-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M3w5IhLmHMHt5rg1HID+lAVte9tCk+QWuN+sYGYDXgCz+nCbHvzicmpsL82Non7A I+hS8+ltgD83GPpPV93dGA== 0000350644-98-000007.txt : 19981116 0000350644-98-000007.hdr.sgml : 19981116 ACCESSION NUMBER: 0000350644-98-000007 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCIENCE DYNAMICS CORP CENTRAL INDEX KEY: 0000350644 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 222011859 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-10690 FILM NUMBER: 98746900 BUSINESS ADDRESS: STREET 1: 1919 SPRINGDALE RD CITY: CHERRY HILL STATE: NJ ZIP: 08003 BUSINESS PHONE: 6094240068 MAIL ADDRESS: STREET 1: SCIENCE DYNAMICS CORP STREET 2: 1919 SPRINGDALE RD CITY: CHERRY HILL STATE: NJ ZIP: 08003 10QSB 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-QSB (Mark One) [x] QUARTERLY REPORT UNDER SECTION 13 0R 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 1998 ------------------ [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from ______________ to ______________ Commission file number 010690 ____________________ Science Dynamics Corporation ------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) Delaware ------------------------------------------------------------ (State or other jurisdiction of incorporation or organization) 22-2011859 ------------------------------- (IRS Employer Identification No.) 1919 Springdale Road, Cherry Hill, New Jersey 08003 ----------------------------------------------------- (Address of principal executive offices) ( 609 ) 424-0068 ----------------------------------------------------- (Issuer's telephone number) N/A --------------------------------------------------------------- (Former name, former address, and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the registrant filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 09/30/98 14,661,449 shares of common stock were outstanding. S C I E N C E D Y N A M I C S C O R P O R A T I O N INDEX ----- PAGE NO. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 1998 1 (unaudited) and December 31, 1997 (audited) Consolidated Statements of Operations for nine months 2 and three months ended September 30, 1998 (unaudited) and nine months and three months ended September 30, 1997 (unaudited) Consolidated Statements of Cash Flows for nine months 3 and three months ended September 30, 1998 (unaudited) and nine months and three months ended September 30, 1997 (unaudited) Consolidated Statements of Shareholders' Equity for 4 the year ended December 31, 1997 (audited) and the nine months ending September 30, 1998 (unaudited) Notes to Consolidated Financial Statements 5 - 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 - 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings 13 Item 2. Changes in Securities 13 Item 3. Defaults upon Senior Securities 13 Item 4. Submission of Matters to Vote of Security Holders 13 Item 5. Other Information 13 Item 6. Exhibits and Reports 13 Item 7. Signatures 14 SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS PART I. FINANCIAL INFORMATION Item 1. Financial Statements: ASSETS September 30 December 31, 1998 1997 Unaudited Audited --------- ------- Current assets: Cash and cash equivalents $ 17,416 $ 21,181 Accounts receivable - trade 589,906 613,916 Inventories 377,381 322,530 Other current assets 36,844 52,200 ------------- ----------- Total current assets 1,021,547 1,009,827 ------------- ----------- Property and equipment, net 249,828 220,060 Software development costs, net of accumulated amortization of $356,176 in 1998 and $277,992 in 1997 165,058 243,243 Deferred income taxes 308,000 308,000 Intangible Assets, net of accumulated amortization of $525,000 in 1998 and $300,000 in 1997. 975,000 1,200,000 Other assets 44,936 39,239 ------------- ----------- Total assets $ 2,764,369 $ 3,020,369 ============= =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable $ 180,521 $ - Accounts payable 470,175 289,188 Accrued expenses, principally payroll related 95,993 87,046 ------------- ----------- Total current liabilities 746,689 376,234 ------------- ----------- Commitments Shareholders' equity - Common stock - .01 par value, 45,000,000 shares authorized, 14,661,449 issued and outstanding in 1998 and 1997 respectively. 146,614 146,614 Additional paid-in capital 10,166,429 10,166,429 Retained earnings (deficit) (7,897,530) (7,271,075) ------------- ----------- 2,415,513 3,041,968 Common stock held in treasury, at cost (397,833) (397,833) ------------- ----------- Total shareholders' equity 2,017,680 2,644,135 ------------- ----------- Total liabilities and shareholders' equity $ 2,764,369 $ 3,020,369 ============= =========== - -1- SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) --------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements(Continued):
Nine Months Ended Three Months Ended September 30, September 30, 1998 1997 1998 1997 ---- ---- ---- ---- NET SALES $3,400,297 $3,366,792 $1,074,991 $ 548,280 ---------- ---------- ---------- --------- Operating costs and expenses: Cost of sales 1,299,739 1,626,411 402,096 303,373 Research and development 954,416 791,169 341,287 386,776 Selling, general and administrative 1,770,243 1,678,863 527,750 488,870 ----------- ---------- ---------- ---------- 4,024,398 4,096,443 1,271,133 1,179,019 ---------- ---------- ---------- --------- Operating income (loss) (624,101) (729,651) (196,142) (630,739) Other income (expenses): Interest and other investment income - 15,434 - 3,660 Interest expense (2,354) (29,402) (2,354) - ---------- ---------- ---------- --------- Net (Loss) $ (626,455) $ (743,619) $ (198,496) $(627,079) ========== ========== ========== ========= Net (Loss) per common share $ (0.04) $ (0.06) $ (0.01) $ (0.05) ========== ========== ========== =========
- -2- SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) ---------
PART I. FINANCIAL INFORMATION Item 1. Financial Statements(Continued): Nine Months Ended Three Months Ended September 30, September 30, 1998 1997 1998 1997 ---- ---- ---- ---- Cash flows from operating activities: Net (loss) $ (626,455) $(743,619) $(198,496) $ (627,079) ---------- --------- --------- ---------- Adjustments to reconcile net (loss) to net cash provided by (used for) operating activities: Depreciation 52,981 49,387 20,384 17,967 Amortization of capitalized software 78,185 78,185 26,062 26,062 Amortization of Intangible assets 225,000 225,000 75,000 75,000 Other non-cash expense 29,402 - Changes in operating assets and liabilities: (Increase) decrease in: Accounts receivable 24,010 (337,733) (189,406) 215,299 Other receivable - 200,000 - 150,000 Inventories (54,850) 255,727 175,819 130,672 Other current assets 15,356 5,242 (7,590) (11,386) Other assets (5,697) (1,462) - (1,462) Increase (decrease) in: Accounts payable and accrued expenses 189,934 (344,223) (80,848) (277,852) ---------- --------- --------- ---------- Total adjustments 524,919 159,525 19,421 324,300 ---------- --------- --------- ---------- Net cash provided by (used for) operating activities (101,536) (584,094) (179,075) (302,779) ---------- --------- --------- ---------- Cash flows from investing activities: Purchase of property and equipment - net (82,750) (67,738) (7,872) (24,032) ---------- --------- --------- ---------- Net cash (used) in investing activities (82,750) (67,738) (7,872) (24,032) ---------- --------- --------- ---------- Cash flows from financing activities: Proceeds from Note Payable Net cash (used in) provided by financing activities 180,521 - 180,521 - ---------- --------- --------- ---------- Net increase (decrease) in cash and cash equivalents (3,765) (651,832) (6,426) (326,811) Cash and cash equivalents - beginning of period 21,181 830,229 23,842 505,208 ---------- --------- --------- ---------- Cash and cash equivalents - end of period 17,416 $ 178,397 17,416 $ 178,397 ========== ========= ========= ==========
- -3- SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1997 AND NINE MONTHS ENDED SEPTEMBER 30, 1998
PART I. FINANCIAL INFORMATION Item 1. Financial Statements(Continued): Common Stock Additional ------------ Paid-In Shares Amount Capital (Deficit) Shares Amount ------ ------ ------- --------- ------ ------ Balance December 31, 1996 12,055,861 120,558 9,615,191 (6,249,045) 125,800 397,833 ----------- -------- ---------- --------- ------- ------- Issuance of common stock to pay long term debt and related interest 2,605,588 26,056 551,238 - - - Net loss - - - (1,022,030) - - ----------- -------- ---------- --------- ------- ------- Balance December 31, 1997 14,661,449 146,614 10,166,429 (7,271,075) 125,800 397,833 ----------- -------- ---------- --------- ------- ------- Net loss - - - (626,455) - - ----------- -------- ---------- --------- ------- ------- Balance September 30, 1998 14,661,449 $ 146,614 $10,166,429 $ (7,897,530) 125,800 $ 397,833 ----------- -------- ---------- --------- ------- -------
- -4- SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) PART I Item 1. (continued) Basis of Presentation --------------------- The unaudited financial statements included in the Form 10-QSB have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation SB. The financial information furnished herein reflects all adjustments, which in the opinion of management are necessary for a fair presentation of the Company's financial position, the results of operations and the cash flows for the periods presented. Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed, or omitted, pursuant to such rules and regulations. These interim statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997. The Company presumes that users of the interim financial information herein have read or have access to the audited financial statements for the preceding fiscal year and that the adequacy of additional disclosure needed for a fair presentation may be determined in that context. The results of operations for any interim period are not necessarily indicative of the results for the full year. Income per share ---------------- Per-share data has been computed on the basis of the weighted average number of shares of common stock outstanding during the periods. Shares issuable upon exercise of common stock options and warrants are not included for the periods presented, as they would be anti-dilutive. New Accounting Pronouncements ----------------------------- The Company adopted Statement of Financial Accounting Standards No. 128,"Earnings Per Share" ("SFAS No. 128") for the year ended December 31, 1997. SFAS No. 128 requires the Company to change its method of computing, presenting and disclosing earnings per share information. Upon adoption, all prior period data presented must be restated to conform to the provisions of SFAS No. 128. The Company has presented basic earnings per share. The basic earnings per common share would be the same as the net loss per share shown in the Statements of Operations included in Item 1 of Part I of this Quarterly Report on Form 10-QSB. As the computation of diluted earnings per common share would be anti-dilutive, the diluted earnings per common share would be the same as the basic income per common share. - -5- In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for the reporting and displaying of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. SFAS No. 130 requires the disclosure of an amount that represents total comprehensive income and the components of comprehensive income in a financial statement. The adoption of SFAS No. 130 required no additional disclosure for the Company and did not have a material effect on the Company's financial position or results of operations. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 establishes standards for determining an entity's operating segments and the type and level of financial information to be disclosed in both annual and interim financial statements. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. The pronouncement is effective for periods beginning after December 15, 1997. The adoption of SFAS No. 131 required no additional disclosure for the Company and did not have a material effect on the Company's financial position or results of operations. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 1998 AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998. Business Overview ----------------- Science Dynamics Corporation designs, develops and markets a variety of Telecommunication products and applications, including intelligent call processing platforms which provide telecommunications service capabilities to the public switched telephone network. These platforms are sophisticated software based systems that satisfy a wide range of computer telephony integration applications. The VFX-250 product provides users of frame relay with a method of video conferencing over their existing network at a typically lower cost than equivalent leased line networks. The VFX-250 is capable of supporting any continuous data bit-stream traffic over a Frame Relay network. The system has been successfully tested with the Frame Relay product lines of leading manufacturers in this field, which should provide additional opportunities for this technology. During the third quarter the Company has revised and developed the VFX product in concert with our customers' requirements. In July, version 2.1 of the VFX-250S was released, adding more flexibility and functionality to the existing version 2.0 product. The 2.1 version includes a number of features to increase flexibility and compatibility with existing frame relay networks. Among the new features included in the 2.1 release are an external TT Clock that enables the use of devices requiring an external clock; the addition of local and remote - -6- loop-back facilities to aid in trouble-shooting network installations; and changes in internal clock speed and the automatic variable buffer length. This product has been technologically endorsed, although the demand ramp-up has been slower than management originally anticipated. In a recent independent test of videoconferencing via frame relay technology equipment, three vendors' products were evaluated and the results published in the September 15, 1998 issue of Network Computing Magazine. The Network Computing Editor's Choice was awarded to the Memotec CX900e system which uses the VFX-250S Frame Relay Access Device developed by Science Dynamics. This article has created a market awareness of the Company's VFX product's performance which management perceives will result in increased sales of this product in the future. The Company continues to expend research and continuing development efforts on this product to further enhance capabilities. Recent customer feedback has suggested that the Company investigate development of 'internal' versions of the technology, for inclusion into several Frame Relay vendor's equipment. The new COMMANDER II inmate-calling system, which was being tested at a RBOC technology laboratory, passed all inmate call control, Windows NT security and call processing thresholds. This product line acceptance certification allowed the company to enter into a major purchasing agreement for thirty-seven new COMMANDER II conversion systems. Additionally, it is anticipated that fifty additional conversion systems will be ordered during the first half of 1999. The Company's new Commander I inmate calling system is currently being tested at a RBOC. It is expected that the Commander I system will receive full acceptance certification in early December with delivery by the end of the year. The Company believes that the new Commander I & II inmate calling systems which are based on the Company's Integrator-C2000(tm) platform provide one of the correctional industries finest inmate phone control systems. During the third quarter, the world of IP Telephony changed greatly, as it will continue to change throughout the upcoming months. Technology that fits in this market is often known as "bleeding edge" due to the fact that the market is changing so rapidly. Participants in this market have to put a great deal of development effort in for possibly little initial return. The development effort providing Voice over IP based on the IntegratorC-2000(tm) platform continued in the third quarter. Currently under development are additional service modules for the IntegratorC-2000(tm) product including a real-time interface into a Billing/Debit Based Calling Card Platform. This interface provides a complete solution for Debit based or Credit based Internet phone systems. The SS7 Interface will allow an Integrator Gateway to connect to Carrier networks as an End Office Gateway. The H323 Interface, which has been inaugurated into the platform, allows interoperability between Gateways of various vendors as well as desktop clients such as Microsoft(r) NetMeeting. - -7- Additional products in development are a new release of the Commander Inmate calling platform. This release expands the capabilities of the Commander system as well as introduces the AdminManager II, a totally new 32bit Windows NT administration system for the Commander I and II. Other features of this release include Recording Interface, Speech Recognition, Increased System Security and numerous feature enhancements. Another product under development is the CIMS II, a new Windows NT based system for polling and administration of Voice Response Intercept Systems. The Company received notice from the National Association of Securities Dealers (NASD) that the Company's common stock was subject to delisting as the stock failed to maintain a closing bid price greater than or equal to $1.00. The Company has requested and received approval for a hearing to review the delisting and a tentative hearing date of December 3, 1998 has been assigned. The Company is presently formulating a definitive plan to submit to the Nasdaq Lisiting Qualifications Panel. The Company is working toward implementing the plan to be able to maintain its Nasdaq listing, although the Company is unable to predict how Nasdaq will rule at the hearing. If the plan is denied or a temporary exception is not granted, the Company's shares may be traded on the OTC Bulletin Board. Year 2000 Technology -------------------- The investigation of the Y2000 problem as it affects the Company's products and internal operations has been ongoing for sometime. The Company is addressing this issue in a comprehensive manner committing resources as necessary. The following highlights outline the Company's Y2000 approach. PRODUCTS - All current software development for our products is Year 2000 compliant. Only three of the Company's products are involved in the Y2000 question with the preponderance of the issues relegated to suppliers to the Company. Efforts to date have entailed working with customers to determine if older installations are still being utilized, i.e., is the unit in service and will it continue to be in service through December 1999. SUPPLIERS - The Company is assessing the possible effects on the Company's operations of Year 2000 compliance related to key suppliers and subcontractors. The Company has identified three critical suppliers that could cause significant problems and has requested information as to their plans and progress in addressing the Year 2000 problem. The Company expects to complete its evaluation of its suppliers by December 31, 1998. Based upon its evaluations, the Company will develop alternative sourcing or other contingency plans by mid-1999. Component suppliers are to follow closely behind the above effort. IN-HOUSE SYSTEMS AND SOFTWARE - During Fiscal 1998, for operational purposes, the Company made the decision to upgrade its internal financial and operational software systems. The Company has substantially completed the identification of other internal computer-based systems it uses which may require upgrading to insure operational continuity beyond December 31, 1999. The Company plans to complete such identification, the upgrading of necessary applications and the testing of all application software for Year 2000 compliance by December 31, 1998. - -8- COSTS - The total cost associated with the Year 2000 issue is not expected to be material to the Company's financial position. The Company's current out-of-pocket cost expended to date has been an immaterial amount. As the upgrade of the Company's internal software will be done for operational purposes, the cost of such upgrade has not been included in the Company's estimates. Results of Operations --------------------- The following table summarizes the basic results of operations for the periods indicated in the Consolidated Statement of Operations. Nine Months ended September 30, 1998 compared to the Nine Months ended September 30, 1997 (unaudited). Nine Months Ended September 30, 1998 1997 ---- ---- Sales $3,400,297 $3,366,792 Net Loss (626,455) (743,619) Net Loss Per Share $(0.04) $(.06) - -9- OPERATING EXPENSES PERCENT OF SALES ------------------ ---------------- 1998 1997 1998 1997 ---- ---- ---- ---- Cost of Goods Sold $1,299,739 $1,626,411 38.2% 48.3% Research & Development 954,416 791,169 28.1% 23.5% Sales, General & Admin 1,770,243 1,678,863 52.1% 49.9% Total Operating Costs and Expenses $4,024,398 $4,096,443 118.4% 121.7% Sales for the nine-month period of 1998 were $3,400,297 an increase of $33,505 from sales of $3,366,792 in the corresponding period in 1997. The increase in sales revenues was attributable to continuing sales of the Commander inmate call control systems and initial sales of the VFX-250S product. The sales of the VFX-250 have been lower than originally anticipated due to the lack of market awareness of the product. The press article in the Network Computing Magazine identifying the product's successful performance and the continual sales and marketing efforts devoted to the product is expected to obtain notable improvement in market acceptance resulting in increased sales. Management of the Company believes that historically, interim results and period-to-period comparisons have been neither predictable nor an accurate measure of the annual performance of the Company. The Company has experienced a trend of crests and ebbs in the sales performance resulting from the revenues of the Company being reliant on a single product area and customer base. This recognition has been the basis of the diversification strategy of the Company developing products allowing penetration of new market opportunities. Cost of Goods sold decreased to $1,299,739 in the first nine months of 1998 from $1,626,411 in the corresponding nine-month period of 1997. The decrease in the cost of goods sold is attributable to maximizing purchasing power through partnerships with selected vendors. Research & Development expenses increased to $954,416 in the first nine months of 1998 as compared to $791,169 in the comparable nine-month period of 1997. The increased costs are attributable to the development of new products and enhancements and the reallocation of duties of certain personnel as the development efforts were focused to expand our product offerings into the VFX-250 and the IP Telephony marketplace. The Company's ability to manage any future growth effectively will require it to prudently invest significant resources to attract, train, motivate and manage its employees successfully as the market acceptance of the new product offerings comes to fruition. - -9- Sales, General & Administrative expenses increased to $1,770,243 in the first nine months of 1998, compared to $1,678,863 in the corresponding period of 1997. The increase is related to the increase in the international sales force and related expenses to penetrate new sales opportunities. Interest expenses were incurred as part of the cost of the financing agreement with The CIT Group/Commercial Services. The agreement, for a revolving credit facility has provided a solution to cash flow situations that occur due to the fluctuations in sales revenue. Three Months ended September 30, 1998 compared to the Three Months ended September 30, 1997 (unaudited). For the Quarter Ended September 30, 1998 1997 ---- ---- Sales $1,074,991 $548,280 Net Loss $(198,496) $(627,079) Net Loss Per Share $(0.01) $(0.05) OPERATING EXPENSES PERCENT OF SALES ------------------ ---------------- 1998 1997 1998 1997 ---- ---- ---- ---- Cost of Goods Sold $402,096 $303,373 37.4% 55.3% Research & Development 341,287 386,776 31.7% 70.5% Selling, General & Admin 527,750 488,870 49.1% 89.2% Total Operating Costs and Expenses $1,271,133 $1,179,019 118.2% 215.0% Cost of Goods sold in the three months ended September 30, 1998 was $402,096 as compared to $303,373 in the corresponding period of 1997. The increase in absolute dollars in the comparative analysis is directly attributable to the increased sales captured in the third quarter of 1998. The costs of goods sold as a percentage of sales amounted to 37.4% and 55.3% for the three months periods ending September 30, 1998 and September 30, 1997 respectively. The decrease was due to the increased sales captured in the third quarter of 1998 as well as the continual efforts to increase purchasing power. Research & Development expenses, as a percentage of revenue, decreased to 31.7% in the third quarter of 1998 compared with 70.5% in the third quarter 1997. The expenses in absolute dollars decreased $45,489 in the third quarter 1998, compared to the corresponding quarter of 1997. The decrease in the percentage of revenue was due to the increased sales in the third quarter of 1998. The decrease in absolute dollars was attributable to a decrease in variable expenses, - -10- which occur sporadically from period to period. Due to the technological nature of the Company's business and the anticipated expansion of its technology into new applications, management expects to continue to expend significant resources for continued development and engineering expenses. Sales, General & Administrative expenses, as a percentage of sales, decreased in the third quarter of 1998 over the same period in 1997, and represents a 49.1% of sales as compared with 89.2% of sales for the same period of 1997 due to the increased sales revenue in the third quarter of 1998. The expenses in absolute dollars increased $38,880 in 1998 over the corresponding quarter in 1997. This increase was primarily due to advertising and tradeshow expenses to increase market awareness of the Company's initiatives into the Voice over IP market. LIQUIDITY AND CAPITAL RESOURCES: ------------------------------- Cash and cash equivalents marginally decreased to $17,416 for the period ended September 30, 1998 from $21,181 at December 31, 1997. The current ratio is 1.4 to 1 for the period ended September 30, 1998 compared to 2.7 to 1 at December 31, 1997. Cash used for operations during the nine-month period ended September 30, 1998 was $101,536 compared to $584,094 in the corresponding period of 1997. The change was primarily the result of the increase in accounts payable and accrued expenses in the nine-month period ended in 1998 compared to a significant decrease in accounts payable and accrued expenses in the corresponding 1997 period. Cash used for operations for the three months ended September 30, 1998 amounted to $179,075 compared to cash used in operations of $302,779 for the comparable three months ended September 30, 1997. The decrease in cash used for operations was primarily due to the decrease in accounts payable and the increase in the accounts receivable compared to the significant decrease in accounts payable and accrued expenses resulting from the collections of accounts receivable and other receivables during the corresponding period of 1997. Cash used for investing activities during the nine month period ended September 30, 1998 amounted to $82,750 compared to $67,738 in the corresponding nine month period of 1997. The increase reflects the continual investment in computer related equipment to further development efforts. Cash used for investing activities for the three months ended September 30, 1998 amounted to $7,872 compared to $24,032 in the comparable period of 1997. The expenditures in both periods were for development applications for product development and enhancement. Cash provided by financing activities amounted to $180,521 in the nine-month period and three-month period ended September 30, 1998. The increase was the funds provided by the financing arrangement with CIT to assist in the management of cash flows as necessary. - -11- The preliminary financing agreement with CIT was a ninety-day contract in which all terms were satisfactorily met. The Company is currently renegotiating a credit vehicle with CIT to subsidize its future working capital needs to bridge the periods of revenue fluctuation. Management cannot give assurance as to the success of these efforts but believes that negotiations will have a positive outcome. The Company believes that funds generated by operations and the additional borrowings that will be available under the credit facility will be sufficient to meet its current working capital needs. Management is committed to exploring both product opportunities and strategic alliances to enable sustained growth to promote investor interest and confidence. Certain statements contained in the 10QSB concerning the Company's business outlook on future performance and statements concerning assumptions made or expectations as to any future events, conditions or other matters are "forward-looking statements" as that term is defined under the Federal Securities Laws. Forward-looking statements are subject to risks, uncertainties and other factors, which may cause actual results to differ materially from those set forth in this report. The Company may encounter competitive, technological, financial and business challenges making it more difficult to market its products and services, the impact of which may in turn affect the Company's results of operations and financial position. - -12- PART II.OTHER INFORMATION SCIENCE DYNAMICS CORPORATION AND SUBSIDIARIES - --------------------------------------------- Item 1. Legal Proceedings No material developments. Item 2. Changes in Securities There has been no change or modification in the constituent instruments defining the rights of holders of neither the corporation's sole class of registered security nor any modification of the rights evidenced by such class by issuance or modification of any other class of securities. Item 3. Defaults Upon Senior Securities There has been no default of any nature upon any form neither of senior security nor in payment of interest or sinking or purchase fund installment with respect to any indebtedness of the registrant, nor any other form of default upon any financial obligation. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports None. - -13- Item 7. Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, registrant has duly caused this report to be signed in its behalf by the undersigned thereunto duly authorized. Signature Title Date --------- ----- ---- By: /s/ Alan C. Bashforth CEO, President, Director November 13, 1998 --------------------- Alan C. Bashforth By: /s/ Joy C. Hartman Exec. Vice President, CFO, November 13, 1998 --------------------- Treasurer, Secretary and Joy C. Hartman Director - -14- EX-27 2 ART. 5 FDS FOR 3RD QTR 10-QSB
5 1,000 3-MOS DEC-31-1998 JUL-01-1998 SEP-30-1998 17 0 590 0 377 1022 1339 1090 2764 747 0 0 0 147 2018 2764 1075 1075 402 673 869 0 2354 (198) 0 (198) 0 0 0 (198) (.01) 0
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