UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
(Mark One)
[x] ANNUAL REPORT UNDER SECTION 13 0R 13(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ______________ to ______________
Commission file number 010690
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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
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(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 [ ]
Check if there is no disclosure of delinquent filers in response to item 405
of Regulation S-B contained in this form, and that no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy
or information statements incorporated by reference in part III of this
form 10-KSB or any amendment to this form 10-KSB [x]
State issuer's revenue for its most recent fiscal year: $5,562,272.
The number of shares of Common Stock outstanding as of December 31, 1996, was
11,929,728 shares.
The aggregate market value of voting stock of the registrant held by
non-affiliates as of December 31, 1996 was approximately $6,656,396.
Documents Incorporated by Reference: Certain portions of the registrant's
definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Securities Exchange Act of 1934, as amended, in connection with the
Annual Meeting of Stockholders of the registrant to be held on or about
June 17, 1997, are incorporated by reference into Part III of this report.
Transitional small business format Yes X No___
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PART I
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ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
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Science Dynamics Corporation (the Company or SDC) markets a variety
of systems, including intelligent call processing platforms which
provide telecommunications service capabilities to the Public
Switched Telephone Network and Private Data Networks. These platforms
are sophisticated, state-of-the-art, software based systems which satisfy
a wide range of computer telephony integration applications. The
Company's products address niche market opportunities in Bell Operating
Companies (BOC's) and large independent telephone operating companies such
as GTE and Sprint, and to certain data network suppliers. These
opportunities lie primarily in the areas of Inmate Systems, Debit
Card Systems, Voice Announcements, Interactive Communications,
Intelligent Network Control and Administration. Management believes that
Science Dynamics' systems enable operating companies to improve service,
increase revenues, reduce operating expenses, and quickly introduce new
service offerings.
PRODUCTS
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The Company's products are microprocessor and software based telephone
support and special services products. Science Dynamics' principle
products are:
1. TELEPHONE MANAGEMENT SYSTEMS
a. COMMANDER - Correctional Facility Inmate Telephone Management System
The Commander Series product line provides a centralized, total control
solution for correctional facility managers. As an integrated prison
control system, Commander puts extensive inmate telecommunications and
processing tools at the customers' fingertips. It provides
cost-effective control and is designed to fit individual facility needs.
The Commander product line is ideally suited for correctional facilities
requiring the integration of the telephone system with other
components of a prison management system, including inmate telephones,
inmate tracking, electronic booking and video imaging, and commissary
and debit services. For the correctional facility, Commander reduces
inmate abuse and fraudulent use of the public telephone network.
The system provides the means to administer telephone privileges and
inmate services while at the same time facilitating inmate investigative
research. For the Telephone Company serving the correctional facility,
Commander serves as a cost effective and revenue producing solution
when facing competitors offering alternate telephone and other prison
services. The Bell Region Holding Companies and independent telephone
companies acquire commander systems, previously named the Collect Call
Timing Device (CCTD). Science Dynamics has installed and is currently
supporting 150 Commander systems controlling in excess of 15,000 inmate
telephones at many of the largest correctional facilities within the
United States.
b. TeleComNet MULTIPLE APPLICATIONS CONTROLLER (TMAC)
Currently, Science Dynamics' TMAC serves as the Company's Front End
Processor (FEP) for its Prepaid Telephone Card systems. This robust
platform and associated management system provides a complete management
system for the control of card reader telephones located within a large
distributed public services network. TMAC centralizes the functions of
fraud prevention, call rating, call detail records, call statistics,
and voice announcements. TMAC also provides for centralized control of
multiple phones, real time call rating, multi-language speech
capability and power for card reader telephones. TMAC's hardware
designen compasses both the Digital and
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Analog central office interface. The system also provides an extensive
and flexible maintenance, administration, and report generation
capability. TMAC is an innovative Public Payphone Management System
that has future applications potential in the control of coin phones,
facsimile services and point of sale terminals.
2. VOICE SERVICES SYSTEMS
a. VOICE RESPONSE SYSTEM
The Company's Voice Response System (VRS) is a cost effective automatic
intercept product designed to provide flexible announcement capabilities
for the central office location. The unique architecture of the VRS
results in a single system solution that can meet all announcement
requirements in any central office.
The VRS interfaces to both digital switches, via analog trunk
interfaces, and electromechanical switches. The VRS also supports
Science Dynamics' Quick Connection application, which addresses local
dial tone competition by helping telephone companies to retain their
customer base with a quick and convenient way for new subscribers to
obtain telephone service.
The Voice Response System contains a standard library of recorded
messages and phrases that can be used for all telephone company
announcement requirements. These messages can be fixed, concatenated,
or recorded by the user and appended to the phrase and/or announcement
library using the digital encoding feature of the VRS. Several key
features of the VRS encompass interactive Custom Local Area Signal
Service (CLASS), changed number referral announcements with optional
call completion, Automatic Number Announcement (ANA), user recorded
custom announcements, service and emergency announcements.
Users can perform custom voice recordings and message construction
locally by using the built-in display and control panel, or remotely
using the administration port. The user recordable memory is
expandable to accommodate larger user recorded message requirements.
The VRS has an internal database for changed number referral or message
assignment by switch designated translation. VRS also supports pooled
trunk announcements to better utilize trunk resources.
b. QUICK CONNECTION
Science Dynamics' Quick Connection provides a way for Local Exchange
Carriers (LEC's) to address local dial tone competition. IntraLATA
presubscription allows customers to select a local telephone company,
just as they now select a carrier for long distance. Quick Connection
provides a quick and convenient way for newly located subscribers to
obtain telephone service.
Quick Connection provides a method by which a new telephone service
subscriber can plug a telephone into an inactive phone jack and connect
automatically to the Local Exchange Carriers (LEC) service
representative at the telephone company's business office.
After going off hook, the subscriber hears a voice announcement
greeting. This announcement gives the name of the Telephone Company
and offers the immediate connection of service. The system automatically
identifies the line to the Telephone Company's service representative,
leaving no question as to the exact location of the telephone line
jack. Quick Connection's features encompass a low cost solution for
the telephone companies in deterring competition and/or acquiring new
customers.
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3. OTHER PRODUCTS
With the November 7, 1996 acquisition of the intellectual properties of
ICT, Science Dynamics accelerated its entry into the dynamic
computer-telephony market. ICT's products include a frame relay system
which enables any digital data stream to be transmitted in packetized form
over dedicated company telephone lines, a file transfer system for use via
satellite networks, and a system to increase access speed to private data
services and the Internet.
With 20 years of experience in the telecommunications industry, Science
Dynamics has built a reputation for adaptable and versatile system
products. The Company has designed and supported numerous products for
the Bell Regional Holding Companies and independent telephone companies.
Over 14,000 units have been installed, including, Coin Line Message
Interceptor, Expanded Announcement, Change Number Announcement, Activities
and Routing, Restriction/Access, Billing Recorder and T1 Converter
systems.
Most of those products, while mature, are still in use today and continue
to provide customer services and a revenue source for many Bell and
Independent Telcos.
While the Company intends to maintain its primary focus on the
telecommunications market place, new products are being developed for the
combination of computers and telephone aspects that are commonly called
Computer Telephony Integration (CTI).
LICENSES
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There are no outstanding license agreements other than commercially
available software packages used by the Company.
MANUFACTURE OF PRODUCTS
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The Company's ongoing restructuring and transitioning to a predominately
software programming Company and system integrator has resulted in disposing
of the Company's manufacturing assembly operation. All hardware items are
outsourced to pre-qualified manufacturers. The Company presently performs
final assembly and test on most of its products in its own facilities
utilizing standard modules supplied by vendors and fabricated parts
manufactured by others to its specifications.
The Company's operations do not pollute or involve discharge of material
into the environment. As a result, no expenditure is budgeted or required
for environmental protection or restoration.
The Company's products are primarily produced to order and inventories
of the Company normally consist of raw materials, work in process, and
finished goods. The Company believes it maintains a quantity of inventory
adequate to insure reasonable customer requirements and service.
The Company is neither dependent upon nor affected by availability of
basic raw materials in any aspect of its operations. The Company buys most
materials from a number of different suppliers and is generally not dependent
on any one supplier. If a supplier should cease to deliver a module, another
source would have to be located. The Company believes it would be able to do
so by acquiring a substitute part that could require a hardware or software
change in the circuit or unit in order to provide satisfactory performance,
although added costs and delays of unknown amount and duration could be
experienced.
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The Company believes that its business does not and will not depend upon
patent protection for its products but will depend primarily on technical
competence, service, and the quality of its products. However, when
patent application appears to be appropriate, patents will be pursued
such as the patent utilizing ANI for ordering goods and services over Feature
Group D telephone lines granted on January 10, 1989. Patent Number 5,157,718
for Interface Adapter for Directory Assistance positions was issued to the
Company on October 20, 1992. The Company continues to copyright its firmware
and software and take the necessary steps to protect its trademarks.
SALES AND MARKETING
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Sales of the Company's products to date have been made to operating
telephone companies covering a large geographical area, to telephone service
distributors, to Mitsui USA, Inc. for FEP units. Relations with all
customers are satisfactory.
During 1996, three customers and their operating subsidiaries accounted
for 84.3%, 9.7%, and 3.0% of total sales. The 84.3% to one customer resulted
primarily from the large last quarter sales and the tangential effect of the
lawsuit against a supplier. Refer to Management Discussion section on
Page 10. Depending on current sales levels, the loss in the entirety of any
such customer would have a material effect on sales. The subsidiaries of
telephone companies are, however, autonomous entities and there is no
information indicating any basis for belief that any such customers will be
lost as a customer for any reason or that there will be material changes in
the customer relationships with any of these companies.
At this time, the Company employs a Vice President of Marketing and
Sales. There are four full-time direct support sales personnel. In addition
to its own staff, the Company has Distribution Agreements with telephone
supply companies for supplying systems to the major independent telephone
companies.
RESEARCH & DEVELOPMENT
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Research and Development expenses in 1996 were $934,260 compared to
$984,567 in 1995 and $637,635 in 1994. The expenditures during 1996 were
primarily a result of electronic design and enhancement of the inmate system
and programming expenditures in the Company's front-end processor, which is
designed to accommodate debit change card phones.
The Company believes that a strong research and development effort is
important to its future growth. An explanation of the changes in research
and development is contained in Management's Discussion and Analysis of
Financial Condition under Part II, Item 6 on Page 11 of this 1996 10KSB.
The Company conducts most of its research and development activities at
its own facility using its own personnel. The Company had approximately 14
employees engaged in research and development. The Company's research and
development activities are aimed at providing new products for its current
product lines and developing new applications.
COMPETITION
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The Company is in a highly competitive business. Its products and
potential products are similar to those supplied or capable of being supplied
by a number of companies, some of which have substantially greater
financial and technological resources, and production and marketing
capabilities. Principal competitive factors include (1) size of the
manufacturer, (2) the capability of the technical staff, (3) the capacity to
be innovative and (4) quick response time. Each of the Company's
competitors are directly competitive with only one, or in some cases two, of
the Company's products.
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CUSTOMERS
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The Company has been a supplier to Telecommunication Companies for the
past 20 years, providing over 14,000 units and systems to a large portion of
the approximately 1,300 major and minor Telephone Operating Companies
(Telcos). SDC has recently evolved into primarily a software driven
integrator of Computer Telephony Integration Systems which the Company
believes will expand sales to private data network companies, as well as
telcos. Present major products--institutional inmate telephone control
systems; computer controlled digital transmission systems for video,
audio and data for transmission over terrestrial and satellite networks.
EMPLOYEES
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At December 31, 1996, the Company employed 31 persons on a full-time
basis including nine engineers, ten technicians, and two salesmen. The
Company supplements full-time employees with subcontractors and part-time
individuals, consistent with workload requirements. There was one part-time
employee. Employee relations to date have been excellent and there has been no
record of labor problems and no foreseeable difficulty.
GOVERNMENT APPROVAL
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No material portion of the Company's business is subject to re-negotiation of
profits or termination of contracts or subcontracts at the election of the
government.
The Federal Communications Commission (FCC) requires that some of the
Company's products meet subpart J of Part 15 and Part 68. Part 15 deals
with the suppression of radio frequency and Electro-magnetic radiation to
specified levels. Part 68 deals with protection of the telephone network.
ITEM 2. DESCRIPTION OF PROPERTY
The Company has leased for ten years commencing May 1, 1995, a free-
standing masonry building in an industrial park in Cherry Hill, New Jersey,
which contains approximately 25,000 square feet utilized for office space and
approximately 25,000 square feet utilized for manufacturing and warehousing
space.
The Company assembles and tests its products and carries on its other
corporate activities at this location. Since the Company's restructuring and
redirection, the facilities are more than presently required. It is
anticipated that a trade-off to a smaller facility within the same industrial
park, or in the alternative, a sub lease of the unused area can be
effectuated.
ITEM 3. LEGAL PROCEEDINGS
The Company is not now a party to any litigation and no action against
the Company has been threatened or is known to be contemplated by any
governmental agency or subdivision or any other entity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Stockholder meeting originally scheduled for June 12, 1996 was
postponed to November 7, 1996 in order to present the acquisition of the
intellectual property of Innovative Communications Technology Ltd.,
(ICT) to stockholders for approval. The following items were presented:
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1. Election of Directors - the following Directors were elected:
L. A. Keele
J. C. Hartman
K. P. Ray
A. C. Bashforth
2. Acquisition of the intellectual property of ICT - approved.
3. Increase the authorized common stock from 10,000,000 to
25,000,000 shares - approved.
4. Establish a new preferred stock - disapproved.
5. Ratification of Cosmas & Company as independent auditors for
1996 - approved.
PART II
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ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Registrant's Common Stock is traded in the NASDAQ Small Cap market
system. The NASDAQ symbol for the Company's Common Stock is "SIDY".
The Company's Common Stock has been traded publicly since April 22, 1981.
The "high" and "low" bid quotations for the Company's Common Stock for
each quarterly period for the fiscal years ended December 31, 1995 and
December 31, 1996 were as follows:
Calendar Quarter High Bid Price Low Bid Price
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1995
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First $1.1875 $0.8125
Second 1.0625 0.8750
Third 1.1275 0.7500
Fourth 0.9687 0.5937
1996
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First $ .8125 $ .3750
Second 1.8125 .4062
Third 1.3750 .6250
Fourth 1.1250 .6562
The above listed quotes reflect inter-dealer prices without retail mark-
up, mark-down, or commissions and are not necessarily representations of
actual transactions or the true value of the Common Stock.
As of December 31, 1996, there were approximately 350 holders of record
of the Common Stock of the Company. However, registrant has reason to
believe that there are more than 850 shareholders because of stock held in
street name by various broker-dealers.
The Company has paid no cash dividends since its inception. The Company
presently intends to retain any future earnings for use in its business and
does not presently intend to pay cash dividends in the foreseeable future.
Holders of the Common stock are entitled to share ratably in dividends when
and as declared by the Board of Directors out of funds legally available
therefor.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
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Net Sales for December 31, 1996 were $5,562,272, a decrease of
$1,160,320 from December 31, 1995. As previously reported, the adjunct
supplier which provided complementary equipment to the Company's Institutional
Inmate System had settled a patent infringement suit which as a requirement
prevented sales of such equipment. This consequent lack of available
equipment for the 3-way-call detection product caused severe constraints on
the Company's sales revenue from September 1995 through the third quarter of
1996. The Company accelerated its own development activity to design a
replacement system that would not be infringement on any patents and
that could also provide a platform for additional functions. The design
encompassing the 3-way-call detection functions was successfully beta tested
with two Bell Operating Companies and an independent telephone company.
The successful design of the 3-way product resulted in orders approaching
4 million dollars for delivery during the fourth quarter. Because of the
curtailed orders during the first three quarters, which resulted from the
above noted lack of necessary equipment, sales during the fourth quarter were
more than the first three quarters combined.
The universal platform designed for the initial 3-way-call detection function
has been incorporated with other salable functions and will continue to have
additional functions added as quickly as the additions can be designed and
tested. The platform is truly universal and will be utilized for purposes
beyond inmate systems.
The acquisition of ICT's intellectual properties provides an array of
smart data transmission products. Those properties, combined with Science
Dynamics' newly introduced switching platform, provides SDC with a number of
strategic product development opportunities. The Company's ongoing strategic
plan to prioritize product development opportunities will define and put into
place detailed programs to assure commercial realities in a timely manner.
The Company has previously stated that the restructuring that has been
ongoing during the past year has dramatically changed the Company. The
changes have remolded the operation from a predominately hardware manufacturing
company into an integration company principally engaged in software
development. Now manufacturing is outsourced with the exception of in-house
testing. For example, the hardware for the universal platform, the Commander
Plus, is almost entirely purchased assemblies. The value added is the
Telephony knowledge and the software that overlays the purchased modules.
The Company believes that the new structure that has been placed in
operation will improve product development and time to market, leading to
improved financial performance by the Company.
A key element of the Company's redirection centers on its strategic plan
in providing products to both the telecommunications and computer telephony
integration (CTI) industries. Historically, Science Dynamics has designed,
engineered and manufactured the majority of its product lines. In 1996 and
beyond, SDC has and will continue to partner with other companies and
suppliers in developing new products. The Company's plan is to take
advantage of readily market-available technologies in providing
telecommunications systems based on SDC's hardware integration and
software application development. The Company believes that the long term
growth of SDC will be realized by melding its capability in software,
engineering and marketing with the expertise of other companies capable of
manufacturing high performance hardware technology. It is believed that this
redirection will provide SDC the ability to deliver to the market in timely
fashion, cost effective, feature rich telecommunication and CTI products
and systems.
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The 1996 Operating Costs, compared to 1995, increased as a percentage of
sales as shown which are shown in the table below. However, in dollar terms,
total costs decreased due to the restructuring noted above. The following
elements compose Operating Costs with each element computed as a percentage
of sales. The increase in Cost of Sales is a result of large OEM purchases
during the last quarter of 1996.
1996 1995 1994
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Cost of Sales 63.9% 55.2% 40.2%
Research and Development 16.8% 14.6% 14.9%
Selling, General, and Administrative 38.9% 43.0% 70.7%
Inventory Write Off 8.1% - -
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Operating Costs 127.7% 112.8% 125.8%
1996 sales of $5,562,272 were 17% less than 1995 sales of $6,722,592.
As stated previously, sales for the first three-quarters of 1996 were
severely depressed due to the lack of available equipment needed for the
Company's inmate system. Most prison officials will not accept an
inmate system without 3-way-call detection because of the possibility of
fraudulent telephone calls originating from a prisoner. The lack of the
detection system almost totally restricted sales of the inmate system
until the Company's own system was designed and accepted.
The 1996 net loss of $1,618,347 was 42% more than the loss experienced
in the prior year because of the reduction in revenue and the $449,062
inventory write off. The loss comparison year to year would have
reduced the 42% down to 20% if the comparison were calculated without
the inventory write off. However, with the Company's restructuring and
redirection as covered above, it became prudent to eliminate inventory that
supported the resulting discontinued products.
1995 sales were up 36% over 1994 sales of $4,290834. The above stated
absence of 3-way-detection, as explained above, also curtailed 1995 sales
during the fourth quarter of 1995. The net loss for 1995 was $934,956 as
compared to a loss of $1,471,143 in 1994. Primary and fully diluted loss per
share for 1996 was (.18) cents, 1995 was (.16) cents, compared to (.40) cents
in 1994.
SUBSEQUENT EVENT
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On February 7, 1996, NYNEX made a public release stating that public
acceptance of debit coin phones "just never caught on with our customers",
in spite of marketing and advertising campaigns. As a result, NYNEX has
chosen to remove the debit card phones and replace those phones with
intelligent coin phones. The Company owned Front End Processors (FEP) were
provided to NYNEX through Teleplus, the prime contractor for the debit card
systems. SDC is presently negotiating licensing the FEP to Teleplus, on a
non-exclusive basis. Teleplus is a division of the Mitsui Corporation.
Science Dynamics had anticipated the possibility of that eventuality and
had taken steps to mitigate any impact upon the Company. That possibility
was one of the many justifications for redirecting SDC's structure to
becoming an almost totally dedicated software value added integrator. This
new Company approach was one of the underlying reasons for the acquisition of
Innovative Communications Technologies, LTD. (ICT), a software company.
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THE INDUSTRY
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The environment for revenue-generating telecommunications services has
been changing dramatically over the past five years. Services such as
Internet, e-mail, 500 follow me numbers, PCS, etc., have begun to re-
shape the telecom market landscape. Recent decisions enabling the
regional Telephone, interexchange, and cable companies to provide both
telephone and various information services has made for even more
extensive changes. Requirements for new types of telecommunications
equipment are being driven by (1) competition to the traditional telephone
operating companies, (2) users' demands for new services, and (3)
the recent federal telecommunications legislation.
As technology, competition, and legislation have resulted in a proliferation
of competitive telecom services, telephone companies have been forced and
will continue to respond to an exploding range of customer demands for
improved and broadened services. As a result of this market turbulence, the
equipment used to provide service applications needs to be easily integrated,
versatile, and capable of being modified easily.
Since local loop competition will be intense, telecommunications
suppliers will need to control investment expenses in equipment while still
being able to respond to network and service needs. Service providers
will also have to reduce operating expenses through centralization of
system administration and system integration strategies.
The competitive needs noted above will impact equipment and services in
this market area. Equipment will have to provide software-derived
functionality for flexibility and speed in deploying and modifying service
applications and call processing sequences. Changes to Centralized
Operation, Administration, and Maintenance (OA&M) capabilities will be
required in order to reduce operating costs. Equipment must be easily
programmable by both end users and the service provider to meet "real time"
service needs. Equipment and software must have a low "prove in" cost where
investment payback periods are short in order to reduce risk in the face of
market change and uncertainties. Science Dynamics sees opportunities in
this environment for companies able to provide flexible, modular,
software-based products. These opportunities were one of the driving forces
behind SDC's restructuring and redirection.
LIQUIDITY & CAPITAL RESOURCES
- -----------------------------
Net cash used for operating activities for the years ended December 31,
1996, 1995, and 1994 were $587,380, $1,270,280 and $611,736 respectively.
The use of cash in operating activities resulted primarily from net losses
and the significant decrease in accounts payable.
Net cash used for investing activities were $24,379 in 1996, $225,247 in
1995, and $19,063 in 1994. The Company's capital purchases in all three
years consisted primarily of computer related equipment utilized in
the development and testing of the Company's products. The Company
expects to increase its capital expenditures as necessary to maximize
development efforts to expedite products to market and to expand its
products into other market segments.
Net cash provided by financing activities was $1,419,362, $1,599,110
and$1,052,697 in the years ending December 31, 1996, 1995, and 1994,
respectively. The cash was generated by the net proceeds from the
sale of the Company's common stock and funds generated from a
convertible note payable reduced by the payments made to the bank note.
The funds were utilized for working capital primarily for the purchase of
inventory to fulfill customer orders.
At December 31, 1996, the Company had $830,229 in cash and cash
equivalents and $1,183,712 in working capital. Current assets as of
December 31, 1996 were $1,741,327 compared to $2,119,680. The collection
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of the accounts receivable in the fourth quarter increased the cash and
cash equivalents. The counterbalance resulting in the overall decrease was
essentially the decrease in accounts receivable and the inventory
obsolescence write off of $449,062 which resulted from the discontinuance of
several of our mature product lines.
Current liabilities at December 31, 1996 were $557,615, 54% less than
current liabilities of $1,220,863 at December 31, 1995. Two major
constituents attributed to this decrease. An investment company purchased
the note payable to Fleet Bank. The Company issued 460,000 shares of
its common stock to satisfy and cancel the note. The other factor was the
significant reduction in accounts payable.
The Company believes that the projected sales performance generating
cash flow from operations together with its current cash balances will be
sufficient to meet its working capital and capital expenditure requirements
for at least the next twelve months. To promote future growth the Company
may require the utilization of some form of financing instrument.
Statements in this Annual Report on Form 10KSB concerning the Company's
business outlook on future economic 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 cause actual results to differ
materially from those set forth above and elsewhere in the Annual 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.
ITEM 7. FINANCIAL STATEMENTS
The Financial Statements are listed at "Index to Consolidated Financial
Statements".
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There were no disputes or disagreements of any nature between the
Company or its management and its public auditors with respect to any aspect
of accounting or financial disclosure.
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PART III
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ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The directors and executive officers of the registrant were:
Name Age Position with the Company
---- --- -------------------------
Lyndon A. Keele 68 Chairman of the Board of Directors.
President from June 1973,
until November 7, 1996. CFO and
Treasurer from December 1980 until
November 7, 1996
Alan C. Bashforth 46 President and Director since November
7, 1996
Kenneth P. Ray 63 Director since May, 1990
Joy C. Hartman 48 Executive Vice President, since December
1994, Corporate Secretary since June 1,
1993, CFO and Treasurer since November 7,
1996, and Director since May 7, 1991
Russell R. Angely 58 Vice President, Sales and Marketing
since May 2, 1994
There were six board meetings during 1996. All members participated in
these meetings, with the exception of one meeting when Mr. Cox was absent.
None of the above persons is related to any other of the above-named persons
by blood or marriage.
BIOGRAPHIES
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LYNDON A. KEELE is the founder of the Company and has been active as
Chairman of its Board of Directors and President from June of 1973 and as its
Treasurer since December of 1980. Mr. Keele's duties as President and
Treasurer were re-assigned to Mr. Bashforth and Ms. Hartman, respectively,
subsequent to the acquisition of Innovative Communications Technology.
From April of 1973 to August of 1977 Mr. Keele managed his own investments
and served as a consultant to a number of companies involved in the
electronics industry. Prior to 1973, Mr. Keele served for five years as
a founder and Executive Vice President of TeleSciences, Incorporated, a
company engaged in design and manufacture of telephone support equipment.
He theretofore served as a Program Manager for multimillion-dollar programs
involving data and circuit switching systems at ITT Federal Laboratories.
From 1958 to 1962, he was employed by GTE's Sylvania Electronics Systems
Division in various management positions, including Program Manager of data
processing and cryptographic communications Projects and Programs. The
University of Texas awarded him a B.B.A. in 1951.
ALAN C. BASHFORTH, President, was the President of Innovative
Communications Technology, LTD. (ICT), a data communications company, located
in Jersey, Channel Islands, until the acquisition of the intellectual property
of ICT by SDC in November, 1996. Prior experience included ownership of the
CSL Group of companies from its inception in 1975. CSL is a Communications
and Computer engineering group and employed over 100 people in 1992 when
Mr. Bashforth sold the company. From 1970 to 1975, Mr. Bashforth was
employed by Automaten CI, LTD., an office equipment and Telecommunications.
- -12-
<PAGE>
Company in various engineering and sales positions leading to the position of
General Manager. Mr. Bashforth was educated in electronic engineering at
Mid Herts Polytechnic College in England and holds a Higher National Diploma
in Electronic Engineering.
KENNETH P. RAY is President of DelRay, Inc., an active telecommunications
consulting firm. From 1964 to 1987 he was associated with ITT in various
responsible positions and in 1976 became Vice President of ITT
Telecommunications, with responsibility for engineering, marketing and sales
departments. In 1981 he became Vice President and Director of Operations for
the Transmission Division of ITT Space Communications. In January 1987,
ITT's telecommunications group was acquired by Alcatel and Mr. Ray became
Vice President of Marketing and Development for Alcatel Network Systems.
From 1988 to 1991, he was Vice President for Technology and Business
Development for Alcatel North America, a telecommunications company.
Mr. Ray received a BSEE from Polytechnic Institute of New York in 1954
and a Masters in Economics from North Carolina State University in 1970.
JOY C. HARTMAN, Executive Vice President, was employed by the Company in
January 1982, and is responsible for General Corporate Administration
including the functions inherent in comptrollership, personnel, employee
benefits, and insurance activities. Her prior experiences included MSA,
a marketing Research Company, TeleSciences, Incorporated, and
Peat Marwick-Mitchell. Ms. Hartman is a graduate of the Wharton School of
Business of the University of Pennsylvania.
RUSSELL R. ANGELY, Vice President of Sales and Marketing, was employed
by the Company in May, 1994. Prior to joining the Company, Mr. Angely was
the National Sales Manager for CXR Corporation, where he managed the direct
sales organization and an extensive network of domestic and international
distributors, VAR's, and Manufacture Representative sales organizations.
Mr. Angely has served in executive level assignments with Xerox Corporation,
Racal Milgo, Delta Data Systems, Develcon Electronics, and Racal DataCom.
These assignments have provided Mr. Angely with over 25 years experience in
sales and marketing management in the data and telecommunication industry.
Mr. Angely received a degree in Business Administration from Penn State
University and has participated in Executive Management programs at the
University of Pennsylvania, NYU, and Michigan State University.
The Company regrettably accepted the resignation of Mr. John E. Cox on
June 12, 1996 and Mr. Sheldon C. Hofferman on June 1, 1996. The resignations
in both instances were for personal reasons and were without prejudice.
ITEM 10. MANAGEMENT REMUNERATION AND TRANSACTIONS
EXECUTIVE COMPENSATION
- ----------------------
Reference is made to the information to be set forth in the section
entitled "Remuneration of Officers and Directors" in the Proxy Statement,
which section is incorporated herein by reference.
None of the Company's officers received any other present or proposed
contingent form of remuneration or deferred compensation as defined in Federal
Securities Laws, Section 228.402 of Regulation S-B. Outside Directors receive
$250.00 per meeting as standard compensation for service as directors. Should
there be a change in control or ownership of the Company by acquisition or
merger, the Board of Directors on January 25, 1996, adopted a resolution
whereby the then present officers of the Corporation are protected from
termination without cause. The compensation amount is limited to compensation
for three years of salary. Such compensation can be either a lump sum payment
or payment over a three year period.
- -13-
<PAGE>
INCENTIVE STOCK OPTION PLAN
- ---------------------------
At the annual meeting of stockholders on April 22, 1982, the stockholders
unanimously approved an Incentive Stock Option Plan initially encompassing
162,000 shares. At the annual meeting of stockholders on April 24, 1984,
the Plan was amended to include an additional 200,000 shares. At the annual
meeting of stockholders on April 27, 1992, the plan was amended to include an
additional 200,000 shares.
Following the imminent expiration of that Plan in 1992, the shareholders
on April 27, 1992, approved the adoption of a successor Incentive Stock
Option Plan encompassing 200,000 shares, excluding 90,950 shares that had not
been subject to grants under the initial Plan. To date, net option grants
with respect to 204,925 shares have been awarded, with 357,075 shares
remaining available for future awards.
During 1996, thirteen individuals participated in the Plan as a result
of grant of option award. A total of 36,800 shares were awarded. The share
price of options on award ranged from $.78 to $1.00 utilizing the market
price of shares on date of award. To date 78,425 shares have been exercised.
No options have been awarded nor can be awarded at less than market value at
the time of grant.
A Committee designated by the Board, which consists of the following
members, has administered the Plan during the year:
Jan. 1 through Nov. 7, 1996 As of Nov. 7, 1996
--------------------------- ------------------
Lyndon A. Keele Kenneth P. Ray
701 Garwood Road 909 Darfield Drive
Moorestown, NJ 08057 Raleigh, NC 27615
Joy C. Hartman Joy C. Hartman
504 Bartram Road 504 Bartram Road
Moorestown, NJ 08057 Moorestown, NJ 08057
There were two meetings of this committee during 1996.
No compensation has been received by any person for any services performed
with respect to the Plan. The Plan involves no investments or assets of any
nature other than SDC shares authorized for award under terms of the Plan.
The Plan has therefore incurred no brokerage commissions payable or due to
any broker, investment adviser, investment manager, underwriter or any
affiliate of any nature. There have been no financial statements prepared in
the course of administration of the Plan nor distributed nor made available
to employees except for the Company's annual statements as included herein.
The Company has no other stock option, stock appreciation right, profit
sharing, bonus or similar remuneration plans or programs. From time to time,
special bonuses are informally awarded in recognition of unusual or
extraordinary service. In 1996, no funds were expended or paid to individuals
or officers for such purposes.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information as of December 31, 1996,
with respect to the ownership of the Company's Common Stock by each person
known to the Company to own beneficially more than 5% of the outstanding
shares of the Company's Common Stock, which is its only voting security.
- -14-
<PAGE>
Name and Address Number of Percent of
of Beneficial Owner Shares Outstanding Shares1
- ------------------- --------- -------------------
Lyndon A. keele 775,534(2) 6.50%
701 Garwood Road, Moorestown
NJ 08057
Reynolds E. Moulton Jr. 761,000 6.38%
54 Washington Street,
Marblehead, MA 01945
Innovative Communications Technology, 1,500,000(4) 12.57%
LTD. (ICT)
Le Clos D'Auranche
La Rue Bel-Aire
St. Mary, Jersey C.I.
(Alan C. Bashforth, President of the
Company controls ICT)
The following table sets forth certain information as of December 31,
1996, with respect to the ownership of the Company's Common Stock by each
director of the Company, and all directors and officers of the Company as a
group.
Number Percent of
Name and Address Title of Shares Outstanding
- ---------------- ----- --------- Shares(1)
-----------
Lyndon A. Keele Chairman of the Board 775,534(2) 6.50%
701 garwood Road President, Treasurer
Moorestown, NJ 08057 to November, 1996
Russel R. Angely Vice President 11,000 0.09%
107 Hardwood Court Sales and Marketing
Chalfont, PA 18914
Joy C. Hartman Exec. Vice President 1,000(2) 0.008%
504 Bartram Road Treasurer,
Moorestown, NJ 08057 Secretary, Director
Kenneth P. Ray Director 6,000(3) .05%
909 Darfield Drive
Raleigh, NC 27615
Alan C. Bashforth Director and President 1,500,000(4) 12.57%
Le Clos D'Auranche Nov. 7 to present
La Rue bel-Aire
St. Mary, Jersey C.I.
All Directors and Officers
as a Group(5) 2,293,534 19.23%
- -15-
<PAGE>
(1) Based upon a total number of 11,929,728 shares outstanding as of
December 31, 1996.
(2) Includes 1,700 shares owned by Mr. Keele's daughter, and 300 shares
owned by Ms. Hartman's children. The daughter of Mr. Keele has sole
voting and investment power with respect to her shares and Mr. Keele
has sole voting and investment power with respect to all other shares
in this total.
(3) Has sole voting power and sole investment power with respect to the
shares owned by such person.
(4) Shares in the name of Innovative Communications Technology, LTD., a
corporation, controlled by Mr. Bashforth.
(5) In addition to the 6,000 shares owned by K. Ray, an outside Company
Director, Mr. Ray holds incentive options to acquire 30,000 shares.
Mr. Angely holds incentive options to acquire 30,000 shares in addition
to the 11,000 shares owned. In addition to the 1,000 shares owned
by Ms. Hartman the VP, Ms. Hartman holds incentive options to acquire
45,000 shares.
There are no arrangements known to the Company including pledges of
securities, which might, at a subsequent date, result in any change of control
of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1995 there were three transactions with certain related parties.
Mr. Reynolds Moulton, Jr., an owner in excess of 5% of the Company's stock,
and Mr. Sheldon Hofferman, a Company Director, purchased additional restricted
stock each in the amount of $100,000 and $25,000 respectively. Mr. Lyndon A.
Keele, then President and a Director converted the Company's $188,600
indebtedness to him into common stock (See Note 6.B. of the 1995 10-KSB).
During 1996, Golden Phoenix, L. P. of which a former member of the Company's
Board of Directors made a convertible loan in the amount of $500,000 with
warrants to later acquire company stock. On November 7, 1996, the stockholders
approved the acquisition of the intellectual property of Innovative
Communications Technology, LTD. This acquisition entailed the transfer of
1,500,000 shares of Company stock to a trust owned by Mr. Alan C. Bashforth.
There have been no other transactions during the last two years or any
currently proposed with any executive officers, directors, nominees for
election as director or any security holder or beneficial owner of more than
five percent of the Company's voting securities or any immediate family
member of any such owner and to the Company within the terms of 17. C.F.R.
Section 228.404 (Item 404 of Regulation S-B).
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. FINANCIAL STATEMENTS
Report of Independent Accountants dated March, 1997 Page 18
Consolidated Balance Sheets as of December 31, 1996
and 1995 Page 19
Consolidated Statements of Operations, three years
ended December 31, 1996 Page 20
Consolidated Statements of Changes in Shareholders'
Equity, three years ended December 31, 1996 Page 21
Consolidated Statements of Cash Flows, three years
ended December 31, 1996 Page 22
Notes to Consolidated Financial Statements Page 23 - 29
- -16-
<PAGE>
2. INDEX OF EXHIBITS
Exhibit No. Description of Exhibit
----------- ----------------------
3.1(1) The Articles of Incorporation
3.2(1) By-Laws
4 Not Applicable. All relevant rights are described
in Exhibit 3.1.
9 Not Applicable.
10 Not Applicable.
11 Computation of per share earnings - see Note 12 to the
Financial Statements.
13 No Annual Report has yet been sent to Security Holders.
The Company will send stockholders copies of the present
10-KSB in lieu of a separate Annual Report.
18 Not Applicable.
24.1 Consent to incorporation by reference of the accountant's
report dated April 11, 1995 in the S-8 Registration
Statements, File Numbers 33-20687, 2-85878,2-93126, and
2-70685.
25 Not Applicable.
28 1997 Proxy Statement
29 Not Applicable.
- ------------
(1) Filed as like numbered exhibits to Registration Statement, Form S-
18, File Number 33-20687, effective April 21, 1981, incorporated by
reference.
(b) A report on Form 8-K was filed on November 22, 1996 with respect to
the following items: (I) Item 2, concerning the acquisition of assets from
Innovative Communications Technology, Inc.; and (ii) Item 5, concerning a
private placement of 1,033,333 shares of the common stock of Registrant.
- -17-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Science Dynamics Corporation
We have audited the accompanying consolidated balance sheets of Science
Dynamics Corporation and Subsidiary as of December 31, 1996 and 1995 and
the related consolidated statements of operations, changes in shareholders'
equity and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Science Dynamics Corporation and Subsidiary as of December 31, 1996 and
1995 and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
Cosmas and Company
400 Madison Avenue
New York, N. Y. 10017
February 24, 1997
- -18-
<PAGE>
<TABLE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements:
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
<CAPTION>
ASSETS
DECEMBER 31,
1996 1995
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 830,229 $ 22,626
Accounts receivable - trade 87,726 683,642
- other 200,000 -
Inventories 581,277 1,226,596
Other current assets 42,095 186,816
----------- -----------
Total current assets 1,741,327 2,119,680
----------- -----------
Property and equipment, net 208,376 243,038
Software development costs, net of
accumulated amortization of $566,827
in 1996 and $395,371 in 1995 347,489 518,945
Deferred income taxes 308,000 308,000
Intangible Assets 1,500,000 -
Other assets 41,294 39,056
----------- -----------
Total assets $ 4,146,487 $ 3,228,719
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable - bank $ - $ 280,000
Accounts payable 372,913 742,581
Accrued expenses, principally -
payroll related 184,702 198,282
----------- -----------
Total current liabilities 557,615 1,220,863
----------- -----------
Long term debt:
Long term debt payable 500,000 -
Total liabilities 1,057,615 1,220,863
----------- -----------
Commitments:
Shareholders' equity -
Common stock - .01 par value,
25,000,000 and 10,000,000 shares authorized,
in 1996 and 1995 respectively 12,055,528 and
8,048,778 issued, 11,929,728 and 7,922,978
outstanding in 1996 and 1995 respectively 120,555 80,488
Additional paid-in capital 9,615,194 6,955,899
Retained earnings (deficit) (6,249,045) (4,630,698)
----------- -----------
3,486,704 2,405,689
Common stock held in treasury, at cost (397,833) (397,833)
Total shareholders' equity 3,088,871 2,007,856
----------- -----------
Total liabilities and shareholders'
equity $ 4,146,487 $ 3,228,719
=========== ===========
See accompanying notes to financial statements.
- -19-
</TABLE>
<PAGE>
<TABLE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (Continued):
SCIENCE DYNAMICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
NET SALES $ 5,562,272 $ 6,722,592 $ 4,290,839
----------- ----------- -----------
Operating costs and expenses:
Cost of sales 3,555,984 3,712,683 1,723,339
Inventory obsolescence write off 449,062 - -
Research and development 934,260 984,567 637,635
Selling, general
and administrative 2,164,784 2,891,487 3,032,047
----------- ----------- -----------
7,104,090 7,588,737 5,393,021
----------- ----------- -----------
Operating income (loss) (1,541,818) (866,145) (1,102,182)
Other income (expenses):
Interest and other
investment income 12,441 - 137
Loss on sale of Telvue note - - (291,000)
Interest expense (88,970) (68,811) (78,098)
------------ ------------ ------------
Net (loss) $(1,618,347) $ (934,956) $(1,471,143)
============ =========== ============
Net (loss) per common share $ (0.18) $ (0.16) (0.40)
============ =========== ============
See accompanying notes to financial statements.
- -20-
</TABLE>
<PAGE>
<TABLE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (Continued):
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss) $(1,618,347) $ (934,956) $(1,471,143)
------------ ----------- ------------
Adjustments to reconcile
net (loss) to net cash
provided by (used for)
operating activities:
Loss on sale of Telvue -
receivable - - 291,000
Depreciation 59,041 102,287 146,364
Amortization of
capitalized software 171,456 148,114 78,617
Changes in operating assets
and liabilities:
(Increase) decrease in:
Accounts receivable 395,916 182,803 (193,518)
Inventories 645,319 (90,862) (90,151)
Other current assets 144,721 (128,938) 1,392
Other assets (2,238) (12,566) 2,687
Increase (decrease) in:
Accounts payable and
accrued expenses (383,248) (536,162) 623,016
Total adjustments 1,030,967 (335,324) 859,407
------------ ----------- ------------
Net cash provided by
(used for) operating
activities (587,380) (1,270,280) (611,736)
------------ ----------- ------------
Cash flows from investing
activities:
Capitalized software - (83,219) (438,015)
Purchase of property and
equipment - net (24,379) (225,247) (19,063)
------------ ----------- ------------
Net cash (used) in
investing activities (24,379) (308,466) (457,078)
------------ ----------- ------------
Cash flows from financing
activities:
Increase (decrease) in
notes payable 455,873 (290,300) (58,500)
Issuance of common stock
and warrants 963,489 1,889,410 1,111,197
------------ ----------- ------------
Net cash (used in) provided
by financing activities 1,419,362 1,599,110 1,052,697
------------ ----------- ------------
Net increase (decrease) in
cash and cash equivalents 807,603 20,364 (16,117)
Cash and cash equivalents -
beginning of period 22,626 2,262 18,379
------------ ----------- ------------
Cash and cash equivalents -
end of period $ 830,229 $ 22,626 $ 2,262
============ =========== ============
See accompanying notes to financial statements.
</TABLE>
- -21-
<PAGE>
<TABLE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (Continued):
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
----------------------------------------------------
<CAPTION>
Common Stock Additional Retained
------------ Paid-In Earnings
Shares Amount Capital (Deficit) Shares Amount
------ ------ ------- --------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance
December
31, 1993 3,223,274 $ 32,233 $4,003,547 $ (2,224,599) 125,800 $ 397,833
Common stock
issued 1,220,000 12,200 1,098,997 - - -
Net loss - - - (1,471,143) - -
--------- --------- --------- ----------- ------- ---------
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
Issuance of common
stock and warrants 2,046,750 20,467 943,022 - - -
Issuance of common
stock for acquisition of
intellectual property 1,500,000 15,000 1,485,000 - - -
Issuance of common
stock to pay note
payable to investment
company 460,000 4,600 231,273 - - -
Net loss - - - (1,618,347) - -
--------- --------- --------- ----------- ------- ---------
Balance
December
31, 1996 12,055,528 $ 120,555 $9,615,194 $ (6,249,045) 125,800 $ 397,833
========== ========== ========== ============= ======= =========
The Company issued 2,046,750 and 3,605,504 shares of its common stock in 1996
and 1995 respectively. Proceeds to the Company totaled $963,489 and $1,889,410
net of expenses associated with the offering in 1996 and 1995 respectively. The
proceeds were used to improve the Company's cash condition and to fund its
operating deficit.
See accompanying notes to financial statements.
</TABLE>
- -22-
<PAGE>
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
a. Principles of Consolidation:
The consolidated financial statements include the Company's
wholly-owned subsidiary. All intercompany transactions have been
eliminated in consolidation.
b. Organization and Description of Business:
The Company, which was incorporated in May, 1973 and commenced
operations in August 1977, is engaged in the design, development,
integration and marketing of microprocessing software based telephone
support and special service products. All the Company's operations
are considered to be in one industry.
c. Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles require management to make estimates
and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results could differ
from those estimated.
d. Inventories:
Inventories are stated at the lower of cost or market, with cost
determined on a first-in, first-out basis.
e. Property and Equipment:
Property and equipment are stated at cost. Depreciation of property
and equipment is computed generally using the straight-line method based
on estimated useful lives of five years for machinery and equipment and
seven years for furniture and fixtures. Leasehold improvements are
amortized over the life of the related lease or their estimated useful
lives, whichever is shorter, using the straight-line method. Costs of
major additions and betterment's are capitalized; maintenance and
repairs, which do not improve or extend the life of respective assets
are charged to expense as incurred. When an asset is sold or otherwise
disposed of, the cost of the property and the related accumulated
depreciation is removed from the respective accounts and any resulting
gains or losses are reflected in income.
f. Cash and Cash Equivalents:
The Company considers all highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents. The Company
did not pay income taxes in 1996, 1995 and 1994. Cash paid for interest
was $78,097 in 1994, $68,811 in 1995 and $ 88,970 in 1996.
- -23-
<PAGE>
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
g. Software Development Costs:
Software development costs are capitalized in accordance with Statement
of Financial Accounting Standards (SFAS) No. 86. As of December 31,
1996, capitalized software development costs, net of amortization were
$347,489. The capitalization of these costs begins when a product's
technological feasibility has been established and ends when the product
is available for general release to customers. Amortization is computed
on an individual product basis and is the greater of: (a) the ratio of
current gross revenues for a product to the total current and anticipated
future gross revenues for that product or (b) the straight-line method
over the estimated economic life of the product. Currently the Company
is using an estimated economic life of five years for all capitalized
software costs. The amount of software development costs capitalized
was $ 0 in 1996, $83,219 in 1995 and $438,015 in 1994. The amortization
was $171,456 in 1996, and $148,114 in 1995 and $78,617 in 1994.
h. Income Taxes:
The Company elected to adopt the provisions of Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes", (SFAS 109)
in 1992. Under SFAS 109, deferred income taxes are recognized for the
tax consequences in future years of differences between the tax basis of
assets and liabilities and their financial reporting amounts at each
year end based on enacted tax laws and statutory tax rates applicable
to the periods in which the differences are expected to affect taxable
income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax
expense (credit) is the tax payable (receivable) for the period and the
change during the period in deferred tax assets and liabilities. Prior
years' financial statements have not been restated for the accounting
change (see Note 7).
i. Revenue Recognition:
Sales and related cost of sales are recognized upon shipment.
2. Accounts Receivable:
The Company evaluates its accounts receivable on a customer by customer
basis and has determined that no allowance for doubtful accounts is
necessary at December 31, 1996 and 1995.
3. Inventories:
Inventories consist of the following:
1996 1997
Raw materials $ 156,012 $ 370,318
Work in process 36,438 81,337
Finished goods 388,827 774,941
--------- ---------
Totals $ 581,277 $ 1,226,596
- -24-
<PAGE>
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Property and Equipment:
A summary of the major components of property and equipment is as
follows:
1996 1995
---- ----
Computers, fixtures and equipment $ 1,229,210 $ 1,205,367
Leasehold improvements 1,245 1,245
----------- -----------
1,230,455 1,206,612
Less accumulated depreciation and
amortization (1,022,079) (963,574)
----------- ------------
Totals $ 208,376 $ 243,038
5. Notes Payable - Bank:
The balance of the note payable to the bank was purchased by an
Investment Company. The Company then issued to the Investment Company
460,000 shares of common stock, valued at $235,873 to pay off the note.
6. Long - Term Debt:
In 1996, at various dates, the Company sold an aggregate of $500,000 of
secured convertible notes to Golden Phoenix, L. P. of which a member of
the Company's Board of Directors, is the General Partner. The Board
member resigned concurrently with the private placement. The notes carry
an interest rate of 15% maturing in yearly installments beginning March 31,
1997 and ending March 31, 2001. The note holder has the option of
converting the remaining principal balances into shares of the Company's
common stock at a conversion price of .25 per share. As further
consideration for the loan, the Company issued the note holder 2,000,000
warrants at .01 per warrant, totaling $20,000. Each warrant is
exercisable through April 30, 2003 at an exercise price, based on 50% of
the market value of the Company's stock on the day preceding the exercise
date, but in no event to exceed an exercise price of $1.00 per share.
7. Income Taxes:
In 1992, the Company adopted Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes. Under the provision of
SFAS No. 109, the Company elected not to restate prior years due to
immateriality. In 1992, the effect of the change was to decrease the net
loss by $308,000 (.10 per share). The deferred tax asset recognized in
the accompanying balance sheet at December 31, 1996 and 1995 is $308,000.
- -25-
<PAGE>
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At this time, the Company does not believe it can reliably predict
profitability for the long-term. Accordingly, the deferred tax asset
applicable to 1996 and 1995 operations has been reduced in its entirety by
the valuation allowance. However, the Company believes that it was not
necessary to reduce the deferred tax asset of $308,000 that resulted from
the 1992 operations.
As a result of the operating losses for the years ended December 31, 1990 and
1992 - 1996 the Company has available to offset future taxable income a net
operating loss of $7,339,028 expiring 2005 - 2011. In addition, research
credits expiring 2005 - 2011 are available to offset future taxes.
The components of the provision (credit) for income taxes from continuing
operations is as follows:
1996 1995 1994
---- ---- ----
Deferred
Federal $ - $ - $ -
Current
Federal - - -
State - - -
$ $ $
Differences between the tax provision computed using the statutory
federal income tax rate and the effective income tax rate on operations are
as follows:
1996 1995 1994
---- ---- ----
Federal statutory rate $ (550,238) $ (317,885) $ (500,189)
Research tax credits - - -
Tax benefit not provided due
to valuation allowance 550,238 317,885 500,189
Surtax exemptions, net - - -
Other $ - $ - $ -
- -26-
<PAGE>
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Components of the Company's deferred tax assets and liabilities are as
follows:
December 31,
1996 1995
---- ----
Deferred tax assets:
Tax benefits related to net operating
loss carryforwards and research
tax credits $2,444,791 $1,894,553
---------- ----------
Total deferred tax assets 2,444,791 1,894,553
Valuation allowance for
deferred tax assets 2,136,791 1,586,553
--------- ---------
Net deferred tax assets $ 308,000 $ 308,000
--------- ----------
8. COMMITMENTS
a. Leases
The company leases their office, sales and manufacturing facilities and
certain vehicles under non-cancelable operating leases with varying
terms. The leases generally provide that the Company pay the taxes,
maintenance and insurance expenses related to the leased assets.
Future minimum lease payments required under operating leases that
have initial or remaining non-cancelable lease terms in excess of
one year, as of December 31, 1996 are as follows:
1997 $ 213,321
1998 198,516
1999 190,365
2000 190,365
2001 190,365
after 2001 634,550
---------
Total minimum lease payments $1,617,482
Rent expense for the years ended December 31, 1996, 1995 and 1994 was
$190,365, $181,899 and $163,824 respectively.
- -27-
<PAGE>
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
b. Employment Agreements:
The Company maintains employment agreements with three officers,
two of whom are also directors of the Company. The employment
agreements contain change in control provisions that would entitle
each of the three to receive up to 2.99 times their annual
salary if there is a change in control in the Company (as defined)
and a termination of their employment. The maximum contingent
liability under these agreements in such event is approximately
$ 980,000.
9. Intangible Assets:
On November 7, 1996, the Company acquired "Intellectual Property",
issuing 1,500,000 shares of its common stock. Based on independent
reviews of the property and the business potential of the technology,
the Company valued the "Intellectual Property" at $1,500,000. The
Company will begin amortizing the property on January 1, 1997 over a
period of five years.
The seller, subsequent to the transaction on November 7, 1996 became
President and Chief Executive Officer at a salary of $160,000 per year.
In addition, there are warrants to be earned over the next five years on
a formula based on profits.
10. Stock Options and Warrants:
On April 27, 1992 the shareholders approved the adoption of a successor
Incentive Stock Option Plan encompassing 200,000 shares, excluding 90,950
that had not been subject to grants under the initial Plan. To date,
net option grants with respect to 204,925 have been awarded, with 357,075
shares remaining available for future awards.
During 1996, thirteen individuals participated in the Plan as a result
of grant of options awarded. A total of 36,800 shares were awarded.
The share price of options on award ranged from $0.78 to $1.00 utilizing
the market price of shares on date of award. To date, 78,425 shares have
been exercised. No options have been awarded nor can be awarded at less
than market value at the time of grant.
Warrants to acquire 97,500 shares are exercisable at prices ranging from
$0.78125 to $2.00 per share. In addition, there are 2,000,000 warrants
outstanding as consideration for obtaining financing. (See Note 6.)
- -28-
<PAGE>
11. Major Customers:
During 1996, three customers and their operating subsidiaries accounted
for 84.3%, 9.7% and 3% of total sales. During 1995, three customers and
their operating subsidiaries accounted for 54.5%, 19.4% and 12.3% of
total sales. During 1994, four customers and their operating subsidiaries
accounted for 30.5%, 19.9%, 15.8% and 13.3% of total sales.
12. Earnings (Loss) Per Share:
The weighted average number of shares used to compute earnings (loss)
per share was 8,937,044 in 1996, 5,756,183 in 1995 and 3,637,974 in 1994.
- -29-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act,
the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SCIENCE DYNAMICS CORPORATION
BY: /s/Alan C. Bashforth
----------------------------
Alan C. Bashforth, President
DATED: March 27, 1997
----------------------------
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities
and on the date indicated.
Signature Title Date
--------- ----- ----
BY: /s/ Lyndon A. Keele Chairman, Director March 27, 1997
---------------------
Lyndon A. Keele
BY: /s/ Alan C. Bashforth President and Director March 27, 1997
--------------------- since Nov. 7, 1996
Alan C. Bashforth
BY: /s/ Joy C. Hartman Exec. Vice President
--------------------- Administration, CFO, March 27, 1997
Joy C. Hartman Treasurer, Secretary
and Director (Principal
Accounting Officer)
- -30-
<PAGE>
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