U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
AMENDMENT NO. 1
(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]
==========================================================
<PAGE>
Scientific Measurement Systems, Inc. hereby amends its Annual Report on
Form 10-KSB for the fiscal year ended July 31, 1997 with respect to the
following item, which amends the Independent Certified Public Accountants'
Report.
None of the financial statements or the notes thereto have been amended.
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
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
<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.
/s/ BDO Seidman, LLP
- --------------------
BDO Seidman, LLP
Houston, Texas
November 13, 1997
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
<TABLE>
BALANCE SHEETS
<CAPTION>
July 31, 1997 1996
- ----------------------------------------------------------------------------------
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
=========== ===========
</TABLE>
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
<TABLE>
BALANCE SHEETS
<CAPTION>
July 31, 1997 1996
- ----------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
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
============ ============
<FN>
See accompanying summary of significant accounting policies and notes to financial statements.
</FN>
</TABLE>
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
<TABLE>
STATEMENTS OF OPERATIONS
<CAPTION>
Years ended July 31, 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
CONTRACT REVENUES
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
============ ============
<FN>
See accompanying summary of significant accounting policies and notes to financial statements.
</FN>
</TABLE>
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
<TABLE>
STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
Additional
Common Stock Paid-In
Shares Amount Capital Deficit Total
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
============ ============ ============ ============ ============
<FN>
See accompanying summary of significant accounting policies and notes to financial statements.
</FN>
</TABLE>
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
<TABLE>
STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
<CAPTION>
Years ended July 31, 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
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>
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
<TABLE>
STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
<CAPTION>
Years ended July 31, 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
FINANCING ACTIVITIES:
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
=========== ===========
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.
- --------------------------------------------------------------------------------
<FN>
See accompanying summary of significant accounting policies and notes to financial statements.
</FN>
</TABLE>
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF Scientific Measurement Systems, Inc. (the "Company") is a
BUSINESS 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 statements in conformity with
ESTIMATES 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 cost. Depreciation and
EQUIPMENT 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 financial instruments,
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. Depreciation for financial
EQUIPMENT statement purposes is provided by the straight-line method over
estimated useful lives of five to ten years.
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PATENT RIGHTS The Company holds patent rights related to procedures for
tomographic examinations which are being amortized using the
straight-line method over their remaining lives.
RESEARCH AND Expenditures for Company-sponsored research and development are
DEVELOPMENT expensed as incurred.
EARNINGS Primary earnings per share amounts are computed based on the
(LOSS) PER weighted average number of shares outstanding. Fully diluted
SHARE 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, cash and cash equivalents
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 for tomographic system sales are accounted for under the
REVENUES 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
<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 for the Impairment of
ASSETS 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 Accounting Standards Board issued
PRONOUNCEMENTS 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
<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
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
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 issued to
AND WARRANTS 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.
RECLAS- Certain amounts previously reported have been reclassified to
SIFICATION conform to current year presentation.
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
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
AND are as 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
========== ==========
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
3.NOTES
PAYABLE Notes payable at July 31 consisted of the following:
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
EQUITY stock, $0.05 par value. Additionally, the Company has
authorized 2,000,000 shares of preferred stock, $0.15 par
value. As of July 31, 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.
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
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, restricted stock awards, and SARs to
certain key employees of the Company,
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
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.
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
A summary of the status of the Company's stock options as of
July 31 is presented below:
1997 1996
---- ----
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
========= ======= ========= ========
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
- --------------------------------------------------------------------------------
$ 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
======== ========= = ======== ========= ========
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
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
============= ===========
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
6.CONTRACT The Company's revenues have been derived from certain major
REVENUES customers (greater than 10% of total revenues) as follows:
Customer 1997 1996
-------- ---- ----
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
=========== ===========
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
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
TAXES deductible 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 15,000 36,400
income tax asset ---------- ----------
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 2001. Approximately
$7,000 in tax credit carryforwards expired in 1997. The
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
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
TRANSACTIONS certain 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.
9.LEASES The Company entered into a lease agreement for office and
manufacturing
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
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
DEVELOPMENT Motors, General Electric and EG&G to develop scanning
CONSORTIUM AND technology that is capable of tomographical scanning 100
GRANT times faster than current systems. The 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.
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
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
ESTIMATES and made 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.
<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/A, 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 9th
day of February, 1998.
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
By:/s/ Howard L. Burris By:/s/ Howard L. Burris
--------------------- ---------------------
Howard L. Burris, Jr. Howard L. Burris, Jr.
President and Chief Executive Officer Acting Principal Financial and
Accounting Officer
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Howard L. Burris President, Chief Executive February 9, 1998
- -------------------------- Officer and Director
Howard L. Burris, Jr.
/s/ Howard L. Burris
- -------------------------- Acting Principal Financial February 9, 1998
Howard L. Burris, Jr. and Accounting Officer
* Director February 9, 1998
- --------------------------
Larry Secrest
* Director February 9, 1998
- --------------------------
Burton W. Kanter
* Director February 9, 1998
- --------------------------
James W. Kenney
* Director February 9, 1998
- --------------------------
Phillips A. Moore
* Director February 9, 1998
- --------------------------
Dr. Thomas Prud'homme
* Director February 9, 1998
- --------------------------
Nancy R. Woodward
* by Howard L. Burris, as attorney-in-fact
