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
For the fiscal year ended June 30, 1997
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_________to____________
Commission File Number: 0-6658
SCIENTIFIC INDUSTRIES, INC.
(Name of small business issuer in its charter)
Delaware 04-2217279
(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)
-
(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
<PAGE>
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. $3,077,100
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 10, 1997 is $1,290,998.
The number of shares outstanding of the issuer's common stock,
par value $.05 per share as of September 10, 1997 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 1997 Annual Meeting which
will be filed with the Commission within 30 days.
<PAGE>
PART I
Item 1. Description of Business.
General. Scientific Industries, Inc., (the "Company") a
Delaware corporation, is engaged in manufacturing and marketing
laboratory equipment consisting primarily of 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 and research
laboratories, clinics, 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 to increase its customer
base through the use of various marketing 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. The licensed products include thermo-electrically refrigerated and
non-refrigerated micro-centrifuges, thermoelectric tube chillers,
thermoelectric coolers, and other related products. These products are
designed to be used by and sold to the Company's existing customers.
In March 1996, the Company purchased the rights to develop a
new attachment for the Company's existing Vortex-Genie 2 (trademark)
mixer. In adiition, in June 1996, the Company entered into an agreement to
purchase the technology for a new mixing device called a rotator. The
Company intends to market these products to its existing customers.
During 1996, the Company established a Research and Development
Department to develop the new products described above as well as
other new products that may be acquired in the future. The Company
anticipates to have the new attachment to the Vortex-Genie 2 (trademark)
mixer ready for sale in the fall of 1997 and the new rotator in the
winter of 1997, while the more sophisticated centrifuge products
still require engineering modification and therefore the first of these
may not be available before the later part of fiscal 1998.
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 Products Corporation
("VWR"), both of which are distributors, accounted for approximately 30%
and 23% respectively, of the Company's net sales for the year ended
June 30, 1997. The Company sells a variety of laboratory products,
primarily vortex mixers, to 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.
The typical lead time is approximately three 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, both of
which are 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 is generally based upon quality,
technical specifications and price.
Research and Development. The Company incurred research and
development expenses of $206,700 during the year ended June 30, 1997
compared to $76,100 during the year ended June 30, 1996, in connection
with the development of new products and the improvement of existing products.
Environmental Protection. The Company's manufacturing operations, like
those of the industry in general, 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, 1997, the number
of persons employed by the Company on a full-time basis was approximately
18. On September 5, 1997, the Company employed 17 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 10, 1997, the Company's offices and manufacturing
facilities consisted of the following:
<TABLE>
<S> <C> <S> <C>
Square Lease Annual
Location Use of Feet Expiration Rental
of space Space (Approx.) Date Payments(*)
- -------------------- ---------------- ---------- ---------- -----------
70 Orville Drive Executive 25,000 December 31, $184,800
Airport International Offices/ 1999
Plaza Manufacturing
Bohemia, NY 11716
(*) Reflects future minimum rental payments for fiscal 1998.
</TABLE>
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, 1997, 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, 1997 and 1996, 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
------------------------- ------- --------
09/30/95 1 1 1/4
12/31/95 1 1 1/4
03/31/96 1 1/16 1 1/4
06/30/96 1 1/16 1 1/16
09/30/96 1 1/16 1 1/16
12/31/96 1 1/16 1 1/16
03/31/97 1 1/16 1 1/8
06/30/97 1 1/16 1 1/4
(b)There were, as of September 10, 1997, 960 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, 1997
(fiscal 1997) increased $559,600 to $3,077,100 from $2,517,500
for the year ended June 30, 1996 (fiscal 1996) basically as a result of
increased demand for laboratory products.
The Company's gross profit margin in fiscal 1997 increased
to 39.4% from fiscal 1996's gross profit margin of 37.5% mainly as a
result of higher sales, as discussed above, while fixed overhead expenses
remained constant.
Selling expenses for fiscal 1997 ($131,300) compared to fiscal 1996
($84,900) increased $46,400 (54.7%) as a result of market research expenses
for the new products and a promotional rebate program for our existing
laboratory products.
Research and development expenses for fiscal 1997 were $206,700 compared
to $76,100 in fiscal 1996, as a result of the establishment of a Research
and Development Department at the end of fiscal 1996. As previously reported,
the Company is investing a significant portion of its operational
income in research and development activities as part of its overall plan
for growth. The Company expects to have a new laboratory product accessory
available for sale in the fall of 1997, and a new laboratory mixing device
called a rotator available in the winter of 1997. The more sophisticated
line of centrifuge products still require engineering modification and
therefore may not be available until the later part of fiscal 1998.
Liquidity and Capital Resources. The Company's working capital as
of June 30, 1997, increased $120,400 to $1,424,800 as compared to
$1,304,400 as of June 30, 1996, primarily due to increased income from
operations.
In January of 1997, the Company's $100,000 secured bank line
of credit was renewed for another year. The credit line expires on
December 31, 1997 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 1997, the
Company did not incur any material capital expenditures. The Company does
not expect to incur any material capital expenditures during fiscal 1998.
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-F14.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
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 will be filed within 30 days 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 will be filed with the Commission
within thirty days and 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.Amendment to employment contract between the Company and Lowell A.
Kleiman, filed herewith.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed with the Securities
and Exchange Commission.
<PAGE>
SIGNATURES
In accordance with Section 13 or 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)
/s/
__________________________________
Lowell A. Kleiman
President and Treasurer
Principal Executive and Financial Officer
/s/
__________________________________
Helena R. Santos
Vice President, Controller and Assistant Treasurer
Principal Accounting Officer
Date: September 29, 1997
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
/s/
_____________________ President, Treasurer and September 29, 1997
Lowell A. Kleiman Director (Principal Executive
and Financial Officer)
/s/
_______________________ Director September 29, 1997
Arthur M. Borden
/s/
_______________________ Director September 29, 1997
Joseph I. Kesselman
/s/
_______________________ Director September 29, 1997
Roger B. Knowles
/s/
_______________________ Director September 29, 1997
James S. Segasture
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors and Shareholders
Scientific Industries, Inc. and subsidiary
Bohemia, New York
We have audited the accompanying consolidated balance sheets of Scientific
Industries, Inc. and subsidiary as of June 30, 1997 and 1996, 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, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in conformity with generally accepted accounting
principles.
/s/
NUSSBAUM, YATES & WOLPOW, P.C.
August 25, 1997
-F-1-
<PAGE>
<TABLE>
<S> <C> <C>
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND 1996
ASSETS
1997 1996
------------ -----------
Current assets:
Cash and cash equivalents $ 146,600 $ 169,900
Investment securities (Note 3) 898,300 740,300
Trade accounts receivable, less allowance for
doubtful accounts of $7,400 in 1997 and 1996 281,500 184,400
Inventories (Note 4) 330,000 294,600
Prepaid expenses and other current
assets (Note 6) 82,500 116,300
Deferred income taxes (Note 10) 35,000 28,000
----------- -----------
Total current assets 1,773,900 1,533,500
----------- -----------
Investment securities (Note 3) - 15,200
----------- -----------
Property and equipment, net (Note 5) 143,200 115,800
----------- -----------
Other assets and deferred charges:
Intangible assets, less accumulated
amortization of $21,500 and $7,000
in 1997 and 1996 (Note 6) 52,900 63,400
Deferred income taxes (Note 10) 16,100 8,600
Other (Note 9) 123,900 102,900
----------- -----------
192,900 174,900
----------- -----------
$2,110,000 $1,839,400
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 82,800 $ 44,500
Accrued expenses (Notes 8 and 9) 262,500 180,300
Customer advances 3,800 4,300
----------- -----------
Total current liabilities 349,100 229,100
----------- -----------
Deferred compensation (Note 9) 77,900 64,700
----------- -----------
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 gain (loss) on investment
securities 300 ( 1,400)
Retained earnings 850,500 714,800
----------- -----------
1,735,400 1,598,000
Less common stock held in treasury,
at cost, 19,802 shares 52,400 52,400
----------- -----------
1,683,000 1,545,600
----------- -----------
$2,110,000 $1,839,400
=========== ===========
See notes to consolidated financial statements
-F-2-
<PAGE>
</TABLE>
<TABLE>
<S> <C> <S><C>
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1997 AND 1996
1997 1996
----------- -----------
Net sales $3,077,100 $2,517,500
Cost of sales 1,865,900 1,574,000
----------- -----------
Gross profit 1,211,200 943,500
----------- -----------
Operating expenses:
General and administrative 724,000 691,500
Selling 131,300 84,900
Research and development 206,700 76,100
----------- -----------
1,062,000 852,500
----------- -----------
Income from operations 149,200 91,000
Interest and other income 30,300 32,600
----------- -----------
Income before income taxes 179,500 123,600
----------- -----------
Income taxes (Note 10):
Current 58,300 3,700
Deferred ( 14,500) 38,400
----------- -----------
43,800 42,100
----------- -----------
Net income $ 135,700 $ 81,500
=========== ===========
Net income per common share (Note 12) $ .14 $ .09
=========== ===========
See notes to consolidated financial statements
</TABLE>
-F-3-
<PAGE>
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<S> <C> <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, 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
Unrealized holding gain on
investment securities 1,700 1,700
Net income 135,700 135,700
--------------- ---------- ------------ -------- --------------- ----------
Balance, June 30, 1997 846,041 $42,300 $842,300 $ 300 $850,500 19,802 $52,400 $1,683,000
=============== ========== ============ ======== =============== ==========
</TABLE>
See notes to consolidated financial statements
-F-4-
<PAGE>
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<S> <C> <C>
1997 1996
------------ ------------
Operating activities:
Net income $ 135,700 $ 81,500
------------ ------------
Adjustments to reconcile net income to
net cash provided by operating activities:
Loss on disposition of fixed assets 5,400 -
Depreciation and amortization 69,400 52,100
Deferred income taxes ( 14,500) 38,400
Changes in assets and liabilities:
Accounts receivable ( 97,100) 86,400
Inventories ( 35,400) ( 22,500)
Prepaid expenses and other
current assets 33,800 ( 78,500)
Other assets ( 21,000) ( 8,600)
Accounts payable 38,300 ( 42,300)
Accrued expenses 82,200 17,300
Customer advances ( 500) ( 11,600)
Deferred compensation 13,200 14,400
------------ ------------
Total adjustments 73,800 45,100
------------ ------------
Net cash provided by operating
activities 209,500 126,600
------------ ------------
Investing activities:
Purchase of investment securities,
principally held to maturity ( 1,444,500) ( 1,112,300)
Redemption of investments held to
maturity 1,286,700 948,400
Capital expenditures ( 70,900) ( 38,000)
Purchase of intangible assets ( 4,100) ( 70,400)
------------- -------------
Net cash used in investing
activities ( 232,800) ( 272,300)
------------- -------------
Net decrease in cash and cash equivalents ( 23,300) ( 145,700)
Cash and cash equivalents, beginning of year 169,900 315,600
------------ -------------
Cash and cash equivalents, end of year $ 146,600 $ 169,900
============ =============
</TABLE>
Supplemental disclosures of cash flow information:
Cash paid for income taxes $ 400 $ 51,500
See notes to consolidated financial statements
-F-5
<PAGE>
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1997 AND 1996
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.
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.
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 mainly of licensing agreements which are stated
at cost. Amortization is provided for by the straight-line method over five
years.
-F-6-
<PAGE>
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of Significant Accounting Policies (Continued)
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.
Stock-Based Compensation
Effective July 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation" and as permitted by this standard, will continue to
apply the recognition and measurement principles of Accounting Principles
Board (APB) Opinion No. 25 to its stock options and other stock-based employee
compensation awards and provide the pro forma disclosures required by SFAS No.
123 (see Note 11).
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.
Estimates are used in accounting for income taxes, accrual for self-insurance
claims, and warranty reserves.
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:
1997 1996
------------ -----------
Export sales (net) (principally Europe and Asia) $1,000,300 $902,500
Customers in excess of 10% of net sales:
Largest in 1997 and 1996 920,300 808,300
Next largest in 1997 and 1996 720,500 540,400
-F-7-
<PAGE>
3. Investment Securities
Details as to investment securities are as follows:
Gross Cost or Unrealized
Amortized Fair Holding
At June 30, 1997: Cost Value Gain (Loss)
- ----------------- ------------- ------- -----------
Available for sale:
Equity securities $ 29,000 $ 29,300 $ 300
======== ======== ========
Held-to-maturity:
State and municipal $869,000 $868,900 ($ 100)
======== ======== ========
At June 30, 1996:
- -----------------
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 -
-------- --------- --------
Total $727,900 $728,000 $ 100
======== ========= ========
4. Inventories
1997 1996
---------- ----------
Raw materials $ 305,500 $ 208,900
Work-in-process 2,400 63,700
Finished goods 22,100 22,000
---------- ----------
$ 330,000 $ 294,600
========== ==========
-F-8-
<PAGE>
5. Property and Equipment, Net
Useful Lives
(Years) 1997 1996
------------ -------- --------
Computer equipment 4 - 5 $ 99,200 $ 72,200
Machinery and equipment 3 - 7 63,500 59,100
Furniture and fixtures 4 - 10 47,900 42,200
Leasehold improvements 3 - 8 30,900 19,000
-------- --------
241,500 192,500
Less accumulated depreciation and
amortization 98,300 76,700
-------- --------
$143,200 $115,800
======== ========
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 cumulative
related costs of $24,400. 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, 1997 and 1996, no royalties have been earned. Prepaid royalties at June
30, 1997 and 1996 are $14,500.
7. Bank Line of Credit
The Company has a $100,000 secured bank line of credit. The credit line
expires on December 31, 1997 and bears 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 $13,400 in 1997 and $11,400 in 1996.
-F-9-
<PAGE>
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:
1997 1996
-------- --------
Minimum rent expense $163,100 $163,100
Other charges 8,800 8,600
-------- --------
$171,900 $171,700
======== ========
As of June 30, 1997, the Company's approximate future minimum rental
payments are as follows:
Fiscal Years
------------
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
$69,500 and $82,900 at June 30, 1997 and 1996.
The Company is obligated under noncancelable operating leases for two
vehicles expiring through March 1999. The approximate future minimum lease
payments at June 30, 1997 are as follows:
Fiscal Years
------------
1998 $21,600
1999 5,200
-F-10-
<PAGE>
9. Commitments and Contingencies (Continued)
Employment Contract
On August 14, 1997, the Company amended and extended an employment
contract with its President through June 2000. The contract provides for an
annual salary of $160,000 and for the payment of a bonus for fiscal 1998 if
certain gross profit levels, as defined, are met. The contract also granted
him a five-year option to purchase 10,000 shares of common stock exercisable
under certain circumstances. An additional agreement with the President
provides that, in the event of termination of his 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.
The employment contract also provides that, at his 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 his benefit. As of June 30, 1997 and 1996, $77,900 and $59,100 was
segregated into such an account and is included in other assets. The balance
due to him 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, 1997 and 1996, $77,900 and $64,700 of accrued
compensation due to him has been deferred.
10. Income Taxes
Income taxes for 1997 and 1996 were different from the amounts computed
by applying the federal income tax rate to the income before income taxes due
to the following:
1997 1996
----------------- -----------------
% of % of
Pretax Pretax
Amount Income Amount Income
-------- -------- -------- --------
Computed "expected" income tax $61,000 34.0% $42,000 34.0%
State income taxes, net of
federal income tax effect 6,700 3.7 1,500 1.2
Differences due to graduated
tax rates ( 7,800) ( 4.3 ) ( 10,500) ( 8.4 )
Non-taxable interest income ( 10,200) ( 5.7 ) ( 10,200) ( 8.3 )
Other ( 5,900) ( 3.3 ) 19,300 15.6
--------- -------- --------- --------
Actual income taxes $43,800 24.4% $42,100 34.1%
========= ======== ========= ========
-F-11-
<PAGE>
10. Income Taxes (Continued)
Deferred tax assets and liabilities consist of the following:
1997 1996
-------- --------
Deferred tax assets:
Deferred compensation $21,800 $18,700
Rent accrual 19,500 24,000
Amortization of patents 4,900 -
Other 15,500 5,600
-------- --------
$61,700 $48,300
======== ========
Deferred tax liabilities:
Depreciation of property
and equipment $10,600 $11,700
======== ========
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. 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, a
ten-year option to purchase 3,000 shares of stock at the fair market value on
the date of grant. These outstanding options expire at various dates through
June 2007. There are 84,000 shares of common stock reserved and available for
future grants at June 30, 1997 under the plan.
The Company has elected to continue to account for its employee stock
options under APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
under which no compensation expense is recognized. Pro forma information
regarding net income and earnings per share, however, is required under
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," (SFAS No. 123) for entities continuing to apply APB
No. 25. For disclosure purposes, the Company has estimated the fair value of
its employee stock options on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions used for stock
options granted in 1997 and 1996, respectively:
1997 1996
---------- ----------
Expected life (in years) 10 9
Risk-free interest rate 6.83% 6.22%
Expected volatility 15.49% 28.12%
Dividend yield 0.0% 0.0%
-F-12-
<PAGE>
11. Stock Options (Continued)
Under the Black-Scholes model, the total value of stock options granted
in 1997 and 1996 was $4,100 and 36,300, respectively, which would be amortized
ratably on a pro forma basis over the vesting periods, which range from three
to ten years. Had the Company determined compensation cost for these plans in
accordance with SFAS No. 123, the Company's pro forma net income would have
been $132,300 in 1997 and $80,400 in 1996. The Company's pro forma earnings
per share would have remained at $.14 in 1997 and $.09 in 1996. The SFAS No.
123 method of accounting does not apply to options granted prior to January 1,
1995, and, accordingly, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.
Option activity under the above stock option plans is summarized as follows:
Fiscal Fiscal
1997 1996
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------- --------- -------- ---------
Shares under option:
Outstanding at beginning
of year 203,000 $ .76 146,000 $ .53
Granted 13,000 1.48 57,000 1.37
------- ------ ------- ------
Outstanding at end of year 216,000 $ .81 203,000 $ .76
======= ====== ======= ======
Options exercisable at year end 180,333 $ .70 166,000 $ .66
------- ------ ------- ------
Weighted average fair value
per share of options granted
during fiscal 1997 and 1996 $ 1.00 $ .78
====== ======
The following table summarizes information about the options outstanding
at June 30, 1997:
Options Outstanding Options Exercisable
------------------------------ ---------------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Outstanding Price
- ------------- ----------- ------------ --------- ----------- ---------
$.35 - .9375 134,000 4.97 $ .46 134,000 $ .46
$1.2813 - 1.75 82,000 7.28 $ 1.38 46,333 $ 1.41
-F-13-
<PAGE>
11. Stock Options (Continued)
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 1997 and 1996) plus the dilutive effect of stock options.
13. Fair Value of Financial Instruments
The financial statements include various estimated fair value information
as of June 30, 1997 and 1996, 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 fair 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 that 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:
1997 1996
---------------------- ----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- --------- -------- ----------
Assets:
Cash and cash equivalents $146,600 $146,600 $169,900 $169,900
Investment securities
(Note 3) 898,300 898,200 755,500 755,600
-F-14-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SEC Form
10-KSB and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 169900
<SECURITIES> 740300
<RECEIVABLES> 191800
<ALLOWANCES> 7400
<INVENTORY> 294600
<CURRENT-ASSETS> 1533500
<PP&E> 192500
<DEPRECIATION> 76700
<TOTAL-ASSETS> 1839400
<CURRENT-LIABILITIES> 229100
<BONDS> 0
0
0
<COMMON> 42300
<OTHER-SE> 1797100
<TOTAL-LIABILITY-AND-EQUITY> 1839400
<SALES> 2517500
<TOTAL-REVENUES> 2517500
<CGS> 1574000
<TOTAL-COSTS> 1574000
<OTHER-EXPENSES> 852500
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 123600
<INCOME-TAX> 42100
<INCOME-CONTINUING> 81500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 81500
<EPS-PRIMARY> .09
<EPS-DILUTED> 0
</TABLE>
(Exhibit 10)
August 14, 1997
Mr. Lowell A. Kleiman
President
Scientific Industries, Inc.
70 Orville Drive
Bohemia, New York 11716
Dear Mr. Kleiman:
This will confirm our understanding and agreement pursuant to which your
previous Employment Agreement dated December 24, 1992 shall be and hereby is
amended and extended as follows:
1. Section 1.01 shall be and hereby is amended to provide that the
"Initial Term" shall commence on July 1, 1997 and terminate on June 30, 2000.
2. Section 2.01 shall be and hereby is replaced by the following
provision:
"As full compensation for his services during the Employment Period, the
Company shall pay and Kleiman shall accept a salary at the rate of $160,000
per annum, payable in weekly installments.
3. The following shall be added to Section 2.02:
"For the contract year beginning on July 1, 1997 and ending June 30, 1998
Kleiman shall be entitled to receive a bonus if the Company's gross
profit for the fiscal year ending June 30, 1998, exceeds the gross profit of
the Company's prior fiscal year by more than ten percent. The amount of
the bonus, if any, shall be five percent of that portion of the gross profit
which is more than ten percent in excess of the prior year's gross
profit.
In addition, Kleiman shall be and hereby is awarded a five year Incentive
Stock Option to purchase 10,000 shares of the Company's Common Stock at
an exercise price equal to the market price on the date of this agreement.
Such option may not be exercised unless and until the Common Stock of the
Company shall have a bid price (adjusted, for any event of dilution) on the
Bulletin Board, the pink sheets, the NASDAQ, Small Cap Market, the NASDAQ
National Market, or as otherwise reported by the National Quotation Bureau, as
the case may be, in excess of $5.00 per share for a period of 90 consecutive
days.
<PAGE>
(Exhibit 10)
Letter of Understanding and Agreement
Mr. Lowell A. Kleiman
August 14, 1997
Page 2
If the price of the Company's Common Stock has met the foregoing
price requirement, the option shall be exercisable in its entirety according
to the other applicable terms of the Company's Stock Option Plan, except
as specified herein, for the balance of the option term. However, if the
Company or essentially all its assets are sold for cash prior to exercise of
the option, the option shall be canceled by the Company, upon such sale. If
this sale is based on a price (adjusted for any event of dilution) exceeding
$5.00 per share of the Company's stock, Kleiman shall then, and only
then, receive a cash consideration equal to the amount by which the sale price
exceeds the exercise price of the Option. If the sale price (adjusted as
aforesaid) is less than $5.00 per Common Share, the Option shall be canceled
and Kleiman shall not receive any consideration hereunder.
4. Section 2.04 shall be and hereby is amended by replacing the
present provision in its entirety with the following provision:
"Kleiman shall continue to operate his present vehicle under the terms of
the present lease until the termination of that lease and may elect to
purchase it as set forth in Section 2.04 of the prior Employment Agreement
dated December 24, 1992. Upon the termination of the present lease, the
Company shall provide Kleiman a suitable auto for business purposes and shall
pay all gas, oil, maintenance and insurance associated with its use. The cost
of such lease for a replacement vehicle shall not exceed $700 per month.
All other provisions of the Employment Agreement and Supplemental
Compensation Agreement shall remain the same and be in effect for the term
herein.
If the foregoing accords with your understanding, please sign and return
a copy of this letter, whereupon the same shall constitute an amendment and
extension of your present Employment Agreement.
Very truly yours,
Scientific Industries, Inc.
/s/
By: _____________________________
Cathy Pulver-Dugan, Vice President
Accepted and agreed: (employee):
/s/
_______________________________
Lowell A. Kleiman
