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
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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
-----------------------------------------------------
(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:
6/30/96 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 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
<PAGE>
<TABLE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements:
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
ASSETS
JUNE 30, DECEMBER 31,
1996 1995
Unaudited Audited
<S> <C> <C>
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-
</TABLE>
<PAGE>
<TABLE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (Continued):
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
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
<S> <C> <C> <C> <C>
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-
</TABLE>
<PAGE>
<TABLE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (Continued):
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION> Six Months Ended Three Months Ended
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
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-
</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
SIX MONTHS ENDED JUNE 30, 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
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-
</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
second quarter of 1996 compared to the 1995 quarter (unaudited).
<CAPTION>
2nd Qtr. 2nd Qtr.
1996 1995
--------- ---------
<S> <C> <C>
Sales $628,461 $1,749,495
Net Income (Loss) (523,417) 47,450
Net Income Per Share $ (0.07) $ 0.01
</TABLE>
<TABLE>
<CAPTION>
OPERATING EXPENSES COSTS PERCENT OF SALES
------------------ ----- ----------------
1996 1995 1996 1995
---- ---- ---- ----
<C> <C> <S> <C> <C>
$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
</TABLE>
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-
<PAGE>
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-
<PAGE>
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-
<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 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
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Jun-30-1996
<CASH> 8
<SECURITIES> 0
<RECEIVABLES> 500
<ALLOWANCES> 0
<INVENTORY> 1000
<CURRENT-ASSETS> 1647
<PP&E> 2130
<DEPRECIATION> 1480
<TOTAL-ASSETS> 2642
<CURRENT-LIABILITIES> 1489
<BONDS> 500
<COMMON> 81
0
0
<OTHER-SE> 654
<TOTAL-LIABILITY-AND-EQUITY> 2643
<SALES> 1177
<TOTAL-REVENUES> 1177
<CGS> 948
<TOTAL-COSTS> 948
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27
<INCOME-PRETAX> (1365)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1365)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1365)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
</TABLE>
