<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10--QSB
(Mark One)
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 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 October 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 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 October 31, 1999
- ----------------------------- ----------------
$0.05 Par Value Common Stock 21,114,468
Transitional Small Business Disclosure Format (check one): Yes__ No X
- ------------------------------------------------------------------------------
<PAGE>
INDEX
Risk Factors
- ------------
Part I - Financial Information
- ------------------------------
Item 1: Financial Statements (Unaudited):
Condensed Balance Sheet:
October 31, 1999 and July 31, 1999.......................
Condensed Statement of Operations:
Three Months Ended October 31, 1999 and 1998.............
Statement of Cash Flows:
Three Months Ended October 31, 1999 and 1998.............
Notes to Condensed Financial Statements...................
Item 2:
Management's Discussion and Analysis of Financial
Condition and Results of Operations......................
Part II - Other Financial Information
Items 1 - 6...............................................
Signatures................................................
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
RISK FACTORS
The statements included in this report regarding future financial
performance and results and the other statements that are not historical facts
are forward-looking statements. The words "expect," "project," "estimate,"
"predict" and similar expressions also are intended to identify forward-looking
statements. Such statements involve risks, uncertainties and assumptions,
including but not limited to, industry conditions, foreign exchange and currency
fluctuations and other factors discussed in this report (including those
specifically discussed below) and in the Company's other filings with the
Securities and Exchange Commission. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual outcomes may vary materially from those indicated.
Low Levels of Working Capital
The Company requires additional financing for its operations, including but
not limited to its obligations under the U.S. Department of Commerce National
Institute of Standards and Technology (NIST) Financial Assistance Award dated
January 19, 1996, as amended, and to produce its backlog, and no assurances can
be given that any such financing will be obtainable, adequate or available on
economically favorable terms.
Incurrence of Substantial Indebtedness
The Company incurred substantial indebtedness, including amounts owed under
the NIST contract (see Note 3 to the Financial Statements). The Company's level
of indebtedness has several important effects on its future operations,
including, without limitation, (i) a substantial portion of the Company's cash
flow from operations has been dedicated to the payment of interest and principal
on its indebtedness, (ii) the Company's leveraged position has substantially
increased its vulnerability to adverse changes in general economic and industry
conditions, as well as to competitive pressure, and (iii) the Company's ability
to obtain additional financing for working capital, capital expenditures,
general corporate and other purposes may be limited.
The Company's ability to continue its operations, to meet its debt service
obligations and to reduce its total indebtedness will be dependent upon the
Company's ability to restructure its dent and/or to raise additional financing.
The Company's future performance will be subject to general economic conditions,
industry cycles and financial, business and other factors, many of which are
beyond its control. There can be no assurance that the Company's business will
continue to generate cash flow at or above current levels.
If the Company is unable to generate sufficient cash flow from operations
in the future to service its debt, it may be required, among other things, to
seek additional financing in the debt or equity markets, to refinance or
restructure all or a portion of its indebtedness, or to sell selected assets or
reduce or delay planned capital expenditures. There can be no assurance that any
such measures would be sufficient to enable the Company to service its debt or
that any such financing, refinancing or sale of assets would be achievable on
economically favorable terms.
Changes in Technology
There can be no assurances that significant changes will not occur in
tomography or that substantial competition will not develop as a result of
technology changes which may adversely affect the Company's ability to compete.
See "Business - Technology."
<PAGE>
The Company experiences significant fluctuations in its backlog. There is
no assurance that the Company will be able to obtain future orders for its
systems, that the number of future orders will be sufficient to enable the
Company to operate profitably, or that the Company will have sufficient cash
available to fill its backlog.
Patents and Other Rights
Effective July 1, 1993, the Company acquired a perpetual, non-exclusive,
royalty-free license from two of the Company's founders to two U.S. patents and
technology know-how relating to its basic system. The licenses for the
technology and underlying "know how" remain in full force and effect, but the
two underlying patents have since lapsed. The Company co-owns a patent entitled
"Online Tomographic Gauging of Hot Sheet Metal" and has been awarded a U.S.
Patent entitled "Process for Analyzing the Contents of Containers." The Company
has also been granted for a patent dealing with 3D or 3 dimensional metrology,
which is scheduled to be issued on or about July 2000.
The issuance of a patent is not conclusive as to its validity or
enforceability; and there has been no independent study of other patents or
prior art which might be infringed by the Company's systems. Attempts by the
Company to enforce or defend its patent rights could result in substantial
expense. The Company has one international patent. But the Company's technology
may be subject to appropriation without compensation in some areas of the world
and may be subject to use without compensation by the U.S. government in
connection with government contracts. (See: "Business - Patents and Other
Rights").
Recent Changes in Management; Dependence on Key Personnel
During FY 1999 the Company experienced changes in its senior management,
notably the loss of its Vice President of Sales and Marketing. The Company
appointed the manager for the scanning service division as the new VP of Sales
and Marketing to fill the position.
The Company believes that its success will depend to a significant extent
upon the continued services of certain other key individuals, including but not
limited to Mr. Howard Burris and Dr. Forrest F. Hopkins. The loss of the
services of certain individuals or the inability of the Company to hire
qualified replacements in an orderly manner could have a material adverse effect
on the Company.
Competition
The non-destructive evaluation industry is highly competitive, and the
Company faces competition from companies with substantially greater financial
and technological resources and greater production capacity and experience than
the Company. The Company believes that its competitive position is negatively
impacted by its relative lack of financial resources and working capital. For
example, because of its lack of financial resources and working capital, the
Company strives to negotiate contracts with a substantial advance payment
requirement as well as periodic progress payments. There can be no assurance
that the Company's limited resources and capacity will be sufficient to compete
effectively in such industry in the future or that it will be able to negotiate
contracts with favorable payment terms. (See: "Business - Competition").
Product Liability Insurance
The Company does not carry product liability insurance. There can be no
assurance that suits may not be filed or judgments obtained against the Company
in the future in excess of available funds or any insurance coverage which may
then be in effect. Additionally, should it be determined that product liability
insurance is necessary or desirable, the cost of such insurance could have a
material effect upon the cost of the tomographic systems, thereby having an
adverse effect on the sales price of such systems and the competitiveness of the
Company.
<PAGE>
Use of X-Ray Equipment and Radioactive Isotopes
The Company's tomographic systems use x-ray generation equipment and,
extremely rarely, radioactive isotope sources. The Company believes that it
complies with all current governmental regulations regarding such equipment and
materials. Changes in safety regulations regarding their use and sale could
cause the Company additional expense and increase the cost of its systems, which
could have an adverse impact upon sales or uses of its systems. (See: "Business
- - Governmental Regulation").
Conflicts of Interest and Benefits to Management and Present Shareholders
Various officers, directors and principal shareholders of the Company have
engaged in or become involved in a variety of business relations with the
Company which confer benefits upon such persons and/or create actual or
potential conflicts of interest.
Dividend Policy
The Company has never paid cash dividends on the Common Stock and does not
anticipate that cash dividends will be paid in the foreseeable future. The
Company currently intends to retain any future earnings to finance the
operations of the Company's business. The declaration and payment in the future
of any cash dividends will be at the election of the Company's Board of
Directors and will depend upon the earnings, capital requirements and financial
position of the Company, future loan covenants, general economic conditions and
other pertinent factors. Furthermore, certain provisions of the Company's loan
documents may restrict the Company's ability to pay cash dividends on the Common
Stock. (See" "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources").
Anti-Takeover Effect of Certain Provisions
The Company's Articles of Incorporation and Bylaws include certain
provisions that may have the effect of discouraging potential unsolicited offers
or other efforts to obtain control of the Company that are not approved by the
Board. Such provisions may adversely affect the market price of the Common Stock
and may also deprive the shareholders of opportunities to sell shares of Common
Stock at prices higher than prevailing market prices. Such provisions include
the requirement that all shareholder action must be taken at a duly called
annual or special meeting of shareholders unless a majority of the entire Board
provides its prior approval for shareholder action to be taken by written
consent of shareholders. (See: "Description of Capital Stock - Provisions Having
Possible Anti-takeover Effect").
The Board has the authority, without further action by the shareholders, to
issue up to 2,000,000 shares of the Company's preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
and to issue over 18,000,000 additional shares of Common Stock. The issuance of
the Company's preferred stock or additional shares of Common Stock could
adversely affect the voting power of the holders of Common Stock and could have
the effect of delaying, deferring or preventing a change in control of the
Company.
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
Balance Sheets
(In Thousands)
Assets 10/31/99 07/31/99
------ -------- --------
Current Assets:
Cash 100 10
Billed receivables 571 339
NIST receivables 0 0
Costs in excess 428 559
Allowance for doubtful accounts (16) (64)
Inventories 141 141
Other current assets 57 21
------ ------
Total current assets 1,281 1,005
------ ------
Property, plant and equipment, at cost:
Equipment 337 337
Furniture and fixtures 85 85
Building 62 62
Land 0 0
------ -----
485 485
Less accumulated Depreciation (384) (375)
------ -----
Net property, plant and equipment 101 110
------ -----
Scanning equipment, less accumulated
depreciation of $310,573.47 207 218
Other assets, less accumulated amortization
of $34,623 64 65
------ ------
Total assets $1,652 $1,398
====== ======
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
Liabilities and Stockholders' Equity 10/31/99 07/31/99
------------------------------------ -------- --------
Current Liabilities:
Accounts payable 920 911
Payable to NIST Members 871 871
Billings in excess of Revenues 231 342
Accrued vacation 87 59
Accrued sales Commissions 76 55
Other accrued expenses 420 205
Leases Payable, current Portion 22 29
Note payable 96 96
Bank Loans 144 144
-------- --------
Total Current Liabilities 2,868 2,714
Long term leases payable 6 7
-------- --------
Total liabilities 2,874 2,721
-------- --------
Stockholders' equity:
Common stock 1,056 1,056
Additional paid-in Capital 9,254 9,254
Retained deficit (11,632) (11,076)
Current year income (loss) 101 (556)
-------- --------
Total stockholders' equity (deficit) (1,222) (1,323)
-------- --------
Total liabilities and stockholders'
equity $ 1,652 $ 1,398
======== ========
The accompanying notes are an integral part of these financial statement.
<PAGE>
Statement of Income (Loss)
For the Three Months Ending 10/31/99
(In Thousands)
<TABLE>
<CAPTION>
Year to Date Year to Date
10/31/99 10/31/98
----------------------------------------------------------------------------
$ % $ %
--------------- -------------------------------------- ----------------
<S> <C> <C> <C> <C>
Contract revenues:
System sales $736 88.42% 1056 78.05%
Scanning services 68 8.12% 0.00%
Maintenance & Upgrades 29 3.45% 297 21.95%
--------------- -------------------------------------- ----------------
Total Revenues 832 100.00% 1353 100.00%
Direct contract costs 398 47.82% 977 72.21%
Overhead 200 24.00%
--------------- -------------------------------------- ----------------
Gross profit 235 28.18% 376 27.79%
--------------- -------------------------------------- ----------------
Operating costs:
Marketing 22 2.70% 119 8.8%
Research & development 30 3.66% 0.00%
General & administrative 87 10.51% 266 19.66%
--------------- ------------------------------------- ----------------
Total operating costs 140 16.87% 385 28.46%
--------------- -------------------------------------- ----------------
Income (loss) from operations 94 11.31% (9) (0.67%)
--------------- -------------------------------------- ----------------
Other (income) expense:
Interest expense 1 0.12% 25 1.85%
Interest and other income 0 0.00% 0 0.00%
--------------- --------------------------------------
Other - Net 1 0.12% 25 1.85%
--------------- ------------------------------------- ----------------
Net gain before extraordinary items 93
===============
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Extraordinary item - gain on
extinguishment of debt (no applicable
income taxes) 8
---------------
Net income (loss) $101 12.12% ($34) (2.51%)
=============== ====================================== ================
Basic Earnings (Loss) per Share 0.004 (0.01)
Weighted average shares outstanding 21,114,468 21,114,468
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statements of Cash Flows
For the three months ended 10/31/99
<TABLE>
<CAPTION>
For Year For Year
2000 1999
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $ 100,947 (172,212)
Adjustments to Reconcile Net Loss to Net Cash
Provided (Used) by Operating Activities
Depreciation and amortization 23,206 (10,008)
Loss on impairment of property and equipment -
(Increase)/Decrease in Assets:
Trade accounts receivable (280,860) 94,588
Other receivables -
Costs and earned profits in excess of billings on contracts 130,597 (340)
Inventories
Prepaid expenses and other current assets (36,192) (59,836)
Other assets -
Increase/(Decrease) in Liabilities:
Accounts payable and accrued liabilities 272,181 80,719
Billings in excess of costs and earned profits on contracts (110,818) -
---------------- -----------------
Total Adjustments (1886) 105,123
---------------- -----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 99,060 (52,373)
---------------- -----------------
CASH FLOWS USED BY INVESTING ACTIVITIES
Acquisitions of property and equipment (1,176) (40,622)
---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under notes payable -
Borrowings under capital leases 0 27,911
Repayments of notes payable 0
Repayments of capital leases (8,367)
---------------- -----------------
</TABLE>
<PAGE>
<TABLE>
For Year 2000 For Year 1999
<S> <C> <C>
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES $ (8,367) 27,911
---------------- ----------------
NET INCREASE (DECREASE) IN CASH $ 89,517 (65,084)
CASH AT BEGINNING OF YEAR 10,115 40,710
---------------- ----------------
CASH AT END OF YEAR $ 99,631 (24,375)
================ =================
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
INFORMATION
Cash Paid During the Period:
Interest $ 1,027
Taxes $ -
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
None
The accompanying notes are an integral part of these financial statements.
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial Statement Presentation:
The accompanying condensed financial statements have been prepared 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.
Certain disclosures and other information required by generally accepted
accounting principles have been omitted from these condensed financial
statements as permitted by reference to other Securities and Exchange Commission
filings. These 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, 1999.
Earnings (Loss) Per Share
The Company has adopted Statement of Financial Accounting Standard (SFAS)
No. 128, "Earnings Per Share" which replaces the presentation of primary EPS
with a presentation of basic EPS.
Net earnings (loss) per common share amounts are computed based on the
weighted average number of shares outstanding. Diluted earnings per share
amounts are based on an increased number of shares that would be outstanding
assuming conversion of the common stock options and warrants. At January 31,
2000 and 1999 respectively, there were vested stock options for 1,399,639 and
2,422,678 shares and warrants for 360,940 and 360,940 outstanding. This
conversion was not presumed for this calculation for the three months ended
January 31, 1999 since their effect would be anti-dilutive.
NOTE 2 - STOCK OPTIONS
On September 15, 1999, the Company's board of directors approved a grant of
up to 555,000 of options to purchase common stock to it employees in
consideration of the sacrifices made to assist the Company through difficult
financial times. The options will be issued with a grant price of $0.06 per
share.
NOTE 3 - SUBSEQUENT EVENTS:
SALE OF ASSETS AND REORGANIZATION OF DEBT
On December 12, 1999 the Company completed the sale of its scanning service
bureau assets, for a cash sales price of $600,000. The proceeds from this sale
were used to reduce the Company's debt. The cost of the service bureau assets
sold amounted to $493,532, with related accumulated depreciation of $272,278 and
a net book value of $221,254. The Company will recognize a one-time gain on the
sale of these assets in the amount of $324,460, which includes a charge for the
forfeiture to the right of future cash flows on a system and scanning contract,
in the approximate amount of $54,286. Terms of the sale provided for the
purchaser to place an order for the purchase of a CT Scanner on or before
February 29, 2000, however such an order has not been placed to date.
Additional provisions provide for the repurchase of these assets under certain
circumstances, including the failure of the purchaser to place the order for the
CT Scanner, with a specific repurchase formula. The Company has not initiated
efforts to avail itself of the option under this agreement to date.
Concurrently with the negotiations to sell these service bureau assets, the
Company entered into negotiations with various vendors to settle outstanding
balances owed to these vendors at year-end. The Company offered a fixed amount
of cash plus a set amount of common stock of the Company in exchange for a
<PAGE>
settlement of its debt with these vendors. Specifically, the Company entered
into an agreement to settle the long outstanding balance due to a member of the
consortium formed to participate in a grant from the U.S. Department of Commerce
National Institute of Standards and Technology ("NIST") under their Advanced
Technology Program. This vendor agreed to accept a settlement of $175,000 in
cash, plus 92,105 shares of common stock of the Company to settle a debt in the
amount of $871,469, plus any and all other potential claims up to an additional
$718,200, related to its participation in the consortium. All other vendors who
accepted the negotiated offer were paid a total of $94,111 plus 7,895 shares of
common stock, to settle trade payable liabilities in the amount of $153,810.
These settlements will be recorded as an extraordinary gain, less the value of
the common stock issued based upon a trading price of $0.06 per share on the
date of settlement, and amounts to $ 750,168.
<PAGE>
Part 1: Financial Information (continued)
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
1999 1998
------------------------------------------------------------------------------------
Dollar % of % Change from Dollar % of % Change from
Amount Total Prior Amount Total Prior
(000s) Revenue Year (000s) Revenue Year
------- -------------------------- -------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Contract revenues:
System sales $736 88.36% (30.30%) $1,056 78.05% 23.65%
Scanning services & 68
Maintenance & Upgrades 29 3.48% (90.24%) 297 21.95% 46.31%
------- ---------------------- -------- ------- ------
Total revenues 833 100.00% (38.43%) 1,353 100.00% 28.00%
Direct contract costs 598 71.79% (38.79%) 977 72.21% 3.06%
Gross profit 235 28.21% (37.50%) 376 27.79% NM
------- ---------------------- -------- ------- ------
Operating costs:
Marketing 22 2.64% (81.51%) 119 8.80% (17.36%)
Research and development 30 3.60% NM 0.00% 0.00%
General and administrative 87 10.44% (67.29%) 266 19.66% 20.36%
------- ---------------------- -------- ------- ------
Total operating costs 139 16.69% (63.90%) 385 28.46% 8.15%
------- ---------------------- -------- ------- ------
Income (loss) from operations 94 11.28% NM (9) (0.67%) NM
------- ---------------------- -------- ------- ------
Other (income) expense:
Interest expense 1 0.12% (96.00%) 25 1.85% 31.58%
Interest and other income 0 0.00% 0.00%
------- ---------------------- -------- ------- ------
Other-net 1 0.12% (96.00%) 25 1.85% 31.58%
------- ---------------------- -------- ------- ------
Net income (loss) $ 93 11.16% NM ($34) (2.51%) NM
======= ======================= ======== ======= ======
Extraordinary item - gain on
extinguishment of debt (no
applicable income taxe 8 0.96%
---------------------
Net income (loss) $101 12.12%
=====================
</TABLE>
<PAGE>
Results of Operations
Total revenue for the first quarter of fiscal 2000 decreased 38% over the
same period a year earlier, from $1,353,000 in the first quarter of fiscal 1999
to $833,000. Most of this decrease is attributable to a drop in systems sales of
320,000.
Gross profit (revenue less direct contract costs) for the first quarter
decreased from $376,000 to $235,000, a 38% decrease over the analogous quarter
in the FY 1999 reporting year. While overhead had decreased some 64%, the direct
cost of goods for the period went down 39%. Despite a decrease in direct costs,
the 38% decrease in revenue had a more profound effect on the bottom line.
First quarter operating costs as a percentage of revenue fell 64% in the
first quarter of FY 2000 from $385,000 to $139,000. The largest component of the
cost reduction came from a decrease in amounts spent for General and
Administrative overhead. This expense dropped by 67%.
Liquidity and Capital Resources
As of October 31, 1999, the Company had a negative net working capital
position of approximately $1,587,975 compared to a negative net working capital
position of approximately $1,225,445 at the same period in 1998. During the
three months ended October 31, 1999 (FY 2000), the Company generated $99,060 in
cash from operations versus using $52,373 in cash in operations for the same
period in FY 1999.
Total net contract revenue backlog as of October 31, 1999 was $251,267 and
$625,591 in billings backlog. The Company has substantial billings remaining to
five customers, including Rolls Royce and Chrysler. Management is actively
pursuing (i) several system sales; (ii) operating lease opportunities; and (iii)
various strategic initiatives which may result in additional sales backlog;
however, no assurance can be given regarding any potential sales.
Because of the net contract revenue backlog outstanding at this time,
management believes that the Company may face difficulty meeting its cash
requirements through fiscal 2000. 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, 1999, the Company was in technical default with one of
its commercial back lenders. The Company owed $143,961 on an original loan
balance of $630,000 on an Export Import Bank of the U.S. ("EXIMBANK") guaranteed
line of credit at Wells Fargo HSBC Trade Bank , N.A. as well as a $50,000 line
of credit to a local lender as of that date. Management has again successfully
negotiated with Wells Fargo HSBC Trade Bank, N.A. to extend the maturity of the
loan, but there can be no assurance that such extensions will continue. Default
was caused by the Company's failure to comply in a timely fashion with the
monthly reporting requirements included in the loan agreement.
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 all
contractual arrangements satisfactorily with its research partners to the
satisfaction of all parties, but there can be no guarantee of such an outcome.
The Company will also endeavor to get one or more of its most significant
creditors to take a discount on their Account(s) Receivable and/or to convert
the net balance of their Account(s) Receivable 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 as of October 31, 1999 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. (See:
"Subsequent Events").
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
<PAGE>
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 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.
<PAGE>
PART II - OTHER FINANCIAL INFORMATION
Item 1 - Legal Proceedings
The Company is a party to four suits as of the date of this filing, all
filed by product and service 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 these suits in aggregate are less than $15,000, but
other suits are threatened. (See: "Subsequent Events").
Item 2 - Changes in Securities
None.
Item 3 - Defaults Upon Senior Securities
As of October 31, 1999, the Company was in technical default on its loan
from Wells Fargo HSBC Trade Bank, N.A.. The original principal amount of that
loan was $630,000. The total amount, including accrued interest, due on October
31, 1999 was $143,961. Management had successfully negotiated with both Wells
Fargo HSBC Trade Bank, N.A. and with its local lender, Frost Bank, N.A. to
extend the maturity dates of both these loans during the reporting period. But
as of October 31, 1999 the Company is in default with Frost Bank. Frost Bank
notified the Company that it was willing to forbear on any collection effort,
but that it was unwilling to extend the loan for additional periods.
(Subsequently, both loans were repaid in full along with all accrued interest.
See: "Subsequent Events").
The Company is also in default on a note payable to a law firm in the
amount of $96,205 payable at 8% interest.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
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.
<PAGE>
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 4, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AT OCT 31, 1999 AND THE INCOME STATEMENT FOR THE QUARTER ENDED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> JUL-31-2000 JUL-31-1999
<PERIOD-START> AUG-01-1999 AUG-01-1998
<PERIOD-END> OCT-31-1999 JUL-31-1998
<CASH> 100 10
<SECURITIES> 0 0
<RECEIVABLES> 571 290
<ALLOWANCES> 16 16
<INVENTORY> 141 141
<CURRENT-ASSETS> 1,281 1,005
<PP&E> 1,005 1,005
<DEPRECIATION> 695 677
<TOTAL-ASSETS> 1,652 1,398
<CURRENT-LIABILITIES> 2,874 2,714
<BONDS> 0 0
0 0
0 0
<COMMON> 1,056 1,056
<OTHER-SE> 9,254 9,254
<TOTAL-LIABILITY-AND-EQUITY> 1,652 1,398
<SALES> 832 2,877
<TOTAL-REVENUES> 832 2,877
<CGS> 598 2,406
<TOTAL-COSTS> 738 3,533
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1 35
<INCOME-PRETAX> 93 (700)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 93 (700)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 8 5
<CHANGES> 0 0
<NET-INCOME> 101 (695)
<EPS-BASIC> 0.03 0.03
<EPS-DILUTED> 0.03 0.03
</TABLE>
