UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
------- EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2002
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
------ EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-6658
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SCIENTIFIC INDUSTRIES, INC.
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(Name of Small Business Issuer in Its Charter)
Delaware 04-2217279
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
70 Orville Drive, Bohemia, New York 11716
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (631) 567-4700
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Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None None
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.05 per share
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(Title of Class)
-
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(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 the definitive proxy or
information statements incorporated by reference in Part III
of this Form 10-KSB or any amendment to this Form 10-KSB. [ X ]
Issuer's revenues for its most recent fiscal year. $3,457,300
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 30, 2002 is $750,600.
The number of shares outstanding of the issuer's common stock,
par value $.05 per share ("Common Stock") as of August 30, 2002
is 950,541 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [ X ]
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Forward Looking Statements
The Company and its representatives may from time to time make
written or oral forward-looking statements with respect to the
Company's annual or long-term goals, including statements contained
in our filings with the Securities and Exchange Commission and in its
reports to stockholders.
The words or phrases "will likely result," "are expected to,"
"will continue to," "is anticipated," "estimate," "project" or
similar expressions identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical
earnings and those presently anticipated or projected. Readers
are cautioned not to place undue reliance on any such
forward-looking statements, which speak only as of the date made.
General. Scientific Industries, Inc., a Delaware corporation
(the "Company"), formed in 1954 is engaged in manufacturing and
selling laboratory equipment consisting primarily of a vortex
mixer, the Vortex-Genie (registered trademark) 2, 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). Gross sales of the Vortex-Genie (registered
trademark) 2 Mixer and accessories represented approximately 92% and
95%, respectively, of the Company's revenues for the years ended
June 30, 2002 and 2001. During the past five years, the Company
has been developing and introducing new products and additional
accessories for its existing products. New products include the
Roto-Shake Genie (registered trademark), a multi-purpose
rotator/rocker; and the Enviro-Genie (trademark), a multi-functional
benchtop refrigerated incubator. The Enviro-Genie (trademark)
consists of an environmentally controlled benchtop 6-in-1 refrigerator/
incubator/rotator/rocker/stirrer/shaker designed for the study
of micro-organisms and cell growth under strictly controlled
conditions of temperature and agitation. In view of the
sophistication of the Enviro-Genie (trademark) and its higher unit
price than other products of the Company, the Company anticipates
lower volumes of unit sales, but a higher profit margin per unit.
New products introduced during the year ended June 30, 2002
comprise a line of mixers derived from the Vortex-Genie
(registered trademark) 2, including the Vortex-Genie
(registered trademark) 1 touch mixer, Vortex-Genie (registered
trademark) 2T timer mixer and the Disruptor Genie (trademark) cell
disruptor/homogenizer, which are targeted at the existing
vortex mixer market.
The Company's products are used by hospital and research laboratories,
clinics, pharmaceutical manufacturers, medical device manufacturers and
other related industries. The products are distributed and marketed
principally through a network of domestic and foreign laboratory
equipment dealers solicited by the Company's personnel and outside
consultant. The Company also markets its products through attendance
of trade shows, advertising in trade publications, brochures and
catalogs, and its website.
Raw Materials. The Company currently manufactures its products from
readily available components supplied by various independent contractors,
and does not rely on any one principal supplier, except as to a few
components where it is not practicable to have multiple suppliers but
alternative suppliers are available.
Patents, Trademarks, Licenses and Franchises. The Company holds several
United States patents relating to existing products. It licenses one of
its patents, a patent on a utilitarian feature of its Vortex-Genie
(registered trademark) 2 Mixer.The Company licenses this patent on a
non-exclusive basis to Troemner, Inc., ("Troemner"), under a royalty-free
settlement agreement dated December 1, 1999. This license expires on
November 2, 2005, the expiration of the patent. The Company's patent for the
TurboMix (trademark), an attachment to the existing Vortex-Genie (registered
trademark) 2 mixer, expires in September 2015. Its patent on the Roto-Shake
Genie (registered trademark) expires in July 2016. The Company intends to
apply for additional patents, when appropriate, for technology and products
which it considers important for the protection of its business. No
assurance can be given that any patent application will result in the
issuance of a patent or, if granted, will provide effective protection.
The Company has various proprietary marks including Vortex-Genie
(registered trademark) 2, TurboMix (trademark), Roto-Shake Genie
(registered trademark), Genie (trademark), and Enviro-Genie
(trademark), which it considers important to the success of its products.
Foreign Sales. The Company's sales to various distributors outside
the United States (principally Europe and Asia) accounted for
approximately 44.0% of the Company's net sales for the fiscal year ended
June 30, 2002 ("fiscal 2002") and 42.7% for the fiscal year ended
June 30, 2001 ("fiscal 2001"). Such sales are paid in United States dollars
and are therefore not subject to risks of currency fluctuation,
foreign duties and customs.
Seasonality. The Company does not consider its business to be seasonal.
Largest Customer. Sales to Fisher Scientific Company, a U.S.
distributor of the Company's products, primarily the Vortex-Genie
(registered trademark) 2 Mixer and related accessories,
accounted for approximately 33.0% of the Company's net sales for fiscal
2002 and 36.3% for fiscal 2001. The loss of this customer or a material
reduction in its purchases would have a material adverse effect upon the
operating results of the Company.
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 for order fulfillment is approximately two weeks or less.
Competition. 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. The Company is a dominant
factor in the market for vortex mixers in the United States and is widely
recognized in the international vortex mixers market. In the general
area of laboratory equipment, the Company's major competitors are
Troemner, Barnstead/Thermolyne Corporation, a subsidiary
of Sybron International, IKA-Werke GmbH & Co. KG, a German company,
and Heidolph Instruments GmbH, a German company.
Research and Development. In connection with the development of new
products, the Company incurred research and development expenses of
$289,600 during fiscal 2002 compared to $251,800 during fiscal 2001.
The $37,800 increase was the result of higher labor costs in the
development of new products. The Company intends to continue investing
in research and development activities to achieve increased product
diversification at approximately the same rate or slightly higher in
fiscal year 2003.
Government and Environmental Regulation. The Company's products
and claims with respect thereto do not require approval of the Food
and Drug Administration or any other government approval. The
Company's manufacturing operations, like those of the industry in
general, are subject numerous existing and proposed, if adopted,
federal, state, and local
regulations proposed 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 existing
laws and regulations and the cost to comply is not significant to
the Company.
Employees. As of August 30, 2002, the Company employed 21 persons
of which 18 were full-time. None of the Company's employees are
represented by any unions.
RISK FACTORS
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, important risk factors are
identified below that could affect our financial performance
and could cause the Company's actual results for future periods to
differ materially from any opinions or statements expressed with respect
to such future periods in any current statements. The Company
undertakes no obligation to publicly revise any forward-looking
statements to reflect future events or circumstances.
THE COMPANY OFFERS A LIMITED NUMBER OF PRODUCTS WITH SALES OF
ONE PRODUCT ACCOUNTING FOR MORE THAN 90% OF ITS ANNUAL REVENUES
The Company currently offers for sale a limited number of products,
with sales of its Vortex-Genie (registered trademark) 2 Mixer and
accessories related thereto accounting for over 90% of the Company's
gross sales for each of fiscal 2002 and fiscal 2001. In the past few
years, there have been new entrants into the vortex-mixer market.
Their mixers are being aggressively marketed by the same distributors
that offer the Company's products. No assurance can be given that
the Company will be able to increase or maintain its current level
of sales of the Vortex-Genie (registered trademark) 2 Mixer or
the operating margin derived therefrom.
THE COMPANY'S ABILITY TO GROW AND COMPETE EFFECTIVELY IS IN PART
DEPENDENT ON ITS ABILITY TO DEVELOP AND EFFECTIVELY MARKET NEW PRODUCTS
During the past five years, the Company has pursued a program to
develop and market new hospital and industrial laboratory equipment
with a view to increasing its revenues and reducing its dependence
on the Vortex-Genie (registered trademark) 2 Mixer. Pursuant to the
program, the Company first developed and introduced the Roto-Shake
Genie (registered trademark) rotator/rocker and then the Enviro-Genie
(trademark) refrigerated incubator and expects to introduce at least
two new products during the fiscal year ending June 30, 2003.
Gross revenues from sales of new products by the Company
amounted to $277,300 and $161,900, respectively, for the years ended
June 30, 2002 and June 30, 2001. The research and development expenditures
for fiscal 2002 and fiscal 2001 amounted to $289,600 and $251,800,
respectively. The Company historically has relied primarily on its
distributors and their catalogues to market its products. Accordingly,
it may be at least 24 to 36 months between the completion of development
of a product and the distribution of the catalogue in which it is first
offered. No assurance can be made that the amounts allocated by the
Company for such program are sufficient for such purpose, that any
particular product will be included in a catalogue or that any significant
sales will result.
THE COMPANY RELIES HEAVILY ON ONE DISTRIBUTOR FOR SALES OF ITS PRODUCTS
Sales of the Company's products, principally the Vortex-Genie (registered
trademark) 2 Mixer, through one of the two major U. S. distributors of
scientific equipment for hospital and industrial laboratories, accounted for
approximately 33% and 36.3% of the Company's sales for the years ended
June 30, 2002 and June 30, 2001, respectively. A termination or material
adverse change in the terms of the Company's relationship with that
distributor would have a material adverse effect on the Company's results
and financial condition. While the Company is attempting to
expand its distribution network, no assurance can be given that it will
be successful or that in view of contractual relationships between
distributors and end users, any reduction in sales through this distributor
would be adequately overcome through arrangements with other distributors.
THE COMPANY IS A SMALL PARTICIPANT IN ITS HIGHLY COMPETITIVE INDUSTRY
Although the Company's principal product, the Vortex-Genie (registered
trademark) 2 Mixer, has been widely accepted, the Company is an
insignificant factor in the highly competitive laboratory products
industry. The Company's net sales for the years ended June 30, 2002 and
June 30, 2001 were $3,457,300 and $3,435,000, respectively. Its principal
competitors are substantially larger and have much greater financial,
production and marketing resources than the Company.
THE COMPANY'S ABILITY TO COMPETE DEPENDS IN PART ON ITS ABILITY TO SECURE
AND MAINTAIN PROPRIETARY RIGHTS TO ITS PRODUCTS
The Company's ability to compete depends in part on its ability to secure
and maintain proprietary rights to its products. The Company holds a design
patent expiring in November 2005 on a feature of its Vortex-Genie (registered
trademark) 2 Mixer, its principal product. It holds patents on an attachment
to that product which expires in 2015 and on another product which expires
in 2016 and intends to apply for additional patents on new products. There
can be no assurance that it will be successful in obtaining additional patents,
that any patent issued to the Company provides or will provide the Company with
competitive advantages or will not be challenged by third parties or that
the patents of others will not prevent the commercialization of
products developed by the Company. Furthermore, there can be no assurance
that others will not independently develop similar products or design around
the Company's patents. Any of the foregoing activities could have a material
adverse effect on the Company.
Moreover, the enforcement by the Company of its patent rights could result in
substantial litigation costs, as it did in fiscal 2000 in the defense of
its proprietary claim with respect to its Vortex-Genie (registered trademark)
2 Mixer.
THE COMPANY HAS LIMITED MANAGEMENT RESOURCES
The Company's operations were managed until August 29, 2002 by Mr. Lowell
A. Kleiman, as President and Chief Executive Officer, Ms. Helena Santos, as
its Vice President - Controller and Mr. Robert Nichols as its
Vice President - Engineering. On August 29, 2002, the employment of
Mr. Kleiman was discontinued and the Company appointed Ms. Santos as
President, Chief Executive Officer and Treasurer to supervise
the Company's operations and administration and Mr. Nichols as Executive
Vice President and Secretary to supervise engineering and development.
No assurance can be given that the change will not have a materially
adverse effect on the Company's operations or financial condition.
Any material expansion of the Company's operations could place a significant
additional strain on the Company's limited management resources.
Furthermore, the loss of either Ms. Santos or Mr. Nichols in the absence
of an equally qualified successor could be materially adverse to
the Company's results and financial condition.
THE COMMON STOCK OF THE COMPANY IS THINLY TRADED AND IS SUBJECT TO VOLATILITY
The Common Stock of the Company is traded on the Over-the-Counter Bulletin
Board and has been thinly traded. There were only 953,341 shares of Common
Stock of the Company outstanding, of which 423,103 shares are held by
affiliates of the Company. There have been a number of trading days
during fiscal 2002 on which no trades of the Company's Common Stock
were reported. Accordingly, the market price for the Common Stock is
subject to great volatility.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's executive offices and manufacturing facilities comprising
approximately 25,000 square feet are located at 70 Orville Drive,
Bohemia, New York 11716, and are held pursuant to a lease which expires
on December 31, 2004 and provides for a minimum annual rental of
$228,100 for the year ended June 30, 2003.
The leased facilities are suitable and adequate for such use. In the
opinion of management, the property is adequately covered by insurance.
See Note 8 to the Financial Statements in Item 7 for further information
about the Company's lease obligations.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any pending legal proceedings. However,
a financial advisor employed by the Company pursuant to an engagement
letter that was not extended by the Company beyond its expiration date
of March 31, 2002 asserted a claim against the Company in April 2002 in
the amount of $125,000 for alleged services rendered to the Company
that were alleged to be outside the scope of the letter. The Company denies
engaging the financial advisor for any services outside the scope of the
engagement letter or that any amounts are owing to the advisor.
The Company's counsel has advised the Company that based on its review
of the engagement letter and the Company's denial, it is unlikely that
the financial advisor will prevail if it institutes a legal proceeding.
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 fiscal 2002.
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 each quarter of fiscal 2002 and fiscal 2001, 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
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09/30/00 .75 1.75
12/31/00 1.21 1.12
03/31/01 1.21 1.56
06/30/01 1.20 2.30
09/30/01 1.30 1.55
12/31/01 1.25 2.40
03/31/02 1.30 2.40
06/30/02 1.20 1.60
(b) There were, as of August 30, 2002, 884 record holders of the
Company's Common Stock.
(c) The Company has not paid any dividends but is not subject to any
agreement which prohibits or restricts the Company from paying dividends
on its Common Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Management's Discussion and Analysis of Financial Condition and Results
of Operations and other portions of this report contain forward-looking
statements that involve risks and uncertainties. Our actual results could
differ materially from those anticipated by the forward-looking information.
Factors that may cause such differences include, but are not limited to,
product demand, market acceptance and other factors discussed elsewhere in
this report. This Management's Discussion and Analysis of Financial
Condition and Results of Operations should be read in conjunction with our
financial statements and the related notes included elsewhere in this report.
Financial Overview. While revenues were slightly higher for fiscal
2002 than fiscal 2001, the Company's operating income was lower than the
prior year. During the last quarter of fiscal 2002, the Company began
experiencing an overall slow down in orders, most likely due to general
economic conditions and increasing competitive pressures. The Company
continued its program of developing new products and engaged in limited
marketing activities. Our future strategy includes scaling costs where
appropriate, while maintaining our investment in new product development
and increasing marketing and sales activity to better position the Company
for future growth.
Results of Operations. Net sales for fiscal 2002 were $3,457,300,
only slightly higher ($22,300 or 0.7%) than sales for fiscal 2001 of
$3,435,000. The failure to achieve a material increase in sales in fiscal
2002 was primarily due to lower sales in the fourth quarter of the fiscal
year, principally the result of lower sales to foreign customers during the
fourth quarter compared to the prior three quarters of the fiscal year. We
attribute the decrease in sales to a downturn in general economic conditions and
competitive pressures. Sincer June 30, 2002, sales have remained lower than
normal, despite an increase in orders from one foreign customer. As a result,
sales for the first quarter of fiscal 2003 are expected to be lower than the
average of the sales for the first three quarters of fiscal 2002, but higher
than the fourth quarter of fiscal 2002.
Gross sales of new products, principally the Roto-Shake Genie
(registered trademark), Enviro-Genie (trademark, Disruptor Genie (trademark),
Vortex-Genie (registered trademark) 2T and Vortex-Genie (registered
trademark) 1, but excluding accessories, amounted to $277,300 for fiscal 2002
compared to $161,900 for fiscal 2001. The gross profit percentage of 40.8% for
fiscal 2002 decreased slightly from 41.5% for fiscal 2001 primarily due
to hgiher factory overhead costs.
General and administrative expenses for fiscal 2002 increased
slightly by $32,800 (4.0%) to $854,900 compared to $822,100 for the
prior year. The increase was primarily due to certain insurance expenses.
Selling expenses for fiscal 2002 increased $19,200 (12.1%)
to $178,400 compared to $159,200 for fiscal 2001 due to increased
promotional activity including greater advertising in trade publications
and more product literature.
Research and development expenses for fiscal 2002 increased by $37,800
(15.0%) to $289,600, compared to $251,800 for fiscal 2001 as a result of
higher labor costs for development activity for new products. The
Company intends to continue investing in research and development activities
at approximately the same rate or slightly higher in the year ending
June 30, 2003 to increase product diversification.
The reduction in interest and other income of $11,000 to
$19,200 for fiscal 2002 from $30,200 for fiscal 2001 was the result of
the Company's change in its investment securities from interest bearing
securities to mostly mutual funds. While the mutual funds offer higher
potential yields, any related income from gains is not recorded in
income until the gains (or losses) are realized. Unrealized gains
and losses are reflected separately under Shareholders' Equity.
Income tax expense amounted to $28,300 for fiscal 2002 compared
to a tax benefit of $101,600 for fiscal 2001. The tax benefit resulted
from the elimination during fiscal 2001 of a valuation allowance for the
deferred tax asset. As of June 30, 2002, the Company had utilized all its net
operating loss carryforwards and had available general business tax credits
of approximately $56,100 expiring in 2019 through 2022.
Liquidity and Capital Resources. The Company's working capital for
fiscal 2002 increased $121,900 to $1,531,400 from $1,409,500 for fiscal 2001,
due to higher cash, an increase in investment securities and of inventory,
partially offset by decreases in net trade accounts receivables and in prepaid
expenses and other current assets. The $102,700 increase in inventory was
primarily a result of a higher level of subassemblies work in process
in anticipation of a greater amount of orders than were realized at year end.
The Company has available a secured bank line of credit of $200,000
with North Fork Bank which expires on November 1, 2002 and carries
interest at prime plus 1%. The Company will seek to extend the credit line,
which has never been utilized. Management believes that it will be
able to meet its cash flow requirements during the next fiscal year from its
available financial resources which are anticipated to include future cash
generated from operations, its cash and cash equivalents and investments,
and if required, the credit line.
Capital Expenditures. During fiscal 2002, 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 2003. It is anticipated, as in past fiscal years, that captial
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.
ITEM 7. FINANCIAL STATEMENTS.
The Financial Statements required by this item are attached hereto
on pages F1-F17.
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 Company has five Directors. The terms of the Directors
currently expire at the annual meeting of stockholders of the Company to
be held as follows: 2002 as to two Directors (Messrs. Kleiman and Knowles,
Class C), 2003 as to two Directors (Messrs. Borden and Segasture, Class A),
and 2004 as to one Director (Mr. Kesselman, Class B). Mr. Kesselman was
appointed Chairman of the Board on August 29, 2002. Prior to that date,
Mr. Kleiman had been Chairman. 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 in this section.
Arthur M. Borden, Esq. (age 82), a Director since 1974, has been
counsel to KMZ Rosenman during the past five years.
Joseph I. Kesselman (age 77), a Director since 1961 and Chairman
of the Board since August 29, 2002, is a consultant to various corporations,
and a director of Nuclear and Environmental Protection Inc., Perrot Duval
Holding S.A. (A Swiss public company), Hopare Holding, S.A.
(A Swiss company), and Infranor Inc., a developer and manufacturer
of servo systems. Prior to November 1994, he was both Chairman and
Chief Executive Officer of Greentree Software, Inc., a developer and provider
of proprietary inventory control software, and during the last year of
his tenure, he acted as a consultant to that company.
Lowell A. Kleiman (age 61), a Director since 1970, and until
August 29, 2002 had been employed by the Company for over thirty years, and
was President of the Company from September 1974 until August 29, 2002.
Roger B. Knowles (age 77), a Director since 1965, is semi-retired.
During the past five years, he was President of various corporations,
including Conductive Systems, Inc., a manufacturer of EMI and RFI shielding
material, and G.H. Realty Company, a real-estate company, and a director of
Ionic, Inc., an investment company.
James S. Segasture (age 66), a Director since 1991, has been a
private investor since February 1990.
EXECUTIVE OFFICERS
On August 29, 2002, after the failure of the Company and Mr.
Kleiman to negotiate an extension of his employment which expired on
june 30, 2002, the Company determined to discontinue the employment of Mr.
Lowell A. Kleiman as President and Chief Executive Officer
of the Company and appointed two executive officers, Helena R. Santos as
President, Chief Executive Officer and Treasurer to supervise operations and
administration, and Robert P. Nichols as Executive Vice President and
Secretary to supervise product development and engineering.
Helena R. Santos, CPA (age 38) has been employed by the Company
since 1994, and served as Vice President, Controller since 1997 and Secretary
since May 2001. Prior to joining the Company, she was an internal auditor
with a major defense contractor from March 1991 to April 1994. Prior to that
she was employed in public accounting.
Robert P. Nichols (age 41) has been employed by the Company since
February 1998, and served as Vice President, Engineering since May 2001.
Prior to joining the Company, he was an Engineer Manager with Bay Side Motion
Group, a precision motion equipment manufacturer from January 1996 to
February 1998.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely on the Company's review of Forms 5 furnished to the
Company during its most recent fiscal year with respect to fiscal 2002,
the Company believes that, for the year ended June 30, 2002, 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 timely.
ITEM 10. EXECUTIVE COMPENSATION.
The following table summarizes all compensation paid by the Company
to its then Chief Executive Officer and President with respect to each of the
three fiscal years ended June 30, 2002. No other executive officer earned
in excess of $100,000 in any of such fiscal periods.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
All Other
Name and Principal Year Salary Bonus Compen-
Position $ $ sation
------ -------- -------- -----------
Lowell A. Kleiman 2002 $160,000 $ - $3,200(2)
CEO, President (1) 2001 $160,000 $ - $3,200(2)
2000 $160,000 $ - $3,200(2)
(1) Mr. Kleiman's employment terminated on August 29, 2002 at which time Ms.
Santos was appointed Chief Executive Officer and President. Ms. Santos's
compensation for the year ended June 30, 2002 was approximately $83,000.
(2) Represents the Company's matching contribution to Mr. Kleiman's account
under the Company's 401(k) Plan.
Neither Mr. Kleiman nor Ms. Santos received or exercised any stock options
during fiscal 2002.
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 at board meetings in the amount of $50 or the Director's
itemized expenses, whichever is greater. During fiscal 2002, the
Company paid fees in the aggregate amount of $20,000 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, at a
price of $0.35 per share, 12,000 shares of Common Stock, which were
exercisable in three annual installments. All 48,000 options
have been exercised by the directors prior to June 30, 2002.
The Company's 1992 Stock Option Plan authorized the grant of
options to purchase 3,000 shares of Common Stock at the then fair market
value to each non-employee director who was on the Board of Directors on
the first business day of each March, in 1993, 1994, 1995, and 1996.
In addition, in December 1997, the Board of Directors approved annual
grants under the Plan beginning in December 1997 of options to purchase
4,000 shares of Common Stock for each non-employee director exercisable
at the fair market value on the date of grant.
As of June 30, 2002, the Company had granted under the Plan
in the aggregate to the foregoing four non-employee Directors options to
purchase 128,000 shares of Common Stock, or options to purchase 32,000
shares of Common Stock for each. The fair market value per share of
Common Stock on the dates of grant were in each of the fiscal years:
$2.40 in 2002, $1.328 in 2001, $.829 in 2000, $1.875 in 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, except for 834
shares each (an aggregate of 3,336 shares) under the options granted
on December 31, 2000 which became available and exercisable on
July 1, 2001.
EMPLOYMENT AGREEMENT
Mr. Kleiman had been employed by the Company pursuant to an
employment contract which expired on June 30, 2002. The contract provided
for an annual salary of $160,000 beginning in fiscal 1998 and provided
for the grant to Mr. Kleiman of a five-year stock option for 10,000 shares
of Common Stock exercisable at $1.50 per share under certain circumstances
and a "golden parachute" provision providing for payment to Mr. Kleiman
in the event of termination of his employment within three years of change
of control resulting from a tender offer for the shares of the Company's
stock in an amount that was 2.99 times his base annual salary and benefits.
Other benefits provided for in the employment contract included continued
use of a Company car, four weeks paid vacation each year and certain death
benefits. Pursuant to the employment contract, a portion of the compensation
was deferred at Mr. Kleiman's option and placed in a separate investment
account with all earnings and losses to be for his benefit. As of
June 30, 2002, $74,400 was segregated into such an account. 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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of September 24, 2002, 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
---------------------------------
FIVE PERCENT STOCKHOLDERS,
DIRECTORS AND EXECUTIVE
OFFICERS: Number of Shares Percentage
---------------- ----------
Class A Directors:
Arthur M. Borden 62,540 (1) 6.4%
James S. Segasture 176,757 (2) 18.5%
Class B Director:
Joseph I. Kesselman 63,520 (3) 6.5%
Class C Directors:
Lowell A. Kleiman 139,581 14.7%
Roger B. Knowles 91,705 (4) 9.3%
All current directors and 581,903 (5) 53.3%
executive officers as a
group
(1) Includes 29,000 shares of Common Stock issuable upon exercise of
currently exercisable options.
(2) Includes 132,757 shares held jointly with his wife and 4,000 shares of
Common Stock issuable upon exercise of currently exercisable options.
(3) Includes 32,000 shares of Common Stock issuable upon exercise of
currently exercisable options, and 735 shares of Common Stock owned
jointly with Mrs. Kesselman.
(4) Includes 44,158 shares of Common Stock owned by Mrs. Knowles; 1,337
shares of Common Stock owned by a trust of which Mr. Knowles is a
trustee, beneficial ownership of which he disclaims, and
32,000 shares of Common Stock issuable upon exercise of currently
exercisable options.
(5) Includes 142,000 shares of Common Stock issuable upon exercise
of currently exercisable options of which options to purchase 45,000
shares of Common Stock are held by Ms. Santos adn Mr. Nichols.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During the last two years, there were no transactions or
proposed transactions between the Company and 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 fiscal 2002 covered by this report with the 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/ Helena R. Santos
____________________
Helena R. Santos
President, Chief Executive Officer and Treasurer
Principal Executive, Financial, and Accounting Officer
Date: September 30, 2002
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Name Title Date
-------------------- -------- ------------------
/s/ Arthur M. Borden Director September 27, 2002
_______________________
Arthur M. Borden
/s/ Joseph I. Kesselman Director (Chairman) September 27, 2002
_______________________
Joseph I. Kesselman
_______________________ Director
Lowell A. Kleiman
/s/ Roger B. Knowles Director September 27, 2002
_______________________
Roger B. Knowles
/s/ James S. Segasture Director September 27, 2002
_______________________
James S. Segasture
CERTIFICATION
I, Helena R. Santos, as Chief Executive Officer and Principal Financial
Officer of Scientific Industries, Inc. (the "Company"), certify that:
1. I have reviewed this annual report on Form 10-KSB of the Company for the
year ended June 30, 2002 (the "Annual Report");
2. Based on my knowledge, the Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by the Annual Report; and
3. Based on my knowledge, the financial statements, and other financial
information included in the Annual Report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Company as of, and for, the periods presented in the Annual Report.
[Items 4, 5, and 6 omitted pursuant to the transition provisions of Release
No. 34-46427.]
Date: September 27, 2002
/s/ Helena R. Santos
____________________
Helena R. Santos
EXHIBIT INDEX
-------------
Exhibit Number Description
-------------- -----------------------
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 restated and amended.
(Filed herewith).
4 Instruments defining the rights of security holders:
4(a) Stock Option Plan (Filed as Exhibit 4.1 to the Company's
Registration Statement filed on Form S-8 dated June 2, 1998
(File No. 333-55871) and incorporated by reference thereto).
10 Material Contracts:
10(a) Employment Agreement dated June 23, 2000, by and between the
Company and Mr. Kleiman, as amended. (Filed as Exhibit 10
to the
Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 2000 and incorporated by reference threto).
10(b) Letter of Intent to exercise 5-year option under the
Company's lease for its offices and manufacturing facilities.
(Filed as Exhibit 10 to the Company's annual report on
Form 10-K for the fiscal year ended June 30, 1999 and
incorporated by reference thereto).
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".
Exhibit 3(c)
AMENDED AND RESTATED AUGUST 29, 2002
BY-LAWS
OF
SCIENTIFIC INDUSTRIES, INC.
ARTICLE I
OFFICES
Section 1. Principal Office. The principle office shall be
established and maintained at the office of the United States Corporation
Company, in the City of Dover, in the County of Kent, in the State of
Delaware, and said corporation shall be the resident agent of this corporation
in charge thereof.
Section 2. Other Offices. The corporation may have other offices
either within or outside of the State of Delaware, at such place or places
as the Board of Directors may, from time to time, appoint; or the business
of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. The annual meeting of stockholders
shall be held in the City of New York, New York, at the place therein
determined by the directors and set forth in the notice thereof, but other
meetings of the stockholders may be held at such place or places as shall
be fixed by the directors and stated in the notice of the meeting.
Section 2. Annual Election of Directors. The Annual Meeting of
Stockholders for the election of Directors and the transaction of other
business shall be held, in each year, commencing in 1955, on the first
business day in October.
If this date shall fall upon a legal holiday, the meeting shall be held
on the next succeeding business day. At each annual meeting the stockholders
entitled to vote shall elect a Board of Directors and they may transact
such other corporate business as shall be stated in the notice of the meeting.
BY-LAWS
Page 2
No change of the time or place of a meeting for the election of
directors, as fixed by the By-Laws, shall be made within sixty days next
before the day on which such election is to be held. In case of any change
in such time or place for such election of directors, notice thereof shall
be given to each stockholder entitled to vote, in person, or by letter mailed
to his last known post office address, twenty days before the election is held.
Section 3. Voting. Each stockholder entitled to vote in accordance
with the terms of the Certificate of Incorporation and in accordance with
the provisions of these By-Laws shall be entitled to one vote, in person or
by proxy, for each share of stock entitled to vote held by such stockholder,
but no proxy shall be voted after three years from its date unless
such proxy provides for a longer period. After the first election of
directors, except where the transfer books of the corporation shall have been
closed or a date shall have been fixed as the record date for the determination
of its stockholders entitled to vote, no share of stock shall be voted on at
any election for directors which shall have been transferred on the books
of the corporation within twenty days next preceding such election. Upon the
demand of any stockholder, the vote for directors and the vote upon any
question before the meeting shall be by ballot. All elections for directors
shall be decided by plurality vote; all other questions shall
be decided by majority vote except as otherwise provided by the Certificate
of Incorporation or the laws of the State of Delaware.
A complete list of the stockholders entitled to vote at the ensuing
election, arranged in alphabetical order, with the residence of each,
and the number of voting shares held by each, shall be prepared by the
Secretary and filed in the office where the election is to be held, at
least ten days before every election, and shall at all times during the usual
hours for business, and during the whole time of said election, be open
to examination of any stockholder.
Section 4. Quorum. Except as otherwise required by law, by the
Certificate of Incorporation or by these By-Laws, the presence, in person
or by proxy, of stockholders holding a majority of the stock of the corporation
entitled to vote shall constitute a quorum at all meetings of the stockholders.
In case a quorum shall not be present at any meetings, a majority in interest
of the stockholders entitled to vote thereat, present in person or by proxy,
shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until the requisite amount of stock
entitled to vote shall be present. At any such adjourned meeting at which
the requisite amount of stock entitled to vote shall be represented, any
business may be transacted which might have been transacted at the meeting
as originally noticed; but only those stockholders entitled to vote at
the meeting as originally noticed shall be entitled to vote at any adjournment
or adjournments thereof.
BY-LAWS
Page 3
Section 5. Special Meetings. Special meetings of the
stockholders for any purpose or purposes may be called by the President
or Secretary, and shall be called upon a requisition in writing therefore,
stating the purpose or purposes thereof, delivered to the President or
Secretary, signed by a majority of the directors or by twenty-five percent
in interest of the stockholders entitled to vote, or by resolution of
the directors.
Section 6. Notice of Meetings. Written or printed notice,
stating the place and time of the meeting, and the general nature of
the business to be considered, shall be given by the Secretary to each
stockholder entitled to vote thereat at his last known post-office address,
at least ten days before the meeting in the case of an annual meeting
and five days before the meeting in the case of a special meeting.
No business other than that stated in the notice shall be
transacted at any meeting without the unanimous consent of all the
stockholders entitled to vote thereat.
Section 7. Action Without Meeting. Whenever the vote of
stockholders at a meeting thereof is required or permitted to be taken in
connection with any corporate action by any provisions of the statutes
or of the Certificate of Incorporation or of these By-Laws, the meeting
and vote of stockholders may be dispensed with, if all the stockholders
who would have been entitled to vote upon the action if such meeting
were held, shall consent in writing to such corporate action being taken.
ARTICLE III
DIRECTORS
Section 1. Number and Term. The number of directors shall be
not less then three nor more than eleven, as may be fixed from time to time
by the stockholders at any annual or special meeting of stockholders or by
the Board of Directors at any regular or special meeting of the Board.
The Directors shall be elected at the annual meeting of stockholders and
each director shall be elected at the annual meeting of stockholders and
each director shall be elected to serve until his successor shall be elected
and shall qualify. Directors need not be stockholders.
Section 2. Resignations. Any director, member of a
committee or other officer may resign at any time. Such resignation shall
be made in writing and shall take effect at the time specified therein,
and if no time be specified, at the time of its receipt by the President
or Secretary. The acceptance of a resignation shall not be necessary to
make it effective.
BY-LAWS
Page 4
Section 3. Vacancies. If the office of any director, member
of a committee or other officer becomes vacant, the remaining directors
in office, by a majority vote, may appoint any qualified person to fill
such vacancy, who shall hold office for the un-expired term and until his
successor shall be duly chosen.
Section 4. Removal. Except as otherwise provided by law, any
director or the entire Board of Directors, may be removed, with or without
cause, by the holders of a majority of the shares then entitled to vote,
at an election of directors.
Section 5. Increase of Number. In the event the number of
directors shall be increased by the stockholders at any annual or special
meeting of stockholders or by the Board of Directors at any regular or
special meeting of the Board, as provided in Section 1 of this Article III,
the stockholders or the directors, as the case may be, may at such meeting, by
majority vote, fill each vacancy thereby created with any qualified person who
shall hold office until the next annual election and until his successor
shall be duly elected and qualify.
Section 6. Powers. The Board of Directors shall exercise all
of the powers of the corporation except such as are by law, or by the
Certificate of Incorporation of the corporation, or by these By-Laws
conferred upon or reserved to the stockholders.
Section 7. Committees. The Board of Directors may, by
resolution or resolutions passed by a majority of the whole board,
designate one or more committees, each committee to consist of two
or more of the directors of the corporation, which, to theextent provided
in said resolution or resolutions or in these By-Laws, shall have and
may exercise the powers of the Board of Directors in the management of the
business and affairs of the corporation, and may have power to authorize
the seal of the corporation, to be affixed to all papers which may
require it. Such committee or committees shall have such name or
names as may be stated in these By-Laws or as may be determined from
time to time by resolution adopted by the Board of Directors. The
committees shall keep regular minutes of their proceeding and report
the same to the Board when required.
Section 8. Meetings. The newly elected directors may
hold their first meeting for the purpose of organization and the
transaction of business, if a quorum be present, immediately after
the annual meeting of the stockholders; or the time and place of
such meeting may be fixed by consent in writing of all the directors.
Regular meetings of the directors may be held without notice at
such places and times as shall be determined from time to time by
resolution of the directors. Special meetings of the board may be
called by the President or by the Secretary on the written request
of any two directors on at least two days' notice to each director
and shall be held at such place or places as may be determined by
the directors, or as shall be stated in the call of the meeting.
BY-LAWS
Page 5
Section 9. Quorum. A majority of the directors shall
constitute a quorum for the transaction of business. If at any meeting
of the board there shall be less than a quorum present, a majority of
those present may adjourn the meeting from time to time until a quorum
is obtained, and no further notice thereof need be given other than by
announcement at the meeting which shall be so adjourned.
Section 10. Compensation. By resolution of the Board,
a fixed fee and expenses of attendance may be allowed for attendance
at each meeting by each member of the Board of Directors.
ARTICLE IV
OFFICERS
*Amended August 29, 2002
*Section 1. Officers. The officers of the corporation
shall be a President, one or more Vice Presidents, a Treasurer, and a
Secretary, and such Assistant Treasurers and Assistant Secretaries as
the Board of Directors may deem proper. All of such officers shall
be elected by the Board of Directors. None of the officers need be
directors. The officers shall be elected at the first meeting of the
Board of Directors after each annual meeting. Any two officers, other
than those of President and Vice-president, may be held by the same person.
In addition the Board of Directors may elect a Chairman of
the Board of Directors.
Section 2. Other Officers and Agents. The Board of
Directors may appoint such other officers and agents as it may deem
advisable, who shall hold their offices for such terms and shall
exercise such powers and perform such other duties as
shall be determined from time to time by the Board of Directors.
Section 3. Chairman. The Chairman of the Board of
Directors, if one be elected, shall preside at all meetings of the
Board of Directors and he shall have and perform such other duties
as from time to time may be assigned to him by the Board of
Directors or the Executive Committee.
Section 4. President. The President shall be the
chief executive officer of the corporation and shall have the general
powers and duties of supervision and management usually vested in the
office of President of a corporation. He shall preside at all
meetings of the Stockholders if present thereat, and in the absence or
non-election of the Chairman of the Board of Directors, at all meetings
of the Board of Directors, and shall have general supervision, direction
and control of the business of the corporation. Except as the
Board of Directors shall authorize the execution thereof in some
other manner, he shall execute bonds, mortgages and other contracts
in behalf of the corporation, and shall cause the seal to be affixed
to any instrument requiring it and when so affixed, the seal shall be
attested by the signature of the Secretary or the Treasurer or an
Assistant Secretary or an assistant Treasurer.
BY-LAWS
Page 6
Section 5. Vice-President. Each Vice-President shall have such
powers and shall perform such duties as shall be assigned to him by the
Directors.
Section 6. Treasurer. The Treasurer shall have the
custody of the corporate funds and securities and shall keep full
and accurate account of receipts and disbursements in books belonging
to the corporation. He shall deposit all moneys and other valuables
in the name and to the credit of the corporation in such depositories
as may be designated by the Board of Directors.
The Treasurer shall disburse the funds of the corporation
as may be ordered by the Board of Directors, or the President taking
proper vouchers for such disbursements. He shall render to the
President and Board of Directors at the regular meetings of the Board
of Directors, or whenever they may request it, an account of all his
transactions as Treasurer and of the financial condition of the
corporation. If required by the Board of Directors, he shall
give the corporation a bond for the faithful discharge of his duties
in such amount and with such surety as the board shall prescribe.
Section 7. Secretary. The Secretary shall give,
or cause to be given, notice of all meetings of stockholders and
directors, and all other notices required by law or by these By-Laws,
and in case of his absence or refusal or neglect so to do, any such
notice may be given by any person there unto directed by the President,
or by the directors, or stockholders, upon whose requisition the
meeting is called as provided in these By-Laws. He shall record
all the proceedings of the meeting of the corporation and of
the directors in a book to be kept for that purpose, and shall perform
such other duties as may be assigned to him by the directors or
the President. He shall have the custody of the seal of the corporation
and shall affix the same to all instruments requiring it, when
authorized by the directors or the President, and attest the same.
Section 8. Assistant Treasurers and Assistant Secretaries.
Assistant Treasurers and Assistant Secretaries, if any, shall be
elected and shall have such powers and shall perform such duties as
shall be assigned to them, respectively, by the directors.
ARTICLE V
MISCELLANEOUS
Section 1. Certificates of Stock. Certificates of stock,
numbered and with the seal of the corporation affixed, signed by the
President or Vice-President, and the Treasurer or an Assistant Treasurer,
or Secretary or an Assistant Secretary, shall be issued to each
stockholder certifying the number of shares owned by him in the
corporation. When such certificates are signed by a transfer agent
or an assistant transfer agent or by a transfer clerk acting on behalf
of the corporation and a registrar, the signatures of such officers may
be facsimiles.
BY-LAWS
Page 7
Section 2. Lost Certificates. A new certificate of
stock may be issued in the place of any certificate theretofore
issued by the corporation, alleged to have been lost or destroyed,
and the directors may, in their discretion, require the owner of the lot
or destroyed certificate, or his legal representatives, to give the
corporation a bond, in such sum as they may direct, not exceeding
double the value of the stock, to indemnify the corporation against
any claim that may be made against it on account of the alleged loss of
any such certificate, or the issuance of any such new certificate.
Section 3. Transfer of Shares. The shares of
stock of the corporation shall be transferable only upon its books
by the holders thereof in person or by their duly authorized
attorneys or legal representatives, and upon such transfer the old
certificates shall be surrendered to the corporation by the delivery
thereof to the person in charge of the stock and transfer books and
ledgers, or to such other person as the directors may designate,
by whom they shall be cancelled, and new certificates shall
thereupon be issued. A record shall be made of each transfer, and
a duplicate thereof mailed to the Delaware office, and whenever a
transfer shall be made for collateral security, and not
absolutely, it shall be so expressed in the entry of the transfer.
Section 4. Closing of Transfer Books. The Board
of Directors shall have power to close the stock transfer books
of the corporation for a period not exceeding fifty days preceding
the date of any meeting of stockholders or the date for payment
of any dividend or the date for the allotment of rights or the date
when any change or conversion or exchange of capital stock shall
go into effect; provided, however, that in lieu of closing the
stock transfer books as aforesaid, the Board of
BY-LAWS
Page 8
Directors may fix in advance a date, not exceeding fifty days
preceding the date of any meeting of stockholders or the date
for the payment of any dividend or the date for the allotment
of rights or the date when any change or conversion or exchange of
capital stock shall go into effect, as a record date for the
determination of the stockholders entitled to notice of, and
to vote at, any such meeting, or entitled to receive payment of
any such dividends or to any such allotment of rights or to
exercise the rights in respect of any such change, conversion
or exchange of capital stock, and in such case such stockholders
only as shall be stockholders of record on the date so fixed shall
be entitled to such notice of, and to vote at, such meeting,
or to receive payment of such dividend or to receive
such allotment of rights or to exercise such rights, as the case
may be, notwithstanding any transfer of any stock on the books
of the corporation after any such record date fixed as aforesaid.
Section 5. Dividends. Subject to the
provisions of the Certificate of Incorporation, the Board of
Directors may, out of funds legally available therefore at any
regular or special meeting, declare dividends upon the capital
stock of the corporation as and when they deem expedient. Before
declaring any dividend there may be set apart out of any funds
of the corporation available for dividends, such sum or sums as the
directors from time to time in their discretion deem proper for
working capital or as a reserve fund to meet contingencies or
for equalizing dividends or for such other purposes as the
directors shall deem conducive to the interests of the corporation.
BY-LAWS
Page 8
Section 6. Seal. The corporate seal shall be
circular in form and shall contain the name of the corporation,
the year of its creation and the words -Laws to be given, personal
notice is not meant unless expressly so stated, and any notice so
required shall be deemed to be sufficient if given by depositing
the same in a post-office box in a sealed post-paid wrapper,
addressed to the person entitled thereto at his last known post
office address, and such notice shall be deemed to have been
given on the day of such mailing. Stockholders not entitled to
vote shall not be entitled to receive notice of any meetings
except as otherwise provided by Statute.
Whenever any notice whatsoever is required to be given
under the provisions of any law, or under the provisions of the
Certificate of Incorporation of the corporation or these By-Laws,
a waiver thereof in writing, signed by the person or persons
entitled to said notice, whether before or after the time stated
therein, shall be deemed equivalent thereto.
ARTICLE VI
AMENDMENTS
These By-Laws may be altered or repealed and By-Laws may be
made at any annual meeting of the stockholders or at any special
meeting thereof if notice of the proposed alteration or repeal of
By-Law or By-Laws to be made be contained in the notice of such
special meeting, by the affirmative vote of a majority of the stock
issued andoutstanding and entitled to vote thereat, or by the
affirmative vote of a majority of the Board of Directors, or at
any special meeting of the Board of Directors, if notice of the
proposed alteration or repeal, or By-Law or By-Laws to be made,
be contained in the notice of such Special Meeting.
______________________________________________________________________
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, 2002 and 2001,
and the related consolidated statements of income, 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 auditing standards generally
accepted in the United States of America. 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, 2002 and 2001,
and the consolidated results of their operations and their consolidated
cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
/s/ Nussbaum Yates, Wolpow, P.C.
--------------------------------
Nussbaum Yates & Wolpow, P.C.
Melville, New York
August 26, 2002
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND 2001
ASSETS
2002 2001
----------- -----------
Current assets:
Cash and cash equivalents $ 296,800 $ 275,400
Investment securities 481,900 412,000
Trade accounts receivable,
less allowance for doubtful
accounts of $7,400 in 2002
and 2001 276,000 300,400
Inventories 679,100 576,400
Prepaid expenses and other
current assets 63,200 71,700
----------- -----------
Total current assets 1,797,000 1,635,900
----------- -----------
Investment securities 51,900 -
Property and equipment, net 182,900 194,600
Deferred taxes 106,600 101,600
Intangible assets, less
accumulated amortization of
$31,200 and $24,700 in
2002 and 2001 6,500 12,300
Other 94,500 150,900
----------- ----------
Total Assets $2,239,400 $2,095,300
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 84,400 $ 152,500
Accrued expenses 181,200 73,900
----------- -----------
Total current liabilities 265,600 226,400
----------- -----------
Deferred compensation 59,500 88,900
----------- -----------
Commitments and contingencies
Shareholders' equity:
Common stock, $.05 par value;
authorized 7,000,000 shares;
issued 970,373 and 915,342
shares in 2002 and 2001 48,500 45,800
Additional paid-in capital 960,900 912,500
Accumulated other comprehensive
income (loss), unrealized
holding gain (loss)
on investment securities 1,000 ( 5,000)
Retained earnings 956,300 879,100
--------- ---------
1,966,700 1,832,400
Less common stock held in
treasury, at cost,
19,802 shares 52,400 52,400
--------- ---------
1,914,300 1,780,000
--------- ---------
Total liabilities and
shareholders' equity $2,239,400 $2,095,300
========== ==========
See notes to consolidated financial statements
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 2002 AND 2001
2002 2001
---------- ----------
Net sales $3,457,300 $3,435,000
Cost of sales 2,048,100 2,008,600
---------- ----------
Gross profit 1,409,200 1,426,400
---------- ----------
Operating expenses:
General and administrative 854,900 822,100
Selling 178,400 159,200
Research and development 289,600 251,800
---------- ----------
1,322,900 1,233,100
---------- ----------
Income from operations 86,300 193,300
Interest and other income 19,200 30,200
---------- ----------
Income before income tax expense (benefit) 105,500 223,500
Income tax expense (benefit):
Current 33,300 -
Deferred ( 5,000) ( 101,600)
----------- -----------
28,300 ( 101,600)
----------- -----------
Net income $ 77,200 $ 325,100
=========== ===========
Net income per common share - basic $ .08 $ .38
=========== ===========
Net income per common share - diluted $ .08 $ .33
=========== ===========
See notes to consolidated financial statements
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2002 AND 2001
Accumulated
Additional Other
Common Stock Paid-in Comprehensive
-------------- Capital Income (Loss)
Shares Amount
------ ------- ---------- -------------
Balance, July 1, 2000 855,342 42,800 $ 869,500 ($ 4,600)
Net income - - - -
Other comprehensive loss:
Unrealized holding loss
arising during period - - - ( 400)
Comprehensive income - - - -
Exercise of stock options 60,000 3,000 18,000 -
Exercise of stock warrant - - 25,000 -
-------- ------- --------- ------------
Balance, June 30, 2001 915,342 45,800 912,500 ( 5,000)
------------
Net income - - - -
Other comprehensive gain:
Unrealized holding gain
arising during period - - - 6,000
Comprehensive income - - - -
Exercise of stock options 55,000 2,700 43,400 -
Exercise of stock warrant 1 - - -
Income tax benefit of
stock options exercised - - 5,000 -
-------- ------- -------- -----------
Balance, June 30, 2002 970,343 $48,500 $960,900 $ 1,000
======== ======= ======== ===========
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
YEARS ENDED JUNE 30, 2002 AND 2001
Total
Retained Treasury Stock Shareholders'
Earnings Shares Amount Equity
-------- ------ ------ -------------
Balance, July 1, 2000 $ 554,000 19,802 $52,400 $ 1,409,300
-------------
Net income 325,100 - - 325,100
Other comprehensive loss:
Unrealized holding loss
arising during period - - - ( 400)
-------------
Comprehensive income - - - 324,700
Exercise of stock options - - - 21,000
Issuance of stock warrant - - - 25,000
----------- ------ ------ -------------
Balance, June 30, 2001 879,100 19,802 52,400 1,780,000
-------------
Net income 77,200 - - 77,200
Other comprehensive gain:
Unrealized holding gain
arising during period - - - 6,000
-------------
Comprehensive income - - - 83,200
Exercise of stock options - - - 46,100
Exercise of stock warrant - - - -
Income tax benefit of stock
options exercised - - - 5,000
-------- ------- ------- -------------
Balance, June 30, 2002 $ 956,300 19,802 $52,400 $ 1,914,300
======== ====== ======= =============
See notes to consolidated financial statements
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2002 AND 2001
2002 2001
------------ -----------
Operating activities:
Net income $ 77,200 $325,100
----------- -----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on sale of investments ( 4,400) -
Issuance of stock warrant for services - 25,000
Depreciation and amortization 65,300 71,800
Deferred income taxes ( 5,000) ( 101,600)
Income tax benefit of stock options exercised 5,000 -
Changes in assets and liabilities:
Trade accounts receivable 24,400 19,500
Inventories ( 102,700) ( 159,500)
Prepaid expenses and other current assets 8,500 ( 44,800)
Other assets 56,400 8,300
Accounts payable ( 68,100) 68,400
Accrued expenses 92,400 ( 16,400)
Deferred compensation ( 14,500) ( 17,600)
------------ ------------
Total adjustments 57,300 ( 146,900)
------------ ------------
Net cash provided by operating activities 134,500 178,200
------------ ------------
Investing activities:
Purchase of investment securities,
available for sale ( 138,300) ( 381,200)
Purchase of investment securities,
held to maturity ( 308,200) ( 106,000)
Redemption of investment securities,
available for sale 156,500 -
Redemption of investment securities,
held to maturity 175,000 246,500
Capital expenditures ( 43,600) ( 77,100)
Purchase of intangible assets ( 600) ( 600)
------------ ------------
Net cash used in investing activities ( 159,200) ( 318,400)
------------ ------------
Financing activities,
proceeds from exercise of stock options 46,100 21,000
------------ ------------
Net increase (decrease) in cash and
cash equivalents 21,400 ( 119,200)
Cash and cash equivalents, beginning of year 275,400 394,600
------------ ------------
Cash and cash equivalents, end of year $ 296,800 $ 275,400
============ ============
Supplemental disclosures of cash flow information:
Cash paid for income taxes $ 6,500 $ 700
============ ============
See notes to consolidated financial statements
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2002 AND 2001
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. Substantially
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.
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2002 AND 2001
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.
Recent Accounting Pronouncements
The Financial Accounting Standards Board issued in July 2001
Statement of Financial Accounting Standards (SFAS) No. 144,
"Impairment or Disposal of Long-Lived Assets," which is effective
for fiscal years beginning after December 15, 2001. The
provisions of this statement provide a single accounting model
for impairment of long-lived assets. The Company plans to
adopt SFAS 144 effective July 1, 2002 and does not expect that
the adoption will have a material impact on its results of
operations and financial position.
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, deferred compensation, the use of
accelerated methods of depreciation and amortization for tax
purposes, and tax credit carryforwards.
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2002 AND 2001
1. Summary of Significant Accounting Policies (Continued)
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.
Use of Estimates
In preparing financial statements in conformity with accounting
principles generally accepted in the United States of America,
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.
Net Income Per Common Share
Basic net income per common share is computed by dividing net
income by the weighted-average number of shares outstanding.
Diluted net income per share includes the dilutive effect of stock
options and warrants.
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. The Company believes
that it has only one reportable segment. Approximately 92% in
2002 and 95% in 2001 of gross sales are generated from the
Vortex-Genie(r) 2 mixer and related accessories. The Company
does not obtain collateral for its accounts receivable.
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2002 AND 2001
2. Line of Business and Concentration of Credit Risk (Continued)
Certain information relating to the Company's export sales and
principal customers is as follows:
2002 2001
---------- ----------
Export sales (principally Europe and Asia) $1,522,900 $1,466,100
Customer in excess of 10% of net sales 1,141,100 1,245,800
3. Investment Securities
Details as to investment securities are as follows:
Gross Cost or Unrealized
Amortized Fair Holding Gain
Cost Value (Loss)
------------- -------- ------------
At June 30, 2002:
Available for sale:
Equity securities $ 20,700 $ 18,500 ($2,200)
Mutual funds 348,800 352,000 3,200
--------- --------- ------------
$ 369,500 $ 370,500 $1,000
========= ========= ============
Held-to-maturity:
State and municipal bonds,
due in one year or less $ 111,400 $ 111,200 ($ 200)
State and municipal bonds,
due September 15, 2003 51,900 51,900 -
--------- --------- ------------
$ 163,300 $ 163,100 ($ 200)
========= ========= ============
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2002 AND 2001
3. Investment Securities (Continued)
Details as to investment securities are as follows:
Gross Cost or Unrealized
Amortized Fair Holding
Cost Value Loss
------------ -------- ----------
At June 30, 2001:
Available for sale:
Equity securities $402,000 $397,000 ($5,000)
======== ======== ========
Held-to-maturity,
state and municipal bonds $ 15,000 $ 15,000 $ -
======== ======== ========
4. Inventories
2002 2001
--------- -----------
Raw materials $ 445,700 $ 436,100
Work-in-process 102,500 27,000
Finished goods 130,900 113,300
--------- -----------
$ 679,100 $ 576,400
========= ===========
5. Property and Equipment, Net
Useful Lives
(Years) 2002 2001
--------- ---------
Computer equipment 3 - 5 $196,600 $180,700
Machinery and equipment 3 - 7 256,000 230,200
Furniture and fixtures 4 - 10 71,500 69,600
Leasehold improvements 1 - 8 34,900 34,900
--------- ---------
559,000 515,400
Less accumulated depreciation and
amortization 376,100 320,800
--------- ---------
$182,900 $194,600
========= =========
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2002 AND 2001
6. 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, 2002 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 required to maintain 20% of the
credit line in average monthly balances.
7. 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 their 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 $16,500
in 2002 and $17,000 in 2001.
8. 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 lease
amounted to approximately $232,700 in 2002 and $232,300 in 2001.
As of June 30, 2002, the Company's approximate future minimum
rental payments on all operating leases are as follows:
Fiscal Years
------------
2003 $235,800
2004 245,500
2005 122,900
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2002 AND 2001
8. 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 $33,000
and $27,000 at June 30, 2002 and 2001.
Employment Contract
The Company had an employment contract (which expired June 30, 2002)
with its President. On August 29, 2002, the Company decided to
terminate his employment. The contract provided for an annual
salary of $160,000 and 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 provided 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.
Pursuant to the employment contract, the President chose that 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 and losses thereon are for his benefit.
As of June 30, 2002 and 2001, $74,400 and $88,900 was segregated
into such an account and is included as an asset. 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. Accordingly, $14,900 has been
classified as a short-term asset and liability and $59,500
as a long-term asset and liability at June 30, 2002.
Other
A financial advisor employed by the Company pursuant to an
engagement letter that was not extended by the Company beyond
its expiration date of March 31, 2002 asserted a claim against
the Company in April 2002 in the amount of $125,000 for alleged
services rendered to the Company that were alleged to be outside
the scope of the letter. The Company denies engaging the
financial advisor for any services outside the scope of the
engagement letter or that any amounts are owing to the advisor.
The Company's counsel has advised the Company that based on its
review of the engagement letter and the Company's denial, it is
unlikely that the financial advisor will prevail if it
institutes a legal proceeding. Accordingly, no provision for
loss has been recorded by the Company at June 30, 2002.
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2002 AND 2001
9. Income Taxes
Income taxes (benefit) for 2002 and 2001 were different from
the amounts computed by applying the Federal income tax rate
to the income before income taxes due to the following:
2002 2001
--------------- ----------------
% of % of
Pretax Pretax
Amount Income Amount Income
-------- ------ -------- ------
Computed "expected" income
tax $ 35,900 34.0% $ 76,000 34.0%
Research and development
credits ( 18,300) (17.3) ( 15,300) ( 6.8 )
Other 10,700 10.1 7,000 3.1
Increase (decrease)in
valuation allowance - - ( 169,300) ( 75.7)
-------- ------ -------- ------
Actual income taxes $ 28,300 26.8% ($101,600) ( 45.4%)
======== ====== ======== ======
Deferred tax assets and liabilities consist of the following:
2002 2001
----------- ------------
Deferred tax assets:
Amortization of intangibles $ 8,100 $ 6,700
Deferred compensation 25,300 30,200
Net operating loss carryforwards - 6,900
Rent accrual 11,200 9,200
Tax credit carryforwards 56,100 44,800
Other 18,600 9,300
---------- ------------
119,300 107,100
Deferred tax liability:
Depreciation of property
and equipment ( 12,700) ( 5,500)
----------- -------------
Net deferred tax assets $ 106,600 $ 101,600
=========== =============
At June 30, 2002, the Company had tax credit carryforwards of
approximately $56,100 expiring in 2019 through 2022.
At June 30, 2002 and 2001, the Company determined that it was more
likely than not that the Company would realize the full benefit of
the deferred tax assets and, accordingly, no valuation allowance
was recorded at June 30, 2002 and the valuation allowance of
$169,300 at June 30, 2000 was eliminated and included as part of
the income tax benefit in 2001.
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2002 AND 2001
10. Stock Options and Warrant
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. As of June 30, 2002, the Plan has expired,
and the Company expects to obtain shareholder approval of a ten-year
extension at the next annual meeting of stockholders. 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 December 2011.
There were 15,667 shares of common stock left available under
the Plan for future grants at the Plan's expiration in February
2002. In June 2002 the Board of Directors granted options for
7,000 shares subject to the Plan being extended with shareholder
approval at the next Annual Meeting of Stockholders.
The Company has elected 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
for options granted under fixed plans when the option price
is not less than the fair market value of the underlying common
stock on the date of grant. 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 2002 and 2001, respectively:
2002 2001
---------- ----------
Expected life (in years) 10 10
Risk-free interest rate 5.54% 5.36%
Expected volatility 36.68% 34.01%
Dividend yield 0.00% 0.00%
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2002 AND 2001
10. Stock Options and Warrant (Continued)
Under the Black-Scholes model, the total value of stock options
granted in 2002 and 2001 was $22,600 and $13,500, respectively,
which would be amortized ratably on a pro forma basis over the
related vesting periods. Had the Company determined compensation
cost for these plans in accordance with SFAS No. 123, the
Company's pro forma net income would have been $49,600 in
2002 and $305,200 in 2001. The Company's pro forma net
income per share would have been $.05 (basic) and $.05 (diluted)
in 2002 and $.36 (basic) and $.31 (diluted) in 2001. 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, 2002, four directors exercised
options under the Plan to acquire a total of 31,000 shares at
$.50 to $2.00 per share. During the year ended June 30, 2001,
an officer exercised options to acquire 60,000 shares at $.35
per share.
Option activity under the above stock option plan is summarized
as follows:
Fiscal 2002 Fiscal 2001
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
--------- ------ ------ --------
Shares under option:
Outstanding at beginning of year 225,000 $1.19 269,000 $ .99
Granted 16,000 2.40 16,000 1.33
Exercised ( 31,000) 1.22 ( 60,000) .35
Expired ( 20,000) 1.41 - -
Forfeited ( 25,000) .38 - -
---------- ----- --------- -----
Outstanding at end of year 165,000 $1.39 225,000 $1.19
========== ===== ======== =====
Options exercisable at year-end 165,000 $1.39 192,001 $1.18
========== ===== ======== =====
Weighted average fair value
per share of options granted
during fiscal 2002 and 2001 $1.41 $ .84
===== =====
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2002 AND 2001
10. Stock Options and Warrant (Continued)
The following table summarizes information about the options
under the above Plan outstanding at June 30, 2002:
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 66,000 4.91 $ .82 66,000 $ .82
$1.2813 - 2.40 99,000 6.20 $1.78 99,000 $1.78
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
were 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. During the year
ended June 30, 2002, the remaining 24,000 options were exercised
by the directors.
The Company has a stock purchase warrant outstanding covering
17,391 shares of the Company's common stock issued during 2001
for services. The warrant has an exercise price of $1.4375 per
share and expires on February 5, 2006. During the year ended
June 30, 2002, one share was issued upon warrant exercise.
11. Net Income Per Common Share
Net incomne per common share data was computed as follows:
2002 2001
--------- ---------
Net income $ 77,200 $325,100
========= =========
Weighted average common shares outstanding 930,704 851,978
Effect of dilutive securities,
stock options and warrant 79,175 129,483
--------- ---------
Weighted average dilutive common
shares outstanding 1,009,879 981,461
========= =========
Net income per common share - basic $ .08 $ .38
========= =========
Net income per common share -
diluted $ .08 $ .33
========= =========
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2002 AND 2001
11. Net Income Per Common Share (Continued)
Unexercised employee stock options to purchase 59,000 shares of
common stock at $1.875 to $2.40 per share were outstanding as
of June 30, 2002, 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.
12. Fair Value of Financial Instruments
The financial statements include various estimated fair value
information as of June 30, 2002 and 2001, as required by Statement
of Financial Accounting Standards 107, "Disclosure about Fair
Value of Financial Instruments." 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:
2002 2001
2002 2001
------------------- -------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- --------- -------- ---------
Assets:
Cash and cash equivalents $296,800 $296,800 $275,400 $275,400
Investment securities
(Note 3) 533,800 533,600 411,900 411,900