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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, 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 OCTOBER 31, 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
[_]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practical date:
<TABLE>
<CAPTION>
SHARES OUTSTANDING AS OF
TITLE OF CLASS APRIL 1, 1999
-------------- -------------
<S> <C>
$0.05 Par Value Common Stock 21,114,468
Transitional Small Business Disclosure Format (check one): Yes___ No X
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</TABLE>
<PAGE>
INDEX
Part I - Financial Information
- ------------------------------
Item 1: Financial Statements (Unaudited):
Condensed Balance Sheet:
October 31, 1998 and July 31, 1998............ 3
Condensed Statement of Operations:
Three Months Ended October 31, 1998 and 1997.. 5
Statement of Cash Flows:
Three Months Ended October 31, 1998 and 1997.. 6
Notes to Condensed Financial Statements........ 7
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations........... 8
Part II - Other Financial Information
- -------------------------------------
Items 1 - 6................................................... 11
Signatures.................................................... 12
2
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
October 31, July 31,
1998 1998
---- ----
(Unaudited) (Audited)
ASSETS
<S> <C> <C>
Current assets:
Cash................................................... $ 6,163 $ 40,710
Billed receivables..................................... 629,190 659,500
NIST receivables....................................... 0 0
Unbilled receivables................................... 168,521 232,799
Allowance for doubtful accounts........................ (48,950) (48,950)
Inventories (Incl. capitalized NIST costs of $986,437
and $910,580, respectively)........................... 202,471 202,131
Other current assets................................... 113,026 53,190
------------ ------------
Total current assets................................
1,070,421 1,139,380
Property, plant and equipment, at cost:
Equipment.............................................. $ 1,202,601 $ 1,124,383
Furniture and fixtures................................. 104,285 104,285
Building............................................... 62,180 62,180
Land................................................... 0 0
------------ ------------
Total property and equipment........................ 1,369,066 1,290,848
Less accumulated depreciation...................... (1,254,200) (1,234,022)
------------ ------------
Net property, plant and equipment.............. 114,866 56,826
Scanning equipment, less accumulated depreciation
of $279,750........................................... 268,856 278,844
Other assets, less accumulated amortization
of $28,509............................................. 70,236 87,675
------------ ------------
Total assets...................................... $ 1,524,380 $ 1,562,725
============ ============
</TABLE>
3
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY October 31, July 31,
1998 1998
------------ ------------
(Unaudited) (Audited)
<S> <C> <C>
Current liabilities:
Accounts payable.......................................
Payable to NIST members................................ $ 684,068 $ 394,385
Billings in excess of revenues......................... 871,469 871,469
Accrued vacation....................................... 274,799 480,106
Accrued sales commissions.............................. 32,685 36,423
Other accrued expenses................................. 35,653 42,636
Leases payable, current portion........................ 31,717 7,747
Note payable........................................... 32,493 0
Bank Loans............................................. 130,739 130,019
202,243 227,125
Total current liabilities.......................... ------------ ------------
$ 2,295,866 $ 2,189,910
Long term leases payable................................. 27,911 0
------------ ------------
Total liabilities................................... $ 2,323,777 $ 2,189,910
============ ============
Stockholders' equity:
Common stock of $0.05 par value, 40,000
shares authorized; issued and outstanding
21,114,468 and 21,114,468, respectively................ $ 1,055,723 $ 1,055,723
Additional paid-in capital............................. 9,253,622 9,253,622
Retained deficit....................................... (10,936,530) (10,059,131)
Current year income (loss)............................. (172,212) (877,399)
------------ ------------
Total stockholders' equity (deficit)............... (799,397) (627,185)
------------ ------------
Total liabilities and stockholders' equity......... $ 1,524,380 $ 1,562,725
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
Condensed Statement of Operations
(In thousands except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended
October 31,
1998 1997
-------- --------
<S> <C> <C>
Contract revenues:
Tomographic system sales............ $ 605 $ 289
Service contracts and upgrades...... 113 154
------- -------
Total revenues..................... 718 443
Direct contract costs................ 640 463
------- -------
Gross profit......................... 78 ( 20)
------- -------
Operating costs:
Marketing........................... 25 79
Research and Development............. 18
General and administrative........... 192 202
------- -------
Total operating costs.............. 235 281
------- -------
Income (loss) from operations........ (157) (301)
------- -------
Other expense (income):
Interest expense.................... 15 23
Interest and other income........... 0 0
------- -------
Other - net....................... 15 23
------- -------
Net income (loss).................... $ (172) $ (324)
------- -------
Weighted average shares outstanding.. 21,114 20,705
======= =======
Net income (loss) per share.......... $ 0 $ 0
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
Statement of Cash Flows
Three Months Ended October 31, 1998 and 1997
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended October 31,
1998 1997
------- -------
<S> <C> <C>
Operating activities:
Net income (loss)........................................ $(172) $(324)
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization......................... 10 22
Changes in operating assets and liabilities:
Accounts receivable................................. 95 325
Costs and earned profits on long-term
contracts in excess of related billings............ (0) (2)
Prepaid expenses and other current assets........... (60) (50)
Other assets........................................ 0 0
Accounts payable and accrued expenses............... 75 29
Billings in excess revenues......................... 0 38
----- -----
Net cash flows provided by (used in) operating
activities............................................. (52) 38
Investing activities:
Common Stock............................................. 0 0
Long Term Assets......................................... 17 0
Purchases of PPE......................................... (58) 0
Capital expenditures..................................... 0 (90)
----- -----
Net cash flows used in investing activities............. (41) (90)
Financing activities:
Proceeds from Issuance of Common Stock................... 0 (25)
Proceeds from exercise of stock options.................. 0 0
Borrowings under line of credit.......................... 0 (10)
Repayments on borrowing from private sources............. 0 0
Notes payable............................................ 0 0
Bank One Revolver........................................ 0 0
Long Term Debt........................................... 28 0
Goodwill................................................. 0 0
----- -----
Net cash flows provided by (used in) financing activities.. 28 (35)
Net increase in cash and cash equivalent................... (65) (87)
Cash and cash equivalents at beginning of period........... 41 390
----- -----
Cash and cash equivalents at end of period................. $ (24) $ 303
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</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
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. SUBSEQUENT EVENT.
In January and February of 1999, the Company initiated formal procedures to
terminate its participation in the National Institute of Standards and
Technology (NIST) Advanced Technology Program. Since the fall, the Company
had concluded that financing for the NIST program to develop a high speed
volumetric CT or 3D CT capability along with General Electric and other
consortium partners was simply not going to be available. The Company
continues nonetheless with its own internal development effort to enhance
its own volumetric CT capability.
7
<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,
----------------------------------------------------------------
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..................... $ 605 84.26% 109.34% $ 289 65.24% (66.16%)
Scanning services & maintenance
& Upgrades....................... 113 15.74% (26.62%) 154 34.76% (24.14%)
----- ------ ------ ----- ------ -------
Total revenues................ 718 100.00% 62.08% 443 100.00% (58.09%)
Direct contract costs............. 640 89.14% 38.23% 463 104.51% (51.16%)
Gross profit...................... 78 10.86% NM (20) -4.51% (118.35%)
Operating costs:
Marketing....................... 25 3.48% (68.35%) 79 17.83% (45.14%)
Research and development........ 18 2.51% NM 0.00% 0.00%
General and administrative...... 192 26.74% (4.95%) 202 45.60% (8.60%)
----- ------ ------ ----- ------ -------
Total operating costs......... 235 32.73% (16.37%) 281 63.43% (21.01%)
----- ------ ------ ----- ------ -------
Income (loss) from operations..... (157) -21.87% NM (301) -67.95% (17.58%)
----- ------ ------ ----- ------ -------
Other (income) expense:
Interest expense................ 15 2.09% (34.78%) 23 5.19% (21.05%)
Interest and other income....... 0 0.00% 0.00%
Other - net................ 15 2.09% (34.78%) 23 5.19% (21.05%)
----- ------ ------ ----- ------ -------
Net income (loss)................. $(172) -23.96% NM $(324) -73.14% (17.82%)
===== ====== ====== ===== ====== =======
</TABLE>
N/M - Not meaningful
8
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
RESULTS OF OPERATIONS
Total revenue for the first quarter of fiscal 1999 increased 62% over the same a
year ago, from $443,000 in the first quarter of 1998 to $718,000 in 1999. Most
of this increase is attributable to a 109% growth in system sales.
Gross profit (revenue less direct contract costs) for the first quarter as a
percentage of revenue was 11%, up from (-4.5%) for the same quarter in the
previous year. This improvement is due primarily to the absorption of overhead
costs in the higher revenue results.
First quarter operating costs as a percentage of revenue improved from 63.4% in
fiscal 1998 to 33% in fiscal 1999. The decrease in operating costs, from
$281,000 in fiscal 1998 to $235,000 in fiscal 1999, is primarily the result of
decreased marketing expenditures.
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 1998, the Company had negative net working capital of
approximately $1,226,000 compared to negative net working capital of
approximately $1,050,000 at July 31, 1997. During the three months ended October
31, 1998, the Company had cash used in operations of $172,212, compared to cash
used in operations of approximately $38,000 in the prior year period. The
largest uses of cash during the first quarter were for the purchase of prepaid
equipment items required for system construction.
Total contract backlog at October 31, 1998 was $1,028,614, down from $2,403,000
for the same period in 1997. Management is actively pursuing several system
sales and lease services opportunities which may result in additional sales
backlog; however, no assurance can be given regarding any potential sales.
Because of the contract backlog, management believes that the Company may have
difficulty meeting its cash requirements through fiscal 1999. The Company's
liquidity position will depend upon the outcome of further cash generating
activities, such as raising additional debt or equity capital, converting some
of its debt into equity capital or preferred stock and/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, 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. Management negotiated with the bank to extend the
maturity of the loan to March 31, 1999 by assigning certain receivables to
provide additional security for the debt. Default was caused by the Company's
failure to comply in a timely fashion with the monthly reporting requirements
included in the loan agreement. Of the $630,000 originally borrowed, the Company
had a remaining balance, including accrued interest, of $138,239.94 as of the
December 22, 1998 renewal date.
In the coming months, the Company will proceed with closing out the research
program from the National Institute of Standards and Technology (NIST) under the
Advanced Technology Program. The Company will endeavor to conclude its
contractual arrangements with its research partners to the satisfaction of all
parties. The Company will also endeavor to get one or more of its most
significant creditors to convert its payable into preferred stock or common
stock of the Company. While the Company believes that its creditors may
entertain such a proposal, there can be no assurance whatsoever that they will,
in fact, convert all or any of their accounts receivable from the Company into
any form of preferred or common stock and their failure to do so could have a
material adverse effect on the Company's liquidity.
THE YEAR 2000 ISSUE
The Company, like many companies, faces the Year 2000 Issue. The problem arises
because many computer programs were written using two digits rather than four to
define the applicable year (for example, "98" for the year 1998). Any of the
Company's programs, including those in its proprietary software applications,
software systems, information technology infrastructure, and embedded technology
(e.g., non-technical assets such as time clocks and building services), may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things a temporary inability to process
transactions or engage in similar normal business activities.
Because the Company's products and services are largely computer based, it is
critical that the Company works proactively with its clients to achieve Year
2000 compliance. Accordingly, the Company has developed and implemented a Year
2000 program to deal with this important issue in an effective and timely
manner. This problem has received significant senior management attention. The
Company has recently completed an assessment of the impact of Year 2000 issues
on the processing of date-related information for all of its information systems
infrastructure (e.g., accounting systems) and its proprietary product software.
9
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
Through its assessment of its information systems infrastructure, the Company
has determined that there may be Year 2000 compliance issues facing the Company,
including its use of third party software packages. The Company is highly
dependent upon its own internal computer technology and relies upon the timely
performance of its suppliers and customers and their systems. For example, a
substantial part of the Company's day-to-day operations is dependent on power
and telecommunications services, for which alternative sources of services may
be limited. A large-scale Year 2000 failure could impair the Company's ability
to provide timely performance results required by the Company's customers,
thereby causing potential liability, lost revenues and additional expenses, the
amounts which have not been estimated. The Company's Year 2000 project seeks to
identify and minimize this risk and includes testing of its in-house
applications, purchased software and hardware to ensure that all such systems
will function before and after the Year 2000. The Company is continually
refining its understanding of the risk the Year 2000 poses to its strategic
suppliers and customers and this refinement will continue through the rest 1999.
At this time, the Company does not believe that such problems will represent a
material financial problem.
The Company's assessment of the impact of the Year 2000 compliance issues on its
proprietary software revealed no significant concerns. Specifically, the Company
does not believe that any of its proprietary software poses a Year 2000
compliance threat to any of its customers, although the operating systems for
workstations or PCs which are utilized by the Company to operate CT systems may
present such issues to customers. For example, minor problems were detected by
the Company in its in-house scanning service system which could also potentially
affect customers using the system. The Company has previously sent instructions
to all previous systems customers advising them of the possible issue and
providing procedural recommendations that could be employed to address this
problem as well as other problems which, in the Company's opinion, may arise in
the future. The Company does not believe that these issues represent either a
material problem to its customers or a problem that could have a material
financial impact on the Company.
Costs for modifications and updates are being expensed as incurred and are not
expected to have a material impact on the results of operations or cash flows.
The cost of the Company's Year 2000 project is being funded from cash flows
generated from operations. The Company estimates that its total Year 2000
expenses will not materially affect its financial condition. To date, the
Company has expended approximately $1,000, primarily for labor and consulting
costs associated with the evaluation, assessment and remediation of computer
systems.
The Company's management believes it has an effective program in place to
resolve the Year 2000 Issue. In the event the Company has made an inaccurate
assessment of its Year 2000 compliance, the Company may not be able to process
customer transactions which could have a material adverse impact on the
operations of the Company. In addition, disruptions in the economy generally
resulting from Year 2000 Issues could also materially adversely affect the
Company. The amount of potential liability and lost revenue cannot be reasonably
estimated at this time.
10
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
The Company is a party to two suits as of the date of this filing, both filed by
vendors. While discussions are underway to settle the matters out of court,
there can be no assurance that settlements can in fact be reached. The amounts
of each of the disputes is less than $10,000.
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 December 22, 1998 loan renewal date was $138,239.94.
Management negotiated with the Bank to extend the maturity of the loan until
March 31, 1999 by making a partial principal reduction and by assigning certain
accounts receivable to provide the Bank with incremental security for the loan.
The Company is also in default on a note payable to a law firm in the amount of
$130,019 payable at 8% interest.
Item 4 - Submission of Matters to a Vote of Security Holders
The Company has deferred its Annual Meeting of Shareholders pending certain
developments to be announced.
Item 5 - Other Information
In February of 1999, the Company executed a Loan Agreement and Security
Agreement with a trade vendor in the original principal amount of $264,126.62
for the provision of a number of new X-ray generation systems to be used by the
Company in the manufacture of certain products to be delivered to the Company's
customers. The security for the loan was (i) title to the X-ray systems until
the product is delivered to the Company's customers as well as (ii) a fractional
security interest in certain accounts receivable. The formal consent of the
Company's other secured creditors was arranged by Management.
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.
11
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SCIENTIFIC MEASUREMENT SYSTEMS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the issuer
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
April 14, 1999
12
