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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, 1999
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, 1999 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:
Shares Outstanding as of
Title of Class May 1, 1999
-------------- -----------
21,114,468
$0.05 Par Value Common Stock
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
- ------------------------------
Item 1: Financial Statements (Unaudited):
Condensed Balance Sheet:
January 31, 1999 and July 31, 1998............................ 3
Condensed Statement of Operations:
Three Months Ended January 31, 1999 and 1998.................. 5
Six Months Ended January 31, 1999 and 1998
Statement of Cash Flows:
Six Months Ended January 31, 1999 and 1998.................... 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.................................................................. 12
Signatures................................................................... 13
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2
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SCIENTIFIC MEASUREMENT SYSTEMS, INC.
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Condensed Balance Sheet
(in thousands)
January 31, July 31,
1999 1998
----------- ---------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash.................................................. $ 7 $ 41
Billed receivables.................................... 649 660
NIST receivables...................................... 0 0
Unbilled receivables.................................. 255 233
Allowance for doubtful accounts....................... (49) (49)
Inventories (includes capitalized NIST costs
of $986,437 and $910,580, respectively)............... 202 202
Other current assets.................................. 129 53
-------- --------
Total current assets................................ 1,194 1,139
Property, plant and equipment, at cost:
Equipment............................................. 1,197 1,124
Furniture and fixtures................................ 104 104
Building.............................................. 62 62
Land.................................................. 0 0
-------- --------
Total property and equipment........................ 1,363 1,291
Less accumulated depreciation....................... (1,273) (1,234)
-------- --------
Net property, plant and equipment................. 90 57
Scanning equipment, less accumulated depreciation
of $289,736........................................... 259 279
Other assets, less accumulated amortization
of $292,939........................................... 69 88
-------- --------
Total assets...................................... $ 1,612 $ 1,563
======== ========
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3
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SCIENTIFIC MEASUREMENT SYSTEMS, INC.
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LIABILITIES AND STOCKHOLDERS' EQUITY January 31, July 31,
(in thousands) 1999 1998
---------- --------
(Unaudited) (Audited)
Current liabilities: $ 728 $ 394
Accounts payable..................................... 871 871
Payable to NIST members.............................. 426 480
Billings in excess of revenues....................... 54 36
Accrued vacation..................................... 43 43
Accrued sales commissions............................ 68 8
Other accrued expenses............................... 33 0
Leases payable, current portion...................... 121 130
Note payable......................................... 208 227
-------- --------
Bank Loans........................................... 2,553 2,190
Total current liabilities........................ 20 0
Long term leases payable............................... -------- --------
Total liabilities................................. 2,573 2,190
-------- --------
Stockholders' equity:
Common stock of $0.05 par value, 40,000
shares authorized; issued and outstanding
21,114,468 and 21,114,468, respectively.............. 1,056 1,056
Additional paid-in capital........................... 9,254 9,254
Retained deficit..................................... (10,937) (10,059)
Current year income (loss)........................... (334) (877)
-------- --------
Total stockholders' equity (deficit)............. (961) (627)
-------- --------
Total liabilities and stockholders' equity....... $ 1,612 $ 1,563
======== ========
The accompanying notes are an integral part of these financial statements.
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4
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SCIENTIFIC MEASUREMENT SYSTEMS, INC.
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Condensed Statement of Operations
(In thousands except per share amounts)
(Unaudited)
Three Months Six Months
Ended Ended
January 31, January 31,
1999 1998 1999 1998
-------- -------- -------- --------
Contract revenues:
Tomographic system sales............ $ 423 $ 1,056 $ 1,028 $ 1,345
Service contracts and upgrades...... 118 297 230 452
------- ------- ------- -------
Total revenues..................... 540 1,353 1,258 1,797
Direct contract costs................ 470 977 1,110 1,440
------- ------- ------- -------
Gross profit......................... 71 376 148 357
------- ------- ------- -------
Operating costs:
Marketing........................... 45 119 71 199
Research and Development............. 6 0 25 0
General and administrative........... 166 266 357 468
------- ------- ------- -------
Total operating costs.............. 218 385 453 667
------- ------- ------- -------
Income (loss) from operations........ (147) (9) (304) (310)
------- ------- ------- -------
Other expense (income):
Interest expense.................... 15 25 29 47
Interest and other income........... 0 0 0 0
------- ------- ------- -------
Other - net....................... 15 25 29 47
------- ------- ------- -------
Net income (loss).................... $ (162) $ (34) $ (334) $ (357)
------- ------- ------- -------
Weighted average shares outstanding.. 21,114 21,114 21,114 21,114
======= ======= ======= =======
Net income (loss) per share.......... $ (.01) $ (.00) $ (.02) $ (.02)
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
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5
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SCIENTIFIC MEASUREMENT SYSTEMS, INC.
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Statement of Cash Flows
Six Months Ended January 31, 1999 and 1998
(In thousands)
(Unaudited)
Six Months
Ended January 31,
1999 1998
------- -------
Cash from Operating activities:
Net income (loss)...................................... $ (334) $ (357)
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization....................... 29 44
Accounts Receivable................................. (12) (299)
Inventory........................................... (0) 0
Prepaid & Other Current Assets...................... (76) (158)
Accounts Payable & Accrued Expenses................. 363 664
----- -----
Net Cash Provided (Used) by Operating Activities.... (30) (106)
Cash from Investing Activities:
Common Stock....................................... 0 (25)
Long Term Assets................................... 18 0
Purchases of PPE................................... (42) (173)
----- -----
Net Cash Provided (Used) by Operating Activities. (24) (198)
Cash from Financing Activities
Notes Payable...................................... 0 0
Long Term Debt..................................... 20 (60)
Goodwill........................................... 0 0
----- -----
Net Cash Provided (Used) by Financing Activities. 20 (60)
----- -----
Increase/Decrease in Cash................................ (34) (364)
Cash at Beginning of Period.............................. 41 390
----- -----
Cash at End of Period.................................... 7 26
===== =====
The accompanying notes are an integral part of these
financial statements.
6
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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, 1998 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.
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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,
------------------------------------------------------------------
1999 1998
------------------------------- ---------------------
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............................................... $ 423 78.24% (59.96%) $1,056 78.05% 21.66%
Scanning services & maintenance
& Upgrades................................................. 118 21.76% (60.42%) 297 21.95% 1.71%
------ ------- ---------- ------ ------- ----------
Total revenues.......................................... 540 100.00% (60.06%) 1,353 100.00% 16.64%
Direct contract costs....................................... 470 86.92% (51.93%) 977 72.21% 0.72%
Gross profit................................................ 71 13.08% (81.21%) 376 27.79% 97.89%
------ ------- ---------- ------ ------- ----------
Operating costs:
Marketing................................................. 45 8.38% (61.93%) 119 8.80% 48.75%
Research and development.................................. 6 1.19% NM 0.00% 0.00%
General and administrative................................ 166 30.68% (37.68%) 266 19.66% 146.30%
------ ------- ---------- ------ ------- ----------
Total operating costs................................... 218 40.25% (43.51%) 385 28.46% 104.79%
------ ------- ---------- ------ ------- ----------
Income (loss) from operations............................... (147) (27.18%) NM (9) (0.67%) 550.00%
------ ------- ---------- ------ ------- ----------
Other (income) expense:
Interest expense.......................................... 15 2.71% (41.32%) 25 1.85% 66.67%
Interest and other income................................. 0 0.00% 0.00% 0 0.00% NM
Other - net.......................................... 15 2.71% (41.32%) 25 1.85% 66.67%
------ ------- ---------- ------ ------- ----------
Net income (loss)........................................... $(162) (29.89%) 375.02% $ (34) (2.51%) (161.54%)
====== ======= ========== ====== ======= ==========
</TABLE>
N/M - Not meaningful
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SCIENTIFIC MEASUREMENT SYSTEMS, INC.
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<TABLE>
<CAPTION>
Six Months Ended January 31,
--------------------------------------------------------------------
1999 1998
--------------------------------- -----------------------
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....................................... $1,028 81.71% (23.57%) $1,345 74.85% (21.89%)
Scanning services & maintenance
& Upgrades......................................... 230 18.29% (49.09%) 452 25.15% (8.87%)
-------- --------- ------------ -------- --------- ------------
Total revenues.................................. 1,258 100.00% (29.99%) 1,797 100.00% (18.98%)
Direct contract costs............................... 1,110 88.21% (22.93%) 1,440 80.13% (24.92%)
Gross profit........................................ 148 11.79% (58.46%) 357 19.87% 19.00%
-------- --------- ------------ -------- --------- ------------
Operating costs:
Marketing......................................... 71 5.62% (64.49%) 199 11.07% (11.16%)
Research and development.......................... 25 1.96% NM
General and administrative........................ 357 28.40% (23.66%) 468 26.04% 41.82%
-------- --------- ------------ -------- --------- ------------
Total operating costs........................... 453 35.97% (32.14%) 667 37.12% 20.40%
-------- --------- ------------ -------- --------- ------------
Income (loss) from operations....................... (304) (24.19%) (1.83%) (310) (17.25%) NM
-------- --------- ------------ -------- --------- ------------
Other (income) expense:
Interest expense.................................. 29 2.34% (37.43%) 47 2.62% 38.24%
Interest and other income......................... 0 0.00% 0.00% 0 0.00% 0.00%
Other - net.................................. 29 2.34% (37.43%) 47 2.62% 38.24%
-------- --------- ------------ -------- --------- ------------
Net income (loss)................................... $ (334) (26.53%) (6.52%) $ (357) (19.87%) NM
======== ========= ============ ======== ========= ============
</TABLE>
Results of Operations
Total revenue for the second quarter of fiscal 1999 decreased 60.16% over the
same a year ago, from $1,353,000 in the second quarter of 1998 to $540,000 in
1999. For the six months ended January 31, 1999 total contract revenue
decreased 30.0% to 1,258,000 from 1,797,000 in fiscal 1998. Most of this
decrease is attributable to a 59.6% growth 49.1% drop in the recognition of
scanning system revenues and down time in the Company's one service scanner.
Gross profit (revenue less direct contract costs) for the second quarter as a
percentage of revenue declined 81.21% was to $71,000 from $376,000 for the same
quarter in the previous year. The low volume of scanning systems revenue and
the 60.42% decline in scanning and upgrade revenues were largely responsible for
this drop.
Second quarter operating costs as a percentage of revenue fell substantially in
fiscal 1998 over in fiscal 1999 with the drop in contribution margin at a time
when overhead was actually reduced by 43.51%. The decrease in operating costs,
from $385,000 in the analogous quarter in fiscal 1998 to $218,000 in fiscal
1999, is primarily the result of a decrease in marketing expenditures as well
as a 37.68% decrease in General & Administrative Costs.
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9
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SCIENTIFIC MEASUREMENT SYSTEMS, INC.
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Liquidity and Capital Resources
As of January 31, 1999, the Company had negative net working capital of
approximately $1,359,413 compared to negative net working capital of
approximately $1,050,530 at July 31, 1998. During the three months ended
January 31, 1999 the company had cash used in operations of $29,607 compared to
cash used in operations of approximately $106,000 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 January 31, 1999, was $824,806, down from $1,300,000
for the same period in 1998. 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 January 31, 1999, 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.
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 of
1999. At this time, the Company does not believe that such problems will
represent a material financial problem.
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10
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SCIENTIFIC MEASUREMENT SYSTEMS, INC.
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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.
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11
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SCIENTIFIC MEASUREMENT SYSTEMS, INC.
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PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
The Company is a party to three suits as of the date of this filing, all 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 the disputes in aggregate is less than $30,000.
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. At
that time, Management negotiated with the Bank to extend the maturity of the
loan by making a partial principal reduction and by assigning certain accounts
receivable to provide the Bank with incremental security for the loan. As of
this date the Bank has agreed to extend the loan yet again to June 30, 1999
whereupon all principle and accrued interest will be due and payable.
At present, the Company is not in default on its line of credit with Frost Bank,
but the loan will mature on July 31, 1999 whereupon all principle and accrued
interest will be due and payable.
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.
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12
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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 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
May 13, 1999
- --------------------------------------------------------------------------------
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> JUL-31-1999 JUL-31-1998
<PERIOD-START> NOV-01-1998 NOV-01-1997
<PERIOD-END> JAN-31-1999 JAN-31-1998
<CASH> 7 41
<SECURITIES> 0 0
<RECEIVABLES> 855 844
<ALLOWANCES> 0 0
<INVENTORY> 202 202
<CURRENT-ASSETS> 198 141
<PP&E> 1,622 1,570
<DEPRECIATION> 1,273 1,234
<TOTAL-ASSETS> 1,612 1,563
<CURRENT-LIABILITIES> 2,573 2,190
<BONDS> 0 0
0 0
0 0
<COMMON> 1,056 1,056
<OTHER-SE> (2,017) (1,682)
<TOTAL-LIABILITY-AND-EQUITY> 1,612 1,563
<SALES> 0 0
<TOTAL-REVENUES> 540 1,353
<CGS> 0 0
<TOTAL-COSTS> 697 1,362
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 15 25
<INCOME-PRETAX> (162) (34)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 0 0
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
