UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (Fee Required)
For the fiscal year ended June 30, 1996
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from__________to__________
Commission File 0-6658
SCIENTIFIC INDUSTRIES, INC.
(Name of small business issuer in its charter)
Delaware 04-2217179
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
70 Orville Drive, Airport International
Plaza, Bohemia, New York 11716
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (516) 567-4700
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.05 per share
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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.
Yes X No
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B 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-KSB or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year. $2,517,500
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the average bid and asked prices of such stock,
as of September 6, 1996 is $648,500.
The number of shares outstanding of the issuer's common stock, par value
$.05 per share as of September 6, 1996 is 826,239 shares.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference:
PART III:
1) The Company's Proxy Statement for the 1996 Annual Meeting which is being
filed today with the Commission.
PART I
Item 1. Description of Business.
General. Scientific Industries, Inc., (the "Company") a Delaware
corporation, is engaged in manufacturing and marketing laboratory equipment
(including equipment for hospital and industrial laboratories). Laboratory
equipment includes vortex mixers (devices used to mix the contents of test
tubes, beakers and other various containers by placing such containers on a
rotating cup or other attachments which cause the contents to be mixed at
varying speeds) and miscellaneous laboratory apparatus, including timers,
rotators and pumps.
The Company's products are used by hospital laboratories, clinics, research
laboratories, pharmaceutical manufacturers, medical device manufacturers
and other industries. The Company's products are marketed principally
through a network of domestic and foreign dealers, by the personal
solicitation of the Company's President and other employees and sales
representatives. The Company seeks customers by use of various media,
including trade publications, trade shows, brochures and catalogs.
In July 1995 the Company entered into a licensing agreement with a
developer and marketer of thermo-electrically cooled centrifuge products to
acquire the rights to develop, improve, make, and sell such products. These
products include thermo-electrically refrigerated and non-refrigerated
micro-centrifuges, thermoelectric tube chillers, thermoelectric coolers,
and other related products. These products will essentially be used by and
sold to the same customers that the Company has for its other laboratory
products. During fiscal 1996, the Company hired an engineer to develop
these new products. Based upon progress to date, we expect the new line of
centrifuge products to be ready to market during the later part of fiscal
1997.
In addition to the new line of centrifuge products the Company has entered
into two other agreements to purchase the technology for the development of
accessory parts for the vortex mixer and a rotator. The Company is also
developing these products and expects to have them ready to market during
fiscal 1997.
Raw Materials. The Company currently manufactures its products from
readily available components supplied by various independent contractors.
Patents, Trademarks, Licenses and Franchises. The Company does not have
broad patent protection for its existing products and does not consider the
absence of such patent protection to be material. However, the Company
does have a U.S. Patent on a design feature of its Vortex Genie 2
(trademark) Mixer which in the Company's opinion does give the Company
some degree of commercial advantage when compared to competitive mixers.
This patent expires on November 2, 2005.
The Company has acquired the rights in the laboratory equipment market to a
U.S. Patent issued in July 1995 on a thermo-electrically cooled centrifuge.
Seasonality. The Company does not consider its business to be seasonal.
Largest Customers. Two of the Company's customers, Fisher Scientific
Company ("Fisher") and VWR Scientific Incorporated ("VWR"), both of which
are distributors, accounted for approximately 32% and 22% respectively of
the Company's net sales for the year ended June 30, 1996. The Company
sells a variety of laboratory products, primarily vortex mixers, to branches
of Fisher and VWR. The Company has a long-standing relationship with these
customers. The loss of any of these customers would have a materially
adverse effect upon the business of the Company.
Backlog. The Company's backlog is not significant because the Company's
current line of products are standard catalog items built to a semi-finished
goods state. The finished products are then completed based upon individual
customer orders. The typical lead time is approximately two weeks, and
backlog is kept to no more than thirty days.
Competition. In the general area of laboratory equipment, the Company's
major competitors are Thermolyne Corporation, a subsidiary of Sybron
Corporation, Baxter Dade and Baxter Scientific Products, divisions of
Baxter Healthcare Corporation Yamato, Inc., a Japanese corporation, and
IKA, a German corporation. The Company is the largest domestic manufacturer
of vortex mixers and has a small share of the market for manufacturing and
distributing the other laboratory equipment products it currently sells.
Most of the Company's competitors are substantially larger and have
greater financial, production and marketing resources than the Company.
Competition generally is based upon quality, technical specifications and
price.
Research and Development. The Company incurred $76,100 during the year
ended June 30, 1996 and none during the year ended June 30, 1995 on research
and development of new products or on improvement of existing products.
Environmental Protection. The Company's manufacturing operations, in
common with those of the industry generally, are subject to numerous
existing and proposed federal and state regulations designed to protect the
environment, to establish occupational safety and health standards and to
cover other matters. The Company believes that its operations are in
compliance with such existing regulations.
Employees. During the year ended June 30, 1996, the number of persons
employed by the Company on a full-time basis was approximately 18. On
September 6, 1996, the Company employed 19 full-time persons and two
part-time persons. None of the Company's employees are represented by any
unions.
Item 2. Description of Property.
As of September 6, 1996, the Company's offices and manufacturing facilities
consisted of the following:
Square Lease Annual
Use of Feet Expiration Rental
Location of Space Space (Approx) Date Payments*
- ----------------- ------ -------- ---------- ---------
70 Orville Drive Executive 25,000 December 31, $176,500
Airport International Offices/ 1999
Plaza Manufacturing
Bohemia, NY 11716
* Reflects future minimum rental payments for fiscal 1997.
See Notes to the Financial Statements for information about the Company's
lease obligations.
Item 3. Legal Proceedings.
There are no material legal proceedings pending.
Item 4. Submission of Matters to a Vote of Security Holders.
During the quarter ended June 30, 1996, no matters were submitted to a vote
of security holders.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.
(a) The Company's Common Stock is traded in the over-the-counter
market. The following table sets forth the low and high bid
quotations for the fiscal years ended June 30, 1996 and 1995,
as reported by the National Association of Securities Dealers,
Inc. Electronic Bulletin Board. Such quotations reflect
inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions:
For Fiscal Quarter Ended: Low Bid High Bid
09/30/94 5/16 7/8
12/31/94 5/8 1
03/31/95 3/4 1 1/8
06/30/95 1 1 1/8
09/30/95 1 1/4 1 1/8
12/31/95 1 1/4 1 1/4
03/31/96 1 1/4 1 1/16
06/30/96 1 1/16 1
(b) There were, as of September 6, 1996, 977 record holders of the
Company's Common Stock.
(c) The Company paid no dividends during the last two fiscal years.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations. Net sales for the year ended June 30, 1996
(fiscal 1996) decreased $155,700 to $2,517,500 from $2,673,200 for the
year ended June 30, 1995(fiscal 1995) basically as a result of lower
demand for laboratory products. The decrease is not considered to be
indicative of future sales trends.
The Company's gross profit margin in fiscal 1996 increased to 37.5%
from fiscal 1995's gross profit margin of 35.8%. The gross profit margin
for fiscal year 1996 was higher than fiscal 1995 mainly as a result of an
$81,600 write-off of sterilizer related inventory taken in fiscal 1995.
The inventory write-off was taken as a consequence of management's
decision to concentrate its activities in the laboratory equipment
market, and the opportunities provided by the newly licensed thermo-
electrically cooled centrifuges and other products. The gross profit
margin for fiscal 1996 is actually lower than fiscal 1995
when the prior year's inventory write-off is added back to fiscal 1995's
gross profit margin. The gross profit margin would have been 38.8%.
The lower gross profit margin in fiscal 1996 is mainly due to amortization
expense of the newly acquired intangible assets and the fact that fixed
overhead expenses had to be absorbed by somewhat lower sales.
General and administrative expenses for fiscal 1996 ($691,500) compared
to fiscal 1995 ($646,000) increased $45,500 (7.0%) due to increased
depreciation expense of the Company's new computer system and regular
increases in salaries, insurance, etc.
Selling expenses for fiscal 1996 ($84,900) compared to fiscal 1995 ($51,400)
increased $33,500 (65.2%) as a result of market research expenses incurred
pertaining to the new line of centrifuge products and marketing expenses
related to a promotional rebate program.
Research and development expenses for fiscal 1996 were $76,100 compared to
none in fiscal 1995, as a result of the research and development activities
conducted relating to the new product line. At the beginning of fiscal
1996, Management had hoped that shipment of the new centrifuge products
would start in late fiscal 1996. However, due to the need for additional
product improvement and engineering, development of the products was
continued and marketing was postponed. Management hopes to have the
products ready to market and deliver in the later part of fiscal 1997. The
Company expects to continue investing significantly in the development of
the centrifuge line of products, as well as other new laboratory products.
Management believes that the investment in research and development
activities is important to the future of the Company.
The Company expects the lower profits to continue in fiscal 1997
because the Company's low sales volume will continue to make even its new
product expenditures seem significant, and thus have a major impact on
profits.
Liquidity and Capital Resources. The Company's working capital as
of June 30, 1996 remained approximately the same at $1,304,400 compared
to $1,304,700 as of June 30, 1995.
In January 1996, the Company's $100,000 secured bank line of credit was
renewed for another year. The credit line expires on December 31, 1996
and carries interest at prime plus 1%. The Company can utilize the
proceeds of these amounts for working capital needs. The Company has not
utilized this credit line.
Capital Expenditures and Inflation. During fiscal 1996, the Company did
not incur any material capital expenditures. The Company does not expect
to incur any material capital expenditures during fiscal 1997. It is
anticipated, as in the past, that the funds for such expenditures, if any,
will be funded from the Company's operations or available working capital.
Due to the demand for medical cost containment, management believes that
inflation will have a more material effect on the Company's existing
products than has been the case in the past. Although the Company's
laboratory products are not considered medical equipment, they are used in
laboratories in medically-related areas. Therefore, the existing products
will be sensitive to inflationary pressures since it will be difficult to
fully pass on cost increases.
Item 7. Financial Statements.
The Financial Statements required by this item are attached hereto on pages
F1-F15.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Scientific Industries, Inc.
Bohemia, New York
We have audited the accompanying consolidated balance sheets of Scientific
Industries, Inc. and Subsidiary as of June 30, 1996 and 1995, and the related
consolidated statements of income, shareholders' equity and cash flows for
the years then ended. 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 in accordance with generally accepted auditing
standards. Those standards 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.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Scientific
Industries, Inc. and Subsidiary as of June 30, 1996 and 1995, and the
consolidated results of their operations and their consolidated cash flows
for the years then ended in conformity with generally accepted accounting
principles.
Nussbaum, Yates, & Wolpow, P.C.
September 3, 1996
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND 1995
ASSETS
------
1996 1995
--------- ---------
Current assets:
Cash and cash equivalents $ 169,900 $ 315,600
Investment securities (Note 3) 740,300 606,200
Trade accounts receivable, less allowance
for doubtful accounts of $7,400 in 1996
and 1995 184,400 270,800
Inventories (Note 4) 294,600 272,100
Prepaid expenses, taxes and other
current assets (Note 6) 116,300 37,800
Deferred income taxes (Note 10) 28,000 67,900
---------- ----------
Total current assets 1,533,500 1,570,400
---------- ----------
Investment securities (Note 3) 15,200 0
---------- ----------
Property and equipment, net (Note 5) 115,800 107,500
---------- ----------
Other assets and deferred charges:
Intangible assets, less accumulated
amortization of $7,000 (Note 6) 63,400 0
Deferred income taxes (Note 10) 8,600 7,100
Other (Note 9) 102,900 94,300
---------- ----------
174,900 101,400
---------- ----------
$1,839,400 $1,779,300
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 44,500 $ 86,800
Accrued expenses (Notes 8 and 9) 180,300 163,000
Customer advances 4,300 15,900
---------- ----------
Total current liabilities 229,100 265,700
---------- ----------
Deferred compensation (Note 9) 64,700 50,300
---------- ----------
Commitments and contingencies
(Notes 6, 8 and 9)
Shareholders' equity (Note 11):
Common stock, $.05 par value; authorized
7,000,000 shares; issued 846,041 shares 42,300 42,300
Additional paid-in capital 842,300 842,300
Unrealized holding loss on investment
securities ( 1,400) ( 2,200)
Retained earnings 714,800 633,300
---------- -----------
1,598,000 1,515,700
Less common stock held in treasury,
at cost, 19,802 shares 52,400 52,400
---------- ---------
1,545,600 1,463,300
---------- ---------
$1,839,400 $1,779,300
========== ==========
See notes to consolidated financial statements
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1996 AND 1995
1996 1995
---------- ----------
Net sales $2,517,500 $2,673,200
Cost of sales 1,574,000 1,716,600
---------- ---------
Gross profit 943,500 956,600
------------ -----------
Operating expenses:
General and administrative 691,500 646,000
Selling 84,900 51,400
Research and development 76,100 0
------------ -----------
852,500 697,400
------------ -----------
Income from operations 91,000 259,200
Interest and other income 32,600 40,100
------------ -----------
Income before income taxes 123,600 299,300
------------ -----------
Income taxes (Note 10):
Current 3,700 119,800
Deferred 38,400 ( 26,800)
------------ -----------
42,100 93,000
------------ -----------
Net income $ 81,500 $ 206,300
============ ===========
Net income per common share (Note 12) $ .09 $ .22
========== ==========
See notes to consolidated financial statements.
<TABLE>
<S> <C>
Unrealized
Holding Gain Total
Additional (Loss) on Share-
Common Stock Paid-in Investment Retained Treasury Stock holders'
-------------- ---------------
Shares Amount Capital Securities Earnings Shares Amount Equity
------ ------ --------- ---------- -------- ------ ------ -------
Balance, July 1, 1994 846,041 $42,300 $842,300 ($ 100) $427,000 19,802 $52,400 $1,259,100
Unrealized holding
loss on investment
securities ( 2,100) ( 2,100)
Net income 206,300 206,300
------- -------- --------- -------- -------- ------ -------- ----------
Balance, June 30, 1995 846,041 42,300 842,300 ( 2,200) 633,300 19,802 52,400 1,463,300
Unrealized holding
gain on investment
securities 800 800
Net income 81,500 81,500
------ -------- --------- -------- ------- ------- ------- -----------
Balance, June 30, 1996 846,041 $42,300 $842,300 ($1,400) $714,800 19,802 $52,400 $1,545,600
======= ======= ======== ======== ======== ====== ======= ==========
See notes to consolidated financial statements
</TABLE>
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1996 AND 1995
1996 1995
---------- ---------
Operating activities:
Net income $ 81,500 $ 206,300
---------- ---------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 52,100 30,600
Deferred income taxes 38,400 ( 26,800)
Changes in assets and liabilities:
Accounts receivable 86,400 ( 19,100)
Inventories ( 22,500) 40,900
Prepaid expenses, taxes and other
current assets ( 78,500) ( 9,300)
Other assets ( 8,600) ( 30,300)
Accounts payable ( 42,300 ) 53,200
Accrued expenses 17,300 ( 118,000)
Customer advances ( 11,600) 12,700
Deferred compensation 14,400 8,900
------------ -----------
Total adjustments 45,100 ( 57,200)
------------ -----------
Net cash provided by operating
activities 126,600 149,100
----------- -----------
Investing activities:
Purchase of investment securities,
principally held to maturity ( 1,112,300) ( 1,011,100)
Redemption of investments held to
maturity 948,400 915,500
Capital expenditures ( 38,000) ( 56,200)
Purchase of intangible assets ( 70,400) 0
------------ ------------
Net cash used in investing
activities ( 272,300) ( 151,800)
------------- ------------
Net decrease in cash and cash equivalent ( 145,700) ( 2,700)
Cash and cash equivalents, beginning of
year 315,600 318,300
------------ -----------
Cash and cash equivalents, end of year $ 169,900 $ 315,600
=========== ===========
Supplemental disclosures of cash flow
information:
Cash paid for income taxes $ 51,500 $ 214,400
See notes to consolidated financial statements
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996 AND 1995
1. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Scientific Industries, Inc. and Scientific Packaging Industries, Inc., its
wholly owned subsidiary (collectively referred to as the "Company"). All
material intercompany balances and transactions have been eliminated.
Investment Securities
Securities which the Company has the ability and positive intent to hold to
maturity are carried at amortized cost. Substantially all held-to-maturity
securities mature within one year. Securities available for sale are
carried at fair value with unrealized gains or losses reported in a
separate component of shareholders' equity.
Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or
market.
Property and Equipment
Property and equipment are stated at cost. Depreciation of machinery and
equipment and furniture and fixtures is provided for primarily by the
straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized by the straight-line method over the
term of the related lease or the estimated useful lives of the assets,
whichever is shorter.
Intangible Assets
Intangible assets consist of licensing agreements which are stated at cost.
Amortization is provided for by the straight-line method over five years.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Income Taxes
The Company accounts for income taxes according to the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting
for Income Taxes". Under the liability method specified by SFAS 109,
deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities as
measured by the enacted tax rates which will be in effect when these
differences reverse. Deferred tax expense is the result of changes in
deferred tax assets and liabilities. Deferred income taxes result
principally from the timing of the deductibility of the rent accrual,
inventory adjustments, the deferred compensation agreement described in
Note 9 and the use of accelerated methods of depreciation and amortization
for tax purposes.
Future Effect of Recently Issued Accounting Pronouncement
For fiscal year 1997, the Company will adopt SFAS No. 123, "Accounting for
Stock-Based Compensation." This standard establishes a fair value method
of accounting for stock-based compensation plans either through recognition
or disclosure. The Company intends to adopt this standard by disclosing
the pro forma net income and earnings per share amounts assuming the fair
value method was adopted on July 1, 1995. The adoption of this standard
will not impact the results of operations, financial position or cash flows.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, 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.
2. Line of Business and Concentration of Credit Risk
The Company is engaged in the manufacturing and marketing of scientific
equipment for hospital and industrial laboratories and other health-care
related entities.
Certain information relating to the Company's export sales and principal
customers are as follows:
1996 1995
------- ------
Export sales (net)(principally Europe
and Asia) $902,500 $993,100
Customers in excess of 10% of net sales:
Largest in 1996 and 1995 808,300 864,800
Next largest in 1996 and 1995 540,400 512,900
3. Investment Securities
Details as to investment securities are as follows:
At June 30, 1996:
---------------- Gross Cost or Unrealized
Amortized Fair Holding
Cost Value Gain (Loss)
------------- ----- -----------
Available for sale:
Equity securities $ 29,000 $ 27,600 ($1,400)
Held-to-maturity:
State and municipal - due
in one year or less $712,700 $712,800 $ 100
State and municipal - due
September 1997 15,200 15,200 0
-------- -------- -------
Total $727,900 $728,000 $ 100
At June 30, 1995:
Gross Cost or Unrealized
Amortized Fair Holding
Cost Value Gain (Loss)
------------- -------- -----------
Available for sale:
Equity securities $ 30,100 $ 27,900 ($2,200)
Held-to-maturity:
State and municipal $578,300 $579,200 $ 900
4. Inventories
1996 1995
-------- --------
Raw materials $208,900 $221,700
Work-in-process 63,700 43,400
Finished goods 22,000 7,000
-------- --------
$294,600 $272,100
5. Property and Equipment, Net
Useful Lives
(Years) 1996 1995
------------ -------- --------
Computer equipment 5 $ 72,200 $ 46,400
Machinery and equipment 4 - 7 59,100 57,800
Furniture and fixtures 4 - 10 42,200 42,200
Leasehold improvements 4 - 8 19,000 8,000
-------- --------
192,500 154,400
Less accumulated depreciation
and amortization 76,700 46,900
-------- --------
$115,800 $107,500
6. Intangible Assets
On July 10, 1995, the Company entered into an agreement to license the
rights to certain laboratory equipment developed and manufactured by
another company. The purchase price for the license was $50,000 plus
related costs of $20,400. The agreement provides that the Company may
elect to engage the sellers to perform certain consulting services for an
agreed-upon fee. Fifty percent of all consulting fees paid to the seller
constitute prepayment against any royalties payable to the seller. As of
June 30, 1996 are $14,500.
7. Bank Line of Credit
In January of 1996, the Company received approval of a request for a
$100,000 secured bank line of credit. The credit line expires on December
31, 1996 and carries interest at prime plus 1%. The Company did not utilize
this credit line.
8. Employee Benefit Plan
Effective April 1, 1994, the Company established a 401(k) profit sharing
plan for all eligible employees as defined in the plan.
The plan provides for voluntary employee salary contributions from 1% to
15% not to exceed the statutory limitation provided by the Internal Revenue
Code. The Company shall match 50% of each participant's salary deferral
election, up to a maximum amount for each participant of 2% of his
compensation. The Company also has the option to make an additional profit
sharing contribution to the plan. Employer matching contributions to the
plan amounted to $11,356 in 1996 and $9,557 in 1995.
9. Commitments and Contingencies
Leases
The Company is obligated through December 1999 under a noncancelable
operating lease for its premises, which requires minimum annual rentals
and certain other expenses, including real estate taxes and insurance. The
Company has a five year renewal option. Rental expense under the above
lease amounted to approximately:
1996 1995
-------- --------
Minimum rent expense $163,100 $163,100
Other charges 8,600 7,200
-------- --------
$171,700 $170,300
As of June 30, 1996, the Company's approximate future minimum rental
payments are as follows:
Fiscal Years
------------
1997 $176,500
1998 184,800
1999 193,500
2000 99,000
In accordance with generally accepted accounting principles, the future
minimum annual rental expense, computed on a level basis, will be
approximately $163,100. Accrued rent, payable in future years, amounted
to $82,900 and $88,500 at June 30, 1996 and 1995.
The Company is obligated under noncancelable operating leases for three
vehicles expiring through March 1999. The approximate future minimum
lease payments at June 30, 1996 are as follows:
Fiscal Years
------------
1997 $26,500
1998 21,600
1999 5,200
Employment Contract
On January 1, 1993, the Company extended an employment contract with its
President to December 31, 1997. The contract provides for a minimum annual
salary of $106,000 plus additional amounts based on the consumer price
index increase in each year of the contract. The contract also provides for
the payment of an annual bonus at the sole discretion of the Board of
Directors. An additional agreement with the President provides that,
in the event of termination of the President's employment within three years
after a change of control of the Company, as defined, the Company would be
liable for a maximum of three years' salary plus certain benefits. Under
this employment contract, the Company's president will receive an annual
salary for the calendar year ending December 31, 1996 amounting to $118,500.
The employment contract provides that, at the employee's option, a portion
of the compensation may be deferred to future years. The deferred amounts
are to be placed in a separate investment account and all earnings or losses
will be for the benefit of the employee. As of June 30, 1996 and 1995,
$59,100 and $45,200 was segregated into such an account and is included in
other assets. The balance due to the employee is payable out of (but not
secured by) the account, in five equal annual installments commencing after
the termination of employment. In the event of a change in control of
the Company, the entire balance is immediately payable. As of June 30, 1996
and 1995, $64,700 and $50,300 of accrued compensation due to the President
has been deferred.
10. Income Taxes
Income taxes for 1996 and 1995 were different from the amounts computed by
applying the federal income tax rate to the income before income taxes due
to the following:
1996 1995
------------------ ----------------
% of % of
Pretax Pretax
Amount Income Amount Income
--------- ------ -------- ------
Computed "expected" income
tax $ 42,000 34.0% $101,800 34.0%
State income taxes, net of
federal income tax effect 1,500 1.2 12,300 4.1
Differences due to graduated
tax rates ( 10,500) ( 8.4 ) ( 4,500) ( 1.5)
Non-taxable interest income ( 10,200) ( 8.3 ) ( 8,800) ( 3.0)
Other 19,300 15.6 ( 7,800) ( 2.6)
--------- ------- --------- ------
Actual income taxes $42,100 34.1% $ 93,000 31.0%
Deferred tax assets and liabilities consist of the following:
1996 1995
-------- --------
Deferred tax assets:
Deferred compensation $18,700 $18,600
Rent accrual 24,000 32,800
Inventory 0 30,200
Other 5,600 4,900
-------- --------
$48,300 $86,500
Deferred tax liabilities:
Depreciation of property and
equipment $11,700 $11,500
11. Stock Options
In February 1992, the Company established a Stock Option Plan which provides
for the grant of options to purchase up to 300,000 shares of common stock
through February 2002. The plan provides for the granting of incentive
stock options and non-incentive stock options. Incentive stock options may
be granted to employees at an exercise price equal to 100% (or 110% if the
optionee owns directly or indirectly more than 10% of the outstanding
voting stock) of the fair market value of the shares on the date of the
grant. Non-incentive stock options shall be granted at an exercise price
not less than 85% of the fair market value on the date of grant. No charge
to income has been made in connection with the grant of options under the
plan. The plan also provides that each non-employee member of the Board of
Directors shall be granted, annually commencing in March 1993, for a period
of four years, an option to purchase 3,000 shares of stock at the fair
market value on the date of grant.
Option activity under the above stock option plans is summarized as follows:
Shares Exercise Price
--------- --------------
Outstanding at July 1, 1994 134,000 $ .35 - $ .938
Granted 12,000 $1.3125
Exercised -0-
Canceled -0-
---------
Outstanding at June 30, 1995 146,000 $ .35 - $1.3125
Granted 57,000 $1.2813 - $1.75
Exercised -0-
Canceled -0-
---------
Outstanding at June 30, 1996 203,000 $.35 - $1.75
These outstanding options expire at various dates through April 2006.
Options for 166,000 shares were exercisable at June 30, 1996. There are
97,000 shares of common stock reserved and available for future grants at
June 30, 1996 under the Plan.
In February 1992, the Company granted to four non-employee members of the
board of directors, ten year options for each to purchase 12,000 shares of
common stock, at an exercise price of $.35, not covered under the above
plan. The options are exercisable one-third within one year from the date
of grant and one-third in each of the following two years. In March 1993,
three directors each exercised 8,000 options.
12. Income Per Share
Income per share of common stock is computed on the basis of the weighted
average number of shares outstanding during the respective years
(826,239 shares in 1996 and 1995) plus the dilutive effect of stock options.
13. 1995 Fourth Quarter Adjustment
Net income for the fourth quarter of 1995 was decreased by approximately
$81,600 due to an inventory adjustment.
14. Fair Value of Financial Instruments
The financial statements include various estimated fair value information
as of June 30, 1996 and 1995, as required by Statement of Financial
Accounting Standards 107, Disclosure about Fair Value of Financial
Instruments. Such information, which pertains to the Company's financial
instruments, is based on the requirements set forth in that statement and
does not purport to represent the aggregate net value of the Company. The
following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to
estimate the value.
The carrying value of cash and cash equivalents and short-term investment
securities approximates fair market value because of the short maturity of
those instruments. Quoted market prices are used to estimate fair value of
long-term instruments.
The following table provides summary information on the fair value of
significant financial instruments included in the financial statements:
1996 1995
------------------- ---------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ---------- -------- ----------
Assets:
Cash and cash
equivalents $169,900 $169,900 $315,600 $315,600
Investment
securities (Note 3) 755,500 755,600 606,200 607,100
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
Item 9. Directors, Executive Officers; Compliance With Section 16(a) of
the Exchange Act.
The information with respect to directors and executive officers of the
Company will be set forth under the heading "Election of Directors" and
"Executive Compensation" in the Company's definitive proxy statement which
is being filed today with the Commission and is incorporated herein by
reference.
Item 10. Executive Compensation.
Information with respect to executive compensation will be set forth under
the heading "Executive Compensation" in the Company's definitive proxy
statement which is being filed today with the Commission as is incorporated
herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
Information with respect to security ownership of certain beneficial owners
and management will be set forth under the headings "election of Directors
and "Principal Stockholders" in the Company's definitive proxy statement
which is being filed today with the Commission and is incorporated herein
by reference.
Item 12. Certain Relationships and Related Transactions.
Information with respect to certain relationships and related transactions
will be set forth under the headings "Election of Directors", "Executive
Compensation" in the Company's definitive proxy statement which is being
filed today with the Commission and is incorporated herein by reference.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
3(a). Certificate of Incorporation of the Company as amended. (Filed
as Exhibit 1(a-1) to the Company's General Form for Registration of
Securities on Form 10 dated February 14, 1973 and incorporated by
reference thereto.)
3(b). Certificate of Amendment of the Company's Certificate of
Incorporation, as filed on January 28, 1985. (Filed as Exhibit
3(a) to the Company's annual report on Form 10-K for the year ended
June 30, 1985 and incorporated by reference thereto.)
3(c). By-Laws of the Company, as amended.
(Filed as Exhibit 3(b) to the Company's annual report on Form 10-K
for the year ended June 30, 1985 and incorporated by reference
thereto.)
10. Employment contracts between the Company and Lowell A. Kleiman,
President (two contracts) and Cathy Pulver, Vice President. (Filed
as Exhibit 10 to the Company's Annual Report on Form 10-KSB for the
year ended June 30, 1992 and incorporated by reference thereto.)
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed with the Securities and
Exchange Commission.
Signatures
In accordance with Section 13 of 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SCIENTIFIC INDUSTRIES, INC.
(Registrant)
__________________________
Lowell A. Kleiman
President and Treasurer
__________________________
Helena R. Santos
Controller and Asst. Treasurer
Date: September 27, 1996
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.
Name Title Date
- ------------------------ ----------------------- ---------------------
Lowell A. Kleiman President, Treasurer and September 27, 1996
Director (Principal Executive
and Financial Officer)
Arthur M. Borden Director September 27, 1996
Joseph I. Kesselman Director September 27, 1996
Roger B. Knowles Director September 27, 1996
James S. Segasture Director September 27, 1996
