<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM . . . . . . . . TO . . . . . . . . . . . . . . .
FOR THE QUARTER ENDED JANUARY 31, 1998 COMMISSION FILE NUMBER 0-14100
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
74-2048763
TEXAS (I.R.S. EMPLOYER
(STATE OR OTHER JURISDICTION OF IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
78758
2210 DENTON DRIVE, SUITE 106, AUSTIN, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (512) 837-4712
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 the
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 [ ]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practical date:
SHARES OUTSTANDING AS OF
TITLE OF CLASS MARCH 13, 1998
-------------- --------------
$0.05 Par Value Common Stock 21,114,468
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
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<PAGE>
INDEX
Part I - Financial Information
Item 1: Financial Statements (Unaudited):
Condensed Balance Sheet:
January 31, 1998 and July 31, 1997................... 3
Condensed Statement of Operations:
Three and Six Months Ended January 31, 1998 and 1997.. 4
Statement of Cash Flows:
Six Months Ended January 31, 1998 and 1997........... 5
Notes to Condensed Financial Statements................ 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 7
Part II - Other Financial Information
Items 1 - 6.............................................................. 11
Signatures.............................................................. 12
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
- --------------------------------------------------------------------------------
Condensed Balance Sheet
(In thousands)
January 31, July 31,
1998 1997
-------- --------
(Unaudited)
ASSETS
Current assets:
Cash............................................ $ 26 $ 390
Trade accounts receivable, net.................. 683 294
Research Grant Receivables...................... 195 450
Costs and earned profits on long-term
contracts in excess of related billings......... 1,067 903
Inventory....................................... 30 20
Prepaid expenses................................ 100 28
-------- --------
Total current assets......................... 2,101 2,085
Property and equipment, net....................... 78 87
Scanning equipment, net........................... 332 211
Other assets, net................................. 89 87
-------- --------
$ 2,600 $ 2,470
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Billings in excess of related costs and earned
profits on long-term contracts.................. $ 227 $ 268
Accrued commissions............................. 62 48
Accounts payable and accrued expenses........... 1,831 1,232
Notes payable................................... 640 700
-------- --------
Total current liabilities................... 2,760 2,248
-------- --------
Stockholders' equity:
Common stock of $0.05 par value, 40,000,000
shares authorized; issued and outstanding
21,114,468 and 21,114,468, respectively......... 1,056 1,056
Additional paid-in capital...................... 9,229 9,254
Accumulated deficit............................. (10,445) (10,088)
-------- --------
Total stockholders' equity.................. (160) 222
-------- --------
$ 2,600 $ 2,470
======== ========
The accompanying notes are an integral part of these financial statements.
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3
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SCIENTIFIC MEASUREMENT SYSTEMS, INC.
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Condensed Statement of Operations
(In thousands except share and per share amounts)
(Unaudited)
Three Months Six Months
Ended Ended
January 31, January 31,
1998 1997 1998 1997
---- ---- ---- ----
Contract revenues:
Tomographic system sales........... $1,056 $868 $1,345 $1,722
Service contracts and upgrades..... 297 292 452 496
------- ------- ------- -------
Total revenues.................... 1,353 1,160 1,797 2,218
Direct contract costs............... 977 970 1,440 1,918
------- ------- ------- -------
Gross profit........................ 376 190 357 300
------- ------- ------- -------
Operating costs:
Marketing.......................... 119 80 199 224
General and administrative......... 266 108 468 330
------- ------- ------- -------
Total operating costs............. 385 188 667 554
------- ------- ------- -------
Income (loss) from operations....... (9) 2 (310) (254)
------- ------- ------- -------
Other expense (income):
Interest expense................... 25 15 47 34
Interest and other income.......... 0 0 0 0
------- ------- ------- -------
Other - net...................... 25 15 47 34
------- ------- ------- -------
Net income (loss)................... $ (34) $ (13) $ (357) $ (288)
======= ======= ======= =======
Weighted average shares outstanding. 21,114 20,705 21,114 20,705
======= ======= ======= =======
Net income (loss) per share......... $0 $0 $(0.02) $(0.01)
== == ====== ======
The accompanying notes are an integral part of these financial statements.
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4
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SCIENTIFIC MEASUREMENT SYSTEMS, INC.
- --------------------------------------------------------------------------------
Statement of Cash Flows
Six Months Ended January 31, 1998 and 1997
(In thousands)
(Unaudited)
Six Months Six Months
Ended January 31, Ended January 31,
1998 1997
------ ------
Operating activities:
Net income (loss)......................... $(357) $ (288)
Adjustments to reconcile net income
to net cash used in operating
activities:
Depreciation and amortization............ 44 32
Changes in operating assets and
liabilities:
Trade accounts receivable............... (135) (1,318)
Costs and earned profits on
long-term contracts in excess of
related billings........................ (164) 449
Prepaid expenses and other
current assets.......................... (71) 3
Other assets............................ (87) (55)
Accounts payable and accrued expenses... 705 138
Billings in excess of related costs
and earned profits on long-term
contracts............................... (41) 213
----- -------
Net cash flows provided by (used in)
operating activities...................... (106) (826)
----- -------
Investing activities:
Capital expenditures...................... (173) (134)
----- -------
Net cash flows used in investing
activities................................ (173) (134)
----- -------
Financing activities:
Proceeds from Issuance of Common Stock..... (25) 1,041
Proceeds from exercise of stock options 0 118
Borrowings under line of credit............ (60) 528
Repayments on borrowing from private
sources.................................... 0 (259)
----- -------
Net cash flows provided by (used in)
financing activities........................ (85) 1,428
----- -------
Net increase in cash and cash equivalents... (364) 468
Cash and cash equivalents at beginning
of period................................... 390 45
----- -------
Cash and cash equivalents at end of period.. $ 26 $ 513
===== =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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5
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SCIENTIFIC MEASUREMENT SYSTEMS, INC.
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NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not contain all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. It is the opinion of
management that all adjustments and eliminations necessary for a fair
presentation of financial position and results of operations for such
periods have been included, and that such adjustments and eliminations
are only of a normal, recurring type. The results of operations for any
interim period are not necessarily indicative of results for the full
year. These condensed financial statements should be read in
conjunction with the financial statements and accompanying notes
contained in the Company's Annual Report on Form 10-KSB for the year
ended July 31, 1997 as filed with the Securities and Exchange
Commission.
2. RELATED PARTY TRANSACTION.
On October 31, 1996 the Company issued 500,000 shares of common stock
to a director in exchange for an SMS Scanner Model 101B. Such scanner
is recorded in the accompanying balance sheet at the director's basis
of $65,000 as required by generally accepted accounting principles.
3. SUBSEQUENT EVENT.
In November and December of 1996 the Company completed a Regulation S
offering of its common stock. The Company received net proceeds of
$1,081,260 for 1,960,732 shares of its common stock.
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6
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SCIENTIFIC MEASUREMENT SYSTEMS, INC.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following tables set forth items from the Company's statement of
operations as a percentage of total revenues and as a percentage change from the
prior period:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JANUARY 31,
-------------------------------------------------------------------------------------
1998 1997
--------------------------------------- ------------------------------------
Dollar % of % Change Dollar % of % Change
Amount Total from Prior Amount Total from Prior
(000s) Revenue Year (000s) Revenue Year
------ ------- ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Contract revenues:
System sales...................... $1056 78.05% 21.66% $ 868 74.83% 46.87%
Service contracts and upgrades.... 297 21.95% 1.71% 292 25.17% 19.18%
----- ------- ------- ------ -------- --------
Total revenues................. 1353 100.00% 16.64% 1160 100.00% 38.76%
Contract costs..................... 977 72.21% 0.72% 970 83.62% 66.95%
----- ------- ------- ------ -------- --------
Gross profit....................... 376 27.79% 97.89% 190 16.38% -25.49%
Operating costs:
Marketing........................ 119 8.80% 48.75% 80 6.90% -6.98%
General and administrative....... 266 19.66% 146.30% 108 9.31% -4.42%
----- ------- -------- ------ -------- ------
Total operating costs.......... 385 28.46% 104.79% 188 16.21% -5.53%
----- ------- -------- ------ -------- ------
Income (loss) from operations...... (9) -0.67% 550.00% 2 0.17% -96.43%
----- ------- -------- ------ ------- ---------
Other (income) expense:
Interest expense................. 25 1.85% 66.67% 15 1.29% 400.00%
Interest and other income........ 0 0.00% N/M 0 0.00% N/ M
Other - net................. 25 1.85% 66.67% 15 1.29% -1600.00%
----- ------- ------- ------ ------- ---------
Net income (loss).................. $ (34) -2.51% -161.54% $ (13) -1.12% -122.81%
===== ======= ========= ====== ======== ==========
</TABLE>
N/M - Not meaningful
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7
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
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<TABLE>
<CAPTION>
SIX MONTHS ENDED JANUARY 31,
-------------------------------------------------------------------------------------
1998 1997
--------------------------------------- ------------------------------------
Dollar % of % Change Dollar % of % Change
Amount Total from Prior Amount Total from Prior
(000s) Revenue Year (000s) Revenue Year
------ ------- ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Contract revenues:
System sales...................... $ 1345 74.85% -21.89% $ 1722 77.64% 76.98%
Service contracts and upgrades.... 452 25.15% -8.87% 496 22.36% -7.81%
------- -------- -------- ------ -------- -------
Total revenues................. 1797 100.00% -18.98% 2218 100.00% 46.79%
Contract costs..................... 1440 80.13% -24.92% 1918 86.47% 103.18%
------- -------- --------- ------ -------- --------
Gross profit....................... 357 19.87% 19.00% 300 13.53% -47.09%
Operating costs:
Marketing........................ 199 11.07% -11.16% 224 10.10% 63.50%
General and administrative....... 468 26.04% 41.82% 330 14.88% 64.18%
------- -------- -------- ------ -------- -------
Total operating costs.......... 667 37.12% 20.40% 554 24.98% 63.91%
------- -------- -------- ------ -------- -------
Income (loss) from operations...... (310) -17.25% -22.05% (254) -11.45% -210.92%
------- --------- --------- ------ --------- ---------
Other (income) expense:
Interest expense................. 47 2.62% 38.24% 34 1.53% 385.71%
Interest and other income........ 0 0.00% N/M 0 0.00% -100.00%
Other - net................. 47 2.62% 38.24% 34 1.53% 1600.00%
------- ------- -------- ------ ------- ---------
Net income (loss).................. $ (357) -19.87% -23.96% $ (288) -12.98% -226.87%
======= ========= ========= ====== ========= =========
</TABLE>
- ------------------
N/M - Not meaningful
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8
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SCIENTIFIC MEASUREMENT SYSTEMS, INC.
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RESULTS OF OPERATIONS
Second quarter total contract revenue grew 17% to $1,353,00 in fiscal 1998 from
$1,160,000 in fiscal 1997. For the six months ended January 31, 1998, total
contract revenue fell 19% to $1,797,00 from $2,218,00 in fiscal 1997. A 22%
decrease in system sales reserve was the main factor in the decrease.
Gross profit (revenue less direct contract cost) for the second quarter as a
percentage of revenues increased to 28% in 1998 from 16% in 1997. Year to date
gross profit as a percentage of revenues increased to 20% from 14% in 1997.
Increased gross profits is due to the Company beginning work on new contracts in
the second quarter and completing work on older projects with little or no
remaining revenue recognition potential.
Second quarter total operating costs as a percentage of revenues increased to
28% in 1998 from 16% in 1997, and year to date operating costs as a percentage
of revenues increased to 37% in 1998 from 25% in 1997. The increases are due
primarily to increased research and development expenses in 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 1998, the Company had negative net working capital of $659,000
compared to negative net working capital of $163,000 at July 31, 1997. During
the six months ended January 31, 1998, the Company had cash used in operations
of $106,000, compared to cash used in operations of $826,000 in the prior year
period. During the six months ended January 31, 1998 and 1997, the Company used
$85,000 and generated $1,428,000, respectively, from financing activities. As
further described in Note 3 to the financial statements, the Company raised
$1,081,260 of equity in November and December of 1996. In addition, during the
first quarter of fiscal 1997, the Company borrowed an additional $329,000 under
a bank line of credit to support the production of export sales. The use of cash
for financing activities in 1997 was due mainly to efforts to secure additional
financing.
Total contract backlog at January 31, 1998 was approximately $1,300,000, down
from $2,403,000 for the same period in 1997. Management is actively pursuing
several system sales opportunities, and is cautiously optimistic that such
activity will result in additional system sales contracts; however, no assurance
can be given regarding any potential sales.
Because of the contract backlog, management believes that the Company has the
ability to meet its cash requirements through fiscal 1998. The Company's
liquidity position thereafter will depend upon the outcome of further cash
generating activities, such as raising additional debt or equity capital, or
generating revenues and cash receipts through system sales and scanning
services. There is no assurance that the Company can successfully complete any
such activity, and the failure to do so could have a material adverse effect on
the Company's financial position. Also at January 31, 1998, the Company was in
technical default with a local bank with respect to its Export Import Bank of
the U.S. ("EXIMBANK") guaranteed line of credit. However, Management has
negotiated with the bank to extend the maturity of the loan to July 31, 1998 by
assigning certain receivables to provide additional security for the debt.
Default was caused by the inability, to date, of the Company to collect, in a
timely fashion, a final 90% payment of approximately $700,000 pursuant to the
Company's prior delivery of an export customer's system. Of the $630,000
originally borrowed, the Company has a remaining balance of $580,000 with the
bank with the receivable from the export customer as collateral. On March 5,
1998, the customer formally accepted the machine in a factory acceptance test
for a reduced purchase price.
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9
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SCIENTIFIC MEASUREMENT SYSTEMS, INC.
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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 contained in the Company's
annual report on Form 10-KSB for the fiscal year ended July 31, 1997, 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 approximately $1,642,000
($831,000 of which is currently due to General Electric and $811,000 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.
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10
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SCIENTIFIC MEASUREMENT SYSTEMS, INC.
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PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
The Company is not a party to any pending lawsuits and is not aware of any such
proceedings known to be contemplated by governmental authorities or others.
Item 2 - Changes in Securities
None
Item 3 - Defaults Upon Senior Securities
In a letter dated April 21, 1997, Wells Fargo HSBC Trade Bank, N.A. (the "Bank")
notified the Company that it was in default under the terms of its loan. The
original principal amount of the loan was $630,000. The total amount, including
interest, due on the date of the filing of this report is $615,171.16.
Management negotiated with the Bank to extend the maturity of the loan until
January 31, 1998 by making a partial principal reduction and by assigning
certain accounts receivable to provide the Bank with incremental security for
the loan.
Item 4 - Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on January 29, 1998. Because
a quorum was not present, the meeting was adjourned until March 13, 1998. On
that date, approximately 19,451,880, or 92.13% of the common stock issued and
outstanding as of the record date were represented at the meeting in person or
by proxy. Set forth below are the voting results for the proposal to elect the
following persons to the Company's Board of Directors:
Name For Against Withheld
---- --- ------- --------
Howard Burris 19,214,636 - 237,244
Burton Kanter 19,211,256 240,624
James Kenney 19,256,456 195,424
Phillips Moore 19,262,456 189,424
Thomas Prud'homme 19,256,136 195,744
Larry Secrest 19,236,261 215,619
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
a) Exhibits
10.33 Fourth Amendment to Exim Guaranteed Loan Agreement dated as of January
31, 1998 between the Company and Wells Fargo HSBC Trade Bank, N.A.
10.34 Promissory Note dated as of January 31, 1998 in the principal amount of
$579,223.94 from the Company to Wells Fargo HSBC Trade Bank, N.A.
10.35 Third Amendment to Security Agreement dated as of January 31, 1998
between the Company and Wells Fargo HSBC Trade Bank, N.A.
b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the period covered by
this report.
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11
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SCIENTIFIC MEASUREMENT SYSTEMS, INC.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the issuer
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
By: /s/ Howard L. Buris
---------------------------------------------
Howard L. Burris, Chief Executive Officer,
President, and Acting Chief Financial Officer
March 17, 1998
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12
<PAGE>
Exhibit 10.33
-------------
FOURTH AMENDMENT TO EXIM GUARANTEED LOAN AGREEMENT
THIS FOURTH AMENDMENT TO EXIM GUARANTEED LOAN AGREEMENT (this "Amendment"),
dated as of January 31, 1998, 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, 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 "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
----------
aggregate principal amount at any time outstanding up to but not exceeding
$579,223.94.
<PAGE>
"Termination Date" means 11:00 a.m., Houston, Texas time on July 31,
----------------
1998 or such earlier date on which the Commitment terminates as provided in
this Agreement.
Section 2.02. 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) Three (3)
------------------------------------
payments of the Advances each in the principal amount of Eight Thousand
Seven Hundred and No/100 Dollars ($8,700.00) plus accrued interest on the
Advances shall be due and payable on February 1, 1998, March 1, 1998 and
April 1, 1998.
(b) Three (3) payments of the Advances each in the principal amount
of Ten Thousand and No/100 Dollars ($10,000.00) plus accrued interest on
the Advances shall be due and payable on May 1, 1998, June 1, 1998 and July
1, 1998.
(c) 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.
(d) In the event that Borrower receives a purchase order for a
"SMARTSCAN System" from 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.
(e) 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.
(f) The unpaid principal amount of all Advances shall 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.
(g) 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.
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<PAGE>
(h) 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.
Section 2.03. 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.
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 Third 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) Lender Fee. A fee payable to Lender in the amount of $1,456.10.
----------
(f) Eximbank Fee. A fee payable to Eximbank in the amount of
------------
$728.06.
(g) Legal Fees. Legal fees and expenses in the amount of $1,537.00.
----------
(h) 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
-3-
<PAGE>
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.
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 for matters set forth in the letter from Lender to
Borrower dated July 21, 1997 (the "Letter"), 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 for
matters set forth in the Letter, 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.
-4-
<PAGE>
ARTICLE V
Miscellaneous
Section 5.01. Survival of Representations and Warranties. All
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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,
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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
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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 reasonable 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
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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
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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
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shall inure to the benefit of Lender and Borrower and their respective
successors and assigns, except Borrower may
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<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
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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,
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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
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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,
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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/ Howard Burris
Howard Burris
Chief Executive Officer
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<PAGE>
LENDER:
WELLS FARGO HSBC TRADE BANK, N.A.
By: /s/ Andrew Moy
Andrew Moy
Assistant Vice President
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<PAGE>
LIST OF ANNEXES
Annex Document
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A Note
B Third Amendment to Security Agreement
C Borrower Agreement
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<PAGE>
Exhibit 10.34
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PROMISSORY NOTE
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$579,223.94 Houston, Texas January 31, 1998
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 FIVE HUNDRED
SEVENTY-NINE THOUSAND TWO HUNDRED TWENTY-THREE AND 94/100 DOLLARS ($579,223.94),
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) Three (3) installments each in the principal amount of Eight
Thousand Seven Hundred and No/100 Dollars ($8,700.00) plus accrued interest
on this Note shall be due and payable on February 1, 1998, March 1, 1998
and April 1, 1998;
(b) Three (3) installments each in the principal amount of Ten
Thousand and No/100 Dollars ($10,000.00) plus accrued interest on this Note
shall be due and payable on May 1, 1998, June 1, 1998 and July 1, 1998;
(c) 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 a principal amount equal
to the amount of such Fiat-Italy Contract payment, plus accrued interest on
the principal amount so paid;
<PAGE>
(d) In the event that Maker receives a purchase order for a
"SMARTSCAN System" from Woodward Governor, 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; and
(e) In the event that prior to the payment of this Note in full,
Maker 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 Maker or from any other source, all principal of this
Note and all accrued interest on this Note shall be immediately due and
payable and, immediately upon receipt of the proceeds of such funding,
Maker will use such proceeds to pay this Note in full.
(f) All outstanding principal of this Note plus all accrued and
unpaid interest on this Note shall be due and payable on July 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
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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, Third
Amendment to EXIM Guaranteed Loan Agreement dated as of July 31, 1997, and
Fourth Amendment to EXIM Guaranteed Loan Agreement dated as of January 31,
1998, 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
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plus seven percent (7%) or (b) the Maximum Rate.
"Maximum Rate" means the maximum rate of nonusurious interest
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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
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<PAGE>
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
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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, 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
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<PAGE>
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.
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 $629,223.94, dated July 31, 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 $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,
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<PAGE>
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
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<PAGE>
Exhibit 10.35
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THIRD AMENDMENT TO SECURITY AGREEMENT
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This THIRD AMENDMENT TO SECURITY AGREEMENT ("Amendment"), dated as of
January 31, 1998 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, Second Amendment to EXIM
Guaranteed Loan Agreement dated as of June 15, 1997, Third Amendment to EXIM
Guaranteed Loan Agreement dated as of July 31, 1997, and Fourth Amendment to
EXIM Guaranteed Loan Agreement dated as of January 31, 1998 (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 and Second Amendment to Security
Agreement dated as of July 31, 1997 (the "Security Agreement").
WHEREAS, the execution of this Amendment is a condition to Secured Party
entering into the Fourth 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,
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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 $579,223.94
dated January 31, 1998, 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 $629,223.94 dated
<PAGE>
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.
ARTICLE II.
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Additional Provisions
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1. Acknowledgment by Debtor. Except as otherwise specified herein, the
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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
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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
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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,
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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
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Loan Documents embody the final, entire agreement among the parties hereto.
There are no oral agreements among the parties hereto.
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<PAGE>
EXECUTED as of the date first above written.
DEBTOR:
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SCIENTIFIC MEASUREMENT SYSTEMS, INC.
By:
--------------------------------
Howard Burris
Chief Executive Officer
SECURED PARTY:
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WELLS FARGO HSBC TRADE BANK, N.A.
By:
--------------------------------
Andrew Moy
Assistant Vice President
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 26
<SECURITIES> 0
<RECEIVABLES> 878
<ALLOWANCES> 0
<INVENTORY> 30
<CURRENT-ASSETS> 2,101
<PP&E> 1,289
<DEPRECIATION> 1,211
<TOTAL-ASSETS> 2,600
<CURRENT-LIABILITIES> 2,760
<BONDS> 0
0
0
<COMMON> 1,056
<OTHER-SE> 9,229
<TOTAL-LIABILITY-AND-EQUITY> 2,600
<SALES> 1,345
<TOTAL-REVENUES> 1,797
<CGS> 1,440
<TOTAL-COSTS> 2,107
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47
<INCOME-PRETAX> (357)
<INCOME-TAX> 0
<INCOME-CONTINUING> (357)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (357)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
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