SI TECHNOLOGIES INC - 10-Q Quarterly Report

Check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for 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.

	October 31, 2002			July 31, 2002
	(Unaudited)
ASSETS
Current assets:
Cash	$	301		$	238
Trade accounts receivable, less allowance for doubtful accounts of $290 and $289 respectively		5,080			5,570
Inventories, net		9,967			9,665
Other current assets		789			842

Total current assets		16,137			16,315

Property and equipment, net		1,902			1,968

Deferred income taxes		581			446
Intangible assets, net		6,885			6,885
Other assets		160			168

	$	25,665		$	25,782

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Revolving lines of credit	$	7,313		$	7,300
Current maturities of long-term debt		2,073			2,148
Accounts payable		3,060			3,307
Accrued liabilities		2,551			2,435

Total current liabilities		14,997			15,190

Long-term debt, less current maturities		3,871			4,039
Other liabilities		295			360

Stockholders’ equity
Preferred stock, par value $0.01 per share; authorized, 2,000,000 shares; none outstanding		—			—
Common stock, par value $.01 per share; authorized 10,000,000 shares; 3,579,935 issued and outstanding		36			36
Additional paid-in capital		10,377			10,377
Accumulated deficit		(3,681	)		(3,995	)
Accumulated other comprehensive loss		(230	)		(225	)

Total stockholders’ equity		6,502			6,193

	$	25,665		$	25,782

	For the three months ended October 31
	2002			2001
Net sales	$	7,836		$	8,536
Cost of sales		4,801			5,558

Gross profit		3,035			2,978

Operating expenses:
Selling, general and administrative		2,135			1,893
Research, development and engineering		340			420
Amortization of intangibles		8			95

		2,483			2,408


Earnings from operations		552			570

Interest expense		(261	)		(277	)
Other income, net		34			60


Earnings before income tax expense		325			353

Income tax expense		(11	)		—


NET INCOME	$	314		$	353

Income per common and common equivalent share-basic	$	0.09		$	0.10

Income per common and common equivalent share-diluted	$	0.09		$	0.10

Weighted average shares outstanding basic		3,579,935			3,579,935

Weighted average shares outstanding-diluted		3,580,130			3,579,935

	For the three months ended October 31
	2002			2001
Cash flows from operating activities:
Net income	$	314		$	353
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		161			293
Deferred lease cost		(65	)		(61	)
Deferred income taxes		(135	)		—

Changes in operating assets and liabilities:
Trade accounts receivable		488			60
Inventories		(303	)		(78	)
Other current assets		180			228
Accounts payable		(247	)		360
Accrued liabilities		(8	)		(741	)

Net cash provided by operating activities		385			414


Cash flows from investing activities:
Purchase of property and equipment		(86	)		(34	)

Net cash used in investing activities		(86	)		(34	)


Cash flows from financing activities:
Net borrowings on line of credit		12			114
Payments on long-term debt		(243	)		(344	)

Net cash used in financing activities		(231	)		(230	)

Effect of translation adjustments on cash		(5	)		32

Net increase in cash		63			182

Cash at beginning of period		238			380

Cash at end of period	$	301		$	562
Cash paid during period for:
Interest	$	249		$	266

Taxes	$	—		$	—

The unaudited consolidated financial statements of the Company and its subsidiaries have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. These financial statements reflect all adjustments, consisting of only normal recurring adjustments which, in the opinion of management, are necessary to fairly present the financial position of the Company at October 31, 2002 and the results of operations and cash flows for the three months ended October 31, 2002 and 2001. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire fiscal year ending July 31, 2003. This Form 10-Q should be read in conjunction with the Company’s Annual Report and Form 10-K for the year ended July 31, 2002.

SI Technologies, Inc. (SI or Company) designs, manufactures and markets high performance industrial sensors, weighing and factory automation equipment, and related products. SI products incorporate devices, equipment and systems for the handling, inspection and measurement of goods and materials. Key markets served by SI include aerospace/aviation, food, forestry, manufacturing, mining, transportation/distribution and waste management. Additional disclosure regarding components of the Company’s businesses is in Note 5- Industry and Geographic Area Segment Information.

The consolidated financial statements include the accounts of SI Technologies, Inc. and its subsidiaries; AeroGo, Inc., Allegany Technology, Inc., Evergreen Weigh, Inc., NV Technology, Inc., Revere Transducers, Inc., Revere Transducers Europe B.V., AeroGo Export, Inc., and IDEAutomation International, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.

The Company recognizes revenue only when all of the four following criteria are met: 1) Persuasive evidence of an arrangement exists, usually in the form of a written purchase order; 2) Delivery has occurred (or a shipment has been made, depending upon the terms of the purchase order) or services have been rendered; 3) The Company’s price to the buyer is fixed or determinable, usually evidenced by a written purchase order; and 4) Collectability is reasonably assured, based on credit evaluation and history with the customer.

Additionally, on long-term contracts, sales are recorded based on the percentage that incurred costs bear to the total estimated costs at completion. Estimated cost to complete is based on the budget, incurred cost, risk assessment of the cost, and is then adjusted for normal/historical variance of project actual versus budget. Estimated losses are recorded in total when they become evident. Such billings are generally made and collected in the subsequent year.

Accounts receivables are reviewed regularly by management and written off against the uncollectable reserve when it is determined that the account can not reasonably be expected to be collected. Reserve balances are determined by management through analysis on past payment history, and current financial status of the customers.

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Uncompleted contracts are included in inventory at the accumulated cost of each contract not in excess of realizable value. Quantities on hand are evaluated compared to recent usage and recent changes in sales trends. Reserves for obsolescence and excess quantities are established based upon this evaluation.

Property and equipment are stated at cost less accumulated depreciation. Depreciation is provided in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives, principally on a straight-line basis. Leasehold improvements are amortized over the lives of the respective leases or the service lives of the improvements, whichever is shorter. Estimated service lives of property and equipment are as follows:

Intangible assets primarily represent the excess costs of acquiring subsidiaries over the fair value of net assets acquired at the date of acquisition. The Company adopted Financial Accounting Standards Board No. 142 “Goodwill and Other Intangible Assets” (“FASB 142”) effective August 1, 2002. In accordance with FASB 142, the Company no longer amortizes goodwill. The Company has compared the estimated fair value of the related segment with the carrying amount of net assets associated with the subsidiaries AeroGo, Inc., Revere Transducers, Inc., and Revere Transducers Europe B.V., and management has determined that none of the goodwill recorded as of October 31, 2002 was impaired. The fair value of the subsidiaries was determined using an estimate of future cash flows of the subsidiaries and a risk adjusted discount rate to compute a net present value of future cash flows.

	2002		2001
Reported net income	$	314	$	353
Addback goodwill amortization		—		81

Proforma net income	$	314	$	434


Basic and diluted earnings per share:
Reported net income	$	0.09	$	0.10
Goodwill amortization		—		0.02

Adjusted net income	$	0.09	$	0.12

The Company continually monitors events or changes in circumstances that could indicate that the carrying amount of long-lived assets to be held and used, including goodwill and intangible assets, may not be recoverable. The determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. When impairment is indicated for a long-lived asset, the amount of impairment loss is the excess of net book value over fair value. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.

Foreign currency assets and liabilities are translated into their U.S. dollar equivalents based on year end exchange rates. Revenue and expense accounts are translated at average exchange rates for the appropriate fiscal year. Aggregate exchange gains and losses arising from the translation of foreign assets and liabilities are included in stockholders’ equity. Transaction gains and losses are included in income and have not been significant in amount.

In preparing the Company’s financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

In June 2002, the FASB approved for issuance SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities. This Statement provides financial accounting and reporting guidance for costs associated with exit or disposal activities and nullifies EITF Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” Statement 146 is effective for exit or disposal activities initiated after December 31, 2002. Early application is encouraged. Previously issued financial statements should not be restated. The provisions of EITF Issue 94-3 continue to apply for an exit activity initiated under an exit plan that met the criteria in EITF Issue 94-3 before the Statement’s initial application. SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002. Management believes implementation of this standard will not have a material effect upon the Company’s financial statements.

Machinery and equipment		2 to 10 years
Buildings		35 years
Leasehold improvements		2 to 10 years

	Gross Carrying Amount		Accumulated Amortization		Net Intangible Assets
Goodwill	$	8,390	$	1,505	$	6,885
Other intangible assets		994		834		160