-----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, JjSq8xEtv2z1mkmJLZ7SsJs2NQZUEm0WK7kbzMt4knOwFdwOjgxFnQkOyiSjcI7e S1BW8N6psxoTG3qIXWOu9w== 0000350644-96-000005.txt : 19960816 0000350644-96-000005.hdr.sgml : 19960816 ACCESSION NUMBER: 0000350644-96-000005 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960815 SROS: NASD 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: 1934 Act SEC FILE NUMBER: 000-10690 FILM NUMBER: 96616176 BUSINESS ADDRESS: STREET 1: 1919 SPRINGDALE RD CITY: CHERRY HILL STATE: NJ ZIP: 08003 BUSINESS PHONE: 6094240068 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 June 30, 1996 [ ] 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: 6/30/96 7,936,728 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 June 30, 1996 and 1 December 31, 1995 Consolidated Statements of Income (loss) for three months 2 ended June 30, 1996 (unaudited) and three months ended June 30, 1995 Consolidated Statements of Cash Flows for three months 3 ended June 30, 1996 (unaudited) and three months ended June 30, 1995 Consolidated Statements of Shareholders' Equity for the 4 period ending December 31, 1995 (audited) and the three months ending June 30, 1996 (unaudited) Item 2. Management's Discussion and Analysis of Financial 5 - 7 Condition and Results of Operations PART II. OTHER INFORMATION Item 1. Legal Proceeding 8 Item 2. Changes in Securities 8 Item 3. Defaults upon Senior Securities 8 Item 4. Submission of Matters to Vote of Security Holders 8 Item 5. Other Information 8 Item 6. Exhibits 8 Item 7. Signatures 8 PART 1. FINANCIAL INFORMATION Item 1. Financial Statements: SCIENCE DYNAMICS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
ASSETS JUNE 30, DECEMBER 31, 1996 1995 Unaudited Audited Current assets: Cash and cash equivalents $ 7,600 $ 22,626 Accounts receivable - trade 500,264 683,642 Inventories 999,899 1,226,596 Other current assets 140,168 186,816 --------- --------- Total current assets 1,647,931 2,119,680 --------- --------- Property and equipment, net 224,369 243,038 Software development costs, net of accumulated amortization of $486,803 in 1996 and $395,371 in 1995 427,514 518,945 Deferred income taxes 308,000 308,000 Other assets 35,141 39,056 --------- --------- Total assets $2,642,955 $3,228,719 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable - bank $ 270,000 $ 280,000 Accounts payable 827,892 742,581 Other payables and accrued expenses, principally payroll related 391,070 198,282 --------- --------- Total current liabilities 1,488,962 1,220,863 Long term debt: Long term debt payable 500,000 - --------- --------- Total liabilities 1,988,962 1,220,863 Shareholders' equity - Common stock - .01 par value, 10,000,000 shares authorized, 8,062,528 and 8,048,778 issued, 7,936,728 and 7,922,978 outstanding in 1996 and 1995 respectively 80,625 80,488 Additional paid-in capital 6,967,261 6,955,899 Retained earnings (deficit) (5,996,060) (4,630,698) ----------- ----------- 1,051,826 2,405,689 Common stock held in treasury, at cost (397,833) (397,833) ----------- ----------- Total shareholders' equity 653,993 2,007,856 ----------- ----------- Total liabilities and shareholders' equity $2,642,955 $3,228,719 -1-
PART 1. FINANCIAL INFORMATION Item 1. Financial Statements (Continued): SCIENCE DYNAMICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Six For the Six For the Three For the Three Months Ended Months Ended Months Ended Months Ended June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1996 Net sales $ 1,176,942 $ 3,140,301 $ 628,461 $ 1,749,495 Operating costs and expenses: Cost of sales 948,042 1,221,581 435,400 628,356 Research and development 344,641 383,455 164,696 244,559 Selling, general and administrative 1,222,623 1,431,257 534,967 813,906 --------- --------- --------- --------- 2,515,306 3,036,293 1,135,063 1,686,821 --------- --------- --------- --------- Operating income (1,338,364) 104,008 (506,602) 62,674 (loss) Other income (expenses): Interest and other investment income - - - - Interest expense (26,998) (29,231) (16,815) (15,224) ----------- ---------- ---------- ---------- Income (loss) before provision (credit) for income taxes (1,365,362) 74,777 (523,417) 47,450 Provision (credit) for income taxes - - - - ----------- ---------- ---------- ---------- Net income (loss) $ (1,365,362) $ 74,777 $ (523,417) $ 47,450 ============= ============ =========== ============ Net income (loss) per common share and common share equivalent $ (.17) $ .02 $ (0.07) $ 0.01 ============= ============ =========== ============ -2-
PART 1. FINANCIAL INFORMATION Item 1. Financial Statements (Continued): SCIENCE DYNAMICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended Three Months Ended June 30, June 30, 1996 1995 1996 1995 Cash flows from operating activities: Net income (loss) $ (1,365,362) $ 74,777 $ (523,417) $ 47,450 ----------- ----------- --------- ----------- Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation 29,538 75,276 14,771 38,042 Amortization of capitalized software 91,432 39,308 45,716 19,654 Changes in operating assets and liabilities: (Increase) decrease in: Accounts receivable Inventories 183,378 (477,116) (99,052) (389,847) Other current assets 226,697 (256,210) (41,346) (192,843) Other assets 46,648 22,463 33,387 15,713 Increase (decrease) in: 3,915 501 3,912 (10,619) Accounts payable, other payables, accrued expenses and customer deposits 278,198 (527,941) 121,427 (613,774) ---------- ----------- --------- ----------- Total adjustments 859,806 (1,123,719) 78,815 (1,133,674) ---------- ----------- --------- ----------- Net cash provided by (used for) operating activities (505,556) (1,048,942) (444,602) (1,086,224) ---------- ----------- --------- ------------ Cash flows from investing activities: Capitalized software - (83,219) - - Purchase of property and equipment - net (10,869) (37,316) (2,356) (21,407) ---------- ----------- --------- ------------ Net cash (used) in investing activities (10,869) (120,535) (2,356) (21,407) ---------- ----------- --------- ------------ Cash flows from financing activities: Increase (decrease) in notes payable 490,000 (79,000) 430,000 (70,000) Issuance of common stock and warrants 11,499 1,271,806 11,499 1,198,562 ---------- ----------- --------- ----------- Net cash (used in) provided by financing activities 501,499 1,192,806 441,499 1,128,562 ---------- ----------- --------- ----------- Net increase (decrease) in cash and cash equivalents (14,926) 23,329 (5,459) 20,931 Cash and cash equivalents - beginning of period 22,626 2,262 13,059 4,660 ---------- ----------- --------- ----------- Cash and cash equivalents - end of period $ 7,700 $ 25,591 $ 7,600 $ 25,591 ============= ============ =========== ============ -3-
PART 1. FINANCIAL INFORMATION Item 1. Financial Statements (Continued): SCIENCE DYNAMICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1995 AND SIX MONTHS ENDED JUNE 30, 1996 ---------------------------------
Common Stock Additional Retained Paid-In Earnings Treasury Stock Shares Amount Capital (Deficit) Shares Amount Balance December 31, 1994 $4,443,274 $ 44,433 $ 5,102,544 $(3,695,742) $ 125,800 $ 397,833 Common stock issued 3,605,504 36,055 1,853,355 - - - Net loss - - - (934,956) - - ---------- -------- --------- ------------ --------- ---------- Balance December 31, 1995 8,048,778 80,488 6,955,899 (4,630,698) 125,800 397,833 Common stock and warrants issued to obtain financing 13,750 137 11,362 - - - Net loss - - - (1,365,362) - - ---------- -------- --------- ------------ --------- ---------- Balance June 30, 1996 8,062,528 $ 80,625 $ 6,967,261 $ (5,996,060) 125,800 $ 397,833 ========== ======== ========= ============ ========= ========== -4-
PART 1. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis, and Plan of Operation SCIENCE DYNAMICS CORPORATION AND SUBSIDIARIES _____________________________________________________ The following table summarizes the basic results of operations during the second quarter of 1996 compared to the 1995 quarter (unaudited).
2nd Qtr. 2nd Qtr. 1996 1995 --------- --------- Sales $628,461 $1,749,495 Net Income (Loss) (523,417) 47,450 Net Income Per Share $ (0.07) $ 0.01
OPERATING EXPENSES COSTS PERCENT OF SALES ------------------ ----- ---------------- 1996 1995 1996 1995 ---- ---- ---- ---- $435,400 $628,356 Cost of Goods Sold 69.3% 35.9% 164,696 244,559 Research & Development 26.2% 14.0% 534,967 813,906 Sales, General & Admin. 85.1% 46.5% --------- -------- ------ ------ $1,135,063 $1,686,821 Total Operating Costs 180.6% 96.4% and Expenses
The severe reduction in sales for the second quarter reflects the effects of a prohibition from utilizing a three-way call detection system previously supplied by a third party, arising out of a patent infringement lawsuit against such third party (as described in the 1995 10-KSB and the 10-QSB for the first quarter 1996). The effect of such lawsuit has had a corollary effect upon the Income Statement and some items on the Balance Sheet for both quarters of this year. Because the second quarter sales have been reduced to approximately one third of the sales of the comparable 1995 quarter (primarily as a result of the Company' inability to ship products utilizing the unavailable three-way call detection system), the operating expense comparisons, both in terms of dollars and percentages, are most likely a temporary anomaly and should be viewed accordingly. Furthermore, although the percentages of each expense category are almost double the comparable previous year's quarter due to the low sales, the actual dollars expended for R&D, sales and general administration have been reduced as a result of the Company's previously reported restructuring. The Company's efforts to cure the problems caused by the unavailability of the three-way call detection system are set forth more fully under "Commentary of 1996 Business". - -5- GENERAL BUSINESS DISCUSSION As previously reported in a May 22, 1996 press release, the Company has designed a replacement for the unavailable three-way call detection system previously supplied by such third party. After successful beta tests at two Regional Bell Operating Companies, the Company has begun to receive requests for quotations for products utilizing the Company's three-way call detection system. In particular, the Company's three-way call detection system is utilized as part of its Inmate Control System, sales of which were suspended during the development of the Company's proprietary three-way call detection system which does not infringe upon existing patents. The Company is hopeful that sales of its products incorporating its system will return to or will exceed historical levels of sales of these products. (For a recap on these events, please refer to the Commentary on 1996 Business following the Liquidity section.) LIQUIDITY AND CAPITAL RESOURCES For the second quarter ending June 30, 1996, the Company's principal sources of working capital have been provided through proceeds obtained from a long term debt arrangement and from operations. The Company has a note payable to the bank for $270,000. The bank has temporarily waived the monthly principal installment and the Company is currently under discussions to formulate a new repayment arrangement. Net Sales for the three months ending June 30, 1996 were $628,461, a decrease of $1,121,034 over the same period in 1995. This decrease was primarily attributable to the patent infringement suit. The net operating loss for the three months ending June 30, 1996, was $523,417, compared to a net income of $47,450 in the corresponding period in 1995. The operating loss was directly attributable to the decrease in sales. Selling, general and administrative costs and the Research & Development costs decreased as a resultant of the downsizing effort. The Company is currently assessing alternative business opportunities. There are a variety of considerations which enter into the evaluation process. The ultimate goal is to achieve an ongoing operation that will generate productivity gains and future financial benefits. COMMENTARY OF 1996 BUSINESS Recap of Events Leading to the First and Second Quarter Sales Effect The Company entered into an agreement in 1992 with Mitsui to co-bid a debit card system to NYNEX. Mitsui had a Japanese telephone Company design and provide the required instrument, but desired to augment the available pool of expertise, and therefore co-bid the project with SDC, a telecommunications company versed in the telephony and network operations. SDC agreed to jointly bid the project even though it would require most of the Company's technical talent to design the very sophisticated front end processor (FEP). The Company was also aware that few of its technical resources would be available to design new products and to enhance its more mature products already in field installations. However, the debit card market appeared to justify the temporary sacrifice of new product delay since the NYNEX project could be leveraged to other RBOCs with Mitsui and NYNEX providing the marketing. - -6- The proposal was made to NYNEX and won against some formidable competition. A letter of intent was issued by NYNEX, with the following eleven and a half months consumed by negotiating the voluminous contract. During that period and some subsequent months, no sales were generated from this design effort. To date, 35 of the Company's FEP systems have been installed and are operating in NYNEX's central telephone offices. There are additional software enhancements to be provided for this project which are presently in progress. Coupled with the reduction in revenue to SDC during the initial phases of the NYNEX project, the Bell Companies (SDC's major customers) began huge layoffs of personnel and, in addition, restricted equipment purchases. The combination of the lack of revenue from the NYNEX debit card system, and the Bell Companies layoffs and reductions in purchases, severely impacted the Company's sales and revenues. However, the Company had partially rebounded from such setbacks with sales of $6.75M in 1995, when the third party supplier of a three-way call detection system utilized by SDC, particularly in its Inmate Control System, was prevented from further sales and maintenance of such three-way call detection system as a result of a judgment against such company in a patent infringement suit. Although, prior to such judgment, SDC had only acted as a distributor (under agreements indemnifying SDC against such patent infringement) and had only supplied a very few systems incorporating the prohibited three-way call detection system, its unavailability prevented the Company from delivering its products utilizing the prohibited system. This curtailment, extending from the last quarter of 1995 until the present time, has severely reduced the Company's total sales. Recognizing that the outcome of the patent suit could have serious implications for the Company, SDC started designing its own 3-way call detection system last September. In parallel, SDC asked the Company's patent attorneys to review patents in that area and to analyze the Company's design. The attorneys of a large prestigious patent law firm provided the Company with an unqualified opinion that SDC did not infringe any patent in this area. To expedite the design of the 3-way detection system, SDC purchased a universal hardware system platform and generated the software to operate the system and provide the designed functionality. In May, systems were installed in two different RBOCs for beta tests. Beta tests are conducted in the "real world" to ensure that there are no undiscovered anomalies in working with the telephone switches, lines, etc., which cannot be discovered in the lab. Both systems worked as designed and as expected. It is now up to the RBOCs to place orders for the 3-Way Detector and recommence ordering of the Company's Inmate Control System. During the postponement of Inmate System purchases, the Company had to rely entirely on sales of both mature products and new software systems. As in the case of any newer system, there is a certain amount of gestation time required, prior to realizing meaningful sales. Continued sales of mature products, new software products, and sales of the 3-Way Detection System with the restart of the Company's Inmate Systems should regain the Company's sales momentum. - -7- 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 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 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. 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. SCIENCE DYNAMICS CORPORATION By: /s/ LYNDON A. KEELE --------------------------------- Lyndon A. Keele President, Treasurer and Director (Principal Executive and Chief Financial Officer) By: /s/ JOY C. HARTMAN --------------------------------- Joy C. Hartman Executive Vice President and Director (Principal Accounting Officer) Dated: August 15, 1996 EX-27 2 ARTICLE 5 FIN. DATA SCHEDULE FOR 1ST QTR 10-QSB
5 1,000 6-MOS Dec-31-1996 Jan-01-1996 Jun-30-1996 8 0 500 0 1000 1647 2130 1480 2642 1489 500 81 0 0 654 2643 1177 1177 948 948 0 0 27 (1365) 0 (1365) 0 0 0 (1365) (.17) (.17)
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