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, 2006
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from______to______
Commission file number 0-6658
SCIENTIFIC INDUSTRIES, INC.
(Name of Small Business Issuer in Its Charter)
DELAWARE 04-2217279
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
70 ORVILLE DRIVE, BOHEMIA, NEW YORK 11716
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (631) 567-4700
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange
on which registered
None None
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $.05 PER SHARE
(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. $3,465,200
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 25, 2006 is $1,876,700.
The number of shares outstanding of the issuer's common stock, par
value $.05 per share ("Common Stock") as of August 25, 2006 is
1,000,352 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [ X ]
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 its 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.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
General. Scientific Industries, Inc., a Delaware
corporation (the "Company"), formed in 1954, designs, manufactures,
and markets a variety of laboratory equipment. The Company's
products are generally used for research purposes in laboratories
of universities, hospitals, pharmaceutical companies, clinics,
medical device manufacturers and other related industries.
Recent Developments. During the last quarter of the year
ended June 30, 2006 ("fiscal 2006"), the Company was advised by
Fisher Scientific International ("Fisher"), its principal
distributor and customer (sales to Fisher represented 20% and 23%
of the Company's net sales for the fiscal years ended June 30, 2006
and June 30, 2005, respectively) that it would no longer purchase
for distribution the Company's products which the Company believes
is a result of a change of focus to sales of Fisher's private label
products. The Company has increased its efforts to increase sales
to its other distributors, and directly to additional customers,
and to appoint other distributors to mitigate the adverse effect
the discontinuance has raised. No assurance can be given that such
efforts will be successful.
In June 2006, the Company received a nonexclusive
sublicense to develop, produce and sell a line of bioreactor
vessels with integral sensors for pH and oxygen in volumes of 250
milliliters up to 5 liters for laboratory systems under a license
from the University of Maryland, Baltimore County, the patent
holder. The Company is engaged in the development of certain
products which incorporate the disposable sensor technology. No
representation can be made that any material sales will result from
the sublicense.
In August, 2006, the Company agreed in principle to acquire
the outstanding capital stock of a privately held company engaged
in the production and sale of catalyst research instruments. The
consummation of the acquisition is subject to negotiation and
execution of a stock purchase agreement. The agreement is to
provide a purchase consideration of $400,000 in cash, 125,000
shares of the Company's Common Stock and contingent payments based
on the annual sales of the acquired business during a four year
period following the acquisition. Sales of the privately held
company were approximately $1,366,000 for the year ended December
31, 2005 (unaudited). No assurance can be given that the proposed
acquisition will be effected or, that if effected, the acquired
operation will be beneficial to the Company's operating results.
Products. The Company's products principally consist of
laboratory mixers, rotators/rockers, refrigerated incubators, and
magnetic stirrers.
Mixers and Disruptors. The Company's primary product is
the Vortex-Genie(R) 2 Mixer. The vortex mixer is 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. Sales of
the Vortex-Genie 2 Mixer (excluding accessories) represented
approximately 72% of the Company's revenues for fiscal 2006 as
compared with 75% of the Company's revenues for the year ended June
30, 2005 ("fiscal 2005").
The Company expanded its mixers line to include, in the
year ended June 30, 2002 ("fiscal 2002"), the Vortex-Genie 2T, a
mixer with an integral timer, the Vortex-Genie 1, a high speed
touch mixer, and the Disruptor Genie(R), a patented cell disruptor.
In fiscal 2004, the Company introduced the MicroPlate Genie ,
another specialty mixer designed specifically to mix and vortex the
contents of microplates, and at the end of fiscal 2005, launched
the Multi-MicroPlate Genie . A digital version of the
Vortex-Genie(R) 2 is planned for launching shortly.
Other Products. The Company's Roto-Shake Genie(R), a
patented benchtop multi-purpose rotator/rocker was designed by the
Company to rotate and rock a wide variety of containers which are
magnetically attached to the unit's magnetized platform. The
Enviro-Genie(R) Refrigerated Incubator and the BioReactor Genie(TM)
Cell Culture Chamber (introduced during fiscal 2003) are
multi-functional benchtop environmental chambers designed to
perform various functions under controlled environmental conditions
of temperature.
During fiscal 2004, the Company launched the MagStir
Genie(R), a new patented magnetic stirrer, which is programmable
and offers a unique low to high speed range. The MultiMagStir
Genie , a four-place magnetic stirrer was launched in fiscal 2005.
Other magnetic stirrers are currently under development for
introduction during the year ending June 30, 2007 ("fiscal 2007").
Product Development. The Company designs and develops
substantially all of its products. Its personnel formulate plans
and concepts for new products and improvements or modifications to
existing products. It also engages outside consultants to augment
its capabilities in such areas as industrial and electronics
design.
Marketing. The Company's products are generally
distributed and marketed through an established network of domestic
and foreign laboratory equipment distributors. See "Major
Customers" below. In general, it takes two to three years for a
new product to begin generating meaningful sales in the industry
due to the catalog distribution system.
The Company also markets its products through attendance
at industry trade shows, trade publication advertising, brochures
and catalogs, and to a limited extent, in view of the type of
customer for the Company's products, its own web site.
Assembly and Production Materials. The Company's
production operation principally involves assembly of components
supplied by various domestic and international independent
suppliers. The Company does not have any sole suppliers, except as
to a few components where it is not feasible to have multiple
suppliers and alternative suppliers are available. Over the last
two fiscal years, the Company has purchased a substantial portion
of components from overseas factories, with a substantial part of
such purchases effected through a U.S. vendor. (The vendor
accounted for approximately 44% and 35% for fiscal 2006 and fiscal
2005, respectively, of the Company's material purchases.) See "Risk
Factors - The Company is Heavily Dependent on Outside
Suppliers for the Components of Its Products".
Patents, Trademarks, Licenses and Franchises. The Company
holds several United States patents relating to existing products.
It licensed one of its patents, a patent on a utilitarian feature
of its Vortex-Genie 2 Mixer on a non-exclusive, royalty-free basis
to Henry Troemner, LLC, ("Troemner"), under an agreement dated
December 1, 1999 settling a lawsuit instituted by the Company in
April, 1999. The patent and license expired on November 2, 2005;
however, there has been no adverse effect as a result of the patent
expiration. The Company's patent for the TurboMix(TM), an
accessory to the existing Vortex-Genie 2 Mixer, expires in
September 2015. Its patent on the Roto-Shake Genie expires in July
2016. A recent patent granted on its MagStir Genie and
MultiMagStir Genie expires in November 2022.
The Company has various proprietary marks, including
BioReactor Genie(TM), Disruptor Beads(TM), Disruptor Genie(R),
Enviro-Genie(R), Genie(TM), MagStir Genie(R), MultiMagStir
Genie(R), MicroPlate Genie(TM), Multi-MicroPlate Genie(TM),
Roto-Shake Genie(R), TurboMix(TM), and Vortex-Genie(R), each of
which it considers important to the success of the related product.
The Company also has several trademark applications pending. No
representation can be made that any application will be granted or
as to the protection, if any, it will provide if granted.
See "Recent Developments" above for a recently acquired
sublicense as to bioreactor vessels.
Foreign Sales. The Company's foreign sales, all of which
were to various distributors outside the United States (principally
Asia and Europe) accounted for approximately 44% of the Company's
net sales for each of fiscal 2006 and fiscal 2005. 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.
Major Customers. Sales, mostly of the Vortex-Genie 2
Mixer, to two of the Company's two major customers, represented in
the aggregate approximately 37% and 40% of net sales for fiscal
2006 and for fiscal 2005, respectively. See "Recent Developments"
above for discontinuance of purchases by the Company's principal
customer and distributor. A third customer, also a distributor of
the Company's products, accounted for 10% of net sales for each of
fiscal 2006 and 2005 of the Company's net sales.
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 not
more than two weeks.
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 technical specifications, price, and product recognition
and acceptance. The Company's main competition in the United
States derives from private label brand mixers offered by the two
largest laboratory equipment distributors in the United States, who
dominate the end user market, one of which is Fisher (see "Recent
Developments" above). The Company believes it is a 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 (private label supplier to the two
largest laboratory equipment distributors in the U.S. and Europe),
Barnstead/Thermolyne Corporation, (an Apogent Technologies company
owned by Fisher Scientific 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 $316,500 during fiscal 2006 compared to
$350,200 during fiscal 2005. The Company expects its expenditures
in fiscal 2007 for research and development will not be materially
different from previous years, except for the expanded efforts with
respect to the development of a line of bioreactor vessels under a
sublicense.
Government and Environmental Regulation. The Company's
products and claims with respect thereto have not required 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 to numerous existing and
proposed, if adopted, federal, state, and local regulations 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 25, 2006, the Company employed 18
persons of whom 17 were full-time, including its two executive
officers. None of the Company's employees is 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 THE COMPANY'S
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 ANNOUNCEMENTS TO REFLECT FUTURE
EVENTS OR CIRCUMSTANCES.
DEPENDENCE ON MAJOR CUSTOMERS
The industry is dominated in the U.S. by two major
laboratory equipment distributors, Fisher Scientific International
and VWR International. During the fourth quarter of fiscal 2006,
the Company was informed by Fisher Scientific that it would no
longer market the Company's products. As a result, significantly
lower sales of the Company's products were effected to such
distributor during the fourth quarter of fiscal 2006 and none are
expected in the future. Sales to this major customer, mostly the
Vortex-Genie 2 Mixer, accounted for approximately 20% and 23% of
total net sales for fiscal 2006 and fiscal 2005, respectively.
Although the Company has increased its direct selling efforts and
increased distribution through its other existing distributors and
new distributors, due to Fisher Scientific's dominance of the end
user market, it is unlikely that it will be able to recoup a
material portion of the lost revenues. The Company's then second
largest customer, (and currently its largest customer) accounted
for approximately 17% of the Company's net sales in each of fiscal
2006 and 2005. A third customer, an overseas distributor of the
Company's products, accounted for approximately 10% for each of
fiscal 2006 and 2005. A material reduction in sales to the
foregoing distributors will have an adverse effect on the results
of operations of the Company.
THE COMPANY OFFERS A LIMITED NUMBER OF PRODUCTS WITH SALES OF ONE
PRODUCT ACCOUNTING FOR A SUBSTANTIAL PORTION OF ITS REVENUES
The Company currently offers for sale a limited number of
products. Sales of its Vortex-Genie 2 Mixer accounted for
approximately 72% and 75% of the Company's sales for fiscal 2006
and fiscal 2005, respectively. See "Dependence on Major Customers"
above.
THE COMPANY IS A SMALL PARTICIPANT IN ITS HIGHLY COMPETITIVE INDUSTRY
The laboratory products industry is highly competitive.
Although the Company's principal product, the Vortex-Genie 2 Mixer,
has been widely accepted, the Company's annual net sales
($3,465,200 for fiscal 2006 and $3,593,000 for fiscal 2005) are
significantly less than the annual revenues of many of its
competitors in the industry. Its principal competitors are
substantially larger and have much greater financial, production
and marketing resources than the Company. In the past few years,
there have been continuous new entrants into the vortex mixer
market, including the manufacturer of the industry's two largest
distributors' private label mixers.
THE COMPANY'S ABILITY TO GROW AND COMPETE EFFECTIVELY IS IN PART
DEPENDENT ON ITS ABILITY TO DEVELOP AND EFFECTIVELY MARKET NEW
PRODUCTS
In the recent past, the Company began pursuing a program
to develop and market new laboratory equipment with a view to
increasing its revenues and reducing its dependence on the
Vortex-Genie 2 Mixer. As result, the Company first developed and
introduced during the fiscal year ended June 30, 1999 the
Roto-Shake Genie rotator/rocker and then in the fiscal year ended
June 30, 2001 the Enviro-Genie refrigerated incubator. During
fiscal 2002, the Company began selling three new products which
generally target the vortex mixer market - the Vortex-Genie 1 touch
mixer, the Vortex-Genie 2T timed mixer, and the Disruptor Genie
cell disruptor. More recently, the Company introduced the MagStir
Genie and MultiMagStir Genie magnetic stirrers and the MicroPlate
Genie and Multi-MicroPlate Genie microplate mixers, with additional
products soon to be launched and others currently under
development.
Revenues derived from new products (those other than the
Vortex-Genie 2, but excluding accessories) amounted to $737,100 and
$669,500, respectively, for fiscal 2006 and fiscal 2005. The
Company historically has relied primarily on its distributors and
their catalogs to market its products. Sales of new products are
heavily dependent on the distributors' decision to include a new
product in the distributors' catalogs and their continued inclusion
in the catalogs and on their websites, since the majority of the
end users purchase through distributors. Accordingly, it may be at
least 24 to 36 months between the completion of development of a
product and the distribution of the catalog in which it is first
offered.
In the beginning of calendar 2003, the Company also began
taking a more aggressive approach towards the marketing of its
products, allocating more resources for marketing staff,
advertising, promotions, website, and miscellaneous other selling
and marketing tools. No assurance can be given that the amounts
allocated by the Company for its development and marketing programs
will prove beneficial or that distributors will include any
particular product in their catalogs and websites.
In June 2006, the Company received a nonexclusive
sublicense to develop, produce and sell a line of bioreactor
vessels with integral sensors for pH and oxygen in volumes of 250
milliliters up to 5 liters for laboratory systems under a license
from the University of Maryland, Baltimore County, the patent
holder. The Company is engaged in the development of certain
products which incorporate the disposable sensor technology.
No assurance can be made that such development will be completed or
that it will result in material revenues.
THE COMPANY IS HEAVILY DEPENDENT ON OUTSIDE SUPPLIERS FOR THE
COMPONENTS OF ITS PRODUCTS
While the Company believes there are several suppliers
available for all of its components, it presently relies on one
source for several components. Purchases through a United States
vendor from one overseas supplier accounted for approximately 44%
and 35% of the cost of purchased materials for fiscal 2006 and
fiscal 2005, respectively. While the Company believes there are
other sources for the materials readily available, the disruption
or termination of the operations of this source or other sources
could have an adverse effect, hopefully of short duration, on the
Company's results of operations. To diminish this risk, the
Company keeps higher than normal quantities on-hand of such
components, and has added several alternate suppliers during the
past two years. Furthermore, the Company intends to continue
purchasing components from overseas factories directly or
indirectly. Such reliance could increase the risks of the
Company's operations including those arising from government
controls, foreign conditions, custom duties, changes in both
foreign and United States government policies, and the reliability
and financial condition of such suppliers.
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's design patent on a feature of its Vortex-Genie 2
Mixer, its principal product, expired in November 2005. Although
the Company has not experienced any adverse effect from the
expiration of this patent, there is no assurance as to future
effect. A new patent was granted to the Company during the year
for one of its new products. A recently acquired sublicense with
respect to a line of bioreactor vessels, which the Company has
commenced developing, will be dependent on the validity of the
licensor's patents.
There can be no assurance that the Company will be
successful in obtaining additional patents, that any patent issued
or licensed 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 patents
related to the Company's products. Any of the foregoing activities
could have a material adverse effect on the Company. Moreover,
there is no assurance that the enforcement by the Company of its
patent rights will not result in substantial litigation costs.
POSSIBLE MATERIAL INVESTMENT TO ACQUIRE NEW OPERATION
In August, 2006, the Company agreed in principle to acquire
the outstanding capital stock of a privately held company engaged
in the production and sale of catalyst research instruments. The
consummation of the acquisition is subject to negotiation and
execution of a stock purchase agreement. The agreement is to
provide a purchase consideration of $400,000 in cash, 125,000
shares of the Company's Common Stock and contingent payments based
on the annual sales of the acquired business during a four year
period following the acquisition. Sales of the privately held
company were approximately $1,366,000 (unaudited) for the year
ended December 31, 2005. While the skills required are somewhat
comparable to those of the Company's, the development and marketing
of the products of the operation to be acquired will initially
depend on the skills of the acquired company's employees. No
assurance can be given that the acquisition will be effected or,
that if effected, that it will prove beneficial to the Company's
results or financial condition.
THE COMPANY HAS LIMITED MANAGEMENT RESOURCES
The loss of the services of Ms. Helena Santos, the
Company's Chief Executive and Financial Officer, and President, or
Mr. Robert Nichols, the Company's Executive Vice President or any
material expansion of the Company's operations could place a
significant additional strain on the Company's limited management
resources and 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, historically, has been thinly
traded. As of August 25, 2006, there were only 1,000,352 shares of
Common Stock of the Company outstanding, of which 317,915 shares
are held by the directors and officers of the Company. There have
been a number of trading days during fiscal 2006 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. They are held
pursuant to a lease which was amended in September 2004,
principally to extend the expiration date from December 31, 2004 to
January 31, 2010, and to reduce the minimum base annual rent. See
Note 8 to the Financial Statements in Item 7 for further
information. The leased facilities are suitable and adequate for
the Company's operations. In the opinion of management, the
property is adequately covered by insurance.
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 in
April 2002 a claim against the Company 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 amount is 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 2006.
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 2005 and fiscal 2006, 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
09/30/04 1.95 2.05
12/31/04 2.00 2.25
03/31/05 2.25 3.28
06/30/05 2.26 3.01
09/30/05 2.76 3.30
12/31/05 3.00 3.95
03/31/06 3.15 4.10
06/30/06 2.50 4.30
(b) As of August 25, 2006, there were 820 record holders
of the Company's Common Stock.
(c) On January 13, 2006, The Company paid a cash dividend
of $.09 per share to stockholders of record on
October 27, 2005. The Company 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.
Certain statements contained in this report are not based
on historical facts, but are forward-looking statements that are
based upon various assumptions about future conditions. Actual
events in the future could differ materially from those described
in the forward-looking information. Numerous unknown factors and
future events could cause such differences, including but not
limited to, product demand, market acceptance, success of marketing
strategy, success of expansion efforts, impact of competition,
adverse economic conditions, and other factors affecting the
Company's business that are beyond the Company's control, which are
discussed elsewhere in this report. Consequently, no
forward-looking statement can be guaranteed. The Company
undertakes no obligation to publicly update forward-looking
statements, whether as a result of new information, future events
or otherwise. 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.
Overview. During the fourth quarter of fiscal 2006, the
Company was informed by its then principal customer and distributor
for more than 30 years of a change in its marketing and selling
focus to its private label products resulting in a decision to
discontinue marketing of the Company's products. As a result,
sales to this customer significantly diminished during the fourth
quarter and no future sales are expected. Sales to this customer
of the Company's products, predominantly the Vortex-Genie 2 Mixer,
accounted for approximately 20% and 23% of Company's net sales for
fiscal 2006 and fiscal 2005, respectively. In order to diminish
the impact of the loss of such customer, the Company has been
pursuing other selling outlets including appointing new
distributors, increased volume with existing distributors through
cooperative promotional efforts, and expanded selling directly to
end users. The Company anticipates that it will be able to recoup
some of the lost
revenues, but is uncertain it will be able to recoup a material
portion of the lost revenues due to the distributor's dominance
of the end user market.
Results of Operations. Net sales for fiscal 2006 decreased
$127,800 (3.6%) to $3,465,200 from $3,593,000 for fiscal 2005. The
decrease in sales was due to the decline in sales during the fourth
quarter to the Company's then largest customer and lower sales in
Europe due to increased global competition. The gross profit
percentage for fiscal 2006 of 49.0% was only slightly higher than
48.7% for fiscal 2005.
General and administrative expenses for fiscal 2006 were
$718,900, an increase of $36,600 (5.4%), as compared with $682,300
for fiscal 2005 mainly as a result of costs associated with
investigating new business opportunities.
Selling expenses for fiscal 2006 were $238,200 or $78,200
(24.7%) lower than $316,400 for fiscal 2005, due mostly to lower
trade show costs, and lower salary expense due to the change in
marketing personnel during fiscal 2006.
Research and development expenses were $316,500 for fiscal
2006, $33,700 (9.6%) lower than $350,200 for the comparable prior
year during which substantial development costs for the new
Multi-MicroPlate Genie and, soon to be launched magnetic stirrers
were incurred.
Interest and other income increased $20,700 to $44,100 for
fiscal 2006 compared to $23,400 for fiscal 2005 mainly due to
higher interest rates and balances of investment securities.
Income tax expense for fiscal 2006 was $147,300 (31.4%) as
compared with $118,500 (28.0%) for fiscal 2005. The increase of
$28,800, resulted primarily from higher taxable income.
As a result of the foregoing, net income was $17,200 (5.6%)
greater, at $321,700 for fiscal 2006, compared to $304,500 for
fiscal 2005.
Liquidity and Capital Resources. Net cash provided by
operating activities increased to $336,200 for fiscal 2006 as
compared to $319,900 for fiscal 2005 primarily due to higher
income. Cash used in investing activities was $216,800 for fiscal
2006 compared to $315,000 for fiscal 2005, a decrease of $98,200,
mainly as a result of fewer investment securities purchases during
fiscal 2006. Cash used in financing activities for fiscal 2006 was
$75,600, compared to $62,400 for the prior year, an increase of
$13,200 due to the higher cash dividend paid in fiscal 2006. As a
result of the foregoing, cash and cash equivalents increased by
$43,800 to $227,700 as of June 30, 2006 from a balance of $183,900
as of June 30, 2005.
The Company's working capital as of June 30, 2006 increased
$240,300 to $2,489,100 from $2,248,800 at June 30, 2005, mainly due
to income from operations, partially offset by the cash dividend.
The Company has available for its working capital needs, a secured
bank line of credit of $200,000 with North Fork Bank with interest
at prime, all of which was available as of June 30, 2006. The
Company has never borrowed under this line of credit.
If a proposed acquisition, to which the Company has agreed
in principle, is consummated, as to which there is no assurance
(see Item 1. Description of Business), the Company will be required
to pay to the sellers $400,000 in cash besides 125,000 shares of
its Common Stock and four annual contingent payments in cash.
Capital Expenditures. During fiscal 2006, the Company
incurred $38,000 in capital expenditures, the approximate level
which the Company expects to incur during fiscal 2007.
Management believes that the Company will be able to meet
its cash flow needs for its operations and capital expenditures
during the next 12 months from its available financial resources
which include its cash and investment securities.
ITEM 7. FINANCIAL STATEMENTS.
The Financial Statements required by this item are attached
hereto on pages F1-F18.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
ITEM 8A. CONTROLS AND PROCEDURES.
As of the end of the period covered by this report, based on
an evaluation of the Company's disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934), the Chief Executive and Chief Financial
Officer of the Company has concluded that the Company's disclosure
controls and procedures are effective to ensure that information
required to be disclosed by the Company in its Exchange Act reports
is recorded, processed, summarized and reported within the
applicable time periods specified by the SEC's rules and forms. The
Company also concluded that information required to be disclosed in
such reports is accumulated and communicated to the Company's
management, including its principal executive and principal
financial officer, as appropriate to allow timely decisions
regarding required disclosure.
There was no change in the Company's internal controls over
financial reporting that occurred during the most recent fiscal
quarter that materially affected or is reasonably likely to
materially affect the Company's internal controls over financial
reporting.
ITEM 8B. OTHER INFORMATION.
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS; COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS
The Company has the following five Directors:
Arthur M. Borden, Esq. (age 86), a Director since 1974, has
been counsel to the law firm of Katen Muchin Zavis Rosenman
(formerly Rosenman & Colin) during the past five years. He is a
director of Supreme Industries, Inc., a nationwide manufacturer of
specialized truck bodies.
Joseph G. Cremonese (age 70), a Director since November
2002 and Chairman of the Board since February 2006, has been a
marketing consultant to the Company since 1996. Mr. Cremonese has
been since 1991, President of Laboratory Innovation Company, Ltd.,
which is a vehicle for technology transfer and consulting services
for companies, including the Company, engaged in the production and
sale of products for science and biotechnology. Since March 2003,
Mr. Cremonese has been a director of and consultant to Proteomics,
Inc., a producer of recombinant proteins for medical research.
Prior to 1991, he had been employed by Fisher Scientific, the
largest U.S. distributor of laboratory equipment.
Joseph I. Kesselman (age 81), a Director since 1961 and
Chairman of the Board from August 2002 until his resignation in
February 2006, has been for more than five years a consultant to
various corporations. He is a director of Nuclear and
Environmental Protection Inc., Hopare Holding, S.A. (a Swiss
company), and Infranor Inc., a developer and manufacturer of servo
systems.
Roger B. Knowles (age 81), a Director since 1965, is
retired. During the past five years he has been involved in
liquidating various real estate and manufacturing concerns.
James S. Segasture (age 70), a Director since 1991, has
been a private investor since February 1990.
The Directors are elected to three-year staggered terms.
The current terms of the Directors expire at the annual meeting of
stockholders of the Company to be held at the next annual meeting
following: the fiscal year ended June 30, 2006 - two Directors
(Messrs. Borden and Segasture, Class A), the fiscal year ending
June 30, 2007 - one Director (Mr. Kesselman, Class B), and the
fiscal year ending June 30, 2008 - two Directors (Messrs. Cremonese
and Knowles, Class C).
BOARD COMMITTEES
Joseph I. Kesselman and James S. Segasture have been
appointed as the sole members of the Company's Stock Option
Committee to serve at the discretion of the Board and to administer
the Company's 2002 Stock Option Plan ("2002 Plan").
The Board of Directors acts as the Company's Audit Committee.
EXECUTIVE OFFICERS
Helena R. Santos, CPA (age 42), employed by the Company
since 1994, was appointed in August 2002 as President, Chief
Executive Officer and Treasurer. Previously she served as Vice
President, Controller from 1997 and Secretary from May 2001. Ms.
Santos was an internal auditor with a major defense contractor from
March 1991 to April 1994. She had been previously employed in
public accounting.
Robert P. Nichols (age 45), employed by the Company since
February 1998, was appointed in August 2002 as Executive Vice
President. He had been Vice President, Engineering from May 2001.
Prior to joining the Company, Mr. Nichols 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
The Company believes that, for the year ended June 30,
2006, its officers, directors and 10% stockholders timely complied
with all filing requirements of Section 16(a) of the Securities
Exchange Act of 1934, as amended.
ITEM 10. EXECUTIVE COMPENSATION.
The following table summarizes all compensation paid by the
Company to its then Chief Executive Officer ("CEO"), Chief
Financial Officer ("CFO"), and President; and Executive Vice
President with respect to each of the three fiscal years ended June
30, 2006, 2005 and 2004. No other executive officer earned in
excess of $100,000 in any of such fiscal periods.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
All Other
Fiscal Compen-
Name Year Salary Bonus sation
___________________ ______ ______ _____ __________
Helena R. Santos, CEO, 2006 $112,100 $ - $ -
President adn CFO 2005 $108,200 $ - $ -
2004 $100,000 $ - $ -
Robert P. Nichols, 2006 $107,000 $ - $ -
Executive Vice 2005 $103,200 $ - $ -
President 2004 $ 95,000 $ - $ -
OPTION GRANTS IN LAST FISCAL YEAR
There were no options granted to officers during fiscal year 2006.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION
VALUES
There were no options exercised by officers during fiscal 2006.
EMPLOYMENT AGREEMENTS
The Company's employment agreements with Ms. Helena R.
Santos and Mr. Robert P. Nichols are effective through December 31,
2006 and provide for base annual salaries of $110,000 for Ms.
Santos and $105,000 for Mr. Nichols. Each agreement authorizes
annual bonuses by the Board based upon performance criteria and
contains noncompetition and confidentiality covenants. No bonus
has been authorized by the Board.
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. Mr.
Joseph I. Kesselman as Chairman of the Board until February 2006
received, and Mr. Joseph G. Cremonese, as Chairman of the Board,
since February 2006 receives also a monthly fee of $750. During
fiscal 2006, the fees to non-employee Directors aggregated $44,000.
Pursuant to the Company's 1992 Stock Option Plan ("1992
Plan") options to purchase 3,000 shares of Common Stock at the then
fair market value were granted 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, namely Messrs. Borden,
Kesselman, Knowles and Segasture. In addition, in December 1997
and through December 2002 the Board of Directors granted under the
1992 Plan annually options to purchase 4,000 shares of Common Stock
to each of them exercisable at the fair market value on the date of
grant. Accordingly, as of June 30, 2006, the Company had granted
under the 1992 Plan to the foregoing four non-employee Directors
options to purchase an aggregate of 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
ranged from $0.50 for options granted in 1993 to $2.40 in 2002. As
of June 30, 2006, options under the 1992 Plan with respect to
58,000 shares had been exercised by the Directors. In addition,
they had exercised options with respect to 48,000 shares granted to
them prior to the adoption of the 1992 Plan.
Under the Company's 2002 Plan, none of the Directors at the
time of the adoption by the Board of Directors of the 2002 Plan
(subsequently approved by stockholders) were eligible to receive
option grants. Mr. Joseph G. Cremonese who was elected Director at
the 2002 Annual Meeting of Stockholders, was granted on December 1,
2003 an option to purchase 5,000 shares of Common Stock at the fair
market value of $1.35.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth, as of June 30, 2006, 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, and (iv) all directors and
executive officers as a group. Shares not outstanding but deemed
beneficially owned by virtue of the right of any individual to
acquire shares within 60 days are treated as outstanding only when
determining the amount of and percentage of Common Stock owned by
such individual. Each person has sole voting and investment power
with respect to the shares shown, except as noted. Except for Mr.
Kleiman, the address for each of the following is c/o Scientific
Industries, Inc., 70 Orville Drive, Bohemia, New York 11716.
Amount and
Name Nature of Beneficial Ownership % of Class
___________________________________________________________________
Lowell A. Kleiman 139,581 (1) 14.0%
16 Walnut Street
Glen Head, NY 11545
Arthur M. Borden 59,540 (2) 5.9%
Joseph G. Cremonese 21,210 (3) 2.1%
Joseph I. Kesselman 63,520 (4) 6.2%
Roger B. Knowles 46,595 (5) 4.6%
James S. Segasture 187,250 (6) 18.6%
Helena R. Santos 21,000 (7) 2.1%
Robert P. Nichols 27,800 (8) 2.8%
All directors and executive
officers as a group (7 persons) 426,915 (9) 38.5%
(1) Based on information reported in his Schedule 13D filed with
the Securities and Exchange Commission on October 30, 2002.
(2) Includes 20,000 shares issuable upon exercise of options.
(3) 16,210 shares are owned jointly with his wife and 5,000
shares are issuable upon exercise of options.
(4) Includes 20,000 shares issuable upon exercise of options and
735 shares of Common Stock owned jointly with his wife.
(5) Includes 20,000 shares issuable upon exercise of options,
22,258 shares owned by his wife, and 1,337 shares owned by a
trust of which he is a trustee, beneficial ownership of
which is disclaimed by him.
(6) Includes 4,000 shares issuable upon exercise of options and
493 shares owned by his wife.
(7) Includes 15,000 shares issuable upon exercise of options.
(8) Includes 25,000 shares issuable upon exercise of options.
(9) includes 109,000 shares issuable upon exercise of options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Mr. Joseph G. Cremonese, who was elected a Class C Director
at the Annual Meeting of Stockholders in November 2002 or his
affiliate, Laboratory Innovation Company, Ltd., have been providing
independent marketing consulting services to the Company for
approximately eight years. The services have been rendered since
January 1, 2003 pursuant to a consulting agreement which was
amended in March 2005. The agreement as amended provides that Mr.
Cremonese and his affiliate render, at the request of the Company,
through December 31, 2006 marketing consulting services of at least
72, but not more than 96, days per year at the rate of $500 per day
with a monthly payment of $3,000, with the Company's obligation
reduced to the extent the consulting services are less than 72 days
for the 12 month period. The agreement contains confidentiality
and non-competition covenants. During fiscal 2006, the Company
paid an aggregate of $35,400 for the consulting services.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibits to this report are listed in the Exhibit
Index at the end of this report.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the
three months ended June 30, 2006:
On May 5, 2006, Registrant filed a report on Form 8-K,
reporting under Item 8.01.
On June 14, 2006, Registrant filed a report on Form 8-K,
reporting under Item 1.01.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The Company incurred for the services of Nussbaum, Yates &
Wolpow, P.C.: audit fees (including for preparation of the
Company's corporate tax returns) of approximately $28,500 and
$27,400 in connection with the audit of the Company's financial
statements for fiscal 2006 and fiscal 2005, respectively; $2,850
and $2,700 in connection with the quarterly reviews for fiscal 2006
and fiscal 2005, respectively, and $3,600 in fiscal 2005 in
connection with reviews of amendments of the Company's annual and
quarterly reports filed under the Securities Exchange Act of 1934.
There were no other audit related fees or other fees paid to
Nussbaum, Yates & Wolpow, P.C.
The Board of Directors has reviewed and discussed the
audited financial statements with management. It discussed with
the independent auditors of the Company matters required to be
discussed by SAS 61 (Codification of Statements on Auditing
Standards AU 380), as modified or supplemented and received the
written disclosures and the letter from the independent accountants
required by Independence Standards Board Standard No. 1
(Independence Standards Board Standard No.1, Independence
Discussions with Audit Committees), as modified or supplemented.
The Board discussed with the independent accountant the independent
accountant's independence.
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, Treasurer
Chief Financial and Principal
Accounting Officer
Date: September 29, 2006
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 29, 2006
____________________
Arthur M. Borden
/s/ Joseph G. Cremonese Chairman of September 29, 2006
_______________________ the Board
Joseph G. Cremonese
/s/ Joseph I. Kesselman Director September 29, 2006
_______________________
Joseph I. Kesselman
/s/ Roger B. Knowles Director September 29, 2006
____________________
Roger B. Knowles
/s/ James S. Segasture Director September 29, 2006
______________________
James S. Segasture
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 as Exhibit 3(ii) to the Company's Current
Report Form 8-K filed on January 6, 2003) and
incorporated by reference thereto.
4 Instruments defining the rights of security holders:
4(a) 2002 Stock Option Plan (Filed as Exhibit 99-1
to the Company's Current Report on Form 8-K
filed on November 25, 2002 and incorporated
by reference thereto.
10 Material Contracts:
10(a) Lease between Registrant and AIP Associates,
predecessor-in-interest of current lessor,
dated October, 1989 with respect to Company's
offices and facilities. (Filed as Exhibit
10(a) to the Company's Form 10-KSB filed on
September 28, 2005 and incorporated by
reference thereto).
10(a)-1 Amendment to lease between Registrant and REP A10
LLC dated September 1, 2004 (Filed as Exhibit
10A-1 to the Company's Current Report on Form 8-K
filed on September 2, 2004, and incorporated by
reference thereto).
10(b) Employment Agreement dated January 1, 2003,
by and between the Company and Ms. Santos
(Filed as Exhibit 10(a) to the Company's
Current Report on Form 8-K filed on January
22, 2003, and incorporated by reference
thereto).
10(b)-1 Employment Agreement dated September 1, 2004,
by and between the Company and Ms. Santos (Filed
as Exhibit 10A-1 to the Company's Current Report on
Form 8-K filed on September 1, 2004, and
incorporated by reference thereto).
10(c) Employment Agreement dated September 1, 2004,
by and between the Company and Mr. Nichols
(Filed as Exhibit 10A-1 to the Company's
Current Report on Form 8-K filed on September 1, 2004,
and incorporated by reference thereto).
10(d) Consulting Agreement dated January 1, 2003 by and
between the Company and Mr. Cremonese and his affiliate,
Laboratory Innovation Company, Ltd., (Filed as Exhibit
10(b) to the Company's Current
Report on Form 8-K filed on January 6, 2003,
and incorporated by reference thereto).
10(d)-1 Consulting agreement dated March 22, 2005, by
and between the(10) Company and Mr. Cremonese and
Laboratory Innovation Company, Ltd., (Filed as
Exhibit 10A-1 to the Company's current report on
Form 8-K filed on March 23, 2005, and
incorporated by reference thereto).
10(e) Sublicense from Fluorometrix Corporation (Filed as
Exhibit 10(a)1 to the Company's current Report on
Form 8-K filed on June 14, 2006, and incorporated by
reference thereto).
21 Subsidiaries of the Registrant
Scientific Packaging Industries, Inc., a New York
corporation, is a wholly-owned inactive subsidiary
of the Company.
31.1 Certification of Chief Executive Officer and
Chief Financial Officer pursuant to Section
302 of Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and
Chief Financial Officer pursuant to Section
906 of Sarbanes-Oxley Act of 2002.
SCIENTIFIC INDUSTRIES, INC.
AND SUBSIDIARY
YEARS ENDED JUNE 30, 2006 AND 2005
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
YEARS ENDED JUNE 30, 2006 AND 2005
CONTENTS
Page
Report of Independent Registered Public Accounting Firm F-1
Consolidated financial statements:
Balance sheets F-2
Statements of income F-3
Statements of shareholders' equity F-4
Statements of cash flows F-5
Notes to financial statements F-6 - F-18
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Scientific Industries, Inc. and Subsidiary
Bohemia, New York
We have audited the consolidated balance sheets of Scientific
Industries, Inc. and subsidiary as of June 30, 2006 and 2005,
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 the standards of the
Public Company Accounting Oversight Board (United States). 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 consolidated 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, 2006 and 2005, and the consolidated results of their operations
and their cash flows for the years then ended in conformity with United
States generally accepted accounting principles.
/s/Nussbaum Yates & Wolpow, P.C.
________________________________
Nussbaum Yates & Wolpow, P.C.
Melville, New York
August 21, 2006
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2006 AND 2005
ASSETS
2006 2005
___________ ___________
Current assets
Cash and cash equivalents $ 227,700 $ 183,900
Investment securities 1,168,200 1,026,700
Trade accounts receivable, less
allowance for doubtful accounts
of $10,600 in 2006 and 2005 313,900 450,600
Inventories 930,300 800,400
Prepaid and other current assets 103,900 57,800
Deferred taxes 25,500 49,000
___________ ___________
Total current assets 2,769,500 2,568,400
Property and equipment, net 122,100 136,100
Intangible assets, less accumulated
amortization of $74,200 and $48,700
in 2006 and 2005 40,200 35,400
Other 38,700 40,000
___________ ___________
Total assets $ 2,970,500 $ 2,779,900
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 68,100 $ 82,400
Accrued expenses and taxes 212,300 237,200
___________ ___________
Total current liabilities 280,400 319,600
___________ ___________
Deferred compensation - 19,400
___________ ___________
Deferred taxes 3,200 3,000
___________ ___________
Commitments and contingencies
Shareholder's equity:
Common stock, $.05 par value;
authorized 7,000,000 shares;
issued 1,020,154 and 1,000,009 shares
in 2006 and 2005 51,000 50,000
Additional paid-in capital 1,010,500 991,200
Accumulated other comprehensive
income, unrealized holding loss
on investment securities (11,500) (7,600)
Retained earnings 1,689,300 1,456,700
___________ ___________
2,739,300 2,490,300
Less common stock held in treasury
at cost, 19,802 shares 52,400 52,400
___________ ___________
Total shareholders' equity 2,686,900 2,437,900
___________ ___________
Total liabilities and
shareholders' equity $ 2,970,500 $ 2,779,900
=========== ===========
See notes to consolidated financial statements.
F-2
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
JUNE 30, 2006 AND 2005
2006 2005
____________ ___________
Net sales $ 3,465,200 $ 3,593,000
Cost of sales 1,766,700 1,844,500
____________ ___________
Gross profit 1,698,500 1,748,500
____________ ___________
Operating expenses:
General and administrative 718,900 682,300
Selling 238,200 316,400
Research and development 316,500 350,200
____________ ___________
1,273,600 1,348,900
____________ ___________
Income from operations 424,900 399,600
____________ ___________
Other income:
Interest income 34,600 18,400
Other income, net 9,500 5,000
____________ ___________
44,100 23,400
____________ ___________
Income before income taxes 469,000 423,000
____________ ___________
Income tax expense:
Current 123,600 76,700
Deferred 23,700 41,800
____________ ___________
147,300 118,500
____________ ___________
Net income $ 321,700 $ 304,500
____________ ___________
Basic earnings per common share $ .32 $ .31
____________ ___________
Diluted earnings per common share $ .30 $ .29
____________ ___________
Weighted average common shares
outstanding 991,809 978,008
____________ ___________
Weighted average common shares
outstanding, assuming dilution 1,068,445 1,051,039
____________ ___________
See notes to consolidated financial statements.
F-3
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2006 AND 2005
Common Stock Additional Accumulated
______________ Paid-in Other Compr-
Shares Amount Capital ehensive Loss
_______ _______ ________ _____________
Balance, July 1, 2004 995,343 $49,800 $984,200 $ (3,500)
Net income - - - -
Other comprehensive loss:
Unrealized holding loss
arising during period - - - (5,500)
Less reclassification
adjustment for loss
included in net income - - - 1,400
Change in net unrealized
holding gain - - - -
Comprehensive income - - - -
Exercise of stock options 4,666 200 5,700 -
Income tax benefit of
stock options exercised - - 1,300 -
Cash dividend paid, $.07
per share - - - -
_________ _______ ________ ___________
Balance, June 30, 2005 1,000,009 50,000 991,200 (7,600)
Net income - - - -
Other comprehensive loss:
Unrealized holding loss
arising during period - - - (6,400)
Less reclassification
adjustment for loss
included in net income - - - 2,500
Change in net unrealized
holding gain - - - -
Comprehensive income - - - -
Exercise of stock options
and warrant 20,145 1,000 12,500 -
Income tax benefit of
stock options exercised - - 6,800 -
Cash dividend paid, $.09
per share - - - -
_________ _______ __________ ___________
Balance, June 30, 2006 1,020,154 $51,000 $1,010,500 $(11,500)
========= ======= ========== ===========
See notes to consolidated financial statements.
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (continued)
YEARS ENDED JUNE 30, 2006 AND 2005
Retained Treasury Stock Shareholders'
______________
Earnings Shares Amount Equity
________ ______ ______ _____________
Balance, July 1, 2004 $1,220,500 19,802 $ 52,400 $ 2,198,600
Net income 304,500 - - 304,500
_____________
Other comprehensive loss:
Unrealized holding loss
arising during period - - - (5,500)
Less reclassification
adjustment for loss
included in net income - - - 1,400
_____________
Change in net unrealized
holding gain - - - (4,100)
_____________
Comprehensive income - - - 300,400
_____________
Exercise of stock options - - - 5,900
Income tax benefit of
stock options exercised - - - 1,300
Cash dividend paid, $.07
per share (68,300) - - (68,300)
___________ _______ _______ _____________
Balance, June 30, 2005 1,456,700 19,802 52,400 2,437,900
_____________
Net income 321,700 - - 321,700
_____________
Other comprehensive loss:
Unrealized holding loss
arising during period - - - (6,400)
Less reclassification
adjustment for loss
included in net income - - - 2,500
_____________
Change in net unrealized
holding gain - - - (3,900)
_____________
Comprehensive income - - - 317,800
_____________
Exercise of stock options - - - 13,500
and warrant
Income tax benefit of
stock options exercised - - - 6,800
Cash dividend paid, $.09
per share (89,100) - - (89,100)
___________ _______ _______ _____________
Balance, June 30, 2006 $1,689,300 19,802 $52,400 $ 2,686,900
=========== ======= ======= =============
See notes to consolidated financial statements.
F-4
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2006 AND 2005
2006 2005
___________ __________
Operating activities:
Net income $ 321,700 $ 304,500
Adjustments to reconcile net income to __________ ___________
net cash provided by operating activities:
Loss on sale of investments 2,500 1,400
Depreciation and amortization 78,100 66,600
Deferred income taxes 23,700 41,800
Income tax benefit of stock options
exercised 6,800 1,300
Changes in assets and liabilities:
Trade accounts receivable 136,700 (61,800)
Inventories (129,900) (134,200)
Prepaid expenses and other current assets (46,100) 600
Other assets 1,300 32,800
Accounts payable (14,300) 6,400
Accrued expenses and taxes (24,900) 77,100
Deferred compensation (19,400) (16,600)
___________ __________
Total adjustments 14,500 15,400
___________ __________
Net cash provided by operating
activities 336,200 319,900
___________ __________
Investing activities:
Purchase of investment securities,
available for sale (344,500) (435,400)
Purchase of investment securities, held to
maturity - (113,500)
Redemption of investment securities,
available for sale 123,600 222,600
Redemption of investment securities,
held to maturity 72,300 95,500
Capital expenditures (38,000) (53,900)
Purchase of intangible assets (30,200) (30,300)
___________ _________
Net cash used in investing activities (216,800) (315,000)
___________ _________
Financing activities:
Proceeds from exercise of stock options 13,500 5,900
Cash dividend paid (89,100) (68,300)
___________ _________
Net cash used in financing
activities (75,600) (62,400)
___________ _________
Net increase (decrease) in cash and cash
equivalents 43,800 (57,500)
Cash and cash equivalents, beginning of year 183,900 241,400
___________ _________
Cash and cash equivalents, end of year $ 227,700 $ 183,900
=========== =========
Supplemental disclosures of cash flow information:
Cash paid for income taxes $ 75,100 $ 24,000
=========== =========
Non-cash financing activity:
See note 10 for exercise of warrants
See notes to consolidated financial statements.
F-5
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2006 AND 2005
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
The Company records revenue from the sale of its goods at the time
of shipment. All shipments are FOB shipping point. All sales are final
without right of return or payment contingencies. The Company has no
special sales arrangements or agreements with any of its customers.
Sales are recorded when the following criteria are met:
. Receipt of a written purchase order which is binding on the customer.
. Goods are shipped and title passes.
. Prices are fixed.
. Collectibility is reasonably assured.
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. At
certain times, the Company maintains balances in accounts in excess of
the $100,000 FDIC insurance coverage.
Accounts Receivable
In order to record the Company's accounts receivable at their net
realizable value, the Company must assess their collectibility. A
considerable amount of judgment is required in order to make this
assessment, including an analysis of historical bad debts and other
adjustments, a review of the aging of the Company's receivables, and
the current creditworthiness of the Company's customers. The Company
has recorded allowances for receivables which it considered
uncollectible, including amounts for the resolution of potential
credit and other collection issues such as disputed invoices, customer
satisfaction claims and pricing discrepancies. However, depending on
how such potential issues are resolved, or if the financial condition
of any of the Company's customers was to deteriorate and its ability
to make required payments became impaired, increases in these
allowances may be required. The Company actively manages its accounts
receivable to minimize credit risk. The Company does not obtain
collateral for its accounts receivable.
F-6
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2006 AND 2005
1. Summary of Significant Accounting Policies (Continued)
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 valued at the lower of cost (first in, first out)
or market value, and have been reduced by an allowance for excess and
obsolete inventories. The estimate is based on management's review of
inventories on hand compared to estimated future usage and sales.
Cost of work-in-process and finished goods inventories include material,
labor and manufacturing overhead.
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.
Intangible Assets
Intangible assets consist of patents, licenses and trademarks
being amortized on a straight-line basis over five years. Amortization
expense of intangible assets for the years ended June 30, 2006 and 2005
was $25,500 and $7,400. Expense is expected to be approximately $10,000
annually for the next four years.
Asset Impairment
The Company reviews its long-lived assets annually to determine
whether facts and circumstances exist which indicate that the carrying
amount of assets may not be recoverable or the useful life is shorter
than originally estimated. If the facts warrant a review, the Company
assesses the recoverability of its assets by comparing the projected
undiscounted net cash flows associated with the related asset or group
of assets over their remaining lives against their respective carrying
amounts.Impairment, if any, is based on the excess of the carrying
amount over the fair value of those assets. If assets are determined
to be recoverable, but the useful lives are shorter than originally
estimated, the net book value of the assets is depreciated over the
newly determined remaining useful lives. The Company has not
recorded any impairment charges.
F-7
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2006 AND 2005
1. Summary of Significant Accounting Policies (Continued)
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 basis 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 paid,
the use of accelerated methods of depreciation and amortization for
tax purposes, and tax credit carryforwards.
Advertising
Advertising costs are expensed as incurred. Advertising expense
amounted to $39,100 and $43,700 for the years ended June 30, 2006
and 2005.
Stock Compensation Plan
During the year ended June 30, 2003, the Company established a
ten-year stock option plan (the "2002 Plan") which provides for the
grant of options to purchase up to 100,000 shares of the Company's
Common Stock, par value $.05 per share ("Common Stock"), plus to the
extent that options previously granted under the 1992 Stock Option
Plan of the Company (the "Prior Plan") expire or terminate for any
reason without having been exercised, then options exercisable for
that same number of shares of Common Stock, up to a maximum of one
hundred sixty one thousand (161,000) shares, may be granted pursuant
to the 2002 Plan. The 2002 Plan provides for the granting of
incentive or non-incentive stock options as defined in the 2002
Plan. 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 are to 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 2002
Plan also stipulates that none of the then members of the Board of
Directors shall be eligible to receive option grants under the
2002 Plan. The Prior Plan provided that each non-employee member
of the Board of Directors be granted, annually commencing 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
director, a ten-year option to purchase 4,000 shares of Common
Stock at the fair market value on the date of grant. No options
have been granted to such directors of the Company since December
2001. The options expire at various dates through October 2012.
At June 30, 2006, 84,667 shares of Common Stock were available
for grant under the 2002 Plan plus 21,667 shares which expired
under the Prior Plan.
F-8
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2006 AND 2005
1. Summary of Significant Accounting Policies (Continued)
Stock Compensation Plan (Continued)
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.
There were no options granted in 2005 or 2006.
Had compensation cost been determined based upon the fair
value of the stock options at grant date for all awards, the
Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
2006 2005
_________ _________
Net income:
As reported $321,700 $304,500
Pro forma 320,600 302,700
Basic earnings per share:
As reported $ .32 $ .31
Pro forma $ .32 $ .31
Diluted earnings per share:
As reported $ .30 $ .29
Pro forma $ .30 $ .29
Stock-based employee compensation
cost, net of related tax effects,
included in the determination of
net income as reported $ - $ -
F-9
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2006 AND 2005
1. Summary of Significant Accounting Policies (Continued)
Stock Compensation Plan (Continued)
The Company did not grant any options or warrants as compensation for
goods or services to non-employees for the years ended June 30, 2006
and 2005.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and judgments that affect the
amounts reported in the financial statements and accompanying notes.
The accounting estimates that require management's most difficult and
subjective judgments include the valuation of inventory and the
recognition and measurement of income tax assets and liabilities.
The actual results experienced by the Company may differ materially
from management's estimates.
Earnings Per Common Share
Basic earnings per common share is computed by dividing net income
by the weighted-average number of shares outstanding. Diluted earnings
per common share includes the dilutive effect of stock options and
warrants, if any.
Recent Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board
(FASB) issued Statement No. 123(R) (revised 2004) that will require
compensation costs related to share-based payment transactions to be
recognized in the financial statements. With limited exceptions, the
amount of compensation cost will be measured based on the grant-date
fair value of the equity or liability instruments issued. In addition,
liability awards will be measured each reporting period. Statement
123(R) replaces FASB Statement No. 123, Accounting for Stock-Based
Compensation, and supercedes APB Opinion No. 25, Accounting for Stock
Issued to Employees. SFAS 123(R) is effective as of the first interim
reporting period for the Company's fiscal year beginning July 1,
2006. The Company is currently assessing the impact of adopting
SFAS 123(R), and does not expect the effect to be material.
F-10
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2006 AND 2005
2. Line of Business and Concentrations
The Company is engaged in the manufacturing and
marketing of equipment for research in university, hospital and
industrial laboratories. The Company believes that it has only one
reportable segment. Approximately 72% in 2006 and 75% in 2005 of sales
are generated from the Vortex-Genie(R) 2 mixer excluding accessories.
Certain information relating to the Company's export sales and
principal customers is as follows:
2006 2005
_________ __________
Export sales (principally Europe and Asia) $1,514,400 $1,575,100
Customers in excess of 10% of net sales:
Largest in 2006 and 2005 703,000 830,800
Second largest in 2006 and 2005 586,700 598,500
Third largest in 2006 and 2005 353,500 366,600
Accounts receivable from these customers amounted to approximately
42% and 41% of total accounts receivable at June 30, 2006 and 2005.
During the fourth quarter of fiscal 2006, the Company's principal
customer and distributor advised the Company that it would no longer
market and buy the Company's products. Sales to this customer accounted
for approximately 20% and 23% of net sales for fiscal 2006 and 2005.
The Company purchased approximately 44% and 35% of inventory from
one supplier for the years ended June 30, 2006 and 2005.
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, 2006:
Available for sale:
Equity securities $ 8,300 $ 11,300 $ 3,000
Mutual funds 621,400 606,900 (14,500)
Callable bonds 550,000 550,000 -
__________ __________ __________
$1,179,700 $1,168,200 $ (11,500)
__________ __________ __________
F-11
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2006 AND 2005
3. Investment Securities (Continued)
Gross Cost or Unrealized
Amortized Fair Holding Gain
Cost Value (Loss)
_____________ ________ ___________
At June 30, 2005:
Available for sale:
Equity securities $ 8,300 $ 10,000 $ 1,700
Mutual funds 678,300 669,000 (9,300)
Callable bonds 275,000 275,000 -
_________ _________ __________
$ 961,600 $ 954,000 $ (7,600)
_________ _________ __________
Held-to-maturity:
State and municipal bonds,
due in one year or less $ 57,700 $ 57,500 $ (200)
Certificate of deposit 15,000 15,000 -
_________ ________ ________
$ 72,700 $ 72,500 $ (200)
_________ ________ ________
4. Inventories
2006 2005
__________ __________
Raw materials $ 806,700 $ 711,400
Work-in-process 5,200 10,600
Finished goods 118,400 78,400
__________ __________
$ 930,300 $ 800,400
__________ __________
5. Property and Equipment
Useful Lives
(Years) 2006 2005
____________ _________ _________
Computer equipment 3-5 $126,000 $123,000
Machinery and equipment 3-7 365,400 340,100
Furniture and fixtures 4-10 88,000 80,600
Leasehold improvements 4-5 37,700 35,200
________ _________
617,100 578,900
Less accumulated depreciation
and amortization 495,000 442,800
________ _________
$122,100 $136,100
________ _________
F-12
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2006 AND 2005
6. Bank Line of Credit
The Company has an available $200,000 secured bank line of credit
which bears interest at prime collateralized by all the assets of
the Company. The Company did not utilize this credit line during
the years ended June 30, 2006 and 2005. To support the line of
credit, the Company would be 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 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. Employer
matching contributions to the Plan amounted to $9,500 in 2006 and
$9,600 in 2005. The Company also has the option to make an
additional profit sharing contribution to the Plan. There was no
profit sharing contribution in either year.
8. Commitments and Contingencies
Lease
The Company is obligated through January 2010 under a
noncancelable operating lease for its premises, which requires
minimum annual rental payments plus other expenses, including
real estate taxes and insurance.
The Company's approximate future minimum rental payments
under the above lease are as follows:
Fiscal Years
____________
2007 179,000
2008 186,100
2009 193,600
2010 115,800
________
$674,500
________
In accordance with generally accepted accounting principles, the
future minimum annual rental expense, computed on a level basis, will be
approximately $182,800 under the terms of the lease. Rental expense
amounted to approximately $199,500 in 2006 and $217,600 in 2005.
Accrued rent, payable in future years, amounted to $28,000 and $19,700
at June 30, 2006 and 2005.
F-13
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2006 AND 2005
8. Commitments and Contingencies (Continued)
Employment Contracts
Pursuant to an expired employment contract with its former
President, the former President chose that a portion of compensation
earned in prior years be deferred to future years. The deferred
amounts were placed in a separate investment account and all
earnings and losses thereon are for his benefit. As of June 30, 2006
and 2005, $21,400 and $38,800 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 as adjusted by market fluctuations commencing after
the termination of employment. For the years ended June 30, 2006
and 2005, $21,000 and $19,600, respectively were paid to the
former President.
The Company has employment contracts with its President and
Executive Vice President expiring on December 31, 2006, providing
for annual base salaries of $110,000 and $105,000, respectively.
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, 2006.
During the year ended June 30, 2003, the Company entered into a
consulting agreement through December 31, 2004 with an affiliate of a
member of its Board of Directors for marketing consulting services.
The agreement provided that the consultant will be paid a monthly fee of
$3,000 for a certain number of consulting days as defined in the
agreement. On March 22, 2005, the agreement was amended to provide,
among other things, for an extension through December 31, 2006 at the
same monthly fee but with an increase from $450 to $500 per day
and a reduction of the guaranteed minimum days of service from
80 to 72.
F-14
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2006 AND 2005
9. Income Taxes
Income taxes for 2006 and 2005 were different from the amounts
computed by applying the Federal income tax rate to the income before
income taxes due to the following:
2006 2005
__________________ _________________
%of % of
Pre-tax Pre-tax
Amount Income Amount Income
_________ _______ _________ _______
Computed "expected" income tax $ 159,500 34.0% $ 143,800 34.0%
Research and development
credits ( 6,000) (1.3) (13,000) (3.1)
State income taxes, net of
Federal effect 11,600 2.5 10,700 2.5
Other, net (17,800) (3.8) (23,000) (5.4)
_________ _______ _________ _______
Actual income taxes 147,300 31.4% $ 118,500 28.0%
_________ _______ _________ _______
Deferred tax assets and liabilities consist of the following:
2006 2005
________ _________
Deferred tax assets:
Amortization of intangibles $ 11,300 $ 10,500
Deferred compensation 7,100 13,300
Rent accrual 9,600 6,800
Tax credit carry forwards - 16,200
Other 21,900 26,200
________ _________
49,900 73,000
Deferred tax liability:
Depreciation of property
and equipment (27,600) (27,000)
________ _________
Net deferred tax assets $ 22,300 $ 46,000
________ _________
F-15
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2006 AND 2005
10. Stock Options and Warrant
Option activity is summarized as follows:
Fiscal 2006 Fiscal 2005
_________________ __________________
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
_______ _______ _______ ________
Shares under option:
Outstanding, beginning of year 131,334 $ 1.54 142,000 $ 1.52
Granted - - - -
Exercised (10,666) 1.27 (4,666) 1.27
Forfeited (1,667) 1.20 (6,000) 1.31
________ _______
Outstanding, end of year 119,001 1.57 131,334 1.54
________ _______ _______ _______
Options exercisable at year-end 119,001 $ 1.57 125,668 $ 1.55
________ _______ _______ _______
Weighted average fair value per
share of options granted
durign fiscal 2006 and 2005 $ - $ -
_______ _______
As of June 30, 2006
Options Outstanding and Exercisable
___________________________________
Weighted-
Average Weighted-
Range Remaining Average
Exercise Number Contractual Exercise
Prices Outstanding Life (Years) Price
_________ ___________ ____________ _________
$1.20-$2.40 102,334 3.45 $1.80
$.82-$.84 29,000 3.14 .84
_______
119,001
_______
F-16
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2006 AND 2005
10. Stock Options and Warrant (Continued)
As of June 30, 2005 As of June 30, 2005
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
_________ ___________ ____________ _________ ___________ _________
$1.20-$2.40 102,334 4.23 $1.74 96,668 $1.77
$.82-$.84 29,000 4.14 .84 29,000 .84
_______ _______
131,334 125,668
_______ _______
During the year ended June 30, 2006 a stock purchase warrant for
17,390 shares of the Company's common stock issued during 2001 for
services was exercised at a price of $1.4375 per share. The exercise
was cashless and resulted in the Company issuing 9,479 shares.
11. Earnings Per Common Share
Earnings per common share data was computed as follows:
2006 2005
________ _________
Net income $ 321,700 $ 304,500
_________ _________
Weighted average common shares
outstanding 991,809 978,008
Effect of dilutive securities,
stock options and warrant 76,636 73,031
_________ _________
Weighted average dilutive common
shares outstanding 1,068,445 1,051,039
_________ _________
Basic earnings per common share $ .32 $ .31
_________ _________
Diluted earnings per common share $ .30 $ .29
_________ _________
F-17
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2006 AND 2005
12. Fair Value of Financial Instruments
The financial statements include various estimated fair value
information as of June 30, 2006 and 2005, 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:
2006 2005
___________________ ___________________
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
________ _________ ________ _________
Assets:
Cash and cash equivalents $ 227,700 $ 227,700 $ 183,900 $ 183,900
Investment securities
(Note 3) $1,168,200 $1,168,200 $1,026,700 $1,026,500
13. Subsequent Events
In August, 2006, the Company agreed in principle to acquire the
outstanding capital stock of a privately held company ("Acquiree")
engaged in the production and sale of catalyst research
instruments. The consummation of the acquisition is subject to
negotiation and execution of a stock purchase agreement. The
agreement is to provide a purchase consideration of $400,000 in
cash, 125,000 shares of the Company's Common Stock and contingent
payments based on annual sales of the Acquiree during a four year
period following the acquisition. Sales of the Acquiree were
approximately $1,366,000 (unaudited) for the year ended December
31, 2005. No assurance can be given that the proposed acquisition
will be effected or, that if effected, the acquired operation
will be beneficial to the Company's operating results.
F-18