<PAGE>
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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 April 30, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from.................to...................
For the Quarter Ended April 30, 2000 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 April 30, 2000
---------------------------------- ------------------------
$0.05 Par Value Common Stock 21,114,468
Transitional Small Business Disclosure Format (check one): Yes No X
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<PAGE>
INDEX
Risk Factors
------------
Part I - Financial Information
------------------------------
Item 1: Financial Statements (Unaudited):
Condensed Balance Sheet:
April 30, 2000 and July 31, 1999
Condensed Statement of Operations:
Three Months Ended April 30, 2000 and 1999
Nine Months Ended April 30, 2000 and 1999
Statement of Cash Flows:
Nine Months Ended April 30, 2000 and 1999
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. Legal Proceedings 12
2. Changes in Securities and Use of Proceeds 12
3. Defaults Upon Senior Securities 12
4. Submission of Matters to a Vote
of Security Holders 12
5. Other Information 12
6. Exhibits and Reports on Form 8-K 12
Signatures_____________________________________ 13
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
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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 ability 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 has recently satisfied a substantial portion of its
indebtedness, but the Company continues to incur substantial indebtedness (see
Note 3 to the Financial Statements). The Company's level of indebtedness has
several important effects on its future operations, including, without
limitation, that (i) a substantial portion of the Company's cash flow from
operations has been dedicated to repaying residual debt and to keeping current
with vendors; (ii) the Company's imbalanced 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 debt 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>
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SCIENTIFIC MEASUREMENT SYSTEMS, INC.
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Backlog
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
produce 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
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 a body of "know-how" that has been enhanced significantly
by its participation in twelve (12) different Small Business Innovation Research
(SBIR's) grants and two (2) different Co-operative Research and Development
Agreements (CRADA's) funded by various federal government agencies. These
research programs were designed to explore a variety of applications of computed
tomography to inspect or to evaluate different products or materials. The
Company believes that the body of know-how from the respective federal R&D
programs as well as its development efforts for US and internationally based
corporate customers have in the aggregate added substantially to the Company's
overall intellectual property position.
The Company has been granted a patent dealing with 3D or 3 dimensional
metrology, which is scheduled to be issued on or about July 2000. And the
Company has also filed 3 additional provisional patents internationally for
certain undisclosed applications.
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 to 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"). Further, while the Company believes that its considerable body of
"know how" is an advantage, it should be noted that competitors may well be able
to duplicate that "know how".
Recent Changes in Management; Dependence on Key Personnel
During FY 2000 the Company experienced changes in its senior management,
notably the loss of its Vice President of Sales and Marketing. The Company
appointed the head of research and development as the acting head of sales and
marketing on an interim basis to fill the position until a new Vice President of
Sales and Marketing can be hired.
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").
<PAGE>
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SCIENTIFIC MEASUREMENT SYSTEMS, INC.
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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 that 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.
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.
Condensed Balance Sheet
(In thousands)
<TABLE>
<CAPTION>
April 30 July 31
Assets 2000 1999
------ -------------- -------------
(Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash $ 10 $ 10
Billed receivables 55 $ 290
NIST receivables 0 0
Unbilled receivables 336 559
Allowance for doubtful accounts (16) (16)
Inventories 90 141
Other current assets 36 21
--------- ---------
Total current assets 512 1,005
Property, plant and equipment, at cost:
Equipment 362 337
Furniture and fixtures 85 85
Building 62 62
Land 0 0
--------- ---------
--------- ---------
509 485
Less accumulated depreciation (439) (375)
--------- ---------
Net property, plant and equipment 70 110
--------- ---------
Scanning equipment, less accumulated depreciation 0 240
Other assets, less accumulated amortization of $38,724 60 43
--------- ---------
Total assets 642 1,398
========= =========
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Liabilities and Stockholders' Equity 2000 36,372
------------------------------------
Current Liabilities:
Accounts payable $ 577 $ 911
Payable to NIST members 0 871
Billings in excess of revenues 143 342
Accrued vacation 78 59
Accrued sales commissions 81 55
Other accrued expenses 405 205
Leases Payable, current portion 7 29
Note payable 34 96
Bank Loans 0 144
--------- ---------
Total current laibilities 1,324 2,714
Long term leases payable 4 7
--------- ---------
Total liabilities 1,327 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) 637 (556)
--------- ---------
Total stockholders' equity (deficit) (685) (1,323)
--------- ---------
Total liabilities and stockholders' equity 642 1,398
========= =========
</TABLE>
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
Condensed Statement of Operations
($000 except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended April 30, Nine Months Ended April 30,
------------------------------ ----------------------------
2000 1999 2000 1999
------------- -------------- ----------------------------
<S> <C>
Contract revenues:
System sales $ 57 $ 487 $ 1,107 $ 1,515
Scanning services &
Maintenance & Upgrades 81 254 258 484
----------- ----------- ----------------------------
Total revenues 138 741 1,365 1,999
Direct contract costs 269 544 1,254 1,654
Gross profit (131) 197 111 345
----------- ----------- ----------------------------
Operating costs:
Marketing 5 82 34 153
Research and development 25 29 84 54
General and administrative 167 125 429 482
----------- ----------- ----------------------------
Total operating costs 197 236 547 689
----------- ----------- ----------------------------
Income (loss) from operations (327) (39) (435) (344)
----------- ----------- ----------------------------
Other (income) expense:
Interest expense 1 10 7 40
Interest and other income 0 7 0 7
----------- ----------- ----------------------------
Other - net 1 17 7 47
----------- ----------- ----------------------------
Net income (loss) ($328) ($56) ($442) ($391)
=========== =========== ============================
Gain on Debt Reduction 0 758
Gain on Sale of Equipment (1) 322
----------- ------------
Net income (loss) ($329) $637
=========== =============
Basic Earnings (Loss) per share ($0.02) (0.003) $0.03 (0.02)
Weighted average shares outstanding 21,114,468 21,114,468 21,114,468 21,114,468
</TABLE>
<PAGE>
Scientific Measurements Systems, Inc.
Statements of Cash Flows
Nine months ended April 30, 2000 and 1999
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
---------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $ 637 (391)
Adjustments to Reconcile Net Loss to Net Cash
Provided (Used) by Operating Activities
Depreciation and amortization 70 48
Loss on impairment of property and equipment 2
Gain on Sale of Service bureau assets (322)
Gain on extinguishment of debt (758)
(Increase)/Decrease in Assets:
Trade accounts receivable 234 (848)
Other receivables -
Costs and earned profits in excess of billings on contracts 223 (2)
Inventories 51
Prepaid expenses and other current assets (15) (50)
Other assets -
Increase/(Decrease) in Liabilities:
Accounts payable and accrued liabilities (291) 29
Billings in excess of costs and earned profits on contracts (199) 38
---------- --------
Total Adjustments (1,004) (785)
---------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES (367) (1,176)
---------- --------
CASH FLOWS USED BY INVESTING ACTIVITIES
Proceeds from sale of Service bureau assets 600
Proceeds from issuance of common stock (25)
Acquisitions of property and equipment (1) (90)
---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES 599 (90)
Borrowings under notes payable 0 (10)
Borrowings under capital leases 0
Repayments of notes payable (206)
Repayments of capital leases (26)
---------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES $ (232) (10)
---------- --------
NET INCREASE (DECREASE) IN CASH $ (0) (1,276)
CASH AT BEGINNING OF PERIOD 10 390
---------- --------
CASH AT END OF YEAR $ 10 (886)
========== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION Cash Paid During the Period:
Interest $ 5 10
Taxes $ -
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Extinguishment of trade payables and payable to research consortium
members 756
</TABLE>
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
--------------------------------------------------------------------------------
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 April 30, 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 nine months ended April
30, 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 options to purchase common stock to its employees in consideration
of the sacrifices made to assist the Company through difficult financial times.
The options were issued, effective January 12, 2000, with a grant price of $0.06
per share, which was the market price as of that date.
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 options 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>
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SCIENTIFIC MEASUREMENT SYSTEMS, INC.
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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.
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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 year:
<TABLE>
<CAPTION>
Three Months Ended April 30,
2000 1999
---------------------------------------------------------------------------
Dollar % of % Change from Dollar % of % Change from
Amount Total Prior Amount Total Prior
Revenue Year Revenue Year
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Contract revenues:
System sales $ 57 41.37% (88.27%) $ 487 65.72% (70.81%)
Scanning services &
Maintenance & Upgrades 81 58.63% (68.11%) 254 34.28% (49.20%)
------- ---------------------- ------ ------- --------
Total revenues 138 100.00% (81.36%) 741 100.00% (34.25%)
Direct contract costs 269 194.53% (50.60%) 544 73.41% (24.13%)
Gross profit (131) -94.53% (166.28%) 197 26.59% (51.95%)
------- ---------------------- ------ ------- --------
Operating costs:
Marketing 5 3.55% (94.02%) 82 11.07% (34.40%)
Research and development 25 18.19% (13.34%) 29 3.91% NM
General and administrative 167 120.59% 33.26% 125 16.87% (51.17%)
------- ---------------------- ------ ------- --------
Total operating costs 197 142.33% (16.69%) 236 31.85% (38.06%)
------- ---------------------- ------ ------- --------
Income (loss) from operations (327) (236.86%) 738.94% (39) (5.26%) (234.48%)
------- ---------------------- ------ ------ --------
Other (income) expense:
Interest expense 1 0.59% (91.90%) 10 1.35% (58.33%)
Interest and other income 0 0.00% (0.94%) 7 0.00% 0.62%
------- ---------------------- ------ ------- --------
Other - net 1 0.59% (95.23%) 17 2.29% (29.17%)
------- ---------------------- ------ ------- --------
Net income (loss) ($328) (237.45%) 485.71% ($56) (7.56%) NM
======= ====================== ====== ====== ========
Gain on Debt Reduction 0 0.00% NM
Gain on Sale of Equipment (1) (0.54%) NM
------- ---------- -------
Net income (loss) ($329) (237.99%) 487.05%
======= ========== -------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended April 30,
2000 1999
---------------------------------------------------------------------------
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 $1,107 81.08% (26.95%) $ 1,515 75.79% (38.58%)
Scanning services&
Maintenance & Upgrades 258 18.92% (46.62%) 484 24.21% (49.11%)
------ -------------------- -------- --------------------
Total revenues 1,365 100.00% (31.71%) 1,999 100.00% (31.60%)
Direct contract costs 1,254 91.83% (24.21%) 1,654 82.74% (23.27%)
Gross profit 111 8.17% (67.68%) 345 17.26% (55.02%)
------ -------------------- -------- --------------------
Operating costs:
Marketing 34 2.51% (77.62%) 153 7.65% (52.63%)
Research and development 84 6.12% 54.76% 54 NM
General and administrative 429 31.42% (11.00%) 482 24.11% (33.52%)
------ -------------------- -------- --------------------
Total operating costs 547 40.05% (20.64%) 689 34.47% (34.26%)
------ -------------------- -------- --------------------
Income (loss) from operations (435) 31.89%) 26.54% (344) (17.21%) 22.40%
------ -------------------- -------- --------------------
Other (income) expense:
Interest expense 7 0.52% (82.20%) 40 2.00% (43.81%)
Interest and other income 0 0.00% 0.00% 7 0.94% 0.62%
------ -------------------- -------- --------------------
Other - net 7 0.52% (84.85%) 47 2.35% (33.95%)
------ -------------------- -------- --------------------
Net income (loss) ($442) 32.41%) 13.15% ($391) (19.56%) 11.03%
====== ==================== ======== ====================
Gain on Debt Reduction 758 55.51%
Gain on Sale of Equipment 322 233.05%
------ -------
Net income (loss) $ 637 46.69%
====== =======
</TABLE>
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
--------------------------------------------------------------------------------
Results of Operations
Total revenue for the third quarter of fiscal 2000 decreased 88% over the
same period a year earlier, from approximately $571,000 in the third quarter of
fiscal 1999 to approximately $138,000. There was a 88% drop in recognized
revenue for systems sales and a 68% drop in maintenance and upgrade revenues.
For the remainder of the fiscal year, a contractually required sale of
a scanning system at full price was to have to offset in great measure the loss
of contribution margin heretofore available from the Company's retail scanning
service business. As of April 30, 2000, though, the purchase order has not been
submitted to the Company. The Company is in continuing discussions with the
Buyer. (See: Note 3 in Notes to Financial Statements, "Subsequent Events")
Gross profit (revenue less direct contract costs) for the third quarter
dropped from $197,000 to a loss of $131,000. The substantial, adverse change
relative to the FY 1999 reporting year was due to the drop in recognized revenue
for the period. Overhead costs decreased by 16.7% over the analogous reporting
period during FY 1999, but a concomitant 88% drop in recognized revenue for the
period produced a substantial loss. The net loss from operations was $328,747
compared to a loss of approximately $56,000 in the analogous period in the
previous fiscal year.
Liquidity and Capital Resources
As of April 30, 2000, the Company had a negative net working capital
position of $815,111 compared to a negative net working capital
position of $1,716,157 at year end for fiscal 1999. The improvement in the
working capital position was an essential step for the Company. During the nine
months ended April 30, 2000, the Company lost approximately $376,000 in cash
from operations versus a loss of approximately $1,176,000 in cash from
operations for the fiscal year end at July 31, 1999.
Total net contract revenue backlog as of April 30, 2000 was $94,054 and
$386,560 in billings backlog. The Company has substantial billings remaining to
three 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
heavily upon its ability to generate new systems backlog and/or its ability to
further cash generating activities, such as raising additional debt or equity
capital. 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.
As of January 31, 2000, the Company has completely satisfied in full all of
its bank debt along with all accrued interest. The Company does not enjoy a
working commercial line of credit against its accounts receivable at this time,
however, and an effort must be made to re-instate such a banking relationship.
The Company's inability to borrow against (qualifying) accounts receivable is a
meaningful handicap.
In the coming months, the Company will proceed with a closing audit for the
research program from the National Institute of Standards and Technology (NIST)
under the Advanced Technology Program (ATP). Such a closing audit is standard
and customary upon the conclusion of any such ATP program. The Company believes
that it has satisfied all contractual and financial arrangements satisfactorily
with its research partners as of April 30, 2000.
Extraordinary Gain, Balance Sheet Improvement
SMS has suffered for several years from a debt laden Balance Sheet. Among
other obligations, the Company needed to satisfy a debt in the amount of
$871,469 plus an additional amount of $718,200 to General Electric for a total
of $1,589,669. The Company also badly needed to satisfy a large number of
vendors that had been very patient with Company management for the last two
years. Overall, the level of debt the Company carried on its Balance Sheet
during that period severely hampered any efforts to raise equity capital or
debt. Any tactical or strategic initiatives undertaken by the Company were
extremely difficult to implement under the circumstances. While one of the
largest impediments to reaching any improvement in the Company's liquidity from
new financing has been removed with the satisfaction of this obligation(s), the
Company still faces very significant obstacles in raising equity capital or
debt.
The Company posted a significant quarterly profit for the Company of
$871,800 for the second quarter of FY 2000. The net profit was largely
attributable to the forgiveness of $1,683,780 in Current Liability, a non-
recurring event. The Company must begin to generate higher levels of (positive)
cash flow from operations. That will need to be the result of more new systems
sales; the development of new services; entry into related markets; strategic
partnerships; and/or strategic acquisitions. Management continues to attempt to
develop such new strategic initiatives, but there can be no assurance whatsoever
that those initiatives will produce any improvement in the Company's position in
the near term or at all.
<PAGE>
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
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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.
As of April 30, 2000 there were no reports at all from any of the Company's
customers worldwide of any system failures or miscalculations that caused
disruptions of operations, including, among other things a temporary inability
to process transactions or engage in similar normal business activities. The
Company believes that the prospects for such failures during the calendar year
2000 beyond April 30 are remote. 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.
SCIENTIFIC MEASUREMENT SYSTEMS, INC.
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PART II - OTHER FINANCIAL INFORMATION
Item 1 - Legal Proceedings
None.
Item 2 - Changes in Securities
None.
Item 3 - Defaults Upon Senior Securities
The Company is also in default on a note payable to a law firm as of
July 1, 2000 in the amount of $140,665.54 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>
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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
July 16, 2000
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