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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, 1998
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, 1998 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 JUNE 12, 1998
-------------- -------------
$0.05 Par Value Common Stock 21,114,468
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
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Item 1: Financial Statements (Unaudited):
Condensed Balance Sheet:
April 30, 1998 and July 31, 1997.................................. 3
Condensed Statement of Operations:
Three and Nine Months Ended April 30, 1998 and
1997.............................................................. 4
Statement of Cash Flows:
Nine Months Ended April 30, 1998 and 1997......................... 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
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Items 1 - 6................................................................ 11
Signatures................................................................. 12
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SCIENTIFIC MEASUREMENT SYSTEMS, INC.
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Condensed Balance Sheet
(In thousands)
April 30, July 31,
1998 1997
----------- ---------
(Unaudited)
ASSETS
Current assets:
Cash................................................ $ 24 $ 390
Trade accounts receivable, net...................... 418 294
Research Grant Receivables.......................... 16 450
Costs and earned profits on long-term
contracts in excess of related billings............. 807 903
Inventory........................................... 173 20
Prepaid expenses.................................... 140 28
-------- --------
Total current assets............................. 1,578 2,085
Property and equipment, net........................... 68 87
Scanning equipment, net............................... 280 211
Other assets, net..................................... 89 87
-------- --------
$ 2,015 $ 2,470
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Billings in excess of related costs and earned
profits on long-term contracts...................... $ 558 $ 268
Accrued commissions................................. 46 48
Accounts payable and accrued expenses............... 1,310 1,232
Notes payable....................................... 257 700
-------- --------
Total current liabilities....................... 2,171 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................................. (10,441) (10,088)
-------- --------
Total stockholders' equity...................... (156) 222
-------- --------
$ 2,015 $ 2,470
======== ========
The accompanying notes are an integral part of these financial statements.
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SCIENTIFIC MEASUREMENT SYSTEMS, INC.
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Condensed Statement of Operations
($000 except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
April 30, April 30,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
Contract revenues:
System sales....................... $ 627 $ 942 $ 1,972 $ 2,663
Service contracts and upgrades..... 500 203 951 700
------- ------- ------- -------
Total revenues.................... 1,127 1,145 2,923 3,363
Contract costs....................... 717 800 2,156 2,718
------- ------- ------- -------
Gross profit......................... 410 345 767 645
------- ------- ------- -------
Operating costs:
Marketing.......................... 125 130 323 355
General and administrative......... 256 128 725 456
------- ------- ------- -------
Total operating costs............ 381 258 1,048 811
------- ------- ------- -------
Income (loss) from operations........ 29 87 (281) (166)
------- ------- ------- -------
Other expense (income):
Interest expense................... 24 18 71 52
Interest and other income.......... 0 (1) 0 (1)
------- ------- ------- -------
Other - net....................... 24 17 71 51
------- ------- ------- -------
Net income (loss).................... $ 5 $ 70 $ (352) $ (217)
======= ======= ======= =======
Weighted average shares outstanding.. 21,114 21,037 21,114 18,849
======= ======= ======= =======
Net income (loss) per share.......... $0.00 $0.00 $(0.02) $( 0.01)
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
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SCIENTIFIC MEASUREMENT SYSTEMS, INC.
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Statement of Cash Flows
Nine Months Ended April 30, 1998 and 1997
(In thousands)
(Unaudited)
1998 1997
------- --------
Operating activities:
Net income (loss)................................. $(352) $ (217)
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization.................. 66 54
Changes in operating assets and liabilities:
Trade accounts receivable.................... 309 (963)
Costs and earned profits on long-term
contracts in excess of related billings..... 96 (70)
Prepaid expenses and other current assets.... (340) 38
Other assets................................. (1) (33)
Accounts payable and accrued expenses........ 167 89
Billings in excess of related costs
and earned profits on long-term contracts... 290 (153)
----- -------
Net cash flows (used in) provided by operating
activities...................................... 235 (1,255)
----- -------
Investing activities:
Capitalized product development costs............. 0 0
Capital expenditures.............................. (134) (166)
----- -------
Net cash flows used in investing activities...... (134) (166)
----- -------
Financing activities:
Proceeds from issuance of common stock............ (25) 1,041
Proceeds from exercise of stock options........... 0 118
Borrowings under line of credit................... (442) 528
Repayments on borrowing from private sources...... 0 (259)
----- -------
Net cash flows provided by financing activities.. (467) 1,428
----- -------
Net increase in cash and cash equivalents........... (366) 7
Cash and cash equivalents at beginning of period.... 390 45
----- -------
Cash and cash equivalents at end of period.......... $ 24 $ 52
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The accompanying notes are an integral part of these financial statements.
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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, 1997 as filed with
the Securities and Exchange Commission.
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.
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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,
--------------------------------------------------------------
1998 1997
----------------------------- -----------------------------
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...................... $ 627 55.63% -33.44% $ 942 82.27% 183.73%
Service contracts and upgrades.... 500 44.37% 146.31% 203 17.73% -57.88%
------ ------ ------- ------ ------ ------
Total revenues................... 1,127 100.00% -1.57% 1,145 100.00% 40.66%
Contract costs...................... 717 63.62% -10.38% 800 69.87% 30.72%
------ ------ ------- ------ ------ ------
Gross profit........................ 410 36.38% 18.84% 345 30.13% 70.79%
------ ------ ------- ------ ------ ------
Operating costs
Marketing......................... 125 11.09% -3.85% 130 11.35% 120.34%
General and administrative........ 258 22.72% 100.00% 128 11.18% 15.32%
------ ------ ------- ------ ------ ------
Total operating costs............. 381 33.81% 47.67% 258 22.53% 51.76%
------ ------ ------- ------ ------ ------
Income (loss) from operations....... 29 2.57% 66.67% 87 7.60% 171.88%
------ ------ ------- ------ ------ ------
Other (income) expense:
Interest expense.................. 24 2.13% 33.33% 18 1.57% 157.14%
Interest and other income......... 0 0.00% -100.00% (1) -0.09% -85.71%
------ ------ ------- ------ ------ ------
Other - net....................... 24 2.13% 41.18% 17 1.48% NM
------ ------ ------- ------ ------ ------
Net income (loss)................... $ 5 0.44% 92.86% $ 70 6.11% 118.75%
====== ====== ======= ====== ====== ======
</TABLE>
NM - Not meaningful
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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,
---------------------------------------------------------------
1998 1997
------------------------------ ------------------------------
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.................... $1,972 67.46% -25.95% $2,663 79.19% 104.06%
Service contracts and upgrades.. 951 32.54% 35.86% 700 20.81% -31.37%
------ ------ ------- ------ ------ --------
Total revenues....... 2,923 100.00% -13.08% 3,363 100.00% 44.65%
Contract costs.................. 2,156 73.76% -20.68% 2,718 80.82% 74.79%
------ ------ ------- ------ ------ --------
Gross profit.................... 767 26.24% 18.91% 645 19.18% -16.23%
------ ------ ------- ------ ------ --------
Operating costs:
Marketing................... 323 11.05% -9.01% 355 10.56% 80.20%
General and administrative.. 725 24.80% 58.99% 456 13.56% 46.15%
------ ------ ------- ------ ------ --------
Total operating costs....... 1,048 35.85% 29.22% 811 24.12% 59.33%
------ ------ ------- ------ ------ --------
Income (loss) from operations... (281) -9.61% -69.28% (166) -4.94% -163.60%
------ ------ ------- ------ ------ --------
Other (income) expenses:
Interest expenses........... 71 2.43% 36.54% 52 1.55% 271.43%
Interest and other income... 0 0.00% -100.00% (1) -0.03% -91.67%
------ ------ ------- ------ ------ --------
Other - net........... 71 2.43% 39.22% 51 1.52% 2,450.00%
------ ------ ------- ------ ------ --------
Net income (loss)............... $ (352) -12.04% -62.21% (217) -6.45% -183.78%
====== ====== ======= ====== ====== ========
</TABLE>
NM - Not meaningful
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SCIENTIFIC MEASUREMENT SYSTEMS, INC.
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RESULTS OF OPERATION
Fiscal 1998 third quarter total contract revenue was down 2%to $1,127,000 in
fiscal 1998 from $1,145,000 in fiscal 1997. For the nine months ended April 30,
1998, total contract revenue fell 13% to $2,923,000 from $3,363,000 in 1997. A
26% decrease in system sales revenue was the main factor in the decrease.
Gross profit (revenue less direct contract cost) for the third quarter as a
percentage of revenues increased to 36% in 1998 from 30% in 1997. Year to date
gross profit as a percentage of revenues increased to 26% in fiscal 1998 from
19% in fiscal 1997. Increased gross profit is due to the Company's ability in
fiscal 1998 to avoid unexpected contract costs.
Third quarter total operating costs as a percentage of revenues increased to 34%
in fiscal 1998 from 23% in fiscal 1997, and year to date operating costs as a
percentage of revenues increased to 36% in fiscal 1998 from 24% in fiscal 1997.
The increases are directly attributable to system development costs incurred in
fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 1998, the Company had negative net working capital of $593,000
compared to negative net working capital of $163,000 at July 31, 1997. For the
nine months ended April 30, 1998, the Company had net cash provided by
operations of $235,000, compared to cash used in operations of $1,255,000 in the
prior year period. The Company used $134,000 for investing activities in the
nine month period in fiscal 1998 and used $166,000 in the same period of fiscal
1997. The Company used $467,000 for financing activities in the nine months
ended April 30, 1998 as compared to generating $1,428,000 in fiscal 1997.
As further described in Note 3 to the financial statements, the Company raised
$1,081,260 of equity in November and December of 1996 (fiscal 1997).
Additionally, in the first nine months of fiscal 1997 the Company borrowed
$538,000 under a bank line of credit to support the production of export sales.
The use of cash in fiscal 1998 was due mainly to payments of approximately
$435,000 including principal and interest made on the line of credit.
Total contract backlog at April 30, 1998 was approximately $1,900,000,
significantly higher than the $580,000 backlog at April 30, 1997. 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 on 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 April 30, 1998, 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. However, management has
negotiated with the bank to extend the maturity of the loan to July 31, 1998, by
assigning certain receivables to provide additional security for the debt.
Originally, default was caused by the Company's inability 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. On March 5, 1998, the
customer formally accepted the machine in a factory acceptance test for a
reduced price. All proceeds from the sale were applied to the obligation, and
of the $630,000 originally borrowed, the Company as of June 10, 1998 had a
remaining balance outstanding of approximately $197,000 and the Company
continues to make monthly principal payments. There are no remaining contract
revenues to apply to this balance; thus, the Company will have to achieve gross
profitability on other contracts to pay the remaining balance.
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SCIENTIFIC MEASUREMENT SYSTEMS, INC.
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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. The Company owes approximately $1,590,000
($779,000 of which is currently due to General Electric and $811,000 of 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.
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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 as of
June 10, 1998 was approximately $197,000 and the Company continues to make
monthly principal payments. The Bank has granted the Company an extension on the
loan until July 31, 1998. 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.
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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/ HOWARD L. BURRIS
---------------------------------------------------
Howard L. Burris, President and Acting Chief
Financial Officer
June 15, 1998
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