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SCIENTIFIC INDUSTRIES, INC.
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SCIENTIFIC INDUSTRIES, INC.
1999
ANNUAL REPORT
CORPORATE INFORMATION
OFFICERS EXECUTIVE OFFICES
Lowell A. Kleiman Airport International Plaza
Chairman 70 Orville Drive
President, Chief Executive Bohemia, New York 11716
Officer and Treasurer
TRANSFER AGENT
Cathy Pulver-Dugan Continental Stock Transfer &
Vice President and Secretary Trust Company
New York, New York
Helena R. Santos, CPA
Vice President, Controller INDEPENDENT AUDITORS
and Assistant Treasurer Nussbaum Yates & Wolpow, P.C.
Melville, New York
DIRECTORS - (PRINCIPAL
OCCUPATIONS) STOCK INFORMATION
Arthur M. Borden Over-the-Counter
(Counsel, Rosenman & Colin LLP) Symbol: SCND
OTC Bulletin Board
Joseph I. Kesselman
(Consultant) ANNUAL MEETING
10:00 a.m. Thursday
Lowell A. Kleiman January 6, 2000
Chairman Princeton Club
(President of the Company) 15 West 43rd Street
New York, New York
Roger B. Knowles
(President, Conductive Systems,
Inc.; a manufacturer of EMI and
RFI shielding materials)
James S. Segasture
(Private Investor)
PRESIDENTS' LETTER December 1, 1999
Dear Stockholder:
PLEASE FIND ENCLOSED HEREIN THE ANNUAL REPORT FOR THE FISCAL YEAR
ENDED JUNE 30, 1999 FOR SCIENTIFIC INDUSTRIES INC. (THE
"COMPANY"). THIS LETTER SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND THE RELATED "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"
INCLUDED IN THE COMPANY'S FORM 10-KSB WHICH IS ALSO ENCLOSED
HEREIN.
We are delighted to inform you that today the Company settled its
litigation in the United States District Court for the Eastern
District of New York with VWR Scientific Products ("VWR") and
Troemner, Inc. ("Troemner"). In the lawsuit, the Company had
contended that VWR and Troemner infringed the Company's United
States patent number 4,781,487 entitled "Quick Disconnect
Coupling" as well as the Company's trade dress in the housing
configuration of its Vortex-Genie 2 (registered trademark) mixer.
The settlement prohibits VWR and Troemner, among other things,
from the manufacture, sale or distribution of any vortex mixer
that has the same housing configuration as the Company's Vortex-
Genie 2 (registered trademark) mixer. Under the settlement, VWR
and Troemner received a license under the Company's patent with
certain limitations and may continue to market the VWR Brand
(registered trademark) Mini-Vortexer which is
currently manufactured by Troemner and distributed by VWR. VWR
has also committed to purchase certain quantities of the
Company's products and will recommence the distribution of the
Company's products including the Vortex-Genie 2 (registered trademark)
mixer and the newly released Roto-Shake Genie (trademark). The
Company will also receive certain promotional considerations
from VWR as well as a cash payment from Troemner.
The settlement with VWR and Troemner reinforces the strength of
the Company's intellectual property rights. This settlement
agreement will enable the Company to continue to move forward to
provide quality products to the Company's customers. As part of
this effort, the Company is pleased that VWR will again be a
distributor of the Company's products.
As you know, the fiscal year ended June 30, 1999 began with
record sales. However, the decision of VWR to purchase one of
its private labeled vortex mixers from Troemner instead of from
the Company, combined with price pressures from Troemner, made
this fiscal year an extremely difficult one for the Company.
Net sales for fiscal year ended June 30, 1999 were $3,171,300,
down 7% from $3,414,700 in the prior fiscal year. The lower
sales figure is a result of the loss of sales to VWR, formerly
our second largest customer in terms of sales. Fiscal year ended
June 30, 1999 reflected a net loss of $347,600 ($.42 loss per
basic share), after incurring litigation costs of $519,100,
compared to net income of $180,500 ($.22 income per basic share)
for the prior fiscal year.
One bright spot is that the Company's sales to customers other
than VWR increased approximately 10% in the fiscal year ended
June 30, 1999.
The litigation against VWR and Troemner proved to be a
significant setback to the Company's implementation of its growth
plans and had a serious impact on the Company's cash flow and
profits. Nonetheless, we continued with research and development
activities for the continued development of new products. At
this point, we are hopeful that we will be able to recuperate
from the financial impact the Company has suffered as a result of
the litigation and resume the Company's pattern of growth.
I thank all of our employees and stockholders for their
cooperation and support. I look forward to working with all of
you.
Sincerely,
/s/Lowell A. Kleiman
----------------------
LOWELL A. KLEIMAN
CHAIRMAN AND PRESIDENT
SCIENTIFIC INDUSTRIES, INC.
AIRPORT INTERNATIONAL PLAZA
70 ORVILLE DRIVE
BOHEMIA, NEW YORK 11716
December 1, 1999
Dear Stockholder:
You are cordially invited to attend the 1999 Annual Meeting
of Stockholders of Scientific Industries, Inc. which will be held
at the Princeton Club, 15 West 43rd Street, New York, New York,
on Thursday, January 6, 2000, at 10:00 a.m. (New York time).
The matters to be acted upon at the meeting are the election
of directors, the ratification of the appointment of Nussbaum,
Yates & Wolpow, P.C. as our independent accountants for fiscal
year 2000, and such other business as may properly come before
the meeting and any adjournments or postponements thereof, all as
described in the attached Notice of Annual Meeting of
Stockholders and Proxy Statement.
It is important that your shares be represented at the
meeting and voted in accordance with your wishes. Whether or not
you plan to attend the meeting, we urge you to complete, date,
sign and return your proxy card in the enclosed business reply
envelope, which requires no postage if mailed in the United
States of America, as promptly as possible so that your shares
will be voted at the Annual Meeting. This will not limit your
right to vote in person or to attend the meeting.
Sincerely,
/s/Lowell A. Kleiman
-----------------------
Lowell A. Kleiman
President and
Chief Executive Officer
SCIENTIFIC INDUSTRIES, INC.
AIRPORT INTERNATIONAL PLAZA
70 ORVILLE DRIVE
BOHEMIA, NEW YORK 11716
(516) 567-4700
NOTICE OF 1999 ANNUAL MEETING OF
STOCKHOLDERS
To the stockholders of Scientific Industries, Inc.:
Notice is hereby given that the 1999 Annual Meeting of
Stockholders (the "Annual Meeting") of Scientific Industries,
Inc., a Delaware Corporation (the "Company") will be held at the
Princeton Club, 15 West 43rd Street, New York, New York, on
Thursday, January 6, 2000, at 10:00 am (New York time), for the
following purposes:
1. To elect two Class C Directors to the
Company's Board of Directors to serve
until the Company's next succeeding annual meeting
of stockholders and until the election and
qualification of their respective successors.
2. To ratify the appointment of Nussbaum,
Yates & Wolpow, P.C. as the Company's
independent accountants for the fiscal year
ending June 30, 2000.
3. To transact such other business as may
properly come before the Annual Meeting and
any adjournments or postponements thereof.
The accompanying Proxy Statement describes the matters to be
considered at the Annual Meeting. The Board of Directors has fixed
the close of business on November 15, 1999 as the record date for
determination of stockholders entitled to notice of, and to vote
at, the Annual Meeting and at any adjournments or postponements
thereof. A complete list of the stockholders entitled to vote at
the Annual Meeting will be available for inspection by any
stockholder of the Company at the Annual Meeting; in addition, the
list will be open for examination by any stockholder of the
Company, for any purpose germane to the Annual Meeting, during
ordinary business hours, for a period of ten days prior to the
Annual Meeting at the offices of the Company at 70 Orville Drive,
Bohemia, New York.
TO ENSURE THAT YOUR VOTE WILL BE COUNTED, PLEASE PROMPTLY
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE
ENCLOSED BUSINESS REPLY ENVELOPE, WHICH REQUIRES NO POSTAGE IF
MAILED IN THE UNITED STATES OF AMERICA, WHETHER OR NOT YOUR PLAN TO
ATTEND THE ANNUAL MEETING. YOU MAY REVOKE YOUR PROXY IN THE MANNER
DESCRIBED IN THE PROXY STATEMENT AT ANY TIME BEFORE THE PROXY HAS
BEEN VOTED AT THE ANNUAL MEETING.
By Order of the Board of Directors,
/s/Lowell A. Kleiman
--------------------
Bohemia, New York Lowell A. Kleiman
December 1, 1999 President and Chief Executive Officer
SCIENTIFIC INDUSTRIES, INC.
AIRPORT INTERNATIONAL PLAZA
70 ORVILLE DRIVE
BOHEMIA, NY 11716
(516) 567-4700
PROXY STATEMENT
FOR THE
1999 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JANUARY 6, 2000
This proxy statement is being furnished by and on behalf of the Board
of Directors of Scientific Industries, Inc., a Delaware Corporation (the
"Company") in connection with the solicitation of proxies to be voted at
the 1999 Annual Meeting of Stockholders (the "Annual Meeting") to be held
at the Princeton Club, 15 West 43rd Street, New York, New York, on
Thursday, January 6, 2000, at 10:00 a.m. (New York time), and at any
adjournments or postponements thereof.
At the Annual Meeting, stockholders of the Company will be asked to
(1) elect the following nominees as directors of the Company to serve until
the Company's next succeeding annual meeting of stockholders and until the
election and qualification of their respective successors - Lowell A.
Kleiman and Roger B. Knowles, (2) ratify the appointment of Nussbaum, Yates
& Wolpow, P. C. as the Company's independent accountants for the fiscal
year ending June 30, 2000, and (3) transact such other business as may
properly come before the Annual Meeting and any adjournments or
postponements thereof.
The principal offices of the Company are located at 70 Orville Drive,
Bohemia, New York 11716 and the Company's telephone number is (516)567-
4700.
RECORD DATE, VOTING RIGHTS
Only holders of record of the Company's Common Stock, par value $0.05
per share (the "Common Stock") as of the close of business on November 15,
1999 (the "Record Date") are entitled to notice of and to vote at the
Annual Meeting and any adjournments or postponements thereof. On the
Record Date, there were issued and outstanding 835,540 shares of Common
Stock, excluding treasury shares. Each share of Common Stock is entitled
to one vote.
With respect to all matters expected to be presented for a vote of
stockholders, the presence at the Annual Meeting, in person or by properly
executed proxy, of the holders of a majority of the Company's Common Stock
entitled to vote at the Annual Meeting is necessary to constitute a quorum.
Abstentions and broker "non-votes" are included in the determination of the
number of shares of Common Stock present at the Annual Meeting for quorum
purposes but are not counted in the tabulations of the votes cast for
election of directors. With respect to the proposal relating to the
ratification of the appointment of independent accountants, abstentions
will have the same effect as a vote against the proposal and broker non-
votes will be disregarded and will have no effect on the outcome of the
vote on the proposal. A broker "non-vote" occurs when a nominee holding
shares of Common Stock for a beneficial owner does not vote on a particular
proposal because the nominee does not have discretionary voting power with
respect to that item and has not received instructions from the beneficial
owner.
VOTING OF PROXIES, REVOCATION, SOLICITATION
All stockholders who deliver properly executed and dated proxies to
the Company prior to the date of the Annual Meeting will be deemed present
at the Annual Meeting regardless of whether such proxies direct the proxy
holders to vote for or against, or to abstain from voting. The proxies,
when properly executed and returned to the Company, unless otherwise
indicated, will be voted in accordance with the instructions given therein
by the person executing the proxy. In the absence of instructions,
properly executed proxies will be voted FOR (1) the election as a director
of the Company each of Lowell A. Kleiman and Roger B. Knowles, and (2) the
ratification of the appointment of Nussbaum, Yates & Wolpow, P.C. as the
Company's independent accountants for the fiscal year ending June 30, 2000.
Any stockholder who executes and delivers a proxy may revoke it at any
time before it is voted by delivering a written notice of such revocation
to the Secretary of the Company at the address of the Company set forth on
the previous page, by submitting a properly executed proxy bearing a later
date or by appearing at the Annual Meeting and requesting the return of the
proxy or by voting in person. In accordance with applicable rules, boxes
and a designated space are provided on the proxy card for stockholders to
mark if they wish either to withhold authority to vote for some or all of
the nominees for director or to abstain from the vote to ratify the
appointment of Nussbaum, Yates & Wolpow, P.C. as the Company's independent
accountants for the fiscal year ending June 30, 2000. A stockholder's
attendance at the Annual Meeting will not by itself revoke a proxy given by
the stockholder. Stockholders vote at the Annual Meeting by casting
ballots (in person or by proxy) which are tabulated by a person who is
appointed by the Board of Directors before the Annual Meeting to serve as
inspector of election at the Annual Meeting and who has executed and
verified an oath of office.
The cost of soliciting proxies will be borne by the Company. In
addition to the use of the mails, proxies may be solicited by officers,
directors and regular employees of the Company personally or by telephone
or telegram. No additional compensation will be paid for such solicitation.
The Company will also request securities brokers, custodians, nominees and
fiduciaries to forward solicitation material to the beneficial owners of
shares of Common Stock held of record and will reimburse them for their
reasonable out-of-pocket expenses in forwarding soliciting materials.
It is anticipated that this proxy statement, the enclosed proxy card
and the Annual Report to stockholders will be mailed to the Company's
stockholders on or about December 10, 1999.
ELECTION OF DIRECTORS
The Company's certificate of incorporation provides for a classified
Board of Directors, consisting of three classes, each class serving three
year terms on a staggered basis. The Board of Directors currently is
comprised of five members, of which two are Class A Directors, one is a
Class B Director and two are Class C Directors. At the Annual Meeting, two
Class C Directors are to be elected to serve until the next succeeding
annual meeting of stockholders and until their successors are duly elected
and qualified. It is intended that the shares of Common Stock represented
by proxies solicited by the Board of Directors will be voted for the
nominees hereinafter named, unless authority is specifically withheld. If
for any reason said nominees shall become unavailable for election, which
is not now anticipated, the proxies will be voted for substitute nominees
designated by the Board of Directors.
Directors of the Company are elected by the affirmative vote of the
holders of a plurality of the shares of Common Stock present in person or
represented by proxy at the Annual Meeting and entitled to vote. A
plurality means that the nominees with the largest number of votes are
elected as directors, up to a maximum number of directors to be chosen at
the meeting. In tabulating the vote, abstentions and broker non-votes will
be disregarded and will have no effect on the outcome of the vote. THE
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE
ELECTION OF THE BOARD OF DIRECTORS OF EACH OF THE TWO NOMINEES IDENTIFIED
BELOW.
DIRECTORS WHOSE TERMS DO NOT EXPIRE AT THIS ANNUAL MEETING:
Arthur M. Borden, Esq. (age 79) has been counsel to Rosenman & Colin
LLP since 1997, and for the prior five year period he was a partner. Mr.
Borden was first elected to the Board of Directors of the Company in 1974
and his current term as director expires in 2000.
James S. Segasture (age 63) has been a private investor since February
1990. Mr. Segasture was first elected to the Board of Directors of the
Company in 1991 and his current term as director expires in 2001.
Joseph I. Kesselman (age 74) is a consultant to various corporations,
and a director of Nuclear and Environmental Protection Inc., Perrot Duval
Holding S.A. and Infranor Inc. (a developer and manufacturer of servo
systems). For the prior five year period, he was both Chairman and Chief
Executive Officer of Greentree Software, Inc. (a developer and provider of
proprietary inventory control software) and later served as a consultant to
Greentree Software Inc. Mr. Kesselman was first elected to the Board of
Directors of the Company in 1961 and his current term as director expires
in 2001.
NOMINEES FOR ELECTION AS DIRECTORS:
Lowell A. Kleiman (age 58) has been employed by the Company for over
thirty years, and has been President since September 1974. Mr. Kleiman was
first elected to the Board of Directors of the Company in 1970 and is
currently a nominee for election as set forth herein.
Roger B. Knowles (age 74) is President of various corporations,
including Conductive Systems, Inc. (a manufacturer of EMI and RFI shielding
material), and G.H. Realty Company (real estate), and a director of Ionic,
Inc. (an investment company). Mr. Knowles was first elected to the Board
of Directors of the Company in 1965 and is currently a nominee for election
as set forth herein.
MEETINGS OF THE BOARD OF DIRECTORS
The Company currently has no option, audit, compensation, nominating
or similar committees.
During the fiscal year ended June 30, 1999, the Board of Directors
held four meetings with all directors present at two meetings, and all but
one director present at the other two meetings.
DIRECTORS' COMPENSATION
The Company currently pays each non-employee director a quarterly
retainer of $750 and a fee of $500 for each meeting attended, plus
reimbursement for out-of-pocket expenses incurred in connection with
attendance of board meetings in the amount of $50 or the director's
itemized expenses, whichever is greater.
During the fiscal year ended June 30, 1999, the Company paid fees in
the amount of $19,000 to non-employee directors.
On February 11, 1992, before the adoption of the Company's 1992 Stock
Option Plan, the Company issued to each of its four non-employee directors,
Messrs. Arthur M. Borden, Joseph I. Kesselman, Roger B. Knowles and James
S. Segasture, ten year non-qualified options to purchase 12,000 shares of
Common Stock, 4,000 shares of Common Stock of which were immediately
exercisable, 4,000 shares of Common Stock of which were fully exercisable
on and after the first anniversary of the date of such grant and 4,000
shares of Common Stock which were fully exercisable after the second
anniversary of the date of such grant; all such options were exercisable at
$.35. In the event of the death of a participant, while in the employ or
service of the Company, the options shall become exercisable in full until
the earlier of expiration of the option or one year from date of death. In
March of 1993, Messrs. Borden, Kesselman and Segasture each exercised 8,000
shares of Common Stock pursuant to such options.
The Company's 1992 Stock Option Plan calls for options to purchase
3,000 shares of Common Stock at the then fair market value to be issued
each March for four years to each non-employee director who shall be on the
Board of Directors on the first business day of each March, beginning in
March 1993. In addition, in December 1997, the Board of Directors approved
the issuance of an annual grant of options to purchase 4,000 shares of
Common Stock for each non-employee directors beginning in December 1997 at
the fair market value on the date of grant. The fair market value per
share of Common Stock on the date of grant was $1.875 in fiscal years 1999,
$2.00 in 1998, $1.2813 in 1996, $1.3125 in 1995, $.9375 in 1994, and $.50
in 1993. All options were immediately exercisable.
INDEPENDENT PUBLIC ACCOUNTANTS
Nussbaum Yates & Wolpow, P.C. have been appointed by the Board of
Directors as the Company's independent accountants for the fiscal year
ended June 30, 2000. The Board of Directors has directed that the
appointment of the independent accountants be submitted for ratification by
the stockholders at the Annual Meeting. Nussbaum, Yates & Wolpow, P.C. has
audited the consolidated financial statement of the Company since 1991. A
representative of that firm is expected to be present at the Annual
Meeting, will have an opportunity to make a statement to the stockholders
if he desires to do so and will be available to respond to appropriate
questions.
The ratification of the appointment of Nussbaum, Yates & Wolpow, P.C.
as the Company's independent accountants for the fiscal year ending June
30, 2000 will require the affirmative vote of the holders of a majority in
voting power of the outstanding shares of Common Stock present in person or
represented by proxy at the Annual Meeting and entitled to vote. In
determining whether the proposal has received the requisite number of
affirmative votes, abstentions will be counted and will have the same
effect as a vote against the proposal. Broker non-votes will be
disregarded and have no effect on the outcome of the vote.
Stockholder ratification of the appointment of Nussbaum, Yates &
Wolpow, P. C. as the Company's independent accountants is not required by
the Company's certificate of incorporation or by-laws or otherwise. The
Board of Directors is submitting the appointment of Nussbaum, Yates &
Wolpow, P.C. to stockholders for ratification as a matter of what it
considers good corporate practice. If the stockholders fail to ratify the
appointment, the Board of Directors will reconsider whether or not to
retain that firm. Even if the appointment is ratified, the Board of
Directors in its discretion may direct the appointment of a different
independent accounting firm at any time during the year if the Board of
Directors determines that such a change would be in the interests of the
Company and its stockholders. THE BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE RATIFICATION OF THE
APPOINTMENT OF NUSSBAUM, YATES & WOLPOW, P.C. AS THE COMPANY'S INDEPENDENT
ACCOUNTANTS FOR THE FISCAL YEAR ENDING JUNE 30, 2000.
EXECUTIVE OFFICERS
The executive officers of the Company are elected annually by the
Board of Directors and hold office until their respective successors are
elected and qualified. There is no arrangement or understanding between
any executive officer and any other person regarding selection as an
officer. There are no family relationships between any director and
executive officer of the Company.
The executive officers of the Company are as follows:
Lowell A. Kleiman, 58, President; Cathy Pulver-Dugan, 49, Vice
President in charge of the manufacturing, inventory control, and
administration functions; and Helena R. Santos, CPA, 35, Vice President,
Controller in charge of all accounting functions. Biographical information
of executive officers of the Company who are not directors is set forth
below.
Cathy Pulver-Dugan (age 49) has been employed by the Company for over
twenty years and has served as Vice President of the Company since 1984.
Helena R. Santos, CPA (age 35) has been employed by the Company since
1994, and has served as Vice President, Controller since 1997. Prior to
joining the Company, Ms. Santos was an internal auditor with a major
defense contractor, and prior to that was employed in public accounting.
EXECUTIVE COMPENSATION
The following table summarizes all compensation paid by the Company to
Lowell A. Kleiman with respect to each of the three fiscal years ended June
30, 1999 for services in all capacities as the Company's principal
executive officer. No other executive officer earned in excess of $100,000
in any of such fiscal periods.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM
COMPENSATION
All
Other
Name and Principal Year Salary Bonuses Compen-
Position $ $ sation
- ------------------ ---- -------- ------- ---------
Lowell A. Kleiman 1999 $160,000 $ - $3,200(1)
President 1998 $160,000 $ - $3,200(1)
1997 $120,700 $ 9,750 $3,025(1)
(1) Represents the Company's matching contribution to Mr. Kleiman's account
under the Company's 401(k) Plan.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
Shares of Number of Securities Value of
Common Underlying Unexercised
Stock Unexercised in-the-Money
Acquired Value Options Options
on Real- At FY-End (#) at FY-End ($)
Exercise ized Exercisable/ Exercisable/Un-
Name ($)(1) Unexercisable exercisable(2)
- ----------------- -------- ------ ------------- ---------------
Lowell A. Kleiman 10,000 $1,875 60,000/10,000 $46,500/0(3)
(1) Calculated by multiplying the difference between the market price of
the shares of Common Stock acquired on exercise and the exercise price of
the options on the date of exercise.
(2) Calculated by multiplying the number of shares of Common Stock subject
to options by the difference between the market price and exercise price,
per share, on June 30, 1999.
(3) On June 30, 1999 the market price was lower than the exercise price.
EMPLOYMENT AGREEMENT
On August 14, 1997, the Company amended and extended an employment
contract with the Company's President, Lowell A. Kleiman, through June
2000. The contract provides for an annual salary of $160,000 beginning in
fiscal 1998 and a bonus for fiscal 1998, if certain gross profit levels
were met. The contract also grants Mr. Kleiman a five-year stock option
for 10,000 shares of Common Stock exercisable under certain circumstances.
The contract contains provisions regarding his termination of employment,
within three years following any change of control (as defined therein),
under which the Company is obligated to pay Mr. Kleiman additional
compensation consisting of a base amount representing his annual salary and
other benefits for the period between the date of his termination of
employment and three years from any change of control subject to the
limitation of it not exceeding 2.99 times the base amount. The other
benefits include continued use of a Company car, four weeks paid vacation
each year and, in the event that Mr. Kleiman should die within the
employment period, the payment to his widow, if living, or, if not, to his
legal representatives, of $5,000 as soon as practicable and an amount equal
to Mr. Kleiman's current annual salary payable in monthly installments. In
such event, if the Company receives $500,000 of insurance proceeds, less
any expenses incurred therein, $50,000 of those benefits will be paid to
his beneficiary as above. The Company is the beneficiary for the balance
of the insurance proceeds.
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of the Record Date, the number of
shares of Common Stock beneficially owned by (i) the persons known to the
Company to be the owners of more than 5% of the Common Stock, (ii) each
director of the Company, (iii) each named executive officer of the Company,
identified in the Summary Compensation table included elsewhere herein, and
(iv) all directors and executive officers as a group.
Sole voting and Dispositive Power
-----------------------------------
Number Percentage Of Class
----------- --------------------
FIVE PERCENT STOCKHOLDERS,
DIRECTORS AND EXECUTIVE OFFICERS:
Class C Directors:
Lowell A. Kleiman 149,581 (3) 16.5%
Roger B. Knowles 79,705 (4)(5) 9.2%
Class A Directors:
Arthur M. Borden 50,540 (1) 5.9%
James S. Segasture 164,757 (1) 19.2%
(and Kristine K. Segasture)
Class B Director:
Joseph I. Kesselman 51,520 (2) 6.0%
All current directors and 546,418 (6)(7) 51.6%
executive officers as a group
(seven persons)
(1) Includes 24,000 shares of Common Stock issuable upon exercise of
currently exercisable options.
(2) Includes 24,000 shares of Common Stock issuable upon exercise of
currently exercisable options. Includes 735 shares of Common Stock
owned jointly with Mrs. Kesselman.
(3) Includes 70,000 shares of Common Stock issuable upon exercise of
currently exercisable options.
(4) Includes 44,158 shares of Common Stock owned by Mrs. Knowles; includes
1,337 shares of Common Stock owned by a trust of which Mr. Knowles is
a trustee, beneficial ownership of which is disclaimed by Mr. Knowles.
(5) Includes 32,000 shares of Common Stock issuable upon exercise of
currently exercisable options.
(6) Includes 224,000 shares of Common Stock issuable upon exercise of
currently exercisable options.
(7) Includes 50,000 shares of Common Stock issuable upon exercise of
currently exercisable options granted to two executive officers who
are not directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers, directors, and persons who own more than
10% of a registered class of the Company's equity securities ("10%
Stockholders"), to file reports of ownership and changes in ownership on
Forms 3, 4,and 5 with the Securities and Exchange Commission. Officers,
directors and 10% Stockholders are required to furnish the Company with all
Forms 3, 4 and 5 they file.
Based solely on the Company's review of the copies of such forms it
has received, the Company believes that, for the period July 1, 1998 to
June 30, 1999, all filing requirements of Section 16(a) of the Securities
Act of 1934, as amended, applicable to its officers, directors and 10%
stockholders were complied with, other than the filing of a Form 4 by Mr.
Kleiman. The filing was effected in August 1999 through a Form 5.
OTHER MATTERS
The Board of Directors is not aware of any matters other than those
set forth in this proxy statement that will be presented for action at the
Annual Meeting; however, if any other matters properly come before the
Annual Meeting, the persons named as proxies intend to vote the shares of
Common Stock they represent in accordance with their judgement on such
matters.
ADDITIONAL INFORMATION
THE COMPANY'S ANNUAL REPORT TO STOCKHOLDERS FOR THE FISCAL YEAR ENDED
JUNE 30, 1999, ON FORM 10-KSB, WHICH IS NOT PART OF THIS PROXY MATERIAL, IS
BEING MAILED TO STOCKHOLDERS WITH THIS PROXY SOLICITATION. ON WRITTEN
REQUEST, THE COMPANY WILL PROVIDE WITHOUT CHARGE TO EACH RECORD OR
BENEFICIAL HOLDER OF THE COMPANY'S COMMON STOCK AS OF NOVEMBER 15, 1999,
ANOTHER COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB AS FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION FOR THE FISCAL YEAR ENDED JUNE 30,
1999. REQUESTS SHOULD BE ADDRESSED TO MS. CATHY PULVER-DUGAN, SECRETARY,
SCIENTIFIC INDUSTRIES, INC., 70 ORVILLE DRIVE, BOHEMIA, NEW YORK 11716.
STOCKHOLDER PROPOSALS
Proposals of stockholders of the Company intended to be presented at
the Company's 2000 annual meeting of stockholders must be received by the
Secretary of the Company for inclusion in the appropriate proxy materials
no later than June 12, 2000.
SCIENTIFIC INDUSTRIES, INC.
December 1, 1999
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
(Mark One)
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended JUNE 30, 1999
-------------
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.)
AIRPORT INTERNATIONAL PLAZA,
70 ORVILLE DRIVE, 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 [ ]
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. $3,171,300
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 August 31, 1999 is $735,275.
The number of shares outstanding of the issuer's common stock, par value
$.05 per share ("Common Stock") as of August 31, 1999 is 835,540 shares.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [ X ]
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
General. Scientific Industries, Inc., (the "Company"), a Delaware
corporation, formed in 1954 is engaged in manufacturing and marketing
laboratory equipment consisting primarily of vortex mixers and related
accessories (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).
Recently, the Company began marketing a multi-purpose rotator/rocker
referred to as the Roto-Shake Genie (trademark).
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. The
Company seeks to increase its customer base through the use of various
marketing media, including trade shows, trade publications, brochures and
catalogs.
Raw Materials. The Company currently manufactures its products
from readily available components supplied by various independent
contractors.
Patents, Trademarks, Licenses and Franchises. The Company has a
U.S. Patent on a utilitarian feature of its Vortex-Genie 2 (registered
trademark) mixer which, in the Company's opinion, provides the Company with
a certain degree of commercial advantage when compared to competitive mixers.
This patent expires on November 2, 2005. The Company also has a patent for
the TurboMix (trademark), which is an attachment to the existing Vortex-Genie 2
(registered trademark) mixer. The TurboMix (trademark) patent
expires in September, 2015. In addition, subsequent to year-end, the Company
acquired a new patent on the Roto-Shake Genie (trademark) which expires in July
2016. Refer to Items 3 and 6 for additional information on the Company's
patents.
The Company has acquired the rights in the laboratory equipment
market to U.S. Patents issued in July 1995, September 1996, and March 1998 on
thermo-electrically cooled centrifuges.
The Company has various proprietary marks including Vortex-Genie
2 (registered trademark), TurboMix (trademark) and Roto-Shake Genie
(trademark) which it considers important to the success of its products.
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 ("VWR"), both of
which are U.S. distributors for the Company, accounted for approximately 36%
and 12% respectively, of the Company's net sales for the fiscal year ended
June 30, 1999. The Company sells primarily vortex mixers and related
accessories, to Fisher and VWR. The loss of any of these customers would have
a material adverse effect upon the business of the Company. At the end of
calendar year 1998, VWR informed the Company that it would no longer be
purchasing the Vortex-Genie 2(registered trademark) mixer from the Company as
their private label vortex mixer effective January 1, 1999. In January 1999,
the Company learned that another company, Troemner, Inc. ("Troemner"), was
supplying VWR with a vortex mixer which the Company believes violates the
trade dress rights of the Company's Vortex-Genie 2 (registered trademark) mixer
and one of the Company's utility patents. The Vortex-Genie 2 (registered
trademark) mixer is the Company's primary product, accounting for
approximately 97% of the Company's total net sales for fiscal 1999. On
January 26, 1999, the Company filed a complaint against VWR and Troemner in
the United States District Court for the Eastern District of New York (the
"District Court") alleging, among other things, that Troemner's vortex mixer
infringes the Company's intellectual property rights. Pending resolution of
this litigation, the Company has suspended all sales of the Company's products
to VWR. See Item 3 for additional information regarding this litigation.
Backlog. The Company's backlog is not significant because the
Company's current line of products is comprised of standard catalog items.
The typical lead time is approximately two weeks, and backlog is kept to no
more than three weeks.
Competition. In the general area of laboratory equipment, the
Company's major competitors are Barnstead/Thermolyne Corporation, a subsidiary
of Sybron International, IKA, a German corporation, and Troemner as discussed
above. The Company dominates the vortex mixers market in the U.S. and is
widely recognized in the international market. 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 $195,400 during the fiscal year ended June 30, 1999
compared to $174,700 during the fiscal year ended June 30, 1998, in connection
with the development of new products. Refer to Item 6 for detailed
information regarding the Company's research and development activities.
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. At the end of fiscal year ending June 30, 1999, the
number of total persons employed by the Company was 23, of which 22 were
employed by the Company on a full-time basis. On September 1, 1999, the
Company employed 23 full-time persons and one part-time person. None of the
Company's employees are represented by any unions.
ITEM 2. DESCRIPTION OF PROPERTY.
As of September 1, 1999, 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(*)
- ----------------- ---------- --------- ----------- -----------
Executive 25,000 December 31, $199,900
Airport International Offices/ 2004
Plaza Manufacturing
70 Orville Drive
Bohemia, NY 11716
(*) Reflects future minimum rental payments for fiscal year 2000.
See Notes to the Financial Statements for information about the Company's
lease obligations.
ITEM 3. LEGAL PROCEEDINGS.
In January 1999, Troemner began supplying VWR, the Company's
second largest customer in terms of net sales, with a vortex mixer which the
Company believes violates the trade dress rights of the Company's Vortex-Genie 2
(registered trademark) mixer and one of the Company's utility patents. The
Vortex-Genie 2 (registered trademark) mixer and related accessories which
the Company sold to VWR as their private label mixer for many years is the
Company's primary product accounting for approximately 97% of the Company's
total net sales for fiscal 1999. The Company also learned that Troemner
began soliciting business from the Company's other customers for Troemner's
vortex mixer at a markedly lower price than the Vortex-Genie 2 (registered
trademark) mixer price. As a result, on January 26, 1999, the Company filed a
complaint against VWR and Troemner in District Court alleging, among other
things, that VWR and Troemner's manufacture, sale, promotion, and distribution
of a vortex mixer called the "VWRbrand Mini-Vortexer" infringes the Company's
trade dress rights in the housing configuration of the Vortex-Genie 2
(registered trademark) mixer, infringes one of the Company's patents, and
constitutes unfair competition. The Company seeks an award for monetary
damages trebled, recovery of its attorneys' fees and expenses, as
well as permanent injunctive relief.
On March 8, 1999, the defendants denied the material allegations
of the complaint and asserted certain affirmative defenses and counterclaims
against the Company for unfair competition and a declaratory judgment of non-
infringement and invalidity of the Company's patent. On March 17, 1999, the
Company denied the material allegations of the counterclaim and made a motion
that VWR and Troemner be preliminarily enjoined from making, selling,
promoting and distributing the VWRbrand Mini-Vortexer. On May 11, 1999, the
District Court granted the Company's motion for a preliminary injunction on
the grounds that the Company is likely to succeed on its trade dress
infringement claim. In connection with the granting of the preliminary
injunction, the District Court required the Company to post an injunction bond
in the amount of $500,000 which it did on May 7, 1999.
Subsequent to the granting of the preliminary injunction, Troemner began
supplying VWR with a modified version of their VWRbrand Mini-Vortexer. The
District Court's preliminary injunction order is presently on appeal to
the United States Court of Appeals for the Federal Circuit.
Counsel for the Company is unable at this time to form a judgment
on this matter and, as a result, the Company is unable to determine if the
litigation will have a material adverse effect on the Company's financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of the Company's fiscal year ended June 30, 1999.
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, 1999 and 1998, 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
09/30/97 1 1/4 1 7/16
12/31/97 1 7/16 2 1/8
03/31/98 1 9/16 1 7/8
06/30/98 1 5/8 1 7/8
09/30/98 1 3/4 1 15/16
12/31/98 1 3/4 1 3/4
03/31/99 21/32 1 3/4
06/30/99 3/8 23/32
(b) There were, as of August 31, 1999, 908 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 Operation. Net sales for fiscal year ended June 30,
1999 ("fiscal 1999") decreased $243,400 (7.1%) compared to last year primarily
as a result of the loss of sales to VWR. Sales to VWR for fiscal 1999
decreased $506,000 compared to the prior year, primarily as a result of VWR's
decision to purchase vortex mixers from Troemner instead of the Company.
However, sales to all other domestic and foreign customers increased
approximately 10% over the prior year. Our previously announced new products,
the Roto-Shake Genie(trademark) rotator/rocker and the TurboMix (trademark)
attachment for our vortex mixer accounted for approximately 4% of our net sales
for fiscal 1999.
The gross profit percentage of 35.3% for fiscal 1999 decreased from 38.6%
for the fiscal year ended June 30, 1998 ("fiscal 1998"), mainly due to the loss
of sales to VWR.
General and administrative expenses decreased $117,500 (14.1%) for fiscal
1999 compared to last year due to lower personnel related costs, fewer
expenses related to the pursuit of external business opportunities, and lower
general legal expenses.
Selling expenses decreased $17,900 (12.9%) compared to fiscal 1998
primarily as a result of lower promotional expenses for the vortex mixer.
Research and development expenses increased $20,700 (11.8%) for
fiscal 1999 compared to fiscal 1998 due to the Company's continued commitment
to the development of new products. The Company intends to continue investing
in research and development activities at approximately the same rate in
fiscal 2000.
The litigation costs of $519,100 in fiscal 1999 incurred in
connection with the litigation with VWR and Troemner combined with the lost
profits associated with the lost sales to VWR as well as lower selling
prices in the later part of the fiscal year resulting from price pressures
brought on by Troemner, resulted in a loss before taxes of $390,600 for
fiscal 1999 compared to income before taxes of $210,200 for fiscal 1998.
The Company is unable to predict the future financial impact the
litigation will have due to the uncertainty of its outcome. See Item 3 for
additional information regarding the litigation.
Liquidity and Capital Resources. The Company's working capital
for fiscal 1999, decreased $348,300 to $1,252,400 as compared to $1,600,700
for fiscal 1998, primarily due to the litigation costs. See Item 3 for
additional information regarding the litigation. The litigation costs have
had a material impact on the Company's liquid resources. However, management
believes that it will be able to meet its cash flow requirements during the
next fiscal year from its available financial resources which include cash
generated from operations and its cash and cash equivalents and investment
securities. In addition, the Company has available a secured bank line of
credit of $200,000 with North Fork Bank. The credit line expires on November
1, 1999 and carries interest at prime plus 1%. The Company could utilize the
proceeds of these amounts for working capital needs. The Company has not
utilized this credit line.
Capital Expenditures. During fiscal 1999, the Company did not
incur any material capital expenditures. The Company does not expect to incur
in the normal course of business any material capital expenditures during
fiscal year 2000. It is anticipated, as in past fiscal years, that the funds
for such expenditures, if any, will be funded from the Company's operations or
available working capital.
Inflation. Due to the demand for medical cost containment,
management believes that inflation will continue to have a material effect on
the Company's existing products. 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.
Readiness for Year 2000. The Year 2000 presents potential
concerns for business and consumer computing. The consequences of this issue
may include systems failures and business process interruption. It may also
include additional business and competitive differentiation.
The Company's accounting information is processed using purchased
computer software programs and systems which are susceptible to the Year 2000
issue. Currently the Company's critical software programs and hardware are
Year 2000 compliant. The cost to address such issues is not material to the
Company. Nevertheless, the Company is in the process of formulating
contingency plans for certain internal systems in the event management
determines that such contingency plans may become necessary.
All organizations dealing with the Year 2000 issue must address
the effect this issue will have on their third-party relationships. The
Company has also undertaken steps to identify whether its vendors have
sufficiently identified and are taking steps to address the Year 2000 issue.
Although the Company's vendors indicated that they will be compliant, the
Company believes it will be prudent to have sufficient raw materials on hand
to avoid any business interruptions in 2000.
The Company's management believes the impact of the Year 2000
issue will not cause any material disruptions in the Company's operations.
However, the impact of such potential disruptions is difficult to discern due
to the uncertainty of third parties' ability to function in Year 2000, and
nonetheless remains a risk to be considered in evaluating the financial
prospects of the Company.
ITEM 7. FINANCIAL STATEMENTS.
The Financial Statements required by this item are attached hereto
on pages F1-F18.
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.
Directors
---------
The name, principal occupation for the last five years, selected
biographical information and period of service as a director of the Company
of each director are set forth below.
Arthur M. Borden, Esq. (age 79) has been counsel to Rosenman & Colin
LLP since 1997, and for the prior five year period he was a partner.
Mr. Borden was first elected to the Board of Directors of the Company
in 1974 and his current term as director expires in 2000.
James S. Segasture (age 63) has been a private investor since February
1990. Mr. Segasture was first elected to the Board of Directors of the
Company in 1991 and his current term as director expires in 2001.
Joseph I. Kesselman (age 74) is a consultant to various corporations,
and a director of Nuclear and Environmental Protection Inc., Perrot Duval
Holding S.A.and Infranor Inc. (a developer and manufacturer of servo systems).
For the prior five year period, he was both Chairman and Chief Executive
Officer of Greentree Software, Inc. (a developer and provider of proprietary
inventory control software) and later served as a consultant to Greentree
Software Inc. Mr. Kesselman was first elected to the Board of 61 and his
current term as director expires in 2001.
Lowell A. Kleiman (age 58) has been employed by the Company for over
thirty years, and has been President since September 1974. Mr. Kleiman was
first elected to the Board of Directors of the Company in 1970 and is currently
a nominee for election to the Board of Directors.
Roger B. Knowles (age 74) is President of various corporations,
including Conductive Systems, Inc. (a manufacturer of EMI and RFI shielding
material), and G.H. Realty Company (real estate), and a director of Ionic, Inc.
(an investment company). Mr. Knowles was first elected to the Board of
Directors of the Company in 1965 and is currently a nominee for election
to the Board of Directors.
Executive Officers
- ------------------
Lowell A. Kleiman, 58, President; Cathy Pulver-Dugan, 49, Vice President
in charge of the manufacturing, inventory control, and administration
functions; and Helena R. Santos, CPA, 35, Vice President, Controller in charge
of all accounting functions. Biographical information of executive officers of
the Company who are not directors is set forth below.
Cathy Pulver-Dugan (age 49) has been employed by the Company for over
twenty years and has served as Vice President of the Company since 1984.
Helena R. Santos, CPA (age 35) has been employed by the Company since
1994, and has served as Vice President, Controller since 1997. Prior to
joining the Company, Ms. Santos was an internal auditor with a major defense
contractor, and prior to that was employed in public accounting.
SECTION 16(a) Beneficial Ownership Reporting Compliance
Based solely on the Company's review of Forms 3 and 4 and amendments
thereto furnished to the Company during its most recent fiscal year and
Form 5 and amendments thereto furnished to the Company with respect to its
most recent fiscal year, the Company believes that, for the period July 1,
1998 to June 30, 1999, all filing requirements of Section 16(a) of the
Securities Act of 1934, as amended, applicable to its officers, directors
and 10% stockholders were complied with, other than the filing of a Form 4
by Mr. Kleiman. The filing was effected in August 1999 through a Form 5.
ITEM 10. EXECUTIVE COMPENSATION.
The following table summarizes all compensation paid by the Company to
Lowell A. Kleiman with respect to each of the three fiscal years ended
June 30, 1999 for services in all capacities as the Company's principal
executive officer. No other executive officer earned in excess of $100,000
in any of such fiscal periods.
Summary Compensation Table
--------------------------
Annual Compensation Long Term Compensation
------------------- ----------------------
All Other
Name and Principal Year Salary Bonus Compen-
Position $ $ sation
----------------- ---- ------ ----- ---------
Lowell A. Kleiman 1999 $160,000 $ - $3,200(1)
President 1998 $160,000 $ - $3,200(1)
1997 $120,700 $9,750 $3,025(1)
(1) Represents the Company's matching contribution to Mr. Kleiman's account
under the Company's 401(k) Plan.
Aggregated Option Exercises in Last Fiscal Year And FY-End Option Values
- ------------------------------------------------------------------------
Shares of Number of Securities Value of
Common Underlying Unexercised
Stock Unexercised in-the-Money
Acquired Value Options Options
on Real- At FY-End (#) at FY-End ($)
Exercise ized Exercisable/ Exercisable/
Name ($)(1) Unexercisable Unexercisable(2)
- ----------------- -------- ------ ------------- ----------------
Lowell A. Kleiman 10,000 $1,875 60,000/10,000 $46,500/0(3)
(1) Calculated by multiplying the difference between the market price of the
shares of Common Stock acquired on exercise and the exercise price of the
options on the date of exercise.
(2) Calculated by multiplying the number of shares of Common Stock subject to
options by the difference between the market price and exercise price, per
share, on June 30, 1999.
(3) On June 30, 1999 the market price was lower than the exercise price.
Directors' Compensation
- -----------------------
The Company currently pays each non-employee director a quarterly
retainer of $750 and a fee of $500 for each meeting attended, plus
reimbursement for out-of-pocket expenses incurred in connection with
attendance of board meetings in the amount of $50 or the director's itemized
expenses, whichever is greater.
During the fiscal year ended June 30, 1999, the Company paid fees in
the amount of $19,000 to non-employee directors.
On February 11, 1992, before the adoption of the Company's 1992 Stock
Option Plan, the Company issued to each of its four non-employee directors,
Messrs. Arthur M. Borden, Joseph I. Kesselman, Roger B. Knowles and James S.
Segasture, ten year non-qualified options to purchase 12,000 shares of
Common Stock, 4,000 shares of Common Stock of which were immediately
exercisable, 4,000 shares of Common Stock of which were fully exercisable
on and after the first anniversary of the date of such grant and 4,000
shares of Common Stock which were fully exercisable after the second
anniversary of the date of such grant; all such options were exercisable
at $.35. In the event of the death of a participant, while in the employ
or service of the Company, the options shall become exercisable in full
until the earlier of expiration of the option or one year from date of
death. In March 1993, Messrs. Borden, Kesselman, and Segasture
each exercised 8,000 shares of Common Stock pursuant to such options.
The Company's 1992 Stock Option Plan calls for options to purchase 3,000
shares of Common Stock at the then fair market value to be issued each
March for four years to each non-employee director who shall be on the Board
of Directors on the first business day of each March, beginning in March 1993.
In addition, in December 1997, the Board of Directors approved the issuance of
an annual grant of options to purchase 4,000 shares of Common Stock for each
non-employee director beginning in December 1997 at the fair market value on
the date of grant. The fair market value per share of Common Stock on the
date of grant was $1.875 in 1999, $1.87 in 1998, $2.00 in 1997, $1.2813 in
1996, $1.3125 in 1995, $.9375 in 1994, and $.50 in 1993. All options were
immediately exercisable.
Employment Agreement
- --------------------
On August 14, 1997, the Company amended and extended an employment contract
with the Company's President, Lowell A. Kleiman, through June 2000. The
contract provides for an annual salary of $160,000 beginning in fiscal 1998
and a bonus for fiscal 1998, if certain gross profit levels were met. The
contract also grants Mr. Kleiman a five-year stock option for 10,000 shares
of Common Stock exercisable under certain circumstances. The contract
contains provisions regarding his termination of employment, within three
years following a change of control (as defined therein), under which the
Company is obligated to pay Mr. Kleiman additional compensation consisting of
a base amount representing his annual salary and other benefits for the period
between the date of his termination of employment and three years from any
change of control subject to the limitation of it not exceeding 2.99 times
the base amount. The other benefits include continued use of a Company car,
four weeks paid vacation each year and, in the event that Mr. Kleiman should
die within the employment period, the payment to his widow, if living, or, if
not, to his legal representatives, of $5,000 as soon as practicable and an
amount equal to Mr. Kleiman's current annual salary payable in monthly
installments. In such e ent, if the Company receives $500,000 of insurance
proceeds, less any expenses incurred therein, $50,000 of those benefits will
be paid to his beneficiary as above. THe Company is the beneficiary for the
balance of the insurance proceeds.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of year end, the number of shares of
Common Stock beneficially owned by (i) the persons known to the Company to
be owners of more than 5% of the Common Stock, (ii) each director of the
Company, (iii) each named executive officer of the Company, identified in
the Summary Compensation Table included elsewhere herein, and (iv) all
directors and executive officers as a group.
Sole Voting and Dispositive Power
---------------------------------
Number Percentage of Class
--------- -------------------
Five Percent Stockholders,
- --------------------------
Directors and Executive Officers:
---------------------------------
Class C Directors:
- ------------------
Lowell A. Kleiman 149,581 (3) 16.5%
Roger B. Knowles 79,705 (4) (5) 9.2%
Class A Directors:
- ------------------
Arthur M. Borden 50,540 (1) 5.9%
James S. Segasture
(and Kristine K. Segasture) 164,757 (1) 19.2%
Class B Director:
- -----------------
Joseph I. Kesselman 51,520 (2) 6.0%
All current directors and
executive officers as a group
(seven persons) 546,418 (6) (7) 51.6%
(1) Includes 24,000 shares of Common Stock issuable upon exercise of
currently exercisable options.
(2) Includes 24,000 shares of Common Stock issuable upon exercise of currently
exercisable options. Includes 735 shares of Common Stock owned jointly
with Mrs. Kesselman.
(3) Includes 70,000 shares of Common Stock issuable upon exercise of currently
exercisable options.
(4) Includes 44,158 shares of Common Stock owned by Mrs. Knowles; includes
1,337 shares of Common Stock owned by a trust of which Mr. Knowles is a
trustee, beneficial ownership of which is disclaimed by Mr. Knowles.
(5) Includes 32,000 shares of Common Stock issuable upon exercise of currently
exercisable options.
(6) Includes 224,000 shares of Common Stock issuable upon exercise of currently
exercisable options.
(7) Includes 50,000 shares of Common Stock issuable upon exercise of currently
exercisable options granted to two executive officers who are not
directors.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During the last two years, there were no transactions or proposed transactions
with any director, executive officer, nominee for election as a director,
security holder, or any member of their immediate families.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The exhibits to this report are listed in the Exhibit Index at the end of
this report.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the last quarter of the
period covered by this report with the Securities and Exchange Commission.
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
--------------------
Lowell A. Kleiman
President and Treasurer
Principal Executive and Financial Officer
/S/Helena R. Santos
-------------------
Helena R. Santos
Vice President, Controller and Assistant
Treasurer
Principal Accounting Officer
Date: October 28, 1999
EXHIBIT INDEX
Exhibit Description
Number
- -------- -----------------------------------
3 Articles of Incorporation and By-Laws:
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 fiscal 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 fiscal year ended June 30, 1985 and incorporated
by reference thereto).
10 Material Contracts
Letter of Intent to exercise 5-year option under the
Company's lease for its offices and manufacturing
facilities.
21 Subsidiaries of the Registrant
Scientific Packaging Industries, Inc., a New York
corporation, is a wholly-owned subsidiary of the
Company, and does business under the name "Scientific
Packaging Industries".
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, 1999
and 1998, and the related consolidated statements of operations,
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, 1999 and 1998, and the consolidated results of
their operations and their consolidated cash flows for the years
then ended in conformity with generally accepted accounting
principles.
August 31, 1999
F-1
------
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998
ASSETS
-----------
1999 1998
----------- -----------
Current assets:
Cash and cash equivalents $ 229,100 $ 165,900
Investment securities 522,500 1,035,600
Trade accounts receivable,
less allowance for doubtful
accounts of $7,400 in 1999
and 1998 323,000 269,300
Inventories 366,000 341,000
Recoverable income taxes 102,000 -
Prepaid expenses and other
current assets 48,300 59,400
Deferred income taxes - 21,200
----------- -----------
Total current assets 1,590,900 1,892,400
Property and equipment, net 180,500 150,800
----------- -----------
Other assets and deferred charges:
Intangible assets, less
accumulated amortization of
$57,700 and $38,300 in
1999 and 1998 42,500 55,200
Deferred income taxes - 22,700
Other 144,100 135,600
----------- ----------
186,600 213,500
----------- ----------
$1,958,000 $2,256,700
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 244,000 $ 108,600
Accrued expenses 94,500 167,900
Customer advances - 15,200
----------- -----------
Total current liabilities 338,500 291,700
Deferred compensation 94,300 87,800
----------- -----------
Commitments and contingencies
Shareholders' equity:
Common stock, $.05 par value;
authorized 7,000,000 shares;
issued 855,342 shares in 1999
and 854,374 shares in 1998 42,800 42,700
Additional paid-in capital 869,500 852,500
Accumulated other comprehensive
income (loss), unrealized
holding gain (loss) on investment
securities ( 1,000) 3,400
Retained earnings 666,300 1,031,000
--------- ---------
1,577,600 1,929,600
Less common stock held in
treasury, at cost,
19,802 shares 52,400 52,400
--------- ---------
1,525,200 1,877,200
--------- ---------
$1,958,000 $2,256,700
========== ==========
See notes to consolidated financial statements
F-2
-----
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1999 AND 1998
1999 1998
---------- ----------
Net sales $3,171,300 $3,414,700
Cost of sales 2,053,000 2,098,200
---------- ----------
Gross profit 1,118,300 1,316,500
---------- ----------
Operating expenses:
General and administrative 717,100 834,600
Selling 121,300 139,200
Research and development 195,400 174,700
---------- ----------
1,033,800 1,148,500
---------- ----------
Income from operations 84,500 168,000
---------- ----------
Other income (expenses):
Litigation costs ( 519,100) -
Interest and other income 44,000 42,200
------------ ---------
( 475,100) 42,200
------------ ---------
Income (loss) before income
taxes (benefit) ( 390,600) 210,200
------------ ---------
Income taxes (benefit):
Current ( 86,900) 22,500
Deferred 43,900 7,200
------------ ---------
( 43,000) 29,700
------------ ---------
Net income (loss) ($ 347,600) $ 180,500
============ ===========
Net income (loss) per
common share - basic ($ .42) $ .22
============ ===========
Net income (loss) per
common share - diluted ($ .42) $ .18
============ ===========
See notes to consolidated financial statements
F-3
-----
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1999 AND 1998
Accumulated
Additional Other
Common Stock Paid-in Comprehensive
-------------- Capital Income (Loss)
Shares Amount
------ ------- ---------- -------------
Balance, July 1, 1997 846,041 $42,300 $842,300 $ 300
Net income - - - -
Other comprehensive income:
Unrealized holding gains
arising during period - - - 3,100
Comprehensive income - - - -
Exercise of stock options 8,333 400 10,200 -
------- ------- -------- -------
Balance, June 30, 1998 854,374 42,700 852,500 3,400
Net loss - - - -
Other comprehensive income:
Unrealized holding gains
arising during period - - - 600
Less: reclassification adjust-
ment for gains included in
net loss - - - ( 5,000)
Comprehensive loss - - - -
Exercise of stock options 968 100 17,000 -
-------- ------- -------- --------
Balance, June 30, 1999 855,342 $42,800 $869,500 ($1,000)
Total
Retained Treasury Stock Shareholders'
Earnings Shares Amount Equity
-------- ------ ------ -------------
Balance, July 1, 1997 $850,500 19,802 $52,400 $1,683,000
-------------
Net income 180,500 - - 180,500
Other comprehensive income:
Unrealized holding gains
arising during period - - - 3,100
-------------
Comprehensive income - - - 183,600
-------------
Exercise of stock options - - - 10,600
-------- ------ ------ -------------
Balance, June 30, 1998 1,031,000 19,802 52,400 1,877,200
-------------
Net loss ( 347,600) - - ( 347,600)
Other comprehensive income:
Unrealized holding gains
arising during period - - - 600
Less: reclassification
adjustment for gains
included in net loss - - - ( 5,000)
-------------
Comprehensive loss - - - ( 352,000)
Exercise of stock options ( 17,100) - - -
-------- ------ ------ -------------
Balance, June 30, 1999 $ 666,300 19,802 $52,400 $1,525,200
=========== ====== ======= =============
See notes to consolidated financial statements
F-4
-----
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999 AND 1998
1999 1998
----------- -----------
Operating activities:
Net income (loss) ($ 347,600) $ 180,500
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Gain (loss) on sale of investments ( 5,000) 300
Depreciation and amortization 94,500 77,800
Deferred income taxes 43,900 7,200
Changes in assets and liabilities:
Accounts receivable ( 53,700) 12,200
Inventories ( 25,000) ( 11,000)
Prepaid expenses and other
current assets ( 90,900) 23,100
Other assets ( 8,500) ( 11,700)
Accounts payable 135,400 25,800
Accrued expenses ( 73,400) ( 94,600)
Customer advances ( 15,200) 11,400
Deferred compensation 6,500 9,900
------------- -----------
Total adjustments 8,600 50,400
------------- -----------
Net cash provided by (used in)
operating activities ( 339,000) 230,900
------------- -----------
Investing activities:
Purchase of investment securities ( 1,193,700) (1,650,700)
Redemption of investments
principally held to maturity 1,693,700 1,504,400
Capital expenditures ( 91,100) ( 56,900)
Purchase of intangible assets ( 6,700) ( 19,000)
------------- -----------
Net cash provided by (used in)
investing activities 402,200 ( 222,200)
------------- -----------
Financing activities,
issuance of common stock for
options exercised - 10,600
------------- -----------
Net increase in cash and cash equivalents 63,200 19,300
Cash and cash equivalents,
beginning of year 165,900 146,600
------------- -----------
Cash and cash equivalents, end of year $ 229,100 $ 165,900
============= ===========
Supplemental disclosures of cash flow information:
Cash paid for income taxes $ 3,200 $ 89,600
Non-cash financing activities:
See Note 11 for 1999 exercise of stock options.
See notes to consolidated financial statements
F-5
-----
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999 AND 1998
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 inactive wholly-owned
subsidiary (collectively referred to as the "Company"). All
material intercompany balances and transactions have been
eliminated.
Revenue Recognition
Sales are recorded when the goods are shipped to customers.
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. 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. Realized gains or losses are determined
based on the specific identification method.
Inventories
Inventories are stated at the lower of cost (first-in,
first-out basis) or market.
F-6
-----
1. Summary of Significant Accounting Policies (Continued)
Property and Equipment
Property and equipment are stated at cost. Depreciation of
computer equipment, 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. The carrying amount of all
long-lived assets is evaluated periodically to determine if
adjustment to the useful life or to the undepreciated balance is
warranted.
Intangible Assets
Intangible assets consist of licensing agreements, patents
and trademarks which are stated at cost. Amortization is
provided for by the straight-line method over five years.
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, the use of
accelerated methods of depreciation and amortization for tax
purposes, and net operating loss and tax credit carryforwards.
Stock-Based Compensation
The Company has 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).
F-7
-----
1. Summary of Significant Accounting Policies (Continued)
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 depreciation and
amortization.
Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing
net income (loss) by the weighted-average number of shares
outstanding. Diluted net income per share includes the
dilutive effect of stock options.
Comprehensive Income
For the year ended June 30, 1999, the Company adopted SFAS
No. 130, "Reporting Comprehensive Income," which established
standards for reporting and display of comprehensive income in
financial statements.
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 healthcare related entities.
Approximately 97% of all sales are generated from the Vortex
Genie 2 (registered trademark) mixer and related accessories (see
Note 14). The Company does not obtain collateral for its
accounts receivable.
Certain information relating to the Company's export sales
and principal customers are as follows:
1999 1998
----------- ------------
Export sales (net)
(principally Europe and Asia) $1,166,100 $1,137,100
Customers in excess of 10% of net sales:
Largest in 1999 and 1998 1,154,000 1,079,700
Second largest in 1999 and 1998
(see Note 14) 390,900 896,700
F-8
-----
3. Investment Securities
Details as to investment securities are as follows:
Gross Cost or Unrealized
Amortized Fair Holding
Cost Value Gain (Loss)
------------- ----------- -----------
At June 30, 1999:
- -----------------
Available for sale:
Equity securities $ 19,400 $ 18,400 ($ 1,000)
========= ========== ===========
Held-to-maturity:
State and municipal $ 471,100 $ 471,100 $ -
Certificates of Deposit 33,000 33,000 -
--------- ---------- -----------
$ 504,100 $ 504,100 $ -
========= ========== ===========
At June 30, 1998:
- -----------------
Available for sale:
Equity securities $ 16,100 $ 19,500 $ 3,400
========= ========== ===========
Held-to-maturity:
State and municipal $1,016,100 $1,016,200 $ 100
========== ========== ===========
4. Inventories
1999 1998
-------- --------
Raw materials $301,300 $309,300
Work-in-process 11,200 8,900
Finished goods 53,500 22,800
-------- --------
$366,000 $341,000
======== ========
F-9
-----
5. Property and Equipment, Net
Useful Lives
(Years) 1999 1998
---------- ----------
Computer equipment 3 - 5 $150,600 $138,200
Machinery and equipment 3 - 7 153,700 77,400
Furniture and fixtures 4 - 10 38,000 37,100
Leasehold improvements 3 - 8 32,400 30,900
-------- --------
374,700 283,600
Less accumulated depreciation and
amortization 194,200 132,800
-------- --------
$180,500 $150,800
======== ========
6. Intangible Assets
In 1995, the Company entered into an agreement to license the rights to
certain laboratory equipment developed and manufactured by another
company. The carrying value of the license, including related costs, net of
accumulated amortization amounted to $20,100 and $32,500 at June 30, 1999
and 1998. 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. Prepaid royalties under this
agreement amounted to $11,600 and $14,500 at June 30, 1999 and 1998. As of
June 30, 1999 and 1998, no royalties have been earned.
7. Bank Line of Credit
The Company has a $200,000 secured bank line of credit collateralized by all
the assets of the Company. The credit line expires on November 1, 1999 and
bears interest at prime plus 1%. The Company did not utilize this credit line.
To support the line of credit available, the Company is to maintain 20% of
the credit line in average monthly balances.
F-10
------
8. Employee Benefit Plan
The Company has 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 $15,500 in 1999 and $14,100
in 1998.
9. Commitments and Contingencies
Leases
The Company is obligated through December 2004 under a
noncancelable operating lease for its premises, which requires minimum annual
rentals and certain other expenses, including real estate taxes and
insurance. Rental expense under the above lease amounted to approximately:
1999 1998
-------- --------
Minimum rent expense $163,100 $163,100
Other charges 6,800 5,800
-------- --------
$169,900 $168,900
======== ========
As of June 30, 1999, the Company's approximate future minimum rental
payments on all operating leases are as follows:
Fiscal Years
------------
2000 $207,700
2001 212,700
2002 217,100
2003 228,100
2004 239,700
2005 122,900
F-11
------
9. Commitments and Contingencies (Continued)
Leases (Continued)
In accordance with generally accepted accounting principles,
the future minimum annual rental expense, computed on a level basis, will be
approximately $223,100 under the terms of the lease. Accrued rent, payable
in future years, amounted to $17,400 and $47,800 at June 30, 1999 and 1998.
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
only if certain gross profit levels, as defined, were met. A bonus was not
provided for in the 1998 financial statements since the levels were not met.
The contract also granted the President a five-year option to purchase 10,000
shares of common stock at $1.50 per share. 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 approximately 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, 1999 and 1998, $94,300
and $87,800 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.
F-12
------
10. Income Taxes
Income taxes (benefit) for 1999 and 1998 were different from
the amounts computed by applying the Federal income tax rate to the income
or loss before income taxes due to the following:
1999 1998
--------------- ---------------
% of % of
Pretax Pretax
Amount Loss Amount Income
-------- ------ -------- ------
Computed "expected" income
tax (benefit) ($132,800) (34.0%) $71,500 34.0%
State income taxes, net of federal
income tax (benefit) effect - - 6,400 3.0
Differences due to graduated
tax rates 9,200 2.4 ( 11,300) ( 5.4)
Non-taxable interest income ( 9,600) ( 2.5) ( 11,900) ( 5.7)
Research and development credits ( 11,900) ( 3.0) ( 10,700) ( 5.1)
Other ( 700) ( .2) ( 14,300) ( 6.8)
Increase in valuation allowance 102,800 26.3 - -
-------- ------ ------- ------
Actual income taxes (benefit ($ 43,000)( 11.0%) $29,700 14.0%
======== ====== ======= ======
Deferred tax assets and liabilities consist of the following:
1999 1998
---------- ----------
Deferred tax assets:
Amortization of patents $ 14,500 $ 8,000
Deferred compensation 32,100 25,400
Net operating loss carryforwards 36,700 -
Rent accrual 5,900 13,900
Tax credit carryforwards 11,900 -
Other 8,800 7,400
---------- ----------
109,900 54,700
Deferred tax liability:
Depreciation of property and
equipment ( 7,100) ( 10,800)
----------- ----------
102,800 43,900
Valuation allowance ( 102,800) -
----------- ----------
Net deferred tax assets $ - $ 43,900
=========== ==========
F-13
------
10. Income Taxes (Continued)
At June 30, 1999, the Company has net operating loss and tax
credit carryforwards of approximately $108,000 and $11,900 expiring in 2019
and 2014, respectively. A valuation allowance has been recognized to offset
the full amount of deferred tax assets at June 30, 1999 due to the uncertainty
of realizing these assets in the future.
11. Stock Options
The Company has established a stock option plan which provides for
the grant of options to purchase up to 300,000 shares of common stock of the
Company, par value $.05 per share, ("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 of Common Stock 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 of the shares of Common Stock 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 Common Stock at
the fair market value on the date of grant and commencing annually in December
1997, for as long as a director, a ten-year option to purchase 4,000 shares of
Common Stock at the fair market value on the date of grant. These outstanding
options expire at various dates through May 2009. There are 14,667 shares of
Common Stock reserved and available for future grants at June 30, 1999 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 1999 and 1998, respectively:
1999 1998
--------- ----------
Expected life (in years) 10 9
Risk-free interest rate 5.60% 5.85%
Expected volatility 34.82% 21.80%
Dividend yield 0.00% 0.00%
F-14
------
11. Stock Options (Continued)
Under the Black-Scholes model, the total value of stock options granted
in 1999 and 1998 was $40,100 and $63,700, 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 (loss)
would have been ($356,600) in 1999 and $173,600 in 1998. The Company's
pro forma net income (loss) per share would have been ($.43) in 1999 (basic and
diluted) and $.21 in 1998 ($.18 diluted). 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.
During the year ended June 30, 1999, an officer exercised options to
acquire 10,000 shares at $1.75 per share and paid for such shares by tendering
9,032 shares of Common Stock with an aggregate market value of $17,500.
The tendered shares were immediately retired.
Option activity under the above stock option plan is summarized as follows:
Fiscal 1999 Fiscal 1998
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
----------- ---------- ----------- ---------
Shares under option:
Outstanding at beginning
of year 241,000 $1.02 216,000 $ .81
Granted 45,000 1.21 57,000 1.88
Expired ( 1,000) 1.41 ( 5,000) .38
Forfeited ( 8,000) 1.94 ( 18,667) 1.29
Exercised ( 10,000) 1.75 ( 8,333) 1.28
--------- ----- --------- ------
Outstanding at end of year 267,000 $ .99 241,000 $ 1.02
========= ===== ========= ======
Options exercisable at
year-end 203,333 $ .91 186,000 $ .81
========= ===== ========= ======
Weighted average fair value
per share of options granted
during fiscal 1999 and 1998 $ .89 $ 1.12
===== ======
F-15
------
11. Stock Options (Continued)
The following table summarizes information about the options
under the above plan outstanding at June 30, 1999:
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 158,000 2.58 $ .53 129,000 $.46
$1.2813 - 2.00 109,000 7.48 $1.66 74,333 $1.68
In addition, 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. Net Income (Loss) Per Common Share
Net income (loss) per common share data was computed as follows:
1999 1998
--------- ----------
Net income (loss) ($347,600) $180,500
========= ==========
Weighted average common shares outstanding 834,601 826,586
Effect of dilutive securities, stock options - 151,961
--------- ----------
Weighted average dilutive common
shares outstanding 834,601 978,547
========= ==========
Net income (loss) per common share - basic ($ .42) $ .22
========= ==========
Net income (loss) per common share - diluted($ .42) $ .18
========= ==========
F-16
------
12. Net Income (Loss) Per Common Share (Continued)
The potential effect of dilution from the assumed exercise of stock
options, amounting to 125,847 shares of Common Stock as of June 30, 1999,
was not included in determining dilutive EPS because to do so would be
anti-dilutive due to the Company incurring a net loss for the year.
Unexercised employee stock options to purchase 112,360 shares of Common Stock
at $1.28 to $2.00 per share were outstanding as of June 30, 1999, but were
not included in the foregoing potential 1999 computation because the
options exercise price was greater than the average market price of the
Company's Common Stock.
13. Fair Value of Financial Instruments
The financial statements include various estimated fair value information
as of June 30, 1999 and 1998, as required by Statement of Financial Accounting
Standards 107, "Disclosure about Fair Value of Financial Statements." 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 investment securities
approximates fair market value because of the short maturity of those
instruments.
The following table provides summary information on the fair
value of significant financial instruments included in the financial
statements:
1999 1998
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- --------- -------- ---------
Assets:
Cash and cash equivalents $229,100 $229,100 $165,900 $165,900
Investment securities (Note 3) 522,500 522,500 1,035,600 1,035,700
F-17
------
14. Litigation
In January 1999, Troemner, Inc. ("Troemner"), began supplying VWR
Scientific Products ("VWR"), the Company's second largest customer in terms
of net sales, with a vortex mixer the Company believes violates the trade
dress rights of the Company's Vortex-Genie 2 (registered trademark) mixer and
one of the Company's utility patents. The Vortex Genie 2 (registered trademark)
mixer and related accessories which the Company sold to VWR as their private
label mixer for many years is the Company's primary product accounting for
approximately 97% of the total net sales during 1999. The Company also learned
that Troemner began soliciting business from the Company's other customers for
Troemner's vortex mixer at a markedly lower price than the Vortex-Genie 2
(registered trademark) mixer price. As a result, on January 26, 1999, the
Company filed a complaint against VWR and Troemner in the United States
District Court for the Eastern District of New York (the "District
Court") alleging, among other things, that VWR and Troemner's manufacture,
sale, promotion and distribution of a vortex mixer called the "VWRbrand
Mini-Vortexer" infringes the Company's trade dress rights in the housing
configuration of the Vortex-Genie 2 (regitered trademark) mixer, infringes one
of the Company's patents, and constitutes unfair competition. The Company
seeks an award for monetary damages trebled, recovery of its attorneys' fees
and expenses, as well as permanent injunctive relief.
On March 8, 1999, the defendants denied all material allegations of the
complaint and asserted certain affirmative defenses and counterclaims
against the Company for unfair competition an a declaratory judgment of
non-infringement and invalidity of the Company's patent. On March 17,
1999, the Company denied all material allegations of the counterclaim and
made a motion that VWR and Troemner be preliminarily enjoined from making,
selling, promoting and distributing the VWRbrand Mini-Vortexer. On May 11,
1999, the District Court granted the Company's motion for a preliminary
injunction on the grounds that the Company is likely to succeed on its
trade dress infringement claim. In connection with the granting of the
preliminary injunction, the District Court required the Company to post an
injunction bond in the amount of $500,000 which it did on May 7, 1999.
Subsequent to the granting of the preliminary injunction, Troemner began
supplying VWR with a modified version of their VWRbrand Mini-Vortexer. The
District Court's preliminary injunction order is presently on appeal to the
United States District Court for the Federal Circuit.
Counsel for the Company is unable at this time to form a
judgment on this matter and, as a result, the Company is unable to determine
if the litigation will have a material adverse effect on the Company's
financial condition or results of operations.
F-18
SCIENTIFIC INDUSTRIES, INC.
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
JANUARY 6, 2000
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned hereby appoints Lowell A. Kleiman and Roger B. Knowles,
and each of them, with full power of substitution, to vote, as a holder of
the common stock, par value $0.05 per share ("Common Stock"), of Scientific
Industries, Inc., a Delaware corporation (the "Company"), all the shares of
Common Stock which the undersigned is entitled to vote, through the
execution of a proxy with respect to the 1999 Annual Meeting of Stockholders
of the Company (the "Annual Meeting"), to be held at Princeton Club, 15 West
43rd Street, New York, New York, on Thursday, January 6, 2000 at 10:00 a.m.
New York time, and any and all adjournments or postponements thereof, and
authorizes and instructs said proxies to vote in the manner directed below.
1. Election of Class C Director:
Lowell A. Kleiman Roger B. Knowles
FOR nominees listed WITHHOLD
above, except vote FOR AUTHORITY
withheld for the all nominees for all nominees
following nominee: ( ) ( )
------------------
2. On proposal to ratify FOR AGAINST ABSTAIN
the appointment of ( ) ( ) ( )
Nussbaum, Yates &
Wolpow, P.C. as the
Company's independent
accountants for the
fiscal year ending
June 30, 2000.
THIS PROXY IS CONTINUED ON THE REVERSE SIDE, PLEASE VOTE, SIGN AND DATE ON
REVERSE SIDE AND RETURN PROMPTLY.
PROPERLY EXECUTED AND RETURNED PROXY CARDS WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO INSTRUCTIONS TO THE
CONTRARY ARE MADE, THIS PROXY WILL BE VOTED FOR APPROVAL OF EACH OF THE
PROPOSALS LISTED ON THE REVERSE SIDE, AND IN ACCORDANCE WITH THE JUDGEMENT
OF THE PERSONS NAMED AS PROXIES WITH RESPECT TO ALL OTHER MATTERS WHICH MAY
PROPERLY COME BEFORE THE ANNUAL MEETING AND ANY AND ALL ADJOURNMENTS OR
POSTPONEMENTS THEREOF.
You may revoke this proxy at any time before it is voted by (i) filing a
revocation with the Secretary of the Company, (ii) submitting a duly
executed proxy bearing a later date or time than the date or time of the
proxy being revoked; or (iii) attending the Annual Meeting and voting in
person. A stockholder's attendance at the Annual Meeting will not by itself
revoke a proxy given by the stockholder.
(Please sign exactly as the name appears below. Joint owners should each
sign. When signing as attorney, executor, administrator, trustee or
guardian, please give full title as such. If a corporation, please sign
with full corporate name by president or other authorized officer. If a
partnership, please sign in the partnership name by authorized person.)
Dated: ___________________________
PLEASE MARK, SIGN, DATE AND RETURN
THE PROXY CARD PROMPTLY USING THE
ENCLOSED ENVELOPE.
__________________________________
Signature
__________________________________
Signature, if held by joint owners
