UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For quarterly period ended MARCH 31, 1999
--------------
TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from to
--------- --------
Commission File Number: 0-6658
------
SCIENTIFIC INDUSTRIES, INC.
(Exact name of small business as specified in its charter)
Delaware 04-2217279
(State of incorporation) (I.R.S. Employer Identification No.)
70 ORVILLE DRIVE, BOHEMIA, NEW YORK 11716
-----------------------------------------
(Address of principal executive offices)
(516)567-4700
-------------
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
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
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 834,572
-------
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
FORM 10-QSB
The following information of the registrant is submitted herewith:
PART I -- Financial Information:
Condensed Consolidated Balance Sheet - March 31, 1999 1
Condensed Consolidated Statements of Income (Loss)
Three and Nine Months Ended March 31, 1999 and 1998 2
Condensed Consolidated Statements of Cash Flows - Nine
Months Ended March 31, 1999 and 1998 3
Notes to Condensed Consolidated Financial Statements 4-5
Management's Discussion and Analysis 6-7
Year 2000 Compliance 8
PART II -- Other Information:
Items 1 through 6 9
Signatures 10
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ASSETS
--------------
March 31, 1999
--------------
Current Assets:
Cash and cash equivalents $ 160,200
Investment securities 835,000
Trade accounts receivable, less allowance for
doubtful accounts of $7,400 295,400
Inventories (Note 2) 427,000
Prepaid expenses, taxes and other current assets 58,400
Deferred income taxes 21,200
---------------
Total current assets 1,797,200
---------------
Property and equipment at cost, less accumulated
depreciation of $178,500 127,900
---------------
Other assets and deferred charges:
Intangible assets, less accumulated amortization
of $52,800 47,400
Deferred income taxes 22,700
Other 165,500
---------------
235,600
---------------
$2,160,700
===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 64,500
Accrued expenses 129,100
---------------
Total current liabilities 193,600
---------------
Deferred compensation 87,800
---------------
Shareholders' equity:
Common stock $.05 par value 42,700
Additional paid-in capital 852,500
Unrealized holding gain on investment securities 2,000
Retained earnings 1,034,500
---------------
1,931,700
Less common stock held in treasury, at cost 52,400
---------------
1,879,300
---------------
$2,160,700
===============
See notes to condensed unaudited consolidated financial statements
1
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)
For the Three Month For the Nine Month
Periods Ended Periods Ended
------------------- ------------------
March 31, March 31,
1999 1998 1999 1998
-------- -------- ---------- ----------
Net sales $617,700 $920,100 $2,397,100 $2,585,200
Cost of goods sold 431,800 563,700 1,550,000 1,566,100
-------- -------- ---------- ----------
Gross profit 185,900 356,400 847,100 1,019,100
-------- -------- ---------- ----------
Operating expenses:
General and administrative 144,200 233,600 548,100 639,500
Selling 34,100 38,200 83,800 121,100
Research and development 34,700 28,500 158,700 126,300
-------- -------- ---------- ----------
213,000 300,300 790,600 886,900
-------- -------- ---------- ----------
Income (loss) from operations (27,100) 56,100 56,500 132,200
Litigation costs (82,200) - (82,200) -
Interest and other income 8,100 9,700 29,200 30,300
-------- -------- ---------- ----------
Income (loss) before income
taxes (credit) (101,200) 65,800 3,500 162,500
Income taxes (credit) (23,300) 24,500 - 42,200
-------- -------- ---------- ----------
Net income (loss) ($ 77,900) $ 41,300 $ 3,500 $ 120,300
======== ======== ========== ==========
Net income (loss) per common
share - Basic (Note 3) ($ .09) $ .05 $ - $ .15
Net income (loss) per common
share - diluted (Note 3) ($ .09) $ .04 $ - $ .12
See notes to condensed unaudited consolidated financial statements
2
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Month Periods Ended
March 31, 1999 March 31, 1998
-------------- --------------
Operating activities:
Net Income $ 3,500 $ 120,300
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation and amortization 70,500 57,100
Change in assets and liabilities:
Accounts receivable (26,100) (108,700)
Inventories (86,000) 41,500
Prepaid expenses, taxes and other
current assets 1,000 16,700
Other assets (29,900) -
Accounts payable (44,100) 59,200
Accrued expenses (38,800) (57,100)
Customer advances (15,200) 11,400
----------- ----------
Total adjustments (168,600) 20,100
Net cash provided by (used in)
operating activities (165,100) 140,400
----------- ----------
Investing activities:
Purchase of investment securities,
principally held to maturity (1,072,000) (1,200,700)
Redemptions of investment securities,
principally held to maturity 1,261,000 1,109,500
Capital expenditures (22,900) (38,000)
Purchase of intangible assets (6,700) (8,500)
----------- ----------
Net cash provided by (used in)
investing activities 159,400 (137,700)
Net increase (decrease) in cash and
cash equivalents (5,700) 2,700
Cash and cash equivalents, beginning of year 165,900 146,600
----------- ----------
Cash and cash equivalents, end of period $ 160,200 $ 149,300
=========== ==========
Supplemental disclosures:
Cash paid during the period for:
Income Taxes $ 3,200 $ 87,700
See notes to condensed unaudited consolidated financial statements
3
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
General: As contemplated by the Securities and Exchange Commission, the
accompanying financial statements and footnotes have been
condensed and therefore do not contain all financial statements
and disclosures required by generally accepted accounting
principles. Reference is made to the financial statements contained
in the Annual Report to Stockholders for the year ended June 30,
1998 of Scientific Industries, Inc., and the information under the
heading "the Company."
The financial statements as of and for the three and nine months
ended March 31, 1999 and 1998 are unaudited. In the opinion of
management, all adjustments have been made that are necessary in
order to make the financial statements not misleading.
1. Significant accounting policies:
Principles of consolidation:
The accompanying condensed consolidated financial statements include the
accounts of Scientific Industries, Inc. and Scientific Packaging Industries,
Inc. (a 100% owned subsidiary). All intercompany items and transactions
have been eliminated in consolidation.
2. Inventories:
Inventories for interim financial statement purposes are based on
perpetual inventory records at the end of the applicable periods.
Components of inventory are as follows:
March 31,
1999
----------
Raw Materials $ 338,300
Work in process 27,700
Finished Goods 61,000
----------
$ 427,000
==========
4
SCIENTIFIC INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
3. Earnings per share:
For the year ended June 30, 1998, the Company adopted Financial Accounting
Standard No. 128, "Earnings Per Share", which replaces the presentation of
primary earnings per share ("EPS") and fully diluted EPS with a presentation
of basic EPS and diluted EPS. Basic EPS excludes common stock equivalents
and is computed by dividing net income available to common stockholders by
the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if common stock
equivalents such as stock options were exercised.
Net income (loss) per common share was computed as follows:
For the Three Month For the Nine Month
Periods Ended Periods Ended
March 31, March 31,
1999 1998 1999 1998
-------- -------- -------- --------
Net income (loss) ($77,900) $ 41,300 $ 3,500 $120,300
Weighted average
common shares outstanding 834,572 826,239 834,572 826,239
Effect of dilutive securities,
stock options - 156,556 135,790 152,387
------- -------- -------- --------
Weighted average dilutive
common shares outstanding 834,572 982,795 970,362 978,626
Net income (loss) per common
share - basic ($ .09) $ .05 $ - $ .15
Net income (loss) per common
share- diluted ($ .09) $ .04 $ - $ .12
Options to purchase 63,000 shares of common stock at $1.875 - $2.00 per share
were outstanding at March 31, 1999, but were not included in the 1999
computation of diluted EPS because the options' exercise price was greater
than the average market price of the common shares. The options, which expire
in December, 2007 through December 2008, were still outstanding at March 31,
1999.
The incremental shares from assumed exercise of stock options were not
included in the three month period ended March 31, 1999 calculation because
including those shares would result in an anti-dilutive per share amount.
Dividends were not paid during 1999 or 1998.
4. Comprehensive Income:
The Company has adopted Financial Accounting Standard No. 130, "Reporting
Comprehensive Income", which requires classification of items of other
comprehensive income in a financial statement and a display of the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid in capital in "Shareholders' Equity."
The Company did not report and display comprehensive income, because it
does not have material items
representing components of other comprehensive income.
5
SCIENTIFIC INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Liquidity and Capital Resources
The Company's working capital remained at approximately the same level with
$1,603,600 at March 31, 1999 compared to $1,600,700 at June 30, 1998.
Management believes that existing cash and investment securities balances will
be sufficient to support the Company's operational requirements for at least
one year.
Results of Operations
The Three Months Ended March 31, 1999 Compared With Three Months Ended March 31,
1998.
In early January 1999, the Company learned that another company, Troemner, Inc.
("Troemner") began supplying VWR Scientific Products ("VWR"), the Company's
second largest customer in terms of net sales, with a vortex mixer that the
Company believes is a replica of the Company's Vortex-Genie 2 (registered
trademark) mixer. The Vortex-Genie 2 (registered trademark) mixer is
the Company's primary product, accounting for approximately 98% of the
Company's net sales. We also learned that Troemner began soliciting business
from the Company's other customers at a markedly lower price than the Company's
vortex mixer price. As a result, on January 26, 1999, the Company filed a civil
action ("Action") in the United States District Court for the Eastern District
of New York against VWR and Troemner alleging, among other things, patent and
trade dress infringement, false designation of origin, false and misleading
representations, deceptive advertising, unfair business practices and
deceptive trade practices. The Complaint seeks, among other remedies,
equitable relief, and monetary damages. The Company filed a motion
for a preliminary injunction and recall order on March 17, 1999. On May 3,
1999, the Court granted the Company's motion for a preliminary injunction on
the grounds that the Company had met its burden for preliminary injunction
purposes of establishing a likelihood of success on its claim of trade dress
infringement. Accordingly, the Court issued an order directing VWR and
Troemner to cease using, manufacturing, distributing, selling, offering for
sale, advertising or promoting vortex mixers whose housing configuration
embodies Scientific Industries' trade dress, including the "VWRbrand Mini
Vortexer" mixer. The order also requires that Scientific Industries, Inc.
post a $500,000 injunction bond, which the Company
complied with on May 7, 1999. Were the Action to be tried, it is expected
that a trial would not occur before the Fall of 1999. The Company believes,
based in part on the successful grant of the preliminary injunction, that it
has meritorious claims which it intends to prosecute vigorously. No prediction
can be made as to the ultimate outcome of the Action nor its impact on the
Company.
VWR's sales accounted for approximately 26% of the Company's total annual net
sales in fiscal year 1998. There were no sales to VWR by the Company during
this quarter and the Company does not expect any sales to VWR during the next
quarter.
Net sales decreased $302,400 (32.9%) for the three month period ended March
31, 1999 compared with the three month period ended March 31, 1998 mostly as
a result of the loss of sales to VWR as discussed above. To a lesser extent,
the decrease is also due to lower than normal sales to foreign customers during
the quarter, which has returned to normal levels subsequent to quarter end.
The gross profit percentage of 30.1% for the three month period ended March
31, 1999 decreased from 38.7% for the comparable quarter last year as a result
of the lower sales.
General and administrative expenses of $144,200 for the three month period ended
March 31, 1999 decreased $89,400 from $233,600 mostly because there are no
expenses related to the pursuit of external business opportunities and lower
personnel related costs.
As a result of the lower sales and litigation costs, partially offset by lower
operating expenses, the Company incurred a net loss of $77,900 for the three
month period ended March 31, 1999 as compared to $41,300 of net income for the
comparable period last year.
6
SCIENTIFIC INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company incurred $82,200 in costs related to the litigation discussed on the
previous page and expects to incur even more substantial amounts in future
periods. These costs are included in the monetary relief requested in the Action
discussed on the previous page.
The Nine Months Ended March 31, 1999 Compared With Nine Months Ended March
31, 1998.
Net sales decreased $188,100 (7.3%) to $2,397,100 for the nine month period
ended March 31, 1999 compared to $2,585,200 for the comparable period last year
mostly as a result of the loss in sales to VWR as discussed on the previous
page. The gross profit percentage of 35.3% for this period compared to the
prior period's 39.4% decreased mainly as a result of the lower sales.
General administrative expenses of $548,100 for the nine month period ended
March 31, 1999 decreased $91,400 from $639,500 mostly because of less expenses
related to the pursuit of external business opportunities and lower personnel
related costs.
Research and development costs for the nine month period ended March 31, 1999
were $158,700 compared to $126,300 for the comparable period last year. The
increase of $32,400 (25.7%) was a result of increased research and development
activities related to new products.
The Company incurred $82,200 in costs related to the litigation discussed on the
previous page and expects to incur even more substantial amounts in future
periods. These costs are included in the monetary relief requested in the Action
discussed on the previous page.
As a result of the lower sales and litigation costs, partially offset by lower
operating expenses, net income for the nine month period ending March 31, 1999
decreased to $3,500 compared to $120,300 for the comparable peirod last year.
While sales to VWR have ceased and the Company has lowered prices for its main
product in response to Troemner's solicitation of other existing customers,
the effect of such events on the amount of future net sales, gross profit and
net income is uncertain; future amounts may be substantially lower if reduced
prices do not spur additional orders from its distributor customers. There can
be no assurance that the Company will not continue to experience a shortfall in
net sales or that any price reduction will be offset by increased sales volume.
7
SCIENTIFIC INDUSTRIES, INC.
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 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 expects to assess its need to create contingency plans during 1999
for certain internal systems in the event management determines that such
contingency plans may become warranted.
All organizations dealing with the Year 2000 issue must address the effect this
issue will have on their third-party relationships. The Company is also
undertaking steps to identify whether its vendors have sufficiently identified
and are taking steps to address the Year 2000 issue. Management is presently
communicating with key third-parties to understand their ability to continue
providing services and products through the change to 2000. The Company is
working directly with its key vendors and distributors, and coordinating its
action with respect to the Year 2000 issue with them if necessary, to avoid any
business interruptions in 2000. For these key third-parties, contingency plans
may be required.
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 and nonetheless
remains a risk to be considered in evaluating the financial prospects of the
Company.
8
SCIENTIFIC INDUSTRIES, INC.
FORM 10-QSB
For the Quarter Ended March 31, 1999
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
On January 26, 1999, the Company filed a civil action ("Action") in the United
States District Court for the Eastern District of New York against VWR and
Troemner alleging, among other things, patent and trade dress infringement,
false designation of origin, false and misleading representations, deceptive
advertising, unfair business practices and deceptive trade practices. The
Complaint seeks, among other remedies, equitable relief, and monetary damages.
The Company filed a motion for a preliminary injunction and recall order on
March 17, 1999. On May 3, 1999, the Court granted the Company's motion for a
preliminary injunction on the grounds that the Company had met its burden for
preliminary injunction purposes establishing a likelihood of success on its
claim of trade dress infringement. Accordingly, the Court issued an order
directing VWR and Troemner to cease using, manufacturing, distributing, selling,
offering for sale, advertising or promoting their product known as the
"VWRbrand Mini Vortexer" mixer. The order also requires that Scientific
Industries, Inc. post a $500,000 injunction bond, which the Company complied
with on May 7, 1999. Were the Actionto be tried, it is expected that a trial
would not occur before the Fall of 1999. The Company believes, based in part
on the successful grant of the preliminary injunction, that it has meritorious
claims which it intends to prosecute vigorously. No prediction can be made
as to the ultimate outcome of the Action nor its impact on the Company.
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K: No reports on Form 8-K were filed during the
quarter for which this report is filed.
9
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Scientific Industries, Inc.
---------------------------
Registrant
/s/
---------------------------
Lowell A. Kleiman
President and Treasurer
Chief Executive and Financial Officer
/s/
----------------------------
Helena R. Santos
Vice President, Controller and Asst.
Treasurer
Principal Accounting Officer
Date: May 14, 1999
10
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 160,200
<SECURITIES> 835,000
<RECEIVABLES> 302,800
<ALLOWANCES> 7,400
<INVENTORY> 427,000
<CURRENT-ASSETS> 1,797,200
<PP&E> 306,400
<DEPRECIATION> 178,500
<TOTAL-ASSETS> 2,160,700
<CURRENT-LIABILITIES> 193,600
<BONDS> 0
0
0
<COMMON> 42,700
<OTHER-SE> 1,836,600
<TOTAL-LIABILITY-AND-EQUITY> 2,282,500
<SALES> 2,397,100
<TOTAL-REVENUES> 2,426,300
<CGS> 1,550,000
<TOTAL-COSTS> 872,800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,500
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,500
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
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