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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, 1996
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, 1996 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 [x] 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 MARCH 12, 1996
$0.05 Par Value Common Stock 13,030,355
Transitional Small Business Disclosure Format (check one): Yes [ ] No [x]
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SCIENTIFIC MEASUREMENT SYSTEMS, INC.
________________________________________________________________________________
INDEX
Part I - Financial Information
Item 1: Financial Statements (Unaudited):
Condensed Balance Sheet:
January 31, 1996 and July 31, 1995.....................................3
Condensed Statement of Operations:
Three and Six Months Ended January 31, 1996 and 1995...................4
Statement of Cash Flows:
Six Months Ended January 31, 1996 and 1995.............................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
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2
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SCIENTIFIC MEASUREMENT SYSTEMS, INC.
________________________________________________________________________________
Condensed Balance Sheet
(In thousands)
<TABLE>
<CAPTION>
January 31,
1996
(Unaudited) July 31, 1995
----------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash........................................... $ 36 $ 25
Trade accounts receivable, net................. 238 193
Costs and earned profits on long-term
contracts in excess of related billings...... 178 78
Inventory...................................... 14 14
Prepaid expenses............................... 45 31
------- -------
Total current assets................... 511 341
Property and equipment, net...................... 17 17
Scanning equipment, net.......................... 190 205
Other assets, net................................ 62 54
------- -------
$ 780 $ 617
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Billings in excess of related costs and earned
profits on long-term contracts............... $ 78 $ 169
Accrued commissions............................ 82 72
Accounts payable and accrued expenses.......... 489 472
Notes payable.................................. 180 180
------- -------
Total current liabilities.............. 829 893
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............................ (9,016) (9,344)
------- -------
Total stockholders' equity (49) (276)
------- -------
$ 780 $ 617
------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
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3
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SCIENTIFIC MEASUREMENT SYSTEMS, INC.
________________________________________________________________________________
Condensed Statement of Income
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
January 31, January 31,
----------------- -----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Contract revenues:
System sales....................... $ 591 $ 118 $ 973 $ 245
Service contracts and upgrades..... 245 194 538 467
------- ------- ------- -------
Total revenues.................... 836 312 1,151 712
Contract costs....................... 581 264 944 569
------- -------
Gross profit......................... 255 48 567 143
------- ------- ------- -------
Operating costs:
Marketing.......................... 86 50 137 141
Research and development........... 0 15 2 34
General and administrative......... 113 104 199 253
------- ------- ------- -------
Total operating costs.............. 199 169 338 428
------- ------- ------- -------
Income from operations............... 56 (121) 229 (285)
------- ------- ------- -------
Other expense (income):
Interest expense................... 3 1 7 28
Interest and other income.......... (4) 0 (5) (18)
Loss on sale of asset.............. 0 0 0 8
------- ------- ------- -------
Other - net....................... $ (1) $ 1 $ 2 $ 18
------- ------- ------- -------
Net income........................... $ 57 $ (122) $ 227 $ (303)
======= ======= ======= =======
Weighted average shares outstanding.. 13,030 13,030 13,030 13,030
======= ======= ======= =======
Net income (loss) per share.......... $.004 $(.009) $0.02 $(.02)
======= ======= ======= =======
</TABLE>
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, 1996 and 1995
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Operating activities:
Net income....................................... $ 227 $(302)
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization................. 28 31
Loss on sale of asset......................... 0 8
Changes in operating assets and liabilities:
Trade accounts receivable................... (45) (225)
Costs and earned profits on long-term
contracts in excess of related billings.... (101) 28
Inventories................................. 0 2
Prepaid expenses............................ (14) (47)
Other assets................................ (9) 0
Accounts payable and accrued expenses....... 28 129
Billings in excess of related costs
and earned profits on long-term contracts.. (91) (75)
----- -----
Net cash flows provided by (used in) operating
activities..................................... 23 (451)
----- -----
Investing activities:
Capital expenditures............................. (12) 0
Proceeds from sale of building and land.......... 0 972
----- -----
Net cash flows (used in) provided by investing
activities...................................... (12) 972
----- -----
Financing activities:
Borrowings under line of credit.................. 0 110
Repayments under line of credit.................. 0 (101)
Principal payments on long-term debt............. 0 (601)
----- -----
Net cash flows used in (provided by) financing
activities..................................... 0 (592)
----- -----
Net increase (decrease) in cash and cash
equivalents....................................... 11 (71)
Cash and cash equivalents at beginning of period... 25 81
----- -----
Cash and cash equivalents at end of period......... $ 36 $ 10
===== =====
</TABLE>
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
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.
The Company's working capital continues to be limited. Working capital
constraints caused by past orders which were accepted without contract financing
provisions have been partially mitigated by recent orders which included
significant prepayments. As the Company proceeds with the production of its
backlog, working capital will remain constrained. In an effort to offset this
constraint, management is attempting to secure an Export Import Bank of the U.S.
(EXIMBANK) working capital guarantee for the production of the Company's foreign
orders which presently comprise approximately half of the Company's backlog.
The Company has been successful in securing EXIMBANK guarantees historically;
however, there can be no assurance that current efforts will ultimately prove
successful. Additionally, notes payable of $80,000 at January 31, 1996 consist
of a term note payable to a bank accruing interest at 11% per annum, which
matured February 28, 1996. The Company has not repaid this note, but is
negotiating with the bank for some form of forbearance or partial renewal. As
of March 12, 1996 the bank has not demanded payment for the note. The Company's
working capital position would be severely and adversely affected by the
immediate full repayment of this note, and there can be no assurance that the
Company's efforts to negotiate any such forbearance or partial renewal will be
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 six months ended January 31, 1996 and 1995
was $2,372 and $12,541 respectively.
3. NOTES PAYABLE
Notes payable of $100,000 at January 31, 1996 consist of one-year unsecured
convertible demand debentures accruing interest at prime rate, convertible to
SMS Common Stock at $0.06 per share. In March 1996 these notes payable plus
accrued interest of $6,876.50, were converted to 1,781,275 shares of SMS Common
Stock. Notes payable of $80,000 at January 31, 1996 consist of a term note
payable to a bank accruing interest at 11% per annum, which matured February 28,
1996. The Company has not repaid this note, but is negotiating with the bank
for some form of forbearance or partial renewal. As of March 12, 1996 the bank
has not demanded payment for the note.
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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,
----------------------------------------------------------
1996 1995
----------------------------- --------------------------
% Change % Change
Dollar % of from Dollar % of from
Amount Total Prior Amount Total Prior
(000s) Revenue Year (000s) Revenue Year
------- ------- -------- ------ ------- --------
<S> <C> <C> <C> <C> <C> <C>
Contract revenues:
System sales................... $591 70.7% 400.9% $ 118 37.8% 37.2%
Service contracts and upgrades 245 29.3% 26.3% 194 62.2% -47.3%
---- ----- ----- ----- ------ ------
Total revenues................ 836 100.0% 168.0% 312 100.0% -31.3%
Contract costs................... 581 69.5% 120.1% 264 84.6% -36.1%
---- ----- ----- ----- ------ ------
Gross profit..................... 255 30.5% 431.3% 48 15.4% -81.5%
---- ----- ----- ----- ------ ------
Operating costs
Marketing...................... 86 10.3% 72.0% 50 16.0% -21.9%
Research and development....... 0 0.0% NM 15 4.8% -11.8%
General and administrative..... 113 13.5% 8.7% 104 33.3% 6.3%
---- ----- ----- ----- ------ ------
Total operating costs 199 23.8% 17.8% 169 54.2% 12.0%
---- ----- ----- ----- ------ ------
Income from operations........... 56 6.7% NM (121) -38.8% NM
---- ----- ----- ----- ------ ------
Other (income) expense:
Interest expense............... 3 0.4% 200.0% 1 0.3% -93.8%
Interest and other income...... (4) -0.5% NM 0 0.0% NM
Loss on sale of asset.......... 0 0.0% NM 0 0.0% NM
---- ----- ----- ----- ------ ------
Other - net................... (1) -0.1% NM 1 0.3% -93.3%
---- ----- ----- ----- ------ ------
Net income....................... $ 57 6.8% NM $(122) -39.1% NM
==== ===== ===== ===== ====== ======
</TABLE>
NM - Not Meaningful
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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 - CONTINUED
<TABLE>
<CAPTION>
SIX MONTHS ENDED JANUARY 31,
----------------------------------------------------------
1996 1995
--------------------------- ----------------------------
% Change % Change
Dollar % of from Dollar % of from
Amount Total Prior Amount Total Prior
(000s) Revenue Year (000s) Revenue Year
------ ------- -------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
System sales........................... $ 973 64.4% 297.1% $ 245 34.4% -48.0%
Service contracts and upgrades......... 538 35.6% 15.2% 467 65.6% -36.6%
------ ----- ----- ----- ----- ------
Total revenues.............. 1,511 100.0% 112.2% 712 100.0% -41.1%
Contract costs......................... 944 62.5% 65.9% 569 79.9% -5.2%
------ ----- ----- ----- ----- ------
Contract revenues:
Gross profit....................... 567 37.5% 296.5% 143 20.1% -76.5%
------ ----- ----- ----- ----- ------
Operating costs:
Marketing.......................... 137 9.1% -2.8% 141 19.8% -7.2%
Research and development........... 2 0.1% -94.1% 34 4.8% -55.3%
General and administrative......... 199 13.2% -21.3% 253 35.5% -7.2%
------ ----- ----- ----- ----- ------
Total operating costs.............. 338 22.4% -21.0% 428 60.1% -7.8%
------ ----- ----- ----- ----- ------
Income from operations................. 229 15.2% NM (285) -40.0% NM
------ ----- ----- ----- ----- ------
Other (income) expenses:
Interest expenses.................. 7 0.5% -75.0% 28 3.9% -12.5%
Loss on sale of asset.............. 0 0.0% NM 8 1.1% NM
Interest and other income.......... (5) -0.3% -72.2% (18) -2.5% NM
------ ----- ----- ----- ----- ------
Other - net.................. 2 0.1% -88.9% 18 2.5% -40.0%
------ ----- ----- ----- ----- ------
Net income............................. $ 227 15.0% NM $(303) -42.6% -365.8%
====== ===== ===== ===== ===== ======
</TABLE>
NM - Not Meaningful
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8
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SCIENTIFIC MEASUREMENT SYSTEMS, INC.
________________________________________________________________________________
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
RESULTS OF OPERATIONS
Total contract revenues for the three and six month period ended January
31, 1996 increased 168% and 112%, respectively, compared to the same periods of
the preceding fiscal year. The growth in total contract revenues is due
primarily to increased systems sales revenues as the result of higher backlog
for these units. In March 1996, the company received two SMARTSCAN orders
totaling $1.5 million, increasing current backlog to $3 million. Substantially
all of this backlog is expected to be recognized as revenue over the next three
quarters.
Gross margin (revenues less direct contract costs) as a percentage of
revenue grew as well for these same periods. Improvement in gross margin can be
attributed to increased production volume which allows for a more full
absorption of fixed overhead costs and improved pricing.
Compared to their respective year earlier periods, total operating costs
increased for the three months ended January 31, 1996, but decreased for the
six-month period ended January 31, 1996. For the three-month periods, operating
costs were higher due to increased marketing and commission costs. Comparing
the six month periods ended January 31, 1996 and 1995, total operating costs
were 21% lower in the current fiscal year as a result of management's continued
cost cutting in all areas of operating expenditure. The Company will seek to
hold operating costs at these approximate levels for the next several quarters.
The trend of higher marketing and commissions costs should continue due to
comparatively higher sales.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operations for the first six months of fiscal 1996
were $23,000, which compares favorably with cash flows used in operations of
$451,000 for the first six months of fiscal 1995. Net income from operations
explains the improvement in cash flow from operations for this period.
The Company's sources of liquidity as of March 12, 1996 were approximately
$290,000 in cash and approximately $170,000 in accounts receivable.
As of March 12, 1996 total contract backlog was approximately $3 million,
up $2 million from this time a year ago. Of the current backlog, approximately
$2.5 million is for SMARTSCAN system sales and approximately $500,000 is for
contract services and upgrades. Approximately half of this backlog is expected
to be recognized as revenue in the current fiscal year.
The Company's working capital continues to be limited. Working capital
constraints caused by past orders which were accepted without contract financing
provisions have been partially mitigated by recent orders which included
significant prepayments. As the Company proceeds with the production of its
backlog, working capital will remain constrained. In an effort to offset this
constraint, management is attempting to secure an Export Import Bank of the U.S.
(EXIMBANK) working capital guarantee for the production of the Company's foreign
orders which presently comprise approximately half of the Company's backlog. The
Company has been successful in securing EXIMBANK guarantees historically;
however, there can be no assurance that current efforts will ultimately prove
successful. Additionally, notes payable of $80,000 at January 31, 1996 consist
of a term note payable to a bank accruing interest at 11% per annum, which
matured February 28, 1996. The Company has not repaid this note, but is
negotiating with the bank for some form of forbearance or partial renewal. As of
March 12, 1996 the bank has not demanded payment for the note. The Company's
working capital position would be severely
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9
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SCIENTIFIC MEASUREMENT SYSTEMS, INC.
________________________________________________________________________________
and adversely affected by the immediate full repayment of this note, and there
can be no assurance that the Company's efforts to negotiate any such forbearance
or partial renewal will be 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 for the three-year
program are estimated at $7,659,000. ATP funds budgeted for this project total
$3,753,000, but ATP has committed only for the first year. The ATP funds are
"cost sharing" funds, budgeted to match expenditures by the industrial partners.
The Company and its team members formally commenced work on this project in
February 1996. The Company's participation in this program requires it to fund
a portion of the non-governmental cost share. The Company will require
additional funds from non-operating sources to fund this commitment. Management
is engaged in discussions with several sources of financing for this project to
raise approximately $2 million to $3 million over the expected three-year life
of the project to pursue the Company's plans relative to this project.
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.
________________________________________________________________________________
10
<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
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11
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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:
Keith A. Jezek
Vice President of Finance;
Chief Financial Officer;
Secretary - Treasurer
March 14, 1996
________________________________________________________________________________
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000087814
<NAME> SCIENTIFIC MEASUREMENT SYSTEMS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> JAN-31-1996
<CASH> 36
<SECURITIES> 0
<RECEIVABLES> 415
<ALLOWANCES> 0
<INVENTORY> 14
<CURRENT-ASSETS> 511
<PP&E> 1,164
<DEPRECIATION> 1,147
<TOTAL-ASSETS> 780
<CURRENT-LIABILITIES> 829
<BONDS> 0
0
0
<COMMON> 651
<OTHER-SE> 8,316
<TOTAL-LIABILITY-AND-EQUITY> (50)
<SALES> 836
<TOTAL-REVENUES> 836
<CGS> 581
<TOTAL-COSTS> 199
<OTHER-EXPENSES> (1)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> 57
<INCOME-TAX> 0
<INCOME-CONTINUING> 57
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 57
<EPS-PRIMARY> 0.004
<EPS-DILUTED> 0.004
</TABLE>
