UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT UNDER SECTION 13 0R 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarterly Period Ended
March 31, 1997
[ ] 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
---------------------------------------------------------------
(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:
03/31/97 11,930,061 shares of common stock were outstanding.
<PAGE>
S C I E N C E D Y N A M I C S C O R P O R A T I O N
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance sheets as of March 31, 1997
and December 31, 1996 1
Consolidated Statements of Income (loss) for three 2
months ended March 31, 1997 (unaudited) and three
months ended March 31, 1996
Consolidated Statements of Cash Flows for three 3
months ended March 31, 1997 (unaudited) and three
months ended March 31, 1996
Consolidated Statements of Shareholders' Equity 4
for the period ending December 31, 1996 (audited)
and the three months ending March 31, 1997 (unaudited)
Item 2. Management's Discussion and Analysis of Financial 5 - 7
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceeding 8
Item 2. Changes in Securities 8
Item 3. Defaults upon Senior Securities 8
Item 4. Submission of Matters to Vote of Security Holders 8
Item 5. Other Information 8
Item 6. Exhibits 8
Item 7. Signatures 9
<PAGE>
<TABLE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements:
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<CAPTION>
ASSETS
MARCH 31, DECEMBER 31
1997 1996
Unaudited Audited
--------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,356,766 $ 830,229
Accounts receivable - trade 142,839 87,726
- other 200,000 200,000
Inventories 641,860 581,277
Other current assets 35,551 42,095
-------------- ---------------
Total current assets 2,377,016 1,741,327
-------------- ---------------
Property and equipment, net 202,039 208,376
Software development costs, net of
accumulated amortization of $199,806
in 1997 and $173,745 in 1996 321,428 347,489
Deferred income taxes 308,000 308,000
Intangible Assets, net of accumulated
amortization of $75,000 1,425,000 1,500,000
Other assets 41,294 41,294
-------------- --------------
Total assets $ 4,674,777 $ 4,146,487
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable 484,433 372,913
Interest payable 70,002 47,892
Deposits in advance 673,141 -
Accrued expenses, principally
payroll related 67,559 136,810
Current portion of long term debt 100,000 -
-------------- --------------
Total current liabilities 1,395,135 557,615
-------------- --------------
Long term debt:
Long term debt payable,
net of current portion 400,000 500,000
Total liabilities 1,795,135 1,057,615
=============== ==============
Shareholders' equity -
Common stock - .01 par value,
25,000,000 shares authorized,
12,055,861 issued, 11,930,061 outstanding
in 1997 and 1996 120,558 120,558
Additional paid-in capital 9,615,191 9,615,191
Retained earnings (deficit) (6,458,274) (6,249,045)
-------------- --------------
3,277,475 3,486,704
Common stock held in treasury,
at cost (397,833) (397,833)
Total shareholders' equity 2,879,642 3,088,871
-------------- --------------
Total liabilities and shareholders'
equity $ 4,674,777 $ 4,146,486
=============== ==============
- -1-
</TABLE>
<PAGE>
<TABLE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (Continued):
SCIENCE DYNAMICS CORPORATION
CONSOLIDATED STATEMENTS OPERATIONS
(UNAUDITED)
<CAPTION>
Three Months Ended March 31,
1997 1996
---- ----
<S> <C> <C>
NET SALES $ 1,116,480 $ 548,481
------------ -------------
Operating costs and expenses:
Cost of sales 523,686 512,642
Research and development 197,187 179,945
Selling, general
and administrative 586,720 687,656
------------ -------------
1,307,593 1,380,243
------------ -------------
Operating income (loss) (191,113) (831,762)
Other income (expenses):
Interest and other
investment income 3,994 -
Interest expense (22,110) (10,183)
------------ -------------
Net (loss) $ (209,229) $ (841,945)
============ =============
Net (loss) per common share $ (0.02) $ (0.10)
============ =============
- -2-
</TABLE>
<PAGE>
<TABLE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (Continued):
SCIENCE DYNAMICS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Three Months Ended March 31,
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating
activities:
Net income (loss) $ (209,229) $ (841,945)
------------- -----------
Adjustments to reconcile
net (loss) to net cash
provided by (used for)
operating activities:
Depreciation 15,873 14,767
Amortization of
capitalized software 26,061 45,716
Amortization of
Intangible assets 75,000
Changes in operating assets
and liabilities:
(Increase) decrease in:
Accounts receivable (55,113) 282,430
Inventories (60,583) 268,043
Other current assets 6,544 13,261
Other assets - 3
Increase (decrease) in:
Capital lease obligation 6,734
Interest payable 70,002 10,266
Accounts payable, accrued expenses
and customer deposits 667,518 139,672
------------- -----------
Total adjustments 745,302 780,892
------------- -----------
Net cash provided by
(used for) operating
activities 536,073 (61,053)
------------- -----------
Cash flows from investing
activities:
Purchase of property and
equipment - net (9,536) (8,513)
------------- -----------
Net cash (used) in
investing activities (9,536) (8,513)
------------- -----------
Cash flows from financing
activities:
Increase (decrease) in
notes payable - 60,000
------------- -----------
Net cash (used in) provided
by financing activities - 60,000
------------- -----------
Net increase (decrease) in
cash and cash equivalents 526,537 (9,566)
Cash and cash equivalents -
beginning of period 830,229 22,626
------------- -----------
Cash and cash equivalents -
end of period $ 1,356,766 $ 13,060
============ ===========
- -3-
</TABLE>
<PAGE>
<TABLE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (Continued):
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
THREE MONTHS ENDED MARCH 31, 1997
---------------------------------
<CAPTION>
Common Stock Additional Retained
------------ Paid-In Earnings
Shares Amount Capital (Deficit) Shares Amount
------ ------ ------- --------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
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 2,047,083 $ 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 12,055,861 $120,555 $ 9,615,194 $ (6,249,045) 125,800 $ 397,833
--------- -------- ----------- ------------- ------- ----------
Net loss - $ - $ - $ (209,229) - $ -
--------- -------- ----------- ------------- ------- ----------
Balance
March
31, 1997 12,055,861 $120,555 $ 9,615,194 $ (6,458,274) 125,800 $ 397,833
--------- -------- ----------- ------------- ------- ----------
- -4-
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis, and Plan of Operation
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARIES
_________________________________________
The following table summarizes the basic results of operations during
the first quarter of 1997 compared to the 1996 and 1995 quarters
(unaudited).
1st Qtr. 1st Qtr. 1st Qtr.
1997 1996 1995
---- ---- ----
Sales 1,116,480 $548,481 $1,390,806
Net Income (Loss) (209,229) (841,945) 27,327
Net Income Per Share $ (0.02) $ (0.10) $ 0.01
COST & OPERATING EXPENSES PERCENT OF SALES
------------------------- ----------------
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
Cost of Goods Sold $523,686 $512,642 $593,225 46.9% 93.5% 42.7%
Research & Development 197,187 179,945 138,896 17.7% 32.8% 10.0%
Sales, General & Admin. 586,720 687,656 617,351 52.7% 125.4% 44.4%
Total Operating Costs
and Expenses $1,307,593 $1,380,243 $1,349,472 117.1% 251.6% 97.1%
The Company's sales more than doubled over the first quarter sales of
1996, even though the Company's first quarter is historically the lowest of
the year's quarters. It should be remembered that the first three quarters
of 1996 suffered from the impact of a patent infringement suit against an
adjunct supplier. The adjunct supplier provided complementary equipment to
the Company's Institutional Inmate System and as part of their settlement
such adjunct supplier agreed to stop providing sales of such equipment.
The consequent lack of available equipment for a 3-way-call detection system
severely constrained the Company's revenue in the first quarter of 1996 while
the Company continued the design of its own replacement system. The
introduction of the Company's 3-Way Call Detection system in the latter part
of 1996 resulted in significant sales revenue for the fourth quarter 1996.
This background information is presented to explain the extreme difference
in the 1997 and 1996 first quarters.
- -5-
<PAGE>
Cost of Goods Sold at 46.9% of Sales and the resulting 53.1% gross
margin is a respectable performance for a software innovator company. The
Company's strategy to improve margins includes expanding its product offerings,
expand the number of markets in which its products are sold and increasing the
volume of existing products.
Research and Development costs increased to $197,187 for the first
quarter of 1997 as compared to $179,945 in 1996. These expenditures consisted
of personnel expenses, independent subcontractors and supplies required to
conduct the Company's development efforts. The Company believes that
continuing research and development is essential to maintaining a competitive
position, and expects to continue to expend funds in this area.
Sales, General & Administrative expenses decreased $100,936 for the
three months ended March 31, 1997, a decrease of 14.7% over the same period
in 1996. This decrease was attributed to an overall effort by management to
decrease costs while increasing efficiency. It involved downsizing certain
positions whose responsibilities were either reassigned or eliminated
consistent with current and future organizational goals.
Total Operating Costs were $1,307,593 for the three months ended March 31,
1997 as compared to $1,380,243 in 1996. The decrease was a result of the
Company reviewing its infrastructure costs in relation to the redirection
strategy and eliminating expenses that would not compromise its core business
opportunities.
Management believes that the restructuring and redirection of activities
have properly positioned the Company for growth. The Company plans to
research market opportunities with emphasis to determine the most expeditious
means to maximize revenues to a level of profitability in the future.
GENERAL BUSINESS DISCUSSION
- ---------------------------
The Company's focus is to provide open system Computer Telephony
Integration (CTI) technologies for data, voice and video transmission. The
Company provides an array of products providing intelligent network control
and administration, prison inmate telecommunications systems, enhanced network
security, interactive communications, call processing and voice response
capabilities. Additional product developments are currently underway
utilizing the technology acquired from Innovative Technologies Ltd. (ICT) and
sales are anticipated from these product offerings in the latter portion of the
year. Prototypes of these products have been supplied for beta testing in
Europe, with every indication that the trials have been successful leading to
deployment.
LIQUIDITY AND CAPITAL RESOURCES:
- -------------------------------
Cash and cash equivalents at March 31, 1997, increased $526,537 since
December 31, 1996. Net cash provided by operating activities was $536,073
compared to cash used for operating activities of $61,053 in the first three
months of 1996. The increase was directly attributable to substantial orders
- -6-
<PAGE>
in excess of $1,300,000 received and paid for in March. The Company shipped
a portion of these orders during the month with the remaining orders completed
subsequent to the quarter ending. Trade accounts receivable increased
$55,113 and inventory increased $60,583 over the corresponding quarter in 1996.
These increases were offset by the material increase in customer deposits and
accounts payable, which resulted from the prepayment of the orders, and the
purchase of materials to fill these orders, respectively.
The current ratio of 1.7 to 1 at March 31, 1997, compared to 1.4 to l at
March 31, 1996, is a result of the Company's substantial increase in its cash
position, offset by the customer deposits in advance, and the restatement of
the current portion of long-term debt. Based on its current staffing levels
and product development schedule, the Company believes that its existing
working capital and funds anticipated to be derived from operations will
satisfy the Company's projected working capital and capital expenditure
requirements through December 31, 1997.
Important product initiatives and the expansion of existing products
into new markets should be significant contributors to growth in 1997 and
beyond. The Company continues to investigate various business arrangements
and may require the utilization of some form of financing instrument to
realize its expansion.
Certain statements contained in this 10QSB concerning the Company's
business outlook on future performance and statements concerning assumptions
made or expectations as to any future events, conditions or other matters are
"forward-looking statements" as that term is defined under the Federal
Securities Laws. Forward-looking statements are subject to risks,
uncertainties and other factors, which may cause actual results to differ
materially from those set forth in this report. The Company may encounter
competitive, technological, financial and business challenges making it more
difficult to market its products and services, the impact of which may in
turn affect the Company's results of operations and financial position.
- -7-
<PAGE>
PART II. OTHER INFORMATION
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARIES
_____________________________________________
Item 1. Legal Proceedings
No material developments.
Item 2. Changes in Securities
There has been no change or modification in the constituent
instruments defining the rights of holders of the corporation's
sole class of registered security nor any modification of the
rights evidenced by such class by issuance or modification of
any other class of securities.
Item 3. Defaults Upon Senior Securities
There has been no default of any nature upon any form of senior
security nor in payment of interest or sinking or purchase fund
installment with respect to any indebtedness of the registrant,
nor any other form of default upon any financial obligation.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports
None.
- -8-
<PAGE>
Item 7. Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, registrant has duly caused this
report to be signed in its behalf by the undersigned thereunto
duly authorized.
SCIENCE DYNAMICS CORPORATION
By: /s/ ALAN C. BASHFORTH
---------------------------------
Alan C. Bashforth
President
By: /s/ JOY C. HARTMAN
---------------------------------
Joy C. Hartman
Executive Vice President,
Treasurer and Director
(Chief Financial Officer)
Dated: May 14,1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Mar-31-1997
<CASH> 1357
<SECURITIES> 0
<RECEIVABLES> 343
<ALLOWANCES> 0
<INVENTORY> 642
<CURRENT-ASSETS> 2377
<PP&E> 202
<DEPRECIATION> 321
<TOTAL-ASSETS> 4675
<CURRENT-LIABILITIES> 1395
<BONDS> 0
<COMMON> 120
0
0
<OTHER-SE> 2880
<TOTAL-LIABILITY-AND-EQUITY> 4675
<SALES> 1116
<TOTAL-REVENUES> 1116
<CGS> 524
<TOTAL-COSTS> 524
<OTHER-EXPENSES> 783
<LOSS-PROVISION> 191
<INTEREST-EXPENSE> 22
<INCOME-PRETAX> (209)
<INCOME-TAX> 0
<INCOME-CONTINUING> (209)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (209)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
