<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 APRIL 30, 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 APRIL 30, 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 MAY 31, 1996
-------------- ------------------------
$0.05 Par Value Common Stock 16,041,939
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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SCIENTIFIC MEASUREMENT SYSTEMS, INC.
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INDEX
Part I - Financial Information
- ------------------------------
Item 1: Financial Statements (Unaudited):
Condensed Balance Sheet:
April 30, 1996 and July 31, 1995............................ 3
Condensed Statement of Operations:
Three and Nine Months Ended April 30, 1996 and
1995....................................................... 4
Statement of Cash Flows:
Nine Months Ended April 30, 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.
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CONDENSED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
April 30, 1996
(Unaudited) July 31, 1995
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................ $ 56 $ 25
Trade accounts receivable, net.................. 248 193
Costs and earned profits on long-term
contracts in excess of related billings....... 584 78
Inventory....................................... 14 14
Prepaid expenses................................ 44 31
------- -------
Total current assets...................... 946 341
Property and equipment, net....................... 17 17
Scanning equipment, net........................... 180 205
Other assets, net................................. 126 54
------- -------
$ 1,269 $ 617
======= =======
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Billings in excess of related costs and earned
profits on long-term contracts.................. $ 300 $ 169
Accrued commissions............................. 62 72
Accounts payable and accrued expenses........... 654 472
Note payable.................................... 80 180
------- -------
Total current liabilities................. 1,096 893
Stockholders' equity:
Common stock of $0.05 par value,
40,000,000 shares authorized, issued and
outstanding 16,041,939........................ 770 652
Additional paid-in capital...................... 8,388 8,316
Accumulated deficit............................. (8,985) (9,244)
------- -------
Total stockholders' equity................ 173 (276)
------- -------
$ 1,269 $ 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.
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CONDENSED STATEMENT OF INCOME
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
---------------------- ----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Contract revenues:
System sales....................... $ 332 $ 177 $ 1,305 $ 422
Service contracts and upgrades..... 482 145 1,020 612
------- -------- ------- -------
Total revenues.................... 814 322 2,325 1,034
Contract costs....................... 612 290 1,555 859
------- -------- ------- -------
Gross profit......................... 202 32 770 175
------- -------- ------- -------
Operating costs:
Marketing.......................... 59 57 197 198
Research and development........... 1 14 3 48
General and administrative......... 110 109 309 362
------- -------- ------- -------
Total operating costs.............. 170 180 509 608
------- -------- ------- -------
Income from operations............... 32 (148) 261 (433)
------- -------- ------- -------
Other expense (income):
Interest expense................... 7 4 14 32
Interest and other income.......... (7) (3) (12) (21)
Loss on sale of asset.............. 0 0 0 8
------- -------- ------- -------
Other - net....................... $ 0 $ 1 $ 2 $ 19
------- -------- ------- -------
Net income........................... $ 32 $ (149) $ 259 $ (452)
======= ======== ======= =======
Weighted average shares outstanding.. 14,661 13,030 13,574 13,030
======= ======== ======= =======
Net income (loss) per share.......... $.00 $(.01) $0.02 $(.04)
======= ======== ======= =======
</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.
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STATEMENT OF CASH FLOWS
Nine Months Ended April 30, 1996 and 1995
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Operating activities:
Net income................................................. $ 259 $(452)
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization........................... 42 46
Loss on sale of asset................................... 0 8
Changes in operating assets and liabilities:
Trade accounts receivable............................. (55) (80)
Costs and earned profits on long-term
contracts in excess of related billings.............. (506) 27
Inventories........................................... 0 2
Prepaid expenses...................................... (12) (32)
Other assets.......................................... (1) 0
Accounts payable and accrued expenses................. 172 150
Billings in excess of related costs
and earned profits on long-term contracts............ 131 (150)
----- -----
Net cash flows provided by (used in) operating
activities............................................... 30 (481)
----- -----
Investing activities:
Capitalized product development costs...................... (73) 0
Capital expenditures....................................... (16) (1)
Proceeds from sale of building and land.................... 0 972
----- -----
Net cash flows (used in) provided by investing activities.... (89) 971
----- -----
Financing activities:
Proceeds from issuance of common stock..................... 113 0
Proceeds from exercise of stock options.................... 77 0
Borrowings under line of credit............................ 0 247
Repayments under line of credit............................ (100) (102)
Principal payments on long-term debt....................... 0 (601)
----- -----
Net cash flows provided by (used in) financing activities.... 90 (456)
----- -----
Net increase in cash and cash equivalents.................... 31 34
Cash and cash equivalents at beginning of period............. 25 81
----- -----
Cash and cash equivalents at end of period................... $ 56 $ 115
===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
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5
<PAGE>
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.
Due to the production of the Company's increased backlog, working capital
continues to be limited. Working capital is constrained due to past orders
currently in production which were accepted without contract financing
provisions. However, this constraint has been partially mitigated by a recent
order which included a prepayment of approximately $275,000 received in March
1996. In June 1996, the Company received a commitment from a bank to finance
the production and delivery of the Company's foreign orders. The credit
facility, which is guaranteed by the Export Import Bank of the U.S. (EXIMBANK)
allows borrowing of up to $1.25 million based on qualified foreign accounts
receivable and contract specific inventory. The credit facility expires in one
year. While approximately 75% of the Company's present backlog is comprised of
foreign orders and thus qualifies for financing under the EXIMBANK facility, the
Company still needs immediate short-term financing to allow timely production of
current jobs. Management is engaged in numerous discussions with potential
sources of this short-term financing and believes that ultimately such financing
will be secured. However, there can be no assurance that such discussions will
prove successful or will prove successful in a timely manner.
2. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Proceeds from the issuance of common stock were received by the Company
pursuant to the conversion from debt to equity of certain notes payable. In
March 1996 these notes payable of $106,000 plus accrued interest of $6,876.50
were converted to 1,881,275 shares of SMS Common Stock.
Cash paid for interest during the six months ended January 31, 1996 and 1995 was
$2,372 and $12,541 respectively.
3. NOTE PAYABLE
The note payable of $80,000 at April 30, 1996 was a term note payable to a bank
accruing interest at 11% per annum, maturing October 22, 1996.
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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 APRIL 30,
----------------------------------------------------------------
1996 1995
------------------------------- ------------------------------
Dollar % of % Change Dollar % of % Change
Amount Total from Prior Amount Total from
(000s) Revenue Year (000s) Revenue Prior Year
-------- ------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Contract revenues:
System sales..................... $332 40.8% 87.6% $ 177 55.0% 2,428.6
%
Service contracts and upgrades... 482 59.2% 232.4% 145 45.0% -17.1%
---- ----- ----- ----- ----- --------
Total revenues.................. 814 100.0% 152.8% 322 100.0% 76.9%
Contract costs..................... 612 75.2% 110.0% 290 90.1% 96.0%
---- ----- ----- ----- ----- --------
Gross profit....................... 202 24.8% 531.3% 32 9.9% -5.9%
---- ----- ----- ----- ----- --------
Operating costs:
Marketing........................ 59 7.3% 3.5% 57 17.7% -42.4%
Research and development......... 1 0.1% -92.9% 14 4.4% 27.3%
General and administrative....... 110 13.5% 0.9% 109 33.9% -10.7%
---- ----- ----- ----- ----- --------
Total operating costs........... 170 20.9% -5.6% 180 55.9% -22.4%
---- ----- ----- ----- ----- --------
Income from operations............. 32 3.9% NM (148) -46.0% -25.3%
---- ----- ----- ----- ----- --------
Other (income) expense:
Interest expense................. 7 0.9% 75.0% 4 1.2% -73.3%
Interest and other income........ (7) -0.9% 133.3% (3) -0.9% -98.6%
Other - net..................... 0 0.0% NM 1 0.3% -100.5%
---- ----- ----- ----- ----- --------
Net income......................... $ 32 3.9% NM $(149) -46.3% NM
==== ===== ===== ===== ===== ========
</TABLE>
NM - Not Meaningful
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7
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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>
NINE MONTHS ENDED APRIL 30,
--------------------------------------------------------------
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........................ $1,305 56.1% 209.2% $ 422 40.8% -11.7%
Service contracts and
upgrades........................ 1,020 43.9% 66.7% 612 59.2% -32.9%
------ ----- ------ ------ ----- ------
Total revenues........... 2,325 100.0% 124.9% 1,034 100.0% -25.6%
Contract costs...................... 1,555 66.9% 81.0% 859 83.1% 14.8%
------ ----- ------ ------ ----- ------
Gross profit........................ 770 33.1% 340.0% 175 16.9% -72.7%
------ ----- ------ ------ ----- ------
Operating costs:
Marketing....................... 197 8.5% -0.5% 198 19.2% -21.1%
Research and development........ 3 0.1% -93.8% 48 4.6% -44.8%
General and administrative...... 309 13.3% -14.6% 362 35.0% 1.1%
------ ----- ------ ------ ----- ------
Total operating costs.. 509 21.9% -16.3% 608 58.8% -12.6%
------ ----- ------ ------ ----- ------
Income from operations.............. 261 11.2% NM (433) -41.9% NM
------ ----- ------ ------ ----- ------
Other (income) expenses:
Interest expense................ 14 0.6% -56.3% 32 3.1% -31.9%
Loss on sale of asset........... 0 0.0% -100.0% 8 0.8% NM
Interest and other income....... (12) -0.5% NM (21) -2.0% 0.0%
------ ----- ------ ------ ----- ------
Other - net............... 2 0.1% -89.5% 19 1.8% -110.9%
------ ----- ------ ------ ----- ------
Net income.......................... $ 259 11.1% NM $ (452) -43.7% NM
====== ===== ====== ====== ===== ======
</TABLE>
NM - Not Meaningful
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8
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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
RESULTS OF OPERATIONS
Total contract revenues for the three and nine month period ended April 30, 1996
increased 153% and 125%, respectively, compared to the prior year's
corresponding periods. While all categories of revenue have increased in fiscal
1996 compared to fiscal 1995 levels, the most notable increase has been in
revenues from system sales. The Company has grown its backlog for its
SMARTSCAN product significantly from this same time last year. Higher revenues
from systems sales in fiscal 1996 corresponds to the successful production of
this backlog throughout the period. Including a recent SMARTSCAN sale in May
1996, the Company's current backlog is $4 million. Based on the Company's
current production schedules, substantially all of this backlog is expected to
be recognized as revenue over the next four quarters assuming sufficient working
capital is available.
Gross margin (revenues less direct contract costs) as a percentage of revenue
grew as well for these same periods. Improvement in gross margin is
attributable mainly to increased production volume which allows for a more
complete absorption of fixed overhead costs and, to a lesser extent, improved
pricing.
Total operating costs decreased for the three month and nine month period ended
April 30, 1996, compared to the respective year earlier periods, driven mainly
by a reduction in research and development expense. The Company is currently
working on a research project in conjunction with the National Institute of
Standards and Technology and team members General Motors Corporation, General
Electric Company, and EG&G. Company expenses related to this new product
development effort are capitalized in accordance with Statement of Financial
Accounting Standards No. 2 "Accounting for Research and Development Costs."
Over the next several quarters, marketing costs are expected to increase due to
increased commission expense commensurate with increased sales while general and
administrative costs should continue to approximate current period levels.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operations for the first nine months of fiscal 1996 were
$30,000, which compares favorably with cash flows used in operations of $481,000
for the first nine months of fiscal 1995. Net income from operations accounts
for the improvement in cash flow from operations for this period.
As of June 10, 1996 total contract backlog was approximately $4.0 million, up
$3.0 million from this time a year ago. Of the current backlog, approximately
$3.5 million is for SMARTSCAN system sales and approximately $500,000 is for
contract services and upgrades.
The Company's sources of liquidity as of June 10, 1996 were approximately
$50,000 in cash and approximately $150,000 in accounts receivable. Due to the
production of the Company's increased backlog, working capital continues to be
limited. Working capital is constrained due to past orders currently in
production which were accepted without contract financing provisions. However,
this constraint has been partially mitigated by a recent order which included a
prepayment of
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9
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
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approximately $275,000 received in March 1996. In June 1996, the Company
received a commitment from a bank to finance the production and delivery of the
Company's foreign orders. The credit facility, which is guaranteed by the
Export Import Bank of the U.S. (EXIMBANK) allows borrowing of up to $1.2 million
based on qualified foreign accounts receivable and contract specific inventory.
The credit facility expires in one year. While approximately 75% of the
Company's present backlog is comprised of foreign orders and thus qualifies for
financing under the EXIMBANK facility, the Company still needs immediate short-
term financing to allow timely production of current jobs. Management is engaged
in numerous discussions with potential sources of this short-term financing and
believes that ultimately such financing will be secured. However, there can be
no assurance that such discussions will prove successful or will prove
successful in a timely manner.
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 $7.7 million. ATP funds budgeted for this project
total $3.8 million, 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 $2.0 million to $3.0 million over the expected
three-year life of the project to pursue the Company's plans relative to this
project.
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10
<PAGE>
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
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
<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: /s/Larry Secrest
-----------------------------------
Larry Secrest
Chairman, President & CEO
Acting Chief Financial and
Accounting Officer
June 12, 1996
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12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> FEB-01-1996
<PERIOD-END> APR-30-1996
<CASH> 56
<SECURITIES> 0
<RECEIVABLES> 832
<ALLOWANCES> 0
<INVENTORY> 14
<CURRENT-ASSETS> 946
<PP&E> 1,167
<DEPRECIATION> 1,150
<TOTAL-ASSETS> 1,269
<CURRENT-LIABILITIES> 1,096
<BONDS> 0
0
0
<COMMON> 770
<OTHER-SE> 8,388
<TOTAL-LIABILITY-AND-EQUITY> 1,269
<SALES> 814
<TOTAL-REVENUES> 814
<CGS> 612
<TOTAL-COSTS> 782
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> 32
<INCOME-TAX> 0
<INCOME-CONTINUING> 32
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
