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, 1998
[ ] 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
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(Address of principal executive offices)
( 609 ) 424-0068
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(Issuer's telephone number)
N/A
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(Former name, former address, and former fiscal year, if changed
since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [x] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13, or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
03/31/98 14,535,649 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
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PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance sheets as of March 31, 1998 unaudited 1
and December 31, 1997 (audited)
Consolidated Statements of Operations for three months 2
ended March 31, 1998 (unaudited) and three months
ended March 31, 1997 (unaudited)
Consolidated Statements of Cash Flows for three months 3
ended March 31, 1998 (unaudited) and three months
ended March 31, 1997 (unaudited)
Consolidated Statements of Shareholders' Equity for the 4
year ended December 31, 1997 (audited) and the three
months ended March 31, 1998 (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition 5 - 9
and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceeding 9
Item 2. Changes in Securities 9
Item 3. Defaults upon Senior Securities 9
Item 4. Submission of Matters to Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits 10
Item 7. Signatures 10
<PAGE>
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
ASSETS
March 31, December 31,
1998 1997
Unaudited Audited
--------- -------
Current assets:
Cash and cash equivalents $ 49,924 $ 21,181
Accounts receivable - trade 832,690 613,916
- -
Inventories 351,306 322,530
Other current assets 47,096 52,200
----------- -----------
Total current assets 1,281,016 1,009,827
----------- -----------
Property and equipment, net 248,440 220,060
Software development costs, net of
accumulated amortization of $304,053
in 1998 and $277,992 in 1997 217,181 243,243
Deferred income taxes 308,000 308,000
Intellectual Property, net of accumulated
amortization of $375,000 in 1998 and
$300,000 in 1997 1,125,000 1,200,000
Other assets 44,436 39,239
----------- -----------
Total assets $ 3,224,073 $ 3,020,369
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 396,942 $ 289,188
Accrued expenses, principally
payroll related 108,450 87,046
----------- -----------
Total current liabilities 505,392 376,234
Commitments:
Shareholders' equity -
Common stock - .01 par value,
25,000,000 shares authorized, 14,661,449
issued, 14,535,649 outstanding in
1998 and 1997 respectively 146,614 146,614
Additional paid-in capital 10,166,429 10,166,429
(Deficit) (7,196,529) (7,271,075)
----------- -----------
3,116,514 3,041,968
Common stock held in treasury,
at cost (397,833) (397,833)
----------- -----------
Total shareholders' equity 2,718,681 2,644,135
----------- -----------
Total liabilities and shareholders'
equity $ 3,224,073 $ 3,020,369
=========== ===========
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<PAGE>
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Continued):
Three Months Ended March 31,
1998 1997
---- -----
NET SALES $ 1,572,707 $ 1,116,480
----------- -----------
Operating costs and expenses:
Cost of sales 602,342 523,686
Research and development 288,062 197,187
Selling, general
and administrative 607,757 586,720
----------- -----------
1,498,161 1,307,593
----------- -----------
Operating Income 74,546 (191,113)
Other income (expenses):
Interest and other
investment income - 3,994
Interest expense - (22,110)
----------- -----------
Income (Loss) before taxes 74,546 (209,229)
Provision for Income Taxes - -
Net Income (Loss) $ 74,546 $ (209,229)
=========== ===========
Net Income (Loss) per common share $ 0.01 $ (0.02)
=========== ===========
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<PAGE>
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Continued):
Three Months Ended March 31,
1998 1997
---- ----
Cash flows from operating
activities:
Net Income $ 74,546 $ (209,229)
----------- -----------
Adjustments to reconcile
net income (loss) to net cash
(used for) operating activities:
Depreciation 15,097 15,873
Amortization of capitalized software 26,062 26,061
Amortization of intellectual property 75,000 75,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (218,774) (55,113)
Inventories (28,776) (60,583)
Other current assets 5,104 6,544
Other assets (5,197) -
Increase (Decrease) in:
Accounts payable and accrued expenses 129,158 667,518
Interest Payable - 70,002
---------- -----------
Total adjustments (2,326) 745,302
Net cash provided by
operating activities: 72,220 536,073
---------- -----------
Cash flows from investing activities:
Capitalized software - -
Purchase of property and equipment - net (43,477) (9,536)
---------- -----------
Net cash (used)
in investing activities: (43,477) (9,536)
---------- -----------
Cash flows from financing activities:
Increase (decrease) in
Issuance of common stock and warrants - -
---------- -----------
Net cash provided by financing activities - -
---------- -----------
Net increase (decrease) in
cash and cash equivalents 28,743 526,537
Cash and cash equivalents -
beginning of period 21,181 830,229
---------- -----------
Cash and cash equivalents -
end of period $ 49,924 $ 1,356,766
========== ===========
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<PAGE>
<TABLE>
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997 AND
THREE MONTHS ENDED MARCH 31, 1998
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (Continued):
<CAPTION>
Common Stock Additional Retained
------------ Paid-In Earnings
Shares Amount Capital (Deficit) Shares Amount
------ ------ ------- --------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance
December
31, 1996 12,055,861 120,558 9,615,191 (6,249,045) 125,800 397,833
Issuance of common
stock to pay long term
debt and related interest 2,605,588 26,056 551,238 - - -
Net loss - - - (1,022,030) - -
---------- --------- ------------ ----------- ------- ---------
Balance
December
31, 1997 14,661,449 146,614 10,166,429 (7,271,075) 125,800 397,833
---------- --------- ------------ ----------- ------- ---------
Net Income - - - 74,546 - -
---------- --------- ------------ ----------- ------- ---------
Balance
March
31, 1998 14,661,449 $ 146,614 $ 10,166,429 $(7,196,529) 125,800 $ 397,833
---------- --------- ------------ ----------- ------- ---------
The Company issued 2,605,588 shares of its common stock in 1997. Shares issued in 1997
were used to satisfy the Company's long-term debt and related interest.
</TABLE>
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<PAGE>
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
PART I
Item 1. (continued)
Basis of Presentation
---------------------
The financial statements included in the Form 10-QSB have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting
principles, have been condensed, or omitted, pursuant to such rules
and regulations.
The financial statements presented herein, as of March 31, 1998
reflect, in the opinion of management, all adjustments necessary for
a fair presentation of financial position and the results of
operations for the periods presented. The results of operations for
any interim period are not necessarily indicative of the results for
the full year.
These interim statements should be read in conjunction with the
audited financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1997.
Income per share
----------------
Income [loss] per share is based on the weighted average number of
common shares outstanding for the periods presented.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998.
Business Overview
-----------------
Science Dynamics Corporation designs, develops and markets a variety
of Telecommunication systems, including intelligent call processing
platforms which provide telecommunications service capabilities to
the public switched telephone network. These platforms are
sophisticated software based systems that satisfy a wide range of
computer telephony integration applications.
Science Dynamics has targeted two addressable markets with the
Integrator C-2000 product ranges and the VFX-250 products. The
Integrator C-2300 was on display at CeBit 1998 in Hannover, Germany
during the first quarter. The VFX-250 products were introduced in
fiscal year 1997.
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<PAGE>
The Integrator C-2000 series is well positioned to meet the needs of
the IP Telephony market. These systems are currently under
development and furnish service providers with a cost-effective
method of supplying voice and fax over Intranet, Internet and
Extranet.
The VFX-250 products have proven their success in a new market, which
bridges the markets of Videoconferencing and Frame Relay. The Company
shipped the first 100 units of the VFX-250S to ACT Networks, Inc. in
the first quarter.
Currently in development are new software modules for the Integrator
platform. These include a Speech Recognition module, and an Alarm
Processor. The Voice over IP development is progressing with field
trials in progress. Additional projects include a new release of the
CIMS (Centralized Intercept Management System). CIMS was developed
several years ago under MS-DOS as a replacement for the CIDBAS product
sold in the 1980's. The new release, called CIMS II will be a Windows
NT product based on the Integrator platform technology. The VFX250
products are undergoing enhancements that will provide greater
flexibility and configuration options.
There are additional contracts currently under negotiation, which we
believe will be consummated in the near future. The VFX products are
expected to provide a base of revenue throughout 1998 and in future
years.
The telecommunications industry is rapidly changing to provide a
variety of services, such as voice, video and data, converged into an
analogous network. Management believes that the Company can
capitalize on these changes in the industry by providing technological
solutions that integrate with the existing infrastructure and enable
companies to offer these various services.
Through the development of innovative software-based products and
solutions the Company intends to further its market acceptance of the
Company's offerings and continue to take advantage of the expanding
industry.
Results of Operations
---------------------
The following table summarizes the condensed results of operations
during the first quarter of 1998 compared to the corresponding
quarter of 1997 (unaudited).
Three Months ended March 31, 1998 compared to the Three Months ended
March 31, 1997 (unaudited).
For the Quarter Ended March 31,
1998 1997
---- ----
Sales $1,572,707 $1,116,480
Net Income (Loss) $74,546 $(209,229)
Net Income (Loss) Per Share $0.01 $(.02)
- -6-
<PAGE>
Three Months ended March 31, 1998 compared to the Three Months ended
March 31, 1997 (unaudited). (Continued)
OPERATING EXPENSES PERCENT OF SALES
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
Cost of Goods Sold $602,342 $523,686 38.3% 46.9%
Research & Development 288,062 197,187 18.3% 17.7%
Selling, General & Admin 607,757 586,720 38.6% 52.5%
Total Operating Costs
and Expenses $1,498,161 $1,307,593 95.2% 117.1%
Sales revenues for the quarter ended March 31, 1998 were $1,572,707
as compared to $1,116,480 in the corresponding quarter of 1997 which
represents an increase of 40.9%. This increase is attributable to the
increased sales efforts of the internal sales force in both the U.S.
office, primarily with the sales of the Commander II and the
international office with the VFX product lines.
Cost of Goods Sold as a percentage of sales revenue for the three
months ended March 31, 1998 was 38.3% as compared to 46.9% for the
three months ended March 31, 1997. The increase of $78,656 in the
cost of goods sold in absolute dollars is a result of the increase
in sales revenue for the first quarter of 1998. This change is
attributable to the change of product offerings and enhancements and
by establishing alliances with a limited number of quality OEM
vendors resulting in maximization of purchasing power. Gross profit
increased $377,571 in absolute dollars for the first quarter of 1998
and as a percentage 61.7% for the three months ended 1998, as
compared to 53.1% for the three months ended 1997, due to the
increase in sales revenue.
Research and Development costs increased to $288,062 for the first
quarter of 1998 as compared to $197,187 in the first quarter of 1997.
As the Company modified its method of operations, the activities of
personnel with adeptness were diverted into research and development
contributing to the increase in the first quarter of 1998. Independent
subcontractors are also being utilized in the areas of research and
development, to enhance the Company's market position. The Company
believes that research and development is critical in achieving a
competitive position and expects to continue to expend funds, as
necessary, in this area.
- -7-
<PAGE>
Selling, General & Administrative expenses increased $21,037 for the
three months ended March 31, 1998, over the same period in 1997, an
increase of 3.5%. This increase is attributed to the opening of the
international office to market and sell products globally offset by
the cost reduction measurers implemented in the U.S. by management.
Total Operating Costs and Expenses were $1,498,161 for the three
months ended March 31, 1998 as compared to $1,307,593 for the three
months ended 1997. The increase was a result of the costs associated
with the growth in sales revenue.
No provision for income tax was recorded for the quarter ended
March 31, 1998. As a result of the operating losses for the years
ended December 31, 1990 and 1992 - 1997 the Company has available to
offset future taxable income a net operating loss of $8,361,058
expiring 2005 - 2012. In addition, research credits expiring
2005 - 2012 are available to offset future taxes.
Management believes that the strategic transformation to a software
development and integration company has enhanced its probability of
success in achieving established objectives. The Company plans to
focus resources, people, time and capital, into product initiatives
that yield the greatest return.
LIQUIDITY AND CAPITAL RESOURCES:
-------------------------------
During the first quarter of 1998, the Company generated cash from
internal operations to satisfy its working capital requirements. As
of March 31, 1998, the Company's working capital amounted to $775,624
compared to $633,593 at December 31, 1997. The working capital ratio
of the Company was approximately 2.5 to 1 as of March 31, 1998
compared to 2.7 to 1 at December 31, 1997.
Net cash provided by operating activities was $72,220 compared to
cash provided for operating activities of $536,073 in the first three
months of 1997. Accounts receivable increased $218,774 and inventory
increased $28,776, with accounts payable and accrued expenses
increasing $129,158. These increases were attributable to the
increase in sales and the purchase of materials to fill these orders,
respectively.
Net cash used in investing activities increased to $43,477 in
March 31, 1998, compared to $9,536 in the corresponding period of
1997. The Company's higher quarterly 1998 capital expenditures
resulted from the acquisition of development and test equipment to
facilitate its aggressive development efforts and equipment necessary
to furnish the international sales and marketing facility.
The Company continually monitors and adjusts expense levels to support
the revenue stream. 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, 1998.
Management believes that the telecommunications industry will
experience significant technological advances to improve the quality
of service and reduce costs. The Company is poised to meet these
challenges by continuing to employ new technologies when they become
- -8-
<PAGE>
available, diversifying its product offerings and by constantly
enhancing its software applications.
The Company will continue to seek growth opportunities by investigating
other businesses and ventures that relate to its present activities
for potential business combinations. As of March 31, 1998, the Company
had not entered into a firm commitment for any such transactions.
In the event a complementary candidate is identified, the Company may
need to seek additional financing through some form of debt or equity
arrangement.
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.
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.
- -9-
<PAGE>
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
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, CEO
DATED: May 5, 1998
---------------------------------
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/ Alan C. Bashforth President, CEO and Director May 5, 1998
---------------------
Alan C. Bashforth
BY: /s/ Joy C. Hartman Exec. Vice President, CFO May 5, 1998
--------------------- Treasurer, Secretary and
Joy C. Hartman Director
- -10-
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<PERIOD-END> MAR-31-1998
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<RECEIVABLES> 833
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0
0
<COMMON> 147
<OTHER-SE> 2719
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