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 DECEMBER 31, 1998
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.
FORM 10-QSB
The following information of the registrant is submitted herewith:
PART I -- Financial Information:
Condensed Consolidated Balance Sheet - December 31, 1998 1
Condensed Consolidated Statements of Income - Three and Six Months
Ended December 31, 1998 and 1997 2
Condensed Consolidated Statements of Cash Flows -Six
Months Ended December 31, 1998 and 1997 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.
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ASSETS
December 31, 1998
-----------------
Current Assets:
Cash and cash equivalents $ 93,500
Investment securities 960,400
Trade accounts receivable, less allowance for
doubtful accounts of $7,400 350,000
Inventories (Note 2) 455,200
Prepaid expenses and other current assets 51,400
Deferred income taxes 21,200
----------
Total current assets 1,931,700
----------
Property and equipment at cost, less accumulated
depreciation of $162,900 141,600
Other assets and deferred charges:
Intangible assets, less accumulated amortization
of $47,900 50,900
Deferred income taxes 22,700
Other 135,600
----------
209,200
----------
$2,282,500
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 100,000
Accrued expenses 136,400
----------
Total current liabilities 236,400
----------
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 3,100
Retained earnings 1,112,400
----------
2,010,700
Less common stock held in treasury, at cost 52,400
----------
1,958,300
----------
$2,282,500
==========
See notes to condensed unaudited consolidated financial statements
1
SCIENTIFIC INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three Month For the Six Month
Periods Ended Periods Ended
December 31, December 31,
1998 1997 1998 1997
-------- -------- ---------- ----------
Net sales $861,800 $940,700 $1,779,400 $1,665,100
Cost of goods sold 551,100 576,600 1,118,200 1,002,400
-------- -------- ---------- ----------
Gross profit 310,700 364,100 661,200 662,700
-------- -------- ---------- ----------
Operating Expenses:
General and administrative 205,400 222,400 403,900 405,900
Selling 26,000 53,600 49,700 82,900
Research and development 56,100 36,200 124,000 97,800
-------- -------- ---------- ----------
287,500 312,200 577,600 586,600
-------- -------- ---------- ----------
Income from operations 23,200 51,900 83,600 76,100
Interest and other income 10,700 11,100 21,100 20,600
-------- -------- ---------- ----------
Income before income taxes 33,900 63,000 104,700 96,700
Income taxes 3,500 9,500 23,300 17,700
-------- -------- ---------- ----------
Net income $ 30,400 $ 53,500 $ 81,400 $ 79,000
======== ========= ========== ==========
Net income per common
share - basic (Note 3) $ .04 $ .06 $ .10 $ .10
Net income per common
share - diluted (Note 3) $ .03 $ .05 $ .08 $ .08
See notes to condensed unaudited consolidated financial statements
2
SCIENTIFIC INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Month Periods Ended
December 31, 1998 December 31, 1997
----------------- -----------------
Operating activities:
Net Income $ 81,400 $ 79,000
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 46,000 37,000
Change in assets and liabilities:
Accounts receivable ( 80,700) (139,200)
Inventories (114,200) 46,100
Prepaid expenses and other
current assets 8,000 7,000
Accounts payable ( 8,600) 51,500
Accrued expenses ( 31,500) ( 65,900)
Customer advances ( 15,200) ( 3,800)
----------- -----------
Total adjustments (196,200) ( 67,300)
----------- -----------
Net cash provided by (used in)
operating activities (114,800) 11,700
----------- -----------
Investing activities:
Purchase of investment securities,
principally held to maturity (846,000) (696,400)
Redemptions of investment securities,
principally held to maturity 914,600 659,500
Capital expenditures ( 20,900) ( 30,900)
Purchase of intangible assets ( 5,300) ( 8,500)
----------- -----------
Net cash provided by (used in)
investing activities 42,400 ( 76,300)
----------- -----------
Net decrease in cash and cash equivalents ( 72,400) ( 64,600)
Cash and cash equivalents, beginning of year 165,900 146,600
------------ -----------
Cash and cash equivalents, end of period $ 93,500 $ 82,000
============ ===========
Supplemental disclosures:
Cash paid during the period for:
Income Taxes $ 3,200 $ 81,200
See notes to condensed unaudited consolidated financial statements
3
SCIENTIFIC INDUSTRIES, INC.
NOTES TO CONDENSED 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 statements as of and for the three and six months ended December
31, 1998 and 1997 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 consolidated financial statements include the
accounts of Scientific Industries, Inc. and Scientific Packaging Industries,
Inc., a New York Corporation, (a wholly owned subsidiary of Scientific
Industries, Inc.). 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:
December 31,
1998
------------
Raw Materials $ 442,400
Work in process 8,700
Finished Goods 4,100
------------
$ 455,200
============
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 per common share was computed as follows:
For the Three Month For the Six Month
Periods Ended Periods Ended
December 31, December 31,
1998 1997 1998 1997
------- ------- ------- -------
Net income $30,400 $53,500 $81,400 $79,000
======= ======= ======= =======
Weighted average common shares
outstanding 834,572 826,239 834,572 826,239
Effect of dilutive securities,
stock options 144,990 150,303 144,990 150,303
------- ------- ------- -------
Weighted average dilutive common
shares outstanding 979,562 976,542 979,562 976,542
======= ======= ======= =======
Net income per common
share - basic $ .04 $ .06 $ .10 $ .10
Net income per common
share - diluted $ .03 $ .05 $ .08 $ .08
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 increased to $1,695,300 at December 31, 1998 from
$1,600,700 at June 30, 1998 attributable primarily to an increase in income from
operations during the first quarter of fiscal year 1999. Management believes
that funds generated from operations, 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 December 31, 1998 Compared With Three Months Ended
December 31, 1997.
In early January 1999, the Company learned that another company, Troemner, Inc.
("Troemner") is suppling 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 duplicate of the Company's Vortex Genie 2(registered trademark)
Mixer, the Company's primary product which accounts for approximately 98% of the
Company's current sales. In addition Troemner appears to be soliciting business
at a markedly lower price than the Company The Company believes that VWR and
Troemner have infringed upon the Company's patent and trade dress of the Vortex
Genie 2 Mixer. Accordingly, on January 26, 1999, the Company commenced a civil
action (the "Action") in the United States District Court in the Easter District
of New York against VWR and Troemner alleging, among other things, patent and
trade dress infringement, false designation of origin and false and misleading
representations, deceptive advertising, unfair business practices and deceptive
trade practices. The Company is seeking, among other remedies, equitable relief
and monetary damages.
VWR's sales accounted for approximately 26% of the Company's total annual net
sales in fiscal year 1998. VWR's sales accounted for approximately 19% for the
three months ended December 31, 1998, and 28% for the three months ended
December 31, 1997 of the Company's totalt net sales. Pending disposition of the
Action, the Company does not expect any future net sales to VWR. As a result,
the financial result of operations set forth herein, including net sales, income
from operations and net income, are expected to be materially adversely
effected, and such adverse effect is expected to occur as early as the quarter
ended March 31, 1999. Because of the uncertainty of the disposition of the
Action and as to whether the expected loss in net sales to VWR can be replaced
through alternative distributors or distribution channels, the Company cannot
predict or quantify the amount extent of such adverse effect.
Net sales decreased $78,900 (8.4%) for the three month period ended December
31, 1998 compared with the three month period ended December 31, 1997 as a
result of unusually high order input for our existing laboratory products during
the quarter ended December 31, 1997. The gross profit percentage for the three
month period ended December 31, 1998 of 36.1% decreased from 38.7% for the
comparable period last year as a result of lower sales and higher labor and
labor-related costs included in factory overhead during the quarter ended
December 31, 1998.
General and administrative expenses decreased $17,000 (7.6%) from $222,400 for
the quarter ending December 31, 1997 to $205,400 for the quarter ending December
31, 1998 due lower administrative labor costs. The decrease was partially
offset by increased expenses related to the pursuit of external business
opportunities.
Selling expenses decreased $27,600 (51.5%) to $26,000 for the quarter ending
December 31, 1998 from $53,600 for the quarter ending December 31, 1997
primarily as a result of promotional expenses related to a certain rebate
program with a customer for our existing laboratory products during the quarter
ended December 31, 1997.
Research and development expenses for the three month period ended December
31, 1998 increased 55.0% to $56,100 compared to $36,200 in the comparable
period last year as a result of increased research and development activities
related to new products.
6
SCIENTIFIC INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Income before income taxes for the three month period ended December 31, 1998 of
$33,900 compared with $63,000 for the three month period ended December 31, 1997
decreased $29,100 (46.2%) mainly due to higher sales during the quarter ended
December 31, 1997.
The Six Months Ended December 31, 1998 Compared With Six Months Ended December
31, 1997.
Net sales increased $114,300 (6.9%) for the six month period ended December
31, 1998 compared with the six month period ended December 31, 1997 as a
result of higher sales of our existing laboratory products during the first
quarter of fiscal year 1999 compared to the first quarter of fiscal year 1998.
The gross profit percentage for the six month period ended December 31, 1998
of 37.2% compared to the gross profit percentage of 39.8% for the six month
period ended December 31, 1997 decreased as a result of higher labor and labor-
related costs in factory overhead during the six month period ended
December 31, 1998.
Selling expenses decreased $33,200 (40.0%) to $49,700 for the six month period
ended December 31, 1998 compared with $82,900 for the same period last year as a
result of promotional expenses related to a certain rebate program with a
customer for our existing laboratory products during the six month period
ended December 31, 1997.
Research and development expenses for the six month period ended December 31,
1998 were $124,000 compared to $97,800 in the comparable period last year.
The increase of $26,200 (26.8%) was a result of increased research and
development activities related to new products.
Income before income taxes for the six month period ended December 31, 1998 of
$104,700 increased $8,000 (8.3%) compared with $96,700 for the six month
period ended December 31, 1997 mainly due to lower selling expenses, partially
offset by higher research and development costs, as discussed above.
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. As of
December 31, 1998, the majority of the Company's critical software programs
are Year 2000 compliant.
Management currently believes that it will be successful in identifying and
resolving any potential deficiencies in the Company's remaining programs and
systems with respect to the Year 2000 issue by June 30, 1999 and that all
material systems will be compliant by the Year 2000, and that the cost to
address such issues is not material. 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 has also
begun to undertake steps to identify whether its vendors have sufficiently
identified and are taking steps to address the Year 2000 issue. Management is
presently formulating a survey and plan for working with key third-parties to
understand their ability to continue providing services and products through
the change to 2000. The Company will work directly with its key vendors and
distributors, and coordinate 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 December 31, 1998
PART II -- OTHER INFORMATION
Items 1. Legal Proceedings The Company was not a party to any
pending legal proceedings during the
quarter.
Items 2. Through 3. NONE
Item 4. Submission of Matters to a Vote of Security Holders
During the quarter ended December 31, 1998, the Company's 1998 Annual Meeting
was held on November 19, 1998. At this meeting one Class B Director, Joseph I.
Kesselman was elected to the Company's Board of Directors to serve until the
2001 Annual Meeting. There was a total of 674,455 "FOR" votes, and 1,154
shares were withheld, and 2,545 "ABSTAIN" votes. The other directors whose
terms of office as directors continued after the meeting are Lowell A. Kleiman
(Class C), Roger B. Knowles (Class C), Arthur M. Borden (Class A), and James
S. Segasture (Class A).
There were no other matters submitted to a vote of security holders during this
quarter.
Items 5. Other Information Not applicable
Items 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
---------------------
Lowell A. Kleiman
President and Treasurer
(Chief Executive and Financial Officer)
/s/ Helena R. Santos
--------------------
Helena R. Santos
Controller and Assistant Treasurer
(Principal Accounting Officer)
Date February 10, 1999
10
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 93,500
<SECURITIES> 960,400
<RECEIVABLES> 357,400
<ALLOWANCES> 7,400
<INVENTORY> 455,200
<CURRENT-ASSETS> 1,931,700
<PP&E> 304,500
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<BONDS> 0
0
0
<COMMON> 42,700
<OTHER-SE> 2,239,800
<TOTAL-LIABILITY-AND-EQUITY> 2,282,500
<SALES> 1,779,400
<TOTAL-REVENUES> 1,800,500
<CGS> 1,118,200
<TOTAL-COSTS> 1,695,800
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<INCOME-PRETAX> 104,700
<INCOME-TAX> 23,300
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