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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, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ..................TO...................
COMMISSION FILE NUMBER 0-14100
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
TEXAS 74-2048763
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2210 DENTON DRIVE, SUITE 106, AUSTIN, TEXAS 78758
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER ........... (512) 837-4712
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
None Not Applicable
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
$0.05 PAR VALUE COMMON STOCK
(TITLE OF CLASS)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [_]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [_]
State issuer's revenues for its most recent fiscal year: $3,723,590
The aggregate market value of the voting stock held by nonaffiliates of the
registrant was approximately $5,869,570 as of December 18, 1997, based upon the
bid price at the close of trading on such date as reported by NASDAQ. ($0.37)
The number of shares or units outstanding of each of the registrant's classes
of securities, as of December 18, 1997 is as follows:
SHARES OUTSTANDING AS OF
TITLE OF CLASS DECEMBER 18, 1997
-------------- ------------------------
$0.05 Par Value Common Stock 21,114,468
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 1997 Annual Meeting of Shareholders.
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Item 9 Directors, Executive Information concerning the Directors and
Officers, Executive Officers of the Company is
Promoters and Control incorporated by reference from the Company's
Persons; Compliance with definitive Proxy Statement and related
Section 16(a) of the Exchange materials in connection with the annual meeting
Act of shareholders on or about January 29, 1998.
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
January 29, 1998. The incorporated portions
consist of all of the disclosures that appear in
that Proxy Statement under the heading
"Executive Compensation."
Item 11 Security Ownership of Certain Information concerning the Security Ownership
Beneficial Owners and of Certain Beneficial Owners and Management
Management is incorporated by reference from the
Company's definitive Proxy Statement and
related materials in connection with the annual
meeting of shareholders on or about January 29,
1998. 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 Relationships
Related Transactions 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 or about
January 29, 1998. 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
PAGE
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PART I.................................................................. 1
RISK FACTORS............................................................ 1
ITEM 1. BUSINESS................................................... 1
ITEM 2. PROPERTIES................................................. 12
ITEM 3. LEGAL PROCEEDINGS.......................................... 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 13
PART II................................................................. 13
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................................ 13
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................ 14
ITEM 7. FINANCIAL STATEMENTS....................................... 19
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................ 43
PART III................................................................ 43
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. 43
ITEM 10. EXECUTIVE COMPENSATION..................................... 43
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................. 43
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 43
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K........................... 44
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RISK FACTORS
THE STATEMENTS INCLUDED IN THIS REPORT REGARDING FUTURE FINANCIAL
PERFORMANCE AND RESULTS AND THE OTHER STATEMENTS THAT ARE NOT HISTORICAL FACTS
ARE FORWARD-LOOKING STATEMENTS. THE WORDS "EXPECT," "PROJECT," "ESTIMATE,"
"PREDICT" AND SIMILAR EXPRESSIONS ALSO ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. SUCH STATEMENTS INVOLVE RISKS, UNCERTAINTIES AND ASSUMPTIONS,
INCLUDING BUT NOT LIMITED TO, INDUSTRY CONDITIONS, FOREIGN EXCHANGE AND CURRENCY
FLUCTUATIONS AND OTHER FACTORS DISCUSSED IN THIS REPORT (INCLUDING THOSE
SPECIFICALLY DISCUSSED BELOW) AND IN THE COMPANY'S OTHER FILINGS WITH THE
SECURITIES AND EXCHANGE COMMISSION. SHOULD ONE OR MORE OF THESE RISKS OR
UNCERTAINTIES MATERIALIZE, OR SHOULD UNDERLYING ASSUMPTIONS PROVE INCORRECT,
ACTUAL OUTCOMES MAY VARY MATERIALLY FROM THOSE INDICATED.
LOW LEVELS OF WORKING CAPITAL
The Company requires additional financing for its operations, including but
not limited to its obligations under the U.S. Department of Commerce National
Institute of Standards and Technology (NIST) Financial Assistance Award dated
January 19, 1996, as amended, and to produce its backlog, and no assurances can
be given that any such financing will be obtainable, adequate or available on
economically favorable terms.
As noted in the independent accountants opinion, there is substantial doubt
about the Company's ability to continue as a going concern without the
realization of additional adequate financing. As of July 31, 1997, the Company
incurred a net loss of $1,121,090 and negative cash flows from operations in
1997 and 1996 of $844,629 and $406,018, respectively. In addition, at July 31,
1997, current liabilities exceeded current assets by approximately $164,000.
INCURRENCE OF SUBSTANTIAL INDEBTEDNESS
The Company has incurred substantial indebtedness, including amounts owed
under the NIST contract (see Note 10 to the Financial Statements). The
Company's level of indebtedness has several important effects on its future
operations, including, without limitation, (i) a substantial portion of the
Company's cash flow from operations must be dedicated to the payment of interest
and principal on its indebtedness, (ii) the Company's leveraged position
substantially increases its vulnerability to adverse changes in general economic
and industry conditions, as well as to competitive pressure, and (iii) the
Company's ability to obtain additional financing for working capital, capital
expenditures, general corporate and other purposes may be limited. The
Company's ability to continue its operations, to meet its debt service
obligations and to reduce its total indebtedness will be dependent upon the
Company's ability to raise additional financing and its future performance which
will be subject to general economic conditions, industry cycles and financial,
business and other factors, many of which are beyond its control. There can be
no assurance that the Company's business will continue to generate cash flow at
or above current levels. If the Company is unable to generate sufficient cash
flow from operations in the future to service its debt, it may be required,
among other things, to seek additional financing in the debt or equity markets,
to refinance or restructure all or a portion of its indebtedness, or to sell
selected assets or reduce or delay planned capital expenditures. There can be
no assurance that any such measures would be sufficient to enable the Company to
service its debt or that any such financing, refinancing or sale of assets would
be achievable on economically favorable terms.
CHANGES IN TECHNOLOGY
There can be no assurances that significant changes will not occur in
tomography or that substantial competition will not develop as a result of
technology changes which may adversely affect the Company's ability to compete.
See "Business - Technology."
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BACKLOG
The Company experiences significant fluctuations in its backlog. There is
no assurance that the Company will be able to obtain future orders for its
systems, that the number of future orders will be sufficient to enable the
Company to operate profitably, or that the Company will have sufficient cash
available to fill its backlog.
PATENTS AND OTHER RIGHTS
Effective July 1, 1993, the Company acquired a perpetual, non-exclusive,
royalty-free license from two of the Company's founders to two U. S. patents and
technology know-how relating to its basic system. In addition, the Company co-
owns a patent entitled "Online Tomographic Gauging of Hot Sheet Metal" and has
been awarded a U.S. Patent entitled "Process for Analyzing the Contents of
Containers." The issuance of a patent is not conclusive as to its validity or
enforceability; and there has been no independent study of other patents or
prior art which might be infringed by the Company's systems. Attempts by the
Company to enforce or defend its patent rights could result in substantial
expense. The Company has no patents in any foreign countries. In addition, the
Company's technology may be subject to appropriation without compensation in
some areas of the world and may be subject to use without compensation by the
U.S. government in connection with government contracts. See "Business -
Patents and Other Rights."
RECENT CHANGES IN MANAGEMENT; DEPENDENCE ON KEY PERSONNEL
The Company has experienced several recent changes in its management,
including the loss of its President and Chief Executive Officer and the loss of
its Chief Financial Officer. The Company recently hired Howard L. Burris, Jr.
to serve as President and Chief Executive Officer and is in the process of
locating a new Chief Financial Officer. The Company believes that its success
will depend upon the ability of its new chief executive, who does not have
previous experience managing public companies, to operate the Company and upon
the Company's ability to hire a new Chief Financial Officer. In addition, the
Company believes that its success will depend to a significant extent upon the
continued services of certain other key individuals, including but not limited
to Dr. Forrest F. Hopkins. The loss of the services of any of these individuals
or the inability of the Company to hire a Chief Financial Officer could have a
material adverse effect on the Company.
COMPETITION
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. The Company believes that its competitive position is negatively
impacted by its relative lack of financial resources and working capital. For
example, because of its lack of financial resources and working capital, the
Company strives to negotiate contracts with a view toward obtaining a
significant advance payment or periodic progress payments. There can be no
assurance that the Company's limited resources and capacity will be sufficient
to compete effectively in such industry in the future or that it will be able to
negotiate contracts with favorable payment terms. See "Business - Competition."
PRODUCT LIABILITY INSURANCE
The Company does not carry product liability insurance. There can be no
assurance that suits may not be filed or judgments obtained against the Company
in the future in excess of available funds or any insurance coverage which may
then be in effect. Additionally, should it be determined that product liability
insurance is necessary or desirable, the cost of such insurance could have a
material effect upon the cost of the tomographic systems, thereby having an
adverse effect on the sales price of such systems and the competitiveness of the
Company.
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USE OF X-RAY EQUIPMENT AND RADIOACTIVE ISOTOPES
The Company's tomographic systems use x-ray equipment and radioactive
isotope sources. The Company believes that it complies with all current
governmental regulations regarding such equipment and materials. Changes in
safety regulations regarding their use and sale could cause the Company
additional expense and increase the cost of its systems, which could have an
adverse impact upon sales or uses of its systems. See "Business - Governmental
Regulation."
CONFLICTS OF INTEREST AND BENEFITS TO MANAGEMENT AND PRESENT SHAREHOLDERS
Various officers, directors and principal shareholders of the Company have
engaged in or become involved in a variety of business relations with the
Company which confer benefits upon such persons and/or create actual or
potential conflicts of interest.
DIVIDEND POLICY
The Company has never paid cash dividends on the Common Stock and does not
anticipate that cash dividends will be paid in the foreseeable future. The
Company currently intends to retain any future earnings to finance the
operations of the Company's business. The declaration and payment in the future
of any cash dividends will be at the election of the Company's Board of
Directors and will depend upon the earnings, capital requirements and financial
position of the Company, future loan covenants, general economic conditions and
other pertinent factors. Furthermore, certain provisions of the Company's loan
documents may restrict the Company's ability to pay cash dividends on the Common
Stock. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS
The Company's Articles of Incorporation and Bylaws include certain
provisions that may have the effect of discouraging potential unsolicited offers
or other efforts to obtain control of the Company that are not approved by the
Board. Such provisions may adversely affect the market price of the Common
Stock and may also deprive the shareholders of opportunities to sell shares of
Common Stock at prices higher than prevailing market prices. Such provisions
include the requirement that all shareholder action must be taken at a duly
called annual or special meeting of shareholders unless a majority of the entire
Board provides its prior approval for shareholder action to be taken by written
consent of shareholders. See "Description of Capital Stock - Provisions Having
Possible Anti-takeover Effect."
The Board has the authority, without further action by the shareholders, to
issue up to 2,000,000 shares of the Company's preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
and to issue over 18,000,000 additional shares of Common Stock. The issuance of
the Company's preferred stock or additional shares of Common Stock could
adversely affect the voting power of the holders of Common Stock and could have
the effect of delaying, deferring or preventing a change in control of the
Company.
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PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Scientific Measurement Systems, Inc. (the "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 certain factors including density differences
between the feature and the material surrounding it. Primary applications of
the Company's systems include process and quality control of both batch type as
well as continuously produced products.
The Company has also developed a series of specialized proprietary software
programs for the evaluation and analysis of data generated by its systems. CT
provides information consisting of precise dimensional and density information
as well as flaw and defect characteristics. This information is often
unavailable by any other means of nondestructive inspection.
The Company pioneered industrial tomography and is a leading supplier of
computerized industrial tomography systems and services to the aerospace,
automotive, steel, aviation and defense industries. Principal applications
include non-destructive testing (NDT), dimensional analysis/control and computer
aided design/computer aided manufacturing (CAD/CAM).
As a result of both customer and Company-sponsored, field-proven
evolutionary product development performed over a period of years, the Company
produces a family of modular general purpose computerized industrial tomography
systems which provide precise dimensional and density information, as well as
flaw and defect characteristics, for a wide range of industrial applications.
The Company's Smart Radiography/TM/ product line offers the unique combination
of performance, flexibility, and cost-effectiveness needed to meet industry and
government's current and future CT requirements.
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TECHNOLOGY
The Company's typical CT system, the SMARTSCAN/TM/, includes a radiation
source, a detector array, an object positioning unit, a computer system with
image processing equipment and a color graphics image display subsystem. At the
option of the customer, the SMARTSCAN/TM/ system may be integrated into a
portable, lead-lined cabinet for radiation shielding.
The radiation source is either an X-ray tube, X-ray linear accelerator or a
gamma-ray emitting radioisotope which emits a flux of photons. The photons are
highly collimated (focused) to form a beam directed at the object under
analysis. The source beam is shaped and filtered to provide application-
specific optimization.
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.
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The SMARTSCAN/TM/ also produces digital radiograms. These can be used
directly for analysis, to select the cross-sectional planes for tomograms, or in
combination with other radiograms for dual radiography and laminography. In dual
radiography, two radiograms from different angles are used to precisely locate
(in three dimensions) features visible in both images. In addition to its direct
use, this capability permits accurate transfer of coordinates between scans of
the same object in different positions and is also helpful in precision
quantitative analysis using radiograms.
In certain cases, such as the examination of very long objects, the
SMARTSCAN/TM/ can take data over a limited angular range. Such data can be
handled by the SMARTSCAN/TM/ system to produce tomograms of somewhat reduced
quality, but often still revealing the features of interest.
A related and more powerful technique, laminography, uses several digital
radiograms to resolve internal features throughout the three-dimensional volume
of the object with only limited blurring from overlapping layers. The
radiograms are mathematically filtered by the same methods used for computed
tomography and projected onto a set of surfaces defined by the user. Such
surfaces can be curved to follow interior sections of interest.
Complete resolution of interior detail is possible by stacking a 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.
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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 is continually evolving as a result of its
research and development efforts. While the products are to a great extent
customized or optimized for a particular customer's application, the Company has
made several significant improvements to its basic systems. The basic systems in
the form of (1) the SMS Smartscan/TM/, a comparatively low cost scanner capable
of measuring objects measuring up to two feet in diameter, three feet in height
and weighing up to 2,000 pounds and (2) the SMS Model 201 which can measure
objects up to five feet in diameter and weighing up to 5,000 pounds, have both
been substantially improved.
The most recent product improvement has been the employment of a high(er)
speed detection system which has been successfully incorporated into the SMS
Smartscan/TM/. The SMS Close-Packed Detector has significantly improved data
acquisition rates.
An internally funded effort to improve image reconstruction and processing
speed involved changing out the old MicroVax II minicomputer to advanced Sun
Microsystems SPARC/TM/ and the newest DEC Alpha/TM/ workstations has improved
both basic products as well. Moving the Company's proprietary software to these
open platforms has improved speed tenfold on both the SMS Smartscan/TM/ and the
SMS Model 201.
Perhaps the most significant change in the product offering at SMS is the
Comparator software which is capable of sophisticated evaluation of complex
castings. This product can graphically report wall thicknesses and wall
displacement variances from design data in near real time. The Company believes
that this Comparator capability, which can be employed on both SMS systems, will
afford the Company access to large existing markets in product-oriented
inspection, reverse engineering and rapid prototyping.
MANUFACTURE AND PRODUCTION
Manufacture of each of the Company's 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. In
previous years, the Company has delivered SMS Model 201 systems which range in
price from approximately $1.5 million to $2 million each, 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 and numerous SMS Model 101B+ systems (the predecessor to the
SMARTSCAN/TM/ product) ranging in price from approximately $500,000 to $950,000
to customers such as 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. The Company has also sold SMARTSCAN/TM/ systems to a number
of customers including NASA-Lewis Research Center and to Morton International,
Inc.
In fiscal year 1996, the Company completed upgrades for prices up to
$150,000 for Lockheed Martin, Allied Signal and EMPA (Switzerland) and delivered
a SMARTSCAN/TM/ system to UNOCAL. In fiscal year 1997, the Company delivered
SMARTSCAN/TM/ systems for prices up to $570,000 to Bridgestone (Japan),
Continental
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Tire (Germany), GM, and Knolls Atomic Power Lab. In addition, in fiscal year
1997, the Company delivered a SMARTSCAN/TM/ system to Fiat (Italy) which was
returned to the Company. The Company has completed the modifications to the
system requested by Fiat and hopes to obtain Fiat's final acceptance of the
product in the near future (see Note 11 to the Financial Statements).
As of November 7, 1997, the Company has orders for four SMARTSCAN/TM/
systems including orders from Savit Corporation, Picatinny Arsenal, and Toyota
ranging in price from approximately $250,000 to $700,000 and orders for upgrades
from Japan Atomic Energy Research Institute and Pratt & Whitney (Canada) ranging
in price from approximately $115,000 to $300,000.
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 advertising, and client liaison for scanning services.
OPERATIONS AND MAINTENANCE SERVICES
With respect to certain systems previously delivered, the Company also
provides ongoing services under maintenance contracts with terms of up to five
years. Additionally, the Company provides field services to customers through
the sale of hardware and software upgrades. Revenues from field services has
become an increasingly important source of revenues as the number of systems in
operation has grown.
RESEARCH AND DEVELOPMENT
Company-sponsored research and development expenses totaled approximately
$6,600 and $5,000 for the years ended July 31, 1997 and 1996, respectively.
The Company's research in past years has been focused on achieving
increases in the speed of data acquisition and image processing. These
improvements were identified as the improvements that would most significantly
expand the implementation of the Company's CT technology in industry. The
Company continues to focus its research and development on increasing speed and
ease of use and reducing costs. In fiscal year 1997, the Company began work on
a prototype development for a solid state detector and state-of-the-art readon
and electronics. In addition, the DEC Alpha computer was integrated into the
hardware architecture of the Company's products to provide a hardware solution
for improving reconstruction times.
A second area of achievement in fiscal year 1997 was a proof of concept
demonstration for an advanced 3D analysis software package for General Motors
complex casting applications. Additionally, the Company has substantially
completed 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 in fiscal 1997, the Company began development of a more
robust Object Positioning unit that will eliminate weight limitations that
currently exist in some models of scanners. This change provides a significant
advancement towards scanner platform standardization.
8
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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 10
to Notes to Financial Statements.
MARKETING
The Company markets its products and services through direct sales tacts
with existing customers, responses to inquiries generated by advertising and
articles in trade magazines and technical publications, trade shows and through
equipment demonstrations and scanning services. The Company's SMARTSCAN/TM/
systems are intended to be standardized, customer-oriented commercial products
designed for volume production.
The Company's marketing efforts are distributed across a wide range of
industries. Representative areas are:
. 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 design verification, 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.
. 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.
. Oil and Gas. Tomography is widely used in the oil industry to measure
fluid flow properties in rock samples from oil and gas reservoirs.
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. 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 5 state region including the upper
Midwest.
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.
9
<PAGE>
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 many 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 and test 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 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 from alternative non-
destructive methods; and (iv) 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, 1997, the Company employed 23 full-time employees, of whom
two were engaged in research, two in software development, two in engineering,
four in scanning services, three in sales and marketing, two in field services,
four 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. The Company has not experienced a strike or
work stoppage and believes that its relations with its employees are adequate.
10
<PAGE>
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 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.
11
<PAGE>
The Company has applied for patent protection for an "Apparatus and Method
for Comparison" for use by manufacturers in determining how close a manufactured
part comes to parts that have previously been determined to be acceptable or to
the design of an acceptable part. Historically, it has not been possible to
measure parts completely once manufactured so as to determine such important
measurements as shape and wall thickness without destroying the part to be
measured. Prior art devices have utilized computerized tomography to create
scans of slices of a part. These prior art scans, however, result only in
individual slices of a part which then are analyzed by an engineer. Because of
the time consuming nature of the prior art scanning devices and the necessity
for an engineer to review the scans, only a limited number of predetermined
"critical" specific locations have been analyzed in the past. The Company's
innovative, proprietary technology provides an apparatus and method wherein the
whole part may be analyzed to determine the shape and wall thickness of the
device throughout and compare it to design specifications or an acceptable
manufactured part.
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.
During fiscal year 1997, the Company developed advanced 3D dimensional
analysis software specifically designed for quickly identifying regions of
rework and quantifying the amount of rework required. The Company believes that
this software is a significant improvement in dimensional analysis requirements
and the Company anticipates that this new software may be the basis of analysis
for the next generation of CT inspection scanners.
FINANCIAL HISTORY
The Company completed its initial public offering in March 1985. As of
December 18, 1997, the Company had the following equity securities outstanding
(exclusive of employees' and directors' stock options):
Common Stock, $0.05 par value..................21,114,468 shares
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.
12
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of the Company's fiscal year ended July 31, 1997.
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 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 OTC Bulletin Board.
<TABLE>
<CAPTION>
Common Stock
--------------
Fiscal Year Ended High Low
------- ------
<S> <C> <C>
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
July 31, 1997
First Quarter $0.90 $0.68
Second Quarter 1.41 0.67
Third Quarter 1.07 0.51
Fourth Quarter 0.65 0.35
</TABLE>
The above quotations are over-the-counter market quotations and thus
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not represent actual transactions.
The total number of shares of Common Stock outstanding as of December 18,
1997 was 21,114,468 and the total number of holders of Common Stock of record as
of such date was approximately 605.
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.
During the period covered by this report, the Company sold the following
unregistered securities. On or about August 26, 1996, the Company granted
options to acquire 600,000 shares of its Common Stock at an exercise price of
$0.86 per share to eight non-employee directors. These options will expire on
August 25, 2006. To date, two directors have returned their option agreements
to the Company unexercised. Effective
13
<PAGE>
December 20, 1996, the Company granted options to acquire 700,000 shares of its
Common Stock at an exercise price of $0.89 per share to five employees. These
options expire on December 19, 2006. On or about November 1, 1996, in exchange
for certain equipment with an agreed value of $85,000, the Company issued
500,000 shares of its Common Stock to Howard L. Burris, Jr. at $0.17 per share,
the fair market value of the shares on the date of the exchange. All of the
above grants of options and issuances of securities were exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
In addition, the Company issued the following restricted shares of its
Common Stock in connection with the exercise of options. All options were
exercised pursuant to the cashless exercise provisions of the option agreements.
In August 1996, the Company issued to an employees 22,387 shares for $0.08 per
share, and to a former officer 39,570 shares for $0.15 per share and 60,878
shares for $0.24 per share. In September 1996, the Company issued to the same
employee 28,207 shares for $0.1406 per share, 28,946 shares for $0.15 per share,
79,296 shares for $0.15 per share and 33,437 shares for $0.24 per share. In
October 1996, the Company issued to an officer, 196,978 shares for $0.1406 per
share and to an employee, 125,730 shares for $0.1406 per share and 77,579 shares
for $0.225 per share. In November 1996, the Company issued to an officer
461,585 shares for $.1406 per share and 252,468 shares for $0.225 per share. In
December 1996, the Company issued 258,141 shares for $0.15 per share and 90,584
shares for $0.225 per share to two separate officers of the Company. In January
1997 the Company issued 34,810 shares for $0.24 per share to an officer of the
Company and 123,472 shares for $0.1406 per share to an employee. In April 1997,
the Company issued 155,521 shares to a former director of the Company for $0.15
per share. All such issuances were made in connection with the exercise of
employee or director options and were exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward looking statements. In addition, the
Management's Discussion and Analysis should be read in conjunction with, and is
qualified in its entirety by reference to, the financial statements of the
Company and the notes thereto included elsewhere in this Annual Report. This
discussion and analysis of operations compares the two years ended July 31, 1996
and 1997.
14
<PAGE>
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,
-----------------------------------------------------------------
1997 1996
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Dollar % of % Change Dollar % of % Change
Amount Total from Prior Amount Total from Prior
(000s) Revenue Year (000s) Revenue Year
--------- -------- ----------- -------- -------- -----------
Contract revenues:
Tomographic system sales....... $ 2,800 75.2% 45.6% $1,923 60.8% 218.8%
Scanning services.............. 488 13.1% -13.5% 564 17.8% 102.9%
Field services and upgrades.... 436 11.7% -35.7% 678 21.4% 34.5%
------- ----- ------ ------ ----- ------
Total revenues............... 3,724 100.0% 17.7% 3,165 100.0% 128.5%
Contract costs................... 3,631 97.5% 65.9% 2,189 69.1% 76.1%
------- ----- ------ ------ ----- ------
Gross profit..................... 93 2.5% -90.5% 976 30.9% 587.3%
------- ----- ------ ------ ----- ------
Operating costs:
Marketing...................... 354 9.5% 36.7% 259 8.2% -16.7%
Research and development....... 7 0.2% 40.0% 5 0.2% -92.5%
General and administrative..... 783 21.0% 84.7% 424 13.4% -15.2%
------- ----- ------ ------ ----- ------
Total operating costs......... 1,144 30.7% 66.3% 688 21.8% -21.6%
------- ----- ------ ------ ----- ------
Income (loss) from operations.... -1,051 -28.2% -464.9% 288 9.1% 139.1%
------- ----- ------ ------ ----- ------
Other (income) expense:
Interest expense............... 71 1.9% 208.7% 23 0.7% -36.1%
Interest and other income...... -1 0.0% -91.7% (12) -0.4% -47.8%
Loss on sale of asset.......... 0 0.0% 0.0% 0 0.0% -100.0%
------- ----- ------ ------ ----- ------
Other - net.................. 70 1.9% 536.4% 11 0.3% -47.6%
------- ----- ------ ------ ----- ------
Net income (loss)................ $-1,121 -30.1% -504.7% $ 277 8.8% 136.6%
======= ===== ====== ====== ===== ======
</TABLE>
NM- Not meaningful
FISCAL 1997 RESULTS OF OPERATIONS
REVENUES
Total contract revenues for the year ended July 31, 1997 increased $559,000, or
17.7% compared to the prior year. A $877,000, or 45.6% increase in revenues
from systems sales was offset by declines in other sources of revenue. Scanning
services revenues decreased $76,000, or 13.5% and maintenance and upgrades
revenues decreased $242,000, or 35.7%. The large decrease in maintenance and
upgrades revenues is due to several large upgrade contracts in 1996, as well as
a lower absolute number of customer maintenance contracts in fiscal year 1997
compared to fiscal year 1996. Management believes that systems sales revenues
should increase in fiscal year 1998 if the Company successfully produces all of
its current backlog during the fiscal year, and is optimistic that scanning
services and maintenance and upgrades revenues for fiscal year 1998 can be
increased as well, provided, however, that no assurances can be given that the
Company can raise working capital in sufficient amounts or otherwise can
successfully produce all such backlog or that any of the Company's revenues will
increase.
GROSS MARGIN
Gross margin (revenue less direct contract costs) as a percentage of revenue
decreased from 30.9% in fiscal year 1996 to 2.5% in fiscal year 1997. This
decrease is due to several factors including the following: (i) significant cost
over-runs on two projects in production during the year which resulted in total
contract costs exceeding contract revenues; (ii) less favorable product mix (in
fiscal year 1996, higher margin services, maintenance and upgrade revenues
comprised 21.4% of total revenues, while in fiscal year 1997, such higher margin
revenues made up only 11.7% of total revenues); (iii) a non-recurring $75,000
software upgrade sale with little associated direct costs in fiscal year 1996;
and (iv) an increase in indirect labor costs in anticipation of higher
production levels. Management anticipates that margins may improve in fiscal
year 1998, provided, however that no assurances of any such improvement can be
given.
OPERATING COSTS
Fiscal year 1997 total operating costs as a percentage of revenues increased to
30.7% from 21.8% in fiscal year 1996. Marketing expenses grew mostly due to
commissions to external representatives and travel expenses incurred. General &
administrative expense increases were caused mainly by salary costs incurred
15
<PAGE>
in anticipation of much higher revenue levels, higher professional fees, and
increased contract labor costs. Most research and development expenses were
either charged to contracts in 1997 or were reimbursed under the NIST contract
(see Note 10 to the financial statements). Consequently, fiscal year 1997
research and development expenses were not significant.
NET DEFERRED TAX ASSET
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" requires the recording of a valuation allowance when it is "more likely
than not that some portion or all of the deferred tax assets will not be
realized." It further states that "forming a conclusion that a valuation
allowance is not needed is difficult when there is negative evidence such as
cumulative losses in recent years." The ultimate realization of this deferred
income tax asset depends upon the ability to generate sufficient taxable income
in the future. There was a 100% valuation allowance for the years ended July
31, 1997 and 1996.
OTHER EXPENSES
Interest expense grew from $23,000 in fiscal year 1996 to $71,000 in fiscal year
1997, primarily due to borrowings from a bank under the Company's Export Import
Bank of the U.S. guaranteed line of credit (see Note 3 to the financial
statements).
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
As of July 31, 1997, the Company had negative working capital of approximately
$164,000 compared to negative net working capital of approximately $82,000 at
July 31, 1996.
CASH FLOWS
The Company's operating activities utilized net cash of approximately $845,000
in fiscal year 1997 compared to net cash utilized in operations of approximately
$406,000 in fiscal year 1996. Cash utilized in operations is less than net
losses in fiscal year 1997 primarily because of non-cash charges for
depreciation and amortization and a net increase in current liabilities.
During fiscal 1997 and 1996, the Company generated $1,304,000 and $452,000,
respectively, from financing activities. The generation of cash from financing
activities in fiscal 1997 was due mainly to the issuance of the Company's common
stock and borrowings under a bank line of credit; in fiscal 1996, cash provided
by financing activity was attributable to issuances of the Company's common
stock and borrowings from notes payable. As further described in Note 4 to the
financial statements, the Company raised $1,080,000 of equity in November and
December of 1996. In addition, the Company borrowed $630,000 pursuant to a bank
line of credit to support the production of export sales.
CAPITAL EXPENDITURES
Capital expenditures in fiscal year 1997 and 1996 were approximately $114,000
and $26,000, respectively. Fiscal year 1997 capital expenditures were for
scanning services equipment, leasehold improvements to accommodate production
requirements, and for the upgrade of internally utilized computer equipment.
Except for computer equipment upgrades, the fiscal year 1997 capital
expenditures are nonrecurring in nature.
LIQUIDITY
Sources of liquidity as of November 7, 1997 include cash on hand of $316,000 and
accounts receivable of $486,000. Based on these sources of liquidity as well as
revenues generated by current backlog, and assuming that the Company does not
lose any contracts, and that none of its customers cancel their contracts or
otherwise fail to pay their debts to the Company, management believes that the
Company has the ability to meet its cash requirements during the fiscal year
ending July 31, 1998, provided, however, that the Company's backlog is
16
<PAGE>
heavily concentrated with a small number of customers. If a customer of the
Company cancels a contract or becomes unable to pay its debts to the Company
pursuant to its purchase contract, liquidity would be adversely affected. This
would require the Company to either obtain additional capital from external
sources or to curtail its working capital expenditures, provided however, that
no assurances can be given of the Company's ability to obtain such additional
capital and any such curtailment could adversely affect the Company's operations
and competitive position.
Over the next several years, the Company will need significant additional
financing for its participation, with consortium members, in a research grant
from the U.S. Department of Commerce National Institute of Standards and
Technology ("NIST") under the Advanced Technology Program. As more fully
described in Note 10 to the financial statements, pursuit of this project
requires funding for the Company's portion of the project in the approximate
amount of $2,745,000 and the Company owes $1,493,000 ($773,000 of which is
currently due to General Electric and $720,000 which will be due to General
Electric upon the Company's receipt of the detector panels) in contract expenses
to consortium members. This amount is expected to increase to a total of
$2,745,000 over future periods, the timing of which is dependent upon the
project's progress. The Company is seeking to obtain such financing from
additional borrowing arrangements and/or the offering of debt or equity
securities. However, there can be no assurance that funds required by the
Company in the future will be available on terms satisfactory to the Company or
at all.
As of November 7, 1997 the Company was in default with a local bank with respect
to its Export Import Bank of the U.S. ("EXIMBANK") guaranteed line of credit.
As more fully described in Note 3 to the financial statements, the Company owed
approximately $630,000 as of July 1997 to a bank in connection with the
production of one of the Company's systems for delivery to a foreign customer,
with the associated receivable from the export customer as collateral. To date,
the customer has not accepted the system, and the Company is seeking to resolve
certain technical and performance issues raised by the customer in an effort to
secure such acceptance. Default was caused by the inability of the Company to
invoice and collect monies that would be due from the customer upon the customer
's acceptance of the system, and to subsequently retire the associated bank loan
within the time required by the terms of the bank note. Management has
negotiated and executed a modification of the note with the bank, which
modification incorporates an extension of the note's due date. Management
presently is in negotiations with the customer and, even though no assurances
can be given, management anticipates that such default might be cured in the
near future, by the customer's acceptance of the product and payment of the
contract price, thus enabling the Company to retire the bank loan. However, if
the customer ultimately declines acceptance of the product, the Company will be
subject to the bank's forbearance of the note until such time as the Company can
retire the loan.
As noted in the independent accountants opinion, there is substantial doubt
about the Company's ability to continue as a going concern without the
realization of additional adequate financing. As of July 31, 1997, the Company
incurred a net loss of $1,121,000 and negative cash flows from operations in
1997 and 1996 of $844,629 and $406,018, respectively. In addition, at July 31,
1997, current liabilities exceeded current assets by approximately $164,000.
Management expects a return to profitable operations in 1998 and will seek
alternative sources of financing to provide additional working capital. Should
the Company be unable to achieve the anticipated level of revenues in 1998,
management would anticipate reducing expenditures in marketing and
administration to preserve positive cash flows. No assurance can be given that
management will be successful in its endeavors.
BACKLOG
Total contract backlog as of November 7, 1997 was approximately $2,700,000, down
from $3,500,000 one year earlier. Of the current backlog, approximately
$2,600,000 is for systems sales. All backlog is scheduled for production in
fiscal year 1998, provided, however that no assurances can be given that all
such backlog will be produced.
17
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
On March 3, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS No. 128").
This pronouncement provides a different method of calculating earnings per share
than is currently used in accordance with APB No. 15, "Earnings Per Share." SFAS
No. 128 provides for calculation of "Basic" and "Diluted" earnings per share.
Basic earnings per share includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution of securities that could share in the earnings of an entity similar to
fully diluted earnings per share. The Company will adopt SFAS No. 128 in 1998
and its implementation is not expected to have a material effect on the
financial statements.
Statement of Financial Accounting Standards No. 129, "Disclosure of Information
about Capital Structure" ("SFAS 129") effective for periods ending after
December 15, 1997, establishes standards for disclosing information about an
entity's capital structure. SFAS 129 requires disclosure of the pertinent
rights and privileges of various securities outstanding (stock, options,
warrants, preferred stock, debt and participation rights) including dividend and
liquidation preferences, participant rights, call prices and dates, conversion
or exercise prices and redemption requirements. Adoption of SFAS 129 will have
no effect on the Company as it currently discloses the information specified.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"), which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is
defined to include all changes in equity except those resulting from investments
by owners and distributions to owners. Among other disclosures, SFAS 130
requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
SFAS 130 is effective for financial statements for periods beginning after
December 15, 1997 and requires comparative information for earlier years to be
restated. Because of the recent issuance of this standard, management has been
unable to fully evaluate the impact, if any, the standard may have on future
financial statement disclosures. Results of operations and financial position,
however, will be unaffected by implementation of this standard.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"), which supersedes SFAS No. 14, "Financial Reporting for Segments of a
Business Enterprise." SFAS 131 establishes standards for the way that public
companies report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments as
components of a company about which separate financial information is available
that is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance.
18
<PAGE>
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997 and requires comparative information for earlier years to be
restated. Because of the recent issuance of this standard, management has been
unable to fully evaluate the impact, if any, it may have on future financial
statement disclosures. Results of operations and financial position, however,
will be unaffected by implementation of this standard.
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Page
Independent Certified Public Accountants' Report............................. 20
Financial Statements:
Balance Sheets, July 31, 1997 and 1996.................................. 21
Statements of Operations, Years Ended July 31, 1997 and 1996............ 23
Statements of Stockholders' Equity, Years Ended July 31, 1997 and 1996.. 24
Statements of Cash Flows, Years Ended July 31, 1997 and 1996............ 25
Summary of Significant Accounting Policies.............................. 27
Notes to Financial Statements................................... 32
</TABLE>
19
<PAGE>
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, 1997 and 1996, and the related
statements of operations, stockholders' equity 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Scientific Measurement Systems,
Inc. at July 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the years then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As disclosed in Note 1 to the
Financial Statements, the Company has suffered recurring losses from operations
and has a working capital deficit that raise substantial doubt about its ability
to continue as a going concern. In addition, the Company is in default in
connection with its line of credit agreement as disclosed in Note 3 to the
Financial Statements. Management's plans in regard to these matters are
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Houston, Texas
November 13, 1997
20
<PAGE>
Scientific Measurement Systems, Inc.
Balance Sheets
===============================================================================
July 31, 1997 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets
<S> <C> <C>
Current
Cash and cash equivalents $390,213 $ 45,042
Trade accounts receivable (Note 3) 293,523 306,187
Research grant receivable 450,090 247,072
Costs and earned profits on long-term contracts
in excess of related billings (Note 6) 903,148 808,825
Inventories (Note 3) 19,900 14,125
Prepaid expenses and other current assets 27,667 83,281
- -------------------------------------------------------------------------------
Total current assets 2,084,541 1,504,532
- -------------------------------------------------------------------------------
Property and equipment (Notes 2 and 3) 1,275,562 1,177,192
Accumulated depreciation (1,188,391) (1,148,916)
- -------------------------------------------------------------------------------
87,171 28,276
- -------------------------------------------------------------------------------
Other assets
Scanning equipment, less accumulated depreciation
of $229,810 and $190,665 (Note 3) 211,323 170,080
Other assets, less accumulated amortization
of $24,591 and $21,457 70,509 52,181
Other prepaids 16,655 33,309
- -------------------------------------------------------------------------------
Total other assets 298,487 255,570
- -------------------------------------------------------------------------------
$2,470,199 $1,788,378
===============================================================================
21
<PAGE>
</TABLE>
Scientific Measurement Systems, Inc.
Balance Sheets
===============================================================================
July 31, 1997 1996
- -------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
Current liabilities
<S> <C> <C>
Accounts payable $399,152 $436,108
Payable to research consortium members (Note 10) 773,186 267,587
Billings in excess of related costs and earned
profits on long-term contracts (Note 6) 267,964 292,812
Notes payable (Note 3) 699,775 471,682
Accrued vacations 45,560 46,174
Accrued commissions 48,474 56,762
Other accrued liabilities 14,382 14,927
- --------------------------------------------------------------------------------
Total current liabilities 2,248,493 1,586,052
- --------------------------------------------------------------------------------
Commitments (See Notes 9, 10 and 11)
- --------------------------------------------------------------------------------
Stockholders' equity
Common stock, $.05 par value; 40,000,000 shares
authorized; 21,114,468 and 16,584,007 shares
issued and outstanding 1,055,723 829,200
Additional paid-in capital 9,253,622 8,339,675
Deficit (10,087,639) (8,966,549)
- --------------------------------------------------------------------------------
Total stockholders' equity 221,706 202,326
- --------------------------------------------------------------------------------
$2,470,199 $1,788,378
================================================================================
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
22
<PAGE>
Scientific Measurement Systems, Inc.
Statements of Operations
===========================================================================
Years ended July 31, 1997 1996
- ---------------------------------------------------------------------------
<TABLE>
<CAPTION>
Contract revenues
<S> <C> <C>
Tomographic system sales $2,800,054 $1,922,698
Scanning services 487,646 564,213
Field services and upgrades 435,890 678,156
- -----------------------------------------------------------------
Total revenues 3,723,590 3,165,067
Direct contract costs (Note 11) 3,630,976 2,188,660
- -----------------------------------------------------------------
Gross profit 92,614 976,407
- -----------------------------------------------------------------
Operating costs:
Marketing 353,679 259,477
Research and development 6,606 4,964
General and administrative 783,497 424,003
- -----------------------------------------------------------------
Total operating costs 1,143,782 688,444
- -----------------------------------------------------------------
(Loss) income from operations (1,051,168) 287,963
- -----------------------------------------------------------------
Other (income) expense:
Interest expense 70,973 22,843
Interest and other income (1,051) (12,310)
- -----------------------------------------------------------------
Total other expense, net 69,922 10,533
- -----------------------------------------------------------------
Net (loss) income $(1,121,090) $277,430
=================================================================
NET (LOSS) INCOME PER COMMON SHARE $ (0.05) $ 0.01
=================================================================
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 22,219,344 17,106,679
=================================================================
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
23
<PAGE>
<TABLE>
<CAPTION>
Scientific Measurement Systems, Inc.
Statements of Stockholders' Equity
================================================================================================
<S> <C> <C> <C> <C> <C>
Additional
Common Stock Paid-In
Shares Amount Capital Deficit Total
- ------------------------------------------------------------------------------------------------
Balance at August 1, 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
Issuance of common stock
and stock options exercised 4,530,461 226,523 913,947 - 1,140,470
Net loss - - - (1,121,090) (1,121,090)
- ------------------------------------------------------------------------------------------------
Balance at July 31, 1997 21,114,468 $1,055,723 $9,253,622 $(10,087,639) $221,706
================================================================================================
See accompanying summary of significant accounting policies and notes to financial statements.
</TABLE>
24
<PAGE>
Scientific Measurement Systems, Inc.
Statements of Cash Flows
Increase (decrease) in cash and cash equivalents
================================================================================
Years ended July 31, 1997 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Operating activities:
<S> <C> <C>
Net (loss) income $(1,121,090) $ 277,430
Adjustments to reconcile net (loss) income to net
cash used in operating activities:
Depreciation and amortization 78,623 52,196
Changes in assets and liabilities:
Trade accounts receivable 12,664 (360,786)
Other receivables (203,018) -
Costs and earned profits on long-term contracts
in excess of related billings (94,323) (731,146)
Inventories (5,775) -
Prepaid expenses and other current assets 55,614 (85,290)
Other assets (1,674) (804)
Billings in excess of related costs and earned
profits on long-term contracts (24,848) 123,955
Accounts payable and accrued expenses 459,198 318,427
- --------------------------------------------------------------------------------
Net cash used in operating activities (844,629) (406,018)
- --------------------------------------------------------------------------------
Net cash used in investing activities:
Capital expenditures (113,763) (25,965)
- --------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
Scientific Measurement Systems, Inc.
Statements of Cash Flows
Increase (decrease) in cash and cash equivalents
================================================================================
Years ended July 31, 1997 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Financing activities:
<S> <C> <C>
Proceeds from issuance of common stock 1,075,470 177,682
Proceeds from exercise of stock options - 23,476
Borrowings from notes payable 537,702 350,682
Repayments on borrowings (309,609) (100,000)
- --------------------------------------------------------------------
Net cash provided by financing activities 1,303,563 451,840
- --------------------------------------------------------------------
Increase in cash and cash equivalents 345,171 19,857
Cash and cash equivalents at beginning of year 45,042 25,185
- --------------------------------------------------------------------
Cash and cash equivalents at end of year $390,213 $45,042
====================================================================
</TABLE>
Supplemental disclosures of cash flow information:
Cash payments for interest were $71,077 and $8,000 in 1997 and 1996,
respectively. No taxes were paid in 1997 and 1996.
================================================================================
Supplemental disclosure of non-cash investing and financing activities:
Assets acquired through issuance of common stock were valued at $65,000 in 1997.
================================================================================
See accompanying summary of significant accounting policies and notes to
financial statements.
26
<PAGE>
Scientific Measurement Systems, Inc.
Summary of Significant Accounting Policies
================================================================================
Nature of Scientific Measurement Systems, Inc.
Business (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 The preparation of financial
Estimates 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.
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 Property and equipment is stated at
Equipment 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. Improvements
to building are depreciated by the
straight-line method over the
remaining term of the building lease.
Maintenance and repairs are charged
to expense as incurred.
Financial The carrying amount of the Company's
Instruments financial instruments, consisting of
cash, receivables, accounts payable,
payable to research consortium
members, and notes payable
approximates their fair value.
Scanning Scanning equipment is stated at cost.
Equipment Depreciation for financial statement
purposes is provided by the
straight-line method over estimated
useful lives of five to ten years.
27
<PAGE>
Scientific Measurement Systems, Inc.
Summary of Significant Accounting Policies
================================================================================
The Company holds patent rights
Patent Rights related to procedures for tomographic
examinations which are being
amortized using the straight-line
method over their remaining lives.
Research and Expenditures for Company-sponsored
Development research and development are expensed
as incurred.
Earnings Primary earnings per share amounts
(Loss) Per are computed based on the weighted
Share 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 For purposes of reporting cash flows,
Equivalents cash and cash equivalents include
cash and interest bearing deposits
with original maturities of three
months or less.
Income Taxes The Company follows the liability
method of accounting for income
taxes. This method provides for
deferred income taxes to be recorded
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
28
<PAGE>
Scientific Measurement Systems, Inc.
Summary of Significant Accounting Policies
================================================================================
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.
Long-Lived In accordance with SFAS 121, "Accounting
Assets for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed
Of", management reviews long-lived
assets and intangible assets for
impairment whenever events or changes in
circumstances indicate the carrying
amount of an asset may not be fully
recoverable. As part of this assessment,
management prepares an analysis of the
undiscounted cash flows for each product
that has significant long-lived or
intangible asset values associated with
it. This analysis for the asset values
as of July 31, 1997 indicated there was
no impairment to these assets' carrying
values.
New Accounting On March 3, 1997, the Financial
Pronouncements Accounting Standards Board issued
Statement of Financial Accounting
Standards No. 128 "Earnings Per Share"
("SFAS No. 128"). This pronouncement
provides a different method of
calculating earnings per share than is
currently used in accordance with APB
No. 15, "Earnings Per Share". SFAS No.
128 provides for calculation of "Basic"
and "Diluted" earnings per share. Basic
earnings per share includes no dilution
and is computed by dividing income
available to common shareholders by the
weighted average number of common shares
outstanding for the period. Diluted
earnings per share reflects the
potential dilution of securities that
could share in the earnings of an entity
similar to fully diluted earnings per
share. The Company will adopt SFAS No.
128 in 1998 and its implementation is
not expected to have a material effect
on the consolidated financial
statements.
Statement of Financial Accounting
Standards No. 129, "Disclosure of
Information about Capital Structure"
("SFAS 129") effective for periods
29
<PAGE>
Scientific Measurement Systems, Inc.
Summary of Significant Accounting Policies
================================================================================
ending after December 15, 1997,
establishes standards for disclosing
information about an entity's capital
structure. SFAS 129 requires disclosure
of the pertinent rights and privileges
of various securities outstanding
(stock, options, warrants, preferred
stock, debt and participation rights)
including dividend and liquidation
preferences, participant rights, call
prices and dates, conversion or exercise
prices and redemption requirements.
Adoption of SFAS 129 will have no effect
on the Company as it currently discloses
the information specified.
In June 1997, the Financial Accounting
Standards Board issued Statement of
Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS
130"), which establishes standards for
reporting and display of comprehensive
income, its components and accumulated
balances. Comprehensive income is
defined to include all changes in equity
except those resulting from investments
by owners and distributions to owners.
Among other disclosures, SFAS 130
requires that all items that are
required to be recognized under current
accounting standards as components of
comprehensive income be reported in a
financial statement that is displayed
with the same prominence as other
financial statements.
SFAS 130 is effective for financial
statements for periods beginning after
December 15, 1997 and requires
comparative information for earlier
years to be restated. Because of the
recent issuance of this standard,
management has been unable to fully
evaluate the impact, if any, the
standard may have on future financial
statement disclosures. Results of
operations and financial position,
however, will be unaffected by
implementation of this standard.
In June 1997, the Financial Accounting
Standards Board issued SFAS No. 131,
"Disclosures about Segments of an
Enterprise and Related Information",
("SFAS 131") which supersedes SFAS No.
14, "Financial Reporting for Segments of
a Business Enterprise". SFAS 131
establishes standards for the way that
public companies report information
about operating segments in annual
financial statements and requires
reporting of
30
<PAGE>
Scientific Measurement Systems, Inc.
Summary of Significant Accounting Policies
================================================================================
selected information about operating
segments interim financial statements
issued to the public. It also
establishes standards for disclosures
regarding products and services,
geographic areas and major customers.
SFAS 131 defines operating segments as
components of a company about which
separate financial information is
available that is evaluated regularly by
the chief operating decision maker in
deciding how to allocate resources and
in assessing performance.
SFAS 131 is effective for financial
statements for periods beginning after
December 15, 1997 and requires
comparative information for earlier
years to be restated. Because of the
recent issuance of this standard,
management has been unable to fully
evaluate the impact, if any, it may have
on future financial statement
disclosures. Results of operations and
financial position, however, will be
unaffected by implementation of this
standard.
Stock Options The Company accounts for stock options
and Warrants and warrants issued to employees in
accordance with APB 25, "Accounting for
Stock Issued to Employees". The Company
follows FASB Statement 123, "Accounting
for Stock-Based Compensation" ("SFAS No.
123") for financial statement disclosure
purposes and for the issuance of options
and warrants to non-employees for
services rendered.
Reclassification Certain amounts previously reported
have been reclassified to conform to
current year presentation.
31
<PAGE>
<TABLE>
<CAPTION>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
====================================================================================================================================
<S> <C>
1. Going Concern The accompanying financial statements have been prepared in
Uncertainty conformity with generally accepted accounting principles, which
contemplates continuation of the Company as a going concern.
However, the Company incurred a net loss of $1,121,090 in 1997 and
negative cash flows from operations in 1997 and 1996 of $844,629 and
$406,018, respectively. In addition, the Company is in default in
connection with its line of credit agreement (see Note 3). At July
31, 1997, current liabilities exceeded current assets by
approximately $164,000. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. The
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Management expects a return to profitable operations in 1998 and
will seek alternative sources of financing to provide additional
working capital. Should the Company be unable to achieve the
anticipated level of revenues in 1998, management would anticipate
reducing expenditures in marketing and administration to preserve
positive cash flows. No assurance can be given that management will
be successful in its endeavors.
2. Property The major classes of property and equipment as of July 31 are as
and follows:
Equipment
1997 1996
------------------------------------------------------------------
Equipment $1,116,886 $1,071,608
Furniture and fixtures 104,285 104,285
Improvements to building 54,391 1,299
------------------------------------------------------------------
$1,275,562 $1,177,192
==================================================================
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
====================================================================================================================================
<S> <C>
3. Notes Notes payable at July 31 consisted of the following:
Payable
1997 1996
--------------------------------------------------------------------
Eximbank note payable in default
and due on demand, secured by certain
foreign accounts receivable, inventories,
and property and equipment; interest
payable at prime (8.5% at July 31, 1997)
plus 5%. $ 629,775 $ 92,073
Note payable to a bank due December
18, 1997; interest at 11%. 70,000 80,000
18% note payable; paid off in 1997. - 233,609
8% note payable; paid off in 1997. - 41,000
11% director note payable; paid off in 1997. - 25,000
--------------------------------------------------------------------
$ 699,775 $ 471,682
=====================================================================
4. Stockholders' The Company has authorized 40,000,000 shares of common stock, $0.05
Equity par value. Additionally, the Company has authorized 2,000,000
shares of preferred stock, $0.15 par value. As of July 31, 1997, no
preferred stock has been issued or is outstanding.
In November 1996, the Company completed limited offerings of
1,960,732 shares of common stock pursuant to Regulation S of the
Securities Act of 1933. Net proceeds of approximately $1,080,000
were primarily used for general corporate needs.
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
====================================================================================================================================
<S> <C>
The Company agreed to compensate a sales agent of the limited
offering 10% of the gross dollars raised as a fee. In addition, the
Company agreed to grant the sales agent 150,000 stock purchase
warrants exercisable at $0.875. These agent warrants may be
exercised for a period of five years with no call provisions and
piggyback registration rights and a one-time demand registration
after twelve months.
5. Stock Options 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.
On December 12, 1996, the Board of Directors approved the 1996
Incentive Plan (the "1996 Plan"). The 1996 Plan is administered by
a Stock Option Committee which consists of not less than two
non-employee directors. The 1996 Plan reserves 3,000,000 shares of
the Company's common stock and provides for the grant of incentive
stock options, nonstatutory options,
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
====================================================================================================================================
<S> <C>
restricted stock awards, and SARs to certain key employees of the
Company, and to certain other individuals. Options, stock awards, and
SARs will be awarded at the discretion of the Stock Option Committee.
The 1996 Plan prohibits the grant of options thereunder after
December 12, 2006. The Stock Option Committee also determines the
expiration dates of options granted provided that all options must be
exercised within 10 years of the date of grant. 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.
During fiscal 1996, the Board of Directors approved awards of 775,000
options to employees which were not awarded pursuant to any formal
plan. All options were granted at fair value at date of issuance.
Certain options vested immediately and others will vest over a period
of three years. The options awarded in fiscal 1996 expire on August
1, 2000.
During fiscal 1997, the Board of Directors approved awards of 700,000
options to employees which were awarded under the 1996 Plan. All
options were granted at fair market value at date of issuance. The
options will vest over a period of three years and will expire
December 19, 2006.
During fiscal 1997, the Board of Directors also approved awards of
600,000 options to eight non-employee directors. These options were
not awarded pursuant to any formal plan. All options were granted at
fair value at date of issuance. The options vested immediately and
will expire August 25, 2006. Two directors chose to return their
option agreements to the Company unexercised during fiscal 1997.
As of July 31, 1997, 2,423,681 shares of common stock were under
option, with exercise prices ranging from $0.1406 to $0.8900;
1,973,681 of these options were exercisable at July 31, 1997.
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
====================================================================================================================================
<S> <C>
A summary of the status of the Company's stock options as of July 31
is presented below:
</TABLE>
<TABLE>
<CAPTION>
1997 1996
------------------- -----------------
<S> <C> <C> <C> <C> <C>
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Options Shares Price Shares Price
-------------------------------------------------------------------
Outstanding and
exercisable at
beginning of year 4,119,352 $0.17 4,959,950 $ 0.16
Granted 1,300,000 0.88 775,000 0.24
Exercised (2,510,671) 0.17 (1,487,266) 0.17
Forfeited (485,000) 0.77 (128,332) 0.23
-------------------------------------------------------------------
Outstanding and
exercisable at
end of year 2,423,681 $0.43 4,119,352 $ 0.17
===================================================================
</TABLE>
<TABLE>
<CAPTION>
The following table summarizes the information about the stock
options as of July 31, 1997.
Weighted
Average
Number Remaining Weighted Number Weighted
Range of Outstand- Contractual Average Exercisable Average
Exercise ing at Life Exercise at Exercise
Price July 31 (Years) Price July 31 Price
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.1406 32,000 1 $0.1406 32,000 $0.1406
$0.1500 1,050,641 3 $0.1500 1,050,641 $0.1500
$0.2250 141,040 1 $0.2250 141,040 $0.2250
$0.2400 300,000 3 $0.2400 300,000 $0.2400
$0.8600 450,000 5 $0.8600 450,000 $0.8600
$0.8900 450,000 9 $0.8900 450,000 $0.8900
-------------------------------------------------------------------
$0.1406-
$0.8900 2,423,681 4 $0.4300 2,423,681 $0.4300
==================================================================
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
====================================================================================================================================
<S> <C>
SFAS No. 123 requires the Company to provide pro forma information
regarding net (loss) income applicable to common stockholders and
(loss) income per share as if compensation cost for the Company's
stock options granted had been determined in accordance with the fair
value based method prescribed in that Statement.
The Company estimates the fair value of each stock option at the grant
date by using the Black-Scholes option-pricing model with the
following weighted average assumptions used for grants in 1997 and
1996 as follows: dividend yield of 0%; expected volatility of 100%;
risk-free interest rates ranging from 5.44% to 6.34%; and expected
lives ranging from 2 to 3 years. The weighted fair value of options
granted in 1997 ranged from $0.58 to $0.47 per share and the weighted
fair value of options granted in 1996 was $0.13 per share.
Under the accounting provisions of SFAS No. 123, the Company's net
(loss) income applicable to common stockholders and (loss) income per
share would have been increased/decreased to the pro forma amounts
indicated below:
1997 1996
------------------------------------------------------------------
Net (loss) income applicable to
common stockholders:
As reported $(1,121,090) $277,430
Pro forma (1,809,090) 176,680
(Loss) income per share:
As reported $ (.05) $ .01
Pro forma (.08) .01
==================================================================
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
====================================================================================================================================
<S> <C>
6. Contract
Revenues
The Company's revenues have been derived from certain major customers
(greater than 10% of total revenues) as follows:
Customer 1997 1996
---------- ----- -----
<S> <C> <C>
A 31% 0%
B 24% 3%
C 14% 7%
D 5% 12%
E 4% 20%
F 0% 17%
The Company had export revenues of approximately $910,000 and $82,000
to Japan, $1,156,000 and $400 to Germany, $117,000 and $-0- to
Switzerland, $-0- and $22,000 to China, and $531,000 and $230,000 to
Italy during fiscal 1997 and 1996, respectively. Revenues derived
either as a prime contractor or subcontractor to prime contractors to
the U. S. Government were 8% and 47% of total revenues during fiscal
1997 and 1996, respectively.
Contracts in progress consist of the following:
July 31, 1997 1996
-------------------------------------------------------------------
Costs and estimated earnings $3,526,572 $2,090,674
Billings 2,891,388 1,574,661
-------------------------------------------------------------------
$ 635,184 $ 516,013
==================================================================
Included in the balance sheet:
Costs and earned profits on long-
term contracts in excess of
related billings $ 903,148 $ 808,825
Billings in excess of related
costs and earned profits on
long-term contracts (267,964) (292,812)
-------------------------------------------------------------------
$ 635,184 $ 516,013
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
====================================================================================================================================
<S> <C>
Requirements for progress billings are negotiated on an individual
contract basis and, accordingly, vary between contracts.
7. Income Temporary differences represent the cumulative taxable or deductible
Taxes amounts recorded in the financial statements in different years than
recognized in the tax returns.
The tax effects of significant items comprising the Company's net
deferred tax assets are as follows:
July 31, 1997 1996
------------------------------------------------------------------
Accrued expenses $ 15,000 $ 36,400
------------------------------------------------------------------
Total current deferred income tax asset 15,000 36,400
------------------------------------------------------------------
Depreciation (17,000) -
Operating loss carryforward 3,396,000 2,933,300
Tax credit carryforward 137,000 137,100
------------------------------------------------------------------
3,531,000 3,106,800
Valuation allowance (3,531,000) (3,106,800)
------------------------------------------------------------------
Total net deferred income tax asset $ - $ -
==================================================================
At July 31, 1997 the Company has available for federal income tax
reporting purposes approximately $9,988,000 of net operating loss
carryforwards of which $32,000 expires in 1999, $483,000 expires in
2000 with the balance expiring in varying amounts in 2001 through
2012. The Company uses accelerated depreciation for federal income
tax purposes. Also, the Company has approximately $137,000 of tax
credit carryforwards expiring from 1998 to
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
====================================================================================================================================
<S> <C>
2001. Approximately $7,000 in tax credit carryforwards expired in
1997. The Company utilized $157,647 of deferred tax benefit in 1996
attributable to the application of the net operating loss
carryforward to 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 "forming a
conclusion that a valuation allowance is not needed is difficult when
there is negative evidence such as cumulative losses in recent
years". The ultimate realization of this deferred income tax asset
depends upon the ability to generate sufficient taxable income in the
future. There was a 100% valuation allowance for the years ended July
31, 1997 and 1996.
8. Related Party In 1981 the Company purchased from various stockholders certain
Transactions technology and patent rights related to the procedures for
tomographic examinations. The cost of such rights, net of accumulated
amortization, of $10,157 and $13,291 are included in other assets at
July 31, 1997 and 1996. 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.
During fiscal year 1997, the Company purchased a scanner from a
Director of the Company. The Company issued 500,000 shares of common
stock to the Director in exchange for the scanner .
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
====================================================================================================================================
<S> <C>
9. 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 1997 and 1996 was $91,175 and $71,634,
respectively.
Future minimum payments, by fiscal year and in the aggregate for
leases of office and manufacturing space and equipment consist of the
following:
1998 $ 31,617
1999 28,804
2000 17,893
--------------------------------------------------------------------
Total minimum lease payments $ 78,314
====================================================================
10. Research and In 1996, the Company formed a consortium with General Motors, General
Development Electric and EG&G to develop scanning technology that is capable of
Consortium and tomographical scanning 100 times faster than current systems. The
Grant Company is the project leader of the consortium and has sole
commercialization rights, except for medical applications, for the
new technology.
Under the terms of the consortium agreement, approximately 30
advanced detector panels will be produced by the consortium which
will require aggregate funding of $7,660,000. In February 1996, the
consortium was awarded a grant from the U.S. Department of Commerce
National Institute of Standards and Technology ("NIST") under their
Advanced Technology Program. The terms of the grant provide that NIST
will contribute 49% of the consortium's funding requirement or
$3,753,000 as a grant to the consortium. The terms of the consortium
agreement also stipulate that the Company will reimburse General
Electric for its costs not reimbursed by NIST (approximately
$1,526,000), over a three-year period. Further, the Company will
invest an additional $1,219,000 into the project. During 1997 and
1996, the Company incurred approximately $194,600 and $87,200,
respectively, under the project net of reimbursement from NIST.
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
====================================================================================================================================
<S> <C>
Through July 31, 1997, the Company, acting as project leader, has
collected grants approximating $1,313,000 from NIST as reimbursement
for costs incurred by other consortium members, of which $540,100 has
been repaid to such members. Accordingly, at July 31, 1997 the
Company had amounts payable to consortium members, (primarily General
Electric) of $773,186.
11. Changes in During fiscal year 1997, the Company completed construction and made
Estimates delivery of a scanning system pursuant to a purchase order from a
foreign customer. Due to technical complications, the customer did
not accept the system, and the system was returned to the Company for
further work. This rework has been completed, and the Company is
presently attempting to negotiate final product acceptance with the
customer. Total contract revenues and direct contract costs
recognized for this project are $761,196 and $562,942, respectively,
through fiscal year 1997. Pending the final acceptance of this system
by the customer, the Company has recorded a reserve in fiscal year
1997 for an amount representing gross profit for the system since
contract inception. The effect of the reserve increased the net loss
for 1997 by $198,254.
During fiscal year 1997, the Company changed its estimate of
percentage-of-completion on one contract, increasing the contract
costs and estimated costs to complete. This change was implemented to
better match revenues and expenses over the term of the contract. The
change in estimate was made prospectively and the effect of the
change on 1997 results was to increase net loss by $41,207.
</TABLE>
42
<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
January 29, 1998. 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 January 29, 1998. 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 January 29, 1998. 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
January 29, 1998. The incorporated portions consist of all of the disclosures
that appear in that Proxy Statement under the heading "Certain Relationships and
Related Transactions."
43
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report.
Page
1. Financial Statements:
Independent Certified Public Accountants' Report............... 20
Balance Sheets, July 31, 1997.................................. 21
Statements of Operations, Years Ended July 31, 1997 and 1996... 23
Statements of Stockholders' Equity, Years Ended
July 31, 1997 and 1996........................................ 24
Statements of Cash Flows, Years Ended July 31, 1997 and 1996... 25
Summary of Significant Accounting Policies..................... 27
Notes to Financial Statements.................................. 32
44
<PAGE>
2. Exhibits:
<TABLE>
<CAPTION>
Incorporated by
Number Description Reference to
- ------ ----------------------------------------------------- ------------------------------------
<C> <S> <C>
3.1 Restated Articles of Incorporation Exhibit 3.1 to the Registration
Statement on Form S-18 effective
March 5, 1985
(File No. 2-94269-FW)
3.1A Amendment to Articles of Incorporation Exhibit 3.1A to the Annual Report
on Form 10-K for the Fiscal Year Ended
July 31, 1991
3.2 By-laws Exhibit 3.2 to the Registration
Statement on Form S-18 effective
March 5, 1985
(File No. 2-94269-FW)
3.2A Amendment to By-laws Exhibit 3.2A to the Annual Report
on Form 10-K for the Fiscal Year Ended
July 31, 1991
4.1 Form of Common Stock Certificate Exhibit 4.1 to the Registration
Statement on Form S-18 effective
March 5, 1985
(File No. 2-94269-FW)
10.8 Form of Employee Agreement (Non-Disclosure) Exhibit 10.10 to the Registration
Statement on Form S-1 effective
September 9, 1986
(File No. 33-6220)
10.9 1983 Incentive Stock Option Plan Exhibit 10.18 to the Registration
Statement on Form S-18 effective
March 5, 1985
(File No. 2-94269-FW)
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Incorporated by
Number Description Reference to
- ------ ----------------------------------------------------- ------------------------------------
<S> <C> <C>
10.10 Letter agreements dated November 20, 1987 and Exhibit 10.14 to the Company's
October 7, 1988 between the Registrant and Annual Report on Form 10-K for the
Bethlehem Steel Corporation for the development fiscal year ended July 31, 1988
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 Option Plan Exhibit A to Proxy Statement for
1990 Annual Meeting of
Shareholders filed October 29, 1990
10.12 Mutual License Agreement dated May 5, 1993 Exhibit 10.12 to the Company's
between the Registrant and Bethlehem Steel Annual Report on Form 10-KSB for
Corporation the fiscal year ended July 31, 1995
10.13 Frost National Bank letter dated October 25, 1995 Exhibit 10.13 to the Company's
regarding Term Note Annual Report on Form 10-KSB for
the fiscal year ended July 31, 1995
10.14 Notes dated May 8, 1995, May 31, 1995 and June Exhibit 10.14 to the Company's
16, 1995 in the principal amounts of $50,000, Annual Report on Form 10-KSB for
$30,000 and $10,000 respectively, all payable by the fiscal year ended July 31, 1995
Registrant to Mr. Howard L. Burris, Jr.
10.15 Note dated June 5, 1996, in the principal amount Exhibit 10.15 to the Company's
of $25,000 payable to Thomas Prud'homme Annual Report on Form 10-KSB for
the fiscal year ended July 31, 1996
10.16 Note dated July 12, 1996, in the principal amount Exhibit 10.16 to the Company's
of $233,608.70 payable to Ulster Investments, Annual Report on Form 10-KSB for
Ltd. and related loan documents the fiscal year ended July 31, 1996
10.17 Volumetric Computed Tomography Consortium Exhibit 10.17 to the Company's
Collaboration Agreement dated December 1995 Annual Report on Form 10-KSB for
the fiscal year ended July 31, 1996
10.18 Volumetric Computed Tomography Consortium Exhibit 10.18 to the Company's
Commercialization Agreement dated December Annual Report on Form 10-KSB for
1995 the fiscal year ended July 31, 1996
10.19 Amendment to U.S. Department of Commerce Exhibit 10.19 to the Company's
National Institute of Standards and Technology Annual Report on Form 10-KSB for
Financial Assistance Award dated January 19, the fiscal year ended July 31, 1996
1996
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
Incorporated by
Number Description Reference to
- ------ ----------------------------------------------------- ------------------------------------
<S> <C> <C>
10.20 Promissory Note dated June 15, 1996 to Wells Exhibit 10.20 to the Company's
Fargo HSBC Trade Bank, N.A. in the principal Annual Report on Form 10-KSB for
amount of $1,250,000.00; Security Agreement the fiscal year ended July 31, 1996
dated June 15, 1996 between the Company and
Wells Fargo HSBC Trade Bank, N.A.
10.21 Note dated January 25, 1996 to Jenkens & Exhibit 10.21 to the Company's
Gilchrist, P.C. in the principal amount of $52,000 Annual Report on Form 10-KSB for
the fiscal year ended July 31, 1996
10.22 U. S. Department of Commerce National Institute N/A
of Standards and Technology Financial Assistance
Award dated September 26, 1995
10.23 1996 Incentive Stock Option Plan N/A
10.24 Amendment to U.S. Department of Commerce N/A
National Institute of Standards and Technology
(NIST) Financial Assistance Award dated
effective September 1, 1997
10.25 Letter from Frost National Bank dated August 5, N/A
1997 and Promissory Note dated July 21, 1997
10.26 EXIM Guaranteed Loan Agreement dated June N/A
15, 1996
10.27 First Amendment to EXIM Guaranteed Loan N/A
Agreement dated as of August 1, 1996 between
the Company and Wells Fargo HSBC Trade Bank,
N.A. and Promissory Note dated August 1, 1996
payable to Wells Fargo HSBC Trade Bank, N.A.
10.28 Second Amendment to EXIM Guaranteed Loan N/A
Agreement dated as of June 15, 1997 between the
Company and Wells Fargo HSBC Trade Bank,
N.A. and Promissory Noted dated June 15, 1997
payable to Wells Fargo HSBC Trade Bank, N.A.
10.29 First Amendment to Security Agreement dated N/A
June 15, 1997 between the Company and Wells
Fargo HSBC Trade Bank, N.A.
10.30 Registration Rights Agreement dated May 8, 1995 N/A
between the Company and Howard L. Burris, Jr.
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
Incorporated by
Number Description Reference to
- ------ ----------------------------------------------------- ------------------------------------
<S> <C> <C>
10.31 Third Amendment to EXIM Guaranteed Loan
Agreement dated as of July 31, 1997
between the Company and Wells
Fargo HSBC Trade Bank, N.A. and
Promissory Note dated July 31, 1997,
payable to Wells Fargo HSBC Trade
Bank, N.A.
10.32 Second Amendment to Security Agreement
dated July 31, 1997 between the
Company and Wells Fargo HSBC
Trade Bank, N.A.
24.1 Consent of Independent Accountants N/A
25.1 Power of Attorney N/A
(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.
</TABLE>
48
<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, 1997, to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Austin and State of Texas, on the 19th
day of December, 1997.
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
By: /s/ HOWARD L. BURRIS, JR. By: /s/ HOWARD L. BURRIS, JR.
---------------------------------- -----------------------------------
Howard L. Burris, Jr. Howard L. Burris, Jr.
President and Chief Executive Officer Acting Principal Financial and
Accounting Officer
POWER OF ATTORNEY TO SIGN AMENDMENTS
KNOW ALL BY THESE PRESENTS, that each person whose signature appears below
does hereby constitute and appoint Howard L. Burris, Jr. 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, 1997, 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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/Howard L. Burris President, Chief Executive Officer December 19, 1997
- ---------------------- and Director
Howard L. Burris, Jr.
/s/Howard L. Burris Acting Principal Financial and December 19, 1997
- ---------------------- Acccounting Officer
Howard L. Burris, Jr.
/s/Larry Secrest Director December 19, 1997
- ----------------------
Larry Secrest
/s/Burton W. Kanter Director December 19, 1997
- ----------------------
Burton W. Kanter
/s/James W. Kenney Director December 19, 1997
- ----------------------
James W. Kenney
/s/Phillips A. Moore Director December 19, 1997
- ----------------------
Phillips A. Moore
/s/Thomas Prud'homme Director December 19, 1997
- ---------------------
Dr. Thomas Prud'homme
Director December , 1997
- ----------------------
Nancy R. Woodward
</TABLE>
49
<PAGE>
Exhibit 10.20
PROMISSORY NOTE
---------------
$629,775.00 Houston, Texas June 15, 1997
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 1445 Ross Avenue, Dallas, Texas, Dallas County, Texas, in lawful
money of the United States of America, the principal sum of SIX HUNDRED TWENTY
NINE THOUSAND SEVEN HUNDRED SEVENTY-FIVE AND NO/100 DOLLARS ($629,775.00), 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, 1997, 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 July 31, 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
<PAGE>
day) unless such calculation would result in a usurious rate in 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 amended by First
Amendment to EXIM Guaranteed Loan Agreement dated as of August 1, 1996
and Second Amendment to EXIM Guaranteed Loan Agreement dated as of June
15, 1997, and as the same may be further 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 Wells Fargo Bank from time to time as its prime rate
which shall vary from time to time. Such rate is set by Wells Fargo Bank
as a general reference rate of interest, taking into account such
factors as Wells Fargo Bank may deem appropriate, it being understood
that many of Wells Fargo Bank'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 Wells Fargo Bank 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
<PAGE>
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 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 of 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
<PAGE>
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, 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.
This Note is executed in renewal, extension and decrease of, but not
in discharge or novation of, that certain promissory note in the original
principal amount of $1,250,000.00, dated August 1, 1996, executed by Maker and
payable to the order of Payee, which was executed in renewal, extension and
modification of, but not in discharge or novation of, that certain promissory
note in the original principal amount of $1,250,000.00, dated June 15, 1996,
executed by Maker and payable to the order of Payee.
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
By: /s/ LARRY SECREST
---------------------------------
Larry Secrest
Chairman
<PAGE>
EXHIBIT 10.22
FORM CD-450 U.S. DEPARTMENT OF COMMERCE
(REV. 10-93) [ ] GRANT [X] COOPERATIVE
DAO 203-26 AGREEMENT
-------------------------
FINANCIAL ASSISTANCE AWARD ACCOUNTING CODE
**SEE BELOW
- --------------------------------------------------------------------------------
RECIPIENT NAME AWARD NUMBER
Scientific Measurement Systems, Inc. 70NANB5H1148
- --------------------------------------------------------------------------------
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
[ ] OMB Circular A-21, Cost Principles for Educational Institutions
[ ] OMB Circular A-87, Cost Principles for State and Local Governments
[X] OMB Circular A-110, Grants and Agreements with Institutions of Higher
Education, Hospitals, and Other Nonprofit Organizations Uniform
Administrative Requirements
[ ] OMB 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
[ ] 15 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 TITLE DATE
COMMERCE GRANTS OFFICER
Lisa K. Jandovitz /s/ LISA K. JANDOVITZ Grants Officer 9/26/95
- --------------------------------------------------------------------------------
TYPED NAMED AND SIGNATURE OF TITLE DATE
AUTHORIZED RECIPIENT OFFICIAL
- --------------------------------------------------------------------------------
2
<PAGE>
SPECIAL AWARD CONDITIONS
ADVANCED TECHNOLOGY PROGRAM - JOINT VENTURE
COOPERATIVE AGREEMENT NO. 70NANB5H11148
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.
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 20889-0001
(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
day period.
<PAGE>
EXHIBIT 10.23
================================================================================
SCIENTIFIC
MEASUREMENT
SYSTEMS, INC.
1996 INCENTIVE PLAN
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
SECTION 1. DEFINITIONS............................................ 1
SECTION 2. SHARES OF STOCK SUBJECT TO THE PLAN.................... 7
2.1 Maximum Number of Shares............................... 7
2.2 Limitation of Shares................................... 7
2.3 Description of Shares.................................. 9
2.4 Registration and Listing of Shares..................... 9
SECTION 3. ADMINISTRATION OF THE PLAN............................. 9
3.1 Committee.............................................. 9
3.2 Duration, Removal, Etc................................. 9
3.3 Meetings and Actions of Committee...................... 9
3.4 Committee's Powers..................................... 10
SECTION 4. ELIGIBILITY AND PARTICIPATION.......................... 10
4.1 Eligible Individuals................................... 10
4.2 Grant of Awards........................................ 11
4.3 Date of Grant.......................................... 11
4.4 Award Agreements....................................... 11
4.5 Limitation for Incentive Options....................... 11
4.6 No Right to Award...................................... 11
SECTION 5. TERMS AND CONDITIONS OF OPTIONS........................ 11
5.1 Number of Shares....................................... 12
5.2 Vesting................................................ 12
5.3 Expiration of Options.................................. 12
5.4 Exercise Price......................................... 12
5.5 Method of Exercise..................................... 12
5.6 Incentive Option Exercises............................. 12
5.7 Medium and Time of Payment............................. 12
5.8 Payment with Sale Proceeds............................. 13
5.9 Payment of Taxes....................................... 13
5.10 Limitation on Aggregate Value of Shares That
May Become First Exercisable During Any
Calendar Year Under an Incentive Option............... 14
5.11 No Fractional Shares................................... 14
5.12 Modification, Extension, and Renewal of Options........ 14
5.13 Other Agreement Provisions............................. 14
SECTION 6. STOCK APPRECIATION RIGHTS.............................. 15
6.1 Form of Right.......................................... 15
6.2 Rights Related to Options.............................. 15
(a) Exercise and Transfer........................... 15
<PAGE>
(b) Value of Right.................................. 15
6.3 Right Without Option................................... 16
(a) Number of Shares................................ 16
(b) Vesting......................................... 16
(c) Expiration of Rights............................ 16
(d) Value of Right.................................. 16
6.4 Limitations on Rights.................................. 16
6.5 Payment of Rights...................................... 16
6.6 Payment of Taxes....................................... 16
6.7 Other Agreement Provisions............................. 17
SECTION 7. RESTRICTED STOCK AWARDS................................ 17
7.1 Restrictions........................................... 17
(a) Transferability................................. 17
(b) Conditions to Removal of Restrictions........... 18
(c) Legend.......................................... 18
(d) Possession...................................... 18
(e) Other Conditions................................ 18
7.2 Expiration of Restrictions............................. 18
7.3 Rights as Shareholder.................................. 18
7.4 Payment of Taxes....................................... 18
7.5 Other Agreement Provisions............................. 19
SECTION 8. AWARDS TO NON-EMPLOYEE DIRECTORS....................... 19
8.1 Grant of Awards........................................ 19
8.2 Exercisability......................................... 19
SECTION 9. ADJUSTMENT PROVISIONS.................................. 19
9.1 Adjustment of Awards and Authorized Stock.............. 19
9.2 Changes in Control..................................... 20
9.3 Restructuring Without Change in Control................ 21
9.4 Notice of Restructuring................................ 23
SECTION 10. ADDITIONAL PROVISIONS................................. 23
10.1 Termination of Employment.............................. 23
10.2 Other Loss of Eligibility - Non Employees.............. 23
10.3 Death.................................................. 24
10.4 Disability............................................. 24
10.5 Leave of Absence....................................... 24
10.6 Transferability of Awards.............................. 24
10.7 Forfeiture and Restrictions on Transfer................ 25
10.8 Delivery of Certificates of Stock...................... 25
10.9 Conditions to Delivery of Stock........................ 25
10.10 Certain Directors and Officers......................... 26
10.11 Securities Act Legend.................................. 26
-ii-
<PAGE>
10.12 Legend for Restrictions on Transfer.................... 27
10.13 Rights as a Shareholder................................ 27
10.14 Furnish Information.................................... 28
10.15 Obligation to Exercise................................. 28
10.16 Adjustments to Awards.................................. 28
10.17 Remedies............................................... 28
10.18 Information Confidential............................... 28
10.19 Consideration.......................................... 28
SECTION 11. DURATION AND AMENDMENT OF PLAN........................ 29
11.1 Duration............................................... 29
11.2 Amendment.............................................. 29
SECTION 12. GENERAL............................................... 29
12.1 Application of Funds................................... 29
12.2 Right of the Corporation and Subsidiaries to
Terminate Employment.................................. 29
12.3 No Liability for Good Faith Determinations............. 29
12.4 Other Benefits......................................... 30
12.5 Exclusion From Pension and Profit-Sharing Compensation. 30
12.6 Execution of Receipts and Releases..................... 30
12.7 Unfunded Plan.......................................... 30
12.8 No Guarantee of Interests.............................. 31
12.9 Payment of Expenses.................................... 31
12.10 Corporation Records.................................... 31
12.11 Information............................................ 31
12.12 No Liability of Corporation............................ 31
12.13 Corporation Action..................................... 31
12.14 Severability........................................... 31
12.15 Notices................................................ 32
12.16 Successors............................................. 32
12.17 Headings............................................... 32
12.18 Governing Law.......................................... 32
12.19 Word Usage............................................. 33
-iii-
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
1996 INCENTIVE PLAN
SCOPE AND PURPOSE OF PLAN
-------------------------
Scientific Measurement Systems, Inc., a Texas corporation (the
"Corporation"), has adopted this 1996 Incentive Plan (the "Plan") to provide for
the granting of:
(a) Incentive Options (hereafter defined) to certain Key Employees
(hereafter defined);
(b) Nonstatutory Options (hereafter defined) to certain Key Employees,
Non-Employee Directors (hereafter defined) and other persons;
(c) Restricted Stock Awards (hereafter defined) to certain Key Employees
and other persons; and
(d) Stock Appreciation Rights (hereafter defined) to certain Key Employees
and other persons.
The purpose of the Plan is to provide an incentive for Key Employees and
directors of the Corporation or its Subsidiaries (hereafter defined) to aid the
Corporation in attracting able persons to enter the service of the Corporation
and its Subsidiaries, to extend to them the opportunity to acquire a proprietary
interest in the Corporation so that they will apply their best efforts for the
benefit of the Corporation, and to remain in the service of the Corporation or
its Subsidiaries. This Plan has been adopted by the Board of Directors and
shareholders of the Corporation prior to the registration of any of securities
of the Corporation under the Exchange Act (hereafter defined) and accordingly
amounts paid under the Plan are exempt from the provisions of Section 162(m) of
the Code (hereafter defined).
SECTION 1. DEFINITIONS
1.1 "Acquiring Person" means any Person other than the Corporation, any
Subsidiary of the Corporation, any employee benefit plan of the Corporation or
of a Subsidiary of the Corporation or of a corporation owned directly or
indirectly by the shareholders of the Corporation in substantially the same
proportions as their ownership of Stock of the Corporation, or any trustee or
other fiduciary holding securities under an employee benefit plan of the
Corporation or of a Subsidiary of the Corporation or of a corporation owned
directly or indirectly by the shareholders of the Corporation in substantially
the same proportions as their ownership of Stock of the Corporation.
1.2 "Affiliate" means (a) any Person who is directly or indirectly the
beneficial owner of at least 10% of the voting power of the Voting Securities or
(b) any Person controlling,
<PAGE>
controlled by, or under common control with the Company or any Person
contemplated in clause (a) of this Subsection 1.2.
1.3 "Award" means the grant of any form of Option, Restricted Stock Award,
or Stock Appreciation Right under the Plan, whether granted individually, in
combination, or in tandem, to a Holder pursuant to the terms, conditions, and
limitations that the Committee may establish in order to fulfill the objectives
of the Plan.
1.4 "Award Agreement" means the written agreement between the Corporation
and a Holder evidencing the terms, conditions, and limitations of the Award
granted to that Holder.
1.5 "Board of Directors" means the board of directors of the Corporation.
1.6 "Business Day" means any day other than a Saturday, a Sunday, or a day
on which banking institutions in the State of Texas are authorized or obligated
by law or executive order to close.
1.7 "Change in Control" means the event that is deemed to have occurred
if:
(a) any Acquiring Person is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Corporation representing fifty percent or more of the
combined voting power of the then outstanding Voting Securities of the
Corporation; or
(b) members of the Incumbent Board cease for any reason to constitute
at least a majority of the Board of Directors; or
(c) a public announcement is made of a tender or exchange offer by any
Acquiring Person for fifty percent or more of the outstanding Voting
Securities of the Corporation, and the Board of Directors approves or fails
to oppose that tender or exchange offer in its statements in Schedule 14D-9
under the Exchange Act; or
(d) the shareholders of the Corporation approve a merger or
consolidation of the Corporation with any other corporation or partnership
(or, if no such approval is required, the consummation of such a merger or
consolidation of the Corporation), other than a merger or consolidation
that would result in the Voting Securities of the Corporation outstanding
immediately before the consummation thereof continuing to represent (either
by remaining outstanding or by being converted into Voting Securities of
the surviving entity or of a parent of the surviving entity) a majority of
the combined voting power of the Voting Securities of the surviving entity
(or its parent) outstanding immediately after that merger or consolidation;
or
(e) the shareholders of the Corporation approve a plan of complete
liquidation of the Corporation or an agreement for the sale or disposition
by the Corporation of all or substantially all the Corporation's assets
(or, if no such approval is required, the
2
<PAGE>
consummation of such a liquidation, sale, or disposition in one transaction
or series of related transactions) other than a liquidation, sale, or
disposition of all or substantially all the Corporation's assets in one
transaction or a series of related transactions to a corporation owned
directly or indirectly by the shareholders of the Corporation in
substantially the same proportions as their ownership of Stock of the
Corporation.
1.8 "Code" means the Internal Revenue Code of 1986, as amended.
1.9 "Committee" means the Committee, which Committee shall administer this
Plan and is further described under Section 3.
1.10 "Convertible Securities" means evidences of indebtedness, shares of
capital stock, or other securities that are convertible into or exchangeable for
shares of Stock, either immediately or upon the arrival of a specified date or
the happening of a specified event.
1.11 "Corporation" has the meaning given to it in the second paragraph
under "Scope and Purpose of Plan."
1.12 "Date of Grant" has the meaning given it in Subsection 4.3.
1.13 "Disability" has the meaning given it in Subsection 10.4.
1.14 "Effective Date" means December 20, 1996.
1.15 "Eligible Individuals" means (a) Key Employees, (b) Non-Employee
Directors only for purposes of Nonstatutory Options pursuant to Section 8, and
(c) any other Person that the Committee designates as eligible for an Award
(other than for Incentive Options) because the Person performs, or has
performed, valuable services for the Corporation or any of its Subsidiaries
(other than services in connection with the offer or sale of securities in a
capital-raising transaction) and the Committee determines that the Person has a
direct and significant effect on the financial development of the Corporation or
any of its Subsidiaries. Notwithstanding the foregoing provisions of this
Subsection 1.15, to ensure that the requirements of the fourth sentence of
Subsection 3.1 are satisfied, the Board of Directors may from time to time
specify individuals who shall not be eligible for the grant of Awards or equity
securities under any plan of the Corporation or its Affiliates. Nevertheless,
the Board of Directors may at any time determine that an individual who has been
so excluded from eligibility shall become eligible for grants of Awards and
grants of such other equity securities under any plans of the Corporation or its
Affiliates so long as that eligibility will not impair the Plan's satisfaction
of the conditions of Rule 16b-3.
1.16 "Employee" means any employee of the Corporation or of any of its
Subsidiaries, including officers and directors of the Corporation who are also
employees of the Corporation or of any of its Subsidiaries.
3
<PAGE>
1.17 "Exchange Act" means the Securities Exchange Act of 1934 and the
rules and regulations promulgated thereunder, or any successor law, as it may be
amended from time to time.
1.18 "Exercise Notice" has the meaning given it in Subsection 5.5.
1.19 "Exercise Price" has the meaning given it in Subsection 5.4.
1.20 "Fair Market Value" means, for a particular day:
(a) If shares of Stock of the same class are listed or admitted to
unlisted trading privileges on any national or regional securities exchange
at the date of determining the Fair Market Value, then the last reported
sale price, regular way, on the composite tape of that exchange on the last
Business Day before the date in question or, if no such sale takes place on
that Business Day, the average of the closing bid and asked prices, regular
way, in either case as reported in the principal consolidated transaction
reporting system with respect to securities listed or admitted to unlisted
trading privileges on that securities exchange; or
(b) If shares of Stock of the same class are not listed or admitted to
unlisted trading privileges as provided in Subsection 1.20(a) and sales
prices for shares of Stock of the same class in the over-the-counter market
are reported by the National Association of Securities Dealers, Inc.
Automated Quotations, Inc. ("NASDAQ") National Market System (or such other
system then in use) at the date of determining the Fair Market Value, then
the last reported sales price so reported on the last Business Day before
the date in question or, if no such sale takes place on that Business Day,
the average of the high bid and low asked prices so reported; or
(c) If shares of Stock of the same class are not listed or admitted to
unlisted trading privileges as provided in Subsection 1.20(a) and sales
prices for shares of Stock of the same class are not reported by the NASDAQ
National Market System (or a similar system then in use) as provided in
Subsection 1.20(b), and if bid and asked prices for shares of Stock of the
same class in the over-the-counter market are reported by NASDAQ (or, if
not so reported, by the National Quotation Bureau Incorporated) at the date
of determining the Fair Market Value, then the average of the high bid and
low asked prices on the last Business Day before the date in question; or
(d) If shares of Stock of the same class are not listed or admitted to
unlisted trading privileges as provided in Subsection 1.20(a) and sales
prices or bid and asked prices therefor are not reported by NASDAQ (or the
National Quotation Bureau Incorporated) as provided in Subsection 1.20(b)
or Subsection 1.20(c) at the date of determining the Fair Market Value,
then the value determined in good faith by the Committee, which
determination shall be conclusive for all purposes; or
4
<PAGE>
(e) If shares of Stock of the same class are listed or admitted to
unlisted trading privileges as provided in Subsection 1.20(a) or sales
prices or bid and asked prices therefor are reported by NASDAQ (or the
National Quotation Bureau Incorporated) as provided in Subsection 1.20(b)
or Subsection 1.20(c) at the date of determining the Fair Market Value, but
the volume of trading is so low that the Board of Directors determines in
good faith that such prices are not indicative of the fair value of the
Stock, then the value determined in good faith by the Committee, which
determination shall be conclusive for all purposes notwithstanding the
provisions of Subsections 1.20(a), (b), or (c).
For purposes of valuing Incentive Options, the Fair Market Value of Stock shall
be determined without regard to any restriction other than one that, by its
terms, will never lapse. For purposes of the redemption provided for in
Subsection 9.3(d)(v), Fair Market Value shall have the meaning and shall be
determined as set forth above; provided, however, that the Committee, with
respect to any such redemption, shall have the right to determine that the Fair
Market Value for purposes of the redemption should be an amount measured by the
value of the shares of Stock, other securities, cash, or property otherwise
being received by holders of shares of Stock in connection with the
Restructuring and upon that determination the Committee shall have the power and
authority to determine Fair Market Value for purposes of the redemption based
upon the value of such shares of stock, other securities, cash, or property.
Any such determination by the Committee, as evidenced by a resolution of the
Committee, shall be conclusive for all purposes.
1.21 "Fiscal Year" means the fiscal year of the Corporation ending on July
31 of each year.
1.22 "Holder" means an Eligible Individual to whom an outstanding Award
has been granted, or a person or entity to whom an Eligible Individual has
transferred an Option in accordance with the terms of this Plan and the
applicable Award Agreement.
1.23 "Incumbent Board" means the individuals who, as of the Effective
Date, constitute the Board of Directors and any other individual who becomes a
director of the Corporation after that date and whose election or appointment by
the Board of Directors or nomination for election by the Corporation's
shareholders was approved by a vote of at least a majority of the directors then
comprising the Incumbent Board.
1.24 "Incentive Option" means an incentive stock option as defined under
Section 422 of the Code and regulations thereunder.
1.25 "Key Employee" means any Employee whom the Committee identifies as
having a direct and significant effect on the performance of the Corporation or
any of its Subsidiaries.
1.26 "Non-Employee Director" has the meaning given it in Rule 16b-
3(b)(3)(i).
1.27 "Nonstatutory Option" means a stock option that does not satisfy the
requirements of Section 422 of the Code or that is designated at the Date of
Grant or in the applicable Award Agreement to be an option other than an
Incentive Option.
5
<PAGE>
1.28 "Non-Surviving Event" means an event of Restructuring as described in
either Subsection 1.36(b) or Subsection 1.36(c).
1.29 "Normal Retirement" means the separation of the Holder from
employment with the Corporation and its Subsidiaries with the right to receive
an immediate benefit under a retirement plan approved by the Corporation. If no
such plan exists, Normal Retirement shall mean separation of the Holder from
employment with the Corporation and its Subsidiaries at age 62 or later.
1.30 "Option" means either an Incentive Option or a Nonstatutory Option,
or both.
1.31 "Outside Director" means a director of the Corporation who while a
director is not an Employee.
1.32 "Person" means any person or entity of any nature whatsoever,
specifically including (but not limited to) an individual, a firm, a company, a
corporation, a partnership, a trust, or other entity. A Person, together with
that Person's affiliates and associates (as "affiliate" and "associate" are
defined in Rule 12b-2 under the Exchange Act for purposes of this definition
only), and any Persons acting as a partnership, limited partnership, joint
venture, association, syndicate, or other group (whether or not formally
organized), or otherwise acting jointly or in concert or in a coordinated or
consciously parallel manner (whether or not pursuant to any express agreement),
for the purpose of acquiring, holding, voting, or disposing of securities of the
Corporation with that Person, shall be deemed a single "Person."
1.33 "Plan" means the Corporation's 1996 Incentive Plan, as it may be
amended from time to time.
1.34 "Restricted Stock" means Stock that is nontransferable or subject to
substantial risk of forfeiture until specific conditions are met under this
Plan.
1.35 "Restricted Stock Award" means the grant or purchase, on the terms
and conditions of Section 7 or that the Committee otherwise determines, of
Restricted Stock.
1.36 "Restructuring" means the occurrence of any one or more of the
following:
(a) The merger or consolidation of the Corporation with any Person,
whether effected as a single transaction or a series of related
transactions, with the Corporation remaining the continuing or surviving
entity of that merger or consolidation and the Stock remaining outstanding
and not changed into or exchanged for stock or other securities of any
other Person or of the Corporation, cash, or other property;
(b) The merger or consolidation of the Corporation with any Person,
whether effected as a single transaction or a series of related
transactions, with (i) the Corporation not being the continuing or
surviving entity of that merger or consolidation or (ii) the Corporation
remaining the continuing or surviving entity of that merger or
consolidation
6
<PAGE>
but all or a part of the outstanding shares of Stock are changed into or
exchanged for stock or other securities of any other Person or the
Corporation, cash, or other property; or
(c) The transfer, directly or indirectly, of all or substantially all
of the assets of the Corporation (whether by sale, merger, consolidation,
liquidation, or otherwise) to any Person, whether effected as a single
transaction or a series of related transactions.
1.37 "Rule 16b-3" means Rule 16b-3 under Section 16(b) of the Exchange Act
as amended in Exchange Act Release No. 34-37260 (May 31, 1996), or any successor
rule, as it may be amended from time to time.
1.38 "Securities Act" means the Securities Act of 1933 and the rules and
regulations promulgated thereunder, or any successor law, as it may be amended
from time to time.
1.39 "Stock" means the common stock, $0.05 par value per share, of
Scientific Measurement Systems, Inc., or any other securities that are
substituted for the Stock as provided in Section 9.
1.40 "Stock Appreciation Right" means the right to receive an amount equal
to the excess of the Fair Market Value of a share of Stock (as determined on the
date of exercise) over, as appropriate, the Exercise Price of a related Option
or the Fair Market Value of the Stock on the Date of Grant of the Stock
Appreciation Right.
1.41 "Subsidiary" means, with respect to any Person, any corporation, or
other entity of which a majority of the Voting Securities is owned, directly or
indirectly, by that Person.
1.42 "Total Shares" has the meaning given it in Subsection 9.2.
1.43 "Voting Securities" means any securities that are entitled to vote
generally in the election of directors, in the admission of general partners or
in the selection of any other similar governing body.
SECTION 2. SHARES OF STOCK SUBJECT TO THE PLAN
2.1 Maximum Number of Shares. Subject to the provisions of Subsection 2.2
------------------------
and Section 9, the aggregate number of shares of Stock that may be issued or
transferred pursuant to Awards under the Plan shall be 3,000,000 shares.
2.2 Limitation of Shares. For purposes of the limitations specified in
--------------------
Subsection 2.1, the following principles shall apply:
(a) the following shall count against and decrease the number of
shares of Stock that may be issued for purposes of Subsection 2.1: (i)
shares of Stock subject to outstanding Options, outstanding shares of
Restricted Stock, and shares subject to outstanding Stock Appreciation
Rights granted independent of Options (based on a good
7
<PAGE>
faith estimate by the Corporation or the Committee of the maximum number of
shares for which the Stock Appreciation Right may be settled (assuming
payment in full in shares of Stock)), and (ii) in the case of Options
granted in tandem with Stock Appreciation Rights, the greater of the number
of shares of Stock that would be counted if one or the other alone was
outstanding (determined as described in clause (i) above);
(b) the following shall be added back to the number of shares of Stock
that may be issued for purposes of Subsection 2.1: (i) shares of Stock
with respect to which Options, Stock Appreciation Rights granted
independent of Options, or Restricted Stock Awards expire, are canceled, or
otherwise terminate without being exercised, converted, or vested, as
applicable, and (ii) in the case of Options granted in tandem with Stock
Appreciation Rights, shares of Stock as to which an Option has been
surrendered in connection with the exercise of a related ("tandem") Stock
Appreciation Right, to the extent the number surrendered exceeds the number
issued upon exercise of the Stock Appreciation Right; provided that, in any
case, the holder of such Awards did not receive any dividends or other
benefits of ownership with respect to the underlying shares being added
back, other than voting rights and the accumulation (but not payment) of
dividends of Stock;
(c) shares of Stock subject to Stock Appreciation Rights granted
independent of Options (calculated as provided in clause (a) above) that
are exercised and paid in cash shall be added back to the number of shares
of Stock that may be issued for purposes of Subsection 2.1, provided that
the Holder of such Stock Appreciation Right did not receive any dividends
or other benefits of ownership, other than voting rights and the
accumulation (but not payment) of dividends, of the shares of Stock subject
to the Stock Appreciation Right;
(d) shares of Stock that are transferred by a Holder of an Award (or
withheld by the Corporation) as full or partial payment to the Corporation
of the purchase price of shares of Stock subject to an Option or the
Corporation's or any Subsidiary's tax withholding obligations shall not be
added back to the number of shares of Stock that may be issued for purposes
of Subsection 2.1 and shall not again be subject to Awards; and
(e) if the number of shares of Stock counted against the number of
shares that may be issued for purposes of Subsection 2.1 is based upon an
estimate made by the Corporation or the Committee as provided in clause (a)
above and the actual number of shares of Stock issued pursuant to the
applicable Award is greater or less than the estimated number, then, upon
such issuance, the number of shares of Stock that may be issued pursuant to
Subsection 2.1 shall be further reduced by the excess issuance or increased
by the shortfall, as applicable.
Notwithstanding the provisions of this Subsection 2.2, no Stock shall be treated
as issuable under the Plan to Eligible Individuals subject to Section 16 of the
Exchange Act if otherwise prohibited from issuance under Rule 16b-3.
8
<PAGE>
2.3 Description of Shares. The shares to be delivered under the Plan
---------------------
shall be made available from (a) authorized but unissued shares of Stock, (b)
Stock held in the treasury of the Corporation, or (c) previously issued shares
of Stock reacquired by the Corporation, including shares purchased on the open
market, in each situation as the Board of Directors or the Committee may
determine from time to time at its sole option.
2.4 Registration and Listing of Shares. From time to time, the Board of
----------------------------------
Directors and appropriate officers of the Corporation shall and are authorized
to take whatever actions are necessary to file required documents with
governmental authorities, stock exchanges, and other appropriate Persons to make
shares of Stock available for issuance pursuant to the exercise of Awards.
SECTION 3. ADMINISTRATION OF THE PLAN
3.1 Committee. The Committee shall administer the Plan with respect to
---------
all Eligible Individuals who are subject to Section 16(b) of the Exchange Act.
The Committee shall not have the power to appoint members of the Committee or to
terminate, modify, or amend the Plan. The Board of Directors may administer the
Plan with respect to all other Eligible Individuals, or may delegate all or part
of that duty to the Committee. Except for references in Subsections 3.1, 3.2
and 3.3, and unless the context otherwise requires, references herein to the
Committee shall also refer to the Board of Directors as administrator of the
Plan for Eligible Individuals who are subject to Section 16(b) of the Exchange
Act. The Committee shall be constituted so that, as long as Stock is registered
under Section 12 of the Exchange Act, each member of the Committee shall be a
Non-Employee Director so that transactions related to the Plan and involving
persons subject to Section 16(b) of the Exchange Act will qualify for the
exemptions from Section 16(b) of the Exchange Act provided by Rule 16b-3, to the
extent exemptions thereunder may be available. The number of Persons that shall
constitute the Committee shall be determined from time to time by a majority of
all the members of the Board of Directors and, unless that majority of the Board
of Directors determines otherwise, or Rule 16b-3 is amended to require
otherwise, shall be no less than two Persons.
3.2 Duration, Removal, Etc. The members of the Committee shall serve at
-----------------------
the discretion of the Board of Directors, which shall have the power, at any
time and from time to time, to remove members from or add members to the
Committee. Removal from the Committee may be with or without cause. Any
individual serving as a member of the Committee shall have the right to resign
from membership in the Committee by at least three days' written notice to the
Board of Directors. The Board of Directors, and not the remaining members of
the Committee, shall have the power and authority to fill all vacancies on the
Committee. The Board of Directors shall promptly fill any vacancy that causes
the number of members of the Committee to be below two or any other number that
Rule 16b-3 may require from time to time.
3.3 Meetings and Actions of Committee. The Board of Directors shall
---------------------------------
designate which of the Committee members shall be the chairman of the Committee.
If the Board of Directors fails to designate a Committee chairman, the members
of the Committee shall elect one of the Committee members as chairman, who shall
act as chairman until he ceases to be a member of
9
<PAGE>
the Committee or until the Board of Directors elects a new chairman. The
Committee shall hold its meetings at those times and places as the chairman of
the Committee may determine. At all meetings of the Committee, a quorum for the
transaction of business shall be required and a quorum shall be deemed present
if at least a majority of the members of the Committee are present. At any
meeting of the Committee, each member shall have one vote. All decisions and
determinations of the Committee shall be made by the majority vote or majority
decision of all of its members present at a meeting at which a quorum is
present; provided, however, that any decision or determination reduced to
writing and signed by all of the members of the Committee shall be as fully
effective as if it had been made at a meeting that was duly called and held. The
Committee may make any rules and regulations for the conduct of its business
that are not inconsistent with the provisions of the Plan, the Articles or
Certificate of Incorporation of the Corporation, the by-laws of the Corporation,
and Rule 16b-3 so long as it is applicable, as the Committee may deem advisable.
3.4 Committee's Powers. Subject to the express provisions of the Plan and
------------------
Rule 16b-3, the Committee shall have the authority, in its sole and absolute
discretion, to (a) adopt, amend, and rescind administrative and interpretive
rules and regulations relating to the Plan; (b) determine the Eligible
Individuals to whom, and the time or times at which, Awards shall be granted;
(c) determine the amount of cash and the number of shares of Stock, Stock
Appreciation Rights, or Restricted Stock Awards, or any combination thereof,
that shall be the subject of each Award; (d) determine the terms and provisions
of each Award Agreement (which need not be identical), including provisions
defining or otherwise relating to (i) the term and the period or periods and
extent of exercisability of the Options, (ii) the extent to which the
transferability of shares of Stock issued or transferred pursuant to any Award
is restricted, (iii) the effect of termination of employment of the Holder on
the Award, and (iv) the effect of approved leaves of absence (consistent with
any applicable regulations of the Internal Revenue Service); (e) accelerate,
pursuant to Section 9, the time of exercisability of any Option that has been
granted; (f) construe the respective Award Agreements and the Plan; (g) make
determinations of the Fair Market Value of the Stock pursuant to the Plan; (h)
delegate its duties under the Plan to such agents as it may appoint from time to
time, provided that the Committee may not delegate its duties with respect to
making Awards to, or otherwise with respect to Awards granted to, Eligible
Individuals who are subject to Section 16(b) of the Exchange Act; and (i) make
all other determinations, perform all other acts, and exercise all other powers
and authority necessary or advisable for administering the Plan, including the
delegation of those ministerial acts and responsibilities as the Committee deems
appropriate. Subject to Rule 16b-3, the Committee may correct any defect, supply
any omission, or reconcile any inconsistency in the Plan, in any Award, or in
any Award Agreement in the manner and to the extent it deems necessary or
desirable to carry the Plan into effect, and the Committee shall be the sole and
final judge of that necessity or desirability. The determinations of the
Committee on the matters referred to in this Subsection 3.4 shall be final and
conclusive.
SECTION 4. ELIGIBILITY AND PARTICIPATION
4.1 Eligible Individuals. Awards may be granted pursuant to the Plan only
--------------------
to persons who are Eligible Individuals at the time of the grant thereof.
10
<PAGE>
4.2 Grant of Awards. Subject to the express provisions of the Plan, the
---------------
Committee shall determine which Eligible Individuals shall be granted Awards
from time to time. In making grants, the Committee shall take into
consideration the contribution the potential Holder has made or may make to the
success of the Corporation or its Subsidiaries and such other considerations as
the Board of Directors may from time to time specify. The Committee shall also
determine the number of shares subject to each of the Awards and shall authorize
and cause the Corporation to grant Awards in accordance with those
determinations.
4.3 Date of Grant. The date on which the Committee completes all action
-------------
resolving to offer an Award to an individual, including the specification of the
number of shares of Stock to be subject to the Award, shall be the date on which
the Award covered by an Award Agreement is granted (the "Date of Grant"), even
though certain terms of the Award Agreement may not be determined at that time
and even though the Award Agreement may not be executed until a later time. In
no event shall a Holder gain any rights in addition to those specified by the
Committee in its grant, regardless of the time that may pass between the grant
of the Award and the actual execution of the Award Agreement by the Corporation
and the Holder.
4.4 Award Agreements. Each Award granted under the Plan shall be
----------------
evidenced by an Award Agreement that is executed by the Corporation and the
Eligible Individual to whom the Award is granted and incorporating those terms
that the Committee shall deem necessary or desirable. More than one Award may
be granted under the Plan to the same Eligible Individual and be outstanding
concurrently. In the event an Eligible Individual is granted both one or more
Incentive Options and one or more Nonstatutory Options, those grants shall be
evidenced by separate Award Agreements, one for each of the Incentive Option
grants and one for each of the Nonstatutory Option grants.
4.5 Limitation for Incentive Options. Notwithstanding any provision
--------------------------------
contained herein to the contrary, (a) a person shall not be eligible to receive
an Incentive Option unless he is an Employee of the Corporation or a corporate
Subsidiary (but not a partnership Subsidiary) and (b) a person shall not be
eligible to receive an Incentive Option if, immediately before the time the
Option is granted, that person owns (within the meaning of Sections 422 and
424(d) of the Code) stock possessing more than ten percent of the total combined
voting power or value of all classes of outstanding stock of the Corporation or
a Subsidiary. Nevertheless, Subsection 4.5(b) shall not apply if, at the time
the Incentive Option is granted, the Exercise Price of the Incentive Option is
at least one hundred ten percent of Fair Market Value and the Incentive Option
is not, by its terms, exercisable after the expiration of five years from the
Date of Grant.
4.6 No Right to Award. The adoption of the Plan shall not be deemed to
-----------------
give any Person a right to be granted an Award.
SECTION 5. TERMS AND CONDITIONS OF OPTIONS
All Options granted under the Plan shall comply with, and the related Award
Agreements shall be deemed to include and be subject to, the terms and
conditions set forth in this Section 5 (to the extent each term and condition
applies to the form of Option) and also to the terms and
11
<PAGE>
conditions set forth in Sections 9 and 10; provided, however, that the Committee
may authorize an Award Agreement that expressly contains terms and provisions
that differ from the terms and provisions set forth in Subsections 9.2, 9.3, and
9.4 and any of the terms and provisions of Section 10 (other than Subsections
10.9 and 10.10).
5.1 Number of Shares. Each Award Agreement shall state the total number
----------------
of shares of Stock to which it relates.
5.2 Vesting. Each Award Agreement shall state the time or periods in
-------
which, or the conditions upon satisfaction of which, the right to exercise the
Option or a portion thereof shall vest and the number of shares of Stock for
which the right to exercise the Option shall vest at each such time, period, or
fulfillment of condition.
5.3 Expiration of Options. No Option shall be exercised after the
---------------------
expiration of a period of ten years commencing on the Date of Grant of the
Option; provided, however, that any portion of a Nonstatutory Option that
pursuant to the terms of the Award Agreement under which such Nonstatutory
Option is granted shall not become exercisable until the date which is the tenth
anniversary of the Date of Grant of such Nonstatutory Option may be exercisable
for a period of 30 days following the date on which such portion becomes
exercisable.
5.4 Exercise Price. Each Award Agreement shall state the exercise price
--------------
per share of Stock (the "Exercise Price"); provided, however, that the exercise
price per share of Stock subject to an Incentive Option shall not be less than
the greater of (a) the par value per share of the Stock or (b) 100% of the Fair
Market Value per share of the Stock on the Date of Grant of the Option.
5.5 Method of Exercise. The Option shall be exercisable only by written
------------------
notice of exercise (the "Exercise Notice") delivered to the Corporation during
the term of the Option, which notice shall (a) state the number of shares of
Stock with respect to which the Option is being exercised, (b) be signed by the
Holder of the Option or, if the Holder is dead or becomes affected by a
Disability, by the person authorized to exercise the Option pursuant to
Subsections 10.3 and 10.4, (c) be accompanied by the Exercise Price for all
shares of Stock for which the Option is being exercised, and (d) include such
other information, instruments, and documents as may be required to satisfy any
other condition to exercise contained in the Award Agreement. The Option shall
not be deemed to have been exercised unless all of the requirements of the
preceding provisions of this Subsection 5.5 have been satisfied.
5.6 Incentive Option Exercises. Except as otherwise provided in
--------------------------
Subsection 10.4, during the Holder's lifetime, only the Holder may exercise an
Incentive Option.
5.7 Medium and Time of Payment. The Exercise Price of an Option shall be
--------------------------
payable in full upon the exercise of the Option (a) in cash or by an equivalent
means acceptable to the Committee, (b) on the Committee's prior consent, with
shares of Stock owned by the Holder (including shares received upon exercise of
the Option or restricted shares already held by the Holder) and having a Fair
Market Value at least equal to the aggregate Exercise Price payable in
connection with such exercise, or (c) by any combination of clauses (a) and (b).
If the Committee
12
<PAGE>
elects to accept shares of Stock in payment of all or any portion of the
Exercise Price, then (for purposes of payment of the Exercise Price) those
shares of Stock shall be deemed to have a cash value equal to their aggregate
Fair Market Value determined as of the date the certificate for such shares is
delivered to the Corporation. If the Committee elects to accept shares of
restricted Stock in payment of all or any portion of the Exercise Price, then an
equal number of shares issued pursuant to the exercise shall be restricted on
the same terms and for the restriction period remaining on the shares used for
payment.
5.8 Payment with Sale Proceeds. In addition, at the request of the Holder
--------------------------
and to the extent permitted by applicable law, the Committee may (but shall not
be required to) approve arrangements with a brokerage firm under which that
brokerage firm, on behalf of the Holder, shall pay to the Corporation the
Exercise Price of the Option being exercised and the Corporation shall promptly
deliver the exercised shares of Stock to the brokerage firm. To accomplish this
transaction, the Holder must deliver to the Corporation an Exercise Notice
containing irrevocable instructions from the Holder to the Corporation to
deliver the Stock certificates representing the shares of Stock directly to the
broker. Upon receiving a copy of the Exercise Notice acknowledged by the
Corporation, the broker shall sell that number of shares of Stock or loan the
Holder an amount sufficient to pay the Exercise Price and any withholding
obligations due. The broker then shall deliver to the Corporation that portion
of the sale or loan proceeds necessary to cover the Exercise Price and any
withholding obligations due. The Committee shall not approve any transaction of
this nature if the Committee believes that the transaction would give rise to
the Holder's liability for short-swing profits under Section 16(b) of the
Exchange Act.
5.9 Payment of Taxes. The Committee may, in its discretion, require a
----------------
Holder to pay to the Corporation (or the Corporation's Subsidiary if the Holder
is an employee of a Subsidiary of the Corporation), at the time of the exercise
of an Option or thereafter, the amount that the Committee deems necessary to
satisfy the Corporation's or its Subsidiary's current or future obligation to
withhold federal, state, or local income or other taxes that the Holder incurs
by exercising an Option. In connection with the exercise of an Option requiring
tax withholding, a Holder may (a) direct the Corporation to withhold from the
shares of Stock to be issued to the Holder the number of shares necessary to
satisfy the Corporation's obligation to withhold taxes, that determination to be
based on the shares' Fair Market Value as of the date of exercise; (b) deliver
to the Corporation sufficient shares of Stock (based upon the Fair Market Value
as of the date of such delivery) to satisfy the Corporation's tax withholding
obligations, which tax withholding obligation is based on the shares' Fair
Market Value as of the later of the date of exercise or the date as of which the
shares of Stock issued in connection with such exercise become includible in the
income of the Holder; or (c) deliver sufficient cash to the Corporation to
satisfy its tax withholding obligations. Holders who elect to use such a stock
withholding feature must make the election at the time and in the manner that
the Committee prescribes. The Committee may, at its sole option, deny any
Holder's request to satisfy withholding obligations through Stock instead of
cash. In the event the Committee subsequently determines that the aggregate
Fair Market Value (as determined above) of any shares of Stock withheld or
delivered as payment of any tax withholding obligation is insufficient to
discharge that tax withholding obligation, then the Holder shall pay to the
Corporation, immediately upon the Committee's request, the amount of that
deficiency in the form of payment requested by the Committee.
13
<PAGE>
5.10 Limitation on Aggregate Value of Shares That May Become First
-------------------------------------------------------------
Exercisable During Any Calendar Year Under an Incentive Option. Except as is
- --------------------------------------------------------------
otherwise provided in Subsection 9.3, with respect to any Incentive Option
granted under this Plan, the aggregate Fair Market Value of shares of Stock
subject to an Incentive Option and the aggregate Fair Market Value of shares of
Stock or stock of any Subsidiary (or a predecessor of the Corporation or a
Subsidiary) subject to any other incentive stock option (within the meaning of
Section 422 of the Code) of the Corporation or its Subsidiaries (or a
predecessor corporation of any such corporation) that first become purchasable
by a Holder in any calendar year may not (with respect to that Holder) exceed
$100,000, or such other amount as may be prescribed under Section 422 of the
Code or applicable regulations or rulings from time to time. As used in the
previous sentence, Fair Market Value shall be determined as of the Date of Grant
of the Incentive Option. For purposes of this Subsection 5.10, "predecessor
corporation" means (a) a corporation that was a party to a transaction described
in Section 424(a) of the Code (or which would be so described if a substitution
or assumption under that Section had been effected) with the Corporation, (b) a
corporation which, at the time the new incentive stock option (within the
meaning of Section 422 of the Code) is granted, is a Subsidiary of the
Corporation or a predecessor corporation of any such corporations, or (c) a
predecessor corporation of any such corporations. Failure to comply with this
provision shall not impair the enforceability or exercisability of any Option,
but shall cause the excess amount of shares to be reclassified in accordance
with the Code.
5.11 No Fractional Shares. The Corporation shall not in any case be
--------------------
required to sell, issue, or deliver a fractional share with respect to any
Option. In lieu of the issuance of any fractional share of Stock, the
Corporation shall pay to the Holder an amount in cash equal to the same fraction
(as the fractional Stock) of the Fair Market Value of a share of Stock
determined as of the date of the applicable Exercise Notice.
5.12 Modification, Extension, and Renewal of Options. Subject to the
-----------------------------------------------
terms and conditions of and within the limitations of the Plan, Rule 16b-3, and
any consent required by the last sentence of this Subsection 5.12, the Committee
may (a) modify, extend, or renew outstanding Options granted under the Plan, (b)
accept the surrender of Options outstanding hereunder (to the extent not
previously exercised) and authorize the granting of new Options in substitution
for outstanding Options (to the extent not previously exercised), and (c) amend
the terms of an Incentive Option at any time to include provisions that have the
effect of changing the Incentive Option to a Nonstatutory Option. Nevertheless,
without the consent of the Holder, the Committee may not modify any outstanding
Options so as to specify a higher or lower Exercise Price or accept the
surrender of outstanding Incentive Options and authorize the granting of new
Options in substitution therefor specifying a higher or lower Exercise Price. In
addition, no modification of an Option granted hereunder shall, without the
consent of the Holder, alter or impair any rights or obligations under any
Option theretofore granted to such Holder under the Plan except, with respect to
Incentive Options, as may be necessary to satisfy the requirements of Section
422 of the Code or as permitted in clause (c) of this Subsection 5.12.
5.13 Other Agreement Provisions. The Award Agreements authorized under
--------------------------
the Plan shall contain such provisions in addition to those required by the Plan
(including without limitation restrictions or the removal of restrictions upon
the exercise of the Option and the retention or
14
<PAGE>
transfer of shares thereby acquired) as the Committee may deem advisable. Each
Award Agreement shall identify the Option evidenced thereby as an Incentive
Option or Nonstatutory Option, as the case may be, and no Award Agreement shall
cover both an Incentive Option and a Nonstatutory Option. Each Award Agreement
relating to an Incentive Option granted hereunder shall contain such limitations
and restrictions upon the exercise of the Incentive Option to which it relates
as shall be necessary for the Incentive Option to which such Award Agreement
relates to constitute an incentive stock option, as defined in Section 422 of
the Code.
SECTION 6. STOCK APPRECIATION RIGHTS
All Stock Appreciation Rights granted under the Plan shall comply with, and
the related Award Agreements shall be deemed to include and be subject to, the
terms and conditions set forth in this Section 6 (to the extent each term and
condition applies to the form of Stock Appreciation Right) and also the terms
and conditions set forth in Sections 9 and 10; provided, however, that the
Committee may authorize an Award Agreement related to a Stock Appreciation Right
that expressly contains terms and provisions that differ from the terms and
provisions set forth in Subsections 9.2, 9.3, and 9.4 and any of the terms and
provisions of Section 10 (other than Subsection 10.10).
6.1 Form of Right. A Stock Appreciation Right may be granted to an
-------------
Eligible Individual (a) in connection with an Option, either at the time of
grant or at any time during the term of the Option, or (b) independent of an
Option.
6.2 Rights Related to Options. A Stock Appreciation Right granted
-------------------------
pursuant to an Option shall entitle the Holder, upon exercise, to surrender that
Option or any portion thereof, to the extent unexercised, and to receive payment
of an amount computed pursuant to Subsection 6.2(b). That Option shall then
cease to be exercisable to the extent surrendered. Stock Appreciation Rights
granted in connection with an Option shall be subject to the terms of the Award
Agreement governing the Option, which shall comply with the following provisions
in addition to those applicable to Options:
(a) Exercise and Transfer. Subject to Subsection 10.9, a Stock
---------------------
Appreciation Right granted in connection with an Option shall be
exercisable only at such time or times and only to the extent that the
related Option is exercisable and shall not be transferable except to the
extent that the related Option is transferable.
(b) Value of Right. Upon the exercise of a Stock Appreciation Right
--------------
related to an Option, the Holder shall be entitled to receive payment from
the Corporation of an amount determined by Multiplying:
(i) The difference obtained by subtracting the Exercise Price of
a share of Stock specified in the related Option from the Fair Market Value
of a share of Stock on the date of exercise of the Stock Appreciation
Right, by
15
<PAGE>
(ii) The number of shares as to which that Stock Appreciation
Right has been exercised.
6.3 Right Without Option. A Stock Appreciation Right granted independent
--------------------
of an Option shall be exercisable as determined by the Committee and set forth
in the Award Agreement governing the Stock Appreciation Right, which Award
Agreement shall comply with the following provisions:
(a) Number of Shares. Each Award Agreement shall state the total
----------------
number of shares of Stock to which the Stock Appreciation Right relates.
(b) Vesting. Each Award Agreement shall state the time or periods in
-------
which the right to exercise the Stock Appreciation Right or a portion
thereof shall vest and the number of shares of Stock for which the right to
exercise the Stock Appreciation Right shall vest at each such time or
period.
(c) Expiration of Rights. Each Award Agreement shall state the date
--------------------
at which the Stock Appreciation Rights shall expire if not previously
exercised.
(d) Value of Right. Each Stock Appreciation Right shall entitle the
--------------
Holder, upon exercise thereof, to receive payment of an amount determined
by multiplying:
(i) The difference obtained by subtracting the Fair Market Value
of a share of Stock on the Date of Grant of the Stock Appreciation
Right from the Fair Market Value of a share of Stock on the date of
exercise of that Stock Appreciation Right, by
(ii) The number of shares as to which the Stock Appreciation
Right has been exercised.
6.4 Limitations on Rights. Notwithstanding Subsections 6.2(b) and 6.3(d),
---------------------
the Committee may limit the amount payable upon exercise of a Stock Appreciation
Right. Any such limitation must be determined as of the Date of Grant and be
noted on the Award Agreement evidencing the Holder's Stock Appreciation Right.
6.5 Payment of Rights. Payment of the amount determined under Subsection
-----------------
6.2(b) or 6.3(d) and Subsection 6.4 may be made, in the sole discretion of the
Committee unless specifically provided otherwise in the Award Agreement, solely
in whole shares of Stock valued at Fair Market Value on the date of exercise of
the Stock Appreciation Right, solely in cash, or in a combination of cash and
whole shares of Stock. If the Committee decides to make full payment in shares
of Stock and the amount payable results in a fractional share, payment for the
fractional share shall be made in cash.
6.6 Payment of Taxes. The Committee may, in its discretion, require a
----------------
Holder to pay to the Corporation (or the Corporation's Subsidiary if the Holder
is an employee of a Subsidiary
16
<PAGE>
of the Corporation), at the time of the exercise of a Stock Appreciation Right
or thereafter, the amount that the Committee deems necessary to satisfy the
Corporation's or its Subsidiary's current or future obligation to withhold
federal, state, or local income or other taxes that the Holder incurs by
exercising a Stock Appreciation Right. In connection with the exercise of a
Stock Appreciation Right requiring tax withholding, a Holder may (a) direct the
Corporation to withhold from the shares of Stock to be issued to the Holder the
number of shares necessary to satisfy the Corporation's obligation to withhold
taxes, that determination to be based on the shares' Fair Market Value as of the
date of exercise; (b) deliver to the Corporation sufficient shares of Stock
(based upon the Fair Market Value as of the date of such delivery) to satisfy
the Corporation's tax withholding obligations, which tax withholding obligation
is based on the shares' Fair Market Value as of the later of the date of
exercise or the date of which the shares of Stock issued in connection with such
exercise become includible in the income of the Holder; or (c) deliver
sufficient cash to the Corporation to satisfy its tax withholding obligations.
Holders who elect to have Stock withheld pursuant to (a) or (b) above must make
the election at the time and in the manner that the Committee prescribes. The
Committee may, in its sole discretion, deny any Holder's request to satisfy
withholding obligations through Stock instead of cash. In the event the
Committee subsequently determines that the aggregate Fair Market Value (as
determined above) of any shares of Stock withheld or delivered as payment of any
tax withholding obligation is insufficient to discharge that tax withholding
obligation, then the Holder shall pay to the Corporation, immediately upon the
Committee's request, the amount of that deficiency in the form of payment
requested by the Commission.
6.7 Other Agreement Provisions. The Award Agreements authorized relating
--------------------------
to Stock Appreciation Rights shall contain such provisions in addition to those
required by the Plan (including without limitation restrictions or the removal
of restrictions upon the exercise of the Stock Appreciation Right and the
retention or transfer of shares thereby acquired) as the Committee may deem
advisable.
SECTION 7. RESTRICTED STOCK AWARDS
All Restricted Stock Awards granted under the Plan shall comply with and be
subject to, and the related Award Agreements shall be deemed to include, the
terms and conditions set forth in this Section 7 and also to the terms and
conditions set forth in Sections 9 and 10; provided, however, that the Committee
may authorize an Award Agreement related to a Restricted Stock Award that
expressly contains terms and provisions that differ from the terms and
provisions set forth in Subsections 9.2, 9.3, and 9.4 and the terms and
provisions set forth in Section 10 (other than Subsections 10.9 and 10.10).
7.1 Restrictions. All shares of Restricted Stock Awards granted or sold
------------
pursuant to the Plan shall be subject to the following conditions:
(a) Transferability. The shares may not be sold, transferred, or
---------------
otherwise alienated or hypothecated until the restrictions are removed or
expire.
17
<PAGE>
(b) Conditions to Removal of Restrictions. Conditions to removal or
-------------------------------------
expiration of the restrictions may include, but are not required to be
limited to, continuing employment or service as a director, officer, or Key
Employee or achievement of performance objectives described in the Award
Agreement.
(c) Legend. Each certificate representing Restricted Stock Awards
------
granted pursuant to the Plan shall bear a legend making appropriate
reference to the restrictions imposed.
(d) Possession. The Committee may require the Corporation to retain
----------
physical custody of the certificates representing Restricted Stock Awards
during the restriction period and may require the Holder of the Award to
execute stock powers in blank for those certificates and deliver those
stock powers to the Corporation, or the Committee may require the Holder to
enter into an escrow agreement providing that the certificates representing
Restricted Stock Awards granted or sold pursuant to the Plan shall remain
in the physical custody of an escrow holder until all restrictions are
removed or expire.
(e) Other Conditions. The Committee may impose other conditions on
----------------
any shares granted or sold as Restricted Stock Awards pursuant to the Plan
as it may deem advisable, including without limitation (i) restrictions
under the Securities Act or Exchange Act, (ii) the requirements of any
securities exchange upon which the shares or shares of the same class are
then listed, and (iii) any state securities law applicable to the shares.
7.2 Expiration of Restrictions. The restrictions imposed in Subsection
--------------------------
7.1 on Restricted Stock Awards shall lapse as determined by the Committee and
set forth in the applicable Award Agreement, and the Corporation shall promptly
deliver to the Holder of the Restricted Stock Award a certificate representing
the number of shares for which restrictions have lapsed, free of any restrictive
legend relating to the lapsed restrictions. Each Restricted Stock Award may
have a different restriction period as determined by the Committee in its sole
discretion. The Committee may, in its discretion, prospectively reduce the
restriction period applicable to a particular Restricted Stock Award.
7.3 Rights as Shareholder. Subject to the provisions of Subsections 7.1
---------------------
and 10.10, the Committee may, in its discretion, determine what rights, if any,
the Holder shall have with respect to the Restricted Stock Awards granted or
sold, including the right to vote the shares and receive all dividends and other
distributions paid or made with respect thereto.
7.4 Payment of Taxes. The Committee may, in its discretion, require a
----------------
Holder to pay to the Corporation (or the Corporation's Subsidiary if the Holder
is an employee of a Subsidiary of the Corporation) the amount that the Committee
deems necessary to satisfy the Corporation's or its Subsidiary's current or
future obligation to withhold federal, state, or local income or other taxes
that the Holder incurs by reason of the Restricted Stock Award. The Holder may
(a) direct the Corporation to withhold from the shares of Stock to be issued to
the Holder the number of shares necessary to satisfy the Corporation's
obligation to withhold taxes, that determination to be based on the shares' Fair
Market Value as of the date on which tax withholding is to be made;
18
<PAGE>
(b) deliver to the Corporation sufficient shares of Stock (based upon the Fair
Market Value as of the date of such delivery) to satisfy the Corporation's tax
withholding obligations, which tax withholding obligation is based on the
shares' Fair Market Value as of the later of the date of issuance or the date as
of which the shares of Stock issued become includible in the income of the
Holder; or (c) deliver sufficient cash to the Corporation to satisfy its tax
withholding obligations. Holders who elect to have Stock withheld pursuant to
(a) or (b) above must make the election at the time and in the manner that the
Committee prescribes. The Committee may, in its sole discretion, deny any
Holder's request to satisfy withholding obligations through Stock instead of
cash. In the event the Committee subsequently determines that the aggregate Fair
Market Value (as determined above) of any shares of Stock withheld or delivered
as payment of any tax withholding obligation is insufficient to discharge that
tax withholding obligation, then the Holder shall pay to the Corporation,
immediately upon the Committee's request, the amount of that deficiency.
7.5 Other Agreement Provisions. The Award Agreements relating to
--------------------------
Restricted Stock Awards shall contain such provisions in addition to those
required by the Plan as the Committee may deem advisable.
SECTION 8. AWARDS TO NON-EMPLOYEE DIRECTORS
Except as otherwise provided in the applicable Award Agreement, Awards
granted pursuant to this Section 8 shall be subject to the conditions of Section
5 to the extent permitted under Rule 16b-3.
8.1 Grant of Awards. Unless any Non-Employee Director (or director
---------------
nominee) shall have given written notice to the Corporation that he or she
declines to accept any Award pursuant to this Subsection 8.2 on or prior to the
Date of Grant of such Award, each Non-Employee Director shall be entitled to
receive Awards as determined from time to time by the Board of Directors, acting
without the vote or participation of such Non-Employee Director.
8.2 Exercisability. Unless otherwise specified by the Board of Directors
--------------
at the time the Award is approved, Options granted pursuant to Subsection 8.2
shall vest immediately upon their grant, and shall be exercisable for a period
of ten years from the date of their grant, and shall be Nonstatutory Options.
SECTION 9. ADJUSTMENT PROVISIONS
9.1 Adjustment of Awards and Authorized Stock. The terms of an Award and
-----------------------------------------
the number of shares of Stock authorized pursuant to Subsection 2.1 and Section
8 for issuance under the Plan shall be subject to adjustment from time to time,
in accordance with the following provisions:
(a) If at any time, or from time to time, the Corporation shall
subdivide as a whole (by reclassification, by a Stock split, by the
issuance of a distribution on Stock payable in Stock, or otherwise) the
number of shares of Stock then outstanding into a
19
<PAGE>
greater number of shares of Stock, then (i) the maximum number of shares of
Stock available for the Plan as provided in Subsection 2.1 shall be
increased proportionately, and the kind of shares or other securities
available for the Plan shall be appropriately adjusted, (ii) the number of
shares of Stock (or other kind of shares or securities) that may be
acquired under any Award shall be increased proportionately, and (iii) the
price (including Exercise Price) for each share of Stock (or other kind of
shares or securities) subject to then outstanding Awards shall be reduced
proportionately, without changing the aggregate purchase price or value as
to which outstanding Awards remain exercisable or subject to restrictions.
(b) If at any time, or from time to time, the Corporation shall
consolidate as a whole (by reclassification, reverse Stock split, or
otherwise) the number of shares of Stock then outstanding into a lesser
number of shares of Stock, then (i) the maximum number of shares of Stock
available for the Plan as provided in Subsection 2.1 shall be decreased
proportionately, and the kind of shares or other securities available for
the Plan shall be appropriately adjusted, (ii) the number of shares of
Stock (or other kind of shares or securities) that may be acquired under
any Award shall be decreased proportionately, and (iii) the price
(including Exercise Price) for each share of Stock (or other kind of shares
or securities) subject to then outstanding Awards shall be increased
proportionately, without changing the aggregate purchase price or value as
to which outstanding Awards remain exercisable or subject to restrictions.
(c) Whenever the number of shares of Stock subject to outstanding
Awards and the price for each share of Stock subject to outstanding Awards
are required to be adjusted as provided in this Subsection 9.1, the
Committee shall promptly prepare a notice setting forth, in reasonable
detail, the event requiring adjustment, the amount of the adjustment, the
method by which such adjustment was calculated, and the change in price and
the number of shares of Stock, other securities, cash, or property
purchasable subject to each Award after giving effect to the adjustments.
The Committee shall promptly give each Holder such a notice.
(d) Adjustments under Subsections 9(a) and (b) shall be made by the
Committee, and its determination as to what adjustments shall be made and
the extent thereof shall be final, binding, and conclusive. No fractional
interest shall be issued under the Plan on account of any such adjustments.
9.2 Changes in Control. Any Award Agreement may provide that, upon the
------------------
occurrence of a Change in Control, one or more of the following apply: (a) each
Holder of an Option shall immediately be granted corresponding Stock
Appreciation Rights; (b) all outstanding Stock Appreciation Rights and Options
shall immediately become fully vested and exercisable in full, including that
portion of any Stock Appreciation Right or Option that pursuant to the terms and
provisions of the applicable Award Agreement had not yet become exercisable (the
total number of shares of Stock as to which a Stock Appreciation Right or Option
is exercisable upon the occurrence of a change in Control is referred to herein
as the "Total Shares"); and (c) the restriction period of any Restricted Stock
Award shall immediately be accelerated and the
20
<PAGE>
restrictions shall expire. An Award Agreement does not have to provide for any
of the foregoing. If a Change in Control involves a Restructuring or occurs in
connection with a series of related transactions involving a Restructuring and
if such Restructuring is in the form of a Non-Surviving Event and as a part of
such Restructuring shares of Stock, other securities, cash, or property shall be
issuable or deliverable in exchange for Stock, then the Holder of an Award shall
be entitled to purchase or receive (in lieu of the Total Shares that the Holder
would otherwise be entitled to purchase or receive), as appropriate for the form
of Award, the number of shares of Stock, other securities, cash, or property to
which that number of Total Shares would have been entitled in connection with
such Restructuring (and, for Options, at an aggregate exercise price equal to
the Exercise Price that would have been payable if that number of Total Shares
had been purchased on the exercise of the Option immediately before the
consummation of the Restructuring). Nothing in this Subsection 9.2 shall impose
on a Holder the obligation to exercise any Award immediately before or upon the
Change of Control, or cause Holder to forfeit the right to exercise the Award
during the remainder of the original term of the Award because of a Change in
Control.
9.3 Restructuring Without Change in Control. In the event a Restructuring
---------------------------------------
shall occur at any time while there is any outstanding Award hereunder and that
Restructuring does not occur in connection with a Change in Control or a series
of related transactions involving a Change in Control, then:
(a) no outstanding Option or Stock Appreciation Right shall
immediately become fully vested and exercisable in full merely because of
the occurrence of the Restructuring;
(b) no Holder of an Option shall automatically be granted
corresponding Stock Appreciation Rights;
(c) the restriction period of any Restricted Stock Award shall not
immediately be accelerated and the restrictions expire merely because of
the occurrence of the Restructuring; and
(d) at the option of the Committee, the Committee may (but shall not
be required to) cause the Corporation to take any one or more of the
following actions:
(i) accelerate in whole or in part the time of the vesting and
exercisability of any one or more of the outstanding Stock
Appreciation Rights and Options so as to provide that those Stock
Appreciation Rights and Options shall be exercisable before, upon, or
after the consummation of the Restructuring;
(ii) grant each Holder of an Option corresponding Stock
Appreciation Rights;
(iii) accelerate in whole or in part the expiration of some or
all of the restrictions on any Restricted Stock Award;
21
<PAGE>
(iv) if the Restructuring is in the form of a Non-Surviving
Event, cause the surviving entity to assume in whole or in part any
one or more of the outstanding Awards upon such terms and provisions
as the Committee deems desirable; or
(v) redeem in whole or in part any one or more of the
outstanding Awards (whether or not then exercisable) in consideration
of a cash payment, as such payment may be reduced for tax withholding
obligations as contemplated in Subsections 5.9, 6.6, or 7.4, as
applicable, in an amount equal to:
(A) for Options and Stock Appreciation Rights granted in
connection with Options, the excess of (1) the Fair Market Value,
determined as of the date immediately preceding the consummation
of the Restructuring, of the aggregate number of shares of Stock
subject to the Award and as to which the Award is being redeemed
over (2) the Exercise Price for that number of shares of Stock;
(B) for Stock Appreciation Rights not granted in connection
with an Option, the excess of (1) the Fair Market Value,
determined as of the date immediately preceding the consummation
of the Restructuring, of the aggregate number of shares of Stock
subject to the Award and as to which the Award is being redeemed
over (2) the Fair Market Value of that number of shares of Stock
on the Date of Grant; and
(C) for Restricted Stock Awards, the Fair Market Value,
determined as of the date immediately preceding the consummation
of the Restructuring, of the aggregate number of shares of Stock
subject to the Award and as to which the Award is being redeemed.
The Corporation shall promptly notify each Holder of any election or action
taken by the Corporation under this Subsection 9.3. In the event of any
election or action taken by the Corporation pursuant to this Subsection 9.3 that
requires the amendment or cancellation of any Award Agreement as may be
specified in any notice to the Holder thereof, that Holder shall promptly
deliver that Award Agreement to the Corporation in order for that amendment or
cancellation to be implemented by the Corporation and the Committee. The
failure of the Holder to deliver any such Award Agreement to the Corporation as
provided in the preceding sentence shall not in any manner affect the validity
or enforceability of any action taken by the Corporation and the Committee under
this Subsection 9.3, including without limitation any redemption of an Award as
of the consummation of a Restructuring. Any cash payment to be made by the
Corporation pursuant to this Subsection 9.3 in connection with the redemption of
any outstanding Awards shall be paid to the Holder thereof currently with the
delivery to the Corporation of the Award Agreement evidencing that Award;
provided, however, that any such redemption shall be effective upon the
consummation of the Restructuring notwithstanding that the payment of the
redemption price may occur subsequent to the consummation. If all or any
portion of an outstanding Award is to be exercised or accelerated upon or after
the consummation of a
22
<PAGE>
Restructuring that does not occur in connection with a Change in Control and is
in the form of a Non-Surviving Event, and as a part of that Restructuring shares
of stock, other securities, cash, or property shall be issuable or deliverable
in exchange for Stock, then the Holder of the Award shall thereafter be entitled
to purchase or receive (in lieu of the number of shares of Stock that the Holder
would otherwise be entitled to purchase or receive) the number of shares of
Stock, other securities, cash, or property to which such number of shares of
Stock would have been entitled in connection with the Restructuring (and, for
Options, upon payment of the aggregate exercise price equal to the Exercise
Price that would have been payable if that number of Total Shares had been
purchased on the exercise of the Option immediately before the consummation of
the Restructuring) and such Award shall be subject to adjustments that shall be
as nearly equivalent as may be practical to the adjustments provided for in this
Section 9.
9.4 Notice of Restructuring. The Corporation shall attempt to keep all
-----------------------
Holders informed with respect to any Restructuring or of any potential
Restructuring to the same extent that the Corporation's shareholders are
informed by the Corporation of any such event or potential event.
SECTION 10. ADDITIONAL PROVISIONS
10.1 Termination of Employment. If a Holder is an Eligible Individual
-------------------------
because the Holder is an Employee and if that employment relationship is
terminated for any reason other than (a) that Holder's death or (b) that
Holder's Disability (hereafter defined), then any and all Awards held by such
Holder in such Holder's capacity as an Employee as of the date of the
termination that are not yet exercisable (or for which restrictions have not
lapsed) shall become null and void as of the date of such termination; provided,
however, that the portion, if any, of such Awards that are exercisable as of the
date of termination shall be exercisable for the period which is the lesser of
(a) the remainder of the term of the Award or (b) the date which is 90 days
after the date of termination. Any portion of an Award not exercised upon the
expiration of such period shall be null and void unless the Holder dies during
such period, in which case the provisions of Subsection 10.3 shall govern.
10.2 Other Loss of Eligibility - Non Employees. If a Holder is an
-----------------------------------------
Eligible Individual because the Holder is serving in a capacity other than as an
Employee and if that capacity is terminated for any reason other than the
Holder's death or Disability, then that portion, if any, of any and all Awards
held by the Holder that were granted because of that capacity which are not yet
exercisable (or for which restrictions have not lapsed) as of the date of the
termination shall become null and void as of the date of the termination;
provided, however, that the portion, if any, of any and all Awards held by the
Holder that are then exercisable as of the date of the termination shall be
exercisable for a period of the lesser of (a) the remainder of the term of the
Award or (b) 90 days following the date such capacity is terminated. If a Holder
is an Eligible Individual because the Holder is serving in a capacity other than
as an Employee and if that capacity is terminated by reason of the Holder's
death or Disability, then the portion, if any, of any and all Awards held by the
Holder that are not yet exercisable (or for which restrictions have not lapsed)
as of the date of that termination for death or Disability shall become
exercisable (and the restrictions thereon, if any, shall lapse) and all such
Awards held by that Holder as of the date of
23
<PAGE>
termination that are exercisable (either as a result of this sentence or
otherwise) shall be exercisable for a period of the lesser of (a) the remainder
of the term of the Award or (b) the date which is 90 days after the date of
termination. Any portion of an Award not exercised upon the expiration of the
periods specified in (a) or (b) of the preceding two sentences shall be null and
void upon the expiration of such period, as applicable.
10.3 Death. Upon the death of a Holder, any and all Awards held by the
-----
Holder that are not yet exercisable (or for which restrictions have not lapsed)
as of the date of the Holder's death shall become exercisable as provided below
and any restrictions shall immediately lapse as of the date of death; provided,
however, that the Awards held by the Holder as of the date of death shall be
exercisable by that Holder's legal representatives, heirs, legatees, or
distributees for a period of 90 days following the date of the Holder's death.
Any portion of an Award not exercised upon the expiration of such period shall
be null and void. Except as expressly provided in this Subsection 10.3, no
Award held by a Holder shall be exercisable after the death of that Holder.
10.4 Disability. If a Holder is an Eligible Individual because the Holder
----------
is an Employee and if that employment relationship is terminated by reason of
the Holder's Disability, then the portion, if any, of any and all Awards held by
the Holder that are not yet exercisable (or for which restrictions have not
lapsed) as of the date of that termination for Disability shall become
exercisable as provided below and any restrictions shall immediately lapse as of
the date of termination; provided, however, that the Awards held by the Holder
as of the date of that termination shall be exercisable by the Holder, his
guardian or his legal representative for a period of 90 days following the date
of such termination. Any portion of an Award not exercised upon the expiration
of such period shall be null and void unless the Holder dies during such period,
in which event the provisions of Subsection 10.3 shall govern. "Disability"
shall have the meaning given it in the employment agreement of the Holder;
provided, however, that if that Holder has no employment agreement, "Disability"
shall mean, as determined by the Board of Directors in the sole discretion
exercised in good faith of the Board of Directors, a physical or mental
impairment of sufficient severity that either the Holder is unable to continue
performing the duties he performed before such impairment or the Holder's
condition entitles him to disability benefits under any insurance or employee
benefit plan of the Corporation or its Subsidiaries and that impairment or
condition is cited by the Corporation as the reason for termination of the
Holder's employment.
10.5 Leave of Absence. With respect to an Award, the Committee may, in
----------------
its sole discretion, determine that any Holder who is on leave of absence for
any reason will be considered to still be in the employ of the Corporation for
any or all purposes of the Plan and the Award Agreement of such Holder.
10.6 Transferability of Awards. In addition to such other terms and
-------------------------
conditions as may be included in a particular Award Agreement, an Award
requiring exercise shall be exercisable during a Holder's lifetime only by that
Holder or by that Holder's guardian or legal representative and shall not be
transferrable other than by will or the laws of descent and distribution.
24
<PAGE>
Except with respect to Incentive Options, notwithstanding the previous
paragraph, the Committee may, in its discretion, authorize all or a portion of
an Award to be granted on terms which permit transfer by an Eligible Individual
to (i) the Eligible Individual's spouse, children, stepchildren, grandchildren,
step grandchildren, parents, stepparents, siblings or step siblings ("Immediate
Family Members"); (ii) a trust or trusts for the exclusive benefit of such
Immediate Family Members; (iii) a partnership in which such Immediate Family
Members are the only partners; or (iv) other Persons as the Committee may
permit, provided that the Award Agreement pursuant to which such Award is
granted must be approved by the Committee and must expressly provide for
transferability in a manner consistent with this Section 10.6, and subsequent
transfers shall be prohibited except transfers to other Immediate Family Members
and transfers by will or the laws of descent and distribution. Following
transfer, any such Award shall continue to be subject to the same terms and
conditions as were applicable immediately prior to transfer. The events of
termination of Sections 10.1 and 10.2 shall continue to apply with respect to
the original Holder, following which the Award shall be exercisable by the
Transferee only to the extent and for the period specified in Sections 10.1 and
10.2.
10.7 Forfeiture and Restrictions on Transfer. Each Award Agreement may
---------------------------------------
contain or otherwise provide for conditions giving rise to the forfeiture of the
Stock acquired pursuant to an Award or otherwise and may also provide for those
restrictions on the transferability of shares of the Stock acquired pursuant to
an Award or otherwise that the Committee in its sole and absolute discretion may
deem proper or advisable. The conditions giving rise to forfeiture may include,
but need not be limited to, the requirement that the Holder render substantial
services to the Corporation or its Subsidiaries for a specified period of time.
The restrictions on transferability may include, but need not be limited to,
options and rights of first refusal in favor of the Corporation and shareholders
of the Corporation other than the Holder of such shares of Stock who is a party
to the particular Award Agreement or a subsequent holder of the shares of Stock
who is bound by that Award Agreement.
10.8 Delivery of Certificates of Stock. Subject to Subsection 10.9, the
---------------------------------
Corporation shall promptly issue and deliver a certificate representing the
number of shares of Stock as to which (a) an Option has been exercised after the
Corporation receives an Exercise Notice and upon receipt by the Corporation of
the Exercise Price and any tax withholding as may be requested, (b) a Stock
Appreciation Right has been exercised (to the extent the Committee determines to
pay such Stock Appreciation Right in shares of Stock pursuant to Subsection 6.5)
and upon receipt by the Corporation of any tax withholding as may be requested,
and (c) restrictions have lapsed with respect to a Restricted Stock Award and
upon receipt by the Corporation of any tax withholding as may be requested. The
value of the shares of Stock or cash transferable because of an Award under the
Plan shall not bear any interest owing to the passage of time, except as may be
otherwise provided in an Award Agreement. If a Holder is entitled to receive
certificates representing Stock received for more than one form of Award under
the Plan, separate Stock certificates shall be issued with respect to Incentive
Options and Nonstatutory Options.
10.9 Conditions to Delivery of Stock. Nothing herein or in any Award
-------------------------------
granted hereunder or any Award Agreement shall require the Corporation to issue
any shares with respect to any Award if that issuance would, in the opinion of
counsel for the Corporation, constitute a
25
<PAGE>
violation of the Securities Act or any similar or superseding statute or
statutes, any other applicable statute or regulation, or the rules of any
applicable securities exchange or securities association, as then in effect. At
the time of any exercise of an Option or Stock Appreciation Right, or at the
time of any grant of a Restricted Stock Award, the Corporation may, as a
condition precedent to the exercise of such Option or Stock Appreciation Right
or vesting of any Restricted Stock Award, require from the Holder of the Award
(or in the event of his death, his legal representatives, heirs, legatees, or
distributees) such written representations, if any, concerning the Holder's
intentions with regard to the retention or disposition of the shares of Stock
being acquired pursuant to the Award and such written covenants and agreements,
if any, as to the manner of disposal of such shares as, in the opinion of
counsel to the Corporation, may be necessary to ensure that any disposition by
that Holder (or in the event of the Holder's death, his legal representatives,
heirs, legatees, or distributees) will not involve a violation of the Securities
Act or any similar or superseding statute or statutes, any other applicable
state or federal statute or regulation, or any rule of any applicable securities
exchange or securities association, as then in effect.
10.10 Certain Directors and Officers. With respect to Holders who are
------------------------------
directors or officers of the Corporation or any of its Subsidiaries and who are
subject to Section 16(b) of the Exchange Act, Awards and all rights under the
Plan shall be exercisable during the Holder's lifetime only by the Holder or the
Holder's guardian or legal representative, but not for at least six months after
grant, unless (a) the Board of Directors expressly authorizes that an Award
shall be exercisable before the expiration of the six-month period or (b) the
death or disability of the Holder occurs before the expiration of the six-month
period. In addition, no such officer or director shall exercise any Stock
Appreciation Right or have shares of Stock withheld to pay tax withholding
obligations within the first six months of the term of an Award. Any election
by any such officer or director to have tax withholding obligations satisfied by
the withholding of shares of Stock shall be irrevocable and shall be
communicated to the Committee during the period beginning on the third day
following the date of release of quarterly or annual summary statements of sales
and earnings and ending on the twelfth business day following such date (the
"Window Period") or by an irrevocable election communicated to the Committee at
least six months before the date of exercise of the Award for which such
withholding is desired. Any election by such an officer or director to receive
cash in full or partial settlement of a Stock Appreciation Right, as well as any
exercise by such individual of a Stock Appreciation Right for such cash, in
either case to the extent permitted under the applicable Award Agreement or
otherwise permitted by the Committee, shall be made during the Window Period or
within any other periods that the Committee shall specify from time to time.
10.11 Securities Act Legend. Certificates for shares of Stock, when
---------------------
issued, may have the following legend, or statements of other applicable
restrictions (including, without limitation, restrictions required under any
Federal, state or foreign law), endorsed thereon and may not be immediately
transferable:
26
<PAGE>
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAWS. THE SHARES MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED,
TRANSFERRED, OR OTHERWISE DISPOSED OF UNTIL THE HOLDER HEREOF PROVIDES
EVIDENCE SATISFACTORY TO THE ISSUER (WHICH, IN THE DISCRETION OF THE
ISSUER, MAY INCLUDE AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER) THAT
SUCH OFFER, SALE, PLEDGE, TRANSFER, OR OTHER DISPOSITION WILL NOT VIOLATE
APPLICABLE FEDERAL OR STATE LAWS.
This legend shall not be required for shares of Stock issued pursuant to an
effective registration statement under the Securities Act.
10.12 Legend for Restrictions on Transfer. Each certificate representing
-----------------------------------
shares issued to a Holder pursuant to an Award granted under the Plan shall, if
such shares are subject to any transfer restriction, including a right of first
refusal, provided for under this Plan or an Award Agreement, bear a legend that
complies with applicable law with respect to the restrictions on transferability
contained in this Subsection 10.12, such as:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
RESTRICTIONS ON TRANSFERABILITY IMPOSED BY THAT CERTAIN INSTRUMENT ENTITLED
"SCIENTIFIC MEASUREMENT SYSTEMS, INC., 1996 INCENTIVE PLAN" AS ADOPTED BY
SCIENTIFIC MEASUREMENT SYSTEMS, INC. (THE "CORPORATION"), AND AN AGREEMENT
THEREUNDER BETWEEN THE CORPORATION AND THE INITIAL HOLDER THEREOF DATED
________________, 199_, AND MAY NOT BE TRANSFERRED, SOLD, OR OTHERWISE
DISPOSED OF EXCEPT AS THEREIN PROVIDED. THE CORPORATION WILL FURNISH A
COPY OF SUCH INSTRUMENT AND AGREEMENT TO THE RECORD HOLDER OF THIS
CERTIFICATE WITHOUT CHARGE ON REQUEST TO THE CORPORATION AT ITS PRINCIPAL
PLACE OF BUSINESS OR REGISTERED OFFICE.
10.13 Rights as a Shareholder. A Holder shall have no right as a
-----------------------
shareholder with respect to any shares covered by his Award until a certificate
representing those shares is issued in his name. No adjustment shall be made
for dividends (ordinary or extraordinary, whether in cash or other property) or
distributions or other rights for which the record date is before the date that
certificate is issued, except as contemplated by Section 9 hereof.
Nevertheless, dividends, dividend equivalent rights and voting rights may be
extended to and made part of any Award denominated in Stock or units of Stock,
subject to such terms, conditions and restrictions as the Committee may
establish. The Committee may also establish rules and procedures for the
crediting of interest on deferred cash payments and dividend equivalents for
deferred payment denominated in Stock or units of Stock.
27
<PAGE>
10.14 Furnish Information. Each Holder shall furnish to the Corporation
-------------------
all information requested by the Corporation to enable it to comply with any
reporting or other requirement imposed upon the Corporation by or under any
applicable statute or regulation.
10.15 Obligation to Exercise. The granting of an Award hereunder shall
----------------------
impose no obligation upon the Holder to exercise the same or any part thereof.
10.16 Adjustments to Awards. Subject to the general limitations set forth
---------------------
in Sections 5, 6, and 9, the Committee may make any adjustment in the Exercise
Price of, the number of shares subject to, or the terms of a Nonstatutory Option
or Stock Appreciation Right by canceling an outstanding Nonstatutory Option or
Stock Appreciation Right and regranting a Nonstatutory Option or Stock
Appreciation Right. Such adjustment shall be made by amending, substituting, or
regranting an outstanding Nonstatutory Option or Stock Appreciation Right. Such
amendment, substitution, or regrant may result in terms and conditions that
differ from the terms and conditions of the original Nonstatutory Option or
Stock Appreciation Right. The Committee may not, however, impair the rights of
any Holder of previously granted Nonstatutory Options or Stock Appreciation
Rights without that Holder's consent. If such action is effected by amendment,
such amendment shall be deemed effective as of the Date of Grant of the amended
Award.
10.17 Remedies. The Corporation shall be entitled to recover from a
--------
Holder reasonable attorneys' fees incurred in connection with the enforcement of
the terms and provisions of the Plan and any Award Agreement whether by an
action to enforce specific performance or for damages for its breach or
otherwise.
10.18 Information Confidential. As partial consideration for the granting
------------------------
of each Award hereunder, the Holder shall agree with the Corporation that he
will keep confidential all information and knowledge that he has relating to the
manner and amount of his participation in the Plan; provided, however, that such
information may be disclosed as required by law and may be given in confidence
to the Holder's spouse, tax or financial advisors, or to a financial institution
to the extent that such information is necessary to secure a loan. In the event
any breach of this promise comes to the attention of the Committee, it shall
take into consideration that breach in determining whether to recommend the
grant of any future Award to that Holder, as a factor mitigating against the
advisability of granting any such future Award to that Person.
10.19 Consideration. No Option or Stock Appreciation Right shall be
-------------
exercisable and no restriction on any Restricted Stock Award shall lapse with
respect to a Holder unless and until the Holder thereof shall have paid cash or
property to, or performed services for, the Corporation or any of its
Subsidiaries that the Committee believes is equal to or greater in value than
the par value of the Stock subject to such Award.
28
<PAGE>
SECTION 11. DURATION AND AMENDMENT OF PLAN
11.1 Duration. No Awards may be granted hereunder after the date that is
--------
ten years from the earlier of (a) the date the Plan is adopted by the Board of
Directors and (b) the date the Plan is approved by the shareholders of the
Corporation.
11.2 Amendment. The Board of Directors may, insofar as permitted by law,
---------
with respect to any shares which, at the time, are not subject to Awards,
suspend or discontinue the Plan or revise or amend it in any respect whatsoever
and may amend any provision of the Plan or any Award Agreement to make the Plan
or the Award Agreement, or both, comply with Section 16(b) of the Exchange Act
and the exemptions from that Section in the regulations thereunder. The Board
of Directors may also amend, modify, suspend, or terminate the Plan for the
purpose of meeting or addressing any changes in other legal requirements
applicable to the Corporation or the Plan or for any other purpose permitted by
law. The Plan may not be amended without the consent of the holders of a
majority of the shares of Stock then outstanding to (a) increase materially the
aggregate number of shares of Stock that may be issued under the Plan (except
for adjustments pursuant to Section 9 hereof), (b) increase materially the
benefits accruing to Eligible Individuals under the Plan, or (c) modify
materially the requirements about eligibility for participation in the Plan;
provided, however, that such amendments may be made without the consent of
shareholders of the Corporation if changes occur in law or other legal
requirements (including Rule 16b-3) that would permit such changes. In
connection with any amendment of the Plan, the Board of Directors shall be
authorized to incorporate such provisions as shall be necessary for amounts paid
under the Plan to be exempt from Section 162(m) of the Code.
SECTION 12. GENERAL
12.1 Application of Funds. The proceeds received by the Corporation from
--------------------
the sale of shares pursuant to Awards may be used for any general corporate
purpose.
12.2 Right of the Corporation and Subsidiaries to Terminate Employment.
-----------------------------------------------------------------
Nothing contained in the Plan, or in any Award Agreement, shall confer upon any
Holder the right to continue in the employ of the Corporation or any Subsidiary
or interfere in any way with the rights of the Corporation or any Subsidiary to
terminate the Holder's employment at any time.
12.3 No Liability for Good Faith Determinations. Neither the members of
------------------------------------------
the Board of Directors nor any member of the Committee shall be liable for any
act, omission or determination taken or made in good faith with respect to the
Plan or any Award granted under it; and members of the Board of Directors and
the Committee shall be entitled to indemnification and reimbursement by the
Corporation in respect of any claim, loss, damage, or expense (including
attorneys' fees, the costs of settling any suit, provided such settlement is
approved by independent legal counsel selected by the Corporation, and amounts
paid in satisfaction of a judgment, except a judgment based on a finding of bad
faith) arising therefrom to the full extent permitted by law and under any
directors' and officers' liability or similar insurance coverage that may from
time to time be in effect. This right to indemnification shall be in addition
to, and not a limitation on,
29
<PAGE>
any other indemnification rights any member of the Board of Directors or the
Committee may have.
12.4 Other Benefits. Participation in the Plan shall not preclude the
--------------
Holder from eligibility in any other stock or stock option plan of the
Corporation or any Subsidiary or any old age benefit, insurance, pension, profit
sharing retirement, bonus, or other extra compensation plans that the
Corporation or any Subsidiary has adopted, or may, at any time, adopt for the
benefit of its Employees. Neither the adoption of the Plan by the Board of
Directors nor the submission of the Plan to the shareholders of the Corporation
for approval shall be construed as creating any limitations on the power of the
Board of Directors to adopt such other incentive arrangements as it may deem
desirable, including, without limitation, the granting of stock options and the
awarding of stock and cash otherwise than under the Plan and such arrangements
may be either generally applicable or applicable only in specific cases.
12.5 Exclusion From Pension and Profit-Sharing Compensation. By
------------------------------------------------------
acceptance of an Award (regardless of form), as applicable, each Holder shall be
deemed to have agreed that the Award is special incentive compensation that will
not be taken into account in any manner as salary, compensation, or bonus in
determining the amount of any payment under any pension, retirement, or other
employee benefit plan of the Corporation or any Subsidiary, unless any pension,
retirement, or other employee benefit plan of the Corporation or Subsidiary
expressly provides that such Award shall be so considered for purposes of
determining the amount of any payment under any such plan. In addition, each
beneficiary of a deceased Holder shall be deemed to have agreed that the Award
will not affect the amount of any life insurance coverage, if any, provided by
the Corporation or a Subsidiary on the life of the Holder that is payable to the
beneficiary under any life insurance plan covering employees of the Corporation
or any Subsidiary.
12.6 Execution of Receipts and Releases. Any payment of cash or any
----------------------------------
issuance or transfer of shares of Stock to the Holder, or to his legal
representative, heir, legatee, or distributee, in accordance with the provisions
hereof, shall, to the extent thereof, be in full satisfaction of all claims of
such persons hereunder. The Committee may require any Holder, legal
representative, heir, legatee, or distributee, as a condition precedent to such
payment, to execute a release and receipt therefor in such form as it shall
determine.
12.7 Unfunded Plan. Insofar as it provides for Awards of cash and Stock,
-------------
the Plan shall be unfunded. Although bookkeeping accounts may be established
with respect to Holders who are entitled to cash, Stock, or rights thereto under
the Plan, any such accounts shall be used merely as a bookkeeping convenience.
The Corporation shall not be required to segregate any assets that may at any
time be represented by cash, Stock, or rights thereto, nor shall the Plan be
construed as providing for such segregation, nor shall the Corporation nor the
Board of Directors nor the Committee be deemed to be a trustee of any cash,
Stock, or rights thereto to be granted under the Plan. Any liability of the
Corporation to any Holder with respect to a grant of cash, Stock, or rights
thereto under the Plan shall be based solely upon any contractual obligations
that may be created by the Plan and any Award Agreement; no such obligation of
the Corporation shall be deemed to be secured by any pledge or other encumbrance
on any property of the Corporation.
30
<PAGE>
Neither the Corporation nor the Board of Directors nor the Committee shall be
required to give any security or bond for the performance of any obligation that
may be created by the Plan.
12.8 No Guarantee of Interests. Neither the Committee nor the Corporation
-------------------------
guarantees the Stock of the Corporation from loss or depreciation.
12.9 Payment of Expenses. All expenses incident to the administration,
-------------------
termination, or protection of the Plan, including, but not limited to, legal and
accounting fees, shall be paid by the Corporation or its Subsidiaries; provided,
however, the Corporation or a Subsidiary may recover any and all damages, fees,
expenses, and costs arising out of any actions taken by the Corporation to
enforce its right to purchase Stock under this Plan.
12.10 Corporation Records. Records of the Corporation or its Subsidiaries
-------------------
regarding the Holder's period of employment, termination of employment and the
reason therefor, leaves of absence, re-employment, and other matters shall be
conclusive for all purposes hereunder, unless determined by the Committee to be
incorrect.
12.11 Information. The Corporation and its Subsidiaries shall, upon
-----------
request or as may be specifically required hereunder, furnish or cause to be
furnished all of the information or documentation which is necessary or required
by the Committee to perform its duties and functions under the Plan.
12.12 No Liability of Corporation. The Corporation assumes no obligation
---------------------------
or responsibility to the Holder or his legal representatives, heirs, legatees,
or distributees for any act of, or failure to act on the part of, the Committee.
12.13 Corporation Action. Any action required of the Corporation shall be
------------------
by resolution of its Board of Directors or by a person authorized to act by
resolution of the Board of Directors.
12.14 Severability. In the event that any provision of this Plan, or the
------------
application hereof to any Person or circumstance, is held by a court of
competent jurisdiction to be invalid, illegal, or unenforceable in any respect
under present or future laws effective during the effective term of any such
provision, such invalid, illegal, or unenforceable provision shall be fully
severable; and this Plan shall then be construed and enforced as if such
invalid, illegal, or unenforceable provision had not been contained in this
Plan; and the remaining provisions of this Plan shall remain in full force and
effect and shall not be affected by the illegal, invalid, or unenforceable
provision or by its severance from this Plan. Furthermore, in lieu of each such
illegal, invalid, or unenforceable provision, there shall be added automatically
as part of this Plan a provision as similar in terms to such illegal, invalid,
or unenforceable provision as may be possible and be legal, valid, and
enforceable. If any of the terms or provisions of this Plan conflict with the
requirements of Rule 16b-3 (as those terms or provisions are applied to Eligible
Individuals who are subject to Section 16(b) of the Exchange Act), then those
conflicting terms or provisions shall be deemed inoperative to the extent they
so conflict with
31
<PAGE>
the requirements of Rule 16b-3 and, in lieu of such conflicting provision, there
shall be added automatically as part of this Plan a provision as similar in
terms to such conflicting provision as may be possible and not conflict with the
requirements of Rule 16b-3. If any of the terms or provisions of this Plan
conflict with the requirements of Section 422 of the Code (with respect to
Incentive Options), then those conflicting terms or provisions shall be deemed
inoperative to the extent they so conflict with the requirements of Section 422
of the Code and, in lieu of such conflicting provision, there shall be added
automatically as part of this Plan a provision as similar in terms to such
conflicting provision as may be possible and not conflict with the requirements
of Section 422 of the Code. With respect to Incentive Options, if this Plan does
not contain any provision required to be included herein under Section 422 of
the Code, that provision shall be deemed to be incorporated herein with the same
force and effect as if that provision had been set out at length herein;
provided, however, that, to the extent any Option that is intended to qualify as
an Incentive Option cannot so qualify, that Option (to that extent) shall be
deemed a Nonstatutory Option for all purposes of the Plan.
12.15 Notices. Whenever any notice is required or permitted hereunder,
-------
such notice must be in writing and personally delivered or sent by mail. Any
notice required or permitted to be delivered hereunder shall be deemed to be
delivered on the date on which it is actually received by the Corporation
addressed to the attention of the Corporate Secretary at the Corporation's
office as specified in the applicable Award Agreement. The Corporation or a
Holder may change, at any time and from time to time, by written notice to the
other, the address which it or he had previously specified for receiving
notices. Until changed in accordance herewith, the Corporation and each Holder
shall specify as its and his address for receiving notices the address set forth
in the Award Agreement pertaining to the shares to which such notice relates.
Any person entitled to notice hereunder may waive such notice.
12.16 Successors. The Plan shall be binding upon the Holder, his legal
----------
representatives, heirs, legatees, and distributees, upon the Corporation, its
successors and assigns and upon the Committee and its successors.
12.17 Headings. The titles and headings of Sections and Subsections are
--------
included for convenience of reference only and are not to be considered in
construction of the provisions hereof.
12.18 Governing Law. All questions arising with respect to the
-------------
provisions of the Plan shall be determined by application of the laws of the
State of Texas, without giving effect to any conflict of law provisions thereof,
except to the extent Texas law is preempted by federal law. Questions arising
with respect to the provisions of an Award Agreement that are matters of
contract law shall be governed by the laws of the state specified in the Award
Agreement, except to the extent that Texas corporate law conflicts with the
contract law of such state, in which event Texas corporate law shall govern
irrespective of any conflict of law principles. The obligation of the
Corporation to sell and deliver Stock hereunder is subject to applicable
federal, state and foreign laws and to the approval of any governmental
authority required in connection with the authorization, issuance, sale, or
delivery of such Stock.
32
<PAGE>
12.19 Word Usage. Words used in the masculine shall apply to the
----------
feminine where applicable, and wherever the context of this Plan dictates, the
plural shall be read as the singular and the singular as the plural.
EXECUTED as of the 20th day of December, 1996.
SCIENTIFIC MEASUREMENT SYSTEMS,
INC., a Texas corporation
By: /s/ Larry Secrest
------------------------
Larry Secrest, President
<PAGE>
EXHIBIT 10.24
- --------------------------------------------------------------------------------
FORM CO-451 U.S. DEPARTMENT OF COMMERCE [_] GRANT [X] COOPERATIVE
(REV. 10-93) AGREEMENT
DAO 203-26 -----------------------------
ACCOUNTING CODE
AMENDMENT TO FINANCIAL ASSISTANCE AWARD ** SEE BELOW
- --------------------------------------------------------------------------------
RECIPIENT NAME AWARD NUMBER
Scientific Measurement Systems, Inc. 70NANB5H1148
-----------------------------
- -------------------------------------------------- AMENDMENT NUMBER
STREET ADDRESS 03
2209 Donley Drive -----------------------------
EFFECTIVE DATE
- -------------------------------------------------- September 1, 1997
CITY, STATE, ZIP CODE -----------------------------
Austin, TX 78758 EXTEND WORK COMPLETION TO
N/A
- --------------------------------------------------------------------------------
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 being amended to (1) obligate and authorize
expenditure of funding for the THIRD and FINAL year (09/01/97 - 08/31/98); (2)
allow the carryover of unexpended funds from the second year to the third year;
and (3) indicate on the attached, those terms and conditions affected by the
additional funds, carryover, and any administrative or statutory requirements.
- --------------------------------------------------------------------------------
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.
[x] Special Award Conditions
[x] Line Item Budget
[ ] Other(s):_________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
**ACCOUNTING CODE: cc: 7/4745329 Ob. CL. 4110 Req. No. 475-5178 $1,252,076
475/T.
- --------------------------------------------------------------------------------
Lettieri B-AE93-Y-H-F-N-A-48-05000 EIN: 74-2048763
- --------------------------------------------------------------------------------
SIGNATURE OF DEPARTMENT OF COMMERCE
GRANTS OFFICER TITLE DATE
Shamim A. Shaikh /s/ SHAMIM A. SHAIKH Grants Officer 9/12/97
- --------------------------------------------------------------------------------
TYPED NAME AND SIGNATURE OF AUTHORIZED
RECIPIENT OFFICIAL TITLE DATE
Forrest Hopkins /s/ FORREST HOPKINS Vice President 9/23/97
- --------------------------------------------------------------------------------
ELECTRONIC FORM ORIGINAL
<PAGE>
SPECIAL AWARD CONDITIONS
ADVANCED TECHNOLOGY PROGRAM - JOINT VENTURE
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
COOPERATIVE AGREEMENT NO. 70NANB5H1148
AMENDMENT NO. 3
CHANGES/MODIFICATIONS TO SPECIAL TERMS CHANGES/MODIFICATIONS TO GENERAL
AND CONDITIONS: TERMS AND CONDITIONS, ADVANCED
TECHNOLOGY PROGRAM - JOINT VENTURE
3. GRANTS OFFICER APPLICANT (7/95) NO. 26, AUDITS:
Shamim Shaikh 26. AUDITS
National Institute of Standards
and Technology The Recipient shall provide
Bldg. 301, Room B129 sufficient funds in the project
Gaithersburg, MD 20899-0001 budget to have a project audit
(301) 975-6621; fax: (301) 840-5976 performed. The cost of the audit
may be charged as a direct cost
provided that costs of audits are
4. GRANTS SPECIALIST not included in the Recipient's
indirect cost rate.
Timothy M. Lynch
National Institute of Standards a. For 2, 3, and 4 year awards, an
and Technology audit is required within ninety (90)
Bldg. 301, Room B150 days after the first year and at the
Gaithersburg, MD 20899-0001 end of the project.
(301) 975-6621; fax: (301) 840-5976
Internet address: [email protected] b. For 5 year awards, an audit is
required within ninety (90) days
after the first year, within ninety
6. FUNDING LIMITATIONS (90) days after the third year, and
at the end of the project.
The scope of work and budget incorporated
into this award covers a three (3) year ALL PRIOR TERMS AND CONDITIONS
-------------- REMAIN THE SAME AND IN EFFECT.
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
$1,252,076.00 for the third and final year
- ------------- -----
period (referred to as the "budget period"),
plus the carryover of unexpended funds from
the second year to the third year period.
------ -----
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. Should
such an excess obligation, expenditures, or
commitments occur, no legal liability will
exist or result on the part of the Federal
Government for payment of funds.
8. COST SHARE
The cumulative year 1, 2, and 3 cost sharing
ratio applicable to this award is the
Recipient's contribution of 51.00%
($3,906,346.00) and NIST's contribution of
49.00% ($3,753,156.00). The Recipient must
meet or exceed the cost share ratio on a
quarterly financial reporting basis.
11. BUREAU OF EXPORT ADMINISTRATION (BXA)
CLEARANCE
The Bureau of Export Administration (BXA)
shall conduct a review for any relevant
information about the Recipient. The BXA
review is expected to be completed by
September 30, 1997. The Technology
Administration reserves the right to
take appropriate corrective action in the
event that significant adverse information
about the Recipient is reported to the Grants
Officer by BXA.
SPECIAL AWARD CONDITIONS/ATP-JV/9-97
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
MULTI-YEAR ESTIMATED BUDGET - JOINT VENTURE YEAR 3
- --------------------------------------------------------------------------------------------------------------------------------
SPECIFY NAME OF PARTICIPANT PARTICIPANT PARTICIPANT PARTICIPANT PARTICIPANT PARTICIPANT TOTAL
SMS EG&G GM GE-CRD GE-AE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1. OBJECT CLASS CATEGORY
- ---------------------------------------
A. TECHNICAL PERSONNEL SALARIES/WAGES $ 346,549 $ 29,825 $ 60,000 $ 131,498 $ 444,039 $ 1,011,911
- --------------------------------------------------------------------------------------------------------------------------------
B. TECHNICAL PERSONNEL FRINGE BENEFITS 245,786 50,685 10,000 52,599 0 359,070
- --------------------------------------------------------------------------------------------------------------------------------
C. ADMINISTRATIVE SUPPORT SALARIES/WAGES
- --------------------------------------------------------------------------------------------------------------------------------
D. ADMINISTRATIVE SUPPORT FRINGE BENEFITS
- --------------------------------------------------------------------------------------------------------------------------------
E. TRAVEL 33,075 10,056 20,000 12,262 0 75,393
- --------------------------------------------------------------------------------------------------------------------------------
F. EQUIPMENT
- --------------------------------------------------------------------------------------------------------------------------------
G. MATERIALS/SUPPLIES 238,700 0 60,000 26,391 0 325,091
- --------------------------------------------------------------------------------------------------------------------------------
H. SUBCONTRACTS
- --------------------------------------------------------------------------------------------------------------------------------
L. OTHER
- --------------------------------------------------------------------------------------------------------------------------------
J. TOTAL DIRECT COSTS (LINE A THRU I) 864,110 90,566 150,000 222,750 444,039 1,771,465
- --------------------------------------------------------------------------------------------------------------------------------
K. TOTAL INDIRECT COSTS 447,150 0 0 336,645 0 783,795
- --------------------------------------------------------------------------------------------------------------------------------
L. TOTAL COSTS (LINES J AND K) $ 1,311,260 $ 90,566 $ 150,000 $ 559,395 $ 444,039 $ 2,555,260
- --------------------------------------------------------------------------------------------------------------------------------
M. NON-ATP FUNDS $ 672,740 $ 46,189 $ 76,500 $ 285,292 $ 222,463 $ 1,303,184
- --------------------------------------------------------------------------------------------------------------------------------
N. ATP FUNDS REQUESTED $ 638,520 $ 44,377 $ 73,500 $ 274,103 $ 221,576 $ 1,252,076
=================================================================================================================================
2. SOURCES OF FUNDS
- ---------------------------------------
A. ATP (SAME AS LINE N) $ 638,520 $ 44,377 $ 73,500 $ 274,103 $ 221,576 $ 1,252,076
- --------------------------------------------------------------------------------------------------------------------------------
B. SMS 672,740 285,292 958,032
- --------------------------------------------------------------------------------------------------------------------------------
C. EG&G 46,189 46,189
- --------------------------------------------------------------------------------------------------------------------------------
D. GM 76,500 76,500
- --------------------------------------------------------------------------------------------------------------------------------
E. GE - CRD
- --------------------------------------------------------------------------------------------------------------------------------
F. GE - AE 222,463 222,463
- --------------------------------------------------------------------------------------------------------------------------------
G. TOTAL SOURCES OF FUNDS
(SAME AS LINE L) $ 1,311,260 $ 90,566 $ 150,000 $ 559,395 $ 444,039 $ 2,555,260
=================================================================================================================================
3. TASKS
- ---------------------------------------
A. TASK 1 $ 248,112 $ 9,213 $ 0 $ 32,173 $ 35,000 $ 324,498
- --------------------------------------------------------------------------------------------------------------------------------
B. TASK 2 75,052 81,354 0 272,728 61,000 490,134
- --------------------------------------------------------------------------------------------------------------------------------
C. TASK 3 100,002 0 0 0 70,000 170,002
- --------------------------------------------------------------------------------------------------------------------------------
D. TASK 4 284,011 0 0 193,133 25,000 502,011
- --------------------------------------------------------------------------------------------------------------------------------
E. TASK 5 50,248 0 0 0 20,000 70,248
- --------------------------------------------------------------------------------------------------------------------------------
F. TASK 6 373,969 0 150,000 57,423 200,000 781,392
TASK 7 179,867 0 0 3,938 33,039 216,844
- --------------------------------------------------------------------------------------------------------------------------------
G. TOTAL COSTS OF ALL TASKS
(SAME AS LINE L) $ 1,311,260 $ 90,566 $ 150,000 $ 559,395 $ 444,039 $ 2,555,260
================================================================================================================================
</TABLE>
<PAGE>
EXHIBIT 10.25
Frost National Bank
Member: Cullen/Frost Bankers, A Family of Texas Banks
August 5, 1997
Richard McCoppin
Scientific Measurement Systems, Inc.
22 1 0 Denton Drive, Suite 106
Austin, Texas 78759
Re: $70,000 Term Loan with The Frost National Bank
Dear Mr. McCoppin:
Please be advised your request for renewal of the loan at a reduced principal
balance of $60,000 has been approved and enclosed are the loan documents
evidencing Frost Bank's commitment. As renewed, the note will mature December
18, 1997, and remain governed by a loan agreement which calls for financial
reporting and compliance with various financial ratios. As with the previous
three renewals, Frost Bank will waive the requirement that SMS maintain a
minimum tangible net worth and that total liabilities not exceed is specific
multiple of tangible net worth. Although the loan is being renewed as a term
note, Frost Bank will continue to require the monthly financial reporting and
will continue to evaluate collateral coverage as prescribed under the Borrowing
base covenants of the loan agreement. To that extent, please provide Frost Bank
with the most recent 10-Q report on SMS, the June 30, 1997 internal financial
and income statements, and an account receivable aging and borrowing base report
as of June 30th.
When returning the executed renewal documents and financial information, please
include a check payable to The Frost National Bank for closing costs in the
amount of $12,111.39, such representing the $10,000 principal reduction,
$1,946.39 in interest due through July 21, 1997, a $150.00 loan processing fee
and a $15.00 record search fee.
Please give me a call at 473-4960 with any questions or comments.
Sincerely,
Michael D. Falk
Vice President
Enclosures
<PAGE>
PROMISSORY NOTE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRINCIPAL LOAN DATE MATURITY LOAN NO. CALL COLLATERAL ACCOUNT OFFICER INITIALS
$60,000.00 07-21-1997 12-18-1997 1235001 500 5073 1235001 660
- ------------------------------------------------------------------------------------------------------------------------------------
REFERENCES IN THE SHADED AREA ARE FOR LENDER'S USE ONLY AND DO NOT LIMIT THE APPLICABILITY OF THIS DOCUMENT TO ANY PARTICULAR LOAN
OR ITEM.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
BORROWER: SCIENTIFIC MEASUREMENT SYSTEMS, INC. LENDER: THE FROST NATIONAL BANK
(TIN: 74-2045763) P. O. BOX 1600
2210 DENTON DRIVE, SUITE 106 SAN ANTONIO, TX 78296
AUSTIN, TX 78758
================================================================================
PRINCIPAL AMOUNT: $60,000.00 INITIAL RATE: 11.000% DATE OF NOTE: JULY 21, 1997
PROMISE TO PAY. SCIENTIFIC MEASUREMENT SYSTEMS, INC. ("Borrower") promises to
pay to THE FROST NATIONAL BANK ("Lender"), or order, in lawful money of the
United States of America, the principal amount of Sixty Thousand & 00/100
Dollars ($60,000.00), together with Interest on the unpaid principal balance
from July 21,1997, until maturity.
PAYMENT. Borrower will pay this loan in one principal payment of $60,000.00
plus Interest on December 16, 1997. This payment due December 18, 1997, will be
for all principal and accrued Interest not yet paid. In addition, Borrower will
pay regular monthly payments of all accrued unpaid Interest due as of each
payment date, beginning August 18, 1997, with all subsequent Interest payments
to be due on the same day of each month after that. Interest on this Note is
computed on a 365/380 simple interest basis; that is, by applying the ratio of
the annual interest rate over a year of 360 days, multiplied by the outstanding
principal balance, multiplied by the actual number of days the principal balance
Is outstanding, unless such calculation would result in a usurious rate, in
which case Interest shall be calculated on a per diem basis of a year of 365 of
366 days, as the case may be. Borrower will pay Lander at Lander's address
shown above or at such other place as Lender may designate in writing. Unless
otherwise agreed or required by applicable law, payments will be applied first
to accrued unpaid Interest, then to principal, and any remaining amount to any
unpaid collection costs and late charges.
VARIABLE INTEREST RATE. The Interest rate an this Note is subject to change
from time to time based on changes in an index which is Lender's Prime Rate (the
"Index"). This is the role Lender charges, or would charge, on 90-day unsecured
loans to the most creditworthy corporate customers. This rate may or may not be
the lowest rate available from Lender at any given time. Lender will tell
Borrower the current Index rate upon Borrower's request. Borrower understands
that Lender may make loans based on other rates as well. The Interest rate
change will not occur more often than each day. The Index currently is 8.500%
per annum. The Interest rate to be applied prior to maturity to the unpaid
principal balance of this Note will be at a rate of 2.500 percentage points over
the Index, resulting in an initial rate of 11.000% per annum. NOTICE: Under no
circumstances will the Interest rate an this Note be more than the maximum rate
allowed by applicable law. For purposes of this Note, the "maximum rate allowed
by applicable law" means the greater of (a) the maximum rate of Interest
permitted under federal or other law applicable to the indebtedness evidenced by
this Note, or (b) the "Indicated Rate Calling" as referred to in Article 5069-
1.04(1)(1) V.T.C.S.
PREPAYMENT. Borrower may pay without penalty all or a portion of the amount
owed earlier then it is due. Early payments will not, unless agreed to by
Lender in writing, relieve Borrower of Borrower's obligation to continue to make
payments under the payment schedule. Rather, they will reduce the principal
balance due.
POST MATURITY RATE. The Post Maturity Rate on this Note is the maximum rate
allowed by applicable law. Borrower will pay Interest on all sums due after
final maturity, whether by acceleration or otherwise, at that rate, with the
exception of any amounts added to the principal balance of this Note based on
Lender's payment of insurance premiums, which will continue to accrue Interest
at the pre-maturity rate.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lander, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lander. (c) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished. (e) Borrower becomes Insolvent, a receiver Is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any creditor
tries to take any of Borrower's property on or in which Lender has a lien or
security interests. This includes a garnishment of any of Borrower's accounts
with Lender. (g) Any guarantor dies or any of the other events described in
this default section occurs with respect to any guarantor of this Note. (h) A
material adverse change occurs In Borrower's financial condition, or Lender
believes the prospect of payment or performance of the Indebtedness is impaired.
(i) Lender in good faith deems itself insecure.
LENDER'S RIGHTS. Upon default, Lender may declare the entire indebtedness,
including the unpaid principal balance on this Note, all accrued unpaid
interest, and all other amounts, costs and expenses for which Borrower is
responsible under this Note or any other agreement with Lender pertaining to
this loan, immediately due, without notice, and them Borrower will pay that
amount. Lender may hire an attorney to help collect this Note it Borrower does
not pay, and Borrower will pay Lender's reasonable attorneys' fees. Borrower
also will pay Lender all other amounts actually incurred by Lender as court
costs, lawful fees for filing, recording, or releasing to any public office any
instrument securing this loan; the reasonable cost actually expended for
repossessing, storing, preparing for sale, and selling any security; and fees
for noting a lien on or transferring a certificate of title to any motor vehicle
offered as security for this loan, or premiums or identifiable charges received
in connection with the sale of authorized insurance. This Note has been
delivered to Lender and accepted by Lender in the State of Texas. If there is a
lawsuit, and if the transaction evidenced by this Note occurred in Bexar County,
Borrower agrees upon Lender's request to submit to the Jurisdiction of the
courts of Bexar County, the State of Texas. Subject to the provisions on
arbitration, this Note shall be governed by and construed in accordance with the
laws of the State of Texas and applicable Federal laws.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and Interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation
<PAGE>
07-21-1997 PROMISSORY NOTE Page 2
Loan No. 1235001 (Continued)
===============================================================================
all accounts held jointly with someone else and all accounts Borrower may open
in the future, excluding however all IRA and Keogh accounts, and all trust
accounts for which the grant of a security interest would be prohibited by law.
Borrower authorizes Lender, to the extent permitted by applicable law, to charge
or setoff all sums owing on this Note against any and all such accounts.
ARBITRATION. Lender and Borrower agree that all disputes claims and
controversies between them, whether individual, joint, or class in nature,
arising from this Note or otherwise including, without limitation, contract and
tort disputes, shall be arbitrated pursuant to the Rules of the American
Arbitration Association, upon request of either party. No act to take or
dispose of any collateral securing this Note shall constitute a waiver of this
arbitration agreement or be prohibited by this arbitration agreement. This
includes, without limitation, obtaining injunctive relief or a temporary
restraining order; invoking a power of sale under any deed of trust or mortgage;
obtaining a writ of attachment or Imposition of a receiver; or exercising any
rights relating to personal property, including taking or disposing of such
property with or without judicial process pursuant to Article 9 of the Uniform
Commercial Code. Any disputes, claims, or controversies concerning the
lawfulness or reasonableness of any act, or exercise of any right, concerning
any collateral securing this Note, including any claim to rescind, reform, or
otherwise modify any agreement relating to the collateral securing this Note,
shall also be arbitrated, provided however that no arbitrator shall have the
right or the power to enjoin or restrain any act of any party. Judgment upon
any award rendered by any arbitrator may be entered In any court having
jurisdiction. Nothing In this Note shall preclude any party from seeking
equitable relief from a court of competent Jurisdiction. The statute of
limitations, estoppel, waiver, laches, and similar doctrines which would
otherwise be applicable in an action brought by a party shall be applicable in
any arbitration proceeding, and the commencement of an arbitration proceeding
shall be deemed the commencement of an action for these purposes. The Federal
Arbitration Act shall apply to the construction, interpretation, and enforcement
of this arbitration provision.
DISHONORED CHECK CHARGE. In the event a check offered in full or partial
payment on this loan is returned unpaid, Lender may charge a fee for the purpose
of defraying the expense incident to handling such returned check, and Borrower
agrees to pay such fee. The fee shall not exceed the maximum amount permitted
under applicable law.
FACSIMILE DOCUMENTS AND SIGNATURES. For purposes of negotiating and finalizing
this document, if this document is transmitted by facsimile machine ("fax"), it
shall be treated for all purposes as an original document. Additionally, the
signature of any party on this document transmitted by way of a fax machine
shall be considered for all purposes as an original signature. Any such faxed
document shall be considered to have the same binding legal effect as an
original document. At the request of any party, any faxed document shall be re-
executed by each signatory party in an original form.
WAIVER OF RIGHT TO TRIAL BY JURY. THE PARTIES TO THIS AGREEMENT HEREBY WAIVE
TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THE
PARTIES HERETO AGAINST THE OTHER TO ENFORCE THIS AGREEMENT, TO COLLECT DAMAGES
FOR THE BREACH OF THIS EMENT, OR WHICH IN ANY OTHER WAY ARISE OUT OF, ARE
CONNECTED TO OR ARE RELATED TO THIS AGREEMENT OR THE SUBJECT MATTER OF THIS
AGREEMENT, ANY SUCH ACTION SHALL BE TRIED BY THE JUDGE WITHOUT A JURY.
RENEWAL AND EXTENSION. This Note is given in renewal and extension and not in
novation of the following described indebtedness: THE PROMISSORY NOTE FROM
SCIENTIFIC MEASUREMENT SYSTEMS, INC. TO LENDER DATED APRIL 21, 1997.
GENERAL PROVISIONS. If any part of this Note cannot be enforced, this fact will
not affect the rest of the Note. In particular, this section means (among other
things) that Borrower does not agree or intend to pay, and Lender does not agree
or intend to contract for, charge, called, take, reserve or receive
(collectively referred to herein as "charge or collect"), any amount in the
nature of interest or in the mature of a fee for this loan, which would in any
way or event (including demand, prepayment, or acceleration) cause Lender to
charge or collect more for this loan than the maximum Lender would be permitted
to charge or collect by federal law or the law of the State of Texas (as
applicable). Any such excess interest or unauthorized fee shall, instead of
anything stated to the contrary, be applied first to reduce the principal
balance of this loan, and when the principal has been paid in full, be refunded
to Borrower. The right to accelerate maturity of sums due under this Note does
not include the right to accelerate any interest which has not otherwise accrued
on the date of such acceleration, and Lender does not intend to charge or
collect any unearned interest in the event of acceleration. All sums paid or
agreed to be paid to Lender for the use, forbearance or detention of sums due
hereunder shall, to the extent permitted by applicable law, be amortized,
prorated, allocated and spread throughout the full term of the loan evidenced by
this Note until payment in full so that the rate or amount of interest on
account of the loan evidenced hereby does not exceed the applicable usury
ceiling. Lender may delay or forgo enforcing any of its rights or remedies
under this Note without losing them. Borrower and any other person who signs,
guarantees or endorses this Note, to the extent allowed by law, waive
presentment, demand for payment, protest, notice of dishonor, notice of intent
to accelerate the maturity of this Note, and notice at acceleration of the
maturity of this Note. Upon any change in the terms of this Note, and unless
otherwise expressly stated in writing, no party who signs this Note, whether as
maker, guarantor, accommodation maker or endorser, shall be released from
liability. All such parties agree that Lender may renew or extend (repeatedly
and for any length of time) this loan, or release any party or guarantor or
collateral; or impair, fail to realize upon or perfect Lender's security
interest in the collateral without the consent of or notice to anyone. All such
parties also agree that Lender may modify this loan without the consent of or
notice to anyone other than the party with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
By:
--------------------------------------------------------
LARRY SECREST, Chief Executive Officer and Chairman
===============================================================================
<PAGE>
EXHIBIT 10.26
EXIM GUARANTEED LOAN AGREEMENT
------------------------------
THIS EXIM GUARANTEED LOAN AGREEMENT, dated as of June 15, 1996 (this
"Agreement"), is between SCIENTIFIC MEASUREMENT SYSTEMS, INC., a Texas
corporation ("Borrower"), and WELLS FARGO HSBC TRADE BANK, N.A., a national
banking association ("Lender").
R E C I T A L S :
Borrower has requested that Lender extend credit to Borrower in the form of
a line of credit guaranteed by Eximbank in the amount of $1,250,000.00. Lender
is willing to make such extension of credit to Borrower upon the terms and
conditions hereinafter set forth.
NOW THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereto agree as follows:
ARTICLE I
Definitions
-----------
Section 1.01. Definitions. As used in this Agreement, the following terms
-----------
have the following meanings:
"Adjusted Letter of Credit Liabilities" means an amount equal to seventy-
-------------------------------------
five percent (75%) of the Letter of Credit Liabilities.
"Advance" means an advance of funds by Lender to Borrower pursuant to
-------
Article II.
"Advance Request Form" means a certificate, in substantially the form of
--------------------
Exhibit "E" hereto, fully completed and executed by Borrower requesting an
Advance.
"Application for Letter of Credit" means an Application and Agreement for
--------------------------------
Standby Letter of Credit in substantially the form of Exhibit "G" hereto.
"Borrower Agreement" means that certain Export-Import Bank of the United
------------------
States Working Capital Guarantee Program Borrower Agreement executed by Borrower
in substantially the form of Exhibit "D" hereto, as the same may be, amended,
supplemented, or modified.
"Borrowing Base" means, at any particular time, the sum of (a) ninety
--------------
percent (90%) of Eligible Accounts, plus (b) seventy percent (70%) of Eligible
Inventory.
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<PAGE>
"Borrowing Base and No Default Certificate" means a certificate in the form
-----------------------------------------
of Exhibit "F" hereto, fully completed and executed by Borrower.
"Bridgestone-Japan" means Bridgestone LTD and its successors and assigns.
-----------------
"Bridgestone-Japan Contract" means Purchase Order No. 1713260 between
--------------------------
Bridgestone-Japan and Borrower.
"Business Day" means any day on which commercial banks are not authorized
------------
or required to close in Houston, Texas.
"Closing Date" means the date on which this Agreement has been executed and
------------
delivered by the parties hereto and the conditions set forth in Section 5.01
have been satisfied.
"Collateral" has the meaning specified in Section 4.01.
----------
"Commitment" means the obligation of Lender to make Advances and issue
----------
Letters of Credit hereunder in an aggregate principal amount at any time
outstanding up to but not exceeding $1,250,000.00.
"Consent, Release and Waiver Letter" means the letter in the form of
----------------------------------
Exhibit "H," hereto, executed by Frost Bank.
"Continental Tire-Germany" means Continental AG and its successors and
------------------------
assigns.
"Continental Tire-Germany Contract" means Purchase Order No.
---------------------------------
4TO65147/01/444 between Continental Tire-Germany and Borrower.
"Contract Collateral" means the following arising from or relating to the
-------------------
Contracts: (a) accounts, accounts receivable, contract rights and general
intangibles, (b) inventory, including raw materials, work-in-process, finished
goods and other tangible property, (c) chattel paper, documents, instruments,
general intangibles and patents, and (d) all products and proceeds thereof, all
whether now owned or hereafter acquired.
"Contract Parties" means Continental Tire-Germany, Bridgestone-Japan, EDMZ-
----------------
Switzerland and Fiat-Italy.
"Contracts" means the Bridgestone-Japan Contract, the Continental Tire-
---------
Germany Contract, the EDMZ-Switzerland Contract and the Fiat-Italy Contract.
"Debt" means for Borrower (a) all indebtedness, whether or not represented
----
by notes, bonds, debentures, securities or other evidences of indebtedness, for
the repayment of money borrowed, (b) all indebtedness representing deferred
payment of the purchase price of property
-2-
<PAGE>
or assets, (c) all indebtedness under any lease which, in conformity with GAAP,
is required to be capitalized for balance sheet purposes, (d) all indebtedness
under guaranties, endorsements, assumptions, or other contingent obligations, in
respect of, or to purchase or otherwise acquire, indebtedness of others, and (e)
all indebtedness secured by a Lien existing on property owned, whether or not
the indebtedness secured thereby shall have been assumed by the owner thereof.
"Default Rate" shall mean the lesser of (a) the sum of the Prime Rate plus
------------
five percent (5%) or (b) the Maximum Rate.
"Disbursement Request-Continental Tire" means a certificate, in
-------------------------------------
substantially the form of Exhibit "I" hereto, fully completed and executed by
Borrower requesting a disbursement from the Payment Account-Continental Tire.
"Disbursement Request-Main" means a certificate, in substantially the form
-------------------------
of Exhibit "J" hereto, fully completed and executed by Borrower requesting a
disbursement from the Payment Account-Main.
"Dollars" and "$" means currency of the United States of America which is
-------- -
at the time of payment legal tender for the payment of public and private debts
in the Untied States of America.
"EDMZ-Switzerland" means Swiss Federal Labs for Materials, Testing and
----------------
Research and its successors and assigns.
"EDMZ-Switzerland Contract" means Purchase Order No. 23U50346 between EDMZ-
-------------------------
Switzerland and Borrower.
"Eligible Accounts" means the accounts receivable of Borrower arising from
-----------------
the Contracts that (a) have not been outstanding more than thirty (30) days past
the date when due, (b) are payable by wire transfer to the applicable Payment
Account, (c) require no further act on the part of Borrower to make such
accounts receivable payable by the Contract Parties, (d) meet all the
requirements of the Borrower Agreement, (e) are not shipped on consignment, (f)
are not unbilled, and (g) are not subject to any defense or claim with respect
to the payment thereof; provided, however, that there shall be subtracted from
Eligible Accounts the amount of any advance payments made on such accounts
receivable.
"Eligible Inventory" means, at any time, all inventory of raw materials,
------------------
work in process, and finished goods then owned by (and in the possession or
under the control of) Borrower related to or consisting of items to be sold
under the Contracts valued at the lower of actual cost or fair market value
(including cost of work-in-process inventory valued in accordance with GAAP and
labor costs associated with the projects), and which satisfies all the
provisions and requirements of the Borrower Agreement; provided, however, that
there shall be subtracted from Eligible
-3-
<PAGE>
Inventory the amount of any advance payments made on such inventory. Eligible
Inventory shall not include (a) inventory with respect to which a claim exists
disputing Borrower's title to or right to possession of such inventory, and (b)
inventory that does not satisfy all the requirements and provisions of the
Borrower Agreement.
"Environmental Laws" means any and all federal, state and local laws,
------------------
regulations, and requirements pertaining to health, safety, or the environment,
including, without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, 42 U.S.C. (S) 9601 et seq., the Resource
Conservation and Recovery Act of 1976, 42 U.S.C. (S) 6901 et seq., the
Occupational Safety and Health Act, 29 U.S.C. (S) 651 et seq., the Clean Water
Act, 33 U.S.C. (S) 1251 et seq., the Toxic Substances Control Act, 15 U.S.C. (S)
2601 et seq., and all similar laws, regulations, and requirements of any
governmental authority or agency having jurisdiction over Borrower or any of its
properties or assets, as such laws, regulations, and requirements may be amended
or supplemented from time to time.
"Event of Default" has the meaning specified in Section 8.01.
----------------
"Eximbank" means the Export-Import Bank of the United States, an
--------
organization owned by the government of the United States of America.
"EXIM Guaranty" means that certain Working Capital Guarantee No.
-------------
____________ issued under Master Guarantee Agreement No. CA-MGA-96-017, dated as
of April l1, 1996, between Lender and Eximbank and the annexes thereto, copies
of which are attached hereto as Exhibit "C," as the same may be amended,
supplemented, extended or modified.
"EXIM Application Fee" means the fee in the amount of $100,00 payable in
---------------------
connection with Borrower's application to Eximbank.
"EXIM Guaranty Fee" means the fee payable in consideration of the issuance
-----------------
of the EXIM Guaranty an amount equal to one and one-half percent (1 1/2%) of the
amount of the Commitment.
"Fiat-Italy" means Fiat SpA and its successors and assigns.
----------
"Fiat-Italy Contract" means Purchase Order No, 60681/71 between Fiat-Italy
-------------------
and Borrower.
"Frost Bank" means Frost National Bank.
"Frost Bank Debt" means Debt of Borrower to Frost Bank in a principal
---------------
amount which does not exceed $85,000.00 and which Debt is secured only by
Borrower's domestic accounts receivable.
-4-
<PAGE>
"GAAP" means generally accepted accounting principles, applied on a
----
consistent basis, as set forth in Opinions of the Accounting Principles Board of
the American Institute of Certified Public Accountants or in statements of the
Financial Accounting Standards Board or their respective successors and which
are applicable in the circumstances as of the date in question, Accounting
principles are applied on a "consistent basis" when the accounting principles
observed in a current period are comparable in all material respects to those
accounting principles applied in a preceding period.
"Hazardous Substance" means any substance, product, waste, pollutant,
-------------------
material, chemical, contaminant, constituent, or other material which is or
becomes listed, regulated, or addressed under any Environmental Law, including,
without limitation, asbestos, petroleum, and polychlorinated biphenyls.
"Letter of Credit" means any standby letter of credit issued by Lender for
----------------
the account of Borrower pursuant to Article II.
"Letter of Credit Liabilities" means, at any time, the aggregate face
----------------------------
amounts of all outstanding Letters of Credit.
"Letter of Credit Retained Amount" is defined in Section 7.1 7.
--------------------------------
"Lien" means any lien, mortgage, security interest, tax lien, financing
----
statement, pledge, charge, hypothecation, assignment, preference, priority, or
other encumbrance of any kind or nature whatsoever (including, without
limitation, any conditional sale or title retention agreement), whether arising
by contract, operation of law, or otherwise.
"Loan Documents" means this Agreement and all promissory notes, security
--------------
agreements, assignments, guaranties, borrower agreements and other instruments,
documents, and agreements executed and delivered pursuant to or in connection
with this Agreement, as such instruments, documents, and agreements may be
amended, modified, renewed, extended, or supplemented from time to time.
"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 the Loan Documents
which are deemed to be interest under applicable law.
"Note" means the promissory note executed by Borrower payable to the order
----
of Lender, in substantially the form of Exhibit "A" hereto, and all extensions,
renewals, and modifications thereof and all substitutions therefor.
-5-
<PAGE>
"Obligated Party" means any Person who is or becomes a party to any
---------------
agreement pursuant to which such Person guarantees or secures payment and
performance of the Obligations or any part thereof.
"Obligations" means all obligations, indebtedness, and liabilities of
-----------
Borrower to Lender, now existing under this Agreement or the other Loan
Documents or hereafter arising under this Agreement and the other Loan
Documents, including, without limitation, all attorneys' fees and other expenses
incurred in the enforcement or collection thereof.
"Other Lender Liens" means first priority security interests of Frost Bank
------------------
in certain portions of the Collateral consisting only of domestic accounts
receivable and which do not arise f rom. or relate in any way to the Contracts.
The Other Lender Liens shall not include any liens or security interests in the
Contract Collateral.
"Payment Account-Continental" means Account No, 1000786829 at Lender held
---------------------------
in the name of and under the control of Lender into which payments on the
Continental Tire-Germany Contract are to be made by Continental Tire-Germany by
wire transfer.
"Payment Account-Main" means Account No, 1000786941 at Lender held in the
--------------------
name of and under the control of Lender into which payments on the Contracts
(other than the Continental Tire-Germany Contract) are to be made by the
Contract Parties (other than Continental Tire) by wire transfer.
"Payment Accounts" means the Payment Account-Continental and the Payment
----------------
Account-Main.
"Permitted Liens" means (a) Liens in favor of Lender, (b) the Other Lender
---------------
Liens, (c) Liens securing Debt permitted by Section 7,10, (d) encumbrances
consisting of minor easements, zoning restrictions, or other restrictions on the
use of real property that do not (individually or in the aggregate) materially
affect the value of the assets encumbered thereby or materially impair the
ability of Borrower to use such assets in its business, and none of which is
violated in any material aspect by existing or proposed structures or land use,
(e) Liens for taxes, assessments, or other governmental charges which are not
delinquent or which are being contested in good faith and for which adequate
reserves have been established, and (f) Liens of mechanics, materialmen,
warehousemen, carriers or other similar statutory Liens securing obligations
that are not yet due and are incurred in the ordinary course of business.
"Person" means any individual, corporation, business trust, association,
------
company, partnership, joint venture, governmental authority, or other entity.
"Prime Rate" means that variable rate of interest per annum. established
----------
by Lender from time to time as its prime rate which shall vary from time to
time. Such rate is set by Lender as a general reference rate of interest, taking
into account such factors as Lender may deem
-6-
<PAGE>
appropriate, it being understood that many of Lender'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 Lender may make various commercial or
other loans at rates of interest having no relationship to such rate.
"Security Agreement" means the Security Agreement executed by Borrower in
------------------
favor of Lender in substantially the form of Exhibit "B" hereto, as the same may
be amended, supplemented, or modified.
"Termination Date" means 11:00 a.m., Houston, Texas time on June 15, 1997
----------------
or such earlier date on which the Commitment terminates as provided in this
Agreement.
Section 1.02. Other Definitional Provisions. All definitions contained in
-----------------------------
this Agreement are equally applicable to the singular and plural forms of the
terms defined. The words "hereof," "herein," and "hereunder" and words of
similar import referring to this Agreement refer to this Agreement as a whole
and not to any particular provision of this Agreement. Unless otherwise
specified, all Article and Section references pertain to this Agreement. All
accounting terms not specifically defined herein shall be construed in
accordance with GAAP. Terms used herein that are defined in the Uniform
Commercial Code as adopted by the State of Texas, unless otherwise defined
herein, shall have the meanings specified in the Uniform Commercial Code as
adopted by the State of Texas.
ARTICLE II
Advances
--------
Section 2.01. Advances. Subject to the terms and conditions of this
--------
Agreement, Lender agrees to make one or more Advances to Borrower from time to
time from the date hereof to and including the Termination Date in an aggregate
principal amount up to but not exceeding the Commitment; provided that the
aggregate amount of all Advances at any time outstanding shall not exceed the
lesser of (a) the Commitment minus the Adjusted Letter of Credit Liabilities or
(b) the Borrowing Base minus the Adjusted Letter of Credit Liabilities. Each
Advance shall satisfy all the provisions and requirements of the Borrower
Agreement. No Advance shall be made after the Availability Date (as defined in
the EXIM Guaranty Agreement). No Advance shall be made with respect to the
Continental Tire-Germany Contract except as provided in Section 7.17(c). Lender
shall not make any Advances if making any such Advance would violate the EXIM
Guaranty. Lender may refuse to make any Advances if the EXIM Guaranty is not in
full force and effect in any manner. Subject to the foregoing limitations and
the terms and provisions of this Agreement, Borrower may borrow, repay and
reborrow hereunder.
-7-
<PAGE>
Section 2.02. The Note. The obligation of Borrower to repay the Advances
--------
shall be evidenced by the Note executed by Borrower, payable to the order of
Lender, in the principal amount of the Commitment.
Section 2.03. Mandatory Prepayment with Proceeds of Contracts; Repayment of
-------------------------------------------------------------
Advances. Borrower shall repay the Advances within one Business Day of the date
- --------
on which Borrower receives a payment under any Contract in a principal amount
equal to the principal amount of such Contract payment plus accrued interest on
the principal amount so paid, except that the provisions of this sentence shall
not apply to payments under the Continental Tire-Germany Contract. Such
payments shall be made as provided in Section 7.17(b), Borrower shall also pay
the unpaid principal amount of all Advances on the earlier of (a) the
Termination Date or (b) such other dates on which the Advances are or may be
required to be paid pursuant to this Agreement.
Section 2.04. Interest. The unpaid principal amount of the Advances shall
-------
bear interest prior to maturity at a varying rate per annum equal from day to
day to the lesser of (a) the Maximum Rate or (b) the sum of the Prime Rate in
effect from day to day plus two percent (2.0%), and each change in the rate of
interest charged on the Advances shall become effective, without notice to
Borrower, 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 on the Advances to be limited to the Maximum Rate, then any
subsequent reduction in the Prime Rate shall not reduce the rate of interest on
the Advances below the Maximum Rate until the aggregate amount of interest which
would have accrued on the Advances if the interest rate specified in clause (b)
preceding had at all times been in effect. All past due principal and interest
shall bear interest at the Default Rate. Accrued and unpaid interest on the
Advances shall be payable on the first day of each month commencing on July 1,
1996 and on the earlier of the Termination Date or any other date on which the
principal amount of the Advances is paid (whether as a result of optional or
mandatory prepayment or acceleration).
Section 2.05. Requests for Advances. Borrower shall give Lender notice of
---------------------
each requested Advance at least two (2) Business Days' prior to the date on
which Borrower desires funding of such Advance by delivery to Lender of an
Advance Request Form fully completed and containing the information required
therein, together with the other items required by Section 5.02.
Section 2.06. Mandatory Prepayment if Advances Exceed Borrowing Base. If
------------------------------------------------------
at any time the outstanding principal amount of the Advances plus the Adjusted
Letter of Credit Liabilities exceeds the Borrowing Base, Borrower shall promptly
prepay the outstanding Advances by the amount of the excess plus accrued and
unpaid interest on the amount so prepaid, and if no Advances are outstanding,
Borrower shall deposit cash with Lender in an amount equal to such excess.
-8-
<PAGE>
Section 2.07. Fees. On the Closing Date, Borrower shall pay to Lender the
----
EXIM Guaranty Fee and the EXIM Application Fee. Such fees shall be deemed to be
fully earned when paid.
Section 2.08. Purpose. The proceeds of the Advances shall be used solely
-------
to support the general working capital needs of Borrower with respect to the
Contracts. The proceeds of the Advances shall not be used to repay other Debt.
Section 2.09. Letters of Credit. (a) Subject to the terms and conditions
-----------------
of this Agreement, Lender agrees to issue one or more Letters of Credit for the
account of Borrower from time to time from the date hereof to and including the
Termination Date; provided, however, that the outstanding Adjusted Letter of
Credit Liabilities shall not at any time exceed the lesser of (a) the Commitment
minus the outstanding Advances, or (b) the Borrowing Base minus the outstanding
Advances. Notwithstanding anything to the contrary contained in this Agreement,
Lender may issue a Letter of Credit for the benefit of Continental Tire-Germany,
and the Borrowing Base coverage provisions of Section 2,09 and the provisions of
Section 2.06 shall not apply to such Letter of Credit if (x) Eximbank
specifically approves the issuance of such Letter of Credit without Borrowing
Base coverage and (y) such Letter of Credit is issued on a non-operative basis,
with a subsequent amendment making the Letter of Credit operative being issued
only after an amount equal to the face amount of the Letter of Credit has been
transferred into the Payment Account-Continental Tire.
(b) Each Letter of Credit shall be secured by cash in an amount equal to
twenty-five percent (25%) of the face amount of such Letter of Credit as further
provided in Section 7.17. In order to satisfy this security requirement,
Borrower agrees to maintain an amount equal to twenty-five percent (25%) of the
face amounts of all outstanding Letters of Credit in the Payment Account-
Continental Tire as further provided in Section 7.17.
(c) Each Letter of Credit shall have an expiration date which shall not be
less than fifteen (15) days prior to the Termination Date and the Availability
Date (as defined in the EXIM Guaranty), shall be payable in Dollars, shall have
a minimum face amount of $100,000.00, and shall otherwise be satisfactory in
form and substance to Lender. Each Letter of Credit shall be issued in
connection with a transaction that satisfies all the provisions and requirements
of the Borrower Agreement. Lender shall not issue any Letter of Credit if the
related transaction is not in full compliance with, or would violate the EXIM
Guaranty. Lender may refuse to issue any Letter of Credit if the EXIM Guaranty
is not in full force and effect. No Letter of Credit shall require any payment
by Lender to the beneficiary thereunder pursuant to a drawing prior to the third
Business Day following presentment of a draft and any related documents to
Lender.
Section 2.10. Payments Constitute Advances. Each payment by Lender
----------------------------
pursuant to a drawing under a Letter of Credit shall constitute and be deemed an
Advance by Lender to Borrower under the Note and this Agreement as of the day
and time such payment is made by Lender and in the amount of such payment.
-9-
<PAGE>
Section 2.11. Requests for Letters of Credit. Borrower shall give Lender
------------------------------
notice of each requested Letter of Credit at least three (3) Business Day prior
to the date on which Borrower desires that the Letter of Credit be issued by
delivery to Lender of an Application for Letter of Credit properly completed and
containing the information required therein together with the other items
required by Section 5.02.
Section 2.12. Letter of Credit Fees. Borrower shall pay to Lender a
---------------------
letter of credit fee payable on the date each Letter of Credit is issued in an
amount equal to the greater of (a) one percent (1.0%) per annum of the stated
amount of such Letter of Credit, for the period during which such Letter of
Credit will remain outstanding, based on a 360 day year and the actual number of
days elapsed and (b) $300.00.
Section 2.13. Obligations Absolute. The obligations of Borrower under
--------------------
this Agreement and the other Loan Documents, including without limitation the
obligation of Borrower to reimburse Lender for Advances to pay any drawing under
any Letter of Credit, shall be absolute, unconditional, and irrevocable, and
shall be performed strictly in accordance with the terms of this Agreement and
the other Loan Documents under all circumstances whatsoever, including without
limitation the following circumstances:
(a) Any lack of validity or enforceability of any Letter of Credit;
(b) Any amendment or wavier of or any consent to departure from any Loan
Document;
(c) The existence of any claim, set-off, counterclaim, defense or other
rights which Borrower, any Obligated Party, or any other Person may have at
any time against any beneficiary of any Letter of Credit, Lender, or any
other Person, whether in connection with this Agreement or any other Loan
Document or any unrelated transaction;
(d) Any statement, draft, or other document presented under any Letter of
Credit is proven to be forged, fraudulent, invalid, or insufficient in any
respect or any statement therein being untrue or inaccurate in any respect
whatsoever; or
(e) Payment by Lender under any Letter of Credit against presentation of a
draft or other document which does not comply with the terms of such Letter
of Credit in a manner which is not material.
Section 2.14. Limitation of Liability. Borrower assumes all risks of the
-----------------------
acts or omissions of any beneficiary of any Letter of Credit with respect to its
use of such Letter of Credit. Neither Lender nor any of its officers or
directors shall have any responsibility or liability to Borrower or any other
Person for (a) the failure of any draft to bear any reference or adequate
reference to any Letter of Credit, or the failure of any documents to accompany
any draft at negotiation, or the
-10-
<PAGE>
failure of any Person to surrender or to take up any Letter of Credit or to send
documents apart from drafts as required by the terms of any Letter of Credit, or
the failure of any Person to note the amount of any instrument on any Letter of
Credit, each of which requirements, if contained in any Letter of Credit itself,
it is agreed may be waived by Lender, (b) errors, omissions, interruptions, or
delays in transmission or delivery of any messages, (c) the validity,
sufficiency, or genuineness of any draft or other document, or any endorsements
thereon, even if any such draft, document or endorsement should in fact prove to
be in any and all respects invalid, insufficient, fraudulent, or forged or any
statement therein is untrue or inaccurate in any respect, (d) the payment by the
Lender to the beneficiary of any Letter of Credit against presentation of any
draft or other document that does not comply with the terms of the Letter of
Credit, or (e) any other circumstance whatsoever in making or failing to make
any payment under a Letter of Credit. Borrower shall have a claim against
Lender, and Lender shall be liable to Borrower, to the extent of any direct, but
not consequential, damages suffered by Borrower which Borrower proves in a final
nonappealable judgment were caused by (i) Lender's willful misconduct or gross
negligence in determining whether documents presented under any Letter of Credit
complied with the terms thereof or (ii) Lender's willful failure to pay under
any Letter of Credit after presentation to it of documents strictly complying
with the terms and conditions of such Letter of Credit. Lender may accept
documents that appear on their face to be in order, without responsibility for
further investigation, regardless of any notice or information to the contrary.
ARTICLE III
Payments
--------
Section 3.01. Method of Payment. All payments of principal, interest, and
-----------------
other amounts to be made by Borrower under this Agreement, the Note or any other
Loan Documents shall be made to Lender at its office at 1000 Louisiana, Houston,
Texas 77002 without setoff, deduction, or counterclaim in immediately available
funds, Whenever any payment under this Agreement, the Note or any other Loan
Document shall be stated to be due on a day that is not a Business Day, such
payment may be made on the next Business Day, and interest shall continue to
accrue during such extension.
Section 3.02. Voluntary Prepayment. Borrower may prepay the Note in whole
--------------------
at any time or f rom time to time in part without premium or penalty but with
accrued interest to the date of prepayment on the amount so prepaid.
Section 3.03. Computation of Interest. Interest on the indebtedness
-----------------------
evidenced by the Note shall be computed on the basis of a year of 360 days and
the actual number of day elapsed (including the first day but excluding the last
day) unless such calculation would result in a usurious rate, in which case
interest shall be calculated on the basis of a year of 365 or 366 days, as the
case may be.
-11-
<PAGE>
ARTICLE IV
Collateral
----------
Section 4.01. Collateral. (a) To secure full and complete payment and
----------
performance of the obligations, Borrower shall execute and deliver or cause to
be executed and delivered the documents described below covering the property
and collateral described therein and in this Section 4.01 (which, together with
any other property and collateral which may now or hereafter secure the
Obligations or any part thereof, is sometimes herein called the "Collateral"):
(i) Borrower shall grant to Lender a first priority security interest
in the Contract Collateral pursuant to the Security Agreement.
(ii) Borrower shall grant to Lender a first priority security interest
in all of the following, provided that with respect only to Borrower f s
domestic accounts receivable, such security interest shall be subject to
the Other Lender Liens: (a) accounts, accounts receivable, contract rights
and general intangibles, (b) inventory, including raw materials, work-in-
process, finished goods and other tangible property, (c) equipment,
machinery and fixtures, (d) chattel paper, documents, instruments, general
intangibles and patents, and (e) all products and proceeds thereof, all
whether now owned or hereafter acquired, pursuant to the Security
Agreement.
(b) To secure full and complete payment and performance of the obligations
of Borrower under this Agreement, Lender has obtained the EXIM Guaranty.
Borrower agrees to comply with all of the requirements imposed on it, directly
or indirectly, by the EXIM Guaranty and the other documents executed in
connection therewith, including the Borrower Agreement, and to provide to
Lender, when due, all reports, documents and instruments, including purchase
orders, invoices and bills of lading required by Lender in connection with the
EXIM Guaranty. Borrower agrees in all respects to assist Lender in maintaining
the effectiveness of the EXIM Guaranty.
(c) Borrower shall execute and cause to be executed such further documents
and instruments, including without limitation, Uniform Commercial Code financing
statements, as Lender, in its sole discretion, deems necessary or desirable to
evidence and perfect its liens and security interests in the Collateral.
Section 4.02. Setoff. Upon the occurrence of an Event of Default, Lender
------
shall have the right to set off and apply against the Obligations in such a
manner as Lender may determine, at any time and without prior notice to
Borrower, any and all deposits (general or special, time or demand, provisional
or final) or other sums at any time credited by or owing from Lender to Borrower
to be applied to the Obligations then due. In addition to Lender's right of
setoff and as further security for the Obligations, Borrower hereby grants to
Lender a security interest in all deposits (general or special, time or demand,
provisional or final) and other accounts of Borrower
-12-
<PAGE>
now or hereafter on deposit with or held by Lender and all other sums at any
time credited by or owing from Lender to Borrower. The rights and remedies of
Lender hereunder are in addition to other rights and remedies (including,
without limitation, to the rights of setoff) which Lender may have.
ARTICLE V
Conditions Precedent
--------------------
Section 5.01. Initial Extension of Credit. The obligation of Lender to
---------------------------
make the initial Advance or issue the initial Letter of Credit is subject to the
condition precedent that Lender shall have received on or before the date
thereof all of the documents set forth below in form and substance satisfactory
to Lender.
(a) Resolutions - Borrower. Resolutions of the Board of Directors of
----------------------
Borrower certified by its Secretary or an Assistant Secretary which
authorize the execution, delivery and performance by Borrower of this
Agreement and the other Loan Documents to which Borrower is or is to be a
party.
(b) Incumbency Certificate - Borrower. A certificate of incumbency
---------------------------------
certified by the Secretary or an Assistant Secretary of Borrower certifying
the names of the officers of Borrower authorized to sign this Agreement and
each of the other Loan Documents to which Borrower is or is to be a party
together with specimen signatures of such officers.
(c) Articles of Incorporation - Borrower. The articles of
------------------------------------
incorporation of Borrower certified by the Secretary or an Assistant
Secretary of Borrower.
(d) Bylaws - Borrower. The bylaws of Borrower certified by the
-----------------
Secretary or an Assistant Secretary of Borrower.
(e) Governmental Certificates - Borrower. Certificates of the
------------------------------------
appropriate government officials of the state of Texas as to the existence
and good standing of Borrower.
(f) Note. The Note executed by Borrower.
----
(g) Security Agreement. The Security Agreement; executed by Borrower.
------------------
(h) Financing Statements. UCC-1 Financing Statements executed by
--------------------
Borrower covering the Collateral.
(i) EXIM Guaranty. The EXIM Guaranty.
-------------
-13-
<PAGE>
(j) Borrower Agreement. The Borrower Agreement executed by Borrower.
------------------
(k) Fees. The EXIM Guaranty Fee and the EXIM Application Fee.
----
(1) Intercreditor Documents. The following documents executed by
-----------------------
Frost Bank (i) the Consent and Waiver Letter, and (ii) UCC-3 financing
statements releasing Frost Bank's security interests in the Collateral,
except f or the other Lender Liens.
(m) Contracts and Purchase Orders. The purchase orders constituting
-----------------------------
the Contracts and the contracts related thereto.
(n) Landlord's Subordination. The Landlord's Subordination executed
------------------------
by Industrial Properties Corporation.
(o) UCC Search. A Uniform Commercial Code search showing all
----------
financing statements and other documents or instruments on file against
Borrower in the of f ice of the Secretary of State of Texas.
(p) Attorneys' Fees and Expenses. Evidence that the costs and
----------------------------
expenses (including reasonable attorneys fees) referred to in Section
10,01, to the extent incurred, have been paid in full by Borrower.
(q) Additional Documentation. Such Additional approvals, opinions or
------------------------
documents as Lender may reasonably request.
Section 5.02. All Extensions of Credit. The obligation of Lender to make
------------------------
any Advance or issue any Letter of Credit (including the initial Advance and
Letter of Credit) is subject to the Additional condition precedent that not less
than two (2) Business Days prior to making such Advance or the issuance of such
Letter of Credit Lender shall have received the items set forth below in form
and substance satisfactory to Lender.
(a) Advance Request Form or Application for Letter of Credit. A fully
--------------------------------------------------------
completed and executed Advance Request Form in the case of and Advance or
an Application f or Letter of Credit in the case of a Letter of Credit.
(b) Borrowing Base and No Default Certificate. A Borrowing Base and
-----------------------------------------
No Default Certificate dated as of a current date satisfactory to Lender.
(c) Fiat-Italy Insurance Coverage. Prior to any Advance with respect
-----------------------------
to which any account receivable arising from the Fiat-Italy Contract is
included as an Eligible Account, evidence that the pre-shipment insurance
coverage required by the Fiat-Italy Contract has been obtained.
-14-
<PAGE>
(d) Other Eximbank Documents. Other documents which may be required
------------------------
by the EXIM Guaranty.
(e) Additional Items. Such other instruments or items as Lender may
----------------
reasonably request.
ARTICLE VI
Representations and Warranties
------------------------------
Section 6.01. Corporate Existence. Borrower is a corporation duly
-------------------
organized, validly existing, and in good standing under the laws of its
jurisdiction of incorporation, and has all requisite corporate power and
authority to own its assets and carry on their business as now being or as
proposed to be conducted. Borrower has the corporate power and authority to
execute, deliver and perform its obligations under this Agreement and the other
Loan Documents to which it is or may become a party. Borrower has no
subsidiaries.
Section 6.02. Financial Statements. Borrower has delivered to Lender
--------------------
audited financial statements as at and for the fiscal year ended July 31, 1995,
and for the nine (9) month period ended April 30, 1996. Such financial
statements are true and correct, have been prepared in accordance with GAAP, and
fairly and accurately present the financial condition of Borrower as of the
respective dates indicated therein and the results of operations for the periods
indicated therein. Borrower has no material contingent liabilities, liabilities
for taxes, material forward or long-term commitments, or unrealized or
anticipated losses from any unfavorable commitments not reflected in such
financial statements, There has been no material adverse change in the business,
condition (financial or otherwise), operations, prospects, or properties of
Borrower since the effective date of the most recent financial statements
referred to in this Section.
Section 6.03. Corporate Action; No Breach. The execution, delivery, and
---------------------------
performance by Borrower of this Agreement and the other Loan Documents to which
Borrower is or may become a party have been duly authorized by all requisite
action on the part of Borrower and do not and will not violate or conflict with
the articles of incorporation or bylaws of Borrower or any law, rule or
regulation or any order, writ, injunction, or decree of any court, governmental
authority, or arbitrator, and do not and will not conflict with, result in a
breach of, or constitute a default under, or result in the imposition of any
Lien (except as provided in this Agreement) upon any of the revenues or assets
of Borrower pursuant to the provisions of any instrument, mortgage, deed of
trust, security agreement, franchise, permit, license, or other instrument or
agreement by which Borrower or any of its properties is bound.
Section 6.04. Operation of Business. Borrower possesses all licenses,
---------------------
permits, franchises, patents, copyrights, trademarks, and tradenames, or rights
thereto, to conduct its business substantially as now conducted and as presently
proposed to be conducted.
-15-
<PAGE>
Section 6.05. Litigation and Judgments. There is no action, suit,
------------------------
investigation, or proceeding before or by any court, governmental authority, or
arbitrator pending, or to the knowledge of Borrower, threatened against or
affecting Borrower that would, if adversely determined, have a material adverse
effect on the business. condition (financial or otherwise), operations,
prospects or properties of Borrower or the ability of Borrower to pay and
perform the Obligations. There are no outstanding judgments against Borrower.
Section 6.06. Rights in Properties; Liens. Borrower has good and
---------------------------
marketable title to or valid leasehold interests in its properties and assets,
real and personal, including the properties, assets and leasehold interests
reflected in the financial statements described in Section 6.02, and none of the
properties, assets or leasehold interests of Borrower is subject to any Lien,
except for Permitted Liens and Liens in favor of Lender.
Section 6.07. Enforceability. This Agreement constitutes, and the other
--------------
Loan Documents to which Borrower is party, when delivered, shall constitute the
legal, valid, and binding obligations of Borrower, enforceable against Borrower
in accordance with their respective terms, except as enforceability thereof may
be limited by bankruptcy, insolvency, or other laws of general application
relating to the enforcement of creditor's rights.
Section 6.08. Approvals. No authorization, approval, or consent of, and
---------
no filing or registration with, any court, governmental authority, or third
party is or will be necessary for the execution, delivery, or performance by
Borrower of this Agreement and the other Loan Documents to which Borrower is or
may become a party or the validity or enforceability thereof.
Section 6.09. Disclosure. There is no fact known to Borrower which has a
----------
material adverse effect, or which would in the future have a material adverse
effect, on the business, condition (financial or otherwise), operations,
prospects, or properties of Borrower that has not been disclosed in writing to
Lender.
Section 6.10. Compliance with Laws. Borrower is not in violation in any
--------------------
material respect of any law, rule, regulation, order, or decree of any court,
governmental authority, or arbitrator, the effect of which violation would have
a material adverse effect on Borrower.
Section 6.11. Compliance with Loan Documents. No Event of Default exists
------------------------------
and no condition which with notice or lapse of time would constitute an Event of
Default exists, Borrower is in compliance with the terms of each of the Loan
Documents.
Section 6.12. Environmental Matters. Borrower and its properties are in
---------------------
compliance with all applicable Environmental Laws and Borrower is not subject to
any liability or obligation for remedial action thereunder. There is no pending
or threatened investigation or inquiry by any governmental authority of Borrower
or any of its properties pertaining to any Hazardous Substance, There are no
Hazardous Substances located on or under any of the properties of Borrower.
Borrower has not caused or permitted any Hazardous Substance to be disposed of
on
-16-
<PAGE>
or under or released from any of its properties, Borrower has obtained all
permits, licenses, and authorizations which are required under and by all
Environmental Laws.
ARTICLE VII
Covenants
---------
Borrower covenants and agrees that, as long as the Obligations or any part
thereof are outstanding or Lender has any Commitment hereunder, Borrower will
perform and observe the covenants set forth below, unless Lender shall otherwise
consent in writing provided that Lender will not unreasonably withhold such
consent.
Section 7.01. Reporting Requirements, Borrower will deliver to Lender:
-------------------------------------------------------
(a) Annual Financial Statements - Borrower. As soon as available, and
--------------------------------------
in any event within one hundred twenty (120) days after the end of each
fiscal year of Borrower, beginning with the fiscal year ending July 31,
1996, a copy of the annual audit report of Borrower for such fiscal year
containing balance sheets , statements of income, statements of
stockholders equity and statements of cash flows as at the end of such
fiscal year and for the 12-month period then ended, in each case setting f
orth in comparative form the figures f or the preceding fiscal year, all in
reasonable detail and audited and certified by independent certified public
accountants of recognized standing acceptable to Lender, to the effect that
such report has been prepared in accordance with GAAP.
(b) Monthly Financial Statements - Borrower. As soon as available,
---------------------------------------
but not later than thirty (30) days after the end of each month, a copy of
an unaudited financial report of Borrower as of the end of such month and
for the portion of the fiscal year then ended, containing balance sheets,
statements of income and statements of cash flows, in each case setting f
orth in comparative form the figures for the corresponding period of the
preceding fiscal year, all in reasonable detail and certified by the
president or chief financial officer of Borrower to have been prepared in
accordance with GAAP and to fairly and accurately present the financial
condition and results of operations of Borrower at the date and for the
period indicated therein.
(c) Borrowing Base and No Default Certificate. As soon as available,
-----------------------------------------
but not later than thirty (30) days after the end of each month, a
Borrowing Base and No Default Certificate as of the last day of such month
executed by the chief executive officer or the chief financial officer of
Borrower.
(d) Monthly Accounts Receivable Reports. As soon as available, and in
-----------------------------------
any event within thirty (30) days after the end of each month of each
fiscal year of Borrower,
-17-
<PAGE>
aged accounts receivable reports for Borrower as of the last day of such
month certified by the chief executive officer or the chief financial
officer of Borrower.
(e) Monthly Accounts Payable Reports. As soon as available, and in
--------------------------------
any event within thirty (30) days after the end of each month of each
fiscal year of Borrower, aged accounts payable reports for Borrower as of
the last day of such month certified by the chief executive officer or the
chief financial officer of Borrower.
(f) Proxy Statements, Etc. As soon as available, one copy of each
---------------------
financial statement,. report, notice or proxy statement sent by Borrower to
its stockholders generally and one copy of each regular, periodic or
special report, registration statement, or prospectus filed by Borrower
with any securities exchange or the Securities and Exchange Commission,
(g) Other Information. Promptly upon request therefor by Lender,
-----------------
other information regarding Borrower or Guarantors as Lender may reasonably
request.
Section 7.02. Notice of Default and Litigation. As soon as possible and
--------------------------------
in any event within five (5) days after the occurrence of each Event of Default
and each event which, with the giving of notice or lapse of time or both, would
constitute an Event of Default, Borrower shall deliver to Lender a written
notice setting forth the details of such Event of Default or event and the
action which Borrower has taken and propose to take with respect thereto.
Promptly after the commencement thereof, Borrower will deliver to Lender notice
of all actions, suits and proceedings before any court or governmental body
affecting Borrower which, if determined adversely to Borrower, would have a
material adverse effect on the business, condition (financial or otherwise),
operations, prospects or properties of Borrower.
Section 7.03. Maintenance of Existence; Conduct of Business. Borrower
---------------------------------------------
will preserve and maintain its corporate existence and all of its leases,
privileges, licenses, permits, franchises, qualifications and rights that are
necessary or desirable in the ordinary conduct of its businesses.
Section 7.04. Maintenance of Properties. Borrower will maintain its
-------------------------
assets and properties in good condition and repair.
Section 7.05. Inspection; Audits. At any reasonable time and from time to
------------------
time, but not less than twice in each fiscal year of Borrower, Borrower will
permit representatives of the Lender or its authorized agent to (a) examine and
make copies of the books and records of, to visit and inspect the properties or
assets of Borrower, to discuss the business, operations, and financial condition
of Borrower with its officers and with its independent certified public
accountants, and (b) inspect and value the Eligible Inventory and to perform a
book audit of the Eligible Accounts, Borrower shall pay the cost of two
inspections each year of the nature described in clause (b) of the preceding
sentence, Borrower will permit representatives of Lender or its agent to inspect
the
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<PAGE>
Collateral at any time during business hours and to monitor the progress of
construction and the condition of the Collateral.
Section 7.06. Taxes and Claims. Borrower will pay or discharge at or
----------------
before maturity or before becoming delinquent (a) all taxes, levies, assessments
, and governmental charges imposed on it or its income or profits or any of its
property, and (b) all lawful claims for labor, material, and supplies, which, if
unpaid, might become a Lien upon any of its property; provided, however, that
Borrower shall not be required to pay or discharge any tax, levy, assessment, or
governmental charge which is being contested in good faith by appropriate
proceedings diligently pursued.
Section 7.07. Insurance. Borrower will maintain with financially sound
---------
and reputable insurance companies liability insurance and insurance on its
property, assets and business at least in such amounts and against such risks as
are usually insured against by Persons engaged in similar businesses. Each
insurance policy covering Collateral shall name Lender as lender loss payee and
provide that such policy will not be canceled without thirty (30) days prior
written notice to Lender.
Section 7.08. Further Assurances. Borrower will execute and deliver such
------------------
further instruments as may be reasonably requested by Lender to carry out the
provisions and purposes of this Agreement and the other Loan Documents and the
EXIM Guaranty and to preserve and perfect the Liens of Lender in the Collateral.
Section 7.09. Mergers, Acquisitions, and Dissolutions. Borrower will not
---------------------------------------
(a) become a party to a merger, consolidation, partnership or joint venture, (b)
purchase or otherwise acquire all or a substantial part of the assets of any
Person or any shares or other evidence of beneficial ownership of any Person,
(c) dissolve or liquidate, (d) create a subsidiary or make any material change
in its corporate structure or entity or (e) enter into any agreement to do any
of the foregoing, if (i) as a result of any such action or event the Persons who
are shareholders of record on the date of this Agreement would cease to own at
least fifty-one percent (51%) of the voting stock of Borrower or (ii) an Event
of Default exists or would exist immediately following completion of the action
or event described in this Section 7.09; provided, however, that Borrower may
issue Additional shares of capital stock.
Section 7.10. Limitation on Debt. Borrower will not incur, create, assume
------------------
or permit to exist any Debt except (a) Debt to Lender, (b) accounts payable in
the ordinary course of business, (c) Debt arising from the endorsement of
instruments for collection in the ordinary course of business, (d) the Frost
Bank Debt, (e) other Debt which exists on the date of this Agreement, and (f)
Debt which is secured only by security interests which are inferior to Lender's
security interest in the Collateral, provided that such Debt cannot be secured
by any liens in the Contract Collateral.
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<PAGE>
Section 7.11. Limitation on Liens. Borrower will not incur, create,
-------------------
assume, or permit to exist, any Liens or security interests (a) on the Contract
Collateral, other than Liens in favor of Lender or (b) on its other assets other
than Permitted Liens.
Section 7.12. Disposition of Assets. Borrower will not sell, lease,
---------------------
assign, transfer, or otherwise dispose of any material portion of its assets, or
enter into any agreement to do any of the foregoing, except dispositions of
inventory in the ordinary course of business and dispositions of machinery and
equipment, provided that the machinery and equipment so disposed is replaced
with machinery and equipment of a similar nature and function which has a market
value at least equal to the market value of the machinery or equipment so
disposed.
Section 7.13. Loans and Investments. Borrower will not make any advance,
---------------------
loan, extension of credit, or capital contribution to or investment in, or
purchase, any stock, bonds, notes, debentures, or other securities of any
Person, except (a) readily marketable direct obligations of the United States of
America, (b) fully insured certificates of deposit with maturities of one year
or less from the date of acquisition of any commercial bank operating in the
United States having capital and surplus in excess of $50,000,000.00, and (c)
commercial paper of a domestic issuer if at the time of purchase such paper is
rated in one of the two highest rating categories of Standard and Poor's
Corporation or Moody Investors Service.
Section 7.14. Accounting. Borrower will not make any change in accounting
----------
treatment or reporting practices, except as required by GAAP.
Section 7.15. Compliance with Environmental Laws. Borrower will not (a)
----------------------------------
use (or permit any tenant to use) any of their respective properties or assets
for the handling, processing, storage, transportation, or disposal of any
Hazardous Substance, (b) generate any Hazardous Substance, (c) conduct any
activity which is likely to cause a release or threatened release of any
Hazardous Substance, or (d) otherwise conduct any activity or use any of their
respective properties or assets in any manner that is likely to violate any
Environmental Law.
Section 7.16. Compliance with EXIM Guaranty. Borrower will comply with
-----------------------------
each and every term, condition and agreement set forth in the EXIM Guaranty and
the documents executed in connection therewith, including the Borrower
Agreement, and Borrower will ensure that the full benefits of the EXIM Guaranty
are maintained while the Commitment or any Obligations are outstanding.
Borrower will cooperate fully with Lender in ensuring that each claim payable
under the EXIM Guaranty is processed and paid thereunder. Borrower will submit
to Eximbank and Lender prior to the time when due all documents and other
information required by Eximbank or Lender in order to process and claim under
the EXIM Guaranty, Borrower will promptly and fully comply with all requests of
Lender related to the EXIM Guaranty.
Section 7.17. Matters Related to the Payment Account. (a) Borrower will
--------------------------------------
cause all the Contract Parties to make payment of all amounts payable under the
Contracts by wire transfer directly to the applicable Payment Account.
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<PAGE>
(b) Lender will apply amounts deposited in the Payment Account-Main by
Bridgestone-Japan, EDMZ-Switzerland and Fiat-Italy to pay the principal of and
interest on the Advances to which such deposits relate with respect to the
Bridgestone-Japan Contract, the EDMZ-Switzerland Contract and the Fiat-Italy
Contract. In the event that the amount in the Payment Account-Main is not
sufficient to pay the entire principal amount of the related Advance with
respect to the applicable Contract (or portion of such any Advance with respect
to which payment has been made by a Contract Party as provided in the related
Contract) plus interest thereon, immediately upon notice from Lender of such
deficiency, Borrower shall deposit into the Payment Account-Main an amount such
that there is a sufficient balance in the Payment Account-Main to pay ,the
entire principal amount of the related Advance with respect to the applicable
Contract (or portion of any such Advance with respect to which payment has been
made by a Contract Party as provided in the related Contract) and accrued
interest on such Advance or portion thereof. Following each deposit into the
Payment Account-Main and each application of such deposit to the Advances as
provided in this paragraph (b), Lender shall disburse the remainder of such
deposit from the Payment Account-Main to Borrower upon receipt by Lender of a
Disbursement Request Form-Main properly completed and acceptable to Lender.
(c) Lender will disburse amounts deposited in the Payment Account-
Continental Tire by Continental Tire-Germany upon receipt by Lender of a
Disbursement Request Form-Continental properly completed and acceptable to
Lender; provided, however, that Lender will at all times hold in the Payment
Account an amount equal to twenty five percent (25%) of all outstanding Letter
of Credit Liabilities (such amount is referred to the "Letter of Credit Retained
Amount"). Lender will never be required to make a disbursement from the Payment
Account-Continental Tire which results in the balance in the Payment Account-
Continental Tire being less than the twenty-five percent (25%) of the Letter of
Credit Liabilities. Lender shall have no obligation to make any disbursements
to Borrower with respect to the Continental Tire Germany Contract except from
monies deposited by Continental Tire Germany into the Payment Account-
Continental Tire, Upon return by the beneficiary of each Letter of Credit,
undrawn, and receipt by Lender of each such undrawn Letter of Credit, Lender
shall disburse the Letter of Credit Retained Amount with respect to such
returned Letter of Credit to Borrower.
(d) Borrower hereby grants to Lender a pledge of and a first priority
security interest in all monies and funds at any time on deposit in the Payment
Accounts.
Section 7.18. Purchase Orders. Borrower agrees that it will not amend the
---------------
Contracts, or any purchase order constituting a Contract, without the prior
written consent of Lender if such amendment would result in reduction of the
price payable under the Contract or would postpone any payment due by a Contract
Party under a Contract.
ARTICLE VIII
Default
-------
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<PAGE>
Section 8.01. Events of Default. Each of the following shall be deemed an
-----------------
"Event of Default":
(a) Borrower shall fail to pay when due the Obligations or any part
thereof.
(b) Any representation or warranty made or deemed made by Borrower or
any Obligated Party (or any of their respective officers) in any Loan
Document or in any certificate, report, notice, or financial statement
furnished at any time in connection with this Agreement shall be false,
misleading, or erroneous in any material respect when made or deemed to
have been made.
(c) Borrower or any Obligated Party shall fail to perform, observe, or
comply with any covenant, agreement or term contained in this Agreement or
any other Loan Document.
(d) Borrower or any Obligated Party shall commence a voluntary
proceeding seeking liquidation, reorganization, or other relief with
respect to itself or its debts under any bankruptcy, insolvency, or other
similar law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian, or other similar official of it
or a substantial part of its property or shall consent to any such relief
or to the appointment of or taking possession by any such official in an
involuntary case or other proceeding commenced against it or shall make a
general assignment for the benefit of creditors or shall generally fail to
pay its debts as they become due or shall take any corporate action to
authorize any of the foregoing.
(e) An involuntary proceeding shall be commenced against Borrower or
any Obligated Party seeking liquidation, reorganization, or other relief
with respect to it or its debts under any bankruptcy, insolvency, or other
similar law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official for it
or a substantial part of its property, and such involuntary proceeding
shall remain undismissed and unstayed for a period of sixty (60) days.
(f) The EXIM Guaranty shall, in whole or in part, terminate, lapse, or
expire or shall cease to be fully enforceable.
(g) Borrower shall fail to cause the transactions related to the
Advances or the Letters of Credit to comply with any covenant or
requirement of the EXIM Guaranty or the documents executed in connection
therewith, including, without limitation, the Borrower Agreement, or do or
fail to do anything which could cause the EXIM Guaranty to cease to be in
full force and effect or in any manner reduce the benefits thereof.
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<PAGE>
Section 8.02. Remedies Upon Default. If any Event of Default shall occur,
---------------------
Lender may do any one or more of the following: (a) .declare the outstanding
principal of and accrued and unpaid interest on the Note and the Obligations or
any part thereof to be immediately due and payable, and the same shall thereupon
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 Borrower, (b) terminate the Commitment without notice
to Borrower, (c) foreclose or otherwise enforce any Lien granted to the Lender
to secure payment and performance of the Obligations, (d) exercise its rights
under the EXIM Guaranty and (e) exercise any and all rights and remedies
afforded by the laws of the State of Texas or any other jurisdiction by any of
the Loan Documents , by equity or otherwise; provided, however, that upon the
occurrence of an Event of Default under Section 8.01(d) or Section 8.01(e), the
Commitment shall automatically terminate, and the outstanding principal of and
accrued and unpaid interest on the Note and the other 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 Borrower.
Section 8.03. Performance by Lender. If Borrower shall fail to perform
---------------------
any covenant, duty, or agreement contained in any of the Loan Documents, Lender
may perform or attempt to perform such covenant, duty, or agreement on behalf of
Borrower, In such event, Borrower shall, at the request of Lender, promptly pay
any reasonable amount expended by Lender in such performance or attempted
performance to Lender, together with interest thereon at the Default Rate from
the date of such expenditure until paid. Notwithstanding the foregoing, it is
expressly agreed that Lender shall not have any liability or responsibility for
the performance of any obligation of Borrower under this Agreement or any other
Loan Document, except for matters arising from the gross negligence or willful
misconduct of Lender.
ARTICLE IX
Miscellaneous
-------------
Section 9.01. Expenses of Lender. Borrower hereby agrees to pay Lender on
------------------
demand (a) all reasonable costs and expenses incurred by Lender in connection
with the preparation, negotiation, and execution of this Agreement and the other
Loan Documents and any and all amendments, modifications, renewals, extensions,
and supplements thereof and thereto, including, without limitation, the fees and
expenses of Lender's legal counsel, (b) all reasonable costs and expenses
incurred by Lender in connection with the enforcement of this Agreement or any
other Loan Document, including, without limitation, the fees and expenses of
Lender's legal counsel, and (c) all other reasonable costs and expenses
*incurred by Lender in connection with this Agreement or any other Loan
Document, including, without limitation, all costs, expenses, taxes,
-23-
<PAGE>
assessments, filing fees, and other charges levied by an governmental authority
or otherwise payable in respect of this Agreement or any other Loan Document or
in obtaining any insurance policy, audit or appraisal in respect of the
Collateral.
Section 9.02. Indemnification. Borrower hereby indemnities Lender and
---------------
each affiliate thereof and their respective officers, directors, employees .
attorneys . and agents f rom, and holds each of them harmless against, any and
all losses, liabilities, claims, damages, penalties, judgments, disbursements,
costs, and expenses (including attorneys I fees) to which any of them may become
subject which directly or indirectly arise f rom or relate to (a) the
negotiation, execution, delivery, performance, administration, or enforcement of
any of the Loan Documents, (b) any of the transactions contemplated by the Loan
Documents, (c) any breach by Borrower of any representation, warranty, covenant,
or other agreement contained in any of the Loan Documents, (d) the presence,
release, threatened release, disposal, removal or cleanup of any Hazardous
Substance located on, about, within, or affecting any of the assets of Borrower,
or (e) any Letter of Credit,
Section 9.03. Limitation of Liability. Neither Lender nor any affiliate,
-----------------------
officer, director, employee, or agent of Lender shall have any liability with
respect to, and Borrower hereby waives, releases and agrees not to sue any of
them upon, any claim for any special, indirect, incidental, or consequential
damages suffered or incurred by Borrower in connection with, arising out of, or
in any way related to, this Agreement or any of the other Loan Documents, or any
of the transactions contemplated by this Agreement or any of the other Loan
Documents, Borrower hereby waives, releases, and agrees not to sue Lender or any
of Lender's affiliates, officers, directors, employees, attorneys, or agents for
punitive damages in respect of any claim in connection with, arising out of, or
in any way related to, this Agreement or any of the other Loan Documents, or any
of the transactions contemplated by this Agreement or any of the other Loan
Documents, except for claims arising from the gross negligence or willful
misconduct of Lender.
Section 9.04. No Waiver; Cumulative Remedies. No failure on the part of
------------------------------
Lender 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 and the other Loan Documents are
cumulative and not exclusive of any rights and remedies provided by law.
Section 9.05. Successors and Assigns. This Agreement is binding upon and
----------------------
shall inure to the benefit of Lender and Borrower and their respective
successors and assigns except that Borrower may not assign or transfer any of
its rights or obligations under this Agreement or any Loan Document without
prior written consent of Lender.
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<PAGE>
Section 9.06. Survival. All representations and warranties made in this
--------
Agreement or any other Loan Document or in any document, statement, or
certificate furnished in connection with this Agreement shall survive the
execution and delivery of this Agreement and the other Loan Documents, and no
investigation by Lender or any closing shall affect the representations and
warranties or the right of Lender to rely upon them. Without prejudice to the
survival of any other obligation of Borrower hereunder, the obligations of
Borrower under Sections 9.01 and 9.02 shall survive repayment of the Note and
termination of the Commitment.
Section 9.07. Amendment. The provisions of this Agreement and the other
---------
Loan Documents to which Borrower is a party may be amended or waived only by an
instrument in writing signed by the parties hereto.
Section 9.08. Maximum Interest Rate. No provision of this Agreement or of
---------------------
any other Loan Documents shall require the payment or the collection of interest
in excess of the maximum permitted by applicable law. If any excess of interest
in such respect is hereby provided for, or shall be adjudicated to be so
provided, in any other Loan Documents or otherwise in connection with this loan
transaction, the provisions of this Section shall govern and prevail and neither
Borrower nor the sureties, guarantors, successors, or assigns of Borrower 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. In
the event Lender ever receives, collects or applies as interest any such sum,
such amount which would be in excess of the maximum amount permitted by
applicable law shall be applied as payment and reduction of the principal of the
indebtedness evidenced by the Note; and, if the principal of the Note has been
paid in full, any remaining excess shall forthwith be paid to Borrower, In
determining whether or not the interest paid or payable exceeds the Maximum
Rate, Borrower and Lender 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 the Note so that interest for the entire term does not exceed the
Maximum Rate.
Section 9.09. Notices. All notices and other communications provided for
-------
in this Agreement and the other Loan Documents shall be in writing and may be
telexed, telecopied, mailed by certified mail return receipt requested, or
delivered to the intended recipient at the addresses specified below or at such
other address as shall be designated by any party listed below in a notice to
the other parties listed below given in accordance with this Section.
If to Borrower: Scientific Measurement Systems, Inc.
2210 Denton Drive, Suite 106
Austin, Texas 7858
Attention: President Telephone No.: 512-837-4712
Fax: 512-837-9082
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<PAGE>
If to Lender: Wells Fargo HSBC Trade Bank, N.A.
1000 Louisiana
Houston, Texas 77002
Attention: Don A, Byers
Telephone: 713-250-1511
Fax: 713-250-6913
Except as otherwise provided in this Agreement, all such communications
shall be deemed to have been duly given when transmitted by telex or telecopy,
subject to telephone confirmation of receipt, when personally delivered or, in
the case of a mailed notice, when duly deposited in the mails, in each case
given or addressed as aforesaid; provided, however, that notices to Lender
pursuant to Article II shall not be effective until received by Lender.
Section 9.10. 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, Any action or proceeding against
Borrower under or in connection with any of the Loan Documents may be brought in
any state or federal court in Harris County, Texas, and Borrower hereby
irrevocably submits to the nonexclusive jurisdiction of such courts and waives
any objection it may now or hereafter have as to the venue of any such action or
proceeding brought in any such court or that any such court is an inconvenient
forum. Nothing herein or in any of the other Loan Documents shall affect the
right of Lender to serve process in any other manner permitted by law or shall
limit the right of Lender to bring any action or proceeding against Borrower or
with respect to any of its property in courts in other jurisdictions. Any
action or proceeding by Borrower against Lender shall be brought only in a court
located in Harris County, Texas.
Section 9.11. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one, and the same instrument.
Section 9.12. Severability. Any provision of this Agreement held by a
------------
court of competent jurisdiction to be invalid or unenforceable shall not impair
or invalidate the remainder of this Agreement and the effect thereof shall be
confined to the provision held to be invalid or illegal.
Section 9.13. Headings. The headings, captions, and arrangements used in
--------
this Agreement are for convenience only and shall not affect the interpretation
of this Agreement.
Section 9.14. Non-Application of Chapter 15 of Texas Credit Code. The
--------------------------------------------------
provisions of Chapter 15 of the Texas Credit Code (Vernon's Texas Civil
Statutes, Article 5069-15) are
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<PAGE>
specifically declared by the parties hereto not to be applicable to this
Agreement or any of the other Loan Documents or to the transactions contemplated
hereby
Section 9.15. ENTIRE AGREEMENT. THIS AGREEMENT, THE NOTE, AND THE OTHER
----------------
LOAN DOCUMENTS REFERRED TO HEREIN EMBODY THE FINAL, ENTIRE AGREEMENT AMONG THE
PARTIES HERETO WITH RESPECT TO THE SUBJECT MATTER HEREOF AND THEREOF 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 above written.
BORROWER:
SCIENTIFIC MEASUREMENT SYSTEMS INC.
By:___________________________________________
Larry Secrest
Chairman
LENDER:
WELLS FARGO HSBC TRADE BANK, N.A,
By:__________________________________________
Michael J. McKenzie
Senior Vice President
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<PAGE>
LIST OF EXHIBITS
Exhibits Document
- -------- --------
A Note
B Security Agreement
C EXIM Guaranty
D Borrower Agreement
E Advance Request Form
F Borrowing Base and No
Default Certificate
G Application for Letter
of Credit
H Consent, Release and
Waiver Letter
I Disbursement Request
Continental Tire
J Disbursement Request-Main
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<PAGE>
EXHIBIT "A"
Note
----
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<PAGE>
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 N0/100 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 (lst) 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 which case interest shall be calculated on the basis of a
year of 365 or 366 days, as the case may be.
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<PAGE>
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 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.
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<PAGE>
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, 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:_______________________________________
Larry Secrest
Chairman
-32-
<PAGE>
EXHIBIT 10.27
FIRST AMENDMENT TO EXIM GUARANTEED LOAN AGREEMENT
THIS FIRST AMENDMENT TO EXIM GUARANTEED LOAN AGREEMENT (this
"Amendment"), dated as of August 1, 1996, is between SCIENTIFIC MEASUREMENT
SYSTEMS, INC., a Texas corporation ("Borrower"), and WELLS FARGO HSBC TRADE
BANK, N.A. ("Lender").
RECITALS:
A. Borrower and Lender entered into that certain EXIM Guaranteed Loan
Agreement dated as of June 15, 1996 (the "Agreement").
B. Borrower and Lender now desire to amend the Agreement as herein set
forth.
NOW, THEREFORE, in consideration of the premises herein contained and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
Definitions
Section 1.01. Definitions. Capitalized terms used in this Amendment,
-----------
to the extent not otherwise defined herein, shall have the meanings given to
such terms in the Agreement, as amended hereby.
ARTICLE II
Amendments
Section 2.01. Amendment to Certain Definitions. (a) Effective as of
--------------------------------
date hereof, the definition of each of the following terms contained in Section
1.01 of the Agreement is amended to read in its respective entirety as follows:
"Prime Rate" shall mean that variable rate of interest per annum
----------
established by Wells Fargo Bank from time to time as its prime rate
which shall vary from time to time. Such rate is set by Wells Fargo Bank
as a general reference rate of interest, taking into account such
factors as Wells Fargo Bank may deem appropriate, it being understood
that many of Wells Fargo Bank'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 Wells Fargo Bank may make various
commercial or other loans at rates of interest having no relationship to
such rate.
<PAGE>
Section 2.02. Amendments to Exhibits. Effective as of the date hereof,
----------------------
(a) Exhibit "A" to the Agreement (Note) is amended to conform in its entirety to
Annex "A" to this Amendment.
ARTICLE III
Conditions Precedent
Section 3.01. Conditions. The effectiveness of this Amendment is
----------
subject to the receipt by Lender of the following in form and substance
satisfactory to Lender:
(a) Resolutions. Resolutions of the Board of Directors of
-----------
Borrower certified by its Secretary or an Assistant Secretary which
authorize the execution, delivery and performance by Borrower of this
Amendment and the other Loan Documents to which Borrower is or is to be
a party hereunder.
(b) Note. The Note executed by Borrower.
----
(c) Additional Information. Such additional documents,
----------------------
instruments and information as Lender may request.
Section 3.02. Additional Conditions. The effectiveness of this
---------------------
Amendment is also subject to the satisfaction of the additional conditions
precedent that (a) the representations and warranties contained herein and in
all other Loan Documents, as amended hereby, shall be true and correct as of the
date hereof as if made on the date hereof, (b) all proceedings, corporate or
otherwise, taken in connection with the transactions contemplated by this
Amendment and all documents, instruments and other legal matters incident
thereto shall be satisfactory to Lender, and (c) no Event of Default shall have
occurred and be continuing and no event or condition shall have occurred that
with the giving of notice or lapse of time or both would be an Event of Default.
ARTICLE IV
Ratifications, Representations, and Warranties
Section 4.01. Ratifications. The terms and provisions set forth in
-------------
this Amendment shall modify and supersede all inconsistent terms and provisions
set forth in the Agreement and except as expressly modified and superseded by
this Amendment, the terms and provisions of the Agreement are ratified and
confirmed and shall continue in full force and effect. Borrower and Lender agree
that the Agreement as amended hereby shall continue to be the legal, valid and
binding obligation of such Persons enforceable against such Persons in
accordance with its terms.
-2-
<PAGE>
Section 4.02. Representations, Warranties and Agreements. Borrower
------------------------------------------
hereby represents and warrants to Lender that (a) the execution, delivery, and
performance of this Amendment and any and all other Loan Documents executed or
delivered in connection herewith have been authorized by all requisite corporate
action on the part of Borrower and will not violate the articles of
incorporation or bylaws of Borrower, (b) the representations and warranties
contained in the Agreement as amended hereby, and all other Loan Documents are
true and correct on and as of the date hereof as though made on and as of the
date hereof, (c) no Event of Default has occurred and is continuing and no event
or condition has occurred that with the giving of notice or lapse of time or
both would be an Event of Default, (d) Borrower is in full compliance with all
covenants and agreements contained in the Agreement as amended hereby, (e)
Borrower is indebted to Lender pursuant to the terms of the Note, as the same
may have been renewed, modified, extended and rearranged, including, without
limitation, renewals, modifications, increases and extensions made pursuant to
this Amendment, (f) the liens, security interests, encumbrances and assignments
created and evidenced by the Loan Documents are, respectively, valid and
subsisting liens, security interests, encumbrances and assignments and secure
the Note as the same may have been renewed, modified or rearranged, including,
without limitation, renewals, modifications, increases and extensions made
pursuant to this Amendment, and (g) Borrower has no claims, credits, offsets,
defenses or counterclaims arising from the Loan Documents or Lender's
performance under the Loan Documents.
ARTICLE V
Miscellaneous
Section 5.01. Survival of Representations and Warranties.
------------------------------------------
All representations and warranties made in this Amendment or any other Loan
Documents including any Loan Document furnished in connection with this
Amendment shall fully survive the execution and delivery of this Amendment and
the other Loan Documents, and no investigation by Lender or any closing shall
affect the representations and warranties or the right of Lender to rely on
them.
Section 5.02. Reference to Agreement. Each of the Loan Documents,
----------------------
including the Agreement and any and all other agreements, documents, or
instruments now or hereafter executed and delivered pursuant to the terms hereof
or pursuant to the terms of the Agreement, as amended hereby, are hereby amended
so that any reference in such Loan Documents to the Agreement shall mean a
reference to the Agreement, as amended hereby.
-3-
<PAGE>
Section 5.03. Expenses of Lender. As provided in the Agreement,
------------------
Borrower agrees to pay on demand all costs and expenses incurred by Lender in
connection with the preparation, negotiation and execution of this Amendment and
the other documents and instruments executed pursuant hereto and any and all
amendments, modifications, and supplements thereto, including, without
limitation, the costs and fees of Lender's legal counsel, and all costs and
expenses incurred by Lender in connection with the enforcement or preservation
of any rights under the Agreement, as amended hereby, or any other Loan
Document, including, without limitation, the costs and fees of Lender's legal
counsel.
Section 5.04. Severability. Any provision of this Amendment held by a
------------
court of competent jurisdiction to be invalid or unenforceable shall not impair
or invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
Section 5.05. Applicable Law. This Amendment and all other Loan
--------------
Documents executed pursuant hereto shall be deemed to have been made and to be
performable in Houston, Harris County, Texas and shall be governed by and
construed in accordance with the laws of the State of Texas.
Section 5.06. Successors and Assigns. This Amendment is binding upon
----------------------
and shall inure to the benefit of Lender and Borrower and their respective
successors and assigns, except Borrower may not assign or transfer any of its
rights or obligations hereunder without the prior written consent of Lender.
Section 5.07. Counterparts. This Amendment may be executed in one or
------------
more counterparts, each of which when so executed shall be deemed to be an
original, but all of which when taken together shall constitute one and the same
instrument.
Section 5.08. Effect of Waiver. No consent or waiver, express or
----------------
implied, by Lender to or for any breach of or deviation from any covenant,
condition or duty by Borrower shall be deemed a consent or waiver to or of any
other breach of the same or any other covenant, condition or duty.
Section 5.09. Headings. The headings, captions, and arrangements used
--------
in this Amendment are for convenience only and shall not affect the
interpretation of this Amendment.
Section 5.10. ENTIRE AGREEMENT. THIS AMENDMENT AND ALL OTHER
----------------
INSTRUMENTS, DOCUMENTS, AND AGREEMENTS EXECUTED AND DELIVERED IN CONNECTION WITH
THIS AMENDMENT EMBODY THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO WITH
RESPECT TO THE SUBJECT MATTER HEREOF AND THEREOF AND SUPERSEDE ANY AND ALL PRIOR
COMMITMENTS, AGREEMENTS, REPRESENTATIONS AND UNDERSTANDINGS, WHETHER WRITTEN OR
ORAL, RELATING TO THIS AMENDMENT AND THE OTHER INSTRUMENTS,
-4-
<PAGE>
DOCUMENTS AND AGREEMENTS EXECUTED AND DELIVERED IN CONNECTION WITH THIS
AMENDMENT, 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.
Executed as of the date first written above.
BORROWER:
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
By: /s/ LARRY SECREST
----------------------------------
Larry Secrest
Chairman
LENDER:
WELLS FARGO HSBC TRADE BANK, N.A.
By: /s/ MICHAEL J. MCKENZIE
---------------------------------
Michael J. McKenzie
Senior Vice President
-5-
<PAGE>
LIST OF ANNEXES
Annex Document
----- --------
A Note
-6-
<PAGE>
PROMISSORY NOTE
---------------
$1,250,000.00 Houston, Texas August 1, 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
September 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 amended by First
Amendment to Exim Guaranteed Loan Agreement dated as of August 1, 1996,
and as the same may be further 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 Wells Fargo Bank from time to time as its prime rate
which shall vary from time to time. Such rate is set by Wells Fargo Bank
as a general reference rate of interest, taking into account such
factors as Wells Fargo Bank may deem appropriate, it being understood
that many of Wells Fargo Bank'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 Wells Fargo Bank 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 provision 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
-2-
<PAGE>
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 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 of 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
not-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,
-3-
<PAGE>
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, 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.
This Note is executed in renewal, extension and modification of, but not
in discharge or novation of, that certain promissory note in the original
principal amount of $1,250,000.00, dated June 15, 1996, executed by Maker and
payable to the order of Payee.
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
By:
---------------------------------
Larry Secrest
Chairman
-4-
<PAGE>
EXHIBIT 10.28
SECOND AMENDMENT TO EXIM GUARANTEED LOAN AGREEMENT
THIS SECOND AMENDMENT TO EXIM GUARANTEED LOAN AGREEMENT (this "Amendment"),
dated as of June 15, 1997, is between SCIENTIFIC MEASUREMENT SYSTEMS, INC., a
Texas corporation ("Borrower"), and WELLS FARGO HSBC TRADE BANK, N.A.
("Lender").
RECITALS:
A. Borrower and Lender entered into that certain EXIM Guaranteed Loan
Agreement dated as of June 15, 1996, as amended by First Amendment to EXIM
Guaranteed Loan Agreement dated as of August 1, 1996 (the "Agreement").
B. Borrower and Lender now desire to amend the Agreement as herein set
forth.
NOW, THEREFORE, in consideration of the premises herein contained and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
Definitions
Section 1.01. Definitions. Capitalized terms used in this Amendment, to
-----------
the extent not otherwise defined herein, shall have the meanings given to such
terms in the Agreement, as amended hereby.
ARTICLE II
Amendments
Section 2.01. Amendment to Certain Definitions. (a) Effective as of date
--------------------------------
hereof, the definition of each of the following terms contained in Section 1.01
of the Agreement is amended to read in its respective entirety as follows:
"Commitment" means the obligation of Lender to make Advances and issue
----------
Letters of Credit hereunder in an aggregate principal amount at any time
outstanding up to but not exceeding $629,775.00.
"Termination Date" means 11:00 a.m., Houston, Texas time on July 31,
----------------
1997 or such earlier date on which the Commitment terminates as provided in
this Agreement.
<PAGE>
Section 2.02. Amendment to Section 9.09. Effective as of the date hereof,
-------------------------
the information set forth after "If to Lender:" contained in Section 9.09 of the
Agreement is amended to read in its entirety as follows:
If to Lender: Wells Fargo Bank HSBC Trade Bank, N.A.
1445 Ross Avenue
Dallas, Texas 75202
Attention: Don A. Byers
Telephone: 214-740-1517
Fax: 214-740-1589
Section 2.03. Amendments to Exhibits. Effective as of the date hereof,
----------------------
(a) Exhibit "A" to the Agreement (Note) is amended to conform in its entirety to
Annex "A" to this Amendment, (b) Exhibit "E" to the Agreement (Advance Request
Form) is amended to conform in its entirety to Annex "D" to this Amendment, and
(c) Exhibit "F" to the Agreement (Borrowing Base and No Default Certificate) is
amended to conform in its entirety to Annex "E" to this Amendment.
ARTICLE III
Conditions Precedent
Section 3.01. Conditions. The effectiveness of this Amendment is subject
----------
to the receipt by Lender of the following in form and substance satisfactory to
Lender:
(a) Resolutions. Resolutions of the Board of Directors of Borrower
-----------
certified by its Secretary or an Assistant Secretary which authorize the
execution, delivery and performance by Borrower of this Amendment and the
other Loan Documents to which Borrower is or is to be a party hereunder.
(b) Note. The Note executed by Borrower.
----
(c) Amendment to Security Agreement. A First Amendment to Security
-------------------------------
Agreement executed by Borrower substantially in the form of Annex "B"
hereto.
(d) Borrower Agreement. A Borrower Agreement executed by Borrower.
------------------
(e) Fee. A fee payable to Lender in the amount of $390.62.
---
(f) Additional Information. Such additional documents, instruments
----------------------
and information as Lender may request.
Section 3.02. Additional Conditions. The effectiveness of this Amendment
---------------------
is also subject to the satisfaction of the
<PAGE>
additional conditions precedent that (a) the representations and warranties
contained herein and in all other Loan Documents, as amended hereby, shall be
true and correct as of the date hereof as if made on the date hereof, (b) all
proceedings, corporate or otherwise, taken in connection with the transactions
contemplated by this Amendment and all documents, instruments and other legal
matters incident thereto shall be satisfactory to Lender, and (c) no Event of
Default shall have occurred and be continuing and no event or condition shall
have occurred that with the giving of notice or lapse of time of both would be
an Event of Default.
ARTICLE IV
Ratifications, Representations, and Warranties
Section 4.01. Ratifications. The terms and provisions set forth in this
-------------
Amendment shall modify and supersede all inconsistent terms and provisions set
forth in the Agreement and except as expressly modified and superseded by this
Amendment, the terms and provisions of the Agreement are ratified and confirmed
and shall continue in full force and effect. Borrower and Lender agree that the
Agreement as amended hereby shall continue to be the legal, valid and binding
obligation of such Persons enforceable against such Persons in accordance with
its terms.
Section 4.02. Representations, Warranties, and Agreements. Borrower
-------------------------------------------
hereby represents and warrants to Lender that (a) the execution, delivery, and
performance of this Amendment and any and all other Loan Documents executed or
delivered in connection herewith have been authorized by all requisite corporate
action on the part of the Borrower and will not violate the articles of
incorporation or bylaws of Borrower, (b) the representations and warranties
contained in the Agreement as amended hereby, and all other Loan Documents are
true and correct on and as of the date hereof as though made on and as of the
date hereof, (c) no Event of Default has occurred and is continuing and no event
or condition has occurred that with the giving of notice or lapse of time or
both would be an Event of Default, (d) Borrower is in full compliance with all
covenants and agreements contained in the Agreement as amended hereby, (e)
Borrower is indebted to Lender pursuant to the terms of the Note, as the same
may have been renewed, modified, extended and rearranged, including, without
limitation, renewals, modifications, increases and extensions made pursuant to
this Amendment, (f) the liens, security interests, encumbrances and assignments
created and evidenced by the Loan Documents are, respectively, valid and
subsisting liens, security interests, encumbrances and assignments and secure
the Note as the same may have been renewed, modified, or rearranged, including,
without limitation, renewals, modifications, increases and extensions made
pursuant to this Amendment, and (g) Borrower has no claims, credits, offsets,
defenses, or counterclaims arising from
<PAGE>
the Loan Documents or Lender's performance under the Loan Documents.
ARTICLE V
Miscellaneous
Section 5.01. Survival of Representations and Warranties. All
------------------------------------------
representations and warranties made in this Amendment or any other Loan
Documents including any Loan Document furnished in connection with this
Amendment shall fully survive the execution and delivery of this Amendment and
the other Loan Documents, and no investigation by Lender or any closing shall
affect the representations and warranties or the right of Lender to rely on
them.
Section 5.02. Reference to Agreement. Each of the Loan Documents,
----------------------
including the Agreement and any and all other agreements, documents, or
instruments now or hereafter executed and delivered pursuant to the terms hereof
or pursuant to the terms of the Agreement, as amended hereby, are hereby amended
so that any reference in such Loan Documents to the Agreement shall mean a
reference to the Agreement, as amended hereby.
Section 5.03. Expenses of Lender. As provided in the Agreement,
------------------
Borrower agrees to pay on demand all reasonable costs and expenses incurred by
Lender in connection with the preparation, negotiation and execution of this
Amendment and the other documents and instruments executed pursuant hereto and
any and all amendments, modifications and supplements thereto, including,
without limitation, the costs and fees of Lender's legal counsel, and all costs
and expenses incurred by Lender in connection with the enforcement or
preservation of any rights under the Agreement, as amended hereby, or any other
Loan Document, including, without limitation, the reasonable costs and fees of
Lender's legal counsel.
Section 5.04. Severability. Any provision of this Amendment held by a
------------
court of competent jurisdiction to be invalid or unenforceable shall not impair
or invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
Section 5.05. Applicable Law. This Amendment and all other Loan
--------------
Documents executed pursuant hereto shall be deemed to have been made and to be
performable in Houston, Harris County, Texas and shall be governed by and
construed in accordance with the laws of the State of Texas.
Section 5.06. Successors and Assigns. This Amendment is binding upon
----------------------
and shall inure to the benefit of Lender and Borrower and their respective
successors and assigns, except Borrower may
<PAGE>
not assign or transfer any of its rights or obligations hereunder without the
prior written consent of Lender.
Section 5.07. Counterparts. This Amendment may be executed in one or
------------
more counterparts, each of which when so executed shall be deemed to be an
original, but all of which when taken together shall constitute one and the same
instrument.
Section 5.08. Effect of Waiver. No consent or waiver, express or
----------------
implied, by Lender to or for any breach of or deviation from any covenant,
condition or duty by Borrower shall be deemed a consent or waiver to or of any
other breach of the same or any other covenant, condition or duty.
Section 5.09. Headings. The headings, captions, and arrangements used
--------
in this Amendment are for convenience only and shall not affect the
interpretation of this Amendment.
Section 5.10. ENTIRE AGREEMENT. THIS AMENDMENT AND ALL OTHER
----------------
INSTRUMENTS, DOCUMENTS, AND AGREEMENTS EXECUTED AND DELIVERED IN CONNECTION WITH
THIS AMENDMENT EMBODY THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO WITH
RESPECT TO THE SUBJECT MATTER HEREOF AND THEREOF AND SUPERSEDE ANY AND ALL PRIOR
COMMITMENTS, AGREEMENTS, REPRESENTATIONS AND UNDERSTANDINGS, WHETHER WRITTEN OR
ORAL, RELATING TO THIS AMENDMENT AND THE OTHER INSTRUMENTS, DOCUMENTS AND
AGREEMENTS EXECUTED AND DELIVERED IN CONNECTION WITH THIS AMENDMENT, 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.
Executed as of the date first written above.
BORROWER:
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
By: /s/ LARRY SECREST
-----------------------------------
Larry Secrest
Chairman
<PAGE>
LENDER:
WELLS FARGO HSBC TRADE BANK, N.A.
By:
----------------------------------
David G. Pope
Vice President
<PAGE>
LIST OF ANNEXES
ANNEX DOCUMENT
----- --------
A Note
B First Amendment to Security Agreement
C Borrower Agreement
D Advance Request Form
E Borrowing Base and No Default
Certificate
<PAGE>
EXHIBIT 10.29
FIRST AMENDMENT TO SECURITY AGREEMENT
-------------------------------------
This FIRST AMENDMENT TO SECURITY AGREEMENT ("Agreement"), dated as of June
15, 1997 is between SCIENTIFIC MEASUREMENT SYSTEMS, INC., a Texas corporation
("Debtor") and WELLS FARGO HSBC TRADE BANK, N.A., a national banking association
("Secured Party").
RECITALS:
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WHEREAS, Debtor and Secured Party have entered into that certain EXIM
Guaranteed Loan Agreement dated as of June 15, 1996, as amended by EXIM
Guaranteed Loan Agreement dated as of August 1, 1996 and Second Amendment to
EXIM Guaranteed Loan Agreement dated as of June 15, 1997 (the "Loan Agreement").
WHEREAS, pursuant to the Loan Agreement Debtor executed that certain
Security Agreement, dated as of June 15, 1996 (the "Security Agreement").
WHEREAS, the execution of this Amendment is a condition to the Secured
Party entering into the Second Amendment to EXIM Guaranteed Loan Agreement
referred to above.
NOW, THEREFORE, for good and valuable consideration the receipt and
sufficiency of which are acknowledged and agreed, Debtor and Secured Party
hereby agree as follows:
ARTICLE I.
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Amendments
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1. Amendment to Section 1.02(a). Effective as of the date hereof,
----------------------------
Section 1.02(a) of the Security Agreement is amended to read in its entirety as
follows:
(a) the obligations and indebtedness of Debtor to Secured Party
evidenced by that certain promissory note in the original principal amount
of $629,775.00 dated June 15, 1997, executed by Debtor and payable to the
order of Secured Party, which was executed in renewal, extension and
decrease of 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.
<PAGE>
ARTICLE II.
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Additional Provisions
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1. Acknowledgment by Debtor. Except as otherwise specified herein, the
------------------------
terms and provisions hereof shall in no manner impair, limit, restrict or
otherwise affect the obligations of Debtor or any third party to Secured Party
under any Loan Document (as defined in the Loan Agreement).
2. Additional Documentation. From time to time, Debtor shall execute or
------------------------
procure and deliver to Secured Party such other and further documents and
instruments evidencing, securing or pertaining to the Security Agreement or the
other Loan Documents as shall be reasonably requested by Secured Party so as to
evidence or effect the terms and provisions hereof.
3. Continued Effectiveness. Except as expressly modified by the terms
-----------------------
and provisions hereof, each of the terms and provisions of the Security
Agreement and the other Loan Documents are hereby ratified and confirmed, and
shall remain in full force and effect. The liens and security interests created
by the Security Agreement remain in full force and effect.
4. Governing Law. THE TERMS AND PROVISIONS HEREOF SHALL BE GOVERNED BY
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AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.
5. Binding Agreement. This Amendment shall be binding upon the heirs,
-----------------
executors, administrators, personal representatives, successors and assigns of
the parties hereto.
6. Counterparts. This Amendment may be executed in any number of
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counterparts, each of which shall be deemed an original and all of which
together shall be construed as one and the same instrument.
7. No Oral Agreements. This Amendment, the Loan Agreement and the other
------------------
Loan Documents embody the final, entire agreement among the parties hereto.
There are no oral agreements among the parties hereto.
<PAGE>
EXECUTED as of the date first above written.
DEBTOR:
------
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
By: /s/ Larry Secrest
--------------------------
Larry Secrest
Chairman
SECURED PARTY:
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WELLS FARGO HSBC TRADE BANK, N.A.
By:
--------------------------
David G. Pope
Vice President
<PAGE>
Exhibit 10.30
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:
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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
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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
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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
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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
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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,
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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 10.31
THIRD AMENDMENT TO EXIM GUARANTEED LOAN AGREEMENT
THIS THIRD AMENDMENT TO EXIM GUARANTEED LOAN AGREEMENT (this "Amendment"),
dated as of July 31, 1997, is between SCIENTIFIC MEASUREMENT SYSTEMS, INC., a
Texas corporation ("Borrower"), and WELLS FARGO HSBC TRADE BANK, N.A.
("Lender").
RECITALS:
A. Borrower and Lender entered into that certain EXIM Guaranteed Loan
Agreement dated as of June 15, 1996, as amended by First Amendment to EXIM
Guaranteed Loan Agreement dated as of August 1, 1996 and Second Amendment to
EXIM Guaranteed Loan Agreement dated as of June 15, 1997 (the "Agreement").
B. Borrower and Lender now desire to amend the Agreement as herein set
forth.
NOW, THEREFORE, in consideration of the premises herein contained and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
Definitions
Section 1.01. Definitions. Capitalized terms used in this Amendment, to
-----------
the extent not otherwise defined herein, shall have the meanings given to such
terms in the Agreement, as amended hereby.
ARTICLE II
Amendments
Section 2.01. Amendment to Certain Definitions. (a) Effective as of date
--------------------------------
hereof, the definition of the following term contained in Section 1.01 of the
Agreement is amended to read in its respective entirety as follows:
"Commitment" means the obligation of Lender to make Advances in an
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aggregate principal amount at any time outstanding up to but not exceeding
$629,223.94.
"Default Rate" means the lesser of (a) the sum of the Prime Rate plus
------------
seven percent (7%) or (b) the Maximum Rate.
<PAGE>
"Frost Bank Debt" means Debt of Borrower to Frost Bank in a principal
---------------
amount which does not exceed $60,000.00 and which Debt is secured only by
Borrower's domestic accounts receivable.
"Termination Date" means 11:00 a.m., Houston, Texas time on January
----------------
31, 1998 or such earlier date on which the Commitment terminates as
provided in this Agreement.
(b) Effective as of the date hereof, clause (c) of the definition of the
term "Permitted Encumbrances" is amended to read in its entirety as follows:
(c) Liens securing Debt permitted by Section 7.10(e), provided that
such Liens do not encumber the inventory, accounts, accounts receivable,
contract rights or general intangibles of Borrower,
(c) Effective as of the date hereof, the following definitions are added
to Section 1.01 of the Agreement and shall read in their entireties as follows:
"Payment Account" means a non-interest bearing collateral account at
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Lender to which deposits shall be made by wire as follows:
Wells Fargo Bank (Texas), National Association
San Francisco, California
ABA# 121-000-248
BNF = LAG Operations Admin\AC
2714507209
OBI = Scientific Measurement Systems, Inc.
6975209491.
(d) Effective as of the date hereof, the definitions of the terms "Payment
Account-Continental", "Payment Account-Main" and "Payment Accounts" are deleted
from the Agreement.
Section 2.02. Amendment to Section 2.01. Effective as of the date hereof,
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the fourth sentence of Section 2.01 shall be deleted from the Agreement.
Section 2.03. Amendment to Section 2.03. Effective as of the date hereof,
-------------------------
Section 2.03 is amended to read in its entirety as follows:
Section 2.03. Payment Account; Payment of Advances. (a) Lender
------------------------------------
shall establish and maintain the Payment Account. Borrower shall cause all
payments made by the Contract Parties with respect to the Contracts to be
paid by wire transfer to the Payment Account.
-2-
<PAGE>
(b) The Advances shall be due and payable on the day on which
Borrower receives any payment under the Fiat-Italy Contract in a principal
amount equal to the amount of such Fiat-Italy Contract payment, plus
accrued interest on the principal amount so paid.
(c) In the event that Borrower receives a purchase order for a
"SMARTSCAN System" from (i) Chrysler, Twenty-Five Thousand and No/100
Dollars ($25,000.00) of the Advances plus accrued interest thereon shall be
due and payable on the date on which such purchase order is received by
Borrower, or (ii) Woodward Governor, Twenty-Five Thousand and No/100
Dollars ($25,000.00) of the Advances plus accrued interest thereon shall be
due and payable on the date on which such purchase order is received by
Borrower.
(d) The unpaid principal amount of all Advances shall also be due and
payable on the earlier of (i) the Termination Date or (ii) such other dates
on which the Advances are or may be required to be paid pursuant to this
Agreement.
(e) Borrower agrees that immediately upon deposit of any amounts in
the Payment Account Lender may and shall apply such amounts to the payment
of the Obligations in such order as Lender may determine in its sole
discretion.
(f) In the event that prior to the payment of the Obligations in
full, Borrower should receive additional funding in an amount in excess of
$1,000,000.00, whether as the result of a private placement of debt or
other securities of Borrower or from any other source, the Advances shall
be immediately due and payable and, immediately upon receipt of the
proceeds of such funding, Borrower will use such proceeds to pay the
Obligations in full.
Section 2.04. Amendment to Section 2.04. Effective as of the date hereof,
-------------------------
the phrase "The unpaid principal amount of the Advances shall bear interest
prior to maturity at a varying rate per annum equal from day to day to the
lesser of (a) the Maximum Rate or (b) the sum of the Prime Rate in effect from
day to day plus two percent (2.0%)" contained in Section 2.04 of the Agreement
shall be amended to read "The unpaid principal amount of the Advances shall bear
interest prior to maturity at a varying rate per annum equal from day to day to
the lesser of (a) the Maximum Rate or (b) the sum of the Prime Rate in effect
from day to day plus five percent (5.0%)".
Section 2.05. Amendment to Section 7.10. Effective as of the date hereof
-------------------------
clause (f) is deleted from Section 7.10.
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<PAGE>
Section 2.06. Amendment to Section 7.17. Effective as of the date hereof,
-------------------------
Section 7.17 of the Agreement is amended to read in its entirety as follows:
Section 7.17. Representations and Agreements Regarding Debt to Frost
------------------------------------------------------
Bank and Additional Debt. (a) Borrower represents and warrants to Lender
------------------------
that its accounts, accounts receivable, inventory contract rights and
general intangibles are subject to no security interests other than (i)
security interests in favor of Lender and (ii) a security interest in favor
of Frost Bank in Borrower's domestic accounts receivable.
(b) As of November 1, 1997, the outstanding principal amount of the
indebtedness of Borrower to Frost Bank was $60,000.00 and accrued interest
on such indebtedness was approximately $2,000.00.
(c) Borrower will not borrow any additional amounts from Frost Bank
or any affiliate thereof. Borrower will not incur any Debt to any Person
if such Debt is or is to be secured by the inventory, accounts, accounts
receivable contract rights or general intangibles of Borrower.
Section 2.07. Addition of Section 7.19. Effective as of the date hereof,
------------------------
Section 7.19 shall be added to the Agreement and shall read in its entirety as
follows:
Section 7.19. Payment of Legal Fees. On the earlier of (i) the date
---------------------
on which Borrower receives a purchase order from Chrysler or (ii) the date
on which Borrower receives a purchase order from Woodward Governor,
Borrower shall pay to Lender legal fees incurred by Lender in the amount of
$7,449.50.
Section 2.08. Amendment to Section 8.01. Effective as of the date hereof,
-------------------------
clause (h) is added to Section 8.01 of the Agreement and shall read as follows:
(h) Payment on any Contract shall be made to any account other than
the Payment Account or by any means other than wire transfer to Lender.
Section 2.09. Amendments to Exhibits. Effective as of the date hereof
----------------------
Exhibit "A" to the Agreement (Note) is amended to conform in its entirety to
Annex "A" to this Amendment.
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<PAGE>
ARTICLE III
Conditions Precedent
Section 3.01. Conditions. The effectiveness of this Amendment is subject
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to the receipt by Lender of the following in form and substance satisfactory to
Lender:
(a) Resolutions. Resolutions of the Board of Directors of Borrower
-----------
certified by its Secretary or an Assistant Secretary which authorize the
execution, delivery and performance by Borrower of this Amendment and the
other Loan Documents to which Borrower is or is to be a party hereunder.
(b) Note. The Note executed by Borrower.
----
(c) Amendment to Security Agreement. A Second Amendment to Security
-------------------------------
Agreement executed by Borrower in substantially the form of Annex "B"
hereto.
(d) Borrower Agreement. A Borrower Agreement executed by Borrower.
------------------
(e) Fee. A fee payable to Lender in the amount of $2,412.03.
---
(f) Principal Payment. Payment of principal of the Note in the
-----------------
amount of $25,000.00, such payment to be made in immediately available
funds.
(g) Additional Information. Such additional documents, instruments
----------------------
and information as Lender may request.
Section 3.02. Additional Conditions. The effectiveness of this Amendment
---------------------
is also subject to the satisfaction of the additional conditions precedent that
(a) the representations and warranties contained herein and in all other Loan
Documents, as amended hereby, shall be true and correct as of the date hereof as
if made on the date hereof, (b) all proceedings, corporate or otherwise, taken
in connection with the transactions contemplated by this Amendment and all
documents, instruments and other legal matters incident thereto shall be
satisfactory to Lender, and (c) no Event of Default shall have occurred and be
continuing and no event or condition shall have occurred that with the giving of
notice or lapse of time or both would be an Event of Default.
-5-
<PAGE>
ARTICLE IV
Ratifications, Representations, and Warranties
Section 4.01. Ratifications. The terms and provisions set forth in this
-------------
Amendment shall modify and supersede all inconsistent terms and provisions set
forth in the Agreement and except as expressly modified and superseded by this
Amendment, the terms and provisions of the Agreement are ratified and confirmed
and shall continue in full force and effect. Borrower and Lender agree that the
Agreement as amended hereby shall continue to be the legal, valid and binding
obligation of such Persons enforceable against such Persons in accordance with
its terms.
Section 4.02. Representations, Warranties and Agreements. Borrower hereby
------------------------------------------
represents and warrants to Lender that (a) the execution, delivery, and
performance of this Amendment and any and all other Loan Documents executed or
delivered in connection herewith have been authorized by all requisite corporate
action on the part of Borrower and will not violate the articles of
incorporation or bylaws of Borrower, (b) the representations and warranties
contained in the Agreement as amended hereby, and all other Loan Documents are
true and correct on and as of the date hereof as though made on and as of the
date hereof, (c) except as disclosed in writing to Lender, no Event of Default
has occurred and is continuing and no event or condition has occurred that with
the giving of notice or lapse of time or both would be an Event of Default, (d)
except as disclosed in writing to Lender, Borrower is in full compliance with
all covenants and agreements contained in the Agreement as amended hereby, (e)
Borrower is indebted to Lender pursuant to the terms of the Note, as the same
may have been renewed, modified, extended and rearranged, including, without
limitation, renewals, modifications, increases and extensions made pursuant to
this Amendment, (f) the liens, security interests, encumbrances and assignments
created and evidenced by the Loan Documents are, respectively, valid and
subsisting liens, security interests, encumbrances and assignments and secure
the Note as the same may have been renewed, modified or rearranged, including,
without limitation, renewals, modifications, increases and extensions made
pursuant to this Amendment, and (g) Borrower has no claims, credits, offsets,
defenses or counterclaims arising from the Loan Documents or Lender's
performance under the Loan Documents.
ARTICLE V
Miscellaneous
Section 5.01. Survival of Representations and Warranties. All
------------------------------------------
representations and warranties made in this Amendment or any other Loan
Documents including any Loan Document furnished in
-6-
<PAGE>
connection with this Amendment shall fully survive the execution and delivery of
this Amendment and the other Loan Documents, and no investigation by Lender or
any closing shall affect the representations and warranties or the right of
Lender to rely on them.
Section 5.02. Reference to Agreement. Each of the Loan Documents,
----------------------
including the Agreement and any and all other agreements, documents, or
instruments now or hereafter executed and delivered pursuant to the terms hereof
or pursuant to the terms of the Agreement, as amended hereby, are hereby amended
so that any reference in such Loan Documents to the Agreement shall mean a
reference to the Agreement, as amended hereby.
Section 5.03. Expenses of Lender. As provided in the Agreement, Borrower
------------------
agrees to pay on demand all costs and expenses incurred by Lender in connection
with the preparation, negotiation and execution of this Amendment and the other
documents and instruments executed pursuant hereto and any and all amendments,
modifications and supplements thereto, including, without limitation, the costs
and fees of Lender's legal counsel, and all costs and expenses incurred by
Lender in connection with the enforcement or preservation of any rights under
the Agreement, as amended hereby, or any other Loan Document, including, without
limitation, the costs and fees of Lender's legal counsel.
Section 5.04. Severability. Any provision of this Amendment held by a
------------
court of competent jurisdiction to be invalid or unenforceable shall not impair
or invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
Section 5.05. Applicable Law. This Amendment and all other Loan Documents
--------------
executed pursuant hereto shall be deemed to have been made and to be performable
in Houston, Harris County, Texas and shall be governed by and construed in
accordance with the laws of the State of Texas.
Section 5.06. Successors and Assigns. This Amendment is binding upon and
----------------------
shall inure to the benefit of Lender and Borrower and their respective
successors and assigns, except Borrower may not assign or transfer any of its
rights or obligations hereunder without the prior written consent of Lender.
Section 5.07. Counterparts. This Amendment may be executed in one or more
------------
counterparts, each of which when so executed shall be deemed to be an original,
but all of which when taken together shall constitute one and the same
instrument.
Section 5.08. Effect of Waiver. No consent or waiver, express or implied,
----------------
by Lender to or for any breach of or deviation from any covenant, condition or
duty by Borrower shall be deemed a
-7-
<PAGE>
consent or waiver to or of any other breach of the same or any other covenant,
condition or duty.
Section 5.09. Headings. The headings, captions, and arrangements used in
--------
this Amendment are for convenience only and shall not affect the interpretation
of this Amendment.
Section 5.10. ENTIRE AGREEMENT. THIS AMENDMENT AND ALL OTHER INSTRUMENTS,
----------------
DOCUMENTS, AND AGREEMENTS EXECUTED AND DELIVERED IN CONNECTION WITH THIS
AMENDMENT EMBODY THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO WITH
RESPECT TO THE SUBJECT MATTER HEREOF AND THEREOF AND SUPERSEDE ANY AND ALL PRIOR
COMMITMENTS, AGREEMENTS, REPRESENTATIONS AND UNDERSTANDINGS, WHETHER WRITTEN OR
ORAL, RELATING TO THIS AMENDMENT AND THE OTHER INSTRUMENTS, DOCUMENTS AND
AGREEMENTS EXECUTED AND DELIVERED IN CONNECTION WITH THIS AMENDMENT, 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.
Executed as of the date first written above.
BORROWER:
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
By:
---------------------------------
Howard Burris
Chief Executive Officer
LENDER:
WELLS FARGO HSBC TRADE BANK, N.A.
By:
---------------------------------
Andrew Moy
Assistant Vice President
-8-
<PAGE>
LIST OF ANNEXES
Annex Document
----- --------
A Note
B Second Amendment to Security Agreement
C Borrower Agreement
-9-
<PAGE>
PROMISSORY NOTE
---------------
$629,223.94 Houston, Texas July 31, 1997
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 1445 Ross Avenue, Dallas, Texas, Dallas County, Texas, in
lawful money of the United States of America, the principal sum of SIX HUNDRED
TWENTY NINE THOUSAND TWO HUNDRED TWENTY-THREE AND 94/100 DOLLARS ($629,223.94),
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 five percent
(5.0%), 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 November 1,
1997, and upon the maturity of this Note, however such maturity may be
brought about;
(b) Principal of this Note shall be due and payable on the day on
which Maker receives any payment under the Fiat-Italy Contract (as defined
in the Agreement, which is hereinafter defined) in an amount equal to the
amount of such Fiat-Italy Contract payment, plus accrued interest on the
principal amount so paid;
(c) In the event that Maker receives a purchase order for a
"SMARTSCAN System" from (i) Chrysler, Twenty-Five Thousand and No/100
Dollars ($25,000.00) of principal of this Note plus accrued interest
thereon shall be due and payable on the date on which such purchase order
is received by Maker, or (ii) Woodward Governor, Twenty-Five Thousand and
No/100
<PAGE>
Dollars ($25,000.00) of principal of this Note plus accrued interest
thereon shall be due and payable on the date on which such purchase order
is received by Maker; and
(d) All outstanding principal of this Note and all accrued interest
thereon shall be due and payable on January 31, 1998.
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 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 amended by First Amendment
to EXIM Guaranteed Loan Agreement dated as of August 1, 1996, Second
Amendment to EXIM Guaranteed Loan Agreement dated as of June 15, 1997 and
Third Amendment to EXIM Guaranteed Loan Agreement dated as of July 31,
1997, and as the same may be further amended or modified from time to time.
"Default Rate" shall mean the lesser of (a) the sum of the Prime
--------------
Rate plus seven percent (7%) 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 Wells Fargo Bank from time to time as its prime rate which
shall vary from time to time. Such rate is set by Wells Fargo Bank as a
general reference rate of interest, taking into account such factors as
Wells Fargo Bank may deem appropriate, it being understood that many of
Wells Fargo Bank'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 Wells Fargo Bank may
-2-
<PAGE>
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, including by the security interests
created by the Security Agreement (as defined 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 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.
-3-
<PAGE>
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
nonpayment 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, 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.
This Note is executed in renewal, extension and decrease of, but not in
discharge or novation of, that certain promissory note in the original principal
amount of $629,775.00, dated June 15, 1997, executed by Maker and payable to the
order of Payee, which was executed in renewal, extension and decrease of, but
not in discharge or novation of, that certain promissory note in the original
principal amount of $1,250,000.00, dated August 1, 1996, executed by Maker and
payable to the order of Payee, which was executed in renewal, extension and
modification of, but not in discharge or novation of, that certain promissory
note in the original principal amount of $1,250,000.00, dated June 15, 1996,
executed by Maker and payable to the order of Payee.
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
By:
-------------------------------------------
Howard Burris
Chief Executive Officer
-4-
<PAGE>
EXHIBIT 10.32
SECOND AMENDMENT TO SECURITY AGREEMENT
--------------------------------------
This SECOND AMENDMENT TO SECURITY AGREEMENT ("Amendment"), dated as of July
31, 1997 is between SCIENTIFIC MEASUREMENT SYSTEMS, INC., a Texas corporation
("Debtor") and WELLS FARGO HSBC TRADE BANK, N.A., a national banking association
("Secured Party").
RECITALS:
--------
WHEREAS, Debtor and Secured Party have entered into that certain EXIM
Guaranteed Loan Agreement dated as of June 15, 1996, as amended by EXIM
Guaranteed Loan Agreement dated as of August 1, 1996, Second Amendment to EXIM
Guaranteed Loan Agreement dated as of June 15, 1997 and Third Amendment to EXIM
Guaranteed Loan Agreement dated as of July 31, 1997 (the "Loan Agreement").
WHEREAS, pursuant to the Loan Agreement Debtor executed that certain
Security Agreement, dated as of June 15, 1996, as amended by First Amendment to
Security Agreement dated as of June 15, 1997 (the "Security Agreement").
WHEREAS, the execution of this Amendment is a condition to Secured Party
entering into the Third Amendment to EXIM Guaranteed Loan Agreement referred to
above.
NOW, THEREFORE, for good and valuable consideration the receipt and
sufficiency of which are acknowledged and agreed, Debtor and Secured Party
hereby agree as follows:
ARTICLE I.
---------
Amendments
----------
1. Amendment to Section 1.02(a). Effective as of the date hereof,
----------------------------
Section 1.02(a) of the Security Agreement is amended to read in its entirety as
follows:
(a) the obligations and indebtedness of Debtor to Secured Party evidenced by
that certain promissory note in the original principal amount of $629,223.94
dated July 31, 1997, executed by Debtor and payable to the order of Secured
Party, which was executed in renewal, extension and decrease of that certain
promissory note in the original principal amount of $629,775.00 dated June 15,
1997, executed by Debtor and payable to the order of Secured Party, which was
executed in renewal, extension and decrease of 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.
<PAGE>
ARTICLE II.
----------
Additional Provisions
---------------------
1. Acknowledgment by Debtor. Except as otherwise specified herein, the
------------------------
terms and provisions hereof shall in no manner impair, limit, restrict or
otherwise affect the obligations of Debtor or any third party to Secured Party
under any Loan Document (as defined in the Loan Agreement).
2. Additional Documentation. From time to time, Debtor shall execute or
------------------------
procure and deliver to Secured Party such other and further documents and
instruments evidencing, securing or pertaining to the Security Agreement or the
other Loan Documents as shall be reasonably requested by Secured Party so as to
evidence or effect the terms and provisions hereof.
3. Continued Effectiveness. Except as expressly modified by the terms
-----------------------
and provisions hereof, each of the terms and provisions of the Security
Agreement and the other Loan Documents are hereby ratified and confirmed, and
shall remain in full force and effect. The liens and security interests created
by the Security Agreement remain in full force and effect.
4. Governing Law. THE TERMS AND PROVISIONS HEREOF SHALL BE GOVERNED BY
-------------
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.
5. Binding Agreement. This Amendment shall be binding upon the heirs,
-----------------
executors, administrators, personal representatives, successors and assigns of
the parties hereto.
6. Counterparts. This Amendment may be executed in any number of
------------
counterparts, each of which shall be deemed an original and all of which
together shall be construed as one and the same instrument.
7. No Oral Agreements. This Amendment, the Loan Agreement and the other
------------------
Loan Documents embody the final, entire agreement among the parties hereto.
There are no oral agreements among the parties hereto.
-2-
<PAGE>
EXECUTED as of the date first above written.
DEBTOR:
------
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
By:
---------------------------------
Howard Burris
Chief Executive Officer
SECURED PARTY:
-------------
WELLS FARGO HSBC TRADE BANK, N.A.
By:
---------------------------------
Andrew Moy
Assistant Vice President
-3-
<PAGE>
EXHIBIT 24.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement
(Form S-8) pertaining to the Scientific Measurement Systems, Inc. 1990 Long-Term
Incentive Plan of our report dated as of November 13, 1997, with respect to the
consolidated financial statements of Scientific Measurement Systems, Inc.
included in the Form 10-KSB for the year ended July 31, 1997, which contains an
explanatory paragraph regarding the company's ability to continue as a going
concern.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Houston, Texas
December 23, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JUL-31-1997
<CASH> 390
<SECURITIES> 0
<RECEIVABLES> 1,647
<ALLOWANCES> 0
<INVENTORY> 20
<CURRENT-ASSETS> 2,085
<PP&E> 1,276
<DEPRECIATION> 1,188
<TOTAL-ASSETS> 2,470
<CURRENT-LIABILITIES> 2,248
<BONDS> 0
0
0
<COMMON> 1,056
<OTHER-SE> 9,254
<TOTAL-LIABILITY-AND-EQUITY> 2,470
<SALES> 3,724
<TOTAL-REVENUES> 3,724
<CGS> 3,631
<TOTAL-COSTS> 4,775
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 71
<INCOME-PRETAX> (1,121)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,121)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
