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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
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, 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 OCTOBER 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 [_] 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 DECEMBER 12, 1997
-------------- -----------------
$0.05 Par Value Common Stock 21,114,468
Transitional Small Business Disclosure Format (check one): Yes No X
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<PAGE>
INDEX
Part I - Financial Information
- ------------------------------
Item 1: Financial Statements (Unaudited):
Condensed Balance Sheet:
October 31, 1997 and July 31, 1997.................... 3
Condensed Statement of Operations:
Three Months Ended October 31, 1997 and 1996.......... 4
Statement of Cash Flows:
Three Months Ended October 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................................................................... 9
Signatures................................................................... 10
<PAGE>
Condensed Balance Sheet
(In thousands)
<TABLE>
<CAPTION>
October 31, July 31,
1997 1997
------------ ---------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash.............................................. $ 303 $ 390
Trade accounts receivable, net.................... 343 294
Research Grant Receivables........................ 75 450
Costs and earned profits on long-term
contracts in excess of related billings........... 906 903
Inventory......................................... 24 20
Prepaid expenses.................................. 74 28
-------- --------
Total current assets........................... 1,725 2,085
Property and equipment, net......................... 76 87
Scanning equipment, net............................. 288 211
Other assets, net................................... 89 87
-------- --------
$ 2,178 $ 2,470
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Billings in excess of related costs and earned
profits on long-term contracts.................... $ 306 $ 268
Accrued commissions............................... 48 48
Accounts payable and accrued expenses............. 1,261 1,232
Notes payable..................................... 690 700
-------- --------
Total current liabilities..................... 2,305 2,248
-------- --------
Stockholders' equity:
Common stock of $0.05 par value, 40,000,000
shares authorized; issued and outstanding
21,114,468 and 21,114,468, respectively.......... 1,056 1,056
Additional paid-in capital........................ 9,229 9,254
Accumulated deficit............................... (10,412) (10,088)
-------- --------
Total stockholders' equity.................... (127) 222
-------- --------
$ 2,178 $ 2,470
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Condensed Statement of Operations
(In thousands except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
October 31, October 31,
1997 1996
------------- -------------
<S> <C> <C>
Contract revenues:
Tomographic system sales..................... $ 289 $ 854
Service contracts and upgrades............... 154 203
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Total revenues.............................. 443 1,057
Direct contract costs......................... 463 948
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Gross profit.................................. (20) 109
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Operating costs:
Marketing.................................... 79 144
General and administrative................... 202 221
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Total operating costs....................... 281 365
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Income (loss) from operations.................
( 301) (256)
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Other expense (income):
Interest expense............................. 23 19
Interest and other income.................... 0 0
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Other - net................................ 23 19
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Net income (loss)............................. $ ( 324) $ (275)
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Weighted average shares outstanding........... 21,114 16,930
======= =======
Net income (loss) per share................... $( 0.02) $( 0.02)
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended October 31, Ended October 31,
1997 1996
---- ----
<S> <C> <C>
Operating activities:
Net income (loss).................................. $(324) $(275)
Adjustments to reconcile net income................
to net cash used in operating activities:
Depreciation and amortization................... 22 14
Changes in operating assets and liabilities:
Trade accounts receivable..................... 325 181
Costs and earned profits on long-term
contracts in excess of related billings...... (2) (702)
Prepaid expenses and other current assets..... (50) (14)
Other assets.................................. 0 0
Accounts payable and accrued expenses......... 29 346
Billings in excess of related costs
and earned profits on long-term contracts.... 38 223
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Net cash flows provided by (used in) operating
activities....................................... 38 (227)
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Investing activities:
Capital expenditures............................... (90) (108)
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Net cash flows used in investing activities....... (90) (108)
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Financing activities:
Proceeds from Issuance of Common Stock............. (25) 78
Borrowings under line of credit.................... 0 329
Repayments under line of credit.................... (10) 0
Principal payments on long-term debt............... 0 0
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Net cash flows provided by (used in) financing
activities......................................... (35) 407
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Net increase in cash and cash equivalents............ (87) 72
Cash and cash equivalents at beginning of period..... 390 45
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Cash and cash equivalents at end of period........... $ 303 $ 117
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</TABLE>
The accompanying notes are an integral part of these financial statements.
<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, 1997 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.
<PAGE>
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,
---------------------------------------------------------------
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................... $ 289 65.24% -66.16% $ 854 80.79% 123.56%
Service contracts and upgrades. 154 34.76% -24.14% 203 19.21% -30.72%
------- ------- ---------- ------ ------- ----------
Total revenues.............. 443 100.00% -58.09% 1057 100.0% 56.59%
Contract costs.................. 463 104.51% -51.16% 948 89.69% 161.16%
------- ------- ---------- ------ ------- ----------
Gross profit.................... (20) -4.51% -118.35% 109 10.31% -65.06%
------- ------- ---------- ------ ------- ----------
Operating costs:
Marketing..................... 79 17.83% -45.14% 144 13.62% 182.35%
General and administrative.... 202 45.60% -8.60% 221 20.91% 151.14%
------- ------- ---------- ------ ------- ----------
Total operating costs....... 281 63.43% -23.01% 365 34.53% 162.59%
------- ------- ---------- ------ ------- ----------
Income (loss) from operations... (301) -67.95% -17.58% (256) -24.22% -247.98%
------- ------- ---------- ------ ------- ----------
Other (income) expense:
Interest expense.............. 23 5.19% 21.05% 19 1.80% 375.00%
Interest and other income..... 0 0.00% N/M 0 0.00% N/M
Other - net.............. 23 5.19% 21.05% 19 1.80% 533.33%
------- ------- ---------- ------ ------- ----------
Net income (loss)............... $ (324) -73.14% -17.82% $ (275) -26.02% -261.76%
======= ======= ========== ====== ======= ==========
</TABLE>
__________________
N/M - Not meaningful
RESULTS OF OPERATIONS
Fiscal 1998 first quarter total contract revenues decreased 58% to $443,000 from
$1,057,000 in the first quarter of fiscal 1997. A 66% reduction in system sales
revenue was the main factor in the decrease.
Gross profit (revenue less direct contract cost) for the first quarter as a
percentage of revenues was -4.5% in 1998 as compared to 10.3% in the first
quarter of 1997. This decline is due to the Company's near completion of
existing contracts combined with a reduction in revenue recognized from
contracts entered during the quarter. Although the Company ended the quarter
with substantially comparable sales backlog to the same period a year ago
($2,400,000 in the current quarter compared with $2,500,000 a year ago), the
timing of the orders limited revenue recognition within the quarter. The Company
was also forced to expend time to complete work on older projects which had
little or no remaining revenue recognition potential for the quarter.
First quarter total operating costs as a percentage of revenues increased to
63.43% in 1998 from 34.53% in 1997, although total dollars decreased to $281,000
in 1998 from $365,000 in 1997. The increase in percentage of revenues is
attributable to the significantly lower revenue recognized in the first quarter
of 1998 compared to 1997. The dollar amounts for total operating costs
decreased from the first quarter of 1997 to the first
<PAGE>
quarter of 1998 because commission expenses for Marketing were much higher in
1997 due to greater recognized revenue, and travel expenses for Marketing were
significantly higher in 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 1997, the Company had negative net working capital of $580,000
compared to negative net working capital of $163,000 at July 31, 1997. During
the three months ended October 31, 1997, the Company had cash provided by
operations of $38,000, compared to cash used in operations of $227,000 in the
prior year period. During the three months ended October 31, 1997 and 1996, the
Company used $35,000 and generated $407,000, respectively, from financing
activities. The generation of cash in the 1996 period 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, during the first quarter of fiscal 1997, the Company
borrowed an additional $329,000 under a bank line of credit to support the
production of export sales. The use of cash for financing activities in 1997
was due mainly to efforts to secure additional financing.
Total contract backlog at October 31, 1997 was approximately $2,403,000, down
slightly from $2,500,000 for the same period in 1996. Of the current backlog,
$2,082,000 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 contract backlog, management believes that the Company has the
ability to meet its cash requirements through fiscal 1998. 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 any
such activity, and the failure to do so could have a material adverse effect on
the Company's financial position. Also at October 31, 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 Company has borrowed $630,000 from a bank with
the receivable from the export customer as collateral. The Company has resolved
certain technical and performance issues raised by the customer, and expects to
receive a modified purchase order from the customer for a reduced purchase
price. Management has negotiated with the bank to extend the maturity of the
loan to January 31, 1998 by assigning certain receivables to provide additional
security for the debt.
Over the next several years, the Company will need significant additional
financing for its participation, with consortium members, in a research grant
from the U.S. Department of Commerce National Institute of Standards and
Technology ("NIST") under the Advanced Technology Program. As more fully
described in Note 10 to the financial statements contained in the Company's
annual report on Form 10-KSB for the fiscal year ended July 31, 1997, pursuit of
this project requires funding for the Company's portion of the project in the
approximate amount of $2,745,000 and the Company owes approximately $1,493,000
($773,000 of which is currently due to General Electric and $720,000 which will
be due to General Electric upon the Company's receipt of the detector panels) in
contract expenses to consortium members. This amount is expected to increase to
a total of $2,745,000 over future periods, the timing of which is dependent upon
the project's progress. The Company is seeking to obtain such financing from
additional borrowing arrangements and/or the offering of debt or equity
securities. However, there can be no assurance that funds required by the
Company in the future will be available on terms satisfactory to the Company or
at all.
<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
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, including
interest, due on the date of the filing of this report is $615,171.16.
Management has negotiated with the Bank to extend the maturity of the loan to
January 31, 1998 by making a partial principal reduction and by assigning
certain accounts receivable to provide the Bank with incremental security for
the loan. See Part I, Item 2, Management'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.
<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/ HOWARD L. BURRIS
-----------------------------------------------
Howard L. Burris, Chief Executive Officer,
President, and Acting Chief Financial Officer
January 8, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> OCT-31-1997
<CASH> 303
<SECURITIES> 0
<RECEIVABLES> 418
<ALLOWANCES> 0
<INVENTORY> 24
<CURRENT-ASSETS> 1,725
<PP&E> 1,276
<DEPRECIATION> 1,200
<TOTAL-ASSETS> 2,178
<CURRENT-LIABILITIES> 2,305
<BONDS> 0
0
0
<COMMON> 1,056
<OTHER-SE> 9,229
<TOTAL-LIABILITY-AND-EQUITY> 2,178
<SALES> 289
<TOTAL-REVENUES> 443
<CGS> 463
<TOTAL-COSTS> 744
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23
<INCOME-PRETAX> (324)
<INCOME-TAX> 0
<INCOME-CONTINUING> (324)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (324)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
