UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarterly Period Ended March 31, 1999
[ ] 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
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(Issuers telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 OR 15(d) of the Securities Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Common stock outstanding as of April 30, 1999 was 9,671,432 shares.
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
SCIENTIFIC TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except per share data)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- -----------
<S> <C> <C>
Assets (unaudited)
Current assets:
Cash and cash equivalents $3,532 $2,577
Short-term investments 9,953 10,798
Accounts receivable, net 7,722 6,612
Inventories 5,160 5,812
Deferred income taxes 1,132 1,132
Other assets 855 345
----------- -----------
Total current assets 28,354 27,276
Property and equipment, net 2,608 2,545
----------- -----------
Total assets $30,962 $29,821
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Trade accounts payable $2,021 $2,391
Payable to Parent 268 --
Accrued expenses 2,191 1,972
----------- -----------
Total current liabilities 4,480 4,363
----------- -----------
Stockholders' Equity
Common stock 10 10
Capital in excess of par value 5,787 5,787
Retained earnings 20,685 19,661
----------- -----------
Total stockholders' equity 26,482 25,458
----------- -----------
Total liabilities and stockholders' equity $30,962 $29,821
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SCIENTIFIC TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1999 1998
---------- ----------
<S> <C> <C>
Sales $11,560 $11,113
Cost of goods sold 5,809 5,386
---------- ----------
Gross profit 5,751 5,727
---------- ----------
Operating expenses
Selling, general and
administrative 3,057 2,904
Research and development 1,171 635
---------- ----------
Total operating expenses 4,228 3,539
---------- ----------
Income from operations 1,523 2,188
Interest and other income, net 129 120
---------- ----------
Income before income taxes 1,652 2,308
Provision for income taxes 628 877
---------- ----------
Net income $1,024 $1,431
========== ==========
Basic net income per common share $0.11 $0.15
========== ==========
Shares used to compute basic
net income per common share 9,670 9,639
========== ==========
Diluted net income per common share $0.11 $0.15
========== ==========
Shares used to compute diluted
net income per common share 9,690 9,835
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SCIENTIFIC TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income $1,024 $1,432
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 242 232
Changes in assets and liabilities:
Accounts receivable, net (1,110) 243
Inventories 652 (156)
Payable to Parent 268 216
Trade accounts payable (370) (200)
Accrued expenses 219 111
Other (510) (113)
----------- -----------
Cash flows provided by operating activities 415 1,765
----------- -----------
Cash flows from investing activities
Investment in intangibles and fixed assets (305) (291)
Sale (purchase) of short-term investments 845 (1,953)
----------- -----------
Cash flows used in investing activities 540 (2,244)
----------- -----------
Cash flows from financing activities
Issuance of common stock -- 23
----------- -----------
Cash flows used in financing activities -- 23
----------- -----------
Change in cash and cash equivalents 955 (456)
Cash and cash equivalents at beginning of period 2,577 4,559
----------- -----------
Cash and cash equivalents at end of period $3,532 $4,103
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid to the Parent for income taxes $628 $877
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SCIENTIFIC TECHNOLOGIES INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements as of March 31, 1999 and the
three months ended March 31, 1999 and 1998 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. We suggest 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, 1998.
1. INVENTORIES
Inventories consist of the following (in thousands):
March 31, December 31,
1999 1998
------------ ------------
Finished goods $1,703 $2,421
Work in process 769 482
Subassemblies 595 541
Raw materials $2,093 2,368
------------ ------------
$5,160 $5,812
============ ============
2. NET INCOME PER SHARE
A reconciliation of the numerators and denominators of the basic and
diluted income per common share computations is provided below.
(In Thousands) (Per Share)
1999 Income Shares Amount
- --------------------------------------------------------------------------
Basic earnings per share calculation $1,024 9,670 $0.11
Effect of dilutive securities
Stock options - 20 -
----- ----- ----
Diluted earnings per share calculation $1,024 9,690 $0.11
===== ===== ====
1998 Income Shares Amount
- --------------------------------------------------------------------------
Basic earnings per share calculation $1,431 9,639 $0.15
Effect of dilutive securities
Stock options - 196 -
----- ----- ----
Diluted earnings per share calculation $1,431 9,835 $0.15
===== ===== ====
3. DIVIDEND PAID
On March 3, 1999, the Company declared a cash dividend of $.0475
per share on all outstanding shares of its common stock. This dividend
was paid on April 1, 1999 to shareholders of record on March 19, 1999.
Approximately 86% of the outstanding common stock of the Company is
beneficially owned by Scientific Technology Incorporated, a California
corporation under common control with the Company. Dividends paid to
Scientific Technology Incorporated were applied to the Payable to Parent
account.
4. COMPREHENSIVE INCOME
For the three months ended March 31, 1999 and 1998, there is no
difference between net income and comprehensive income.
<PAGE>
ITEM 2 . MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
- --------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ----------------------
This interim report on Form 10-Q 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 Act of
1934. Such statements include expectations, beliefs, intentions or
strategies regarding future operating results, future expenditures,
future cash requirements, and future industry conditions and involve
risks and uncertainties. The Company's actual results could differ
materially from those projected in such forward-looking statements as a
result of many factors, including, without limitation, those set forth
under this section, the section entitled "Business Factors" below and
elsewhere in this report on Form 10Q.
Results of Operations
Scientific Technologies Incorporated 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,
power monitoring devices, safety mats, and other electronic equipment
supplied to industrial automation, commercial and defense customers.
Sales for the three months ended March 31, 1999 increased 4% to
$11,560,000 from $11,113,000 in the first quarter of 1998. This was
primarily the result of increased acceptance of STI's products leading
to an overall increase in units shipped.
Gross margin as a percent of sales was 50% during the first quarter
of 1999 compared to 52% for the comparable 1998 quarter. This was
attributable to a change in product mix wherein sales of products with a
lower relative gross margin increased as a percentage of total sales.
Selling, general and administrative expenses increased 5% to
$3,057,000 in the first quarter of 1999 from $2,904,000 in first quarter
of 1998. This was the result of increased selling expenses associated
with the higher levels of revenue, as well as increased advertising and
outside service expenses. Selling, general and administrative expenses
as a percent of sales remained constant at 26% in the first quarter of
1999 and the comparable 1998 quarter.
Reflecting the Company's continuing commitment to new product
development, research and development expenses increased 84% to
$1,171,000 in 1999 from $635,000 in 1998. Research and development
expenses were 10% of sales for the three months ended March 31, 1999
compared to 6% for the comparable 1998 period. The Company anticipates
that it will continue to make substantial investments in research and
development in subsequent quarters.
Liquidity and Capital Resources
At March 31, 1999 the Company's working capital was $23,874,000, a
4% increase from the $22,913,000 reported at December 31, 1998. This was
due to positive cash flows from operations, resulting in increased
accounts receivable and lower accounts payable, which offset increased
Payable to Parent, accrued expenses, lower inventories and short-term
investments.
Available bank borrowings were $6,100,000 at March 31, 1999. The
Company believes that cash from operations, together with its cash
resources and available bank borrowings, will be sufficient to fund its
working capital requirements for the next twelve months.
Year 2000 Compliance
The Company believes that it 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 cannot assure you that all of its products
will contain all of the necessary data code changes to prevent
processing errors potentially arising from calculations using the Year
2000 date, or that disruptions relating to the Year 2000 will not occur.
Furthermore, the Company could be adversely impacted by Year 2000 issues
faced by major distributors, suppliers, customers, vendors and financial
service organizations. An assessment of the impact that third parties
that are not Year 2000 compliant may have on the operations of the
Company is expected to be completed in the second quarter of 1999.
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 of the
Company's 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 any of the Company's
resellers 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.
Risks Associated with Potential Acquisitions, Investments or Other
Ventures
The Company may acquire or make investments in complementary
businesses, technologies, services or products if appropriate
opportunities arise. From time to time, the Company has discussions and
negotiations with other companies regarding acquiring or investing in
such companies' businesses, products, services or technologies, and the
Company regularly engages in such discussions and negotiations in the
ordinary course of its business. Subsequent to March 31, 1999, the
Company acquired Lundahl Instruments, Inc. There can be no assurance
that the Company will be able to identify future suitable acquisition
or investment candidates, or if it does identify suitable candidates,
that it will be able to make such acquisitions or investments on
commercially acceptable terms or at all. If the Company acquires or
invests in another company, it could have difficulty in assimilating
that company's personnel, operations, technology and software. In
addition, the key personnel of the acquired company may decide not to
work for the Company. If the Company makes acquisitions, it could have
difficulty in integrating the acquired products, services or
technologies in its operations. These difficulties could disrupt the
Company's ongoing business, distract its management and employees,
increase its expenses and adversely affect its result of operations.
Furthermore, the Company may incur indebtedness or issue equity
securities to pay for any future acquisitions. The issuance of equity
securities would be dilutive to the Company's existing shareholders.
<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
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, 1998 to Bank Agreement
dated November 29, 1994 is incorporated by
reference to the Registrant's Form 10-K for
the year ended December 31, 1998, Exhibit 10.3.
Exhibit 10.4 - Lease agreement dated November 21, 1995 is
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, 1998, 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, 1998, Exhibit 23.1
Exhibit 24.1 - Power of Attorney is incorporated by reference to
the Registrant's Form 10-K for the year ended
ended December 31, 1998, Exhibit 24.1
Exhibit 27.0 - Financial Data Schedule.
(b) No Reports on Form 8-K were filed during the first quarter of
1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCIENTIFIC TECHNOLOGIES INCORPORATED
------------------------------------
Registrant
Date: May 13, 1999 /s/Joseph J. Lazzara
----------------- ---------------------------------
Joseph J. Lazzara
President and Chief Executive
Officer
(Principal Executive and
Financial officer)
Date: May 13, 1999 /s/ Richard O. Faria
----------------- ----------------------------------
Richard O. Faria
Vice-President, Finance &
Administration
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACT
FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AND THE
STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 3,532 4,103
<SECURITIES> 9,953 6,926
<RECEIVABLES> 8,111 7,369
<ALLOWANCES> 389 138
<INVENTORY> 5,160 5,269
<CURRENT-ASSETS> 28,354 24,956
<PP&E> 6,358 5,664
<DEPRECIATION> 3,750 2,919
<TOTAL-ASSETS> 30,962 27,701
<CURRENT-LIABILITIES> 4,480 3,728
<BONDS> 0 0
0 0
0 0
<COMMON> 10 10
<OTHER-SE> 26,472 23,973
<TOTAL-LIABILITY-AND-EQUITY> 30,962 27,701
<SALES> 11,560 11,113
<TOTAL-REVENUES> 11,560 11,113
<CGS> 5,809 5,386
<TOTAL-COSTS> 5,809 5,386
<OTHER-EXPENSES> 4,228 3,539
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 1,652 2,308
<INCOME-TAX> 628 877
<INCOME-CONTINUING> 1,024 1,431
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,024 1,431
<EPS-PRIMARY> $0.11 $0.15
<EPS-DILUTED> $0.11 $0.15
</TABLE>
