000.00 dated June 15, 1996, executed by Debtor and payable to the
order of Secured Party;
(b) the obligations and indebtedness of Debtor to Secured Party under
the Loan Agreement;
(c) all future advances by Secured Party to Debtor;
-2-
<PAGE>
(d) all costs and expenses, including, without limitation, all
attorneys' fees and legal expenses, incurred by Secured Party to preserve
and maintain the Collateral, collect the obligations herein described, and
enforce this Agreement;
(e) all other obligations, indebtedness, and liabilities of Debtor to
Secured Party, now existing or hereafter arising, regardless of whether
such obligations, indebtedness, and liabilities are similar, dissimilar,
related, unrelated, direct, indirect, fixed, contingent, primary,
secondary, joint, several, or joint and several; and
(f) all extensions, renewals, and modifications of any of the
foregoing.
ARTICLE II
Representations and Warranties
------------------------------
To induce Secured Party to enter into this Agreement and the Loan
Agreement, Debtor represents and warrants to Secured Party that:
Section 2.01. Title. Except for the security interest granted herein
-----
and except for security interests in the Other Lender Collateral in favor of the
Other Lender, Debtor owns, and with respect to Collateral acquired after the
date hereof Debtor will own, the Collateral free and clear of any lien, security
interest, or other encumbrance.
Section 2.02. Accounts. Unless Debtor has given Secured Party written
--------
notice to the contrary, whenever the security interest granted hereunder
attaches to an account, Debtor shall be deemed to have represented and warranted
to Secured Party as to each and all of its accounts that (a) each account is
genuine and is in all respects what it purports to be, (b) each account
represents the legal, valid, and binding obligation of the account debtor
evidencing indebtedness unpaid and owed by such account debtor arising out of
the performance of labor or services by Debtor or the sale or lease of goods by
Debtor, (c) the amount of each account represented as owing is the correct
amount actually and unconditionally owing except for normal trade discounts
granted in the ordinary course of business, and (d) no account is subject to any
offset, counterclaim, or other defense.
Section 2.03. Financing Statements. No financing statement, security
--------------------
agreement, or other lien instrument covering all or any part of the Collateral
is on file in any public office, except as may have been filed in favor of
Secured Party or except as may have been filed in favor of the Other Lender with
respect to the Other Lender Collateral.
-3-
<PAGE>
Section 2.04. Principal Place of Business. The principal place of
---------------------------
business and chief executive office of Debtor, and the office where Debtor keeps
its books and records, is located at the address of Debtor listed in the Loan
Agreement.
Section 2.05. Location of Collateral. All inventory of Debtor is located
----------------------
at 2210 Denton Drive, Austin, Texas 78758.
ARTICLE III
Covenants
---------
Debtor covenants and agrees with Secured Party that until the Obligations
are paid and performed in full:
Section 3.01. Maintenance. Debtor shall maintain the Collateral in good
-----------
operating condition and repair and shall not permit any waste or destruction of
the Collateral or any part thereof. Debtor shall not use or permit the
Collateral to be used in violation of any law or inconsistently with the terms
of any policy of insurance. Debtor shall not use or permit the Collateral to be
used in any manner or for any purpose that would impair the value of the
Collateral or expose the Collateral to unusual risk.
Section 3.02. Encumbrances. Debtor shall not create, permit, or suffer to
------------
exist, and shall defend the Collateral against any lien, security interest, or
other encumbrance on the Collateral except the security interest of Secured
Party hereunder and the security interests of the Other Lender in the Other
Lender Collateral, and shall defend Debtor's rights in the Collateral and
Secured Party's security interest in the Collateral against the claims of all
persons and entities.
Section 3.03. Modification of Collateral. Debtor shall do nothing to
--------------------------
impair the rights of Secured Party in the Collateral. Without the prior written
consent of Secured Party, Debtor shall not grant any extension of time for any
payment with respect to the Collateral, or compromise, compound, or settle
any of the Collateral, or release in whole or in part any person or entity
liable for payment with respect to the Collateral, or allow any credit or
discount for payment with respect to the Collateral other than normal trade
discounts granted in the ordinary course of business, or release any lien,
security interest, or assignment securing the Collateral, or otherwise amend or
modify any of the Collateral.
Section 3.04. Disposition of Collateral. Debtor shall not sell, lease, or
-------------------------
otherwise dispose of the Collateral or any part thereof without the prior
written consent of Secured Party, except Debtor may sell inventory in the
ordinary course of business.
-4-
<PAGE>
Section 3.05. Further Assurances. At any time and from time to time, upon
------------------
the request of Secured Party, and at the sole expense of Debtor, Debtor shall
promptly execute and deliver all such further instruments and documents and take
such further action as Secured Party may deem necessary or desirable to preserve
and perfect its security interest in the Collateral and carry out the provisions
and purposes of this Agreement, including, without limitation, the execution and
filing of such financing statements as Secured Party may require. A carbon,
photographic, or other reproduction of this Agreement or of any financing
statement covering the Collateral or any part thereof shall be sufficient as a
financing statement and may be filed as a financing statement. Debtor shall
promptly endorse and deliver to Secured Party all documents, instruments, and
chattel paper that it now owns or may hereafter acquire.
Section 3.06. Risk of Loss; Insurance. Debtor shall be responsible for
-----------------------
any loss of or damage to the Collateral. Debtor shall maintain, insurance on
the Collateral as provided in the Loan Agreement.
Section 3.07. Inspection Rights. Debtor shall permit Secured Party and its
-----------------
representatives to examine or inspect the Collateral wherever located and to
examine, inspect, and copy Debtor's books and records at any reasonable time and
as often as Secured Party may desire.
Section 3.08. Mortgagee's and Landlord Waivers. Debtor shall cause each
--------------------------------
mortgagee of real property owned by Debtor and each landlord of real property
leased by Debtor to execute and deliver instruments satisfactory in form and
substance to Secured Party by which such mortgagee or landlord waives its
rights, if any, in the Collateral.
Section 3.09. Notification. Debtor shall promptly notify Secured Party of
------------
(a) any lien, security interest, encumbrance, or claim made or threatened
against the Collateral, and (b) any material change in the Collateral,
including, without limitation, any material damage to or loss of the Collateral.
Section 3.10. Corporate Changes. Debtor shall not change its name,
-----------------
identity, or corporate structure in any manner that might make any financing
statement filed in connection with this Agreement misleading. Debtor shall not
change its principal place of business, chief executive office, or the place
where it keeps its books and records unless it shall have given Secured Party
thirty (30) days prior written notice thereof and shall have taken all action
deemed necessary or desirable by Secured Party to cause its security interest in
the Collateral to be perfected with the priority required by this Agreement.
-5-
<PAGE>
Section 3.11. Books and Records; Information. Debtor shall keep accurate
------------------------------
and complete books and records of the Collateral and Debtor's business and
financial condition in accordance with generally accepted accounting principles
consistently applied. Debtor shall from time to time at the request of Secured
Party deliver to Secured Party such information regarding the Collateral and
Debtor as Secured Party may request, including, without limitation, lists and
descriptions of the Collateral and evidence of the identity and existence of the
Collateral. Debtor shall mark its books and records to reflect the security
interest of Secured Party under this Agreement.
Section 3.12. Location of Collateral. Debtor shall not move any of its
----------------------
inventory from the locations described in Section 2.05 without the prior written
consent of Secured Party.
ARTICLE IV
Rights of Secured Party
-----------------------
Section 4.01. Power of Attorney. Debtor hereby irrevocably constitutes
-----------------
and appoints Secured Party and any officer or agent thereof, with full power of
substitution, as its true and lawful attorney-in-fact with full irrevocable
power and authority in the name of Debtor or in its own name upon the occurrence
of an Event of Default to take any and all action and to execute any and all
documents and instruments which Secured Party at any time and from time to time
deems necessary or desirable to accomplish the purposes of this Agreement and,
without limiting the generality of the foregoing, Debtor hereby gives Secured
Party the power and right on behalf of Debtor and in its own name to do any of
the following, without notice to or the consent of Debtor:
(a) to demand, sue for, collect, or receive in the name of Debtor or
in its own name, any money or property at any time payable or receivable on
account of or in exchange for any of the Collateral and, in connection
therewith, endorse checks, notes, drafts, acceptances, money orders,
documents of title, or any other instruments for the payment of money under
the Collateral or any policy of insurance;
(b) to pay or discharge taxes, liens, security interests, or other
encumbrances levied or placed on or threatened against the Collateral;
(c) to send requests for verification to account debtors and other
obligors;
(d) to notify post office authorities to change the address for
delivery of mail of Debtor to an address designated by Secured Party and to
receive, open, and dispose of mail addressed to Debtor; and
-6-
<PAGE>
(e) (i) to direct account debtors and any other parties liable for any
payment under any of the Collateral to make payment of any and all monies
due and to become due thereunder directly to Secured Party or as Secured
Party shall direct; (ii) to receive payment of and receipt for any and all
monies, claims, and other amounts due and to become due at any time in
respect of or arising out of any Collateral; (iii) to sign and endorse any
invoices, freight or express bills, bills of lading, storage or warehouse
receipts, drafts against debtors, assignments, proxies, stock powers,
verifications, and notices in connection with accounts and other documents
relating to the Collateral; (iv) to exchange any of the Collateral for
other property upon any merger, consolidation, reorganization,
recapitalization, or other readjustment of the issuer thereof and, in
connection therewith, deposit any of the Collateral with any committee,
depositary, transfer agent, registrar, or other designated agency upon such
terms as Secured Party may determine; (v) to insure, and to make, settle,
compromise, or adjust claims under any insurance policy covering any of the
Collateral; and (vi) to sell, transfer, pledge, make any agreement with
respect to or otherwise deal with any of the Collateral as fully and
completely as though Secured Party were the absolute owner thereof for all
purposes, and to do, at Secured Party's option and Debtor's expense, at any
time, or from time to time, all acts and things which Secured Party deems
necessary to protect, preserve, or realize upon the Collateral and Secured
Party's security interest therein.
This power of attorney is a power coupled with an interest and shall be
irrevocable. Secured Party shall be under no duty to exercise or withhold the
exercise of any of the rights, powers, privileges, and options expressly or
implicitly granted to Secured Party in this Agreement, and shall not be liable
for any failure to do so or any delay in doing so. Secured Party shall not be
liable for any act or omission or for any error of judgment or any mistake of
fact or law in its individual capacity or in its capacity as attorney-in-fact
except acts or omissions resulting from its willful misconduct. This power of
attorney is conferred on Secured Party solely to protect, preserve, and realize
upon its security interest in the Collateral. Secured Party shall not be
responsible for any decline in the value of the Collateral and shall not be
required to take any steps to preserve rights against prior parties or to
protect, preserve, or maintain any security interest or lien given to secure the
Collateral.
Section 4.02. Performance by Secured Party. If Debtor fails to perform or
----------------------------
comply with any of its agreements contained herein, Secured Party itself may, at
its sole discretion, cause or attempt to cause performance or compliance with
such agreement and the expenses of Secured Party, together with interest thereon
at the maximum nonusurious per annum rate permitted by applicable law, shall be
payable by Debtor to Secured Party on demand and shall
-7-
<PAGE>
constitute Obligations secured by this Agreement. Notwithstanding the
foregoing, it is expressly agreed that Secured Party shall not have any
liability or responsibility for the performance of any obligation of Debtor
under this Agreement.
Section 4.03. Assignment by Secured Party. Secured Party may from time to
---------------------------
time assign the Obligations and any portion thereof or the Collateral and any
portion thereof, and the assignee shall be entitled to all of the rights and
remedies of Secured Party under this Agreement in relation thereto.
ARTICLE V
Default
-------
Section 5.01. Events of Default. The term "Event of Default" shall mean an
-----------------
Event of Default as defined in the Loan Agreement.
Section 5.02. Rights and Remedies. Upon the occurrence of an Event of
-------------------
Default, Secured Party shall have the following rights and remedies:
(a) Secured Party may declare the Obligations or any part thereof
immediately due and payable, without notice, demand, presentment, notice of
dishonor, notice of acceleration, notice of intent to accelerate, notice of
intent to demand, protest, or other formalities of any kind, all of which
are hereby expressly waived by Debtor; provided, however, that upon the
occurrence of an Event of Default under Section 8.01(d) or Section 8.01(e)
of the Loan Agreement, the Obligations shall become immediately due and
payable without notice, demand, presentment, notice of dishonor, notice of
acceleration, notice of intent to accelerate, notice of intent to demand,
protest, or other formalities of any kind, all of which are hereby
expressly waived by Debtor.
(b) In addition to all other rights and remedies granted to Secured
Party in this Agreement and in any other instrument or agreement securing,
evidencing, or relating to the Obligations or any part thereof, Secured
Party shall have all of the rights and remedies of a secured party under
the Uniform Commercial Code as adopted by the State of Texas. Without
limiting the generality of the foregoing, Secured Party may (i) without
demand or notice to Debtor, collect, receive, or take possession of the
Collateral or any part thereof and for that purpose Secured Party may enter
upon any premises on which the Collateral is located and remove the
Collateral therefrom or render it inoperable, and/or (ii) sell, lease, or
otherwise dispose of the Collateral, or any part thereof, in one or more
parcels at public or private sale or sales, at Secured Party's offices or
elsewhere, for cash, on credit, or for future delivery. Upon the request of
-8-
<PAGE>
Secured Party, Debtor shall assemble the Collateral and make it available
to Secured Party at any place designated by Secured Party that is
reasonably convenient to Debtor and Secured Party. Debtor agrees that
Secured Party shall not be obligated to give more than five (5) days
written notice of the time and place of any public sale or of the time
after which any private sale may take place and that such notice shall
constitute reasonable notice of such matters. Debtor shall be liable for
all expenses of retaking, holding, preparing for sale, or the like, and
all attorneys' fees, legal expenses, and all other costs and expenses
incurred by Secured Party in connection with the collection of the
Obligations and the enforcement of Secured Party's rights under this
Agreement. Secured Party may apply the Collateral against the Obligations
in such order and manner as Secured Party may elect in its sole discretion.
Debtor shall remain liable for any deficiency if the proceeds of any sale
or disposition of the Collateral are insufficient to pay the Obligations in
full. Debtor waives all rights of marshalling in respect of the
Collateral.
(c) Secured Party may cause any or all of the Collateral held by it to
be transferred into the name of Secured Party or the name or names of
Secured Party's nominee or nominees.
(d) Secured Party may exercise or cause to be exercised all voting
rights and corporate powers in respect of the Collateral.
ARTICLE VI
Miscellaneous
-------------
Section 6.01. No Waiver; Cumulative Remedies. No failure on the part of
------------------------------
Secured Party to exercise and no delay in exercising, and no course of dealing
with respect to, any right, power, or privilege under this Agreement shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, power, or privilege under this Agreement preclude any other or further
exercise thereof or the exercise of any other right, power, or privilege. The
rights and remedies provided for in this Agreement are cumulative and not
exclusive of any rights and remedies provided by law.
Section 6.02. Successors and Assigns. This Agreement shall be binding
----------------------
upon and inure to the benefit of Debtor and Secured Party and their respective
heirs, successors, and assigns, except that Debtor may not assign any of its
rights or obligations under this Agreement without the prior written consent of
Secured Party.
-9-
<PAGE>
Section 6.03. Amendment. The provisions of this Agreement may be
---------
amended or waived only by an instrument in writing signed by the Parties hereto.
Section 6.04. Notices. All notices and other communications provided for
-------
in this Agreement shall be given as provided in the Loan Agreement.
Section 6.05. Applicable Law; Venue; Service of Process. This Agreement
-----------------------------------------
shall be governed by and construed in accordance with the laws of the State of
Texas and the applicable laws of the United States of America. This Agreement
has been entered into in Harris County, Texas, and it shall be performable for
all purposes in Harris County, Texas. The venue of, and provisions regarding
service of process in connection with any action or proceeding hereunder shall
be determined as provided in the Loan Agreement.
Section 6.06. Headings. The headings, captions, and arrangements used in
--------
this Agreement are for convenience only and shall not affect the interpretation
of this Agreement.
Section 6.07. Survival of Representations and Warranties. All
------------------------------------------
representations and warranties made in this Agreement or in any certificate
delivered pursuant hereto shall survive the execution and delivery of this
Agreement, and no investigation by Secured Party shall affect the
representations and warranties or the right of Secured Party to rely upon them.
Section 6.08. Counterparts. This Agreement may be executed in any number
------------
of counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Section 6.09. Waiver of Bond. In the event Secured Party seeks to take
--------------
possession of any or all of the Collateral by judicial process, Debtor hereby
irrevocably waives any bonds and any surety or security relating thereto that
may be required by applicable law as an incident to such possession, and waives
any demand for possession prior to the commencement of any such suit or action.
Section 6.10. Severability. Any provision of this Agreement which is
------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions of this Agreement, and any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
Section 6.11. Obligations Absolute. The obligations of Debtor under this
--------------------
Agreement shall be absolute and unconditional and, except upon payment and
performance of the Obligations in
-10-
<PAGE>
full, shall not be released, discharged, reduced, or in any way impaired by any
circumstance whatsoever, including, without limitation, any amendment,
modification, extension, or renewal of this Agreement, the Obligations, or any
document or instrument evidencing, securing, or otherwise relating to the
Obligations, or any release or subordination of collateral, or any waiver,
consent, extension, indulgence, compromise, settlement, or other action or
inaction in respect of this Agreement, the Obligations, or any document or
instrument evidencing, securing, or otherwise relating to the Obligations, or
any exercise or failure to exercise any right, remedy, power, or privilege in
respect of the Obligations. Secured Party shall not have any liability or
responsibility for the performance of any obligation of Debtor under this
Agreement.
Section 6.12. ENTIRE AGREEMENT. THIS AGREEMENT AND THE OTHER DOCUMENTS
----------------
(AS DEFINED IN THE LOAN AGREEMENT) EMBODY THE FINAL, ENTIRE AGREEMENT AMONG THE
PARTIES HERETO AND SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS,
REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE
SUBJECT MATTER HEREOF AND THEREOF AND MAY NOT BE CONTRADICTED OR VARIED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS
OF THE PARTIES HERETO. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES HERETO.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the day and year first written above.
DEBTOR:
------
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
By: /s/ LARRY SECREST
-----------------------------------
Larry Secrest
Chairman
SECURED PARTY:
--------------
WELLS FARGO HSBC TRADE BANK, N.A.
By: /s/ MICHAEL J. MCKENZIE
-----------------------------------
Michael J. McKenzie
Senior Vice President
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EXHIBIT 10.21
INSTALLMENT PROMISSORY NOTE
$52,000.00 Austin, Texas January 25, 1996
FOR VALUE RECEIVED, the undersigned, Scientific Measurement Systems, Inc., a
Texas corporation (the "Maker"), promises to pay to the order of Jenkens &
Gilchrist, P.C., a Texas professional corporation ("Payee"), in lawful money of
the United States of America, the principal sum of Fifty-Two Thousand Dollars
($52,000.00), together with interest on the principal balance from time to time
unpaid at the rate of eight percent (8%) per annum, until maturity, as follows:
Place of Payment
All payments will be made at the offices of Jenkens & Gilchrist, a Professional
Corporation, 2200 One American Center, 600 Congress Avenue, Austin, Texas 78701
or such other place as the holder hereof may from time to time appoint in
writing.
Payments
This note shall be due and payable as follows:
(a) Principal and interest shall be due and payable in twelve equal
installments of principal, the first installment of Four Thousand
Three Hundred Thirty-Three and 33/100ths Dollars ($4,333.33) (or
more), plus accrued interest, being due and payable on January 31,
1996; and the remaining eleven installments being due and payable on
the last day of each successive month thereafter, with all unpaid
amounts due hereunder being due and payable no later than
December 31, 1996.
(b) Interest shall be calculated on the unpaid principal to the date of
each installment paid and the payment made credited first to the
discharge of the interest accrued and the balance to the reduction of
the principal.
Upon default by Maker in the payment of any installment due hereunder, Payee may
accelerate the maturity of all amounts due hereunder. Any installments that
become past due shall bear interest at the lower of (i) eighteen percent (18%)
per annum or (ii) the highest lawful rate permitted under applicable law.
Prepayment
This Note may be prepaid in part or full at any time without penalty.
<PAGE>
Waiver of Protest and Extension of Time
Each maker, endorser and guarantor or other surety of this Note hereby waives
demand, grace, notice, presentment for payment and protest, and further does
hereby consent that this Note may be renewed, and the time for payment extended,
without notice and without releasing any of the parties.
Costs of Collection
The Maker will pay on demand all costs of collection, legal expenses and
reasonable attorneys' fees incurred or paid by the Payee in collecting or
enforcing this Note.
Interest
Notwithstanding anything contained herein to the contrary, this Note is hereby
expressly limited so that in no contingency or event whatsoever, whether by
acceleration of maturity of the indebtedness evidenced hereby or otherwise,
shall the amount paid or agreed to be paid to Payee for the use, forbearance or
detention of money exceed the highest lawful rate permissible under applicable
law. If, from any circumstances whatsoever, Payee shall ever receive as interest
hereunder an amount that would exceed the highest lawful rate applicable to
Maker, such amount that would be excessive interest shall be applied to the
reduction of the unpaid principal balance of the indebtedness evidenced hereby
and not to the payment of interest, and if the principal amount of this Note is
paid in full, any remaining excess shall forthwith be paid to Maker, and in such
event, Payee shall not be subject to any penalties provided by any laws for
contracting for, charging, taking, reserving or receiving interest in excess of
the highest lawful rate permissible under applicable law.
Joint and Several Obligation
Should this Note be signed by more than one person, firm, or corporation or
combination thereof, all of the obligations herein contained shall be considered
joint and several obligations of each signer hereof. In such case, the
liability of each such signer shall be absolute, unconditional and without
regard to liability of any other party hereto.
Time of Essence
Time is of the essence with respect to all of Maker's obligations and agreements
under this Note.
Parties Bound
This Note and all the provisions, conditions, promises and covenants hereof
shall be binding in accordance with the terms hereof upon Maker, its successors
and assigns, provided nothing herein shall permit any assignment of this Note by
Maker.
2
<PAGE>
Acknowledgement by Maker
The obligations evidenced by this Note are tendered by Maker in payment of
certain legal services previously rendered to the Maker by Payee. In
consideration of the acceptance by Payee of this Note in payment of fees that
were due and payable upon receipt of invoices therefor, Maker hereby
acknowledges that all such services rendered were satisfactory to Maker, and
fully, finally, and completely releases Payee, its successors and assigns, and
any and all of its directors, officers, partners, employees, agents, and
attorneys from any and all demands, claims, damages, actions and/or causes of
action that Maker has or might claim to have against any of them, in any way
related to such legal services.
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
By: ?????
---------------------------------------
Title: VP - CFO
------------------------------------
3
<PAGE>
EXHIBIT 24.1
Consent of Independent Accountants
----------------------------------
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-8 (No. 233-03363) of
Scientific Measurement Systems, Inc. (the Company) of our report dated as of
September 25, 1996, appearing on page 13 of this Form 10-KSB.
/s/ BDO Seidman, LLP
Austin, Texas
October 29, 1996
