SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Annual report pursuant to section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1997
[_] 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
Incorporated in Oregon IRS Employer Identification Number:77-0170363
Address of principal executive offices: Telephone: (510) 608-3400
6550 Dumbarton Circle, Fremont, CA 94555
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange on
Title of Class which registered
- ----------------------------- ----------------------------
Common Stock, $.001 Par Value NASDAQ National Market System
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, and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [_]
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
The issuer's revenue for the most recent fiscal year was $44,859,000.
The aggregate market value of voting stock held by non-affiliates of the
Registrant, based on the closing sales price of Common Stock on February 28,
1998 as reported by the NASDAQ Market System , was approximately $18,213,000.
Such amount excludes shares held by registrant's current directors and officers
and by each person who owns 5% or more of the outstanding Common Stock in that
such persons may be deemed to be "affiliates" as that term is defined pursuant
to the Rules and Regulations of the Securities Exchange Act of 1934. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
The number of shares of the Registrant's Common Stock outstanding as of
February 28, 1998 was 9,634,570 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy statement to be filed with the
Commission in connection with the Company's 1998 Annual Meeting of Shareholders
("the Proxy Statement") are incorporated by reference in Part III of this Form
10K.
<PAGE>
PART I
Item 1. BUSINESS
Scientific Technologies Incorporated (the "Company" or "STI"
designs, manufactures and distributes electrical and electronic
industrial controls. The Company's products include safety light guards,
profiling scanners, factory automation sensors, controls, components,
microcomputers, fiber optics, optical and radio frequency data
communications, power monitoring, safety mats, and other electronic
equipment supplied to industrial automation, commercial and defense
customers.
Eighty-six percent of the Company's capital stock is currently
held by Scientific Technology Inc., a California corporation (the
"Parent").
Products
1. Safety Automation Products, Optical Sensors, Wireless Communications.
STI designs, manufactures and markets a wide variety
of safety light guards, photoelectric sensors, fiberoptic
sensors, optical data links, and optical profiling
scanners. STI employs patented technology under eleven
registered trade names and also markets and distributes
several products manufactured by others.
a. Safety Light Guards. The Company's leading product
group, which accounted for a significant majority of the
Company's sales in 1997, 1996 and 1995, is a family of
safety light guards, also called presence sensing devices
or safety light curtains, used to safeguard personnel in
manufacturing environments near robots and moving
machinery. STI offers several product variations,
providing customers with a complete line of optical
guarding solutions.
The Company manufactures and markets a miniaturized
light guard called the MiniSafe, designed for inclusion in
systems offered by original equipment manufacturers
("OEM") and other small guarding needs where limited space
precludes using larger light curtains. The MiniSafe 4300
is available in four-inch increments ranging from four
inches in coverage height to 64 inches. The operating
distance, the distance between the transmitter and
receiver, is up to 30 feet.
_____________
Scientific Technology, Scientific Technologies, Datricon,
STI, The STI logo, OptoSwitch, OptoData, OptoSafe and
Fiberlens, are registered trademarks of Scientific
Technology Incorporated. Aegis, MiniSafe, FlexSafe,
MicroSafe, BeamSafe, FastScan, SpectraData, PartScan and
ValuScan are trademarks of Scientific Technologies
Incorporated, This Annual Report on Form 10-K also refers
to trademarks and service marks of other companies and
entities.
The MiniSafe MS4400 Series offers a longer range product,
up to 50 feet, in a larger, more robust package. The
MS4400 series and the more recently introduced MS4500
series include Individual Beam Indicators, an STI patented
feature, which provide the customer with a visual
indicator of the status of each individual beam in the
sensing array. The Individual Beam Indicators assist in
both the installation and operation of the MiniSafe.
The FlexSafe is a segmented safety light curtain
that offers greater flexibility and machine guarding for
unusually shaped applications. Instead of a single head
comprising the transmitter and a single head comprising
the receiver, the FlexSafe is offered with two or more
segments comprising each transmitter and receiver. The
respective transmitter and receiver segments are connected
with flexible cables to facilitate fitting to the
machinery.
The Company also offers the MicroSafe safety light
curtain, which is more compact than the MiniSafe but has
comparable features. Designed for use in locations in
which space is limited, the small size of the MicroSafe
allows it to be easily integrated with the support framing
used on many automated industrial machines.
The PA4400 and PA4500 Perimeter Access Systems are
safety light curtains specifically designed for perimeter
protection around the boundaries of large automated
machining centers and robotic work cells.
Introduced in 1997, the DuoSafe controller allows
the customer to configure two independent safety light
curtains to achieve common or discrete output. DuoSafe
works with seven different versions of STI light curtains.
Selected models of the safety light curtain products
are certified by independent laboratories to comply with
one or more of the following safety and electrical
standards: UL, CSA and British Standards BS6491. The
newest MicroSafe and MiniSafe models are European
certified by independent test agencies and carry the CE
test mark.
b. Other Safety Automation Products. The Company has a
strategic relationship with Guardmaster, Ltd., a
manufacturer of mechanical safety interlocks based in the
United Kingdom. Guardmaster safety interlock switches are
utilized on hinged, sliding, or lift-off guards and
barriers that are often installed with STI safety light
curtains. When the guard is opened, the power supply to
the machine is disconnected. The function and design of
Guardmaster interlocks are complementary to the STI range
of safety products. An affiliate of Guardmaster is the
distributor for the STI product line in the United
Kingdom.
STI safety mats are designed for use in industrial
environments where safety enhancements or zone detection
is required. The mats are sensitive to foot or vehicular
traffic. TouchStart capacitive palm switches for two hand
control applications actuate with a soft touch.
c. Optical Profiling Scanners. In today's industrial
environment, non-contact, on-the-move sensing is vital to
control automated processes and improve industrial
productivity. STI has developed a diverse line of optical
profiling scanner products. These scanners (ValuScan and
PartScan) provide non-contact sensing for a wide variety
of customer applications.
The ValuScan is a family of high speed,
microprocessor-based profiling scanners designed to
provide an economical way to measure the physical size of
various objects. The modular design of the ValuScan
enables the user to select among various infrared beam
spacings, size of the scanned area, single or multiple
axes and many output and programming functions.
PartScan is designed to detect parts as they
are ejected from a stamping machine. Objects as small as
0.5mm can be detected at rates up to 3,600 per minute.
ValuScan and PartScan, among other applications,
verify part presence, measure products in both X and Y
axes, scan for package sorting applications, detect flaws
caused by holes or tears in moving webs of material and
control slack loops in rolled material.
The ValuScan and PartScan are microprocessor-based
products which greatly simplify configuring an object
measurement system. Software is included for a variety of
scanning applications. STI can customize the software for
a customer's specific needs.
In 1995 the Company introduced the STI VSS6600
vehicle scanner series of high speed, profiling scanners
utilized in highway toll collection systems. These
scanners are used for both detection and vehicle
classification, providing imaging information to a host
computer which determines the appropriate toll to be
charged in a automatic fare collection application.
d. Photoelectric Sensors. STI also manufactures and/or
markets a variety of photoelectric and fiberoptic sensors
used for detecting the presence or absence of objects in a
wide selection of factory automation applications.
Fiberoptic sensors utilize flexible glass or
plastic fiberoptic cable to traverse the light beam from
the solid state light source to the receiving electronics.
This cable is very small, and depending upon its design,
can provide resistance against high temperatures,
corrosive chemicals or repeated flexing. Fiberoptic
sensors are often used in confined spaces and in
environments in which standard photoelectric sensors
typically would not survive.
Typical uses and applications for
photoelectric and fiberoptic sensors include canning and
bottling lines, conveyor warehousing, palletizing,
printing, food processing, plastic molding, wood and
forest products manufacturing, automotive manufacturing,
material handling and a variety of other applications in
an array of industries.
e. Other Products. STI also manufactures and/or markets a
line of optical communications data links (OptoData) and
spread spectrum radio frequency modems (SpectraData).
STI product users include companies in the
automotive, machine tool, metal forming, robotics,
electronics, material handling, packaging, food
processing, pulp and paper, forest products, personal care
products, printing, chemical, defense and textile
industries.
To cover this diversified industrial market, these
products are marketed primarily to end-users and original
equipment manufacturers, through more than 195 US
distributors and sales representatives and 27 foreign
distributors. Customers include end-users and original
equipment manufacturers.
2. Control Components, Power Monitoring and Defense Electronics.
The Company manufactures and markets a wide variety
of sensors and relays for commercial and defense
customers. Such products include custom magnetic
components, current sensors, RPM sensors, voltage sensors,
current monitors, time delay relays, flashers, phase
sequence relays and indicators, DC to DC converters, and
isolation transformers. STI also manufactures and markets
a line of power supplies for lasers.
STI is qualified as a supplier of a variety of
military-specified sensors and controls. Many of the these
products are selected for use on military and general
aviation aircraft and ground support systems. Products are
sold to original equipment manufacturers, government
agencies and end users.
Marketing of these products is accomplished
primarily through direct sales.
3. Industrial Control Microcomputers, Peripherals and Software.
The Company also designs and produces modular,
board-level, computer products under the Datricon label.
This product line consists of a series of single
printed circuit board microcomputers and related
peripheral boards for industrial applications and use by
original equipment manufacturers, and printed circuit pre-
packaged systems. Most of the Datricon microcomputers are
constructed on a single circuit board and are designed
using a set of electrical and mechanical connections known
as "STD-Bus". STD-Bus is one of several competing
electronic bus structures used for microcomputers and
peripherals in the industrial automation control
marketplace.
Datricon products can be used in a range of customer
applications, including remote-controlled robots, process
control equipment, measuring instrumentation, plastics
manufacturing, lighting controls, semiconductor processing
equipment, photographic processing and automatic test
equipment. Datricon products are marketed directly to
customers, which include end-users and original equipment
manufacturers.
4. Level and Flow Sensors
In addition to its three primary product groups, STI
markets a wide variety of level and flow sensing products
imported from several manufacturers. The principal
provider of these products is Nohken, the largest level
control manufacturer in Japan. STI is the exclusive US
distributor of the Nohken products. These products provide
point level detection of solids, liquids and
solids/liquids, as well as contiguous measurement of
continuous flow of solids and liquids, in a wide variety
of environments.
Sources and availability of components
The Company maintains an inventory of components and parts for
its manufacturing activities. There are many sources for most of the
components needed; however, some products, components and sub-
assemblies are obtained from sole sources which may be the only
supplier or in order to obtain pricing or supply efficiencies. In
the event of supply interruptions from these vendors, the Company
believes most sole source components could be obtained from
alternate suppliers, but this would require the transfer of tooling
or designs or the redesign of the Company's product to facilitate
use of alternate source components. Delays would be incurred by
switching to an alternate source which could have an adverse effect
on the Company's business, financial condition and results of
operations.
The Company also derives revenue from the distribution of
products from third party manufacturers. In the event such
arrangements are terminated or third party products otherwise become
unavailable, the Company's results of operations could be adversely
affected.
Research and development
In order to meet the changing needs of its customers, the
Company continuously engages in research and development both to
introduce new products and to improve existing products. In
addition, the Company modifies products as necessary to meet
original equipment manufacturers' requirements. At December 31,
1997, there were approximately 23 employees engaged in research and
development activities. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Business Factors -
Rapid Technological Change and New Product Development."
In 1997, 1996, and 1995, the Company spent $3,135,000,
$2,482,000, and $1,598,000, respectively, on engineering, research
and development. In addition to new products such as DuoSafe and
enhancements to existing products, the Company's research and
development efforts are directed towards qualifying the Company's
light curtains, scanners and sensors for sale in foreign countries
and qualifying products the Company imports for sales in the U.S.
The Company anticipates that its level of research and development
expenditures may be higher in 1998.
Patents and trademarks
The Company holds seven US patents and nine US registered
trademarks. In addition, the Company has been licensed by its Parent
to use three patents for its products and six US registered
trademarks, including the use of the Parent's logo "STI". Products
are marketed under the following US registered trademarks:
"DUOSAFE," "OPTOFENCE," "MINISAFE," "OPTOSAFE," "FIBERLENS,"
"BEAMSAFE," "SPECTRADATA," "FLEXSAFE" and "MICROSAFE". The Company
has filed for additional patent protection on certain of its
technologies.
There can be no assurance that these patents or trademarks or
other steps taken by the Company to protect its intellectual
property will prove sufficient to prevent misappropriation of the
Company's technology. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Business Factors -
Protection and Enforcement of Intellectual Property Rights." Because
of the rapid rate of technology change in the electronics industry,
the Company believes its success in the future depends on the
quality of its products and services and the technical skills of its
personnel to adapt to technological developments, rather than solely
on its patents.
Backlog
Because many customers place large orders for delivery
throughout the year and because of the possibility of customer
changes and cancellation of orders, the Company's backlog as of any
particular date may not be representative of the Company's sales for
any succeeding fiscal period. At March 9, 1998, the Company's
backlog was $1,654,000, compared to $1,974,000 at March 13, 1997. Of
this total, $186,000 is scheduled at customer's request, to be
filled during periods after 1998.
Competition
The industry in which the Company operates is competitive and
subject to rapid technological change. Many of the Company's
competitors are significantly larger and possess greater financial
and other resources.
Competitors of STI include, among others, Honeywell, Rockwell
Automation, Eaton Corporation, Banner Engineering, Sick Optic-
Electronic, Inc., Cutler Hammer, Danaher Controls, Data Instruments,
Link Controls and Omron. Competitors of the control components
power monitoring and defense product lines include several of the
above-mentioned firms and also SCI Systems, Inc., Technitrol,
Logitek, Hi-G and Xentek. The Datricon line's competitors include
Mizar, Pro-Log, and Ziatech. In addition, the Company faces indirect
competition from present and potential end users who from time to
time evaluate the "make or buy" decision of whether to manufacture
their own components or purchase them from outside sources.
Competition is based primarily upon product quality,
performance and price. The Company believes that it generally
competes favorably with respect to these factors. To maintain its
competitive position, the Company will continue to devote
substantial resources to the development of new products. See
"Business - Research and development."
Foreign operations
The Company has no foreign manufacturing operations. STI
Scientific Technologies GmbH, a wholly owned German subsidiary, was
established in 1995 as the Company's European sales office. The
Company's products are also sold in foreign countries by
distributors and independent sales representatives. Foreign sales
represented less than 10% of sales in each of 1997, 1996 and 1995.
Customers
NCC Electronics, an independent distributor, represented 18%
of sales in 1997 and 19% of sales in 1996 and 1995. No other
customer represented more than 10% of sales. Aggregate sales to both
government agencies and government contractors represented less than
5% of sales in 1997, 1996 and 1995.
Costs and effects of compliance with environmental laws
Compliance with environmental protection laws or similar
ordinances is not expected to have any material affect on the
business of the Company.
Employees
At December 31, 1997, the Company employed approximately 254
full time employees. Included in this total was the common
manufacturing, support and administrative staff that the Company
shares with the Parent and other subsidiaries of the Parent at the
Dumbarton Circle facility, in Fremont, California.
None of the employees are represented by unions, and there has
never been a disruption of operations due to a labor dispute.
Many of the Company's employees are skilled in technical and
engineering disciplines and the future success of the Company will
depend, in part, upon its ability to attract and retain such
employees. The Company believes that its relations with its
employees are good.
Item 2. PROPERTIES
The Company owns no real estate. The Company's manufacturing
operations, corporate headquarters, administrative, engineering and
sales offices are located a 95,000 square foot facility located at
6550 Dumbarton Circle, Fremont, California. The facility is owned by
an affiliate of the Parent and the Company leases approximately
85,000 square feet, 89% of the total, for its use. The Company
believes its current facilities will be adequate for the foreseeable
future. See Note 7 of Notes to Consolidated Financial Statements for
information regarding lease commitments.
The Company maintains insurance policies for property,
casualty, fire, business interruption, workers compensation, general
liability and product liability. There can be no assurance that in
the future, the Company will continue to be able to obtain such
insurance on commercially and economically feasible terms. In the
event the Company were to suffer a claim not covered by insurance or
if insurance coverage is insufficient, such claim could have an
adverse effect on the Company's operations or financial condition.
Item 3. LEGAL PROCEEDINGS.
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's common stock is traded on the Nasdaq Stock Market
under the symbol STIZ. The stock tables in most daily newspapers list
the Company as "SciTech".
Price of Common Stock
- ----------------------
1997 High Low 1996 High Low
- --------------- --------- --------- --------------- --------- ---------
1st Quarter $ 8-7/8 $ 7-1/8 1st Quarter $16-3/4 $10-1/2
2nd Quarter 9-3/4 7-1/4 2nd Quarter 17-3/4 10-1/2
3rd Quarter 13-7/8 8-3/4 3rd Quarter 11-3/4 7-1/2
4th Quarter 13-3/4 9-7/16 4th Quarter 10-1/4 7-1/2
The closing sales price on February 27, 1998 was $14.25 per share.
Holders
There were 746 stockholders of record on February 27, 1998.
Dividends
In 1997, regular quarterly dividends of $.0425 per share were
paid on April 1, July 1, September 9, and December 2. In 1996,
regular quarterly dividends of $.04 per share were paid on April 1,
July 1, September 3, and December 3. On March 5, 1998, the Company
declared a regular quarterly dividend of $.045 per share, payable on
April 1, 1998 to shareholders of record on March 20, 1998.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
SCIENTIFIC TECHNOLOGIES INCORPORATED
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income statement data
- ---------------------------
Net sales $44,859 $38,294 $36,006 $26,115 $18,617
Income from operations 9,266 7,798 10,247 6,063 3,995
Net income 6,070 5,168 6,336 3,698 2,476
Basic income per common
share $0.63 $0.54 $0.66 $0.38 $0.26
Diluted income per common
share $0.62 $0.53 $0.66 $0.38 $0.26
December 31,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Balance sheet data
- -------------------
Total assets $26,119 $21,713 $18,097 $12,284 $8,310
Long-term obligations -- -- 14 58 86
Stockholders' equity 22,518 17,871 14,336 9,249 6,504
Dividends declared per
share $0.17 $0.16 $0.13 $0.10 $0.09
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The discussion and analysis below contains trend analysis and other
forward looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Actual results could differ materially from those projected in the
forward looking statements as a result of the risk factors set forth
under "Business Factors" and elsewhere in this report. The following
discussion should be read in conjunction with the Company's consolidated
financial statements and notes thereto. All references to years are to
fiscal years unless otherwise noted.
Results of Operations
Sales
Sales in 1997 grew 17% to $44.9 million from $38.3 million in 1996.
Sales in 1996 grew 6% to $38.3 million from $36.0 million in 1995. The
most significant factor driving the growth in both periods was an
overall increase in units shipped. Also contributing to this growth was
the strong customer acceptance of new products such as DuoSafe. Sales in
1997 were positively affected by an improvement in the Company's overall
sales discount rate. The Company believes that competitive conditions
could have an impact on its distributor discount and future sales growth
rates. The table below summarizes operating performance as a percent of
sales for the most recent three years.
1997 1996 1995
---------- ---------- ----------
Sales 100% 100% 100%
---------- ---------- ----------
Gross margin 52% 51% 55%
---------- ---------- ----------
Operating expenses
Selling, general and administrative 24% 24% 22%
Research and development 7% 6% 4%
---------- ---------- ----------
Total operating expenses 31% 30% 26%
---------- ---------- ----------
Income from operations 21% 21% 29%
Interest income, net 1% 1% 1%
---------- ---------- ----------
Income before income taxes 22% 22% 30%
Provision for income taxes 8% 8% 12%
---------- ---------- ----------
Net income 14% 14% 18%
========== ========== ==========
Gross profit
1997 = $23.3 million
1996 = $19.6 million
1995 = $19.9 million
Increase in 1997 = 19%
Decrease in 1996 = 2%
STI's gross margin was 52% of sales in 1997, 51% in 1996 and 55% in
1995. The increase in gross profit in 1997 compared to 1996 was due
primarily to continued improvements in manufacturing techniques and
processes and economies of scale associated with higher volume,
resulting in decreased cost per unit. The decline in gross profit and
gross margin in 1996 compared to 1995 was attributable to: a more
competitive market which resulted in greater sales discounts and a
product mix change consisting of increased proportionate sales of lower
margin products. Gross margin in 1996 was also impacted by higher sales
of products manufactured by other companies and distributed by STI,
which generally have lower gross margins. In addition, during the latter
part of 1995, the Company relocated to a new and larger facility and
increased its manufacturing support staff. During 1996, the Company
experienced a 36% increase in manufacturing overhead expenses which was
the result of the full year effect of the new facilities expenses, and
to a lesser extent, manufacturing staff increases. The Company believes
that increased sales helped to offset the higher fixed costs associated
with relocation to a larger facility and had a positive impact on gross
margin.
Selling, general and administrative expenses
1997 = $10.9 million
1996 = $9.4 million
1995 = $8.0 million
Increase in 1997 = 16%
Increase in 1996 = 18%
For 1997, selling, general and administrative expenses as a percent of
sales remained constant at 24%. Total expenditures increased 16%,
compared to sales growth of 17%. During 1997, the Company continued the
expansion of its advertising and promotional expenditures, completed an
extensive revision to its product data book and expanded its sales
staff. Economies of scale allowed it to keep the growth rate of selling,
general and administrative expenses below the sales growth rate. In
1996, the Company increased its promotional expenditures, continued to
expand its sales and information systems staff and incurred the full
year effect of expenses associated the new facilities and German sales
and marketing operations. These were the primary reasons that the growth
in selling, general and administrative expenses exceeded sales growth
when compared to 1995. The Company also translated its product
literature into other languages as required for sales activity in the
European market. The Company anticipates that selling, general and
administrative expenses will increase in the future but will remain
constant or be slightly lower as a percent of sales.
Research and development expenses
1997 = $3.1 million
1996 = $2.5 million
1995 = $1.6 million
Increase in 1997 = 26%
Increase in 1996 = 55%
Product creation, development and enhancement have been and continue to
be an important factor in STI's long-term success. Investments in this
area enable the Company to serve the factory automation market with
increasingly sophisticated sensors, manufacturing controls and data
communication products. In 1997 and 1996, STI introduced a number of
product advancements that have helped the Company to maintain its
position in a highly competitive marketplace. The Company anticipates
that the level of research and development expenses will increase in the
future, although the Company expects such expenses to remain constant as
a percentage of sales. To date, all product development costs have been
expensed as incurred.
Income Tax
The Company's effective income tax rate was 38% in 1997 and 1996 and 40%
in 1995. The Company expects that its effective tax rate for 1998 will
be reasonably consistent with 1997 as the Company will continue to earn
research and development tax credits through June 1998, in addition to
the mix of foreign and domestic income. See Notes 1 and 5 of Notes to
Consolidated Financial Statements.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 130, "Reporting on Comprehensive Income." SFAS No. 130
establishes standards for reporting and display of comprehensive income
and its components in a financial statement that is displayed with the
same prominence as other financial statements for periods beginning
after December 15, 1997. Comprehensive income, as defined, includes all
changes in equity (net assets) during a period from non-owner sources
including unrealized gains and losses from available-for-sale
securities. Reclassification of financial statements for earlier periods
for comparative purposes is required. The Company will adopt SFAS No.
130 beginning in 1998 and does not expect such adoption will have a
material effect on the consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information." This statement establishes
standards for the way companies report information about operating
segments in annual financial statements for periods beginning after
December 15, 1997. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. It
is not expected that adoption of SFAS No. 131 will have material impact
on the consolidated financial statements.
Liquidity and Capital Resources
STI's working capital needs have been met through funds generated from
operating activities. During 1997, operating funds were provided by net
income, adjusted for depreciation, an increase in accrued expenses and,
to a lesser extent, the issuance of common stock. These operating funds
were used to finance increased accounts receivable, inventories and
other assets, to purchase short-term investments and fixed assets and to
pay dividends. Working capital amounted to $19.8 million at December 31,
1997. The bank line of credit with Bank of the West, consisting of a one
year $2.5 million revolving line and term loan commitment was extended
in 1997 to May 31, 1998. Secured by qualified receivables, fixed assets
and inventories, borrowing under this credit line bears interest at the
bank's prime rate. At December 31, 1997, none of the revolving line of
credit had been utilized. The Company has the option to convert up to
$500,000 of the credit line into a five year term note. See Notes 4 and
6 of Notes to Consolidated Financial Statements.
The Company made certain capital expenditures during 1997, primarily for
production, quality assurance, research and development equipment,
information systems and software. Consistent with its customary
operations and plans for growth, the Company plans to make certain
capital expenditures during 1998, primarily for production, quality
assurance and research and development equipment. While the Company had
no formal commitments at December 31, 1997, it is anticipated that
capital expenditures in 1998 will be approximately $1,000,000. See Note
7 of Notes to Consolidated Financial Statements.
STI believes that its cash flow from operations and available bank
borrowings will be sufficient to meet anticipated working capital
requirements through at least 1998. While the Company continues to
evaluate its financing alternatives from time to time, it has no current
plans to raise additional outside capital.
Relationship with Parent
The Parent manages cash for the Company. Cash collected by the Parent on
the Company's behalf is reflected as a decrease to the Payable to Parent
account or as an increase to the Receivable from Parent account. Cash
transfers, management service, interest and rent charges from the Parent
to the Company, charges for income taxes and the Parent's share of
dividends are reflected as increases to the payable account or as
decreases to the receivable account. The Parent files consolidated
returns, including the accounts of the Company, for federal and state
income taxes. See Note 2 of Notes to Consolidated Financial Statements.
Year 2000
The Company has completed upgrading its information systems to Year 2000
compliant versions, and therefore does not anticipate any internal Year
2000 issues from its own information systems. However, the Company could
be adversely impacted by Year 2000 issues faced by major distributors,
suppliers, customers, vendors and financial service organizations.
Management has not yet completed an assessment of the impact that third
parties who are not Year 2000 compliant may have on the operations of
the Company.
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 the Company's
future business, financial condition or operating results are the
following:
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, fluctuations in complementary third
party products with which STI products are sold, the mix of products
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 market for the Company's products is characterized by rapidly
changing technology, evolving industry standards, changes in customer
needs and frequent new product introductions. 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. There can be no assurance that a reseller will continue to
offer the Company's products. In addition many of the Company's
resellers are privately owned firms and some may not be well
capitalized.
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.
To date, the Company has not been notified that any of its products
infringe the proprietary rights of third parties, but there can be no
assurance that third parties will not claim infringement by the Company
with respect to current or future products. Any such claim, whether
meritorious or not, could be time-consuming, result in costly litigation
or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements might not be available on terms
acceptable to the Company or at all. As a result, any such claim could
have a material adverse affect upon the Company's business, results and
financial condition. See " Business - Patents and Trademarks".
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
(a) The following documents are filed as a part of this Report:
(1) Financial Statements
Consolidated Balance Sheet - December 31, 1997 and 1996
Consolidated Statement of Operations - Years ended December 31, 1997,
1996 and 1995
Consolidated Statement of Cash Flows - Years ended December 31, 1997,
1996 and 1995
Consolidated Statement of Changes in Stockholders' Equity - Years
ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Report of Independent Accountants
(2) Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not
required or applicable, or the information required to be set forth
therein is included in the Financial Statements or notes thereto.
<PAGE>
SCIENTIFIC TECHNOLOGIES INCORPORATED
CONSOLIDATED BALANCE SHEET
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $4,559 $2,371
Short-term investments 4,973 4,989
Accounts receivable, net 7,474 6,692
Inventories 5,113 4,066
Deferred income taxes 1,020 840
Other assets 294 278
--------- ---------
Total current assets 23,433 19,236
Property and equipment, net 2,686 2,477
--------- ---------
Total assets $26,119 $21,713
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $1,934 $2,385
Accrued expenses 1,667 1,457
--------- ---------
Total current liabilities 3,601 3,842
--------- ---------
Commitments and contingencies (Notes 4 and 7)
Stockholders' Equity
Voting Preferred stock; shares authorized -
10,000; shares issued and outstanding -
none; $.10 par value -- --
Non-voting Preferred stock; shares authorized -
10,000; shares issued and outstanding -
none; $.10 par value -- --
Common stock; shares authorized - 100,000;
shares issued and outstanding - 9,635 and
9,602, respectively; $.001 par value 10 10
Capital in excess of par value 5,532 5,319
Retained earnings 16,976 12,542
--------- ---------
Total stockholders' equity 22,518 17,871
--------- ---------
Total liabilities and stockholders' equity $26,119 $21,713
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SCIENTIFIC TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Sales $44,859 $38,294 $36,006
Cost of goods sold 21,510 18,661 16,139
---------- ---------- ----------
Gross profit 23,349 19,633 19,867
Operating expenses
Selling, general and administrative 10,948 9,353 8,022
Research and development 3,135 2,482 1,598
---------- ---------- ----------
Total operating expenses 14,083 11,835 9,620
---------- ---------- ----------
Income from operations 9,266 7,798 10,247
Interest income, net 524 537 312
---------- ---------- ----------
Income before income taxes 9,790 8,335 10,559
Provision for income taxes 3,720 3,167 4,223
---------- ---------- ----------
Net income $6,070 $5,168 $6,336
========== ========== ==========
Basic net income per common share $0.63 $0.54 $0.66
========== ========== ==========
Shares used to compute basic
net income per common share 9,615 9,606 9,607
========== ========== ==========
Diluted net income per common share $0.62 $0.53 $0.66
========== ========== ==========
Shares used to compute diluted
net income per common share 9,777 9,733 9,607
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SCIENTIFIC TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(In thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $6,070 $5,168 $6,336
Adjustments to reconcile net income to
cash provided by (used in)
operating activities:
Depreciation and amortization 833 649 465
Changes in assets and liabilities:
Accounts receivable, net (782) (1,439) (467)
Inventories (1,047) (579) (1,120)
Trade accounts payable (451) 167 651
Accrued expenses 210 (22) 97
Other (196) (523) (344)
---------- ---------- ----------
Cash flows provided by operating
activities 4,637 3,421 5,618
---------- ---------- ----------
Cash flows from investing activities:
Purchases of property and
equipment (1,042) (1,228) (863)
Sale (purchase) of short-term
investments, net 16 (1,602) (2,254)
---------- ---------- ----------
Cash flows used in investing activities (1,026) (2,830) (3,117)
---------- ---------- ----------
Cash flows from financing activities:
Payments on debt -- (64) (22)
Issuance (repurchase) of common stock 213 (96) --
Dividends (1,636) (1,537) (1,249)
---------- ---------- ----------
Cash flows used in financing activities (1,423) (1,697) (1,271)
---------- ---------- ----------
Change in cash and cash equivalents 2,188 (1,106) 1,230
Cash and cash equivalents at beginning
of year 2,371 3,477 2,247
---------- ---------- ----------
Cash and cash equivalents at end of year $4,559 $2,371 $3,477
========== ========== ==========
Supplemental disclosure of cash flow
information:
Cash paid to Parent for
income taxes $3,720 $3,167 $4,223
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SCIENTIFIC TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995
(In thousands)
<TABLE>
<CAPTION>
Common Stock
----------------------------
Capital
in excess
Par of par Retained
Shares Value Value Earnings Total
--------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Balances December 31, 1994 9,607 $10 $5,415 $3,824 $9,249
Net income for the year -- -- -- 6,336 6,336
Dividends paid -- -- -- (1,249) (1,249)
--------- -------- --------- -------- ---------
Balances December 31, 1995 9,607 10 5,415 8,911 14,336
Repurchase of common stock (5) -- (96) -- (96)
Net income for the year -- -- -- 5,168 5,168
Dividends paid -- -- -- (1,537) (1,537)
--------- -------- --------- -------- ---------
Balances December 31, 1996 9,602 10 5,319 12,542 17,871
Issuance of common stock 33 -- 213 -- 213
Net income for the year -- -- -- 6,070 6,070
Dividends paid -- -- -- (1,636) (1,636)
--------- -------- --------- -------- ---------
Balances December 31, 1997 9,635 $10 $5,532 $16,976 $22,518
========= ======== ========= ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Scientific Technologies Incorporated
Notes to Consolidated Financial Statements
NOTE 1-OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES
Description of Operations
Scientific Technologies Incorporated (the "Company") develops,
manufactures and markets safety light curtains, industrial sensors,
optical profilers, microcomputers, power monitoring devices and data
communications products for factory automation applications. A majority
of the Company's outstanding common stock is held by Scientific
Technology Incorporated (the "Parent").
The Company operates in one business segment - the development,
manufacture and marketing of electronic products. Sales to foreign
customers represented less than 10% of total sales in 1997, 1996 and
1995. One customer, a distributor, accounted for 18% of total sales in
1997 and 19% of total sales in 1996 and 1995.
Basis of Presentation
The consolidated financial statements include the accounts of the
Company and its subsidiaries after elimination of all significant
intercompany accounts and transactions.
Revenues
Revenues from product sales are recognized when products are shipped.
The Company warranties its products for 12 months from date of
installation and provides for warranty upon shipment.
Cash and Cash Equivalents and Short-Term Investments
The Company invests primarily in money market accounts and short-term
investments held at financial institutions and considers all highly
liquid investments with an original maturity of less than 90 days to be
cash equivalents.
Short-term investments consist of highly rated mutual funds and Treasury
bonds which generally mature in less than one year and are classified as
"available for sale". Interest income is accrued as earned. The
investments are carried at cost plus accrued interest, which
approximates market value.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Property and Equipment
Property and equipment, including furniture and fixtures, are recorded
at cost. Depreciation is provided using the straight-line method over
the estimated useful lives, which range from three to ten years.
Leasehold improvements are amortized over the shorter of the term of the
lease or the estimated life of the improvement.
Income Taxes
Deferred income taxes are provided for the temporary differences between
the financial reporting basis and the tax basis of the Company's assets
and liabilities.
The Company is included in the consolidated tax return of the Parent,
but provides for income taxes on a separate return basis pursuant to a
tax sharing arrangement, which limits the Company's tax liability to the
amount payable to the Parent. Income taxes payable are recorded as a
reduction to the receivable from Parent account or as an increase to the
payable to Parent account.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash,
cash equivalents, short-term investments and trade accounts receivable.
The Company places its cash and cash equivalents in a variety of money
market accounts. The Company further limits its exposure to these
investments by placing such investments with various high quality
financial institutions. The Company routinely performs evaluations of
these financial institutions. The Company's short-term investments are
primarily composed of highly rated mutual funds and Treasury bonds. The
Company offers credit terms on the sale of its products to its
customers. The Company performs ongoing credit evaluations of its
customers' financial condition and, generally, requires no collateral
from its customers. The Company maintains an allowance for uncollectable
accounts receivable based upon the expected collectability of all
accounts receivable.
Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in accordance
with generally accepted accounting principles. For certain of the
Company's financial instruments, including cash, cash equivalents,
short-term investments, trade accounts receivable, accounts payable and
accrued expenses, the carrying amounts approximate fair value due to the
short maturities.
Foreign currency
The Company's German subsidiary generally transacts its business in
German Marks. Translation and transaction gains and losses to date have
been immaterial.
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. All
prior period net income per share data has been restated in accordance
with SFAS 128. 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. A reconciliation of the numerators and
denominators of the basic and diluted income per common share
computations is provided below.
In Thousands Per
---------------------- Share
Income Shares Amunt
---------- ---------- ----------
1997
Earnings per share of common stock $6,070 9,615 $0.63
Effect of dilutive securities
Stock options -- 162 ($0.01)
---------- ---------- ----------
Earnings per share of common stock-
assuming dilution $6,070 9,777 $0.62
========== ========== ==========
1996
Earnings per share of common stock $5,168 9,606 $0.54
Effect of dilutive securities
Stock options -- 127 ($0.01)
---------- ---------- ----------
Earnings per share of common stock-
assuming dilution $5,168 9,733 $0.53
========== ========== ==========
1995
Earnings per share of common stock $6,336 9,607 $0.66
Effect of dilutive securities
-- -- --
Earnings per share of common stock- ---------- ---------- ----------
assuming dilution
$6,336 9,607 $0.66
========== ========== ==========
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reported periods. Actual results could
differ from those estimates.
Stock Based Compensation Plans
The employees of the Company are eligible to participate in stock
option and stock purchase plans of the Parent. The Company applied the
provisions of Statement of Accounting Standards No. 123 ("SFAS 123") to
the stock option and stock purchase plans for 1997, 1996 and 1995, and
found that the allocated pro forma effects of applying SFAS 123 were
immaterial to the Company's financial position and results of
operations.
NOTE 2 - RELATED PARTY TRANSACTIONS
The Parent provides certain management, marketing and sales services to
the Company. The costs are allocated to the Company based on the
percentage of the Company's sales to total sales of the Parent and its
subsidiaries. The amounts allocated to the Company for 1997, 1996 and
1995 were $824,000, $949,000 and $890,000, respectively.
The Company leases approximately 85,000 square feet in a 95,000 square
foot facility owned by an affiliate of the Parent. The lease term is ten
years. Overhead costs are allocated primarily on the basis of square
footage utilized.
Additionally, the Parent manages the Company's cash. The Company
utilizes a payable to Parent account to record activity including cash
received, cash disbursed and amounts owed to the Parent for allocated
charges and dividends. The net effect of transactions with the Parent
resulted in a zero balance at December 31, 1997 and 1996. The Company
charges interest on the receivables from the Parent and pays interest on
payables to Parent at the Company's average interest rate on bank
borrowings. Interest expense amounted to $34,000 in 1997 and $42,000 in
1996. There was no interest income or expense in 1995.
NOTE 3-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 on sales of the product to the Parent for a
number of years. The acquisition had an immaterial impact on revenues,
gross margin and net income for the year ended December 31, 1997.
NOTE 4 - BALANCE SHEET DATA
December 31,
----------------------
1997 1996
---------- ----------
ACCOUNTS RECEIVABLE:
Trade accounts receivable $7,612 $6,806
Less: Allowance for doubtful accounts (138) (114)
---------- ----------
Accounts receivable, net $7,474 $6,692
========== ==========
INVENTORIES:
Finished goods $1,496 $1,449
Work in process 624 509
Subassemblies 613 493
Raw materials 2,380 1,615
---------- ----------
$5,113 $4,066
========== ==========
PROPERTY AND EQUIPMENT:
Equipment $4,445 $3,659
Furniture and fixtures 907 651
Leasehold improvements 21 20
---------- ----------
5,373 4,330
Less: accumulated depreciation (2,687) (1,853)
---------- ----------
$2,686 $2,477
========== ==========
ACCRUED EXPENSES:
Accrued compensation and benefits $944 $666
Accrued commissions 247 222
Warranty reserve 262 229
Other 214 340
---------- ----------
$1,667 $1,457
========== ==========
The Company has a $2,500,000 line of credit with Bank of The
West, of which no amount was outstanding at December 31, 1997 and
1996. The credit line, which is subject to certain financial
statement covenants, bears interest at the bank's prime rate (8.5%
at December 31,1997), expires on May 31, 1998, and is secured by
accounts receivable, inventories and fixed assets.
NOTE 5 - INCOME TAXES
The provision for income taxes was as follows:
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(In thousands)
Current tax expense:
Federal $3,142 $2,691 $3,578
State, net of federal benefit 758 876 1,085
---------- ---------- ----------
Sub total 3,900 3,567 4,663
Deferred tax benefit (180) (400) (440)
---------- ---------- ----------
Total $3,720 $3,167 $4,223
========== ========== ==========
Deferred income taxes are provided for the temporary differences between the
financial reporting basis and the tax basis of the Company's assets and
liabilities. At December 31, 1997 and 1996, the Company's deferred tax
assets of $1,020,000 and $840,000, respectively, were comprised primarily
of the following items: $417,000 and $425,000, respectively, of inventory
reserves and $603,000 and $415,000, respectively, of other accruals and
reserves not currently deductible.
The provision for income taxes differs from the amount of tax determined by
applying the applicable U.S. statutory income tax rate to pretax income as a
result of the following differences:
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
Percentage of pretax income:
Statutory U.S. tax rate 34% 34% 34%
State income taxes, net of
federal benefit 6% 6% 6%
Research and development
and other credits (2%) (2%) --
---------- ---------- ----------
Effective tax rate 38% 38% 40%
========== ========== ==========
NOTE 6-DIVIDENDS
On March 5, 1998, the Company declared a regular quarterly dividend of
$.045 per share on all of its common shares, payable on April 1, 1998 to
shareholders of record on March 21, 1998. During 1997, the Company paid
quarterly dividends of $.0425 per share. During 1996, the Company paid
quarterly dividends of $.04 per share. During 1995, the Company paid
regular quarterly dividends of $.03 per share on April 3 and July 5, and
$.035 per share on September 1, and December 1.
NOTE 7-COMMITMENTS AND CONTINGENCIES
The Company leases certain office and manufacturing space and other
equipment under noncancellable operating leases. At December 31, 1997,
future minimum payments under these leases due in the years 1998 through
2005 were approximately $630,000 per year.
Rent expense under operating lease agreements was approximately $630,000
in 1997 and 1996 and $261,000 in 1995.
<PAGE>
NOTE 8 - UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
1997 First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------- -------- -------- -------- --------
Sales $10,110 $11,577 $11,491 $11,681 $44,859
Gross Profit 5,287 5,945 5,962 6,155 23,349
Net Income 1,272 1,650 1,534 1,614 6,070
Basic income per common
share $0.13 $0.17 $0.16 $0.17 $0.63
Diluted income per common
share $0.13 $0.17 $0.16 $16.00 $0.62
1996 First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------- -------- -------- -------- --------
Sales $9,351 $9,254 $9,713 $9,976 $38,294
Gross Profit 5,069 4,484 4,897 5,183 19,633
Net Income 1,507 948 1,204 1,509 (1) 5,168
Basic income per common
share $0.16 $0.10 $0.13 $0.16 (1) $0.54
Diluted income per common
share $0.16 $0.10 $0.13 $0.15 (1) $0.53
(1) Includes a $167 benefit from a change in the Company's effective tax rate.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Scientific Technologies Incorporated
In our opinion, the consolidated financial statements listed in the
index appearing under Item 8(a)(1) present fairly, in all material
respects, the financial position of Scientific Technologies
Incorporated (a subsidiary of Scientific Technology Incorporated)
and its subsidiaries at December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our
audits. We conducted our audits of these statements in accordance
with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
San Jose, California
March 3, 1998
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Certain information required by Part III is omitted from this Report in
that the registrant will file a definitive Proxy Statement for its 1998
Annual Meeting of Stockholders pursuant to Regulation 14A (the "Proxy
Statement") no later than 120 days after the end of the fiscal year covered
by this Report, and certain information included therein is incorporated
herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item concerning the Company's
directors and the Company's executive officers is incorporated by
reference to the sections entitled "Nominees" and "Management",
respectively, appearing in the Company's Proxy Statement for its
1998 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference
to the sections entitled "Executive Compensation" and "Report of
the Compensation Committee" appearing in the Proxy Statement for
its 1998 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference
to the sections entitled "Security Ownership of Certain Beneficial
Owners and Management" appearing in the Proxy Statement for its
1998 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference
to the sections entitled "Certain Relationships and Related
Transactions" appearing in the Proxy Statement for its 1998 Annual
Meeting of Stockholders.
<PAGE>
PART IV
ITEM 14. EXHIBITS LIST AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Report:
1. FINANCIAL STATEMENTS
Reference is made to the index appearing in Item 8(a) of this report.
2. FINANCIAL STATEMENT SCHEDULES
Reference is made to the index appearing in Item 8(a) of this report.
3. EXHIBITS AND EXHIBIT INDEX:
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 with Bank of The West.
Exhibit 10.4 - Lease agreement dated November 21, 1995 for 1,835 square
feet of space in Menlo Park California is incorporated by
reference to the Registrant's Form 10-KSB for the year ended
December 31, 1995, Exhibit 10.4.
Exhibit 21.1 - Subsidiaries of the Registrant.
Exhibit 23.1 - Consent of Price Waterhouse LLP, Independent Accountants.
Exhibit 24.1 - Power of Attorney
Exhibit 27.1 - Financial Data Schedule.
All other exhibits for which provision is made in Regulation S-K of the
Securities and Exchange Commission are not required under the related
instructions or are inapplicable, and therefore have been omitted.
(b) No Reports on Form 8-K were filed during the last quarter of 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act,
the registrant has caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SCIENTIFIC TECHNOLOGIES INCORPORATED
Dated: March 24, 1998 By /s/ Anthony R. Lazzara
-------------- ---------------------------------
Anthony R. Lazzara
Chairman
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Anthony R. Lazzara and Joseph J. Lazzara, jointly
and severally, his attorney-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendments to this Report on Form 10-
K and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Dste
- ------------------------- ----------------------------------- ---------------
<S> <C> <C>
/s/ Anthony R. Lazzara Chairman of the Board and March 24, 1998
- ------------------------ Director ---------------
Anthony R. Lazzara
/s/ Joseph J. Lazzara President, Chief Executive Officer, March 24, 1998
- ------------------------ Treasurer, Director (Principal ---------------
Joseph J. Lazzara Executive and Financial Officer)
/s/ James A. Lazzara Vice President, Secretary and March 24, 1998
- ------------------------ Director ---------------
James A. Lazzara
/s/ James A. Ashford Vice President and Director March 24, 1998
- ------------------------ ---------------
James A. Ashford
/s/ Carl H. Frei Director March 24, 1998
- ------------------------ ---------------
Carl H. Frei
/s/ Bernard J. Ploshay Director March 24, 1998
- ------------------------ ---------------
Bernard J. Ploshay
/s/ Richard O. Faria Vice President, Finance and March 24, 1998
- ------------------------ Administration (Principal Accounting ---------------
Richard O. Faria Officer)
</TABLE>
<PAGE>
SCIENTIFIC TECHNOLOGIES INCORPORATED
EXHIBITS
TO
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1997
EXHIBITS - TABLE OF CONTENTS
Exhibit 10.3 - Amendment dated May 31, 1997 to Bank Agreement
dated November 29, 1994
Exhibit 21.1 - Subsidiaries of the Registrant
Exhibit 23.1 - Consent of Independent Accountants
Exhibit 24.1 - Power of Attorney (included above)
Exhibit 27.1 - Financial Data Schedule
Exhibit 10.3
THIRD AMENDMENT TO
LOAN AND SECURITY AGREEMENT
THIS THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT this "First
Amendment") is dated as of May 31, 1997 and is entered into between
SCIENTIFIC TECHNOLOGIES INCORPORATED, an Oregon corporation doing business
in California as Oregon Scientific Technologies (the "Borrower"), and BANK
OF THE WEST, a California banking corporation (the "Bank").
RECITALS:
A. Borrower and Bank have entered into that certain Loan and
Security Agreement dated November 29, 1994 as amended by that certain First
Amendment to the Loan and Security Agreement dated as of May 31, 1995 and
that certain Second Amendment to the Loan and Security Agreement dated as
of May 31, 1996 (collectively, the "Loan Agreement") and that certain
Equipment Purchase Line Note dated December 6, 1994 (the "Equipment
Purchase Line Note");
B. Borrower and Bank intend to further amend the Loan Agreement as
provided by this First Amendment.
AMENDMENT:
NOW, THEREFORE, Borrower and Bank hereby agree as follows:
1. This Third Amendment shall modify and, to the extent
inconsistent with, amend the Loan Agreement and/or the Equipment Purchase
line Note. Any capitalized term not specifically defined herein shall have
the meaning ascribed to it in the Loan Agreement.
2. The last sentence of Section 3.1(a) of the Loan Agreement is
hereby deleted in its entirety and is replaced with the following:
For the purpose of this Agreement, "Draw Period" shall mean the
period between the date of this Loan and Security Agreement and the
earlier of: (i) May 31, 1998 or (ii) the date on which the aggregate
of all advances made pursuant to this Section 3.1 equals Five Hundred
Thousand and 00/100 Dollars ($500,000.00).
3. The last sentence of Section 3.3(b) of the Loan Agreement is
hereby deleted in its entirety and is replaced with the following:
For the purpose of this Agreement, the "Interim Maturity Date" shall
mean May 31, 1998.
4. The last sentence of Section 3.3(c) of the Loan Agreement is
hereby deleted in its entirety and is replaced with the following:
For the purpose of this Agreement, the "Term Maturity Date" shall
mean May 31, 1998.
5. The second sentence of the first paragraph of Section 4.1 of
the Loan Agreement is hereby deleted in its entirety and is replaced with
the following:
Borrower's right to obtain advances under Section 2.1 and to enter
into foreign exchange contracts under the FX Facility provided by
Section 14.1 shall remain in full force and effect until May 31,
1998, and shall continue on a month-to-month basis thereafter until
terminated by either party on thirty (30) days prior written notice
to the other.
6. The last sentence of the fourth paragraph of the Equipment
Purchase Line Note is hereby deleted in its entirety and is replaced with
the following:
For the purpose of this Note, the "Interim Maturity Date" shall mean
May 31, 1998.
7. The last sentence of the fifth paragraph of the Equipment
Purchase Line Note is hereby deleted in its entirety and is replaced with
the following:
For the purpose of this Note, the "Term Maturity Date" shall mean May
31, 1998.
8. Concurrently with the execution of this Third Amendment,
Borrower shall pay to Bank a fee in an annual amount equal to Six Thousand
Five Hundred Dollars ($6,500.00), which fee shall represent an
unconditional and nonrefundable payment to Bank in consideration of Bank's
agreement to enter into this First Amendment.
9. Bank's duties to extend and renew the Obligations and to make
advances in accordance with this Third Amendment shall be subject to (i)
there being no outstanding and uncured details under the Loan Agreement,
the Equipment Purchase Line or any other obligation owing by borrower to
Bank and (ii) the satisfaction of each of the conditions precedent set
forth in Article 6 of the Loan Agreement, each of which is incorporated
herein by this reference.
10. Except as amended by this Third Amendment, all of the terms and
conditions of the Loan Agreement (and each and every document or instrument
executed and delivered in connection therewith) is and shall remain in full
force and effect.
11. Except as amended by this Third Amendment, Borrower hereby
ratifies, reaffirms, and remakes as of the date hereof each and every
representation and warranty contained in the Loan Agreement, the Equipment
Purchase Line Note, or in any document executed and delivered in connection
therewith.
IN WITNESS WHEREOF, Borrower has executed and delivered this Third
Amendment to Bank on the date first above written at Walnut Creek,
California.
"BORROWER"
SCIENTIFIC TECHNOLOGIES INCORPORATED,
an Oregon corporation doing business in
California as
Oregon Scientific Technologies
By: s/l Joseph J. Lazzara
Its: President & CEO
IN WITNESS WHEREOF, Bank hereby accepts this Third Amendment to be
effective as of the date first above written in Walnut Creek, California.
"BANK"
BANK OF THE WEST,
a California banking corporation
By: s/l R. W. Hansen
Its: Vice President
<PAGE>
EXHIBIT 21.1
SCIENTIFIC TECHNOLOGIES INCORPORATED
Annual Report on Form 10-K
Year ended December 31, 1997
Subsidiaries of the Registrant.
Applied Electro Technology, International, a California corporation
Zaisan Inc., a Texas corporation
STI Scientific Technologies GmbH, a German corporation
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (No. 33-30195 and 33-21892) of Scientific
Technologies Inc. of our report dated March 3, 1998 appearing in
this Annual Report on Form 10-K.
PRICE WATERHOUSE LLP
San Jose, California
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted
from the Consolidated Balance Sheet and Consolidated Statement of
Income included in the Company's Form 10-K for the period ended
December 31, 1997 and is qualified in its entirety by reference to
such Financial Statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Dec-31-1997
<PERIOD-TYPE> 12-MOS
<CASH> 4,559
<SECURITIES> 4,973
<RECEIVABLES> 7,612
<ALLOWANCES> 138
<INVENTORY> 5,113
<CURRENT-ASSETS> 23,433
<PP&E> 5,373
<DEPRECIATION> 2,687
<TOTAL-ASSETS> 26,119
<CURRENT-LIABILITIES> 3,601
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 22,508
<TOTAL-LIABILITY-AND-EQUITY> 26,119
<SALES> 44,859
<TOTAL-REVENUES> 44,859
<CGS> 21,510
<TOTAL-COSTS> 21,510
<OTHER-EXPENSES> 14,083
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,790
<INCOME-TAX> 3,720
<INCOME-CONTINUING> 6,070
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,070
<EPS-PRIMARY> $0.63
<EPS-DILUTED> $0.62
</TABLE>
