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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
--------------
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO ________
Commission File Number: 0-12254
SCIENTIFIC TECHNOLOGIES INCORPORATED
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(Issuer)
Oregon 77-0170363
------------------------ ---------------------------------------
(State of incorporation) (I.R.S. Employer Identification Number)
6550 Dumbarton Circle, Fremont, California 94544
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(Address of principal executive offices) (Zip Code)
(510) 608-3400
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(Issuers telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 OR 15(d) of the Securities Exchange Act during the past 12 months (or 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
--- ---
Common stock outstanding as of April 30, 1997 was 9,607,758 shares.
1
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PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
- -----------------------------
SCIENTIFIC TECHNOLOGIES INCORPORATED
------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
(Unaudited)
Assets Mar. 31, 1997 Dec. 31, 1996
------------- -------------
Current assets:
Cash and cash equivalents .................... $ 3,243,000 $ 2,371,000
Short-term investments ....................... 5,491,000 4,989,000
Accounts and notes receivable, net............ 6,706,000 6,692,000
Inventories .................................. 4,258,000 4,066,000
Deferred income taxes ........................ 840,000 840,000
Other assets ................................. 377,000 278,000
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Total current assets ..................... 20,915,000 19,236,000
Property and equipment, net .................... 2,865,000 2,477,000
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Total assets ............................ $23,780,000 $21,713,000
=========== ===========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities
Trade accounts payable ....................... $ 2,124,000 $ 2,385,000
Payable to Parent ............................ 762,000 --
Accrued expenses ............................. 1,769,000 1,457,000
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Total current liabilities ................ 4,655,000 3,842,000
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Total liabilities ........................ 4,655,000 3,842,000
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Shareholders' equity
Common stock: shares authorized 20,000,000
issued and outstanding; 9,607,000
($.001 par value) .......................... 10,000 10,000
Capital in excess of par value ............... 5,300,000 5,319,000
Retained earnings ............................ 13,815,000 12,542,000
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Total shareholders' equity ............... 19,125,000 17,871,000
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Total liabilities and shareholders' equity $23,780,000 $21,713,000
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SCIENTIFIC TECHNOLOGIES INCORPORATED
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CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
(Unaudited)
For the three months ended
Mar. 31, 1997 Mar. 31, 1996
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Sales ............................... $10,110,000 $ 9,352,000
Cost of goods sold .................. 4,823,000 4,283,000
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Gross profit .................. 5,287,000 5,069,000
Operating Expenses:
Selling, general and administrative 2,519,000 2,197,000
Research and development .......... 827,000 574,000
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Total operating expenses ...... 3,346,000 2,771,000
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Income from operations ........ 1,941,000 2,298,000
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Interest income, net ................ 111,000 214,000
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Income before income taxes .... 2,052,000 2,512,000
Provision for taxes on income ....... 780,000 1,005,000
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Net income .......................... $ 1,272,000 $ 1,507,000
=========== ===========
Net income per share ............. $ .13 $ .16
=========== ===========
Weighted average common and common
equivalent shares ........... 9,601,000 9,607,000
=========== ===========
3
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SCIENTIFIC TECHNOLOGIES INCORPORATED
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CONSOLIDATED STATEMENT OF CASH FLOWS
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(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
Mar. 31, 1997 Mar. 31, 1996
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<S> <C> <C>
Cash flows from operating activities
Net income ...................................... $ 1,272,000 $ 1,507,000
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization ................. 194,000 145,000
Changes in assets and liabilities:
Accounts receivable, net .................... (14,000) (1,055,000)
Inventories ................................. (192,000) (759,000)
Payable to Parent ........................... 762,000 443,000
Trade accounts payable ...................... (261,000) 383,000
Accrued expenses ............................ 312,000 (70,000)
Other ....................................... (98,000) (289,000)
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Cash flows provided by operating activities 1,975,000 305,000
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Cash flows from investing activities
Investment in intangibles and fixed assets ...... (582,000) (420,000)
Sale (purchase) of short-term investments ....... (502,000) 1,203,000
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Cash flows used in investing activities ... (1,084,000) 783,000
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Cash flows from financing activities
Increase (decrease) in debt ..................... -- (4,000)
Repurchase of common stock ...................... (19,000)
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Cash flows used in financing activities ... (19,000) (4,000)
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Change in cash and cash equivalents ............... 872,000 1,084,000
Cash and cash equivalents at beginning of period .. 2,371,000 3,477,000
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Cash and cash equivalents at end of period ........ $ 3,243,000 $ 4,561,000
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid to the Parent for income taxes ........ $ 780,000 $ 1,005,000
</TABLE>
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SCIENTIFIC TECHNOLOGIES INCORPORATED
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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The consolidated financial statements as of March 31, 1997 and the three
months ended March 31, 1997 and 1996 are unaudited. In the opinion of
management, they reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair statement of the results of these periods but
may not necessarily be indicative of the results to be expected for the full
fiscal year. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been consolidated or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. It is suggested that
these consolidated financial statements be read in conjunction with the
financial statements and notes thereto included in Scientific Technologies
Incorporated's Annual Report to Shareholders on Form 10-K for the year ended
December 31, 1996.
1. INVENTORIES
Inventories consist of the following:
Mar. 31, 1997 Dec. 31, 1996
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Raw Materials ..... $ 1,841,000 $ 1,615,000
Subassemblies ..... 463,000 493,000
Work in Process ... 599,000 509,000
Finished Goods .... 1,355,000 1,449,000
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$ 4,258,000 $ 4,066,000
============= =============
2. NET INCOME PER SHARE
Statement of Financial Accounting Standards no. 128 (FAS 128),
"Earnings Per Share (EPS)", was issued in February 1997. Under FAS 128, the
Company will be required to disclose basic EPS and diluted EPS for all periods
for which an income statement is presented, which will replace disclosure
currently being made for primary EPS and fully-diluted EPS. FAS 128 requires
adoption for fiscal periods ending after December 15, 1997. Pro forma disclosure
of basic EPS and diluted EPS for the current reporting and comparable period in
the prior year is as follows:
Three months ended March 31,
Earnings Per Share: 1997 1996
-----------------------------
Basic $.13 $.15
Diluted $.13 $.15
3. DIVIDEND PAID
On March 3, 1997, the Company declared a cash dividend of $.0425 per
share on all its common shares. This dividend was paid on April 1, 1997 to
shareholders of record on March 21, 1997. Approximately 87% of the outstanding
common stock of the Company is beneficially owned by Scientific Technology
Incorporated, a California corporation under common control with the Company.
Dividends paid to Scientific Technology Incorporated were applied to the Payable
to Parent account.
4. PRODUCT LINE ACQUISITION
In January 1997, the Company reached an agreement with the Parent to
acquire the distribution rights to certain level and flow control products
manufactured by outside sources. As compensation for this agreement, the Company
will pay a royalty to the Parent for a number of years. The addition of these
sales did not have a material impact on the first quarter results.
5
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
The following section contains certain forward looking statements based
on current expectations. Actual results may differ materially. Among the factors
which could effect actual results are those listed under "Business Factors"below
and those listed under "Management's Discussion and Analysis of Financial
Conditions and Results of Operations" in the Company's Annual Report on Form 10K
for the year ended December 31, 1996.
Results of Operations
---------------------
Sales for the three months ended March 31, 1997 increased 8% to $10,110,000
from $9,352,000 in the first quarter of 1996. This was primarily the result of
continued acceptance of the Company' products, a lower overall discount rate and
sales from the level sensor product line, which was purchased from the Parent in
the first quarter of 1997.
Gross margin as a percent of sales declined to 52% during the first quarter
of 1997 compared to 54% in the comparable 1996 quarter. This resulted from
faster growing new products, which carry a higher relative cost of sales.
Selling, general and administrative costs increased 15% to $2,519,000 in the
first quarter of 1997 from $2,197,000 in 1996. Selling, general and
administrative expenses as a percent of sales increased to 25% in the first
quarter of 1997 from 24% in the comparable 1996 quarter. This was the result of
increased selling expenses associated with the higher levels of revenue and
increased investment in the selling infrastructure of the Company.
Research and development expenses rose 44% to $827,000 in 1997 from $574,
000 in 1996. Research and development expenses were 8% of sales for the three
months ended March 31, 1997 compared to 6% for the comparable 1996 period. This
was chiefly the result of continued expansion of the Company's product
development efforts. The Company anticipates that it will continue to make
substantial investments in research and development in subsequent quarters.
Interest income, net declined to $111,000 for the three months ended March
31, 1997 compared to $214,000 for the same period in the prior year. This was
primarily caused by increased income from short-term investments offset by a non
recurring gain resulting from the sale of a short-term investment in the first
quarter of 1996.
The Company's provision for income taxes was $780,000 for the three months
ended March 31, 1997 compared to $1,005,000 for the comparable 1996 period.
In light of the significant growth of the Company's operations in past
years, the Company believes that period to period comparisons of its financial
results should not be relied upon as an indication of future performance.
Liquidity and Capital Resources
-------------------------------
At March 31, 1997 the Company's working capital was $16,260,000, a 6%
increase from the $15,394,000 reported at December 31, 1996. This was due to
cash flows from operations resulting in increased short-term investments,
accounts receivable and inventory, which offset increased trade accounts
payable, payable to Parent and accrued expenses.
Available bank borrowings were $2,500,000 at March 31, 1997. The Company
believes that cash from operations, together with its cash resources and
available bank borrowings, should be adequate to fund its working capital
requirements through at least the remainder of 1997.
6
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Business Factors
----------------
Because of the variety of factors and uncertainties affecting the Company's
operating results, past financial performance and historic trends may not be a
reliable indicator of future performance. These factors, as well as other
factors affecting the Company's operating performance may result in significant
volatility in the Company's common stock price. Among the factors which could
affect future results:
Variability of operating results
- --------------------------------
The Company has experienced fluctuations in annual and quarterly operating
results and anticipates that these fluctuations will continue. These
fluctuations are caused by a number of factors, including the level and timing
of customer orders, the mix of products sold, fluctuations in complementary
third party products with which STI products are sold and the timing of
operating expenditures.
Seasonality
- -----------
The industrial manufacturing equipment industry can be subject to seasonality.
Competition
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The market for industrial sensors is highly competitive. Competitive pressures
have in the past and could in the future result in increased distributor, OEM
and system integrator discounts, price reductions, increased expenses and
reduced market acceptance of the Company's products.
Rapid technological change and new product development
- ------------------------------------------------------
The Company's future success will depend on its ability to enhance its current
products, develop new products and respond to emerging industry standards, all
on a timely and cost-effective basis. The introduction of new products also
requires the Company to manage the transition from older products in order to
minimize disruption of customer orders, avoid excessive levels of older product
inventories and ensure that adequate supplies of new products can be delivered
to meet customer demands.
Dependence on indirect distribution channel
- -------------------------------------------
A majority of the Company's sales are sold through third party distributors,
system integrators and original equipment manufacturers. These resellers are not
required to offer the Company's products exclusively and there can be no
assurance that a reseller will continue to offer the Company's products.
International sales
- -------------------
The Company's international sales may be disrupted by currency fluctuations or
other events beyond the Company's control, including political or regulatory
changes.
7
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
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Not Applicable
Item 5. OTHER INFORMATION
- -------------------------
Not Applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
- ----------------------------------------
(a) The following documents are filed as a part of this Report:
Exhibit 3.1 - Articles of Incorporation, as amended, are incorporated
by reference to the Registrant's Form 10-K for the year
ended December 31, 1988, Exhibit 3.1.
Exhibit 3.3 - By-Laws are incorporated by reference to the Registrant's
Form 10-K for the year ended December 31, 1985, Exhibit
3.
Exhibit 4.1 - 1987 Employee Stock Purchase Plan is incorporated by
reference to the Registrant's Registration Statement on
Form S-8 dated May 13, 1988.
Exhibit 4.2 - 1987 Stock Option Plan is incorporated by reference to
the Registrant's Registration Statement on Form S-8 dated
May 13, 1988.
Exhibit 10.1 - Lease agreement dated February 21, 1995 for 6550
Dumbarton Circle, Fremont, California 94555, is
incorporated by reference to the Registrant's Form 10-
KSB for the year ended December 31, 1994, Exhibit 10.4.
Exhibit 10.2 - Bank agreement dated November 29, 1994 with Bank of The
West is incorporated by reference to the Registrant's
Form 10-KSB for the year ended December 31, 1994,
Exhibit 10.3.
Exhibit 10.3 - Amendment dated May 31, 1996 to Bank Agreement dated
November 29, 1994 is incorporated by reference to the
Registrant's Form 10-K for the year ended December 31,
1996, Exhibit 10.3.
Exhibit 10.4 - Lease agreement dated November 21, 1995 is incorporated
by reference to the Registrant's Form 10-KSB for the
year ended December 31, 1995, Exhibit 10.4.
Exhibit 10.5 - Agreement dated January 1, 1997 with Scientific
Technology Inc. for the purchase of the level sensor
product line.
Exhibit 21.1 - Subsidiaries of the Registrant is incorporated by
reference to the Registrant's Form 10-K for the year
ended December 31, 1996, Exhibit 21.1.
Exhibit 23.1 - Consent of Independent Accountants is incorporated by
reference to the Registrant's Form 10-K for the year
ended December 31, 1996, Exhibit 23.1.
Exhibit 24.1 - Power of Attorney is incorporated by reference to the
Registrant's Form 10- K for the year ended December 31,
1996, Exhibit 24.1.
Exhibit 27.0 - Financial Data Schedule.
(b) No Reports on Form 8-K were filed during the first quarter of 1997.
8
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SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCIENTIFIC TECHNOLOGIES INCORPORATED
------------------------------------
Registrant
Date: May 13, 1997 /s/Joseph J. Lazzara
------------ ------------------------------------
Joseph J. Lazzara
President and Chief Executive Officer
(Principal Executive and Financial
officer)
Date: May 13, 1997 /s/ Richard O. Faria
------------ -------------------------------------
Richard O. Faria
Vice-President, Finance & Administration
(Principal Accounting Officer)
9
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EXHIBIT 10.5
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ACQUISITION AGREEMENT
---------------------
This agreement is made effective as of this 1st day of January 1997 by and
between Scientific Technology, Inc. ("STI") and Scientific Technologies Inc.
("STIZ").
RECITALS
--------
A. STI is in the business (the "Business") of distributing in the United
States certain level and flow control products (the "Products") manufactured by
Nohken Incorporated of Suita-City, Japan, and Kari-Finn of Lahti, Finland
(collectively, the "Manufacturers").
B. STIZ wishes to distribute the Products in the United States and
purchase, subject to the satisfaction or waiver of the conditions set forth
hereinafter, certain of the assets of the Business, each as defined herein.
C. STIZ wishes to obtain the long term commitment of STI to assist STIZ
in the transfer of the Business.
NOW, THEREFORE, in consideration of the foregoing premises and the
respective representations, warranties, agreements, and conditions herein
contained, the parties hereto agree as follows:
1. Transfer of Distribution Rights. In exchange for the
-------------------------------
consideration set forth herein, STI agrees to transfer to STIZ all rights and
interests in the exclusive distribution of the Products in the United States.
STI hereby assigns to STIZ, effective the Closing Date, all rights under
distribution agreements and arrangements, whether written or oral, with the
Manufacturers for the distribution of the Products (the "Distribution
Arrangements"). STI further agrees to assist STIZ in obtaining such rights to
distribute the Products from their respective manufacturers.
2. Sale of Assets. Also in exchange for the consideration set forth
--------------
herein, STI agrees to sell or assign to STIZ, as applicable, all of STI's right,
title, and interest to the following assets of the Business (the "Assets"):
a. All of the fully salable inventory of the Products (the
"Valued Inventory").
b. All of the outstanding accounts receivable associated with
the sale of the products (the "Accounts Receivable".
c. Any customer purchase orders that will not be shipped prior
to the transfer.
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d. All customer files and records related to the products.
e. All existing mail lists related to these products.
f. All existing artwork, brochures and instructions related to
these products.
3. Items not Included in Purchase and Sale. It is expressly
---------------------------------------
understood and agreed that the following items are not included within the
meaning of "Assets" under Section 2, and, accordingly, are not included in this
sale and purchase:
a. Any real property owned or leased by STI (the "Real
Property"), together with all transferable development rights, air rights,
condemnation awards, appurtenances, beneficial easements, insurance proceeds,
and other similar items relating to the Real Property.
b. All cash, notes and receivables of the Business as of the
Closing Date relating to sales made prior to the closing date.
4. Liabilities. STIZ will assume and be solely responsible for the
-----------
payment and discharge of all known STI liabilities incurred by STI prior to the
Closing but not settled before the Closing (collectively, the "Liabilities")
related to the acquisition of the valued inventory.
5. The Closing. The Closing for the consummation of the transactions
-----------
contemplated by this Agreement ("Closing") including the transfer of the rights
to distribute the Products and the sale and purchase of the Assets, shall,
unless another date and time is agreed to in writing by the parties, take place
at 12:00 noon on January 1, 1997 ("Closing Date"). Upon completion of the
Closing, STI shall immediately be entitled to actual and be charged with
constructive possession of the Assets, and all risk of loss with regard thereto
shall pass to STIZ. On or before the Closing Date, STI will provide to STIZ the
following:
a. A complete detailed listing of the Valued STI Inventory.
6. Transfer of Items. STI will assume immediately custody of the
-----------------
valued inventory.
7. STIZ Performance of Distribution Arrangements. Following the
---------------------------------------------
Closing, STIZ shall assume and perform all obligations of STI under each
assigned Distribution Arrangement; provided, however, that STIZ shall have no
liability with respect to any expense, obligation or liability arising under
such Distribution Arrangement prior to the Closing Date.
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8. Payment Arrangements. From January 1, 1997 until January 1, 1998,
--------------------
STIZ will pay to STI 10% of all net sales of the Products, and from January 1,
1998 until January 1, 2002 STIZ will pay to STI 5% of all net sales of the
Products.
In addition, STIZ will pay STI the net book value of the Valued
Inventory and the book value of the Accounts Receivable reduced by open accounts
payable relating to the Valued Inventory, all as reflected on the audited
balance sheet of the Company at December 31, 1996.
9. Representations and Warranties of STI. STI represents and
-------------------------------------
warrants to STI as follows:
a. STI Authority. This Agreement constitutes the legal, valid,
-------------
and biding obligation of STI. Neither the execution and delivery of this
Agreement nor the consummation by STI of the transactions contemplated hereby,
nor compliance by STI with any of the provisions hereof will (i) conflict with
or result in a breach of or default under mortgage, indenture, license,
agreement, or other instrument or obligation to which STI is a party or by
which it or the Assets may be bound, or (ii) violate any material order,
injunction, degree, statute, rule, or regulation applicable to STI, the
Business or the Assets.
b. Title. STI has full right and title to all the Assets, free
-----
and clear of all claims, liens, charges, security interests, easements or
encumbrances of any nature whatsoever except as noted. At closing, STI shall
sell, convey, assign, transfer and deliver to STI good title to all the Assets,
free and clear of all liens or other encumbrances heretofore mentioned.
c. Distribution Arrangements.
-------------------------
(a) There are no STI written Distribution Arrangements
between the Manufacturers and STI; each Distribution Arrangement is oral, and,
together with all amendments thereto has been completely and accurately
described by STI to STIZ. STI has performed all obligations required to be
performed by it to date under each Distribution Arrangement and, to the best
knowledge of STI, each of the other parties thereto or bound thereby has
performed all the obligations required to be performed by it to date
thereunder. STI has no knowledge or received notice of the intention of any
party to terminate any Distribution Agreement.
(ii) Each Distribution Arrangement is in full force and
effect with no default or dispute or basis therefore existing with respect
thereto.
d. Taxes. All federal, state and other tax returns and reports,
-----
domestic or foreign, required to be filed by or on
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behalf of STI or the Business have been duly filed, and all taxes and other
assessments and all instruments of estimated taxes required to be paid or on
behalf of STI or the Business have been duly paid. STI is not aware of any tax
deficiency proposed to be assessed by any governmental agency. STI is not
under any tax audit or examination. STI has withheld all appropriate federal,
state and local payroll taxes, including federal and state income taxes, FICA
and other applicable taxes. There are no liens for taxes on any of the Assets.
e. Litigation.
----------
(i) There are no actions, suits, proceedings,
investigations, orders, rulings or decrees in or by or before any court,
administrative agency or commission or other governmental authority or
instrumentality ("Governmental Entity"). domestic or foreign, or before any
arbitrator of any kind, pending or known by STI to be threatened, relating to
or affecting STI, the Assets or the Business.
(ii) There are no unsatisfied judgments or outstanding
orders, injunctions, decrees, stipulations or awards (whether rendered by a
court or administrative agency or by arbitration) against STI or against any
of its properties or the Business which, individually or in the aggregate,
would have a material adverse effect on the Business or the Assets, and no
action, proceeding, investigation, order, injunction, ruling, decree or
stipulation has been commenced or entered which contests the validity of this
Agreement or any action taken or to be taken in connection herewith.
f. Compliance With Laws.
--------------------
(i) STI has complied with, is not in violation of, and has
not received any notices of violation with respect to, any federal, state or
local statute, law or regulation with respect to the conduct of the Business,
or the ownership or operation of the Business or the Assets.
(ii) All STI governmental approvals, permits and licenses,
required by STI to conduct the Business have been obtained and are in full
force and effect and are being complied with in all respects, except for such
which either singly or in the aggregate do not and will not have a material
adverse effect on the Business or the Assets.
g. Environment. There are no actions or proceedings (including
-----------
formal investigations) of whatever nature involving STI, the Business, the
Products or the Assets whether brought or conducted by any Governmental Entity
or any other person, arising under any federal, state, local or foreign laws,
rules or regulations which have been enacted or adopted regulating the discharge
of materials into the environment or otherwise relating to the protection of the
environment. STI has not received any
-4-
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notice of intent to commence any action or proceeding (including formal
investigation) against it regarding violations or alleged violations of any
such laws, rules or regulations. To the best of STI's knowledge, there is no
reasonable basis for any action or proceeding (including formal investigation)
regarding violations or alleged violations of such laws, rules or regulations
which, either individually or in the aggregate, may reasonably be anticipated
to have a material adverse effect on the Business of the Assets.
h. Absence of Certain Business Practices. Neither STI nor any
-------------------------------------
director, officer, employee or agent of STI on its behalf, or any other person
acting on its behalf has, directly or indirectly, within the past three years
given or agreed to give any gift or similar benefit to any customer, supplied,
competitor or governmental employee or official (a) which would subject STI, the
Business or the Assets to any damage or penalty in any civil, criminal or
governmental litigation or proceeding or (b) which, if not given in the past,
would have an adverse effect on the Assets or Business.
i. Documents Correct and Complete. As of the Closing Date, each of
------------------------------
the documents required to be furnished by STI pursuant to Article 2 hereof shall
be correct and complete in all respects.
j. Full Disclosure. No representation, warranty or statement of
---------------
STI in this Agreement or the Exhibits hereto or any other document furnished to
STIZ, its counsel or its accountants, by or on behalf of STI in connection with
the transactions contemplated hereby contains or will contain at the Closing
Date any untrue statement of a material fact or omits or will omit to state a
material fact necessary in order to make the statements contained herein or
therein, in light of the circumstances and which made, not misleading.
k. Brokers or Finders Fees. STI is not obligated, directly or
-----------------------
indirectly, to any person for brokerage or finders' fees or agents' commissions
or any similar charges in connection with this Agreement.
10. Conditions to STIZ's Obligation to Close. The obligation of STIZ
----------------------------------------
to consummate the transaction contemplated by this Agreement, including the sale
and purchase of the Assets, is expressly conditioned upon the fulfillment by and
as of the time of the Closing or each of the conditions specified in this
Section 10; provided, however, that STIZ, at its election by written notice to
STI prior to or at the Closing, may waive any or all of such conditions:
a. Inspection of Assets. STIZ shall have completed STIZ
--------------------
inspections of the Assets, which inspections may include, at STIZ's option, an
audit of the evaluated Inventory and the carrying costs reflected thereon, and
an inspection of STI's
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books and records relating to the Assets and the Business, the results of
which inspections will be satisfactory to STIZ in STIZ's sole discretion. STI
will provide reasonable access to the Assets to STIZ and its agents for
purposes of conducting such inspection. This inspection contingency shall be
deemed to have been satisfied unless STIZ provides written notice to STI prior
to the Closing of STIZ's disapproval of the results of such inspection.
b. Performance of Agreements. STI shall have performed all
-------------------------
agreements contained in this Agreement to be performed by it prior to the
Closing Date.
c. Representations and Warranties. The representations and
-------------------------------
warranties of STI contained in this Agreement shall be true in all material
respects on and as of the Closing Date, as if made on and as of the Closing
Date.
d. Litigation. There shall be no pending or threatened
----------
litigation seeking to restrain, prevent, rescind, or change the terms of the
sale and purchase, of the Assets from those set forth herein, or to obtain
damages in connection with such sale and purchase which, in STIZ's reasonable
opinion, makes it inadvisable to proceed with such sale and purchase.
e. Tender. STI shall have tendered to STIZ the delivery of the
------
items contemplated in Section 5.
11. Conduct of Business Prior to Closing. STI agrees that, between the
------------------------------------
date of this Agreement and the Closing Date, STI will operate the Business in
substantially the same manner as conducted prior to the date hereof. Without
limiting the generality of the foregoing, STI agrees that between the date of
this Agreement and the Closing Date:
a. Notice of Change. STI will notify STIZ promptly if STI
----------------
becomes aware of any transaction or occurrence which would make any of the
representations and warranties in Article 8 untrue in any material adverse
respect.
b. Distribution Arrangements. STI will not enter into any new
-------------------------
Distribution Arrangements or renew or amend any existing Distribution
Arrangements with the Manufacturers.
c. Goodwill and Business. STI shall use his best efforts to (i)
---------------------
preserve intact the goodwill of the Business with its existing customers and
the public, and (ii) preserve his business relationships with the
Manufacturers and other parties with whom it has an existing business
relationship. STI will cooperate with STIZ in the course of STIZ's advising
all necessary and appropriate parties of STI's acquisition of the business.
12. Covenants.
---------
-6-
<PAGE>
a. Nondisclosure. STI agrees not to disclose or reveal to anyone
-------------
other than STIZ's directors, officers and employees, at any time after the
date of this Agreement, any customer lists, price lists, trade secrets, or
other confidential information including in the Assets or relating to the
Business.
b. Future Inquiries. STI shall promptly refer to STIZ all future
----------------
inquiries and purchase orders received by STI for any of this products.
13. Indemnification.
---------------
a. STI agrees to indemnify and hold harmless STIZ and STIZ's
directors, officers, shareholders and employees from and against any and all
losses, liabilities, expenses (including, without limitation, fees and
disbursements of counsel and expenses of investigation), claims, fines,
penalties, damages, deficiencies, liens, judgments, costs, settlement payments
or other obligations whatsoever (hereinafter individually a "Claim" or
collectively "Claims") discovered by STIZ or asserted against or incurred by
any such indemnified party that may be payable by virtue of or resulting from
(i) the inaccuracy or break of any representation or warranty made in this
Agreement or otherwise made in writing and delivered by STI to STIZ in
connection with the transactions contemplated hereby; (ii) any failure of STI
to perform or comply with any of its covenants and agreements set forth herein
or in any other document executed in connection with the transactions
contemplated hereby; (iii) any injury to any person or damage to any property
related in any way to any of the Assets sold, licensed or leased by STI,
arising from or based upon any condition, event or action existing on or
occurring before the Closing Date; (iv) any liabilities, obligations or
commitments of, and all claims against STI or against or involving any of the
Assets or the Business, arising from or based upon any condition, even or
action existing on or occurring before the Closing Date; and (v) any
liabilities, obligations, commitments or claims, contingent or otherwise, or
claims against STI arising before the Closing Date.
b. Upon obtaining knowledge of the institution of any action,
proceeding, or other event which could give rise to a Claim pursuant to this
Section 16, STIZ shall promptly given written notice to STI thereof. Except to
the extent set forth in this Section 16, if such Claim relates to a Claim
asserted by a third party (including any Tax authority), STI shall have the
right at its expense to employ counsel to defend such Claim and STIZ shall
have the right, but not the obligation, to participate in the defense of any
such Claim; provided, however, that in the even that STI has employed counsel
to defend a Claim (other than Claims referred to in the last sentence of this
Section 16) and STIZ elects to engage its own counsel to assist in the
defense, STIZ shall pay all costs and expenses of its own counsel. So long as
STI is defending such Claim in good faith, STIZ will not
-7-
<PAGE>
settle such Claim without STI's consent. STIZ shall make available to STI all
records and other materials reasonably required by it in contesting a Claim
asserted by a third party against STIZ and shall cooperate in the defense
thereof. Notwithstanding the foregoing, with respect to Claims covered by
Section 16 which relate to or are likely to affect STIZ's continuing business
relationships (as determined in the reasonable judgment of STIZ), including,
without limitation, STIZ's relationships with its customers, vendors or
suppliers, STIZ shall have the right to employ counsel and defend and/or
settle such Claims at STI's expenses.
c. The indemnification obligations of STI under this Section 16
shall terminate on the date five (5) years after the Closing Date, but shall
not terminate as to any Claim (or any potential Claim by an appropriate party)
asserted prior to the end of the five year period.
d. In the event STIZ is entitled to indemnification under this
Section 16, STIZ shall have the right, in its sole discretion and in such
manner and proportions as STIZ shall choose, to make an equal reduction in any
Purchase Payment or Support Fee then owed to STI. The right of STIZ to be
indemnified under this Section 16 shall not limit, reduce or otherwise affect
any other rights and remedies it may have with respect to the matter
indemnified hereunder, except that STI shall have no right to be indemnified
and is not indemnified under this Section 16 for any Claim satisfied through
an adjustment to the Purchase Payment or Support Fee owed to STI. Nothing
herein, however, shall preclude STIZ from seeking indemnification where the
amount of any Claim exceeds the amount adjusted, indemnified, paid or
reimbursed hereunder.
14. Bulk Sales Act. STI hereby indemnifies STIZ against any claims,
---------------
losses, damages, liabilities, or expenses arising under Bulk Sales Act in
connection with this transaction.
15. Notices. Except as otherwise provided in this Agreement, all notices,
-------
demands, requests, consents, approvals, or other communications (for the purpose
of this Section 18 collectively called "Notices") which required or permitted to
be given hereunder or which are given with respect to this Agreement shall be in
writing and shall be delivered personally or sent either by telecopy or by
registered or certified mail, return receipt requested, postage prepaid,
addressed to the party to be notified at the following address, or to such other
address as such party shall specify by like notice:
To STI:
Scientific Technology Inc.
6550 Dumbarton Circle
Fremont, CA 94555
Attn: Anthony R. Lazzara, Chairman
-8-
<PAGE>
To STIZ:
Scientific Technologies, Inc.
6550 Dumbarton Circle
Fremont, CA 94555
Attn: Joseph J. Lazzara, President & CEO
Notices given as provided above shall be deemed given upon personal delivery or
upon the sending of the telecopy, or if mailed, upon the second (2nd) business
day following the mailing thereof, as the case may be.
16. Proprietary Information. STI and STIZ agree that all information
-----------------------
which is exchanged prior to Closing, except to the extent is has already been
disclosed as publication information, is confidential and proprietary
information, and each party agrees that it will neither use nor disclose any
such information in the event this transaction is not consummated, except to
the extent such disclosure is reasonably necessary in connection with STI's
efforts to purchase the Assets. If the transaction is not consummated, each
party agrees immediately to use its best efforts to return to the other party
all originals and copies of all confidentiality and proprietary information.
17. Arbitration. Any disputed or conflicts related to this Agreement
-----------
shall be submitted for resolution by arbitration in Alameda County,
California, in accordance with the rules of the American Arbitration
Association.
18. Governing Law. This Agreement shall be governed by, interpreted
-------------
under, and construed and enforced in accordance with the laws of the State of
California applicable to agreements made and to be performed wholly within the
State of California. In the event of litigation to resolve any dispute
hereunder, the substantially prevailing party, in the event of litigation,
with respect to any appeal therefrom, shall be entitled to reasonable
attorney's fees from the other party, both for the trial of said dispute and
any appeal therefrom.
19. Entire Agreement. This Agreement contains the entire agreement
----------------
between the parties with respect to the subject matter hereof and supersedes
all prior understandings with respect thereto. All exhibits are incorporated
by this reference as if fully set forth herein; all references herein to the
Agreement shall be deemed to include all such incorporated exhibits. This
Agreement may not be modified, changed, supplemented, or terminated, nor may
any obligations hereunder be waived, except by written instruments signed by
the party to be charged. No waiver of a breach of any provision hereof shall
be deemed a waiver of any preceding or succeeding breach thereof of any other
provision.
-9-
<PAGE>
Time is expressly declared to be of the essence of this Agreement. No extension
of time for performance of any obligation or act shall be deemed an extension of
the time for performance of any other obligation or act. STIZ may assign its
interest under this Agreement without STI's consent, and the parties agree that
STIZ shall be discharged and released from all obligations hereunder upon and
following any such assignment. This Agreement shall be binding upon and inure
to the benefit of the successors and assigns of the parties hereto. The parties
do not intend to confer any benefit hereunder on any person, firm, or
corporation other than the parties hereto.
IN WITNESS WHEREOF, of each party has caused this Agreement to be
executed on its behalf by its duly authorized officers, all on the date first
above written.
SCIENTIFIC TECHNOLOGY INC.
By: /s/Anthony R. Lazzara
-------------------------------------
Anthony R. Lazzara, Chairman
SCIENTIFIC TECHNOLOGIES, INC.
By: /s/Joseph J. Lazzara
-------------------------------------
Joseph J. Lazzara, President & CEO
-10-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,243,000
<SECURITIES> 5,491,000
<RECEIVABLES> 6,820,000
<ALLOWANCES> 114,000
<INVENTORY> 4,258,000
<CURRENT-ASSETS> 20,915,000
<PP&E> 5,095,000
<DEPRECIATION> 2,230,000
<TOTAL-ASSETS> 23,780,000
<CURRENT-LIABILITIES> 4,655,000
<BONDS> 0
10,000
0
<COMMON> 0
<OTHER-SE> 19,115,000
<TOTAL-LIABILITY-AND-EQUITY> 19,125,000
<SALES> 10,110,000
<TOTAL-REVENUES> 10,110,000
<CGS> 4,823,000
<TOTAL-COSTS> 8,169,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,052,000
<INCOME-TAX> 780,000
<INCOME-CONTINUING> 1,272,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,272,000
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
