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
March 31, 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
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(Exact name of small business issuer as specified in its charter)
Delaware
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(State or other jurisdiction of incorporation or organization)
22-2011859
-------------------------------
(IRS Employer Identification No.)
1919 Springdale Road, Cherry Hill, New Jersey 08003
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(Address of principal executive offices)
( 609 ) 424-0068
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(Issuer's telephone number)
N/A
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(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:
3/31/96 7,936,728 shares of common stock were outstanding.
<PAGE>
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 March 31, 1996 and 1
December 31, 1995
Consolidated Statements of Income (loss) for three months 2
ended March 31, 1996 (unaudited) and three months
ended March 31, 1995
Consolidated Statements of Cash Flows for three months 3
ended March 31, 1996 (unaudited) and three months
ended March 31, 1995
Consolidated Statements of Shareholders' Equity for the 4
period ending December 31, 1995 (audited) and the three
months ending March 31, 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 9
<PAGE>
<TABLE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements:
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
ASSETS
MARCH 31, DECEMBER 31,
1996 1995
Unaudited Audited
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 13,060 $ 22,626
Accounts receivable - trade 401,212 683,642
Inventories 958,553 1,226,596
Other current assets 173,555 186,816
----------- -----------
Total current assets 1,546,380 2,119,680
----------- -----------
Property and equipment, net 236,784 243,038
Software development costs, net of
accumulated amortization of $441,087
in 1996 and $395,371 in 1995 473,229 518,945
Deferred income taxes 308,000 308,000
Other assets 39,053 39,056
----------- -----------
Total assets $2,603,446 $3,228,719
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable - bank $ 270,000 $ 280,000
Accounts payable 839,437 742,581
Capital Lease Obligation 6,734 -
Interest payable 10,266 -
Accrued expenses, principally
payroll related 241,098 198,282
----------- -----------
Total current liabilities 1,367,535 1,220,863
----------- -----------
Long term debt
Long term debt payable 70,000 -
----------- ----------
Total liabilities 1,437,535 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 6,955,762 6,955,899
Retained earnings (deficit) (5,472,643) (4,630,698)
------------ -----------
Common stock held in treasury,
at cost (397,833) (397,833)
------------- -----------
Total shareholders' equity 1,165,911 2,007,856
Total liabilities and
shareholders' equity $ 2,603,446 $3,228,719
============= ===========
-1-
</TABLE>
<PAGE>
<TABLE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (Continued):
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
Three Months Ended
March 31,
1996 1995
<S> <C> <C>
Net sales $ 548,481 $1,390,806
----------- ----------
Operating costs and expenses:
Cost of sales 512,642 593,225
Research and development 179,945 138,896
Selling, general and administrative 687,656 617,351
---------- ---------
1,380,243 1,349,472
---------- ---------
Operating income (loss) (831,762) 41,334
Other income (expenses):
Interest and other investment - -
income
Interest expense (10,183) (14,007)
---------- ---------
Income (loss) before provision
(credit) for income taxes (841,945) 27,327
Provision (credit) for income taxes - -
---------- ---------
Net income (loss) $ (841,945) $ 27,327
=========== ==========
Net income (loss) per common share
and common share equivalent $ (0.10) $ 0.01
========== ==========
-2-
</TABLE>
<PAGE>
<TABLE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (Continued):
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Three Months Ended
March 31,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (841,945) $ 27,327
---------- -----------
Adjustments to reconcile net income
(loss) to net cash provided by
(used for) operating activities:
Depreciation 14,767 37,234
Amortization of capitalized
software 45,716 19,654
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 282,430 (87,269)
Inventories 268,043 (63,367)
Other current assets 13,261 6,750
Other assets 3 11,120
Increase (decrease) in:
Capital lease obligation 6,734
Interest payable 10,266
Accounts payable, accrued expenses
and customer deposits 139,672 85,833
---------- ----------
Total adjustments 780,892 9,955
---------- ----------
Net cash provided by (used for)
operating activities (61,053) 37,282
---------- ----------
Cash flows from investing activities:
Capitalized software - (83,219)
Purchase of property and equipment -
net (8,513) (15,909)
---------- ----------
Net cash (used) in investing
activities (8,513) (99,128)
----------- ----------
Cash flows from financing activities:
Increase (decrease) in notes payable 60,000 (9,000)
Issuance of common stock - 73,244
----------- ----------
Net cash (used in) provided by
financing activities 60,000 64,244
----------- ----------
Net increase (decrease) in cash
and cash equivalents (9,566) 2,398
Cash and cash equivalents - beginning
of period 22,626 2,262
------------ ----------
Cash and cash equivalents - end of
period $ 13,060 $ 4,660
============ ==========
-3-
</TABLE>
<PAGE>
<TABLE>
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
THREE MONTHS ENDED MARCH 31, 1996
---------------------------------
<CAPTION>
Common Stock Additional Retained
Paid-In Earnings Treasury Stock
Shares Amount Capital (Deficit) Shares Amount
<S> <C> <C> <C> <C> <C> <C>
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
issued to
obtain
financing 13,750 137 (137) - - -
Net income - - - (841,945) - -
---------- ------- ----------- ------------ ------- -------
Balance
March 31,
1996 8,062,528 $ 80,625 $ 6,955,762 $ (5,472,643) 125,800 $397,833
=========== ======== =========== ============= ======= ========
-4-
</TABLE>
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis, and Plan of Operation
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARIES
_________________________________________
<TABLE>
The following table summarizes the basic results of operations during the
first quarter of 1996 compared to the 1995 and 1994 quarters (unaudited).
<CAPTION>
1st Qtr. 1st Qtr. 1st Qtr.
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Sales $548,481 $1,390,806 $967,594
Net Income (Loss) (841,945) 27,327 (281,729)
Net Income Per Share $ (.10) $ 0.01 $ (.09)
</TABLE>
<TABLE>
<CAPTION>
OPERATING EXPENSES COSTS PERCENT OF SALES
------------------ ----- ----------------
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
<C> <C> <C> <S> <C> <C> <C>
$512,642 $593,225 $349,324 Cost of Goods Sold 93.5% 42.7% 36.1%
179,945 138,896 251,943 Research & Development 32.8% 10.0% 26.0%
687,656 617,351 637,740 Sales, General & Admin. 125.4% 44.4% 65.9%
--------- -------- -------- ------ ------ ------
$1,380,243 $1,349,472 $1,239,007 Total Operating Costs 251.6% 97.1% 128.1%
and Expenses
</TABLE>
The Company's sales during the first quarter of the year are historically
low; however, not as low as indicated above. Those shareholders that reviewed
the Management's Discussion of the Company's Annual Report may recall the
statements concerning the patent infringement lawsuit that one of the
Company's key suppliers sustained last year. As stated in that report, the
first quarter's sales would be impacted due to the unavailability of that
infringed system. That forecast has indeed become fact as can be seen by the
low amount of sales for the quarter. Without that important system function,
the sales of the Company's Inmate Systems were totally affected.
Last year the Company began the design of its own replacement for the
infringed unit. The replacement unit is an extremely sophisticated system
which, unfortunately, consumed more design and calendar time than originally
anticipated. The Company presently has units at two Bell Operating Companies
-5-
<PAGE>
on beta test trials. Even though the unit design delay caused a dearth of
orders for the Inmate Systems during the first quarter and will extend into
the second quarter, the Company believes that those orders were postponed
rather than canceled. Deeming that assumption proves to be correct, the orders
should regain momentum toward the end of the second quarter and extending into
the third and fourth quarters. Although the system has been through extensive
testing at the Company, some anomalies could be experienced in the "real world"
which could cause additional design changes that would further delay orders.
While the Company has no reason to believe that such will occur, the
"real world" is the purpose for beta tests.
Since the sales for the subject quarter are so low, no meaningful
comparisons can be made to previous quarters comparing either the dollar
amounts or the percentages attributed to each of the operating cost
categories.
A deficiency has been discovered in the debit card telephone supplied by
Tamura Electric. The prime contractor requested SDC to evaluate and correct
the deficiency in the supplier's telephone. After the evaluation, it was
determined that this correction be made in the Company's FEP rather than
correcting the deficiency in the telephone. This correction has been placed
on hold by the prime contractor because of the costs involved. The design has
been accomplished; however, the retrofit of the 35 FEP systems presently
operating in the telephone Central Offices has not been accomplished. This
uncorrected deficiency could have serious consequences for the debit card
project; therefore, it is presumed that the problem of costs will be quickly
resolved.
GENERAL BUSINESS DISCUSSION
The increasing competition for telecom services is now impacting the
Local Exchange Carrier (LEC). Recent legislation and Federal Communications
Commission (FCC) action has opened the local loop to competition and has
required LEC's to provide access to central office equipment and services to
Alternative Service Providers (ASP's). This means that telcos will face
competition for services not only from long distance service providers (IXC),
but also from the alternative providers. The LEC's and ASP's will compete
on the basis of responding rapidly and cost-effectively to changing service
requirements and demands. This competition also means that end users will be
given more direct control over facilities utilization and service features as
part of service packages aimed at winning their business. There are
opportunities in this environment for companies such as Science Dynamics that
are capable of supplying flexible, modular software-based products that
provide rapid service creation capability.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital decreased by $719,972 in the first three
months of 1996 compared to the increase of $69,451 for the same period in
1995. The decrease in working capital for the three months ended March 31,
1996 is primarily due to the decrease in accounts receivable and a write
down of inventory attributable to the Company's redirection and reevaluation
of the product mix the Company plans to offer in the future.
-6-
<PAGE>
The Company has an installment note payable to the bank of $270,000 as of
March 31, 1996, compared to $280,000 at December 31, 1995. The bank continues
to cooperate with the Company provided the interest payments remain current.
Net sales for the three months of 1996 were $548,481, a decrease of
$842,325 over the same period in 1995. This decrease was directly related to
the inability of the Company to provide 3-way call detection required by its
customers as part of the inmate telephone system. This function has been
provided in the past by an OEM product purchased through a supplier, which
was unable to continue sales of the product due to a judgment in the last
quarter of 1995 in a patent infringement suit. The Company continues to
design a replacement system which its counsel has determined will not infringe
on the patented system. Customers of the Company have indicated that they
will begin purchasing the inmate systems once the 3-way detection issue is
resolved. The Company anticipates beta tests to begin shortly. Should the
beta tests substantiate the Company's design integrity, the Company can
resume sales of the base systems together with the 3-way call detection
systems.
The net operating loss for the three months ending March 31, 1996 was
$841,945, compared to a $27,327 net income in the corresponding period in
1995. This operating loss was primarily the result of the decrease in sales
and write down of inventory. Selling, general and administrative costs
increased slightly over the corresponding period due to expenses incurred
in connection with the reduction in force and from the redirection of the
Company. The research and development costs also reflect a slight
increase. However, certain research and development costs were capitalized
during the three month period ending March 31, 1995, distorting the
horizontal analysis.
The Company has successfully negotiated a long-term debt arrangement
and has utilized $70,000 during the first quarter. The agreement is currently
under attorney review but should be signed imminently.
Management believes that the funds generated from the debt financing and
cash flows from operations should be sufficient to meet it's working capital
requirements. The Company continues to seek and investigate various business
arrangements.
-7-
<PAGE>
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 any nature upon any form 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.
-8-
<PAGE>
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: June 27, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Mar-31-1996
<CASH> 13
<SECURITIES> 0
<RECEIVABLES> 401
<ALLOWANCES> 0
<INVENTORY> 959
<CURRENT-ASSETS> 1546
<PP&E> 2127
<DEPRECIATION> 1417
<TOTAL-ASSETS> 2603
<CURRENT-LIABILITIES> 1368
<BONDS> 70
<COMMON> 81
0
0
<OTHER-SE> 1483
<TOTAL-LIABILITY-AND-EQUITY> 2603
<SALES> 549
<TOTAL-REVENUES> 549
<CGS> 513
<TOTAL-COSTS> 513
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10
<INCOME-PRETAX> (842)
<INCOME-TAX> 0
<INCOME-CONTINUING> (842)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (842)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
