<PAGE>
================================================================================
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 October 31, 1995
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 October 31, 1995
Commission file number 0-14100
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
(Exact name of Registrant as specified in 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)
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 |_| No |_|
The number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practical date:
Shares Outstanding as of
Title of Class December 1, 1995
$0.05 Par Value Common Stock 13,030,355
Transitional Small Business Disclosure Format (check one): Yes No X
================================================================================
<PAGE>
INDEX
Page
----
Part I - Financial Information
Item 1: Financial Statements (Unaudited):
Condensed Balance Sheet:
October 31, 1995 and July 31, 1995.....................3
Condensed Statement of Operations:
Three Months Ended October 31, 1995 and 1994...........4
Statement of Cash Flows:
Three Months Ended October 31, 1995 and 1994...........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...................................................................10
Signatures....................................................................11
2
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
Condensed Balance Sheet
(In thousands)
<TABLE>
<CAPTION>
October 31, July 31,
1995 1995
----------- ----------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash $ 129 $ 25
Trade accounts receivable, net 145 193
Costs and earned profits on long-term
contracts in excess of related billings 346 78
Inventory 14 14
Prepaid expenses 57 31
------- -------
Total current assets 691 341
Property and equipment, net 17 17
Scanning equipment, net 198 205
Other assets, net 62 54
------- -------
$ 968 $ 617
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Billings in excess of related costs and earned
profits on long-term contracts $ 364 $ 169
Accrued commissions 79 72
Accounts payable and accrued expenses 452 472
Notes payable 180 180
------- -------
Total current liabilities 1,075 893
------- -------
Stockholders' equity:
Common stock of $0.05 par value, 40,000,000
shares authorized; issued and outstanding
13,030,355 651 651
Additional paid-in capital 8,316 8,316
Accumulated deficit (9,074) (9,344)
------- -------
Total stockholders' equity (107) (276)
------- -------
$ 968 $ 617
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
Condensed Statement of Operations
($000 except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
October 31, October 31,
1995 1994
------------ ------------
<S> <C> <C>
Contract revenues:
Tomographic system sales $ 382 $ 128
Service contracts and upgrades 293 272
-------- --------
Total revenues 675 400
Direct contract costs 363 305
-------- --------
Gross profit 312 95
-------- --------
Operating costs:
Marketing 51 91
Research and development 2 19
General and administrative 86 148
-------- --------
Total operating costs 139 258
-------- --------
Income (loss) from operations 173 (163)
-------- --------
Other expense (income):
Interest expense 4 12
Interest and other income (1) (2)
Loss on sale of asset 0 8
-------- --------
Other - net 3 18
-------- --------
Net income (loss) $ 170 $ (181)
======== ========
Weighted average shares outstanding 15,309 13,030
======== ========
Net income (loss) per share $ 0.01 $ (.0139)
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
Statement of Cash Flows
Three Months Ended October 31, 1995 and 1994
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Operating activities:
Net income $ 170 $(181)
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 14 17
Loss on sale of asset 0 8
Changes in operating assets and liabilities:
Trade accounts receivable 48 (152)
Costs and earned profits on long-term
contracts in excess of related billings (268) (37)
Inventories 0 3
Prepaid expenses and other current assets (26) (41)
Other assets (8) 0
Accounts payable and accrued expenses (13) 96
Billings in excess of related costs
and earned profits on long-term contracts 195 (89)
----- -----
Net cash flows provided by (used in) operating
activities 112 (376)
----- -----
Investing activities:
Proceeds from sale of building and land, net . 0 972
Capital expenditures (8) 0
----- -----
Net cash flows (used in) provided by investing
activities (8) 972
----- -----
Financing activities:
Borrowings under line of credit 0 56
Repayments under line of credit 0 (86)
Principal payments on long-term debt 0 (602)
----- -----
Net cash flows used in financing activities . 0 (632)
----- -----
Net increase (decrease) in cash and cash equivalents 104 (36)
Cash and cash equivalents at beginning of period 25 81
----- -----
Cash and cash equivalents at end of period $ 129 $ 45
===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
Notes to Condensed Financial Statements
(Unaudited)
1. THE COMPANY
The accompanying condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information. 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, 1995 as filed
with the Securities and Exchange Commission.
Even though the Company is currently in a negative net working capital
position, management believes that the Company has the ability to meet
its known cash requirements during the fiscal year ending July 31, 1996
based on revenues expected to be generated by the Company's current
backlog. Historically, the Company has relied upon contract progress
payments as a means of financing the production and delivery of systems.
Recently, the Company has accepted in certain instances contracts not
providing for such payments. Consequently, only about half of the
contracts which comprise the Company's current backlog contain contract
financing provisions. The Company therefore may need to implement
additional actions, such as negotiating more favorable terms with
vendors and accelerating collections of the Company's receivables, in
order to produce and deliver its current backlog. If these measures are
not adequate, then the Company may require supplemental working capital
financing. Management is in discussions with several different potential
sources of these funds and has received a proposal from one source for
such financing; however, there can be no assurance that these
discussions will prove successful.
The ability of the Company to meet its long term cash requirements is
dependent on any one or a combination of the following: sustaining
profitable operations through continued system sales; securing new
sources of cash; further reducing operating costs and curtailing Company
operations; or developing new business activities.
2. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest during the three months ended October 31, 1995
and 1994 was $2,000 and $12,000, respectively.
3. NOTES PAYABLE
Notes payable of $100,000 at October 31, 1995 consist of one-year
unsecured convertible demand debentures accruing interest at prime rate,
convertible to SMS Common Stock at $0.06 per share. Notes payable of
$80,000 at October 31, 1995 consist of a term note payable to a local
bank, due February 28, 1996 accruing interest at 11 percent, payable
monthly. The
$80,000 represents the outstanding balance of a line of credit with the
bank which expired on October 26, 1995.
6
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
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 October 31,
--------------------------------------------------------------------------
1995 1994
-------------------------------- -----------------------------------
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............... $ 382 56.6% 198.4% $ 128 32.0% -66.8%
Service contracts and upgrades 293 43.4% 7.7% 272 68.0% -26.3%
----- ------ -------- ------ ------ ------
Total revenues.......... 675 100.0% 68.8% 400 100.0% -47.0%
Contract costs.............. 363 53.8% 19.0% 305 76.3% -24.9%
----- ------ -------- ------ ------ ------
Gross profit................ 312 46.2% 228.4% 95 23.8% -72.7%
----- ------ -------- ------ ------ ------
Operating costs:
Marketing................. 51 7.6% -44.0% 91 22.8% 3.4%
Research and development.. 2 0.3% -89.5% 19 4.8% -67.8%
General and administrative 86 12.7% -41.9% 148 37.0% 18.4%
----- ------ -------- ------ ------ ------
Total operating costs... 139 20.6% -46.1% 258 64.5% -5.2%
----- ------ -------- ------ ------ ------
Income from operations...... 173 25.6% NM (163) -40.8% NM
------ ------ -------- ------ ------ ------
Other (income) expense:
Interest expense.......... 4 0.6% -66.7% 12 3.0% -25.0%
Interest and other income. (1) -0.2% -50.0% (2) -0.5% 100.0%
Loss on sale of asset..... 0 0.0% NM 8 2.0% NM
------ ------ -------- ------ ------ ------
Other - net............ 3 0.4% -83.3% 18 4.5% 20.0%
------ ------ -------- ------ ------ ------
Net income.................. $ 170 25.2% NM $ (181) -45.3% NM
====== ======= ======== ====== ====== ======
</TABLE>
NM - Not meaningful
Results of Operations
First quarter total contract revenue grew from $400,000 in fiscal 1995 to
$675,000 in fiscal 1996, a 68.8% increase. Revenue from system sales was the
main cause of this increase, expanding almost threefold compared to the year
earlier period. Increased overall backlog for the Company's SMARTSCAN product
prompted the growth in system sales. Over the next several quarters, revenue
growth should remain approximately the same, assuming the Company's ability to
successfully produce current backlog for systems and upgrades.
Gross margin (revenues less direct contract costs) as a percentage of revenues
improved significantly in the first quarter of fiscal 1995 compared to the first
quarter of fiscal 1994. Improvement in gross margin compared to the prior year
is the result of greater overall revenue volume, more favorable pricing, lowered
occupancy costs, and a non-recurring $75,000 software upgrade sale with little
associated direct costs. Gross margin over the next several quarters of fiscal
1996 should continue to show improvement
7
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
compared with prior year levels, but at a reduced percentage of total contract
revenues than in the first quarter of fiscal 1996.
Total operating costs fell 46.1% in first quarter of fiscal 1996 compared to the
first quarter of fiscal 1995. All categories of operating costs were reduced.
Marketing costs were reduced due mainly to an increased reliance on external
manufacturer's representatives compared to in-house activity for marketing and
sales. Internal research and development costs decreased in the period as
resources have been transitioned from developing the SMARTSCAN technology to the
manufacture, integration and test of the unit under specific sales contracts.
General and administrative costs were reduced as well, driven mainly by an
almost 50% reduction in general and administrative labor costs. Total operating
costs for the next several quarters of fiscal 1996 should roughly approximate
current period levels.
Liquidity and Capital Resources
Cash flows provided by operations for the first three months of fiscal 1996 were
$112,000, which compares favorably with cash flows used in operations of
$376,000 during the first three months of fiscal 1995. The comparative increase
in cash flows from operations is explained by income from operating activities
and an increase during the period in billings in excess of related costs and
earned profits on long-term contracts.
As of November 30, 1995 the Company's primary sources of liquidity consisted of
$50,000 in cash and $180,000 in billed accounts receivable.
Total contract backlog as of November 30, 1995 was $1,900,000, up from $900,000
one year earlier. Approximately $1,200,000 is for system sales, and $700,000 is
for field services, scanning services and upgrades. The Company expects that all
backlog will be recognized as revenue during the current fiscal year.
Even though the Company is currently in a negative net working capital position,
management believes that the Company has the ability to meet its known cash
requirements during the fiscal year ending July 31, 1996 based on revenues
expected to be generated by the Company's current backlog. Historically, the
Company has relied upon contract progress payments as a means of financing the
production and delivery of systems. Recently, the Company has accepted in
certain instances contracts not providing for such payments. Consequently, only
about half of the contracts which comprise the Company's current backlog contain
contract financing provisions. The Company therefore may need to implement
additional actions, such as negotiating more favorable terms with vendors and
accelerating collections of the Company's receivables, in order to produce and
deliver its current backlog. If these measures are not adequate, then the
Company may require supplemental working capital financing. Management is in
discussions with several different potential sources of these funds and has
received a proposal from one source for such financing; however, there can be no
assurance that these discussions will prove successful.
A further challenge to the Company's liquidity is the notification in September
1995 by the National Institute of Standards and Technology (NIST) that SMS,
along with its team members General Electric Company, General Motors
Corporation, and EG&G, was awarded an Advanced Technology Program (ATP) grant
for the development of a "Fast, Volumetric X-ray Scanner for Three-Dimensional
Characterization of Critical Objects." Total project funds are estimated at
$7,659,000. ATP funds committed to this project total $3,753,000. The ATP funds
are "cost sharing" funds, budgeted to match expenditures by the industrial
partners. Pursuit of this project would require incremental funding for
8
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
SMS' portion of the industrial cost share. Management is engaged in discussions
with several sources of financing for this project as well.
The ability of the Company to meet its long term cash requirements is dependent
on any one or a combination of the following: sustaining profitable operations
through continued system sales; securing new sources of cash; further reducing
operating costs and curtailing Company operations; or developing new business
activities.
9
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
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
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
a) Exhibits - None
b) Reports on Form 8-K - None
10
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
By /s/ Keith A. Jezek
_________________________________
Keith A. Jezek
Vice President of Finance;
Chief Financial Officer;
Secretary - Treasurer
December 6, 1995
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
filer's operations as of October 31, 1995, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Jul-31-1995
<PERIOD-START> Aug-1-1995
<PERIOD-END> Oct-31-1995
<CASH> 129
<SECURITIES> 0
<RECEIVABLES> 145
<ALLOWANCES> 0
<INVENTORY> 14
<CURRENT-ASSETS> 691
<PP&E> 1,160
<DEPRECIATION> 1,143
<TOTAL-ASSETS> 968
<CURRENT-LIABILITIES> 1,075
<BONDS> 0
<COMMON> 651
0
0
<OTHER-SE> 8,316
<TOTAL-LIABILITY-AND-EQUITY> (107)
<SALES> 675
<TOTAL-REVENUES> 675
<CGS> 363
<TOTAL-COSTS> 139
<OTHER-EXPENSES> 3
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4
<INCOME-PRETAX> 170
<INCOME-TAX> 0
<INCOME-CONTINUING> 170
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 170
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
