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 September 30, 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
------------------------- ------------------------------
(State of incorporation) (I.R.S. Employer Identification Number)
6550 Dumbarton Circle, Fremont, California 94555
- - --------------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
(510) 608-3400
-----------------------------------------------------
(Issuers telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 OR 15(d) of the Securities Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Common stock outstanding as of October 31, 1998 was 9,624,838 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>
September 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Assets (unaudited)
Current assets:
Cash and cash equivalents $4,520 $4,559
Short-term investments 10,191 4,973
Accounts receivable, net 6,312 7,474
Inventories 4,844 5,113
Deferred income taxes 1,020 1,020
Other assets 566 294
----------- -----------
Total current assets 27,453 23,433
Property and equipment, net 2,712 2,686
----------- -----------
Total assets $30,165 $26,119
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Trade accounts payable $1,651 $1,934
Payable to Parent 2,392 --
Accrued expenses 1,622 1,667
----------- -----------
Total current liabilities 5,665 3,601
----------- -----------
Commitments and contingencies
Stockholders' Equity
Common stock 10 10
Capital in excess of par value 5,635 5,532
Retained earnings 18,855 16,976
----------- -----------
Total stockholders' equity 24,500 22,518
----------- -----------
Total liabilities and stockholders' equity $30,165 $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
September 30,
---------------------
1998 1997
---------- ----------
<S> <C> <C>
Sales $10,161 $11,491
Cost of goods sold 5,358 5,529
---------- ----------
Gross profit 4,803 5,962
---------- ----------
Operating expenses
Selling, general and
administrative 2,992 2,844
Research and development 739 757
---------- ----------
Total operating expenses 3,731 3,601
---------- ----------
Income from operations 1,072 2,361
Interest and other income, net 123 113
---------- ----------
Income before income taxes 1,195 2,474
Provision for income taxes 454 940
---------- ----------
Net income $ 741 $1,534
========== ==========
Basic net income per common share $0.08 $0.16
========== ==========
Shares used to compute basic
net income per common share 9,648 9,607
========== ==========
Diluted net income per common share $0.08 $0.16
========== ==========
Shares used to compute diluted
net income per common share 9,830 9,743
========== ==========
</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>
Nine Months Ended
September 30,
---------------------
1998 1997
---------- ----------
<S> <C> <C>
Sales $32,618 $33,178
Cost of goods sold 16,421 15,984
---------- ----------
Gross profit 16,197 17,194
---------- ----------
Operating expenses
Selling, general and
administrative 8,887 8,094
Research and development 2,164 2,288
---------- ----------
Total operating expenses 11,051 10,382
---------- ----------
Income from operations 5,146 6,812
Interest and other income, net 591 376
---------- ----------
Income before income taxes 5,737 7,188
Provision for income taxes 2,180 2,731
---------- ----------
Net income $3,557 $4,457
========== ==========
Basic net income per common share $0.37 $0.46
========== ==========
Shares used to compute basic
net income per common share 9,619 9,618
========== ==========
Diluted net income per common share $0.36 $0.45
========== ==========
Shares used to compute diluted
net income per common share 9,805 9,833
========== ==========
</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>
Nine Months Ended
September 30,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income $3,557 $4,457
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 714 613
Changes in assets and liabilities:
Accounts receivable, net 1,162 (682)
Inventories 269 (621)
Payable to Parent 2,392 1,651
Trade accounts payable (283) (733)
Accrued expenses (45) 343
Other (336) 107
----------- -----------
Cash flows provided by operating activities 7,430 5,135
----------- -----------
Cash flows from investing activities
Investment in intangibles and fixed assets (676) (1,032)
Sale (purchase) of short-term investments (5,218) (236)
----------- -----------
Cash flows used in investing activities (5,894) (1,268)
----------- -----------
Cash flows from financing activities
Dividends (1,678) (1,225)
Issuance of common stock 103 71
----------- -----------
Cash flows used in financing activities (1,575) (1,154)
----------- -----------
Change in cash and cash equivalents (39) 2,713
Cash and cash equivalents at beginning of period 4,559 2,371
----------- -----------
Cash and cash equivalents at end of period $4,520 $5,084
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid to the Parent for income taxes $2,180 $2,731
=========== ===========
</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 September 30, 1998 and
the three and nine months ended September 30, 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):
September 30, December 31,
1998 1997
------------ ------------
Finished goods $1,966 $1,496
Work in process 443 624
Subassemblies 508 613
Raw materials $1,927 2,380
------------ ------------
$4,844 $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 August 6, 1998, the Company declared a cash dividend of $.045
per share on all outstanding shares of its common stock. This dividend
was paid on September 1, 1998 to shareholders of record on August 19,
1998. A dividend of $.045 per share was paid on July 1, 1998 to
shareholders of record on June 19, 1998. A dividend of $.045 per share
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. The Company's actual results may differ
materially from those anticipated in such forward-looking statements.
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 September 30, 1998 declined 12% to
$10,161,000 from $11,491,000 in the third quarter of 1997. During the
third quarter of 1998, the General Motors labor dispute and the Asia
economic situation continued to have an adverse effect on the Company's
customers doing business in those sectors, which, in turn, negatively
impacted the Company's sales during such period compared to the third
quarter of 1997. Sales for the nine months ended September 30, 1998
declined 2% to $32,618,000 from the $33,178,000 recorded in the first
nine months of 1997. The above mentioned labor dispute and economic
situation, led to a reduction in units shipped in the first nine months
of 1998, which was also the primary cause of the year to date sales
decline.
Cost of sales in the third quarter of 1998 declined 4% compared to
the comparable 1997 period, as a result of the lower sales volume. As a
percent of sales, cost of sales rose to 53% compared to 48% in the third
quarter of 1997. This was caused by a change in sales mix to products
carrying a higher relative cost of sales. Year to date cost of sales
increased 3% as compared to the comparable 1997 period. As a percent of
sales, cost of sales increased to 50% of sales in the first nine months
of 1998 compared to 48% in the same period in 1997. This was primarily
the result of increased costs associated with the change in sales mix,
which was partially offset by the reduction in units shipped.
Selling, general and administrative expenses increased 5% to
$2,992,000 in the third quarter of 1998 from $2,844,000 in 1997.
Selling, general and administrative expenses as a percent of sales
increased to 29% in the third quarter of 1998 from 25% in the comparable
1997 quarter. This increase resulted from increased staffing expenses in
marketing and selling, which were partially offset by a reduction in the
Company's printing and publicity expenses. As a result of the above-
mentioned staffing expenses, which were partially offset by lower
advertising, commission, publicity and printing expenses, selling,
general and administrative expenses during the first nine months of 1998
increased 10% to $8,887,000 from the $8,094,000 recorded in the first
nine months of 1997.
Research and development expenses in the three months ended
September 30, 1998 declined 2% to $739,000 from $757,000 in the comparable
period in 1997. Research and development expenses as a percent of sales,
remained constant at 7% for the three and nine months ended September 30,
1998 and the comparable 1997 periods. The quarterly decline in
expenditures was chiefly the result of lower material and consulting
expenses. Research and development expenses for the nine months ended
September 30, 1998 decreased 5% to $2,164,000 from $2,288,000 in 1997.
Again, this was primarily due to lower consulting and materials usage. The
Company anticipates that, consistent with STI's continuing commitment to
new product development, research and development expenditures will
increase in the fourth quarter of 1998 and on into 1999.
Interest and other income, net increased to $123,000 and to $591,000
for the three and nine months ended September 30, 1998, respectively,
compared to $113,000 and $376,000 for the same periods in the prior
year. This was the result of a non-recurring gain associated with the
settlement of a patent lawsuit in the second quarter of 1998.
The Company's provision for income taxes was $454,000 and $2,180,000
for the three and nine months ended September 30, 1998 compared to
$940,000 and $2,731,000 for 1997.
In light of the significant growth of the Company's operations in
recent 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 September 30, 1998 the Company's working capital was $21,788,000,
a 10% 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, lower accounts payable and accrued expenses,
which offset increased payable to Parent and lower accounts receivable
and inventories.
During the second quarter of 1998, the Company expanded its line of
credit with Bank of The West to $6,000,000, none of which had been
utilized at September 30, 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. However, in the event that the
Company expands its capital requirements, it may be required to raise
capital in debt or equity financing. Such financing may be available on
terms less favorable to 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 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, the timing of operating expenditures and general
economic conditions in the U.S. and abroad, particularly in Asia and
Europe.
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 devote substantial resources
in order 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 products 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 international events beyond the Company's control,
including political or regulatory changes and changes in general
economic conditions.
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.
Year 2000 Compliance
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 that are not Year 2000 compliant may have on the operations of
the Company.
<PAGE>
PART II - OTHER INFORMATION
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 - 1997 Employee Stock Purchase Plan is incorporated
by reference to the Registrant's Registration
Statement on Form S-8 dated October 2, 1998.
Exhibit 4.2 - 1997 Stock Plan is incorporated by reference
to the Registrant's Registration Statement on Form
S-8 dated October 2, 1998.
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 third 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: November 16, 1998 /s/Joseph J. Lazzara
----------------- ---------------------------------
Joseph J. Lazzara
President and Chief Executive
Officer
(Principal Executive and
Financial officer)
Date: November 16, 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> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 4,520 5,084
<SECURITIES> 10,191 5,225
<RECEIVABLES> 6,450 7,488
<ALLOWANCES> 138 114
<INVENTORY> 4,844 4,687
<CURRENT-ASSETS> 27,453 23,381
<PP&E> 6,304 5,556
<DEPRECIATION> 3,592 2,660
<TOTAL-ASSETS> 30,165 26,277
<CURRENT-LIABILITIES> 5,665 5,103
<BONDS> 0 0
0 0
0 0
<COMMON> 10 10
<OTHER-SE> 24,490 21,164
<TOTAL-LIABILITY-AND-EQUITY> 30,165 26,277
<SALES> 32,618 33,178
<TOTAL-REVENUES> 32,618 33,178
<CGS> 16,421 15,984
<TOTAL-COSTS> 16,421 15,984
<OTHER-EXPENSES> 11,051 10,382
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 5,737 7,188
<INCOME-TAX> 2,180 2,731
<INCOME-CONTINUING> 3,557 4,457
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,557 4,457
<EPS-PRIMARY> $0.37 $0.46
<EPS-DILUTED> $0.36 $0.45
</TABLE>
