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, 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)
(631)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.
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
ASSETS
December 31, 1999
-----------------
Current Assets:
Cash and cash equivalents $ 395,800
Investment securities 75,300
Trade accounts receivable, less allowance for
doubtful accounts of $7,400 200,700
Inventories (Note 2) 478,400
Litigation settlement receivable 200,000
Prepaid expenses and other current assets 32,300
----------
Total current assets 1,382,500
----------
Property and equipment at cost, less accumulated
depreciation of $226,400 186,300
----------
Other assets and deferred charges:
Intangible assets, less accumulated amortization
of $67,700 32,500
Other 144,100
----------
176,600
----------
$1,745,400
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 257,500
Accrued expenses 72,300
----------
Total current liabilities 329,800
----------
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 (1,100)
Retained earnings 462,500
----------
1,373,700
Less common stock held in treasury, at cost 52,400
----------
1,321,300
----------
$1,745,400
==========
See notes to condensed consolidated financial statements
1
SCIENTIFIC INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Month For the Six Month
Periods Ended Periods Ended
December 31, December 31,
------------------- -----------------
1999 1998 1999 1998
-------- ---------- ---------- ---------
Net sales $514,400 $861,800 $1,230,600 $1,779,400
Cost of goods sold 382,900 551,100 881,600 1,118,200
-------- -------- ---------- ----------
Gross profit 131,500 310,700 349,000 661,200
-------- -------- ---------- ----------
Operating Expenses:
General and administrative 186,500 205,400 360,000 403,900
Selling 30,800 26,000 57,000 49,700
Research and development 71,900 56,100 135,900 124,000
-------- -------- ---------- ----------
289,200 287,500 552,900 577,600
-------- -------- ---------- ----------
Income (loss) from operations (157,700) 23,200 (203,900) 83,600
-------- -------- ---------- ----------
Other income (expenses):
Litigation costs (35,700) - (262,200) -
Proceeds from litigation
settlement 250,000 - 250,000 -
Interest and other income 4,700 10,700 12,300 21,100
-------- -------- ---------- ----------
219,000 10,700 100 21,100
-------- -------- ---------- ----------
Income (loss) before income taxes 61,300 33,900 (203,800) 104,700
Income taxes - 3,500 - 23,300
-------- ------- ---------- ---------
Net income (loss) $ 61,300 $ 30,400 ($ 203,800 $ 81,400
======== ======== ========== =========
Net income (loss) per common
share - basic (Note 3) $ .07 $ .04 ($ .24) $ .10
Net income (loss) per common
share - diluted (Note 3) $ .07 $ .03 ($ .24) $ .08
See notes to condensed consolidated financial statements
2
SCIENTIFIC INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Month Periods Ended
December 31, 1999 December 31, 1998
----------------- -----------------
Operating activities:
Net Income (loss) ($ 203,800) $ 81,400
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Gain on sale of investments (800) -
Depreciation and amortization 49,200 46,000
Change in assets and liabilities:
Accounts receivable 122,300 (80,700)
Inventories (112,400) (114,200)
Litigation settlement receivable (200,000) -
Recoverable income taxes 102,000 -
Prepaid expenses and other
current assets 16,000 8,000
Accounts payable 13,500 (8,600)
Accrued expenses (22,200) (31,500)
Customer advances - (15,200)
---------- -----------
Total adjustments (32,400) (196,200)
---------- -----------
Net cash used in
operating activities (236,200) (114,800)
---------- -----------
Investing activities:
Purchase of investment securities,
available-for-sale (4,800) (846,000)
Redemptions of investment securities,
available-for-sale 4,300 -
Redemptions of investment securities,
principally held to maturity 447,300 914,600
Capital expenditures (43,900) (20,900)
Purchase of intangible assets - (5,300)
---------- -----------
Net cash provided by
investing activities 402,900 42,400
---------- -----------
Net increase (decrease) in cash and cash
equivalents 166,700 (72,400)
Cash and cash equivalents, beginning of year 229,100 165,900
--------- -----------
Cash and cash equivalents, end of period $ 395,800 $ 93,500
========= ============
Supplemental disclosures:
Cash paid during the period for:
Income Taxes $ 400 $ 3,200
See notes to condensed consolidated financial statements
3
SCIENTIFIC INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
General: As contemplated by the Securities and Exchange Commission (the
"Commission"), the accompanying financial statements and
footnotes thereto 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 fiscal year ended June 30, 1999 of
Scientific Industries, Inc., (the "Company").
The statements as of and for the three and six months ended
December 31, 1999 and 1998 are unaudited. In the opinion of
management of the Company, 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 the Company and Scientific Packaging Industries, Inc., a New
York Corporation and 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 of
inventory are as follows:
December 31,
1999
------------
Raw Materials $ 375,400
Work in process 63,000
Finished Goods 40,000
------------
$ 478,400
============
4
SCIENTIFIC INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), (continued)
3. Earnings per share:
For the fiscal year ended June 30, 1998, the Company adopted Financial
Accounting Standard No. 128, "Earnings Per Share," which replaced 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 (loss)
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 Six Month
Periods Ended Periods Ended
December 31, December 31,
------------------- ------------------
1999 1998 1999 1998
---------- -------- --------- --------
Net income (loss) $ 61,300 $ 30,400 ($203,800) $ 81,400
========== ======== ========= ========
Weighted average common shares
outstanding 835,540 834,572 835,540 834,572
Effect of dilutive securities,
stock options 97,867 144,990 - 144,990
---------- -------- -------- --------
Weighted average dilutive common
shares outstanding 933,407 979,562 835,540 979,562
========== ======== ======== ========
Net income (loss) per common
share - basic $ .07 $ .04 ($ .24) $ .10
Net income (loss) per common
share - diluted $ .07 $ .03 ($ .24) $ .08
The potential effect of dilution from the assumed exercise of stock options,
amounting to 97,867 shares of common stock as of December 31, 1999, was not
included in determining dilutive EPS for the six month period ended December
31, 1999 because to do so would be anti-dilutive since the Company incurred
a year-to-date net loss. Unexercised employee stock options to purchase
105,000 shares of common stock at $1.28 to $2.00 per share were outstanding
as of December 31, 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 fiscal 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.
5
SCIENTIFIC INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Liquidity and Capital Resources
The Company's working capital for the six months ended December 31, 1999
decreased $199,700 to $1,052,700 compared to $1,252,400 as of June 30, 1999,
primarily due to litigation costs related to the lawsuit discussed in Part II,
Item 1 and losses from operations. Management believes that the Company's
working capital will be sufficient to meet the Company's operational
requirements for at least one year.
Results of Operations
The Three Months Ended December 31, 1999 Compared with the Three Months Ended
December 31, 1998.
The Company's net sales for the three months ended December 31, 1999 decreased
$347,400 (40.3%) from the comparable period last year primarily due to the
loss of sales to VWR Scientific Products ("VWR") and fewer orders
from other customers for the three months ended December 31, 1999. However,
as of December 31, 1999, the Company had a backlog of orders amounting to
approximately $348,000, which included purchase orders from VWR in the amount
of $200,000 from VWR in connection with the settlement of the litigation
discussed in Part II, Item 1. The Company cannot predict VWR's future
purchases of the Company's Vortex-Genie 2 (registered trademark) mixer once
VWR's inventory of this initial order is depleted.
The gross profit percentage of 25.6% for the three months ended December 31,
1999 decreased from 36.1% for the comparable period last year, primarily as a
result of the lower sales relative to the level of fixed costs. In addition,
lower selling prices resulting from price pressures brought on by Troemner Inc.
("Troemner") contributed to the lower gross profit.
General and administrative expenses of $186,500 for the three months ended
December 31, 1999 decreased $18,900 (9.2%) from $205,400 for the comparable
period last year, primarily because there were no expenses incurred
related to the pursuit of external business opportunities. Due to the
litigation, the Company did not pursue external business opportunities in order
to focus on protecting the Company's existing business.
Research and development expenses of $71,900 for the three months ended
December 31, 1999 increased $15,800 (28.2%) from $56,100 for the comparable
period last year as a result of increased activity related to the Company's
new product, the Enviro-Genie (trademark).
The Company incurred litigation costs of $35,700 for the three months ended
December 31, 1999 which are not expected to continue beyond this quarter. The
proceeds from the litigation settlement in the amount of $250,000 pertain to
the cash portion of the settlement agreement. The Company received $50,000 in
December and received the remainder prior to the filing of this report.
As a result of the proceeds from the litigation settlement, the Company
reflected income before income taxes of $61,300, compared to $33,900 for the
comparable period last year.
6
SCIENTIFIC INDUSTRIES, INC.
The Six Months Ended December 31, 1999 Compared with Six Months Ended December
31, 1998.
The Company's net sales for the six months ended December 31, 1999 decreased
$548,800 (30.9%) for the same reasons previously discussed for the three month
results. The gross profit percentage of 28.4% for the six months ended
December 31, 1999 decreased from 37.2% for the comparable period last year for
the same reasons previously discussed for the three month results.
General and administrative expenses of $360,000 for the six months ended
December 31, 1999 decreased $43,900 (10.9%) from $403,900 for the comparable
period last year, primarily because there were no expenses incurred during the
six months ended December 31, 1999 related to the Company's pursuit of
external business opportunities. Due to the litigation, the Company did not
pursue external business opportunities in order to focus on protecting the
Company's existing business.
Research and development expenses of $135,900 for the six months ended December
31, 1999 increased $11,900 (9.6%) from $124,000 for the comparable period last
year primarily as a result of increased activity related to a new product, the
Enviro-Genie (trademark).
As a result of the litigation costs and lower sales during the six months ended
December 31, 1999, the Company reflected a loss before income taxes of $203,800
for the six months ended December 31, 1999, compared to income before income
taxes of $104,700 for the comparable period last year.
Year 2000 Compliance
As of the date of this filing, the Company has not incurred any material
effects on its business due to failures from computer software/systems. At
this time the Company has no indication that any problems will arise. The
Company cannot give any assurances that Year 2000 problems will not occur.
7
PART II
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 believed
violated 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's 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 sought 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 was 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
was not before the District Court is currently being marketed by VWR. The
District Court's preliminary injunction order was appealed to the United States
Court of Appeals for the Federal Circuit.
On December 1, 1999 a settlement agreement was reached among the parties.
Under the settlement, VWR and Troemner agreed not to manufacture, sell or
distribute any vortex mixer that infringes the Company's trade dress in the
housing configuration of the Vortex-Genie 2(registered trademark) mixer and, fo
a limited time, whose accessories are interchangeable with the
Vortex-Genie 2(registered trademark) mixer's accessories. Troemner and VWR
also agreed not to sell the original VWRbrand (registered trademark)
Mini-Vortexer manufactured by Troemner. Troemner will be entitled to
manufacture, market and sell to VWR, and VWR will be entitled to continue to
market and sell the modified version of Troemner's VWRbrand (registered
trademark) Mini-Vortexer. The VWRbrand Mini-Vortexer will include the
existing coupling under a patent license from the Company. In addition, VWR
will begin purchasing vortex mixers from the Company under the Company's own
brand. The settlement agreement included an immediate purchase commitment
from VWR of $200,000 which included significant quantities of the
Vortex-Genie 2(registered trademark) mixer, and to a lesser extent
quantities of the Company's new products, the Roto-Shake Genie(trademark)
and the Enviro-Genie(trademark). The settlement agreement also includes a
cash payment of $250,000 from Troemner and certain promotional considerations
from VWR amounting up to a maximum of $250,000 based on a percentage of sales
of the Company's products. The promotional activities are to be performed during
2000, 2001, and 2002.
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: On December 3, 1999, the Company filed a
Form 8-K with the Commission, announcing a
settlement agreement in connection with the
litigation described in Item 1.
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
Controller and Assistant Treasurer
(Principal Accounting Officer)
Date February 14, 2000
- ----------------------
10
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 395,800
<SECURITIES> 75,300
<RECEIVABLES> 208,100
<ALLOWANCES> 7,400
<INVENTORY> 478,400
<CURRENT-ASSETS> 1,382,500
<PP&E> 412,700
<DEPRECIATION> 226,400
<TOTAL-ASSETS> 1,745,400
<CURRENT-LIABILITIES> 329,800
<BONDS> 0
0
0
<COMMON> 42,800
<OTHER-SE> 1,278,500
<TOTAL-LIABILITY-AND-EQUITY> 1,745,400
<SALES> 1,492,900
<TOTAL-REVENUES> 1,230,600
<CGS> 881,600
<TOTAL-COSTS> 1,434,500
<OTHER-EXPENSES> 262,200
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (203,800)
<INCOME-TAX> 0
<INCOME-CONTINUING> (203,800)
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<NET-INCOME> (203,800)
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