UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarterly Period Ended March 31, 1998
[ ] Transition report pursuant to 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
------------------------------------
(Issuer)
Oregon 77-0170363
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(State of incorporation) (I.R.S. Employer Identification Number)
6550 Dumbarton Circle, Fremont, California 94555
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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
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Common stock outstanding as of April 30, 1998 was 9,639,243 shares.
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
SCIENTIFIC TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except per share data)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Assets (unaudited)
Current assets:
Cash and cash equivalents $4,103 $4,559
Short-term investments 6,926 4,973
Accounts receivable, net 7,231 7,474
Inventories 5,269 5,113
Deferred income taxes 1,020 1,020
Other assets 407 294
----------- -----------
Total current assets 24,956 23,433
Property and equipment, net 2,745 2,686
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Total assets $27,701 $26,119
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Trade accounts payable $1,734 $1,934
Payable to Parent 216 --
Accrued expenses 1,778 1,667
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Total current liabilities 3,728 3,601
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Commitments and contingencies
Stockholders' Equity
Common stock 10 10
Capital in excess of par value 5,555 5,532
Retained earnings 18,408 16,976
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Total stockholders' equity 23,973 22,518
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Total liabilities and stockholders' equity $27,701 $26,119
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SCIENTIFIC TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1998 1997
---------- ----------
<S> <C> <C>
Sales $11,113 $10,110
Cost of goods sold 5,386 4,823
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Gross profit 5,727 5,287
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Operating expenses
Selling, general and
administrative 2,904 2,519
Research and development 635 827
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Total operating expenses 3,539 3,346
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Income from operations 2,188 1,941
Interest income, net 120 111
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Income before income taxes 2,308 2,052
Provision for income taxes 877 780
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Net income $1,431 $1,272
========== ==========
Basic net income per common share $0.15 $0.13
========== ==========
Shares used to compute basic
net income per common share 9,639 9,601
========== ==========
Diluted net income per common share $0.15 $0.13
========== ==========
Shares used to compute diluted
net income per common share 9,835 9,743
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SCIENTIFIC TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1998 1997
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<S> <C> <C>
Cash flows from operating activities
Net income $1,431 $1,272
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 232 194
Changes in assets and liabilities:
Accounts receivable, net 243 (14)
Inventories (156) (192)
Payable to Parent 216 762
Trade accounts payable (200) (261)
Accrued expenses 111 312
Other (112) (98)
----------- -----------
Cash flows provided by operating activities 1,765 1,975
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Cash flows from investing activities
Investment in intangibles and fixed assets (291) (582)
Sale (purchase) of short-term investments (1,953) (502)
----------- -----------
Cash flows used in investing activities (2,244) (1,084)
----------- -----------
Cash flows from financing activities
(Repurchase) issuance of common stock 23 (19)
----------- -----------
Cash flows used in financing activities 23 (19)
----------- -----------
Change in cash and cash equivalents (456) 872
Cash and cash equivalents at beginning of period 4,559 2,371
----------- -----------
Cash and cash equivalents at end of period $4,103 $3,243
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid to the Parent for income taxes $877 $780
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SCIENTIFIC TECHNOLOGIES INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements as of March 31, 1998 and the
three months ended March 31, 1998 and 1997 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, 1997.
1. INVENTORIES
Inventories consist of the following (in thousands):
March 31, December 31,
1998 1997
------------ ------------
Finished goods $2,029 $1,496
Work in process 564 624
Subassemblies 794 613
Raw materials $1,882 2,380
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$5,269 $5,113
============ ============
2. NET INCOME PER SHARE
The Company has adopted Statement of Financial Accounting Standards
No. 128 ("SFAS 128"). SFAS 128 requires presentation of both Basic and
Diluted income per share on the face of the Statement of Operations.
Basic income per common share is computed based on the weighted average
number of shares outstanding during the period. Diluted income per share
is computed based on the weighted average number of shares outstanding
during the period plus the weighted average of stock options outstanding
during the period. In computing diluted net income per common share, the
average stock price for the period is used in determining the number of
shares assumed to be repurchased from the proceeds of the stock options.
3. DIVIDEND PAID
On March 5, 1998, the Company declared a cash dividend of $.045 per
share on all outstanding shares of its common stock. This dividend was
paid on April 1, 1998 to shareholders of record on March 20, 1998.
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.
<PAGE>
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,
1997.
Results of Operations
---------------------
Sales for the three months ended March 31, 1998 increased 10% to
$11,113,000 from $10,110,000 in the first quarter of 1997. This was
primarily the result of an overall increase in units shipped.
Gross margin as a percent of sales remained relatively constant at
52% during the first quarter of 1998 compared to the comparable 1997
quarter.
Selling, general and administrative expenses increased 15% to
$2,904,000 in the first quarter of 1998 from $2,519,000 in 1997.
Selling, general and administrative expenses as a percent of sales
increased to 26% in the first quarter of 1998 from 25% in the comparable
1997 quarter. This was the result of increased selling expenses
associated with the higher levels of revenue and increased investment in
the marketing infrastructure of the Company.
Research and development expenses declined 23% to $635,000 in 1998
from $827,000 in 1997. Research and development expenses were 6% of
sales for the three months ended March 31, 1998 compared to 8% for the
comparable 1997 period. This was chiefly the result of lower material
and supplies usage as well as a reduction in services performed by
outside contractors. The Company anticipates that it will continue to
make substantial investments in research and development in subsequent
quarters.
Interest income, net increased to $120,000 for the three months
ended March 31, 1998 compared to $111,000 for the same period in the
prior year.
The Company's provision for income taxes was $877,000 for the three
months ended March 31, 1998 compared to $780,000 for the comparable 1997
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, 1998 the Company's working capital was $21,228,000, a
7% increase from the $19,832,000 reported at December 31, 1997. This was
due to positive cash flows from operations resulting in increased short-
term investments and accounts receivable, and lower accounts payable
which offset increased payable to Parent and accrued expenses.
Available bank borrowings were $2,500,000 at March 31, 1998. 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 1998.
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. This is also true with respect to European markets where
business activity declines due to vacations taken in the summer months.
COMPETITION
- ------------
The market for industrial sensors is highly competitive. Many
competitors have substantially greater name recognition and technical,
marketing and financial resources than the Company. Competitive
pressures could reduce market acceptance of the Company's products and
result in price reductions and increases in expenses.
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.
PROTECTION AND ENFORCEMENT OF INTELLECTUAL PROPERTY RIGHTS
- ----------------------------------------------------------
The Company relies on a combination of patent, trademark and trade
secret laws and contractual restrictions to establish and protect
certain proprietary rights in its products and services. There can be no
assurance that the Company's patents, trademarks, or contractual
arrangements or other steps taken by the Company to protect its
intellectual property will prove sufficient to prevent misappropriation
of the Company's technology or defer independent third party development
of similar technologies. Moreover, there can be no assurance that the
technology licenses granted to the Company from its Parent will continue
to be available. The loss of any of the Company's proprietary technology
could require the Company to obtain technology of lower quality or
performance standards or at greater cost, which could materially
adversely affect the Company's business, results of operations and
financial condition. Furthermore, the laws of certain foreign countries
may not protect the Company's products, services or intellectual
property rights to the same extent as do the laws of the United States.
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
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, 1997 to Bank Agreement
dated November 29, 1994 is incorporated by
reference to the Registrant's Form 10-K for the
year ended December 31, 1997, 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, 1997, 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, 1997, 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, 1997, Exhibit 24.1.
Exhibit 27.0 - Financial Data Schedule.
(b) No Reports on Form 8-K were filed during the first quarter of 1998.
<PAGE>
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 12, 1998 /s/Joseph J. Lazzara
----------------- ---------------------------------
Joseph J. Lazzara
President and Chief Executive
Officer
(Principal Executive and
Financial officer)
Date: May 12, 1998 /s/ Richard O. Faria
----------------- ----------------------------------
Richard O. Faria
Vice-President, Finance &
Administration
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACT
FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AND THE
STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 4,103 3,243
<SECURITIES> 6,926 5,491
<RECEIVABLES> 7,369 6,820
<ALLOWANCES> 138 114
<INVENTORY> 5,269 4,258
<CURRENT-ASSETS> 24,956 20,915
<PP&E> 5,664 5,095
<DEPRECIATION> 2,919 2,230
<TOTAL-ASSETS> 27,701 23,780
<CURRENT-LIABILITIES> 3,728 4,655
<BONDS> 0 0
0 0
0 0
<COMMON> 10 10
<OTHER-SE> 23,973 19,115
<TOTAL-LIABILITY-AND-EQUITY> 27,701 23,780
<SALES> 11,113 10,110
<TOTAL-REVENUES> 11,113 10,110
<CGS> 5,386 4,823
<TOTAL-COSTS> 5,386 4,823
<OTHER-EXPENSES> 3,539 3,346
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 2,308 2,052
<INCOME-TAX> 877 780
<INCOME-CONTINUING> 1,431 1,272
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,431 1,272
<EPS-PRIMARY> $0.15 $0.13
<EPS-DILUTED> $0.15 $0.13
</TABLE>
