UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT
OF 1934
For the quarterly period ended SEPTEMBER 30, 1999
TRANSITION REPORT PURSUANT TO 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 issuer as specified in its charter)
DELAWARE 04-2217279
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 835,540
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [ X ]
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
ASSETS
September 30, 1999
------------------
Current Assets:
Cash and cash equivalents $ 354,400
Investment securities 214,300
Trade accounts receivable, less allowance for
doubtful accounts of $7,400 282,900
Inventories (Note 2) 420,700
Recoverable income taxes 88,300
Prepaid expenses, and other current assets 38,200
---------
Total current assets 1,398,800
---------
Property and equipment at cost, less accumulated
depreciation of $207,400 192,200
---------
Other assets and deferred charges:
Intangible assets, less accumulated amortization
of $62,700 37,500
Other 144,100
---------
181,600
----------
$1,772,600
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 307,400
Accrued expenses 112,600
----------
Total current liabilities 420,000
----------
Deferred compensation 94,300
----------
Shareholders' equity:
Common stock $.05 par value 42,800
Additional paid-in capital 869,500
Accumulated other comprehensive loss, unrealized
holding loss on investment securities (2,800)
Retained earnings 401,200
----------
1,310,700
Less common stock held in treasury, at cost 52,400
----------
1,258,300
----------
$1,772,600
==========
See notes to condensed unaudited consolidated financial statements
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)
For the Three Month Periods Ended
September 30, 1999 September 30, 1998
------------------ ------------------
Net sales $ 716,200 $ 917,600
Cost of sales 498,700 567,100
---------- ----------
Gross profit 217,500 350,500
---------- ----------
Operating expenses:
General and administrative 173,500 198,500
Selling 26,200 23,700
Research and development 64,000 67,900
---------- ----------
263,700 290,100
---------- ----------
Income (loss) from operations ( 46,200) 60,400
---------- ----------
Other income (expenses):
Litigation costs ( 226,500) -
Interest and other income 7,600 10,400
---------- ----------
( 218,900) 10,400
---------- ----------
Income (loss) before income taxes ( 265,100) 70,800
Income taxes - 19,800
---------- ----------
Net income (loss) ($ 265,100) $ 51,000
========== ==========
Net income (loss) per common
share-basic ($ .32 ) $ .06
========== ==========
Net income (loss) per common
share-diluted ($ .32 ) $ .05
========== ==========
See notes to condensed unaudited consolidated financial statements
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three Month Periods Ended
September 30, 1999 September 30, 1998
------------------ ------------------
Operating activities:
Net Income (Loss) ($ 265,100) $ 51,000
---------- -----------
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Gain on sale of investments (800) -
Depreciation and amortization 24,800 22,500
Change in assets and liabilities:
Accounts receivable 40,100 (52,600)
Inventories (54,700) (90,200)
Recoverable income taxes 13,700 -
Prepaid expenses, and other
current assets 10,100 5,800
Accounts payable 63,400 49,000
Accrued expenses 18,100 (14,100)
Customer advances - 300
---------- -----------
Total adjustments 114,700 (79,300)
---------- -----------
Net cash used in operating activities (150,400) (28,300)
---------- -----------
Investing activities:
Purchase of investment securities,
available-for-sale (4,800) -
Purchase of investment securities,
held to maturity - (473,300)
Redemptions of investment securities,
available-for-sale 4,300 2,100
Redemptions of investment securities,
held to maturity 306,700 513,000
Capital expenditures (30,500) (8,000)
---------- -----------
Net cash provided by investing
activities 275,700 33,800
---------- -----------
Net increase in cash and
cash equivalents 125,300 5,500
Cash and cash equivalents, beginning of year 229,100 165,900
---------- -----------
Cash and cash equivalents, end of period $ 354,400 $ 171,400
========== ===========
Supplemental disclosures:
Cash paid during the period for:
Income Taxes $ 400 $ 2,500
See notes to condensed unaudited consolidated financial statements
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 should be made to the Annual Report to Stockholders
for the year ended June 30, 1999 of Scientific Industries, Inc.
(the "Company").
The statements as of and for the three months ended September 30,
1999 and 1998 are unaudited. In the opinion of management, all
adjustments have been made to present fairly the results of such
unaudited interim periods.
1. Significant accounting policies:
Principles of consolidation:
The accompanying condensed unaudited consolidated financial statements
include the accounts of the Company and Scientific Packaging Industries,
Inc. (a wholly owned subsidiary of the Company). 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 ofinventory are as follows:
September 30,
1999
------------
Raw Materials $ 370,600
Work in process 17,300
Finished Goods 32,800
------------
$ 420,700
============
3. Earnings Per Share:
For the year ended June 30, 1998, the Company adopted Financial Accounting
Standard No. 128, "Earning 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 holders of common stock
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 Periods Ended
September 30, 1999 September 30, 1998
Net Income (Loss) ($ 265,100) $ 51,000
========== ===========
Weighted average common shares
outstanding 835,540 834,572
Effect of dilutive securities,
stock options - 149,238
---------- -----------
Weighted average dilutive common shares
outstanding 835,540 983,810
========== ===========
Net income (loss)per common share-basic ($ .32) $ .06
========== ===========
Net income (loss) per common share-diluted ($ .32) $ .05
========== ===========
The potential effect of dilution from the assumed exercise of stock options,
amounting to 99,892 shares of common stock as of September 30, 1999, was not
included in determining dilutive EPS because to do so would be anti-dilutive
because the Company incurring a net loss for the period. Unexercised employee
stock options to purchase 106,680 shares of common stock at $1.28 to $2.00 per
share were outstanding as of September 30, 1999, but were not included in the
foregoing potential computation because the options' exercise price was greater
than the average market price of the Company's common stock.
4. Comprehensive Income:
For the year ended June 30, 1999, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income," which established standards for reporting and
displaying comprehensive income in financial statements. During the three month
period ended September 30, 1999 the comprehensive loss totaled $2,800
attributable to holding losses from available-for-sale investments.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Liquidity and Capital Resources
The working capital of Scientific Industries, Inc. (the "Company"), for the
three months ended September 30, 1999 decreased $253,600 to $978,800 compared
to $1,252,400 as of June 30, 1999, primarily due to litigation costs.
See Part II, Item 1 for additional information regarding this 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 year from its available financial resources
which include 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, 2000 and carries
interest at prime plus 1%. The Company could utilize this line of credit for
working capital needs but has not yet utilized this credit line.
Results of Operations
The Three Months Ended September 30, 1999 Compared With Three Months Ended
September 30, 1998.
Net sales decreased $201,400 (21.9%) for the three months ended September 30,
1999 as compared to 1998 primarily due to the loss of sales to VWR Scientific
Products ("VWR"). Gross sales to VWR amounted to approximately $228,000 in
the comparable period last year. To a lesser extent, net sales decreased due
to lower selling prices as a result of price pressures brought on by Troemner,
Inc. ("Troemner"). The gross profit percentage of 30.4% for the
three months ended September 30, 1999 decreased from 38.2% for the three months
ended September 30, 1998 primarily as a result of the lower sales relative to
the level of fixed costs. Factory labor and overhead costs remained relatively
fixed because of the Company's small size even though the Company had lower
sales.
General and administrative expenses decreased $25,000 (12.6%) for the three
months ended September 30, 1999 as compared to 1998 primarily because there were
no expenses incurred during this quarter related to the pursuit of external
business opportunities. While proceedings against VWR and Troemner are ongoing,
the Company has stopped pursuing external business opportunities in order to
focus on protecting the Company's existing business.
The Company incurred litigation costs of $226,500 for the three months ended
September 30, 1999 primarily as a result of the proceedings brought by the
Company against VWR and Troemner. See Part II, Item 1 for additional
information regarding the litigation.
As a result of the litigation costs, and lower sales and gross profit discussed
above, the Company incurred a net loss of $265,100 for the three months ended
September 30, 1999 as compared to net income of $51,000 for the three months
ended September 30, 1998.
Year 2000 Compliance
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 remains a risk
to be considered in evaluating the financial prospects of the Company.
PART II -- OTHER INFORMATION
ITEM 1. 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 which accounted for approximately 97% of the
Company's total net sales for the fiscal year ended June 30, 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. As a result, on
January 26, 1999, the Company filed a complaint against VWR and Troemner
in the United States District Court for the
Easter 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 (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. During the summer, Troemner began supplying VWR with a
modified version of their VWRbrand Mini-Vortexer. This mixer, which the
District Court has not considered is currently being marketed by VWR. The
District Court's preliminary injunction order is presently on appeal to
the United States Court of Appeals for the Federal Circuit. The Company
is currently in settlement discussions with VWR and Troemner. There can
be no assurance as to whether the Company will be successful in reaching a
settlement with VWR and Troemner or as to the timing of any such settlement. The
Company will not comment upon any proposed settlement terms or the course
of settlement discussions (nor will it comment upon any rumors with regard
to the same) until a definitive settlement is reached or settlement
discussions have terminated at which time appropriate public disclosure
will be made.
ITEM 2. CHANGES IN SECURITIES - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5. OTHER INFORMATION - 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 period covered by this
report.
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
Principal Executive and Financial Officer
/s/
------------------------------
Helena R. Santos
Vice President, Controller and
Assistant Treasurer
Principal Accounting Officer
Date November 10, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 354,400
<SECURITIES> 214,300
<RECEIVABLES> 290,300
<ALLOWANCES> 7,400
<INVENTORY> 420,700
<CURRENT-ASSETS> 1,398,800
<PP&E> 399,600
<DEPRECIATION> 207,400
<TOTAL-ASSETS> 1,772,400
<CURRENT-LIABILITIES> 420,000
<BONDS> 0
0
0
<COMMON> 42,800
<OTHER-SE> 1,215,500
<TOTAL-LIABILITY-AND-EQUITY> 1,772,600
<SALES> 716,200
<TOTAL-REVENUES> 723,800
<CGS> 498,700
<TOTAL-COSTS> 762,400
<OTHER-EXPENSES> 226,500
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (265,100)
<INCOME-TAX> 0
<INCOME-CONTINUING> (265,100)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (265,100)
<EPS-BASIC> ( .32)
<EPS-DILUTED> ( .32)
</TABLE>
