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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, 1997
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, 1997 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:
SHARES OUTSTANDING AS OF
TITLE OF CLASS JANUARY 29, 1997
- -------------- ----------------
$0.05 Par Value Common Stock 20,958,947
Transitional Small Business Disclosure Format (check one): Yes No X
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<PAGE>
INDEX
Part I - Financial Information
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Item 1: Financial Statements (Unaudited):
Condensed Balance Sheet:
January 31, 1997 and July 31, 1996............................... 3
Condensed Statement of Operations:
Three and Six Months Ended January 31, 1997 and 1996............. 4
Statement of Cash Flows:
Six Months Ended January 31, 1997 and 1996....................... 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
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SCIENTIFIC MEASUREMENT SYSTEMS, INC.
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Condensed Balance Sheet
(In thousands)
<TABLE>
<CAPTION>
January 31, July 31,
1997 1996
----------- --------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash................................................ $ 513 $ 45
Trade accounts receivable, net...................... 1,573 306
Research Grant Receivables.......................... 299 247
Costs and earned profits on long-term
contracts in excess of related billings............. 289 809
Inventory........................................... 14 14
Prepaid expenses.................................... 80 84
------- -------
Total current assets............................. 2,768 1,505
Property and equipment, net........................... 90 28
Scanning equipment, net............................... 216 170
Other assets, net..................................... 135 85
------- -------
$ 3,209 $ 1,788
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Billings in excess of related costs and earned
profits on long-term contracts...................... $ 436 $ 293
Accrued commissions................................. 100 57
Accounts payable and accrued expenses............... 900 766
Notes payable....................................... 700 470
------- -------
Total current liabilities........................ 2,136 1,586
------- -------
Stockholders' equity:
Common stock of $0.05 par value, 40,000,000
shares authorized; issued and outstanding
20,958,947 and 16,584,007, respectively............. 1,047 829
Additional paid-in capital.......................... 9,280 8,340
Accumulated deficit................................. (9,254) (8,967)
Total stockholders' equity....................... ------- -------
1,073 202
------- -------
$ 3,209 $ 1,788
======= =======
</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 Operations
($000 except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Contract revenues:
System sales....................... $ 868 $ 591 $ 1,722 $ 973
Service contracts and upgrades..... 292 245 496 538
------- ------- ------- -------
Total revenues.................... 1,160 836 2,218 1,511
Contract costs....................... 970 581 1,918 944
------- ------- ------- -------
Gross profit......................... 190 255 300 567
------- ------- ------- -------
Operating costs:
Marketing.......................... 80 86 224 137
General and administrative......... 108 113 330 201
------- ------- ------- -------
Total operating costs.............. 188 199 554 338
------- ------- ------- -------
Income (loss) from operations........ 2 56 (254) 229
------- ------ ------- -------
Other expense (income):
Interest expense................... 15 3 34 7
Interest and other income.......... 0 (4) 0 (5)
------- ------- ------- -------
Other - net....................... 15 1 34 2
------- ------- ------- -------
Net income (loss).................... $ (13) $ 57 $ (288) $ 227
------- ======= ======= =======
Weighted average shares outstanding.. 20,705 13,030 20,705 13,030
======= ======= ======= =======
Net income (loss) per share.......... $ 0 $ 0 $( 0.01) $0.02
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
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4
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
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Statement of Cash Flows
Six Months Ended January 31, 1997 and 1996
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
-------- ------
<S> <C> <C>
Operating activities:
Net income (loss)........................................... $ (288) $ 227
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization............................ 32 28
Changes in operating assets and liabilities:
Trade accounts receivable.............................. (1,318) (45)
Costs and earned profits on long-term
contracts in excess of related billings............... 449 (101)
Prepaid expenses....................................... 3 (14)
Other assets........................................... (55) (9)
Accounts payable and accrued expenses.................. 138 28
Billings in excess of related costs
and earned profits on long-term contracts............. 213 (91)
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Net cash flows provided by (used in) operating
activities................................................. (826) 23
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Investing activities:
Capital expenditures........................................ (134) (12)
------- -----
Net cash flows used in investing activities................ (134) (12)
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Financing activities:
Proceeds from issuance of common stock...................... 1,041 0
Proceeds from exercise of stock options..................... 118 0
Borrowings under line of credit............................. 528 0
Repayments on borrowing from private sources................ (259) 0
------- -----
Net cash flows provided by financing activities............ 1,428 0
------- -----
Net increase in cash and cash equivalents..................... 468 11
Cash and cash equivalents at beginning of period.............. 45 25
------- -----
Cash and cash equivalents at end of period.................... $ 513 $ 36
======= =====
</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 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.
2. RELATED PARTY TRANSACTION.
On October 31, 1996 the Company issued 500,000 shares of its 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. COMMON STOCK OFFERING
In November and December of 1996 the Company completed an 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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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
------------------------------------------------------------------------
1997 1996
----------------------------------- ----------------------------------
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...................... $ 868 74.8% 46.9% $591 70.7% 400.9%
Service contracts and upgrades.... 292 25.2% 19.2% 245 29.3% 26.3%
------ ----- ------ ---- ----- -----
Total revenues................. 1,160 100.0% 38.8% 836 100.0% 168.0%
Contract costs...................... 970 83.6% 67.0% 581 69.5% 120.1%
------ ----- ------ ---- ----- -----
Gross profit........................ 190 16.4% (25.5%) 255 30.5% 431.3%
------ ----- ------ ---- ----- -----
Operating costs
Marketing......................... 80 6.9% (7.0%) 86 10.3% 72.0%
General and administrative........ 108 9.3% (4.48) 113 13.5% 8.7%
------ ----- ------ ---- ----- -----
Total operating costs.......... 188 16.2% (5.5%) 199 23.8% 17.8%
------ ----- ------ ---- ----- -----
Income from operations.............. 2 .2% NM 56 6.7% NM
------ ----- ------ ---- ----- -----
Other (income) expense:
Interest expense.................. 15 1.3% NM 3 0.4% 200.0%
Interest and other income......... 0 0.0% NM (4) (0.5%) NM
------ ----- ------ ---- ----- -----
Other - net.................... 15 1.3% NM (1) 0.1% NM
------ ----- ------ ---- ----- -----
Net income (loss)................... $ (13) (1.1%) (122.8%) $ 57 6.8% NM
====== ===== ====== ==== ===== =====
</TABLE>
NM - Not meaningful
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7
<PAGE>
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,
---------------------------------------------------------------
1997 1996
------------------------------- ------------------------------
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>
System sales..................... $1,722 77.6% 77.0% $ 973 64.4% 297.1%
Service contracts and upgrades... 496 22.4% (7.8%) 538 35.6% 15.2%
------ ----- ----- ------ ----- -----
Total revenues........ 2,218 100.0% 46.8% 1,511 100.0% 112.2%
Contract costs................... 1,918 86.5% 103.2% 944 62.5% 65.9%
Contract revenues:
Gross profit................. 300 13.5% (47.1%) 567 37.5% 296.5%
------ ----- ----- ------ ----- -----
Operating costs:
Marketing.................... 224 10.1% 63.5% 137 9.1% (2.8%)
General and administrative.. 330 14.8% 64.2% 201 13.3% NM
------ ----- ----- ------ ----- -----
Total operating costs........ 554 25.0% 63.9% 338 22.4% (21.0%)
------ ----- ----- ------ ----- -----
Income (loss) from operations... (254) (11.5%) NM 229 15.2% NM
------ ----- ----- ------ ----- -----
Other (Income) Expenses:
Interest Expenses............ 34 1.5% NM 7 0.5% (75.0%)
Interest and Other Income.... 0 0.0% NM (5) (0.3%) (72.2%)
------ ----- ----- ------ ----- -----
Other - Net........... 34 1.5% NM 2 0.1% (88.9%)
------ ----- ----- ------ ----- -----
Net Income (loss)................ $ (288) (13.0%) NM $ 227 15.0% NM
====== ===== ===== ====== ===== =====
</TABLE>
NM - Not Meaningful
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8
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
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RESULTS OF OPERATIONS
Second quarter total contract revenue grew 39% to $1,160,000 in fiscal 1997 from
$836,000 in fiscal 1996 . For the six months ended January 31, 1997, total
contract revenue grew 47% to $2,218,000 from $1,511,000 in fiscal 1996. 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 for both the three and six-
month periods ended January 31, 1997 as compared to the same periods 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.
Second quarter total operating costs as a percentage of revenues decreased from
24% in second quarter of fiscal 1996 compared to 16% in second quarter of fiscal
1997. For the six-month period, total operating costs as a percentage of
revenues increased from 22% in the first six months of fiscal 1996 compared to
25% in the first six months 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.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 1997 the Company had positive net working capital of $632,000
compared to negative net working capital of $81,000 at July 31, 1996.
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, management believes that the Company has the ability
to meet its cash requirements during fiscal year 1997.
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9
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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
On December 20, 1996, the Company's board of directors approved the grant to
certain officers of the Company of options to acquire an aggregate of 700,000
shares of the Company's common stock. All of the options vest ratably over a
three year period beginning upon the next anniversary date of the officer's
employment with the Company after the date of grant, and may be exercised after
vesting at a price of $0.91 per share until the termination of the option
agreement which will occur upon the earlier of the date that is seven years from
the date that all options covered by such agreement have vested, and 90 days
after the officer's employment with the Company has been terminated. The grant
of these options is exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
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
On November 13, 1996 and December 3, 1996, the Company filed reports on Form 8-K
to report the sale by the Company in November of 1,365,573 shares of its common
stock to three investors and in December of 595,159 shares of its common stock
to two investors pursuant to Rule 903 of Regulation S under the Securities Act
of 1933, as amended. Financial statements were not included in these reports.
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10
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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
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
By: /s/ Gary S. Kofnovec
-------------------------------------------------
Gary S. Kofnovec, Executive Vice President,
Chief Financial Officer, Secretary, and Treasurer
March 17, 1997
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 513
<SECURITIES> 0
<RECEIVABLES> 2,161
<ALLOWANCES> 0
<INVENTORY> 14
<CURRENT-ASSETS> 2,768
<PP&E> 1,247
<DEPRECIATION> 1,157
<TOTAL-ASSETS> 3,209
<CURRENT-LIABILITIES> 2,136
<BONDS> 0
1,047
0
<COMMON> 0
<OTHER-SE> 9,280
<TOTAL-LIABILITY-AND-EQUITY> 3,209
<SALES> 2,218
<TOTAL-REVENUES> 2,218
<CGS> 1,918
<TOTAL-COSTS> 2,472
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34
<INCOME-PRETAX> (288)
<INCOME-TAX> 0
<INCOME-CONTINUING> (288)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (288)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
