<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, 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 October 31, 1996 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 [ ]
The number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practical date:
<TABLE>
<CAPTION>
Shares Outstanding as of
Title of Class December 2, 1996
-------------- ----------------
<S> <C>
$0.05 Par Value Common Stock 20,451,940
Transitional Small Business Disclosure Format (check one): Yes No X
===============================================================================
</TABLE>
<PAGE>
INDEX
Part I - Financial Information
- ------------------------------
Item 1: Financial Statements (Unaudited):
<TABLE>
<CAPTION>
<S> <C>
Condensed Balance Sheet:
October 31, 1996 and July 31, 1996................... 3
Condensed Statement of Operations:
Three Months Ended October 31, 1996 and 1995......... 4
Statement of Cash Flows:
Three Months Ended October 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
</TABLE>
Part II - Other Financial Information
- -------------------------------------
<TABLE>
<S> <C>
Items 1 - 6.............................................................. 9
Signatures............................................................... 10
</TABLE>
<PAGE>
Condensed Balance Sheet
(In thousands)
<TABLE>
<CAPTION>
October 31, July 31,
1996 1996
------------ ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash............................................. $ 117 $ 45
Trade accounts receivable, net................... 152 306
Research Grant Receivables....................... 221 247
Costs and earned profits on long-term............
contracts in excess of related billings.......... 1,441 809
Inventory........................................ 14 14
Prepaid expenses................................. 97 84
------- -------
Total current assets.......................... 2,042 1,505
Property and equipment, net...................... 67 28
Scanning equipment, net.......................... 226 170
Other assets, net................................ 84 85
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$ 2,419 $ 1,788
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Billings in excess of related costs and earned
profits on long-term contracts................... $ 445 $ 293
Accrued commissions.............................. 102 57
Accounts payable and accrued expenses............ 1,106 766
Notes payable.................................... 760 470
------- -------
Total current liabilities.................... 2,413 1,586
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Stockholders' equity:
Common stock of $0.05 par value, 40,000,000
shares authorized; issued and outstanding
17,277,155 and 16,584,007, respectively......... 854 829
Additional paid-in capital....................... 8,393 8,340
Accumulated deficit.............................. (9,241) (8,967)
------- -------
Total stockholders' equity................... 6 202
------- -------
$ 2,419 $ 1,788
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
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3
<PAGE>
Condensed Statement of Operations
($000 except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
October 31, October 31,
1996 1995
------------- -------------
<S> <C> <C>
Contract revenues:
Tomographic system sales............ $ 854 $ 382
Service contracts and upgrades...... 203 293
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Total revenues..................... 1,057 675
Direct contract costs................ 948 363
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Gross profit......................... 109 312
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Operating costs:
Marketing........................... 144 51
General and administrative.......... 221 88
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Total operating costs.............. 365 139
------- -------
Income (loss) from operations....... (256) 173
------- -------
Other expense (income):
Interest expense.................... 19 4
Interest and other income........... 0 (1)
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Other - net....................... 19 3
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Net income (loss)................... $ ( 275) $ 170
======= =======
Weighted average shares outstanding 16,930 15,309
======= -------
Net income (loss) per share $( 0.02) $0.01
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
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4
<PAGE>
Statement of Cash Flows
Three Months Ended October 31, 1996 and 1995
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Operating activities:
Net income (loss).................................... $ (275) $ 170
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization....................... 14 14
Changes in operating assets and liabilities:
Trade accounts receivable.......................... 181 48
Costs and earned profits on long-term
contracts in excess of related billings........... (702) (268)
Prepaid expenses and other current assets.......... (14) (26)
Other assets....................................... 0 (8)
Accounts payable and accrued expenses.............. 346 (13)
Billings in excess of related costs
and earned profits on long-term contracts......... 223 195
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Net cash flows provided by (used in) operating
activities.......................................... (227) 112
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Investing activities:
Capital expenditures................................. (108) (8)
------- -------
Net cash flows used in investing activities.......... (108) (8)
------- -------
Financing activities:
Proceeds from Issuance of Common Stock............... 78 0
Borrowings under line of credit...................... 329 0
Repayments under line of credit...................... 0 0
Principal payments on long-term debt................. 0 0
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Net cash flows from financing activities............ 407 0
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Net increase in cash and cash equivalents............. 72 104
Cash and cash equivalents at beginning of period...... 45 25
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Cash and cash equivalents at end of period............ $ 117 $ 129
======= =======
The accompanying notes are an integral part of these financial statements.
</TABLE>
5
<PAGE>
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, 1996 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, 1997 based
on additional equity received in November and December of 1996 as further
described in Note 3.
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.
6
<PAGE>
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 October 31,
---------------------------------------------------------------
1996 1995
------------------------------- ------------------------------
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.................. $ 854 80.8% 173.6% $ 382 56.6% 198.4%
Service contracts and upgrades 203 19.2% 69.3% 293 43.4% 7.7%
------ ------ ------- ------ ------ -------
Total revenues.............. 1,057 100.0% 56.6% 675 100.0% 68.8%
Contract costs................. 948 89.7% 161.2% 363 53.8% 19.0%
------ ------ ------- ------ ------ -------
Gross profit................... 109 10.3% 34.9% 312 46.2% 228.4%
------ ------- ------- ------ ------ -------
Operating costs:
Marketing..................... 144 13.6% 182.4% 51 7.6% -44.0%
General and administrative.... 221 20.9% 165.1% 88 13.0% -41.9%
------ ------- ------- ------ ------ -------
Total operating costs........ 365 34.5% 162.6% 139 20.6% -46.1%
------ ------- ------- ------ ------ -------
Income (loss) from operations.. (256) -24.2% 148.0% 173 25.6% NM
------ ------- ------- ------ ------ -------
Other (income) expense:
Interest expense.............. 19 1.8% 375.0% 4 0.6% -66.7%
Interest and other income..... 0 0.0% NM (1) -0.2% -50.0%
Other - net............... 19 1.8% 533.3% 3 0.4% -83.3%
------ ------- ------- ------ ------ -------
Net income (loss).............. $ (275) -26.0% -161.8% $ 170 25.2% NM
====== ======= ======== ====== ====== =======
</TABLE>
- ------------------
NM - Not meaningful
Results of Operations
First quarter total contract revenue grew from $675,000 in fiscal 1996 to
$1,057,000 in fiscal 1997, a 57% increase. Revenue from system sales was the
main cause of this increase. Increased orders for the Company's product
generated in fiscal 1996 prompted the growth in system sales.
Gross Profit as a percentage of revenues decreased in the first quarter of
fiscal 1997 compared to the first quarter of fiscal 1996 because of a non-
recurring $75,000 software upgrade sale with little associated direct costs in
fiscal 1996 and because of significant increases in total estimated costs on one
system contract in fiscal 1997.
Total operating costs as a percentage of revenues increased from 21% in first
quarter of fiscal 1996 compared to 34% in the first quarter of fiscal 1997.
Marketing costs increased primarily from commissions to external representatives
and travel expenses incurred. General and administrative expenses increased
primarily for salary expenses incurred in anticipation of much higher revenue
levels.
- --------------------------------------------------------------------------------
7
<PAGE>
Liquidity and Capital Resources
As of October 31, 1996 the Company had negative net working capital of $371,000
compared to negative net working capital of $81,000 at July 31, 1996. Such
increase resulted primarily from the first quarter net loss.
As further described in Note 3 to the financial statements, the Company raised
$1,081,260 of equity in November and December of 1996. Because of such
additional equity capital, substantial completion of the loss contract
previously discussed, and backlog at October 31, 1996 of approximately $2.5
million, management believes that the Company has the ability to meet its cash
requirements during fiscal year 1997.
8
<PAGE>
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
9
<PAGE>
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:
--------------------------------------
Gary S. Kofnovec, Executive Vice
President, Chief Financial Officer,
Secretary, and Treasurer
December 13, 1996
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> OCT-31-1996
<CASH> 117
<SECURITIES> 0
<RECEIVABLES> 1,814
<ALLOWANCES> 0
<INVENTORY> 14
<CURRENT-ASSETS> 2,042
<PP&E> 1,220
<DEPRECIATION> 1,153
<TOTAL-ASSETS> 2,419
<CURRENT-LIABILITIES> 2,413
<BONDS> 0
0
0
<COMMON> 854
<OTHER-SE> 8,393
<TOTAL-LIABILITY-AND-EQUITY> 2,419
<SALES> 854
<TOTAL-REVENUES> 1,057
<CGS> 948
<TOTAL-COSTS> 1,313
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19
<INCOME-PRETAX> (275)
<INCOME-TAX> 0
<INCOME-CONTINUING> (275)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (275)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
