<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, 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 APRIL 30, 1997 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:
<TABLE>
<CAPTION>
SHARES OUTSTANDING AS OF
TITLE OF CLASS MAY 31, 1997
-------------- ------------------------
<S> <C>
$0.05 Par Value Common Stock 21,114,460
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
</TABLE>
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<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
- --------------------------------------------------------------------------------
INDEX
Part I - Financial Information
- ------------------------------
Item 1: Financial Statements (Unaudited):
Condensed Balance Sheet:
April 30, 1997 and July 31, 1996.................................... 3
Condensed Statement of Operations:
Three and Nine Months Ended April 30, 1997 and 1996................. 4
Statement of Cash Flows:
Nine Months Ended April 30, 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
2
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
- --------------------------------------------------------------------------------
Condensed Balance Sheet
(In thousands)
<TABLE>
<CAPTION>
April 30, July 31,
1997 1996
----------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash............................................. $ 52 $ 45
Trade accounts receivable, net................... 1,144 306
Research grant receivable........................ 372 247
Costs and earned profits on long-term
contracts in excess of related billings.......... 808 809
Inventory........................................ 14 14
Prepaid expenses................................. 45 84
------- -------
Total current assets.......................... 2,435 1,505
Property and equipment, net........................ 116 28
Scanning equipment, net............................ 209 170
Other assets, net.................................. 104 85
------- -------
$ 2,864 $ 1,788
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Billings in excess of related costs and earned
profits on long-term contracts................... $ 70 $ 293
Accrued commissions.............................. 106 57
Accounts payable and accrued expenses............ 845 766
Notes payable.................................... 700 470
------- -------
Total current liabilities.................... 1,721 1,586
------- -------
Stockholders' equity:
Common stock of $0.05 par value, 40,000,000
shares authorized; issued and outstanding
21,114,460 and 16,584,007, respectively......... 1,056 829
Additional paid-in capital......................... 9,272 8,340
Accumulated deficit................................ (9,185) (8,967)
------- -------
Total stockholders' equity................... 1,143 202
------- -------
$ 2,864 $ 1,788
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
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 Nine Months Ended
April 30, April 30,
------------------ -------------------
1997 1996 1997 1996
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Contract revenues:
System sales......................... $ 942 $ 332 $ 2,663 $ 1,305
Service contracts and upgrades....... 203 482 700 1,020
------- ------- ------- -------
Total revenues...................... 1,145 814 3,363 2,325
Contract costs......................... 800 612 2,718 1,555
------- ------- ------- -------
Gross profit........................... 345 202 645 770
------- ------- ------- -------
Operating costs:
Marketing............................ 130 59 355 197
General and administrative........... 128 111 456 312
------- ------- ------- -------
Total operating costs.............. 258 170 811 509
------- ------- ------- -------
Income (loss) from operations.......... 87 32 (166) 261
------- ------- ------- -------
Other expense (income):
Interest expense..................... 18 7 52 14
Interest and other income............ (1) (7) (1) (12)
------- ------- ------- -------
Other - net........................ 17 0 51 2
------- ------- ------- -------
Net income (loss)...................... $ 70 $ 32 $ (217) $ 259
======= ======= ======= =======
Weighted average shares outstanding.... 21,037 14,661 18,849 13,574
======= ======= ======= =======
Net income (loss) per share............ $ 0.00 $ 0.00 $( 0.01) $ 0.02
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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SCIENTIFIC MEASUREMENT SYSTEMS, INC.
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Statement of Cash Flows
Nine Months Ended April 30, 1997 and 1996
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
-------- ------
<S> <C> <C>
Operating activities:
Net income (loss).................................. $ (217) $ 259
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization................... 54 42
Changes in operating assets and liabilities:
Trade accounts receivable..................... (963) (55)
Costs and earned profits on long-term
contracts in excess of related billings...... (70) (506)
Prepaid expenses.............................. 38 (12)
Other assets.................................. (33) (1)
Accounts payable and accrued expenses......... 89 172
Billings in excess of related costs
and earned profits on long-term contracts.... (153) 131
------- -----
Net cash flows (used in) provided by operating
activities....................................... (1,255) 30
------- -----
Investing activities:
Capitalized product development costs.............. 0 (73)
Capital expenditures............................... (166) (16)
------- -----
Net cash flows used in investing activities....... (166) (89)
------- -----
Financing activities:
Proceeds from issuance of common stock............. 1,041 113
Proceeds from exercise of stock options............ 118 77
Borrowings under line of credit.................... 528 0
Repayments on borrowing from private sources....... (259) (100)
------- -----
Net cash flows provided by financing activities... 1,428 90
------- -----
Net increase in cash and cash equivalents............ 7 31
Cash and cash equivalents at beginning of period..... 45 25
------- -----
Cash and cash equivalents at end of period........... $ 52 $ 56
======= =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
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.
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,
----------------------------------------------------------------------
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 $ 942 82.3% 183.7% $332 40.8% 87.6%
Service contracts and upgrades 203 17.7% (57.9%) 482 59.2% 232.4%
------ ----- ----- ---- ----- -----
Total revenues 1,145 100.0% 40.7% 814 100.0% 152.8%
Contract costs 800 69.9% 30.7% 612 75.2% 110.0%
------ ----- ----- ---- ----- -----
Gross profit 345 30.1% (70.8%) 202 24.8% 531.3%
------ ----- ----- ---- ----- -----
Operating costs
Marketing 130 11.3% 120.3% 59 7.3% 3.5%
General and administrative 128 11.2% 15.3% 111 13.6% NM
------ ----- ----- ---- ----- -----
Total operating costs 258 22.5% 51.8% 170 20.9% (5.6%)
------ ----- ----- ---- ----- -----
Income from operations 87 7.6% 171.9% 32 3.9% NM
------ ----- ----- ---- ----- -----
Other (income) expense:
Interest expense 18 1.6% 157.1% 7 0.9% 75.0%
Interest and other income (1) 0.0% NM (7) (0.9%) 133.3%
------ ----- ----- ---- ----- -----
Other - net 17 1.5% NM 0 0% NM
------ ----- ----- ---- ----- -----
Net income (loss) $ 70 6.1% 118.8% $ 32 3.9% NM
====== ===== ===== ==== ===== =====
</TABLE>
NM - Not meaningful
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>
NINE MONTHS ENDED APRIL 30,
-------------------------------------------------------------------
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..................... $2,663 79.2% 104.0% $1,305 56.1% 209.2%
SERVICE CONTRACTS AND UPGRADES... 700 20.8% (31.4%) 1,020 43.9% 66.7%
------ ----- ----- ------ ----- -----
TOTAL REVENUES........ 3,363 100.0% 44.6% 2,325 100.0% 124.9%
CONTRACT COSTS................... 2,718 80.8% 74.8% 1,555 66.9% 81.0%
------ ----- ----- ------ ----- -----
GROSS PROFIT..................... 645 19.2% (16.2%) 770 33.1% 340.0%
------ ----- ----- ------ ----- -----
OPERATING COSTS:
MARKETING.................... 355 10.6% 80.2% 197 8.5% (0.5%)
GENERAL AND ADMINISTRATIVE... 456 13.6% 46.2% 312 13.4% NM
------ ----- ----- ------ ----- -----
TOTAL OPERATING COSTS........ 811 24.1% 59.3% 509 21.9% (16.3%)
------ ----- ----- ------ ----- -----
INCOME (LOSS) FROM OPERATIONS.... (166) (4.9%) NM 261 11.2% NM
------ ----- ----- ------ ----- -----
OTHER (INCOME) EXPENSES:
INTEREST EXPENSES............ 52 1.5% 271.4% 14 0.6% (56.3%)
INTEREST AND OTHER INCOME.... (1) 0.0% (91.7%) (12) (0.5%) NM
------ ----- ----- ------ ----- -----
OTHER - NET............ 51 1.5% NM 2 0.1% (89.5%)
------ ----- ----- ------ ----- -----
NET INCOME (LOSS)................ $ (217) (6.5%) NM $ 259 11.1% NM
====== ===== ===== ====== ===== =====
</TABLE>
NM - NOT MEANINGFUL
8
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
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RESULTS OF OPERATIONS
Fiscal 1997 third quarter total contract revenues increased 40.7% to $1,145,000
from $814,000 in fiscal 1996. For the nine months ended April 30, 1997, total
contract revenues grew 44.6% to $3,363,000 from $2,325,000 in fiscal 1996.
Revenue increases are directly attributable to increases in system sales.
Gross profit (revenue less direct contract cost) for the third quarter as a
percentage of revenues was 30.1% in 1997 as compared to 24.8% in the third
quarter of 1996. This improvement is chiefly due to significantly better
pricing on system sales contracts which were in production during the period.
For the nine months ended April 30, 1997, gross profit as a percentage of
revenues decreased to 19.2% in 1997 as compared to 33.1% in the same period of
1996. A non-recurring $75,000 software upgrade sale with little direct costs in
fiscal 1996, along with cost overruns on one system contract in fiscal 1997,
contributed to this decrease.
Third quarter total operating costs as a percentage of revenues increased to
22.5% in 1997 from 20.9% in 1996. For the nine months ended April 30, 1997,
total operating costs as a percentage of revenues increased to 24.1% in fiscal
1997 as compared to 21.9% in the year earlier period. Two factors drive this
increase. Marketing expenses grew primarily due to commission expenses on the
projects in production in 1997. General and administrative expense increases
stem from salary costs incurred in anticipation of much higher revenue levels.
LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 1997, the Company had positive net working capital of $714,000
compared to negative net working capital of $81,000 at July 31, 1996. During
the nine months ended April 30, 1997, the Company used cash in its operations of
$1,256,000, compared to cash provided by operations of $30,000 in the prior year
period. Cash used in operations for the first nine months of 1997 is more than
net losses primarily because of a large increase in accounts receivable. During
the nine months ended April 30, 1997 and 1996, the Company generated $1,428,000
and $90,000, respectively, from financing activities. The generation of cash
from financing activities was due mainly from the issuance of the Company's
common stock and borrowings under a bank line of credit. As further described
in Note 3 to the financial statements, the Company raised $1,081,260 of equity
in November and December of 1996. In addition, the Company has borrowed
$630,000 under a bank line of credit to support the production of export sales.
Total contract backlog at April 30, 1997 was approximately $580,000, down from
$4.0 million for the same period in 1996. Of the current backlog, $433,000 is
for SMARTSCAN system sales. Management is actively pursuing several system sales
opportunities, and is cautiously optimistic that such activity will result in
additional system sales contracts; however, no assurance can be given regarding
any potential sales.
Because of the additional equity capital, management believes that the Company
has the ability to meet its cash requirements through fiscal 1997. The
Company's liquidity position thereafter will depend upon the outcome of further
cash generating activities, such as raising additional debt or equity capital,
or generating revenues and cash receipts through system sales and scanning
services. There is no assurance that the Company can successfully complete such
activity, and failure to do so over approximately the next six months could have
a material adverse effect on the Company's financial position. Also at April
30, 1997, the Company was in technical default with a local bank with respect to
its Export Import Bank of the U.S. ("EXIMBANK") guaranteed line of credit.
Default was caused by the inability, to date, of the Company to collect, in a
timely fashion, a final 90% payment of approximately $700,000 pursuant to the
Company's prior delivery of an export customer's system. The customer has not
yet accepted the system, and the Company is seeking to resolve certain technical
and performance issues raised by the customer. The Company has borrowed $630,000
from a bank with the receivable from the export customer as collateral.
Management anticipates that such default will be cured in the near future as the
above described receivable is collected and the associated bank loan is
simultaneously retired.
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
None
Item 3 - Defaults Upon Senior Securities
In a letter dated April 21, 1997, Wells Fargo HSBC Trade Bank, N.A. (the "Bank")
notified the Company that it was in default under the terms of its loan. The
original principal amount of the loan was $630,000. The total amount due on the
date of the filing of this report is $634,918. The Bank waived its default
rights in writing through May 27, 1997. The Bank has also communicated verbally
to the Company that the Bank does not intend to enforce its default rights at
this time in view of a 45 day extension (through July 31, 1997) of the EXIMBANK
guaranty. See Part I, Item 2, Managements's Discussion and Analysis of Financial
Condition and Results of Operations, Liquidity and Capital Resources.
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
The Company did not file any reports on Form 8-K during the period covered by
this report.
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:
-------------------------------------------------
Dr. Larry Secrest, President and Acting
Chief Financial Officer
June 13, 1997
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> APR-30-1997
<CASH> 52
<SECURITIES> 0
<RECEIVABLES> 1,516
<ALLOWANCES> 0
<INVENTORY> 14
<CURRENT-ASSETS> 2,435
<PP&E> 1,276
<DEPRECIATION> 1,160
<TOTAL-ASSETS> 2,864
<CURRENT-LIABILITIES> 1,721
<BONDS> 0
0
0
<COMMON> 1,056
<OTHER-SE> 9,272
<TOTAL-LIABILITY-AND-EQUITY> 2,864
<SALES> 3,363
<TOTAL-REVENUES> 3,363
<CGS> 2,718
<TOTAL-COSTS> 3,529
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52
<INCOME-PRETAX> (217)
<INCOME-TAX> 0
<INCOME-CONTINUING> (217)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (217)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
