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, 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
-----------------------------------------------------
(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, 1999 was 9,634,369 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,
1999 1998
----------- -----------
<S> <C> <C>
Assets (unaudited)
Current assets:
Cash and cash equivalents $1,451 $2,577
Short-term investments 10,032 10,798
Accounts receivable, net 8,213 6,612
Inventories 7,158 5,812
Deferred income taxes 1,132 1,132
Other assets 981 345
----------- -----------
Total current assets 28,967 27,276
intangibles and other assets 2,295 --
Property and equipment, net 2,872 2,545
----------- -----------
Total assets $34,134 $29,821
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Trade accounts payable $2,358 $2,391
Payable to Parent 2,058 --
Accrued expenses 1,960 1,972
----------- -----------
Total current liabilities 6,376 4,363
----------- -----------
Stockholders' Equity
Common stock 10 10
Capital in excess of par value 5,581 5,787
Retained earnings 22,167 19,661
----------- -----------
Total stockholders' equity 27,758 25,458
----------- -----------
Total liabilities and stockholders' equity $34,134 $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
September 30,
---------------------
1999 1998
---------- ----------
<S> <C> <C>
Sales $12,804 $10,161
Cost of goods sold 6,410 5,358
---------- ----------
Gross profit 6,394 4,803
---------- ----------
Operating expenses
Selling, general and
administrative 3,231 2,992
Research and development 1,169 739
---------- ----------
Total operating expenses 4,400 3,731
---------- ----------
Income from operations 1,994 1,072
Interest and other income, net 111 123
---------- ----------
Income before income taxes 2,105 1,195
Provision for income taxes 800 454
---------- ----------
Net income $1,305 $ 741
========== ==========
Net income per common share:
Basic $0.14 $0.08
========== ==========
Diluted $0.14 $0.08
========== ==========
Shares used to compute net income per common share:
Basic 9,667 9,648
========== ==========
Diluted 9,692 9,830
========== ==========
</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,
---------------------
1999 1998
---------- ----------
<S> <C> <C>
Sales $36,378 $32,618
Cost of goods sold 18,168 16,421
---------- ----------
Gross profit 18,210 16,197
---------- ----------
Operating expenses
Selling, general and
administrative 9,545 8,887
Research and development 3,465 2,164
---------- ----------
Total operating expenses 13,010 11,051
---------- ----------
Income from operations 5,200 5,146
Interest and other income, net 361 591
---------- ----------
Income before income taxes 5,561 5,737
Provision for income taxes 2,113 2,180
---------- ----------
Net income $3,448 $3,557
========== ==========
Net income per common share:
Basic $0.36 $0.37
========== ==========
Diluted $0.36 $0.37
========== ==========
Shares used to compute net income per common share:
Basic 9,652 9,619
========== ==========
Diluted 9,678 9,805
========== ==========
</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,
-----------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income $3,448 $3,557
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 872 714
Changes in assets and liabilities:
Accounts receivable, net (1,601) 1,162
Inventories (1,346) 269
Payable to Parent 2,058 2,392
Trade accounts payable (33) (283)
Accrued expenses (12) (45)
Other 41 (336)
----------- -----------
Cash flows provided by operating activities 3,427 7,430
----------- -----------
Cash flows from investing activities
Acquisition of Lundahl Instruments, Inc. (2,659) --
Investment in intangibles and fixed assets (1,139) (676)
Sale (purchase) of short-term investments 766 (5,218)
----------- -----------
Cash flows used in investing activities (3,032) (5,894)
----------- -----------
Cash flows from financing activities
Dividends (1,315) (1,678)
Issuance (repurchase) of common stock (206) 103
----------- -----------
Cash flows used in financing activities (1,521) (1,575)
----------- -----------
Change in cash and cash equivalents (1,126) (639)
Cash and cash equivalents at beginning of period 2,577 4,559
----------- -----------
Cash and cash equivalents at end of period $1,451 $4,520
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid to the Parent for income taxes $2,113 $2,180
=========== ===========
</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, 1999 and
the three and nine months ended September 30, 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):
September 30, December 31,
1999 1998
------------ ------------
Finished goods $2,029 $2,421
Work in process 797 482
Subassemblies 1,171 541
Raw materials 3,161 2,368
------------ ------------
$7,158 $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)
Three months ended September 30, 1999 Income Shares Amount
- --------------------------------------------------------------------------
Basic earnings per share calculation $1,305 9,667 $0.14
Effect of dilutive securities
Stock options - 25 -
----- ----- ----
Diluted earnings per share calculation $1,305 9,692 $0.14
===== ===== ====
Three months ended September 30, 1998
- -------------------------------------
Basic earnings per share calculation $ 741 9,648 $0.08
Effect of dilutive securities
Stock options - 182 -
----- ----- ----
Diluted earnings per share calculation $ 741 9,830 $0.08
===== ===== ====
Nine months ended September 30, 1999
- -----------------------------------
Basic earnings per share calculation $3,448 9,652 $0.36
Effect of dilutive securities
Stock options - 26 -
----- ----- ----
Diluted earnings per share calculation $3,448 9,678 $0.36
===== ===== ====
Nine months ended September 30, 1998
- ------------------------------------
Basic earnings per share calculation $3,557 9,619 $0.37
Effect of dilutive securities
Stock options - 186 -
----- ----- ----
Diluted earnings per share calculation $3,557 9,805 $0.36
===== ===== ====
3. DIVIDEND PAID
On September 1, 1999, a cash dividend of $.0475 per share on all
outstanding shares of its common stock was paid to shareholders of
record on August 18, 1999. Dividends of $.0475 per share on all
outstanding shares of common stock were paid on July 1, 1999, and April
1, 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 and nine months ended September 30, 1999 and 1998,
there is no difference between net income and comprehensive income.
5. ACQUISITION OF LUNDAHL INSTRUMENTS, INC.
On April 1, 1999, the Company acquired all of the outstanding
capital stock of Lundahl Instruments, Inc. ("LII"). In the transaction,
accounted for as a purchase, the Company paid $2,659 in cash, of which
$2,361 was allocated to goodwill and is being amortized using the
straight-line method over twenty years. The operations and financial
position of LII were accounted in the consolidated financial statements
of the Company beginning in April 1999. LII designs and manufactures
non-contact ultrasonic sensors and controllers, for use in the
automation of industrial processes for applications involving level and
flow control, environmental monitoring, automated vehicle collision
avoidance and material positioning.
<PAGE>
ITEM 2 . MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
- --------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ----------------------
(Amounts in thousands except percentages)
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 that 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 September 30, 1999 increased 26% to
$12,804 from $10,161 in the third quarter of 1998. This increase was the
result of an increase in the level of sales of vehicle scanners, sales
generated by LII (See Note 5 of Notes to Consolidated Financial
Statements), and an increase in units of safety products shipped. For
the first nine months of 1999, net sales increased 12% to $36,378 from
$32,618. This resulted primarily from an increase in sales of units of
the Company's safety products, as well as sales generated by LII in the
second and third quarters of 1999.
Gross margin as a percent of sales was 50% during the third quarter
of 1999 compared to 47% in the same 1998 quarter. The economies of scale
associated with the higher sales levels led to the above-mentioned
increase. Gross margin remained constant at 50% for the nine months
ended September 30, 1999 and 1998.
Selling, general and administrative expenses increased 8% to $3,231
in the third quarter of 1999 from $2,992 in third quarter of 1998, and
increased 7% to $9,545 in the nine months ended September 30, 1999 from
$8,887 in the nine months ended September 30, 1998. This increase was
due to increased selling expenses associated with the higher levels of
revenue, as well as expenses incurred by LII during second and the third
quarters. Selling, general and administrative expenses as a percent of
sales were 25% and 26%, respectively, in the three and nine months ended
September 30, 1999, compared to 29% and 27% for the comparable 1998
periods.
Reflecting the Company's continuing commitment to new product
development, research and development expenses increased 58% and 60% to
$1,169 and $3,465 in the third quarter and first nine months of 1999,
from $739 and $2,164, respectively, in the comparable periods in 1998.
Research and development expenses were 9% of sales for the three and
nine months ended September 30, 1999 compared to 7% for the comparable
1998 periods. The Company anticipates that it will continue to make
substantial investments in research and development in subsequent
quarters.
Liquidity and Capital Resources
At September 30, 1999 the Company's working capital was $22,591, a
slight decline from the $22,913 reported at December 31, 1998. This was
due to increased Payable to Parent and lower short-term investments,
partially offset by positive cash flows from operations. Accounts
receivable increased as a result of record sales levels in the month of
September. Inventories also increased as a result of anticipated
increased sales associated with new products introduced in the second
and third quarters, increased sales products purchased from others and
the customer rescheduling of vehicle scanner orders.
Available bank borrowings were $6,100,000 at September 30, 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 substantially completed upgrading
its information systems to Year 2000 compliant, and 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
essentially complete and we anticipate no significant impact from any
non-compliance.
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 sales of 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 typically 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 on satisfactory terms or at all. 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. For example, on April 1, 1999, the
Company completed the acquisition of Lundahl Instruments, Inc ("LII") by
purchasing all of the outstanding shares of its capital stock. 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 or integrating the acquired products, services or technologies
in its operations. Further, any such acquisition could cause the Company
to assume unanticipated liabilities of the acquired company. In
addition, the key personnel of the acquired company may decide not to
work for the Company. 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 third 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: November 12, 1999 /s/Joseph J. Lazzara
----------------- ---------------------------------
Joseph J. Lazzara
President and Chief Executive
Officer
(Principal Executive and
Financial officer)
Date: November 12, 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> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 1,451 4,520
<SECURITIES> 10,032 10,191
<RECEIVABLES> 8,602 6,450
<ALLOWANCES> 389 138
<INVENTORY> 7,158 4,844
<CURRENT-ASSETS> 28,967 27,453
<PP&E> 7,191 6,304
<DEPRECIATION> 4,319 3,592
<TOTAL-ASSETS> 34,134 30,165
<CURRENT-LIABILITIES> 6,376 5,665
<BONDS> 0 0
0 0
0 0
<COMMON> 10 10
<OTHER-SE> 27,748 24,490
<TOTAL-LIABILITY-AND-EQUITY> 34,134 30,165
<SALES> 36,378 32,618
<TOTAL-REVENUES> 36,378 32,618
<CGS> 18,168 16,421
<TOTAL-COSTS> 18,168 16,421
<OTHER-EXPENSES> 13,010 11,051
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 5,561 5,737
<INCOME-TAX> 2,113 2,180
<INCOME-CONTINUING> 3,448 3,557
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,448 3,557
<EPS-BASIC> $0.36 $0.37
<EPS-DILUTED> $0.36 $0.36
</TABLE>
