FORM 10-QSB SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: October 31, 1996 or [ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission File No.: 0-9880 E N G I N E E R I N G M E A S U R E M E N T S C O M P A N Y (Exact name of Registrant as specified in its charter) Colorado 84-0572936 (State or other jurisdiction of (I.R.S. Identification No.) incorporation or organization) 600 Diagonal Highway, Longmont, Colorado 80501 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (303)651-0550 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 such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____. The number of shares outstanding of Registrant's $.01 par value common stock, as of November 25, 1996, was 2,773,052. Transitional Small Business Disclosure Format. Yes No X . Page 1 of 11 PART I - FINANCIAL INFORMATION Item 1. Financial Statements ENGINEERING MEASUREMENTS COMPANY CONSOLIDATED BALANCE SHEETS (Unaudited) ASSETS October 31, 1996 (unaudited) April 30, 1996 Current assets: Cash and cash equivalents $740,688 $532,721 Accounts receivable, net of allowance for doubtful accounts of $61,429 at October 31, 1996 and $75,687 at April 30, 1996 1,161,034 1,313,033 Short-term investments 972,825 708,042 Inventories 1,383,841 1,574,547 Prepaid expenses 120,536 75,892 Other receivables 24,662 50,141 Deferred income taxes 442,381 380,969 --------- --------- Total current assets 4,845,967 4,635,345 --------- --------- Property and equipment, at cost: Land 568,940 568,940 Building & improvements 1,637,657 1,589,118 Vehicles 22,197 16,791 Machinery and equipment 2,657,406 2,561,532 Office furniture and fixtures 1,305,725 1,209,306 --------- --------- 6,191,925 5,945,687 Less accumulated depreciation (4,181,029) (4,032,724) --------- --------- Net property and equipment 2,010,896 1,912,963 --------- --------- Other 96,286 90,237 Investment in common stock of Marcum Natural Gas Services, Inc. 163,625 197,312 --------- --------- Total other assets 259,911 287,549 --------- --------- TOTAL ASSETS: $7,116,774 $6,835,857 ========== ========== The accompanying notes are an integral part of these consolidated financial statements. (Continued) Page 2 of 11 ENGINEERING MEASUREMENTS COMPANY CONSOLIDATED BALANCE SHEETS (Unaudited) LIABILITIES AND STOCKHOLDER'S EQUITY October 31,1996 (unaudited) April 30, 1996 Current liabilities: Current portion of long-term debt $73,410 $137,558 Accounts payable 534,247 462,332 Accrued liabilities 632,118 593,524 --------- --------- Total current liabilities 1,239,775 1,193,414 --------- --------- Long-term liabilities: Loans from stockholder less current maturities 383,150 418,382 Deferred income taxes 179,400 183,100 --------- --------- Total long-term liabilities 562,550 601,482 --------- --------- Stockholders' equity: Common stock, $.01 par value; 5,000,000 shares authorized; 2,963,452 shares issued at October 31, 1996, 2,943,452 shares issued at April 30, 1996, 2,773,052 shares outstanding at October 31, 1996, 2,753,052 shares outstanding at April 30, 1996, 29,635 29,435 Capital in excess of par value 2,023,127 1,988,327 Unrealized holding losses (67,228) (56,416) Retained earnings 3,958,614 3,709,314 Treasury stock at cost; 190,400 shares at October 31, 1996, 190,400 shares at April 30, 1996 (629,699) (629,699) --------- --------- Total stockholders' equity 5,314,449 5,040,961 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY: $7,116,774 $6,835,857 ========== ========== The accompanying notes are an integral part of these consolidated financial statements. Page 3 of 11 ENGINEERING MEASUREMENTS COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Six Months Ended October 31, October 31, 1996 1995 1996 1995 Sales $2,578,617 $2,186,132 $5,030,919 $4,278,821 Cost of sales 1,432,508 1,172,207 2,764,099 2,372,740 --------- --------- --------- --------- Gross margin on sales 1,146,109 1,013,925 2,266,820 1,906,081 --------- --------- --------- --------- Operating expenses: Selling 602,112 513,276 1,164,051 1,012,487 General and administrative 222,966 196,754 450,334 384,445 Research and development 157,209 103,581 295,668 197,172 Provision for doubtful accounts (1,716) 25,876 6,127 36,267 --------- --------- --------- --------- Total operating expenses 980,571 839,487 1,916,180 1,630,371 --------- --------- --------- --------- Income from operations 165,538 174,438 350,640 275,710 --------- --------- --------- --------- Other income/(expense): Gain/(loss) on sale of stock 7,061 10,321 5,988 22,669 Interest expense (9,981) (14,218) (20,900) (30,269) Royalty and other income 39,011 43,146 72,021 74,951 --------- --------- --------- --------- Total other income 36,091 39,249 57,109 67,351 Income/(loss) from operations before income taxes 201,629 213,687 407,749 343,061 Income tax provision/(benefit) 76,256 74,392 158,449 121,809 --------- --------- --------- --------- Net income/(loss) 125,373 139,295 249,300 221,252 ========= ========= ========= ========= Net earnings/(loss) per share $0.04 $0.05 $0.09 $0.08 Net earnings/(loss) per share on a fully diluted basis $0.04 $0.05 $0.08 $0.08 ========= ========= ========= ========= Weighted average number of shares outstanding 2,766,385 2,733,052 2,759,719 2,733,052 ========= ========= ========= ========= The accompanying notes are an integral part of these consolidated financial statements. Page 4 of 11 ENGINEERING MEASUREMENTS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS: INCREASE/(DECREASE) IN CASH (Unaudited) Six Months Ended October 31, 1996 1995 Cash flows from operating activities: Net income $ 249,300 $ 221,252 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization 157,158 161,013 Deferred tax provision/(benefit) (58,200) (7,040) Provision for doubtful accounts (14,258) 14,442 Gain on sales of investments (7,037) (22,669) Changes in assets and liabilities- Receivables 191,736 50,048 Inventories 190,706 (364,405) Prepaid expenses (44,644) (59,240) Accounts payable and accrued liabilities 110,509 92,896 --------- ---------- Net cash provided by operating activities 775,270 86,297 --------- ---------- Cash flows from investing activities Capital expenditures, net (246,238) (111,943) Expenditures for intangible assets (14,902) (19,309) Investment purchases (766,819) (62,852) Proceeds from sale of investments 525,036 143,561 Net cash provided by/(used) in --------- ---------- investing activities (502,923) (50,543) --------- ---------- Cash flows from financing activities: Payments of long and short term debt (90,788) (101,897) Proceeds from exercise of stock options 35,000 0 Principle payment under capital lease obligations (8,592) (8,163) --------- ---------- Net cash used in financing activities (64,380) (110,060) Net increase/(decrease) in cash and --------- ---------- cash equivalents 207,967 (74,306) Cash and cash equivalents at beginning of period 532,721 312,183 --------- ---------- Cash and cash equivalents at end of period $ 740,688 $ 237,877 of period ========= ========= Supplemental disclosure of cash flow information: Cash paid during period for-- Interest $ 20,900 $ 39,789 Income taxes 169,000 24,080 The accompanying notes are an integral part of these consolidated financial statements. Page 5 of 11 ENGINEERING MEASUREMENTS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The accompanying unaudited, condensed financial statements have been prepared in accordance with the instructions to the Form 10-QSB and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six months ended October 31, 1996 are not necessarily indicative of the results that may be expected for the fiscal year ending April 30, 1997. These statements should be read in conjunction with the financial statements and footnotes thereto included in the Company's Form 10-KSB for the fiscal year ended April 30, 1996. 1. Principles of Consolidation The consolidated financial statements include the accounts of Engineering Measurements Company (the Company) and its subsidiary, General Metrology Corporation. All significant intercompany accounts and transactions have been eliminated in consolidation. 2. Inventories Inventories, stated at the lower of cost (first-in, first-out method) or market, are as follows: October 31, 1996 April 30, 1996 Raw materials and work-in-process $1,150,689 $1,272,573 Finished goods 233,152 301,974 ---------- ---------- $1,383,841 $1,574,547 ========== ========== 3. Investments Investments are carried at fair market value. The Company's investment securities are classified as available for sale and recorded on the balance sheet at fair market value with unrealized gains and losses on these investments shown as a separate component of stockholder's equity, net of related taxes. 4. Income Taxes Deferred income taxes are provided for items which are reported for tax purposes in different periods than in the Statements of Operations. 5. Earnings Per Share Earnings per share is computed by dividing net income by the weighted average number of shares outstanding during the period. Pursuant to the terms of a loan agreement, a stockholder may convert up to $353,790 in principal and accrued interest into 345,766 shares of common stock at an average price of $1.02 per share. There are a total of 220,775 shares subject to outstanding options under the Company's stock option plans at October 31, 1996. The effect of the outstanding options and conversion right to purchase the total of 565,541 shares as of July 31, 1996 is dilutive and reflected in the financial statements. Year to date earnings per share on a fully dilutive basis using the treasury stock method was $.08 at October 31, 1996. In the previous fiscal year the shares issuable pursuant to the terms of a stockholder loan agreement were dilutive. Earnings per share on a fully dilutive basis using the treasury stock method was $.08 at October 31, 1995. Page 6 of 11 6. Changes in Accounting Principles There have been no changes in accounting principles during these reporting periods. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations A. Financial Condition The Company's net working capital increased approximately $164,000 during the six months ended October 31, 1996, primarily because of increases in cash, investments, prepaid expenses and deferred income taxes and decreases in accounts receivable, inventories, and the current maturities of long term debt offset by higher accounts payable and accrued liabilities. The current ratio remained at 3.9 during the period. Cash and cash equivalents increased approximately $208,000 at October 31, 1996 compared to April 30, 1996, due to the reduction of accounts receivable and inventory and the increase in accounts payable and accrued liabilities during the period. The Company intends to continue investing excess cash in high grade investment securities until the cash is needed for operations. Management expects cash flow and earnings for the remainder of the fiscal year will flucuate and be weaker than the results shown for the second quarter ended October 31, 1996, due to increases in new product marketing and development costs. No assurance can be given that the Company's investment of resources in new products will produce additional revenues for the Company. Accounts receivable decreased by approximately $152,000 at October 31, 1996, primarily due to improved collections. The Days Sales Outstanding (DSO) improved to 52.6 days for the six months ended October 31, 1996 compared to 62.0 days for the same period last year. Inventories decreased approximately $191,000 in the first six months of the fiscal year. The inventory turnover ratio for the three months ended July 31, improved to 1.97 compared to 1.30 in fiscal 1996. The decrease in inventories reflects management's renewed emphasis on inventory management as well as increased sales levels. Investments in common stock of Marcum Natural Gas Services, Inc. decreased approximately $34,000 in the period when valued at market. The Company has been making monthly payments of principal and interest, of approximately $21,000 to pay off the loans from shareholder. This amount decreased to approximately $9,000 per month in October as one of the notes was paid in full. The company does not expect any material expenditures in the next six months, and anticipates all cash needs will be satisfied from operations. The Company currently does not have any line of credit arrangements. B. Results of Operations Six months ended October 31, 1996 compared to the six months ended October 31, 1995 Sales were approximately $752,000 higher in 1996 compared to 1995, a 17.6% increase, due to higher demand in the international market. The Company's order backlog is higher at October 31, 1996 at approximately $1,560,000, compared to $1,325,000 at October 31, 1996. Gross margin increased by approximately $361,000 to 45.1% of sales in 1996 compared to 44.5% in 1995. The higher gross margin is due to lower warranty costs 0.6% current year, compared to 2.3% last year, offset by higher material costs 29.0% this year compared to 26.7% for the same period last year. The higher material costs are due to a larger percentage of the Company's sales are of products with a higher material cost, an unfavorable product mix. Warranty costs for the current year are approximately $70,000 lower compared to the same period last year, reflecting the Company's continued commitment to produce quality products. Page 7 of 11 Operating expenses were up approximately $286,000 from last year including a $102,000 increase in commissions expense, reflecting the higher sales level attained to date and higher commissions on Danfoss products than was offered a year ago. The Company's expenses increased approximately $125,000 for the six months ended October 31, 1996, due to new product marketing and development costs. The Company expects to continue the higher spending levels for new products for several quarters. Income from operations improved to 7.4% for the six months ended October 31, 1996 versus 6.7% for the same period a year ago. Net cash provided by operating activities was $775,270, due primarily to decreases in receivables and inventories, increases in accounts payable and improved net income. Three months ended October 31, 1996 compared to the three months ended October 31, 1995 Sales were approximately $392,000 higher in 1996 compared to 1995, a 17.9% increase, due to higher demand in the international market. Gross margin increased by approximately $132,000 compared to the same quarter in 1995. As a percentage of sales, gross margin was 44.4% in 1996 compared to 46.4% in 1995. The decrease in the margin percentage is due primarily to higher material costs 28.8% this quarter compared to 24.7% last year. The higher material costs are due to a larger percentage of the Company's sales are of products with a higher material cost, an unfavorable product mix. Manufacturing Overhead costs, in particular repair and maintenance of machines, are also higher 9.3% this quarter, compared to 8.2% for the same period last year. Operating expenses are up approximately $141,000 from last year including a increase of approximately $37,000 in commissions expense. New product marketing and development costs for the quarter were approximately $80,000 higher than for the same period last year. The Bad Debt Expense for the six months ended October 31, 1996 is approximately $27,000 less than for the same period last year. The decrease reflects improved accounts receivable collection efforts, and a better job of analyzing customer credit status. Income from operations decreased slightly from the same period a year ago to $165,538 or 6.4% of sales for the three months ended October 31, 1996 versus 8.0% for the same period in 1995. The Company recognized a gain of approximately $7,000 from the sale of stock for the three months ended October 31, 1996. The Company recognized a gain of approximately $10,000 for the three months ended October 31, 1995. Royalty and other income decreased approximately $4,000 to approximately $39,000 due to lower interest and dividend income from high grade investment securities for the three months ended October 31, 1996 compared the same period last year. The Company's interest expense has decreased approximately $4,000 for the period ended October 31, 1996 compared to the same period ended in 1995, due to the Company's lower outstanding debt. The income tax provision for the three months ended October 31, 1996 increased approximately $2,000 compared to the same period in 1995. The impact of deferred tax items resulted in current tax rates of approximately 37.8% and 34.8% in 1996 and 1995, respectively. Page 8 of 11 PART II -- OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K A. Exhibits None filed in the quarter ended October 31, 1996. B. Reports on Form 8-K None filed in the quarter ended October 31, 1996. Page 9 of 11 S I G N A T U R E S Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, Engineering Measurements Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ENGINEERING MEASUREMENTS COMPANY Registrant Date: November 27, 1996 By: Charles E. Miller, Chairman (Principal Financial Officer and Chief Accounting Officer) Page 10 of 11 PRESS RELEASE November 27, 1996 ENGINEERING MEASUREMENTS COMPANY (NASDAQ SYMBOL: EMCO) Second Quarter Results Corporate Contact: Charles E. Miller (303) 651-0550 Longmont, Colorado: Engineering Measurements Company announced today a net income of $125,373 ($.04 per share) for the second quarter ended October 31, 1996. Net income for the six-month period ended October 31, 1996 was $249,300 ($.09 per share). This compares to net income for the three-month and six-month periods last year of $139,295 ($.05 per share) and $173,749 ($.08 per share), respectively. Sales for the quarter were approximately $2.58 million, and for the six-month period approximately $5.03 million; an 18% increase over the comparable periods last year. Income from operations for the three and six month periods ended October 31, 1996, were approximately $166,000 and $351,000, as compared to approximately $174,000 and $276,000 for the same periods last year. Management expects to report lower earnings for the third quarter due to increases in new product marketing and development costs. E N G I N E E R I N G M E A S U R E M E N T S C O M P A N Y Operating Results Second Quarter Ended October 31, 1996 Three Months Ended Six Months Ended October 31, October 31, 1996 1995 1996 1995 Net sales $2,578,617 $2,186,132 $5,030,919 $4,278,821 Income from operations 165,538 174,438 350,640 275,710 Other income 36,091 39,249 57,109 67,351 Income taxes 76,256 74,392 158,449 121,809 Net income 125,373 139,295 249,300 221,252 Net earnings per share $.04 $.05 $.09 $.08 Number of shares outstanding 2,766,385 2,733,052 2,759,719 2,733,052 Page 11 of 11