AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON
December 26,2002 Registration No.:333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SCIENCE DYNAMICS CORPORATION
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
----------------------------------------------------------
Delaware 3661 22-2011859
(State or jurisdiction (Primary standard (I.R.S. Employer
of incorporation) industrial Identification Number)
classification
code number)
2059 Springdale Road, Suite 100, Cherry Hill, New Jersey 08003;
(856) 424-0068
(Address and telephone number of principal executive offices and
principal place of business)
Alan C. Bashforth, President
2059 Springdale Road, Cherry Hill, New Jersey, 08003; (856) 424-0068
(Address and telephone number of agent for service)
Copies to:
Gregory Sichenzia, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas
New York, New York 10018
Phone (212) 930-9700; Fax (212) 930-9725
Approximate date of proposed sale to the public: From time to time as
the selling shareholders may decide.
If any securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number
of the earlier effective registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.
If the delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box.
Pursuant to Rule 429 promulgated under the Securities Act of 1933, the
enclosed prospectus constitutes a combined prospectus also relating to an
aggregate of up to 3,813,903 shares of our common stock that were previously
registered for sale in a Registration Statement on Form SB-2, Registration
No. 333-62226 and an aggregate of up to 20,000,000 shares of common stock
that were previously registered for sale in a Registration Statement on Form
SB-2 333-76530. As such, this prospectus also constitutes post-effective
amendment no. 1 to the Registration Statement on Form SB-2, Registration No.
333-62226 and a post-effective amendment no. 1 to the Registration Statement
on Form SB-2, Registration No. 333-76350, which shall hereafter become
effective concurrently with the effectiveness of this post-effective
amendment no. 1 to the Registration Statement in accordance with Section
8(c) of the Securities Act of 1933.
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Calculation of Registration Fee
------------------------------------------------------------------------------
Title of each Amount of Proposed Maximum Proposed Maximum Amount of
Class of shares to be Offering price Aggregate Offering Registration
securities to Registered per Share(1) Price (1) Fee
be registered
------------------------------------------------------------------------------
Common stock, 115,017,865 $0.04 $ 4,600,715 $423.27
$.01 par
value
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Common Stock, 1,130,909 $0.04 $45,236 4.16
$.01 par
value issuable
upon exercise
of Warrants
------------------------------------------------------------------------------
Total 116,148,774 $0.04 $ 4,645,951 $427.43
1. Based on the closing bid price of the common stock on December 18,
2002.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the
registrant shall file a further amendment which specifically states that
this registration statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933 or until the
registration statement shall become effective on such date as the
Commission, acting pursuant to said Section 8(a), may determine.
-iii-
Prospectus
SCIENCE DYNAMICS CORPORATION
116,148,774 shares of common shares
Up to 116,148,774 shares of our common stock are being offered by
the security holders named in this prospectus. We will not receive any
of the proceeds from the sale of common stock by the security holders.
However, we may receive amounts upon exercise of outstanding warrants.
Our common stock is traded in the Over-The-Counter Electronic
Bulletin Board under the symbol "SIDY". On December 18, 2002 the closing
price of our common stock was $.04 per share.
Please see "Risk Factors" beginning on page 5 to read about factors
you should consider before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The date of this prospectus is __________, 200_
-1-
TABLE OF CONTENTS
Prospectus Summary 3
Summary Financial Data 4
Risk Factors 5
The Offering 9
Use of Proceeds 10
Dividend Policy 11
Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Business 19
Management 30
Certain Transactions 35
Principal Security Holders 36
Description of Securities 38
Selling Shareholder 40
Plan of Distribution 41
Legal Matters 43
Experts 43
How to Get More Information 43
Financial Statements F-1
-2-
PROSPECTUS SUMMARY
You should read the following summary together with more detailed
information and our combined financial statements and the notes to those
statements appearing elsewhere in this prospectus.
Our Business
We have developed, designed and marketed a variety of hardware
oriented, telecommunications equipment over the past 23 years. We
primarily develop and market hardware and software products and
applications for the telecommunications industry that use third party
hardware.
Today we focus on three primary product lines:
- Commander Inmate Telephone Control System - originally designed in
1986, this system provides timing and call control for collect phone
calls made by inmates from U.S. correctional institutions.
- Integrator Series of IP Gateways - commonly referred to as Voice over
Internet Protocol or IP Telephony. IP Telephony refers to communication
services - voice, facsimile, and/or voice messaging applications - that
are transported via the Internet, rather than the traditional telephone
network.
- VFX-250S Video over Frame Relay device - a hardware based device
designed to upgrade Frame Relay Networks to handle video conferencing
applications in addition to their traditional data requirements. The
VFX establishes the first ever means of transporting continuous data bit
streams over Frame Relay. A Frame relay is a packet switching protocol.
Data packets, referred to as frames, are routed to different
destinations dependent on header (address) information.
Our Offices
Our executive offices are located at 2059 Springdale Road, Cherry
Hill, New Jersey, 08003, our telephone number is (856) 424-0068; and our
web site can be accessed at www.scidyn.com. Information contained in
our web site is not part of this prospectus.
The Offering Summary
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Total shares of common stock
outstanding as of December 18, 2002 40,673,099
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Common stock offered for sale by Up to 116,148,774 shares,
assuming the selling shareholders the issuance of all of the
shares registered in
connection with the
convertible notes and
warrants.
------------------------------------------------------------------------
-3-
Use of Proceeds
We will not receive any of
the proceeds of the shares
offered by the selling
shareholder. Any proceeds
we receive from our
sales of common stock upon
the exercise of warrants will
be used for working capital
and other general corporate
purposes.
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OTC BB Symbol "SIDY"
------------------------------------------------------------------------
-4-
RISK FACTORS
An investment in our common stock involves a high degree of risk.
You should carefully consider the following risk factors before
investing in our common stock.
We have a history of losses which may continue, requiring us to seek
additional sources of capital which may not be available, requiring us
to curtail or cease operations.
We incurred net losses of $4,375,476 for the year ended December
31, 2001 and $1,339,262 for the year ended December 31, 2000. For the
nine months ended September 30, 2002, we incurred a net loss of
$1,964,739. We cannot assure you that we can achieve or sustain
profitability on a quarterly or annual basis in the future. If revenues
grow more slowly than we anticipate, or if operating expenses exceed our
expectations or cannot be adjusted accordingly, we will continue to
incur losses. In addition, we will require additional funds to sustain
and expand our sales and marketing activities, research and development,
and our strategic alliances, particularly if a well-financed competitor
emerges or if there is a rapid technological shift in the
telecommunications industry. We anticipate that we will require up to
approximately $2,500,000 to fund our continued operations for the next
twelve months, depending on revenue from operations. There can be no
assurance that financing will be available in amounts or on terms
acceptable to us, if at all. The inability to obtain sufficient funds
from operations or external sources would require us to curtail or cease
operations.
We operate in highly competitive markets and may not be able to compete
effectively, which could result in additional losses.
Our products are sold in several different markets, and our
competition varies greatly by product line. We compete directly against
several other suppliers of inmate call processing systems. Some of
these competitors' systems have features, which our inmate call
processing system does not have. These include advanced technical
features such as speaker identification or "voice print" technology to
use an inmate's voice to uniquely identify them instead of having them
enter a touch-tone Personal Identification Number (PIN). We are
currently evaluating several technology partners to integrate this
technology into our inmate call processing system. In addition our
inmate call processing systems do not currently work with coin-operated
public phones which are found on a limited basis at our customer
locations.
We do not compete with any other company in the video over Frame
Relay market. Traditionally, video conferencing has been done using ISDN
or leased line connections. Frame Relay has been in existence for
several years, and is now the most widely deployed data transmission
means in the world. The significance of our technology is the new and
innovative ability to take standard videoconferencing, "packetize it"
and route it over a Frame Relay network. To date, we are not aware of
any other video over frame relay products, which perform this function.
Our Internet products compete in a marketplace that is populated by
larger companies who have significantly more resources for development,
marketing and deployment. We may not be able to compete successfully
against current or future competitors, and competitive pressures could
significantly harm us, resulting in more significant financial losses.
-5-
We depend on a limited number of suppliers for certain parts, the loss
of which could result in production delays and additional expenses.
Although most of the parts used in our products are available from
a number of different suppliers on an off-the-shelf basis, however,
certain parts are available from only one supplier, specifically,
certain circuit boards from Natural Micro Systems. We already have in
progress development to support other board vendors, however if Natural
Micro Systems were unable to deliver certain key components, it could
delay us for two to four months while we complete this process. We are
in the process of evaluating other vendors for these key components to
help mitigate this risk. The substitute part may require a hardware or
software change in the unit in order to provide satisfactory
performance, adding costs and delays.
A small number of customers account for a significant portion of our
revenue and if we are unable to maintain our current customer base or
attract a new customer base we will be required to curtail or cease
operations.
A small number of customers account for a significant portion of
our revenue. If we lose existing customers and do not replace them with
new customers, our revenue will decrease and may not be sufficient to
cover our costs. During 2001, two customers, Bealls Communications
Group and Bell South, each accounted for an aggregate of 37% of total
sales. During 2000, two customers accounted for 83% and 15% of total
sales. The customer accounting for 83% of total 2000 sales was
Cascadent Communications, with whom we had a supply agreement. The
customer accounting for 15% of total 2000 sales was Bell South.
Mr. Alan Bashforth, our President, Chief Executive officer and
Chairman of the Board, served as President of Cascadent subsequent to
his service as an officer of Science Dynamics. The supply agreement was
terminated on January 4, 2001, upon receiving notice that Cascadent was
placed into receivership. In a letter dated June 25, 2001, the
Cascadent receiver advised that it was not possible to achieve a sale of
Cascadent's business on a going concern basis. The letter also stated
that it appears that there will be insufficient funds available for a
liquidator to be appointed in this matter. In addition, Bell South
Communications, which accounted for 15% of our sales in 2000, announced
that it was withdrawing from the public phone market, so future sales to
Bell South are unlikely.
The loss of such major customers severely impacts our operations.
Although we actively seek new customers, these losses resulted in
significant financial losses. If we are unable to attract and maintain
a new customer base, we will be required to continue to curtail or cease
operations.
Changes in government telecommunications regulations could reduce demand
for our products, resulting in reduced revenues.
-6-
For our Integrator product lines, our customers are subject to
varying degrees of domestic and foreign, federal, state, and local
regulation. Regulatory actions have affected, and are likely to continue
to affect, both our customers and us. Regulatory actions may cause
changes in the manner in which our customers or we conduct business. The
products that we develop must comply with standards established by the
Federal Communications Commission and other international standards
bodies. A change in these standards requiring a modification of our
products could result in additional unanticipated expenses and a delay
in the delivery of our products.
If our products and services fail to perform or perform improperly,
revenues and results of operations could be adversely affected and we
could be subject to legal action to recover losses incurred by our
customers.
Products as complex as ours may contain undetected errors or
"bugs", which result in product failures or security breaches or
otherwise fail to perform in accordance with customer expectations. Any
failure of our systems could result in a claim for substantial damages
against us, regardless of our responsibility for the failure. Although
we maintain general liability insurance, including coverage for errors
and omissions, there can be no assurance that our existing coverage will
continue to be available on reasonable terms or will be available in
amounts sufficient to cover one or more large claims, or that the
insurer will not disclaim coverage as to any future claim. The
occurrence of errors could result in loss of data to us or our customers
which could cause a loss of revenue, failure to achieve acceptance,
diversion of development resources, injury to our reputation, or damages
to our efforts to build brand awareness, any of which could have a
material adverse affect on our market share, revenues and, in turn, our
operating results.
Changes in technology and our ability to enhance our existing products,
including research and development, will require technical and financial
resources, then availability of which may hinder sales of our products
and result in decreased revenues.
The markets for our products, especially the telecommunications
industry, change rapidly because of technological innovation, changes in
customer requirements, declining prices, and evolving industry
standards, among other factors. To be competitive, we must develop and
introduce product enhancements and new products, which increase our
customers' and our ability to increase market share in the corrections
industry. New products and new technology often render existing
information services or technology infrastructure obsolete, excessively
costly, or otherwise unmarketable. As a result, our success depends on
our ability to timely innovate and integrate new technologies into our
current products and services and to develop new products. In addition,
as the telecommunications networks are modernized and evolve from
analog-based to digital-based systems, certain features offered by us
may diminish in value. Moreover, regulatory actions affecting the
telecommunications industry may require significant upgrades to our
current technology or may render our service offerings obsolete or
commercially unattractive. We cannot guarantee that we will have
sufficient technical, managerial or financial resources to develop or
acquire new technology or to introduce new services or products that
would meet our customers needs in a timely manner.
Our common stock was delisted from the Nasdaq Stock Market, currently
trades on the Over-the-Counter Electronic Bulletin Board and is treated
as a "penny stock", which may negatively impact its price and make it
more difficult to dispose of.
-7-
On August 24, 2001, our common stock was delisted from trading on
The Nasdaq Stock Market for failure to comply with the net tangible
asset and minimum bid requirements. Our common stock now trades on the
Over-The-Counter Electronic Bulletin Board. In the absence of at least
$5,000,000 of net tangible assets or a stock price in excess of $5.00
per share, trading in our common stock is subject to Rule 15c2-6 and
Rules 15g-2 through 15g-9 under the Securities Exchange Act of 1934,
requiring additional pricing and compensation disclosures to be made to
customers. These rules require, among other things, that any broker
engaging in a transaction in our securities provide its customers with a
risk disclosure document, disclosure of market quotations, if any,
disclosure of the compensation of the broker and its salespersons in the
transaction, and monthly account statements showing the market values of
our securities held in the customer's accounts. The brokers must provide
bid and offer quotations and compensation information before making any
purchase or sale of a penny stock and also provide this information in
the customer's confirmation. Generally, brokers may be less willing to
execute transactions in securities subject to the "penny stock" rules.
This may make it more difficult for investors to dispose of our common
stock and cause a decline in the market value of our stock.
There are a large number of shares underlying our convertible notes, and
warrants that may be available for future sale and the sale these shares
may depress the market price of our common stock.
As of December 18, 2002, we had 40,673,099 shares of common stock
issued and outstanding and a convertible promissory notes outstanding
that may be converted into an estimated 57,099,842 shares of common
stock at current market prices, and outstanding warrants to purchase
1,130,909 shares of common stock. In addition, the number of shares of
common stock issuable upon conversion of the outstanding convertible
notes may increase if the market price of our stock declines. All of the
shares, including all of the shares issuable upon conversion of the
notes and upon exercise of our warrants, may be sold without
restriction. The sale of these shares may adversely affect the market
price of our common stock.
The continuously adjustable conversion price feature of our convertible
notes could require us to issue a substantially greater number of
shares, which will cause dilution to our existing stockholders.
Our obligation to issue shares upon conversion of our convertible
securities is essentially limitless. The selling shareholders have the
ability to convert any portion of the convertible note at the discounted
current market price. As the selling shareholder converts the
convertible note and sells its shares of common stock, the market price
may decline as a result of an influx of shares into the market. A
decrease in the price of our common stock would in turn result in a
lower conversion rate which will require us to issue more shares of
common stock as the selling shareholder converts subsequent portions of
the convertible note.
The following is an example of the amount shares of our common
stock that is issuable, upon conversion of our convertible notes, based
on market prices 25%, 50% and 75% below the current market price as of
December 18, 2002 of $.04.
-8-
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 15% Issuable Stock
-----------------------------------------------------------------------
25% $.03 $.015 103,541,067 71.8%
50% $.02 $.01 155,311,600 79.2%
75% $.01 $.005 310,623,200 88.4%
As illustrated, the number of shares of common stock issuable upon
conversion of our convertible notes will increase if the market price
of our stock declines, which will cause dilution to our existing
stockholders.
The issuance of shares upon conversion of the convertible notes and
exercise of outstanding warrants may cause immediate and substantial
dilution to our existing stockholders.
The issuance of shares upon conversion of the convertible notes and
exercise of warrants may result in substantial dilution to the interests
of other stockholders since the selling stockholders may ultimately
convert and sell the full amount issuable on conversion. Although the
selling stockholders may not convert their convertible note and/or
exercise their warrants if such conversion or exercise would cause them
to own more than 4.99% of our outstanding common
stock, this restriction does not prevent the selling stockholder from
converting and/or exercising some of their holdings and then converting
the rest of their holdings. In this way, the selling stockholders could
sell more than this limit while never holding more than this limit.
There is no upper limit on the number of shares that may be issued which
will have the effect of further diluting the proportionate equity
interest and voting power of holders of our common stock,
including investors in this offering.
Shares of our total outstanding shares that are restricted from
immediate resale but may be sold into the market in the future could
cause the market price of our common stock to drop significantly, even
if our business is doing well.
As of December 18, 2002 we had 40,673,099 shares of our common
stock issued and outstanding, 6,557,000 of which we believe are
restricted securities. Rule 144 provides, in essence, that a person
holding "restricted securities" for a period of one year may sell only
an amount every three months equal to the greater of (a) one percent of
a company's issued and outstanding shares, or (b) the average weekly
volume of sales during the four calendar weeks preceding the sale. The
amount of "restricted securities" which a person who is not our
affiliate sells is not so limited, since non-affiliates may sell without
volume limitation their shares held for two years if there is adequate
current public information available concerning us. In that event,
"restricted securities" would be eligible for sale to the public at an
earlier date. As restrictions on resale end, the market price of our
common stock could drop significantly if the holders of these restricted
shares sell them or are perceived by the market as intending to sell
them.
-9-
We may, in the future, issue additional shares of our common stock which
would reduce investors percentage of ownership and may dilute our share
value.
Our certificate of incorporation authorizes the issuance of
200,000,000 shares of common stock. The future issuance of all or part
of our remaining authorized common stock may result in substantial
dilution in the percentage of our common stock held by our then existing
stockholders. We may value any common stock issued in the future on an
arbitrary basis. The issuance of common stock for future services or
acquisitions or other corporate actions may have the
effect of diluting the value of the shares held by our investors, and
might have an adverse effect on any trading market for our common stock.
Selling security holders may sell securities at any price or time which
may cause the price of our common stock to decline.
On August 24, 2001, our common stock was delisted from trading on
The Nasdaq Stock Market for failure to comply with the net tangible
asset and minimum bid requirements. After effectiveness of this
prospectus, the non-affiliated selling Security holders may offer and
sell their shares at a price and time determined by them without subject
to Rule 144. The timing of sales and the price at which the shares are
sold by the selling security holders could have an adverse effect upon
the public market for our common stock. Our common stock is subject to
"Penny Stock" rules.
The Securities and Exchange Commission (the "Commission") has adopted
Rule 15g-9 which establishes the definition of a "penny stock," for the
purposes relevant to us, as any equity security that has a market price
of less than $5.00 per share or with an exercise price of less than
$5.00 per share, subject to certain exceptions. For any transaction
involving a penny stock, unless exempt, the
rules require:
- that a broker or dealer approve a person's account for
transactions in penny stocks; and
- the broker or dealer receive from the investor a written
agreement to the transaction, setting forth the identity and quantity of
the penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks,
the broker or dealer must:
- obtain financial information and investment experience
objectives of the person; and
- make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in
a penny stock, a disclosure schedule prepared by the Commission relating
to the penny stock market, which, in highlight form:
- sets forth the basis on which the broker or dealer made the
suitability determination; and
- that the broker or dealer received a signed, written agreement
from the investor prior to the transaction.
-10-
Disclosure also has to be made about the risks of investing in
penny stocks in both public offerings and in secondary trading and about
the commissions payable to both the broker-dealer and the registered
representative, current quotations for the securities and the rights and
remedies available to an investor in cases of fraud in penny stock
transactions. Finally, monthly statements have to be sent disclosing
recent price information for the penny stock held in the account and
information on the limited market in penny stocks
Our Independent Auditors have expressed doubt about our ability to
continue as a going concern, which may hinder our ability to obtain
future financing.
In their report dated April 3, 2002, our independent
auditors stated that our financial statements for the year ended
December 31, 2001 were prepared assuming that we would continue as a
going concern. Our ability to continue as a going concern is an issue
raised as a result of a loss for the year ended December 31, 2001 in the
amount of $4,375,476 and an accumulated deficit of
$16,077,005 as of December 31, 2001. We continue to experience net
operating losses. Our ability to continue as a going concern is subject
to our ability to generate a profit and/or obtain necessary funding from
outside sources, including obtaining additional funding from the sale of
our securities, increasing sales or obtaining loans and grants from
various financial institutions where possible. The going concern
qualification in the auditor's report increases the difficulty in
meeting such goals and there can be no assurances that such methods will
prove successful.
-11-
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These
forward-looking statements are not historical facts, but rather are
based on our current expectations, estimates and projections about our
industry, our beliefs and assumptions. Words including "may," "could,"
"would," "will," "anticipates," "expects," "intends," "plans,"
"projects," "believes," "seeks," "estimates" and similar expressions are
intended to identify forward-looking statements. These statements are
not guarantees of future performance and are subject to certain risks,
uncertainties and other factors, some of which are beyond our control,
are difficult to predict and could cause actual results to differ
materially from those expressed or forecasted in the forward-looking
statements. These risks and uncertainties are described in "Risk
Factors" and elsewhere in this prospectus.
We caution you not to place undue reliance on these forward-
looking statements, which reflect our management's view only as of the
date of this prospectus. We are not obligated to update these statements
or publicly release the result of any revisions to them to reflect
events or circumstances after the date of this prospectus or to reflect
the occurrence of unanticipated events.
THE OFFERING
In this prospectus, we are registering 116,148,774 shares of common
stock underlying $1,480,650 of 8% convertible debentures, due on various
dates from August 2003 through December 2004, issued pursuant to various
Subscription Agreement dated August 2001 through December 2002 and
warrants in connection therewith. Interest only payments are due
quarterly and the principal is due on various dated commencing on August
2003 through December 2004, or upon certain events of default.
The conversion price for the convertible debentures issued from
August 2001 through October 2002 is the lesser of 85% of the average of
the three lowest closing prices for the common stock for the 30 trading
days prior to but not including the closing date for each funding, or
85% percent of the average of the three lowest closing prices for the
common stock for the 30 trading days prior to but not including the
conversion date. The conversion price for the convertible debenture
issued in December 2002 is the lesser of $.03 or 85% percent of the
average of the three lowest closing prices for the common stock for the
30 trading days prior to but not including the conversion date. The
maximum number of shares of common stock that any subscriber or group of
affiliated subscribers may own after conversion at any given time is
4.99%. The number of shares of common stock issuable upon conversion
of the convertible debentures and exercise of the warrants is
116,148,774. The shares of common stock issuable upon conversion of the
convertible debentures is based on a conversion price of $0.0272 per
share. The actual conversion price will depend on the market price of
our common stock prior to the conversion.
The parties have made mutually agreeable standard representations
and warranties. We have also entered into certain covenants including,
but not limited to, the following:
- we may not redeem the convertible debentures without the consent of
the holder;
- we will pay to certain finders a cash fee of 8% of the principal
amount of the convertible debentures for location of the financings; and
-12-
- we have agreed to incur certain penalties for untimely delivery of the
shares.
Upon any event of default, including the failure to register or
deliver shares of common stock in a timely manner upon conversion, the
note holders can require us to immediately pay a sum equal to 130% of
the unconverted principal amount of the notes, together with accrued but
unpaid interest.
In connection with the sale of the convertible debentures,
Laurus Capital Management LLC and Keshet Management Limited received an
aggregate of approximately $117,732 as payment for their services as
finders. In addition, they will receive an aggregate of 8% of the
proceeds upon the exercise of the warrants issued to the investors.
USE OF PROCEEDS
We will not receive any proceeds from the resale of shares of
common stock by the selling stockholder. However, we will receive the
sale price of any common stock we sell to the selling stockholder upon
exercise of the warrants. We expect to use the proceeds of any such
sales for general working capital purposes.
PRICE RANGE OF COMMON STOCK
On August 24, 2001, our common stock was delisted from trading on
The Nasdaq Stock Market for failure to comply with the net tangible
asset and minimum bid requirements. Our common stock now trades on the
Over-The-Counter Electronic Bulletin Board. In the absence of at least
$5,000,000 of net tangible assets or a stock price in excess of $5.00
per share, trading in our common stock is subject to Rule 15c2-6 and
Rules 15g-2 through 15g-9 under the Securities Exchange Act of 1934.
Our common shares are subject to the "penny stock" rules that
impose additional sales practice requirements should because our common
shares are below $5.00 per share. For transactions covered by these
rules, the broker-dealer must make a special suitability determination
for the purchase of the common shares and must have received the
purchaser's written consent to the transaction prior to the purchase.
The "penny stock" rules also require the delivery, prior to the
transaction, of a risk disclosure document mandated by the Securities
and Exchange Commission relating to the penny stock market.
The broker-dealer must also disclose:
- the commission payable to both the broker-dealer and the
registered representative,
- current quotations for the securities, and
- if the broker-dealer is the sole market maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control
over the market.
-13-
Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on
the limited market in penny stocks. These rules apply to sales by
broker-dealers to persons other than established customers and
accredited investors (generally those with assets in excess of
$1,000,000 or annual income exceeding $200,000, or $300,000 together
with their spouse), unless our common shares trade above $5.00 per
share. Consequently, the "penny stock" rules may restrict the ability of
broker-dealers to sell our common shares, and may affect the ability to
sell the common shares in the secondary market as well as the price at
which such sales can be made. Also, some brokerage firms will decide not
to effect transactions in "penny stocks" and it is unlikely that any
bank or financial institution will accept "penny stock" as collateral.
The following table shows for the periods indicated the high and
low bid quotations for our common stock as reported by one of our market
makers. These quotations are believed to represent inter-dealer
quotations without adjustment for retail mark-up, mark-down or
commissions, and may not represent actual transactions.
HIGH BID LOW BID
-------- -------
FISCAL 2000
First Quarter $19.92 $9.92
Second Quarter $13.58 $7.60
Third Quarter $10.83 $7.40
Fourth Quarter $ 6.90 $3.00
FISCAL 2001
First Quarter $ 1.96 $1.24
Second Quarter $ 1.32 $0.16
Third Quarter $ 0.65 $0.12
Fourth Quarter $ 0.14 $0.06
FISCAL 2002
First Quarter $ 0.09 $0.07
Second Quarter $ 0.28 $0.05
Third Quarter $ 0.08 $0.03
Fourth Quarter
(through December 12, 2002) $ 0.06 $0.03
As of December 18, 2002, there were approximately 253 holders of
record of our 40,698,899 outstanding shares of common stock.
-14-
DIVIDEND POLICY
We have never declared or paid any cash or stock dividends on our
capital stock. We presently intend to reinvest earnings to fund the
development and expansion of our business and, therefore, do not
anticipate paying cash dividends on our common stock in the foreseeable
future. The declaration of dividends will be at the discretion of our
board of directors and will depend upon our earnings, capital
requirements and financial position, general economic conditions and
other pertinent factors.
-15-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Business Overview
Science Dynamics made significant efforts in the past twelve months
to react to the tremendous slowdown in the global communications market.
The focus was to concentrate on all potential revenue opportunities and
eliminate those that could not produce revenue in the short-term. This
resulted in drastic reductions in the workforce especially in the area
of Voice over Internet technologies. The sales revenue potential of the
IP product line was deemed to have a long-term sales cycle with no
short-term revenue opportunity. Unforeseen was the continued decline in
the telecom market combined with the step response to critical failures
in major telecom industry giants. This has set in motion an uncertain
future for this sector along with predictable reductions in capital
spending.
These reductions along with refocused efforts on core business
markets helped sustain us during the early portion of 2002. We set in
motion an early effort to enter new avenues for sustained revenue during
this period of reduced capital spending. These include new sales models
for the Commander Call Control System including lease and transaction
based offerings. These new financing options have opened the door to
allow many vendors access to the Commander product line. In addition to
forging new customer relationships, many of our traditional customers
such as the major long distance and local exchange carriers, are
exploring how these financing options allow them to continue to improve
operational costs in an increasingly competitive market without the up-
front capital expenditure.
New revenue initiatives included the launching of an operations
center to provide value-added enhancements to key industry services.
These services focus on the needs of the corrections market and extend
the value of a typical equipment sale into a multi-year contract for
transaction-based services. The operations center is now in full
production mode and the initial invoicing commenced during the latter
part of June. In the first five months of operation the operations
center has experienced a growth of 133% in daily transactions processed.
We are also exploring other established markets that are considered
more viable in the short term following the telecom disruption currently
facing the industry. One such market is the pre-paid and debit calling
card industry. We are embracing this industry by offering a new entry-
level product for pre-paid and debit card carriers. The new product
known as MinuteMan offers advanced pre-paid services comparable with
many of the legacy systems on the market today at a price that is
targeted at allowing providers the chance to transition from a pure
resale mode into the first step of creating a network infrastructure.
Over the past year, several new software releases have been
produced for the Commander I and II models that have repositioned the
product for a greater segment of the inmate call control market. This
has opened the door to allow the Commander product to fill the needs of
all service providers, both large and small. Heretofore, the Commander
product was designed solely for the needs of the large Local Exchange
Carrier (LEC) customers.
-16-
We have recently engaged several nascent independent inmate call
control service providers that are now competing equitably with LECs.
These smaller companies are winning contracts on the merits, strength
and reputation of the Commander platform.
We continue to embrace the benefits and competitive advantages that
a converged voice/data network holds for communications carriers in many
market sectors. As such, we will continue to maintain a forward pace in
the development of integrated voice over data technology.
We expect operating losses and negative cash flow for the
foreseeable future, as we must obtain orders, continue to introduce
additional services and offer optional procurement methods. We believe
that increasing our revenues will depend in large part on our ability to
offer products that are attractive to our customers, increase customer
awareness of our product offerings by developing effective marketing and
promotional activities and developing strategic relationships.
We intend to continue to increase the scope of our operations while
also facing the challenge of maximizing resources effectively.
RESULTS OF OPERATIONS
---------------------
The following table summarizes the basic results of operations for
the periods indicated in the Consolidated Statement of Operations.
Nine Months ended September 30, 2002 (unaudited) compared to the Nine
Months ended September 30, 2001 (unaudited).
Nine Months Ended
September 30,
2002 2001
---- ----
Sales $812,143 $506,134
Net (Loss) (1,964,739) (3,797,646)
Net (Loss) Per Share $(0.06) $(0.21)
OPERATING EXPENSES PERCENT OF SALES
2002 2001 2002 2001
---- ---- ---- ----
Cost of Goods Sold $ 357,611 $ 381,509 44% 75%
Research & Development 593,707 1,107,916 73% 219%
Sales, General & Admin 1,483,794 2,560,369 183% 505%
Total Operating Costs
and Expenses $2,435,112 $4,049,794 300% 799%
-17-
Sales for the nine months ended September 30, 2002 were $812,143 an
increase of $306,009 from sales of $506,134 for the nine months ended
September 30, 2001. Our revenue in 2002 was predominantly derived from
the Commander Product Line with sales of the VFX Product Line.
Cost of Goods Sold decreased to $357,611 in the nine months ended
September 30, 2002 from $381,509 in the corresponding nine months ended
September 30, 2001. The decrease in the cost of goods sold was related
to the decrease in overhead. The percentage decrease of cost of goods
sold as a percentage of sales was due to the increase in sales and
improved margins on the Commander and VFX product lines.
Research & Development expenses decreased to $593,707 in the nine
months ended September 30, 2002 as compared to $1,107,916 in the
comparable nine months ended September 30, 2001. The decrease in
research and development expenses during the first nine months of 2002
was due to the reduction in the development staff for the IP Telephony
Integrator product line. The sales revenue potential of the IP product
line was long term and we had to reduce our expenses to survive in this
very difficult market place. We believe that continual enhancements of
our products will be required to enable us to maintain our competitive
position. We intend to focus our principal future product development
efforts on developing new, innovative, technical products and updating
existing products in the communications arena which will enable us to
explore other established markets that are considered "safe" from the
telecom disruption currently facing the industry.
One such market is the pre-paid and debit calling card industry. In
June, we introduced the MinuteMan Calling Card/Billing System, which is
described above in the product section.
Sales, General & Administrative expenses decreased to $1,483,794 in
the nine months ended September 30, 2002, compared to $2,560,369 in the
nine months ended September 30, 2001. The decrease is related to a
reduction in force and other cost saving initiatives.
Interest Expense in the first nine months ended September 30, 2002
is interest accrued on our convertible notes, paid on the line of credit
and the interest due for the loans from two stockholders.
Finance Expense in the first nine months ended September 30, 2002
was $311,193. The finance expense includes $216,819 relating to the
recognition of a debt discount resulting from a beneficial conversion
feature embedded in the convertible notes issued between February 6,
2002 and October 16, 2002. The finance expense also includes the
amortization of the finance cost.
Per Emerging Issues Task Force (EITF) Number 98-5, "Accounting for
Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios," this beneficial conversion
feature was assigned an intrinsic value of $216,819, as calculated under
the provisions of the EITF. This amount was immediately expensed, as the
Notes were convertible into our common shares at the time of the signing
of the Agreement.
-18-
Three Months ended September 30, 2002 (unaudited) compared to the Three
Months ended September 30, 2001 (unaudited).
Three Months Ended
September 30,
2002 2001
---- ----
Sales $156,266 $133,521
Net (Loss) (570,227) (1,059,917)
Net (Loss) Per Share $(0.02) $(0.06)
OPERATING EXPENSES PERCENT OF SALES
2002 2001 2002 2001
---- ---- ---- ----
Cost of Goods Sold $ 80,969 $ 92,983 52% 70%
Research & Development 170,636 353,126 109% 264%
Sales, General & Admin 394,649 719,229 253% 539%
Total Operating Costs
and Expenses $ 646,254 $1,165,338 414% 873%
Sales for the three months ended September 30, 2002 were $156,266
an increase of $22,745 from sales of $133,521 for the three months ended
September 30, 2001. Our revenue in the three months ended September 2002
was predominantly derived from the Commander Product Line with sales of
the VFX Product Line progressively increasing. Contributing factors to
the sales performance in the third quarter ended September 30, 2002 were
the overall reduction in capital spending for products and services in
the telecom industry and the continued economic downturn. The sales
results in the third quarter of 2001 were due to a combination of the
slowdown in telecommunications spending and the loss of the Cascadent
contract.
Cost of Goods Sold decreased to $80,969 in the three months ended
September 30, 2002 from $92,983 in the corresponding three months ended
September 30, 2001. The decrease in the cost of goods sold was related
to the decrease in overhead. The percentage decrease of cost of goods
sold as a percentage of sales was due to the increase in sales and
improved margins on the Commander.
Research & Development expenses decreased to $170,636 in the three
months ended September 30, 2002 as compared to $353,126 in the
comparable three months ended September 30, 2001. The decrease in
research and development expenses during the three months ended
September 2002 was due to the reduction in the development staff for the
IP Telephony Integrator product line. The sales revenue potential of the
IP product line was long term and we had to reduce our expenses to
survive in this very difficult market place. We believe that continual
enhancements of our products will be required to enable us to maintain
our competitive position. We intend to focus our principal future
product development efforts on developing new, innovative, technical
products, updating existing products in the communications arena, which
will enable us to explore other established markets. The MinuteMan
Calling Card/Billing System, which is described above in the product
section, was introduced in June to address the pre-paid and debit
calling card industry.
-19-
Sales, General & Administrative expenses decreased to $394,649 in
the three months ended September 30, 2002, compared to $719,229 in the
three months ended September 30, 2001. The decrease is related to a
reduction in force and other cost saving initiatives that were
implemented.
Interest Expense is interest accrued on our convertible notes, paid on
the line of credit and the interest due for the loans from the two
stockholders.
Finance Expense in the three months ended September 30, 2002 was
$119,989. The finance expense includes $81,642 relating to the
recognition of a debt discount resulting from a beneficial conversion
feature embedded in the convertible note issued between July 5, 2002 and
October 16, 2002. The finance expense also includes the amortization of
the finance cost.
Per Emerging Issues Task Force (EITF) Number 98-5, "Accounting for
Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios," this beneficial conversion
feature was assigned an intrinsic value of $81,642, as calculated under
the provisions of the EITF. This amount was immediately expensed, as the
Notes were convertible into our common shares of at the time of the
signing of the Agreement.
Year ended December 31, 2001 (audited) compared to the year ended
December 30, 2000 (audited).
The following table sets forth income and certain expense items as
a percentage of total revenue and the change in dollar amounts of such
items compared to the previous fiscal year:
For the Years Ending December 31,
For the Years Ending December 31,
2001 2000
---- ----
Sales $ 891,149 $5,269,377
Net Loss $(4,375,476) $(1,339,262)
Net Loss Per Share $(0.24) $(0.08)
OPERATING EXPENSES PERCENT OF SALES
------------------ ----------------
2001 2000 2001 2000
---- ---- ---- ----
Cost of Goods Sold $ 555,064 $1,891,484 62.3% 35.9%
Research & Development 1,533,890 1,141,656 172.1% 21.7%
Selling, General & Admin 2,966,347 3,605,768 332.9% 68.4%
Total Operating Costs
and Expenses $5,055,301 $6,638,908 567.3% 126.0%
-20-
Sales for the fiscal year ended December 31, 2001 were $891,149
compared to sales of $5,269,377 in the 2000 fiscal year. The sales
revenue consists of sales of our integrated hardware and software
products, as well as revenue generated from the maintenance and support
of those products. We believe that the decrease in product revenues is
reflective of the turmoil in the technology and telecom sectors and the
impact of changes in global economic conditions in 2001. The Company's
revenue in 2000 was predominantly derived from the Integrator Product
Line due to the deployment of the Cascadent Supply Agreement during
2000. This Agreement was terminated during the first quarter of 2001
upon our receiving official notification that Cascadent was placed into
receivership. The loss of this contract is directly related to the
decrease in sales for the year. We are continuing to focus our efforts
on existing business opportunities and evaluating other vertical
markets.
Cost of Goods Sold for the fiscal year ended December 31, 2001
increased 26.4% as a percentage of sales from a 35.9% for the year ended
December 2000 to 62.3% for the year ended December 2001. This percentage
increase is directly related to the decrease in sales revenue.
Research and development expenses increased from $ 1,141,656 in
2000 to $1,533,890 in 2001, an increase of $392,234. Research and
development expenses consist of payroll and related expenses for
research and development personnel, costs related to systems
infrastructure and expenses for testing facilities and equipment. The
increase in research and development expenses was attributable to an
increase in the engineering staff for the IP Telephony Integrator
gateway products. Due to the long term involved for potential sales
revenue in the IP product line, we reduced the development staff of this
product line in January 2002. We will continue to explore opportunities
and look for prospective niches for Voice over IP. We believe that the
research and development activities are crucial to maintaining a
competitive edge and have focused current development efforts on
innovative enhancements to our existing product lines.
Selling, general and administration expenses increased 264.5% as a
percentage of sales. Sales and marketing expenses consist primarily of
compensation and related costs for sales personnel, marketing personnel,
sales commissions, marketing programs, public relations, promotional
materials, travel expenses and trade show exhibit expenses. This
increase on a percentage basis is due to the significant decrease in
sales during 2001. The actual dollar decrease of $639,421 is attributed
to reductions in personnel, salary reductions, cutback in trade shows,
travel expenses and closing the U.K. office.
Interest Expense for the year ended December 31, 2001 was $439,046,
and interest income was $9,589. For the year ended December 31, 2000, we
recognized interest income of $40,647 and interest expense of $10,378.
The interest expense of $439,046 for the year ended December 31, 2001
includes $295,569 relating to the recognition of a debt discount
resulting from a beneficial conversion feature embedded in the
$1,200,000 convertible note issued on May 22, 2001 and the $400,000
convertible note issued on August 17, 2001. Per Emerging Issues Task
Force (EITF) Number 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios" this beneficial conversion feature was assigned an intrinsic
value of $295,569, as calculated under the provisions of the EITF. This
amount was immediately expensed, as the Notes were convertible into our
common shares at the time of the signing of the Agreement. The remaining
interest expense is interest paid and accrued on the Convertible Notes.
-21-
Liquidity and Capital Resources
Cash and cash equivalents decreased to $12,457 for the nine months
ended September 30, 2002 from $17,075 at December 31, 2001. Net cash
used for operating activities was $908,699 during the nine months ended
September 30, 2002 compared to $2,486,852 in the corresponding nine
months ended September 30, 2001.
Net cash used in investing activities was $133,455 for the nine
months ended September 30, 2002 compared to $120,062 in the
corresponding nine months ended September 30, 2001.
Net cash provided by financing activities in the nine months ended
September 30, 2002 amounted to $1,037,536. This compares to $1,413,226
in the corresponding nine months ended September 30, 2001.
The cash requirements for funding our operations have greatly
exceeded cash flows from operations. We have satisfied our capital needs
primarily through issuance of convertible debentures and equity
financing. Our liabilities consist of over extended accounts payable,
arrearages to the landlord and we are in default on the capital lease
obligation. We are attempting to negotiate payment arrangements with our
vendors, landlord and an alternate arrangement with the leasing company.
We cannot guarantee that any of these discussions will be successful. If
we are unable to obtain successful negotiations, our business may well
be severely affected.
The short-term loan payable consists of loans from two
stockholders. One stockholder has exchanged debt for equity. The
equipment against the customer deposits have not been shipped to date as
the customer has two delivered systems they have not yet deployed.
The bank line of credit has been converted to a loan and shall be
repaid over a term of three years during which we shall make equal
monthly payments of $3,046.79 each, including interest, which for the
purpose of maintaining level monthly payments has been calculated at the
assumed rate of 6.25% per annum. Monthly payments shall commence on the
tenth (10th) day of July 2002 and continue on the same day of each month
thereafter during the term with a final payment to be due and payable on
the tenth (10th) day of June 2005. This final payment shall consist of
all unpaid principal and any interest which shall have accrued thereon.
We are seeking and continually investigating other business
ventures and strategic relationships that may have applications directly
related to our product offerings. Due to general economic conditions,
rapid technological advances being made in the telecom industry and
shortages of available capital we believe other companies will be
seeking joint ventures and partnerships to augment their sales
potential. We anticipate that we may be able to participate in only
limited potential business ventures because we have nominal assets and
limited financial resources. However, we believe perceived benefits of
our technology will provide the interest to implementing joint ventures.
-22-
Our failure to develop strategic relationships could inhibit our
ability to grow. We believe that, in order to market our technology, we
need to enter into strategic relationships and business ventures to
develop commercial applications of our technology directed at other
vertical markets. We intend to concentrate on identifying preliminary
prospective business opportunities, which may be brought to our
attention through present affiliations and relationships. We do not
presently have any agreements relating to strategic relationships, we
may never enter into such agreements, and our failure to develop such
relationships could impair our ability to grow.
We may be unable to respond to the rapid technological changes in
our industry. Rapidly changing technologies, frequent new product and
service introductions and evolving industry standards characterize the
telecom and telecommunications industries. Our future success will
depend on our ability to adapt to rapidly changing technologies by
continually improving the performance, features and reliability of our
services, particularly with respect to other companies.
The sales revenue shortfall has greatly impacted cash on hand. Our
currently anticipated levels of revenue and cash flow are subject to
many uncertainties and cannot be assured. In order to have sufficient
cash to meet our anticipated cash requirements for the next twelve
months we must increase sales to provide cash flow from operations. We
have reduced our expenses and continue to investigate further cost
cutting initiatives. However, we do not have sufficient cash on hand to
continue its operations without successfully raising additional funds to
implement the business plan. The inability to generate sufficient cash
from operations or to obtain the required additional funds could require
us to reduce or curtail operations. While negotiations are underway to
secure additional funds, we cannot guarantee that such negotiations will
be successful.
-23-
BUSINESS
General Overview
We were incorporated in the State of Delaware May 1973 and
commenced operations in July 1977. During the past twenty-four (24)
years, never have we faced such challenges as those that evolved over
the previous year in the telecom sector. We embarked on a major
development cycle, to bring products to market with the latest forms of
communication: Voice over IP (VoIP), video over packet and call control.
These developments brought new competitive offerings to our customer
base.
The dramatic market upsurge in building telecommunications
infrastructure in 2000 created many opportunities and obstacles to which
we responded well. The decimation of that infrastructure and
bankruptcies of major corporations meant we had to retrench in order to
survive and avoid becoming a casualty along with many larger
organizations.
The last three (3) months has seen our company take bold steps to
improve our survivability in this very difficult market place. New
initiatives are being formulated which will allow us to grow by focusing
on niche applications and markets.
Voice over Internet Protocol (VoIP) is now an integral part of
global telecommunications as opposed to being distinct from the PSTN
legacy communications. This marketplace shift in telecommunications
architecture makes an understanding of VoIP and PSTN communication
networks a requirement for innovative solutions.
The opportunity for us to provide creative applications and
solutions that add functionality and features to this new infrastructure
are huge. We will concentrate on bringing our many years of
telecommunications understanding and capability to this new and very
demanding marketplace. Profitability and shareholder value, along with
quality, value for money and usability for our customers will be the
driving force for our future.
Business Development
We have maintained a long and highly reputable position as a
supplier of call control technology to service providers offering
Collect-Only calling to inmates of correctional institutions. We have
been a primary supplier to a major Local Exchange Carrier (LEC) and, in
recent years, have expanded our customer base to include the newly
emerging cadre of unregulated companies offering the same service in
today's more highly competitive telecom environment. Our Commander
product line continues to receive high marks as a versatile and feature-
rich platform, well prepared to deal with the increasing demand for
investigative tools and security.
The U.S. Department of Justice reports that there were 2,071,686
persons incarcerated at yearend 2000. While the growth rate of prisoners
slowed to 1.3% in 2000, the overall annual growth since 1990 is 6%. It
is an unfortunate truth that, even during the recent economic decline,
this is one segment of the telecom marketplace that continues to grow.
-24-
One nuance among call control service providers is a shift away
from traditional equipment purchases to transaction-based pricing
structures. We are taking steps to align with this change by offering
various pricing options that allow customers to spread capital
investment over the life of their correctional institution contracts.
These contract periods are commonly five years in duration. There are a
number of transaction related events that parallel the provision of
Collect-Only service, such as Line Identification Database (LIDB)
validation of billable telephone numbers. We are preparing to undertake
such validation for our customers. We are creating an advanced LIDB
validation service complete with a decision support system component to
mitigate unbillable call events.
Within the foreseeable future, we anticipate becoming a Network
Operations Center (NOC) to provide a suite of transaction-based services
including low cost voice communication services to improve customers'
profitability. Our past experiences with VoIP gateways and packet
switching technologies fit well within this strategy.
Products
Commander Call Control System
The Commander call control system is built on our unique
BubbleLINK(R) software architecture. This open system platform is a
combination of integrated Computer Telephony (CTI) hardware and
software, which can handle thousands of call transactions per hour and
provide correctional facility officials with effective tools to manage
and control inmate telephone calls using the Commander system software.
The Commander I models are designed for the small to midsize
municipal and county correctional facilities requiring control for up to
40 inmate telephone lines. The Commander I base system provides
telephone control for four lines and can be expanded in four line
increments. This modular design provides a cost effective solution with
an abundance of inmate phone control features.
Commander call control systems are supported by an integrated array
of administrative and investigative programs that provide a management
solution suite. All programs interact in real-time with Commander calls
and databases via an Ethernet Local Area Network (LAN) or a Wide Area
Network (WAN).
Commander provides state of the art call control and some of the
first tools targeted at investigation and law enforcement in the inmate
telephone control industry. The Commander Live Monitoring, Debit and
Recording continue to be some of the leading features required within
the industry today.
The latest software release for Commander enhances the debit
capability of the product by providing an extensive pre-paid card
system. The new DebitCard feature set provides flexible capability in
card creation and management. DebitCard supports specialized tariffs and
call timing. By being totally integrated with the Commander, no external
network facility is necessary. This provides complete control and
security when using pre-paid cards. None of the Commander call control
functions are jeopardized when a pre-paid card is used.
-25-
Currently under development is the next generation Commander
system. This next generation Commander will be produced on the latest
technology and provide greater capabilities for new features. This
generation of Commander system will introduce our first totally internal
recording solution. This new recording component will provide great cost
savings over the traditional recording equipment used today. This
generation of Commander will no longer be assembled exclusively from
components purchased from a single vendor. Currently two vendors have
been selected to source components in the next generation Commander.
This will provide us greater flexibility and reliability in producing
and supporting new systems.
Also in development is the integration of new biometric technology
interfaces to the Commander. Biometric technology is fast becoming a
realistic tool for increasing system security at many levels.
Development will also continue in the area of more powerful
investigative tools. The Investigator's File Cabinet will provide a
single repository for storing call records, recordings and other
documents related to a specific case or investigation.
Development has begun on a new Commander system targeted at multi-
facility centralized control. This solution will allow inmate phone
providers a method to bring all of the Commander features including the
extensive call control, debit, and pre-paid solutions to the smallest
facilities. This system provides an aggregated point of switching and
control for the provider. This minimizes on-site equipment and
maintenance costs. The Commander will still maintain per facility
branding and rating without the need for dedicated switching equipment
at the institution.
We continue to explore opportunities with the major telephone
companies in providing the Commander inmate phone control system with
call transaction (price per call) programs. Management believes that the
recent and continued drive to develop new capabilities for the Commander
will establish the Commander and our company in inmate telephone
control.
IP Telephony
One of the impacts of IP Telephony has been that of driving the
convergence of the IT and telecom markets. This together with the
dramatic over capacity in the bandwidth market place and the
corresponding reduction of demand in the IP telephony and networking
product has meant that we have taken the decision not to compete
directly against the large manufacturers of such equipment. Our modular
approach to the design of these "next generation" products has
positioned it well to now focus on adding value and driving toward the
promise of enhanced functionality that these converged networks can
ultimately provide. Building on our core BubbleLINK(R) technology the
company is continuing to develop products, concepts and services that
will bring such enhanced value added propositions to those systems
provided by the larger suppliers of networking equipment.
-26-
Our modular architecture permits our customers to add new product
and service features without significant cost or development time. Based
on publicly available data provided by large telecommunications service
providers, we believe our modular architecture enables the provision of
new and existing communications services at a lower cost than the
provision of communications services by traditional telephone companies.
The IP Integrator gateway product line addresses the various market
segments. The IntegratorC-2100(R) Series focus is corporate enterprises,
the IntegratorC- 2300(R) Series focus is large ISPs and Telco Carriers
and the IntergratorC- 2500(R) Series focus is intended to address the
needs of PTT/Telco Carriers.
Our IP Telephony products aim to enhance the new operators'
abilities to combine the technologies of the new IP-based networks with
the traditional feature-rich circuit networks without forfeiting the key
functionality of IP network adaptability.
We offer our proprietary BubbleLINK(R) software architecture
throughout our current IP Telephony Gateway product line. This includes
our high capacity versatile IntegratorC-2308(R), which has one of the
smallest footprints in the industry.
During 2001 the Integrator product was enhanced with additional
capabilities. System enhancements included support for SNMP, Radius
Authentication and Interoperability testing with various other vendor
products. The system hardware was revised and a cost reduction cycle was
executed to lower the per-port cost and conversely the entry-level price
of the IntegratorC-2300(R).
Due to the slowdown of Internet Telephony networks, development
efforts in this area have been re-directed to align with areas in which
Internet telephony has managed to sustain growth. Specifically, the
enterprise marketplace including IP-PBX and inter-office gateway
applications. We are exploring this market and developing technology to
supplement these applications. We expect to make new product
announcements in this area later this year or in early 2003.
MinuteMan
The MinuteMan product, built on our core BubbleLINK(R) technology,
is a complete turnkey system providing all aspects of a pre-paid and
debit card platform. MinuteMan provides PSTN interface, card databases,
IVR and SMDR collection. The MinuteMan is ideal for smaller pre-paid
card vendors that want to break free from the resale only mode of the
card business. MinuteMan is also the ideal front end for VoIP carriers
that are looking to complete their offerings for low cost international
traffic. Most VoIP Gateways do not offer a robust solution for pre-paid
calling. Most of these carriers have been forced to purchase or lease
expensive adjunct systems to integrate pre-paid solutions into their
VoIP networks. The MinuteMan provides all of the necessary functions to
convert an existing VoIP toll bypass network into a full-featured
international pre-paid network.
MinuteMan development is continuing based on requirements from
customers and other industry trends. Enhancements to the original
MinuteMan include expanded rating capabilities for specialized charges
and dynamic rates. Initial installations of the MinuteMan are scheduled
for completion before the end of this year.
-27-
Voice Response System
Our Voice Response System (VRS) is an automatic intercept product
designed to provide a cost-effective solution for implementing
announcement capabilities at the central office location. This non-
BubbleLINK(R) product has reached its mature stage of the product life
cycle and has been discontinued. A base line revenue stream will be
generated from support of this product.
We maintain a small but steady revenue from the maintenance of VRS
and VRI platforms. There are currently several hundred of these systems
still actively installed and operational. We are currently investigating
the need to provide a technology upgrade to customers using these
traditional platforms.
Product Development
New applications are also being investigated within our product
development team. We believe that new vertical markets exist and can be
penetrated with ongoing platform enhancements. We believe that the
robust capabilities of our current technology along with the ability to
integrate a voice over packet interface can combine traditional network
systems with new market requirements.
Our products have primarily been designed and developed by our
internal engineering staff. We consider the features and performance of
our products to be generally competitive to those of other available
applications.
We believe that continual enhancements of our products will be
required to enable us to maintain our competitive position. We intend to
focus our principal future product development efforts on developing
new, innovative, technical products and updating existing products in
the communications arena to enable us to take advantage of opportunities
resulting from the expected direction of technology.
We continue to refine our core BubbleLINK(R) software architecture.
This software architecture provides the foundation for hosting
applications for various Telephony and transaction oriented processes.
Currently the BubbleLINK(R) architecture supports our existing products
such as the Commander family of inmate products, the MinuteMan pre-paid
card system, and the IntegratorC-2000(R) Series of IP Telephony gateway
products. Management believes that the product design strategy will keep
us competitive in the changing communications marketplace.
Video over Frame Relay
In 1997, we launched our new way to carry video conferencing. The
VFX- 250S is a hardware-based Frame Relay Access Device (FRAD) designed
to carry video streams through the frame relay network. As the largest
data network protocol in the world, frame relay seemed an obvious choice
for adding video connectivity to its wide complement of features.
-28-
We continue to market the VFX-250S products in markets where ISDN
and leased-line services are not available or are cost prohibitive. As
Frame Relay becomes more prolific, so does the need for value added
services to maximize the efficiency of the network.
In June, a contract was signed with Mercury Corporation for
exclusive rights to distribute the VFX within Korea. The first systems
have been shipped and are currently undergoing the approval process in
Korea. We have had additional sales in Germany, China, Mexico, Brazil,
Peru and Canada, extending the reach of the VFX across six continents.
We expect continued sales from these opportunities to proceed steadily
throughout the year.
Error Correction Algorithm
In 1999, we acquired the "Error Detection and Correction System for
Use with Address Translation Memory Controller" patent, in exchange for
172,029 shares of common stock then valued at $100,000. Such a patent
provides us with the ability to embed in certain technology an error
correction method that should substantially reduce data transmission
errors. This correction device (FEC) is designed to reduce costly
retransmission and can be utilized across various data transport
mediums.
The Patent, which has been issued in the United States with
application in many foreign countries, is for a data transmission system
for use in a mass memory system, which includes an EDAC that corrects
all single component errors and detects all double component errors.
High-speed operation permits use of the EDAC on address and control
lines as well as on data lines. In memory systems, which use virtual
memory addressing, further efficiency and economy is achieved by
incorporating a partial implementation of the EDAC encoding in the same
virtual memory address translation unit in which the virtual memory
address is calculated.
We intended to make the patent available to others on a royalty
basis. We have explored the use of its FEC patent with several entities
during the past few years. We have continually been advised that the
prime difficulty of incorporating this new method of Error Correction is
that it is so different in approach and incompatible with the long used
Reed-Solomon Error correction system. It is difficult to supplant Reed-
Solomon, particularly in today's Telecom environment. In spite of the
advantages of lower cost, smaller footprint, because of fewer
components, and the inherent better correction performance, uprooting R-
S would be a major undertaking. Our FEC must be at both ends of the data
stream. This, in turn, means that only new installations are candidates
for the Company's system.
To date a suitable entity has not been identified to exploit this
new technology in the near term. Our near term strategy and capital
priorities preclude us from investing additional time and funds into
exploiting this patent independently. As stated in previous reports its
carrying value of $89,700 has been written off. We believe that the
underlying patent may still have practical applications.
-29-
Integration of Products
We continue to maintain a primary focus on the development and use
of software technology. Most hardware requirements are filled through
the use of OEM components. New vendors are routinely evaluated for
several critical product components. The general goal is to maintain a
multi-source solution for critical components.
We have or are in the process of establishing relationships with
new vendors to help us bring the best solutions to market. Some of the
vendors include NMS, Pika Technologies, and Brooktrout for telephony
interface components. Other Companies such as Interlogic Industries, and
ITOX provide computer components.
Sources and Availability of Material
Although most materials are available from a number of different
suppliers on an off-the-shelf basis, several suppliers are the sole
source of each of certain components. If a supplier should cease to
deliver a component, another source would have to be developed. We
believe we would be able to do so by acquiring a substitute part or
module that could require a hardware or software change in the unit in
order to provide satisfactory performance, although added costs and
delays of unknown amount and duration could be experienced.
Sales and Marketing
We have just signed a General Purchase Agreement with a major
interexchange carrier to provide call control products and services for
the inmate market. This is consistent with our marketing strategy to
develop vendor relationships with Tier I network service providers.
Moving forward, we intend to position ourself as a primary vendor to
major accounts who occupy the majority of the inmate telecommunications
marketplace.
As a robust and flexible platform, the Commander product line lends
itself well to other market applications such as Truck Stops, Colleges
and selected major transportation facilities. We plan initiatives to
penetrate these market segments as well.
Sales and Marketing resources are positioned to focus individually
on major accounts and the nascent community of new and unregulated
providers who seek to serve smaller inmate facilities. Staff resources
are dedicated to market research and product management to ensure all
areas of the inmate market with potential are fully explored.
Research and Development
Research efforts are focused on adapting new technology to current
and potential products. Efforts in research cover new techniques in
software development and component technologies. Research also covers
emerging hardware technologies and improvements in current technology.
Existing products are currently being redesigned to integrate the latest
generation of specific key components. These changes will increase the
capability of products such as the Commander and provide new features
while reducing overall cost of the product. As penetration into existing
markets increases and as we make initial steps into new markets,
increases in research expenditures will become necessary.
-30-
An area of increased activity is in the development of technology
to support the back office operations center. This service-oriented
facility will be developed from hardware and software technologies that
can leverage the latest capabilities offered by the Internet.
The majority of the research and development activities are
conducted at our facility using our array of telephony resources and the
technical expertise of our engineering staff. We anticipate that an
increase in future research and development expenditures will be
necessary to remain competitive in the rapidly changing
telecommunications industry.
Intellectual Property
It is our practice to apply for patents as new products or
processes appropriate for patent protection as developed. We made
application for a patent on the three-way Call Detection System and on
January 21, 1998, received a Notice of Allowance from the U.S. Patent
Office. The formal United States Patent was received in June 1998. We
hold other patents related to some of our other products. No assurance
can be given as to the scope of the patent protection.
We believe that the rapid technological developments in the
telecommunications industry may limit the protection afforded by
patents. Since a patent generally defines what and how to competitors,
that information often allows mutations by rivals to circumvent the
original patent. Accordingly, we believe that our success will be
dependent upon our engineering competence, service, and the quality and
economic value of our products.
We also own trademarks, copyrighted material and intellectual
property relating to proprietary technology utilized in the development
of some of the products.
Customer Support
Our technical support staff provides telephone support to our
customers using a computerized call tracking and problem reporting
system. We also provide initial installation and training for our
products. We have instituted an annual maintenance contract entitling
customers to software updates, technical support and technical
bulletins.
Industry
The inmate call control market generates $1 billion annually in
network usage. Its 200,000 telephones represent $200 million in
equipment sales, which include call control platforms and such ancillary
equipment as telephones, call recording devices and administrative
terminals. The Federal Bureau of Prisons operated 84 correctional
facilities that are currently at 31% over capacity. There are 1,558
public and private facilities housing State inmates. Many of these are
operating above their capacity. Additionally, there are some 3,365 jails
with over 600,000 inmates operated by municipal and county governments.
There is a trend within the Industry to privatize jails and there
are a number of entities emerging to administer such facilities. In some
cases, these private entities operate with some autonomy with respect to
selecting call control vendors. In other cases, the governing body
retains such oversight. We are reviewing this changing landscape in
order to position ourself to capitalize on opportunities as they
materialize.
-31-
Competition
The competitive field is somewhat convoluted in that there are
traditional equipment manufacturers who have breached their traditional
roles to become service providers. Such is the case with T-Netix, a
Texas-based company that recently positioned itself to prime bid several
big contracts. Traditional Tier I network service providers who have
used T-Netix's platforms in the past in their role as prime bidders,
find themselves competing with their selected vendor. While this might
appear to be an anomaly, it is becoming commonplace and clearly an
example of how desirable these inmate call control contracts are. This
is a relatively small but highly profitable marketplace with only a
handful of viable competitors.
There are six major competitors in the call control platform field,
three of which are formidable. We realize the stiffness of our
competition but believes we have the skills, resources and technology to
garner a substantial portion of this business. With efforts directed
toward transaction pricing and our keen awareness of this transitioning
competitive landscape, we anticipate being able to capture a significant
portion of the equipment business and a piece of each related
transaction as well.
Customers
During 2001, two customers, Bealls Communications Group and Bell
South, each accounted for an aggregate of 37% of total sales. During
2000, two customers accounted for 83% and 15% of total sales. The
customer accounting for 83% of total 2000 sales was Cascadent
Communications, with whom we had a supply agreement. The customer
accounting for 15% of total 2000 sales was Bell South.
Employees
As of December 13, 2002, we employed 16 persons on a full time
basis. We supplement full-time employees with subcontractors and part-
time individuals, consistent with workload requirements. Our continued
success depends heavily upon our ability to retain highly qualified and
competent personnel. We are operating in a high growth industry, which
is experiencing fierce competition for experienced and talented
personnel. We continue to provide our employees with appropriate equity-
linked incentives to advance the interests of our company and our
stockholders.
Governmental Approval
The Federal Communications Commission (FCC) requires that some of
our products meet Part 15 and Part 68 of the code of Federal Regulations
(CFR). Part 15 (subpart B) deals with the suppression of radio frequency
and electro-magnetic radiation to specified levels. Part 68 deals with
protection of the telephone network. Other than FCC requirements, there
is no known effect resulting from existing or probable Government
regulations requiring approval.
-32-
Facilities
Pursuant to a ten-year lease commencing May 1, 1995, we lease a
50,000 square foot freestanding masonry building in an industrial park
in Cherry Hill, New Jersey, utilized for office space and testing of our
products and other corporate activities. In the latter part of 1998, we
subleased 25,645 square feet of the building to a printed circuit board
manufacturer.
Compliance with Environmental Laws
Our operations do not pollute nor involve discharge of material
into the environment. As a result, no expenditure is budgeted or
required for environment protection or restoration. We are concerned
about protecting the environment and participate in recycling programs.
Legal Proceedings
We are not now a party to any litigation and no action against us
has been threatened or is known to be contemplated by any governmental
agency or subdivision or any other entity.
MANAGEMENT
The following table sets forth certain information regarding our
directors and executive officers as of December 18, 2002.
Name Age Position with the Company
---- --- -------------------------
Alan C. Bashforth 53 Chairman of the Board,
President, Chief Executive Officer
and Secretary
Joy C. Hartman 54 Chief Financial Officer
Directors are elected at the annual meeting of shareholders for a
period of one year. Directors appointed to fill vacancies or to
increase the number of board members serve until the next annual
meeting.
Alan C. Bashforth, is currently our Chairman, President, CEO and
Secretary and has been since April 4, 2002. Prior to his present
positions, Mr. Bashforth served as a director with active duties in
seeking finance for our company. Prior to serving as director, Mr.
Bashforth was our President and Chief Executive Officer until January
2000 and served as Chairman of the Board until November 30, 2000. He was
President of Cascadent Communications, our major customer until December
15, 2000. Previously he was 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 us 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 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.
-33-
Joy C. Hartman is currently our Chief Financial Officer and has been
since April 4, 2002. Prior to this position, Ms. Hatrman served as
President and Chief Executive Officer from January 2000 until April 4,
2002. Ms. Hartman joined our company in January 1982. In addition to
holding these positions, other positions she has held at our company
include CFO, Treasurer, Corporate Secretary, and Executive Vice
President. Her prior experiences included TeleSciences, Inc., and Peat
Marwick Mitchell. Ms. Hartman is a graduate of The Wharton School of
Business of the University of Pennsylvania. She is a member of the
Financial Executives Institute, the National Association of Corporate
Directors, and the American Society of Corporate Secretaries.
Board of Directors Committees and Other Information
All directors hold office until the next annual meeting of
shareholders and until their successors have been duly elected and
qualified. Officers are elected by and serve at the discretion of the
Board of Directors. There are no family relationships among our
directors or officers. The Board of Directors currently has an Audit
Committee and a Compensation Committee. The Audit Committee oversees the
actions taken by our independent auditors and reviews our internal
financial and accounting controls and policies. The Compensation
Committee is responsible for determining salaries, incentives and other
forms of compensation for our officers, employees and consultants and
administers our incentive compensation and benefit plans.
Directors' Compensation
We do not compensate members of our Board of Directors for their
services. We reimburse non-employee Directors for their reasonable
expenses incurred in attending meetings of our Board.
Executive Compensation
The following table sets forth the total compensation paid to our
president and other executive officers whose compensation during any of
the past three years exceeded $100,000.
-34-
SUMMARY COMPENSATION TABLE
Annual Compensation Long term compensation
----------------------- --------------------------
Name and Year Salary Bonus Other Awards All
Principal ($) ($) Annual Restrict- Options/ LTIP Other
Position Compen- ed Stock SARs(#) Pay- Compensa-
sation ($) Award(s)($) outs($) tion ($)
---------- ---- ------ ----- ---------- --------- ---------- ------ --------
Joy C.Hartman, 2001 159,519 -0- 6,731 -0- -0- -0- -0-
President and 2000 161,185 -0- 1,666 -0- 100,000 -0- -0-
CEO (1) 1999 113,237 -0- -0- -0- 10,000 -0- -0-
Thomas Spadaro 2001 112,500 -0- -0- -0- 10,000 -0- -0-
Vice President(2) 2000 87,151 -0- 1,104 -0- 25,000 -0- -0-
Robert O'Connor 2001 108,548 -0- -0- -0- 30,000 -0- -0-
Vice President(3) 2000 67,842 -0- -0- -0- 20,000 -0- -0-
Joseph Giegerich 2001 125,000 -0- -0- -0- 10,000 -0- -0-
Vice President(4) 2000 24,038 -0- -0- -0- 60,000 -0- -0-
Denny Ko 2001 67,692 -0- -0- -0- 60,000 -0- -0-
Chief Technology
Officer(5)
(1) On April 4, 2002, Ms. Hartman resigned as President and CEO and was
appointed as our Chief Financial Officer.
(2) Mr. Spadaro was appointed Vice President on December 17, 2000;
previously he was our Director of Engineering.
(3) Mr. O'Connor is no longer with our company.
(4) Mr. Giegerich is no longer with our company.
(5) Mr. Ko is no longer with our company.
-35-
The outside Directors receive $250.00 per meeting as standard
compensation for service as directors.
Stock Options Exercised During Fiscal Year
No options were exercised by our executive officers and directors during
the most recent financial year.
Options Granted During Most Recent Financial Year.
The following table sets out information relating to options granted
during the most recent financial year to our executive officer and
directors:
Securities % of Total Market Value of
Under Options Granted Exercise Per Securities Underlying Expiration
Name Options to Employees in Security Options on the Date of Date
Granted Financial year ($/Security) the grant ($/security)
----------------------------------------------------------------------------------------------------
Joe Giegerich 10,000 3.7% $0.26 $ 2,600 7/30/2011
Denny Ko 60,000 21.9% $0.29 $17,400 7/23/2011
Robert O'Connor 15,000 5.5% $0.98 $14,700 4/03/2011
Robert O'Connor 15,000 5.5% $0.26 $ 3,900 7/03/2011
Thomas Spadaro 10,000 3.7% $0.26 $ 2,600 7/30/2011
James Tsoi(1) 20,000 7.3% $0.06 $ 1,200 11/05/2011
(1) Mr. Tsoi is no longer with our Company.
Fiscal Year-end Option Values
The following table shows information regarding the value of unexercised
options held by executive officers as of December 31, 2001:
Number of Securities
Underlying Value of Unexercised
Unexercised Options In-The-Money Options(1)
-----------------------------------------------------------------------------------
Name & Position Exerciseable Unexerciseable Exerciseable Unexerciseable
-----------------------------------------------------------------------------------
Joy Hartman, President
and CEO (2) 155,000 - $8,469 -
Joseph Giegerich, Vice
President - Sales and
Marketing (3) 60,000 60,000 - -
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Thomas R. Spadaro,
Vice President -
Technology (4) 56,200 - $5,167 -
Robert O'Connor, Vice
President - Finance
and Administration,
Chief Financial
Officer (5) 20,000 - - -
(1) Value of unexercised options is based on the closing bid price of
our common stock on the Over the Counter Bulletin Board on December 31,
2001, minus the exercise price.
(2) On April 4, 2002, Ms. Hartman resigned as President and CEO and was
appointed as our Chief Financial Officer.
(3) Mr. Giegerich is no longer with our company.
(4) Mr. Spadaro was appointed Vice President on December 17, 2000;
previously he was our Director of Engineering.
(5) Mr. O'Connor is no longer with our company.
Employment Contracts
On January 1, 2002, we entered into an agreement with Calabash
Consulting Ltd. ("Calabash") for a term of three years by which
Calabash agreed to provide us with consulting services including the
services of Alan Bashforth to act as our Chief Executive Officer in
consideration of an annual fee of $240,000. Calabash is also entitled
to a bonus in the amount of one year's fee to be paid in common stock at
a value of $.055 per share on December 31, 2002 if we are still in
business as of that date.
2002 Employee Stock Option Plan
On November 6, 2002, a majority of our stockholders approved the
2002 Employee Stock Option Plan and we reserved 20,000,000 shares of
common stock for issuance thereunder. We registered the 2002 Employee
Stock Option Plan on Form S-8 filed with the Securities and Exchange
Commission on December 4, 2002. As of the date hereof no common shares
are underlying outstanding stock option grants and 20,000,000 common
shares remain available for future option awards.
-37-
2002 Employee Stock Purchase Plan
On November 6, 2002, a majority of our stockholders approved the
2002 Employee Stock Purchase Plan and we reserved 20,000,000 shares of
common stock for issuance thereunder. We registered the 2002 Employee
Stock Purchase Plan on Form S-8 filed with the Securities and Exchange
Commission on December 4, 2002. As of the date hereof no common shares
have been issued under the plan and 20,000,000 common shares remain
available for future stock awards.
1992 Stock Option Plan
Our 1992 incentive stock option plan, as filed with our
registration statement on Form S-8 with the Securities and Exchange
Commission on June 5, 1992, reserved 290,950 common shares for
issuance; on March 22, 2000, we filed a post-effective amendment to
increase the shares reserved for issuance to 1,378,950, of which
562,700 common shares are underlying outstanding stock option grants
and 752,287 common shares remain available for future stock awards.
RELATED PARTY TRANSACTIONS
In February 2000, we entered into an agreement for consulting
services with Alan Bashforth. The consulting services primarily related
to identifying, evaluating, and recommending business strategies for us.
This agreement expired on April 30, 2001 and was not renewed. Mr.
Bashforth received an aggregate of $150,000 pursuant to the agreement.
On February 11, 2000, we entered into a supply agreement with
Cascadent Communications (formerly @IPbell Inc.). Pursuant to the terms
of the agreement, Cascadent agreed to purchase $4,180,800 of our
Integrator gateway products. Cascadent also expressed its intent, in
the agreement, to purchase either directly, or through a third party
vendor, additional equipment amounting to approximately $13,000,000.
During the course of the agreement, we sold $4,370,146 of our Integrator
gateway products under the agreement. The agreement was terminated on
January 4, 2001, upon receiving notice that Cascadent was placed into
receivership. In a letter dated June 25, 2001, the Cascadent receiver
advised that it was not possible to achieve a sale of Cascadent's
business as a going concern. The letter also stated that it appears
that there will be insufficient funds available for a liquidator to be
appointed in this matter. We have outstanding invoices in the amount of
$100,159, but presently have no expectations that such amounts will be
recovered. The pricing of the products sold and the terms and conditions
of sale were no more favorable than those provided to unrelated parties,
although Cascadent did have the right to receive prices as favorable as
those offered to any other customer. Our President, chief executive
officer and Chairman of the Board, Alan Bashforth, was president of
Cascadent subsequent to his service as an officer with our company.
We believe, based upon our experience in the industry, that the
terms of the foregoing agreements were no more favorable than those
which could have been obtained from unaffiliated third parties.
PRINCIPAL SECURITY HOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock, as of the date of this prospectus. The
information in this table provides the ownership information for:
- each person known by us to be the beneficial owner of more than 5% of
our common stock;
-38-
- each of our directors and director nominees;
- each of our executive officers; and
- our executive officers, directors and director nominees as a group.
Beneficial ownership has been determined in accordance with the
rules and regulations of the Securities and Exchange Commission and
includes voting or investment power with respect to the shares. Unless
otherwise indicated, the persons named in the table have sole voting and
investment power with respect to the number of shares indicated as
beneficially owned by them. The number of shares of common stock
outstanding used in calculating the percentage ownership for each person
listed below includes shares of common stock underlying options or
warrants held by the person that are exercisable within 60 days of the
date of this prospectus. Common stock beneficially owned and percentage
ownership are based on 40,673,099 shares outstanding before this
offering.
-39-
Shares of
Common
Stock
Name and Address Beneficially Percent of
Beneficial Owner Title Owned Outstanding Shares(1)
---------------- ----- --------- ------------------
NEObliviscaris Partnership 5% Owner 3,852,451 9.5%
200 Bar Harbor Drive
Suite 300
West Conshohocken, PA 19428
Cumberland Investments LLC 5% Owner 3,630,951 8.9%
Golf Corporate Centre
415 W. Golf Road, Suite 17
Arlington Heights, IL 60005
Aberfoyle Limited 5% Owner 2,700,000 6.6%
2 Boulevard Villas
St. Heler, Jersey
Channel Islands
Alan C. Bashforth CEO/President 1,520,000(2) 3.7%
Le Virage Chairman of the
La Route de Sainte Marie, Board, Secretary
St. Mary, Jersey, UK
JE3 3DB
Joy C. Hartman CFO 195,185(3) 0.5%
27 Hogan Way
Moorestown, NJ 08057
All Directors
and Officers As a Group 1,715,185 4.2%
1) Based upon a total number of 40,673,099 shares outstanding as of
December 18, 2002.
2) Shares in the name of Innovative Communications Technology, LTD., a
corporation, controlled by Mr. Bashforth.
-40-
3) The 195,185 shares in Ms. Hartman's name include incentive options,
exercisable within sixty days to acquire 155,000 shares, and 300 shares
owned by Ms. Hartman's children.
-41-
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 200,000,000 shares of
common stock, par value $.01 per share, and 10,000,000 shares of
preferred stock, par value $.01 per share.
The description of our securities are summaries of the material
provisions of our securities. For more complete information, you should
read our certificate of incorporation and its amendments.
Common Stock
Holders of our common stock are entitled to one vote for each
share held on all matters submitted to a vote of stockholders and do not
have cumulative voting rights. Accordingly, holders of a majority of the
shares of our common stock entitled to vote in any election of directors
may elect all of the directors standing for election. Holders of our
common stock are entitled to receive dividends ratably, if any, as may
be declared from time to time by our board of directors out of funds
legally available therefore. Upon the liquidation, dissolution or
winding up of us, the holders of our common stock are entitled to
receive ratably, our net assets available after the payment of all
liabilities.
Holders of our common stock have no preemptive, subscription,
redemption or conversion rights, and there are no redemption or sinking
fund provisions applicable to the common stock. The outstanding shares
of our common stock are, and the shares offered by us in this offering
will be, when issued and paid for, validly issued, duly authorized,
fully paid and nonassessable.
Preferred Stock
On December 4, 2002, we filed a "blank check" amendment to our
certificate of incorporation creating 10,000,000 shares of preferred
stock. The preferred stock may be issued in one or more series, the
terms of which may be determined at the time of issuance by the Board of
Directors, without further action by stockholders, and may include the
designations, rights and preferences including preferences as to
dividends and liquidation, conversion rights, redemption rights and
sinking fund provisions. The issuance of any such preferred stock could
adversely affect the rights of the holders of common stock and,
therefore, reduce the value of the common stock. The ability of the
Board of Directors to issue preferred stock could discourage, delay or
prevent a takeover of us. We do not have any current plans to issue any
preferred stock.
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Recent Financing
On May 22, 2001, we issued $1,200,000 principal amount of 8%
convertible debentures, due May 22, 2003, to three investors pursuant to
a Subscription Agreement dated May 22, 2001. Interest only payments are
due quarterly commencing September 30, 2001, and the principal is due in
one lump sum on May 22, 2003, or upon certain events of default. The
conversion price for the convertible debentures is the lesser of 85% of
the average of the three lowest closing prices for the common stock for
the 30 trading days prior to but not including May 22, 2001, or 85%
percent of the average of the three lowest closing prices for the common
stock for the 30 trading days prior to but not including the conversion
date. This embedded conversion feature was valued at $212,523 and was
recorded in the second quarter of 2001 as interest expense per EITF 98-
5. This was calculated by taking 85% of the average of the three lowest
closing prices in the thirty days preceding the signing of the agreement
and assumed that the entire $1,200,000 was converted. The agreement
does not have a waiting period for conversion, so the entire amount was
expensed in the period the Agreement was signed. The maximum number of
shares of common stock that any subscriber or group of affiliated
subscribers may own after conversion at any given time is 4.99%. On
January 10, 2002, we filed a Form SB-2 Registration Statement
registering 20,000,000 shares of common stock issuable upon conversion
of the Notes. The actual conversion price will depend on the market
price of our common stock prior to the conversion.
In addition to the convertible debentures, we also issued warrants
to purchase 872,727 shares of common stock. These warrants, which
expire May 22, 2006, have an exercise price of $1.4339 per share.
From August 2001 until October 2002, we issued $1,471,650
principal amount of 8% convertible debentures, due August 2003 through
October 2004, pursuant to various Subscription Agreements dated August
2001 through October 2002. Interest only payments are due quarterly,
and the principal on each note is due in one lump sum on dates from
August 2003 through October 2004, or upon certain events of default.
The conversion price for the convertible debentures is the lesser of 85%
of the average of the three lowest closing prices for the common stock
for the 30 trading days prior to but not including the closing date, or
85% percent of the average of the three lowest closing prices for the
common stock for the 30 trading days prior to but not including the
conversion date. The maximum number of shares of common stock that any
subscriber or group of affiliated subscribers may own after conversion
at any given time is 4.99%. The actual conversion price will depend
on the market price of our common stock prior to the conversion.
In addition to the convertible debentures, we also issued warrants
to purchase 1,130,909 shares of common stock. These warrants, which
expire five year after the date of issuance, have exercise prices
ranging from $.0636 to $.1008 per share.
In December 2002, we issued $9,000 principal amount of 8%
convertible debentures, due December 2004, pursuant to a Subscription
Agreement dated December 2002. Interest only payments is due quarterly,
and the principal on the note is due in one lump sum on December 2004,
or upon certain events of default. The conversion price for the
convertible debentures is the lesser of $.03 or 85% percent of the
average of the three lowest closing prices for the common stock for the
30 trading days prior to but not including the conversion date. The
maximum number of shares of common stock that any subscriber or group of
affiliated subscribers may own after conversion at any given time is
4.99%. The actual conversion price will depend on the market price of
our common stock prior to the conversion.
Transfer Agent
The Transfer Agent and Registrar for the common stock and the
warrants described above is Continental Stock Transfer & Trust Company.
-43-
SELLING SHAREHOLDERS
The table below sets forth information concerning the resale of the
shares of common stock by the selling stockholder. We will not receive
any proceeds from the resale of the common stock by the selling
stockholder. We will receive proceeds from the exercise of the warrants.
Assuming all the shares registered below are sold by the selling
stockholder, none of the selling stockholders will continue to own any
shares of our common stock.
The following table also sets forth the name of each person who is
offering the resale of shares of common stock by this prospectus, the
number of shares of common stock beneficially owned by each person, the
number of shares of common stock that may be sold in this offering and
the number of shares of common stock each person will own after the
offering, assuming they sell all of the shares offered.
Name Total Shares of Total Shares of Beneficial Percentage of Amount of
Common Stock Percentage of Common Stock Ownership Common Stock Common Stock
Issuable Upon Common Stock, Included in Before Owned Before Owned After
Conversion of Assuming Full Prospectus(2) the Offering(1) Offering Offering (3)
Notes and/or Conversion(1)
Warrants(1)
----------------------------------------------------------------------------------------------------------------
Laurus
Master
Fund, Ltd.
57,508,933 58.57% Up to 2,136,183 4.99% 0
116,148,774
shares of
common
stock
The number and percentage of shares beneficially owned is
determined in accordance with Rule 13d-3 of the Securities Exchange Act
of 1934, and the information is not necessarily indicative of beneficial
ownership for any other purpose. Under such rule, beneficial ownership
includes any shares as to which the selling stockholder has sole or
shared voting power or investment power and also any shares which the
selling stockholder has the right to acquire within 60 days. The actual
number of shares of common stock issuable upon the conversion of the
debentures and exercise of the debenture warrants is subject to
adjustment depending on, among other factors, the future market price of
the common stock, and could be materially less or more than the number
estimated in the table.
(1) The number of shares of common stock issuable upon conversion
of the debentures is dependent in part upon the market price of the
common stock prior to a conversion, the actual number of shares of
common stock that will be issued in respect of such conversions and,
consequently, offered for sale under this registration statement, cannot
be determined at this time. As a result of the contractual agreement
not to exceed 4.99% beneficial ownership, the selling shareholder does
not believe it is a control person as defined in the Securities Exchange
Act of 1934 or is required to file a Schedule 13D.
-44-
(2) Represents shares of common stock issuable upon conversion of
debentures of the selling shareholder at an assumed conversion price of
$0.027 per share. However, the selling shareholder has contractually
agreed to restrict its ability to convert its debentures or exercise its
warrants and receive shares of our common stock such that the number of
shares of common stock held by it and its affiliates after such
conversion or exercise exceed 4.99% of the then issued and outstanding
shares of common stock following such conversion or exercise. This
restriction may not be waived.
(3) Assumes that all securities registered will be sold.
(4) The following chart discloses the principal(s) of each
selling securityholder and the person(s) with investment and dispositive
power:
Investment/dispositive
Security holder Principal authority
-------------------------------------------------------------------
Laurus Master Fund, Ltd. Eugene Grin Eugene Grin
& David Grin & David Grin
-45-
Plan of Distribution
The selling stockholder may, from time to time, sell any or all of
their shares of common stock on any stock exchange, market, or trading
facility on which the shares are traded or in private transactions.
These sales may be at fixed or negotiated prices. There is no assurance
that the selling stockholders will sell any or all of the common stock
in this offering. The selling stockholder may use any one or more of the
following methods when selling shares:
- Ordinary brokerage transactions and transactions in which the broker-
dealer solicits purchasers.
- Block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction.
- An exchange distribution following the rules of the applicable
exchange
- Privately negotiated transactions
- Short sales or sales of shares not previously owned by the seller
- A combination of any such methods of sale or any other lawful method
The selling stockholder may also engage in:
- Short selling against the box, which is making a short sale when
the seller already owns the shares.
- Other transactions in our securities or in derivatives of our
securities and the subsequent sale or delivery of shares by the
stockholder.
- Pledging shares to their brokers under the margin provisions of
customer agreements. If a selling stockholder defaults on a margin
loan, the broker may, from time to time, offer to sell the pledged
shares.
Broker-dealers engaged by the selling stockholder may arrange for
other broker-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from selling stockholder in amounts to be
negotiated. If any broker-dealer acts as agent for the purchaser of
shares, the broker-dealer may receive commission from the purchaser in
amounts to be negotiated. The selling stockholder do not expect these
commissions and discounts to exceed what is customary in the types of
transactions involved.
The selling stockholder and any broker-dealers or agents that are
involved in selling the shares may be considered to be "underwriters"
within the meaning of the Securities Act for such sales. An underwriter
is a person who has purchased shares from an issuer with a view towards
distributing the shares to the public. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale
of the shares purchased by them may be considered to be underwriting
commissions or discounts under the Securities Act.
-46-
Because the selling shareholder is deemed an "underwriter" within
the meaning of Section 2(11) of the Securities Act, it will be subject
to the prospectus delivery requirements.
We are required to pay all fees and expenses incident to the
registration of the shares in this offering. However, we will not pay
any commissions or any other fees in connection with the resale of the
common stock in this offering. We have agreed to indemnify the selling
shareholders and their officers, directors, employees and agents, and
each person who controls any selling shareholder, in certain
circumstances against certain liabilities, including liabilities arising
under the Securities Act. Each selling shareholder has agreed to
indemnify us and our directors and officers in certain circumstances
against certain liabilities, including liabilities arising under the
Securities Act.
If the selling stockholder notifies us that they have a material
arrangement with a broker-dealer for the resale of the common stock,
then we would be required to amend the registration statement of which
this prospectus is a part, and file a prospectus supplement to describe
the agreements between the selling stockholder and the broker-dealer.
LEGAL MATTERS
Sichenzia Ross Friedman Ference LLP, New York, New York, will pass
upon certain legal matters with respect to the shares of the common
stock offered hereby.
EXPERTS
Peter C. Cosmas, CPA's, independent auditors, have audited, as set
forth in their report thereon appearing elsewhere herein, our financial
statements as of December 31, 2001 and 2000, and for the years then
ended, that appear in this prospectus. The financial statements referred
to above are included in reliance upon the report by the auditors given
upon their authority as experts in accounting and auditing.
HOW TO GET MORE INFORMATION
We have filed with the SEC a registration statement on Form SB-2
under the Securities Act with respect to the shares to be sold in this
offering. This prospectus does not contain all the information contained
in the registration statement. For further information with respect to
our company and the shares to be sold in this offering, reference is
made to the registration statement and the exhibits and schedules filed
with the registration statement. We have described all material
information for each contract, agreement or other document filed with
the registration statement in this prospectus. However, statements
contained in this prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete. As
a result, you should refer to the copy of the contract, agreement or
other document filed as an exhibit to the registration statement for a
complete description of the matter involved.
-47-
You may read and copy all or any portion of the registration
statement or any reports, statements or other information that we file
at the SEC's public reference room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You can request copies of these documents, upon
payment of a duplicating fee, by writing to the SEC. Please call the SEC
at 1-800-SEC-0330 for further information on the operation of the public
reference rooms. Our SEC filings, including this registration statement,
are also available to you without charge from the SEC Web site, which is
located at http://www.sec.gov.
-48-
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
2002 2001
Unaudited Audited
--------- -------
Current assets:
Cash and cash equivalents $ 12,457 $ 17,075
Accounts receivable - trade 66,903 13,234
Accounts receivable - other - 60,721
Inventories 225,158 310,857
Other current assets 34,562 125,446
---------- ---------
Total current assets 339,080 527,333
---------- ---------
Property and equipment, net 714,067 805,727
Deferred Financing costs 159,268 154,268
Other assets 25,363 25,363
---------- ---------
Total assets $1,237,778 $1,512,691
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligation $ 128,413 $ 69,615
Bank Note 58,323 99,535
Customer Deposits 140,596 289,368
Short term loan payable 158,000 195,000
Accounts payable 1,098,140 800,460
Accrued expenses 339,340 152,151
---------- ---------
Total current liabilities 1,922,812 1,606,129
Long Term liabilities:
Non current portion of bank note 33,327 -
Non current portion of capital lease obligation - 58,798
Convertible Debenture 1,776,982 1,431,949
---------- ---------
Total liabilities $3,733,121 $3,096,876
---------- ---------
Commitments
Shareholders' equity (deficit)
Common stock - .01 par value,
45,000,000 shares authorized,
40,783,590 and 20,879,501 issued
40,657,790 and 20,753,701 outstanding
in 2002 and 2001 respectively. 407,836 208,795
Additional paid-in capital 15,536,398 14,681,858
(Deficit) (18,041,744) (16,077,005)
---------- ---------
(2,097,510) (1,186,352)
Common stock held in treasury,
at cost (397,833) (397,833)
---------- ---------
Total shareholders' equity (deficit) (2,495,343) (1,584,185)
---------- ---------
Total liabilities and shareholders'
Equity $1,237,778 $1,512,691
========== =========
The accompanying notes are an integral part of these consolidated financial statements.
-F1-
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended Three Months Ended
September 30 September 30,
2002 2001 2002 2001
---- ---- ---- ----
NET SALES $ 812,143 $ 506,134 $ 156,266 $ 133,521
---------- ---------- ---------- ----------
Operating costs and expenses:
Cost of sales 357,611 381,509 80,969 92,983
Research and development 593,707 1,107,916 170,636 353,126
Selling, general
and administrative 1,483,794 2,560,369 394,649 719,229
---------- ---------- ---------- ----------
2,435,112 4,049,794 646,254 1,165,338
---------- ---------- ---------- ----------
Operating (loss) (1,622,969) (3,543,660) (489,988) (1,031,817)
Other income (expenses):
Sale of NJ NOL 90,000 90,000
Interest Expense (120,577) (253,986) (50,250) (28,100)
Finance Expense (311,193) - (119,989) -
---------- ---------- ---------- ----------
Net (loss) $(1,964,739) $(3,797,646) $(570,227) $(1,059,917)
========== ========== ======== ==========
Net(loss)per common share
basic and diluted $ (0.06) $ (0.21) $ (0.02) $ (0.06)
========== ========== ======== ==========
The accompanying notes are an integral part of these consolidated financial statements.
-F2-
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30
2002 2001
---- ----
Cash flows from operating activities:
Net (loss) $(1,964,739) $(3,797,646)
----------- -----------
Adjustments to reconcile net (loss) to
net cash used for
operating activities:
Depreciation 225,115 189,453
Financing expense non cash 311,193 212,524
Amortization of intangible assets - 225,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (53,669) 38,566
Other receivable 60,721 1,401
Inventories 85,699 (157,573)
Other current assets 90,884 (2,214)
Increase (Decrease) in:
Accounts Payable and
accrued expenses 484,869 383,437
customer deposits (148,772) 420,200
----------- -----------
Total adjustments 1,056,040 1,310,794
----------- -----------
Net cash used for
operating activities (908,699) (2,486,852)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment - net (133,455) (120,062)
----------- -----------
Net cash used in investing activities (133,455) (120,062)
----------- -----------
Cash flows from financing activities:
Increase (decrease)in
Line of Credit (7,885) 97,741
Issuance of Convertible Debt 1,082,421 1,362,710
Short term loan Payable (37,000) -
Payment on capitalized lease - (47,225)
----------- -----------
Net cash provided
by financing activities 1,037,536 1,413,226
----------- -----------
Net increase (decrease) in
cash and cash equivalents (4,618) (1,193,688)
Cash and cash equivalents -
beginning of period 17,075 1,351,641
----------- -----------
Cash and cash equivalents -
end of period $ 12,457 $ 157,953
The accompanying notes are an integral part of these consolidated financial statements.
-F3-
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Item 1.
Basis of Presentation
---------------------
The unaudited financial statements included in the Form 10-QSB have
been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-QSB and Item 310(b) of Regulation SB. The
financial information furnished herein reflects all adjustments,
which in the opinion of management are necessary for a fair
presentation of the Company's financial position, the results of
operations and the cash flows for the periods presented.
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.
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, 2001. The Company presumes that users of the interim
financial information herein have read or have access to the audited
financial statements for the preceding fiscal year and that the
adequacy of additional disclosure needed for a fair presentation may
be determined in that context. The results of operations for any
interim period are not necessarily indicative of the results for the
full year.
Income per share
----------------
Per-share data has been computed on the basis of the weighted
average number of shares of common stock outstanding during the
periods.
-F4-
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2001 AND 2000
ASSETS
December 31,
2001 2000
---- ----
Current assets:
Cash and cash equivalents $ 17,075 $1,351,641
Accounts receivable - trade 13,234 102,194
Accounts receivable - other 60,721 51,401
Inventories 310,857 87,623
Other current assets 125,446 84,566
---------- ---------
Total current assets 527,333 1,677,425
---------- ---------
Property and equipment, net 805,727 1,005,364
Deferred Financing costs 154,268 -
Intangible Assets, net of accumulated
amortization of $1,500,000 in 2001 and
$1,200,000 in 2000. - 300,000
Other assets 25,363 25,363
---------- ---------
Total assets $1,512,691 $3,008,152
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligation $ 69,615 $ 57,598
Line of Credit 99,535 -
Customer Deposits 289,368 -
Short term loan payable 195,000 -
Accounts payable 800,460 358,820
Accrued expenses 152,151 118,059
---------- ---------
Total current liabilities 1,606,129 534,477
Long Term liabilities:
Non current portion of capital lease obligation 58,798 128,413
Convertible Debenture 1,431,949 -
---------- ---------
Total liabilities $3,096,876 $ 662,890
---------- ---------
Commitments
Shareholders' equity (deficit)
Common stock - .01 par value,
45,000,000 shares authorized,
20,879,500 and 17,783,700 issued
20,753,370 and 17,444,151 outstanding
in 2001 and 2000 respectively. 208,795 177,837
Additional paid-in capital 14,681,858 14,266,787
(Deficit) (16,077,005) (11,701,529)
---------- ---------
(1,186,352) 2,743,095
Common stock held in treasury,
at cost (397,833) (397,833)
---------- ---------
Total shareholders' equity (deficit) (1,584,185) 2,345,262
---------- ---------
Total liabilities and shareholders'
Equity $1,512,691 $3,008,152
========== =========
The accompanying notes are an integral part of these consolidated financial statements.
-F1-
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
---- ----
NET SALES $ 891,149 $5,269,377
---------- ----------
Operating costs and expenses:
Cost of sales 555,064 1,891,484
Research and development 1,533,890 1,141,656
Selling, general
and administrative 2,966,347 3,605,768
---------- ----------
5,055,301 6,638,908
---------- ----------
Operating (Loss) (4,164,152) (1,369,531)
Other income (expenses):
Interest income 9,589 40,647
Sales of New Jersey Net
Operating Loss 218,135 -0-
Interest expense (439,046) (10,378)
---------- ----------
Net (Loss) $(4,375,476) $(1,339,262)
========== ==========
Net Loss per common share
basic and diluted $ (0.24) $ (0.08)
========== ==========
Weighted average shares
outstanding basic and diluted 18,019,738 17,549,993
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
-F2-
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,2001 AND 2000
2001 2000
---- ----
Cash flows from operating activities:
Net (Loss) $(4,375,476) $(1,339,262)
----------- -----------
Adjustments to reconcile net (loss) to
net cash used for
operating activities:
Depreciation 222,241 159,859
Interest expense non cash 295,569 -
Amortization of capitalized software - -
Amortization of Intangible assets 300,000 300,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 88,960 54,846
Other receivable (9,320) 12,276
Inventories (223,234) 273,416
Other current assets (40,880) (34,381)
Other assets (154,267) 416,413
Decrease in:
Accounts Payable and
accrued expenses 475,732 (163,207)
customer deposits 289,368 -
----------- -----------
Total adjustments 1,244,169 1,019,222
----------- -----------
Net cash used for
operating activities (3,131,307) (320,040)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment - net (22,605) (704,246)
----------- -----------
Net cash used in investing activities (22,605) (704,246)
----------- -----------
Cash flows from financing activities:
Increase (decrease)in
Line of credit 99,535 -
Issuance of Convertible Debt 1,431,949 -
Short term loan payable 195,000 -
Payment on capitalized lease (57,598) (14,423)
Issuance of common stock and warrants 150,460 1,715,557
----------- -----------
Net cash provided
by financing activities 1,819,346 1,701,134
----------- -----------
Net increase (decrease) in
cash and cash equivalents (1,334,566) 676,848
Cash and cash equivalents -
beginning of period 1,351,641 674,793
----------- -----------
Cash and cash equivalents -
end of period 17,075 1,351,641
=========== ===========
Noncash transactions:
Increase in Capital Lease Obligations $ - $ 200,434
The accompanying notes are an integral part of these consolidated financial statements.
-F2-
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE TWO YEARS ENDED DECEMBER 31, 2001 AND 2000
Common Stock Additional Treasury
------------ Paid-In --------
Shares Amount Capital (Deficit) Shares Amount
------ ------ ------- --------- ------ ------
Balance
December 31, 1999 17,286,278 $172,862 $ 12,556,205 $(10,362,267) 125,800 $397,833
---------- -------- ------------ ------------- ------- -------
Exercise of Stock Options 283,673 2,838 151,069 - - -
Issuance of common stock
net of related expenses 213,749 2,137 1,559,513 - - -
Net loss - - - (1,339,262) - -
---------- -------- ------------ ------------- ------- -------
Balance
December 31, 2000 17,783,700 177,837 14,266,787 (11,701,529) 125,800 397,833
---------- -------- ------------ ------------- ------- -------
Issuance of common stock
net of related expenses 3,095,800 30,958 415,071 (4,375,476) - -
Balance
December 31, 2001 20,879,500 $208,795 $14,681,858 $(16,077,005) 125,800 $397,833
========== ======== ============ ============= ======= =======
The accompanying notes are an integral part of these consolidated financial statements.
-F3-
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 July 1977, is engaged in the design, development,
integration and marketing of advanced telecommunications products
and applications. 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 affect 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 expenses 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.
-F4-
g) Income Taxes:
The Company elected to adopt the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109 "Accounting for Income
Taxes", (SFAS No. 109) in 1992. Under SFAS No. 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 expenses
(credit) is the tax payable (receivable) for the period and the
change during the period in deferred tax assets and liabilities.
h) Revenue Recognition:
Revenue is generally recognized when all significant contractual
obligations have been satisfied and collection of the resulting
receivable is reasonably assured. Revenue from product sales is
recognized at time of delivery and acceptance and after
consideration of all the terms and conditions of the customers
contract. Sales of services are recognized at time of performance.
i) Impairment of Long-Lived Assets:
Effective January 1, 1996, the Company adopted SFAS No. 121,
"Accounting for the Impairment of long-lived Assets and for long-
lived Assets to be Disposed of." SFAS No. 121 requires the Company
to review the recoverability of the carrying amounts of its long-
lived assets whenever events or changes in circumstances indicate
that the carrying amount of the asset might not be recoverable.
In the event that facts and circumstances indicate that the
carrying amount of long-lived assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation
is required, the estimated future undiscounted cash flows
associated with the asset would be compared to the assets'
carrying amount to determine if a write-down to fair value is
required. Fair value may be determined by reference to discounted
future cash flows over the remaining useful life of the related
asset. In 2000, the Company wrote off the carrying value of one
of its patents in the amount of $89,706.
j) Fair Value Disclosures:
The carrying amounts reported in the Consolidated Balance Sheets for
cash and cash equivalents, accounts receivable, accounts payable and
accrued expenses, approximate fair value because of the immediate or
short-term maturity of these financial instruments.
k) Stock Options:
The Company accounts for its stock options in accordance with the
provisions of Accounting principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on
the date of grant only if the current market price of the underlying
stock exceeded the exercise price. On January 1, 1996, the Company
adopted the disclosure requirements of SFAS No. 123, Accounting for
Stock Based Compensation. Had the company determined compensation
cost based on fair value at the grant date for stock options under
SFAS No. 123 the effect would have been immaterial.
l) New Accounting Pronouncements:
The financial Accounting Standards Board (FASB) recently issued SFAS 141,
"Business Combinations," SFAS 142, "Goodwill and Intangible Assets,"
SFAS143, "Accounting for Asset Retirement obligations" and SFAS 144,
"Accounting for the impairment or Disposal of Long -Lived Assets."
SFAS 141 requires companies to account for acquisitions entered into after
June 30,2001 using the purchase method and establishes criteria to be used
in determining whether acquired intangible assets are to be recorded
separately from goodwill. Statement 142 sets forth the accounting for
goodwill and intangible assets after the completion of a business
acquisition and for goodwill and intangible assets already recorded.
Goodwill will no longer be amortized beginning January 1, 2002. Rather,
goodwill will be tested for impairment by comparing the asset's fair value
to its carrying value. The Company will adopt Statement 142 on
January 1, 2002.
-F5-
SFAS 143 requires the fair value of a liability for asset retirement
obligations to be recorded in the period in which it is incurred. The
statement applies to a company's legal or contractual obligation
associated with the retirement of a tangible long-lived asset that
resulted from the acquisiton, construction or development through the
normal operation of a long-lived asset. The statement is effective for
the Company beginning January 1, 2003.
SFAS 144 addresses the accounting and reporting for the impairment or
disposal of long-lived assets. The statement provides a consistent
method to value long-lived assets to be disposed of. New criteria must
be met to classify the asset as a asset held-for-sale. This statement
also changes the rules for reporting the effects of a disposal of a
segment of a business. This statement will be adopted January 1, 2002.
m) Basis of Financial Statement Presentation
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The
Company has generated significant losses and is unable to predict
profitability for the future. These factors indicate that the Company's
continuation, as a going concern is dependent upon its ability to obtain
adequate financing.
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, 2001 and 2000.
3) Property and Equipment:
A summary of the major components of property and equipment is as
follows:
2001 2000
---- ----
Computers, fixtures
And equipment $1,557,163 $1,452,454
Less accumulated Depreciation (751,436) (447,090)
---------- ----------
Totals $ 805,727 $1,005,364
========== ==========
4 ) Income Taxes:
In 1992, the Company adopted SFAS 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 was recovered through the sale of New Jersey State
net-operating loss carryovers as permitted by the State in the amount
of $308,000. In 2001 the Company recovered $218,135 through the sale
of New Jersey State net-operating loss carryovers as permitted by the
State. This recovery was recognized as other income in the year ended
2001 Statement of Operations.
At this time, the Company does not believe it can reliably predict
profitability for the long-term. Accordingly, the deferred tax asset
applicable to 2001 and 2000 operations has been reduced in its
entirety by the valuation allowance.
-F6-
As a result of the operating losses for the years ended December 31,
1990 and 1992-2001 the Company has available to offset future taxable
income a net operating loss of $17,097,839 expiring 2005-2021. In
addition, research credits expiring 2005-2015 are available to offset
future taxes.
The components of the provision (credit) for income taxes from
continuing operations is as follows:
2001 2000
---- ----
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 is as follows:
2001 2000
---- ----
Federal
Statutory rate $(1,487,662) $(455,349)
Research tax
Credits - -
Tax benefit not
Provided due
To valuation
Allowance 1,487,662 455,349
--------- ---------
- -
========= =========
Components of the Company's deferred tax assets and liabilities are as
follows:
December 31,
2001 2000
---- ----
Deferred tax assets:
Tax benefits related
To net operating
Loss carry forwards
And research tax
Credits $5,786,297 $4,298,635
---------- ----------
Total deferred tax
Asset 5,786,297 4,298,635
Valuation
Allowance for
Deferred tax
Assets 5,786,297 4,298,635
---------- ----------
Net deferred tax
Assets $ -0- $ -0-
---------- ----------
-F7-
5) 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, 2001 are as follows:
2002 $300,973
2003 276,118
2004 212,717
2005 79,570
2006 3,445
After 2006 -0-
--------
Total minimum lease payments $872,823
========
6) Intangible Assets:
On November 7, 1996, the Company acquired "Intellectual Property",
issuing 1,500,000 shares of its common stock. Based on technical
reviews of the property and the business potential of the technology,
the Company valued the "Intellectual Property" at $1,500,000. The
Company began amortizing the property on January 1, 1997 over a period
of five years. The amortization for 2001 and 2000 was $300,000 for
each year.
7) Notes payable
a) Line of Credit
The Company secured a line of credit that renews in June 2002 at a
rate of 1.5% above the prime rate. The balance at December 31, 2001
was $99,535.
b) Short Term Loans Payable
The short-term loan payable consists of loans from two stockholders.
The interest rate to the two stockholders is 10% and 7% respectively.
-F8-
c) Convertible Notes Payable
In May 2001, we entered into a securities purchase agreement with
three accredited investors for the issuance of 8% convertible
debentures in the aggregate amount of $1,200,000 and 872,727 common
stock purchase warrants. The maturity date of this debenture is
May 2003. The debentures were convertible into common stock at a
conversion price of the lower of 85% of the average of the three
lowest closing bid prices for the common stock thirty days prior to
the closing date or 85% of the average of the three lowest closing
bid prices for the common stock thirty days prior to conversion. Each
warrant entitles the holder to purchase one share of common stock at an
exercise price of $1.4339. The commission for the transaction was 8%
($96,000). The offering of convertible debentures and warrants was
exempt from registration under Rule 506 of Regulation D and under
Section 4(2) of the Securities Act. No advertising or general
solicitation was employed in offering the securities. All persons were
accredited investors, representing that they were capable of analyzing
the merits and risks of their investment. In 2001 $168,060 plus
interest of $1,909 was converted into 3,095,800 shares of the Company's
common stock.
In August 2001, we entered into a securities purchase agreement with
two accredited investors, for the issuance of 8% convertible debentures
in the aggregate amount of $400,000 and 290,909 common stock purchase
warrants. The maturity date of this debenture is August 2003. The
debentures were convertible into common stock at a conversion price of
the lower of 85% of the average of the three lowest closing bid prices
for the common stock thirty days prior to the closing date or 85% of
the average of the three lowest closing bid prices for the common stock
thirty days prior to conversion. Each warrant entitles the holder to
purchase one share of common stock at an exercise price of $.355. The
commission for the transaction was 8% ($32,000). The offering of
convertible debentures and warrants was exempt from registration under
Rule 506 of Regulation D and under Section 4(2) of the Securities Act.
No advertising or general solicitation was employed in offering the
securities. All persons were accredited investors, representing that
they were capable of analyzing the merits and risks of their investment.
8) Stock Options and Warrants:
a) Stock options
On November 17, 1999 the Company amended the Incentive Stock Option
Plan, authorizing an additional share increase of 1,088,000 shares.
335,013 shares were exercised in 2001 and 283,673 shares were
exercised in 2000. The total amount of shares granted and not
exercised at December 31, 2001 amount to 683,2000 at exercise prices
ranging from 0.26 to 7.625 per share.
As allowed by FASB No. 123, The Company has elected to continue to
follow Accounting Principles Board (APB) Opinion No. 23, " Accounting
for Stock Issued to Employees" (APB No. 25) in accounting for its
stock option plans. Under APB No. 25, the Company does not recognize
compensation expense on the issuance of its stock options because the
options terms are fixed and the exercise price equals the market price
of the underlying stock on the grant date.
As required by FASB No. 123, the Company has determined the pro-forma
information as if the Company had accounted for stock options granted
since January 1, 1996, under the fair value method of FASB No. 123. An
option pricing model similar to the Black-Sholes was used with the
following weighted average assumptions used for grants in the year
2001 and 2000, respectively: expected volatility of 80 percent; risk
free interest rate of 7% and 6% respectively and expected lives of 5
years. The pro-forma effect of these options on net earnings was not
material. These pro-forma calculations only include the effect of
2000 and 2001 grants. As such, the impacts are not necessarily
indicative of the effects on reported net income of future years.
b) Warrants
The Company issued 1,163,636 warrants to purchase the Company's common
stock at prices ranging from $1.4339 to $0.355 per share in connection
with the issuance of two convertible notes.
-F9-
9) Major Customers:
During 2001 two customers each accounted for 37% of total sales. During
2000 two customers accounted for 83% and 15% of total sales.
10) Earnings (Loss) Per Share:
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128. "Earnings Per Share" applicable for financial statements
issued for periods ending after December 15, 1997. As required the
Company adopted SFAS No. 128 for the year ended December 31, 1997 and
restated all prior period earnings per share figures. The Company has
presented basic earnings per share. Basic earnings per share excludes
potential dilution and is calculated by dividing income available to
common stockholders by the weighted average number of outstanding
common shares. Diluted earnings per share incorporates the potential
dilutions from all potentially dilutive securities that would have
reduced earnings per share. Since the potential issuance of
additional shares would reduce loss per share they are considered
anti-dilutive and are excluded from the calculation.
The weighted average number of shares used to compute basic loss per
share was 18,019,738 in 2001 and 17,549,993 in 2000.
11) Related Party Transactions
During 2000, Scidyn began the deployment of the Cascadent Supply
Agreement, this Agreement provided $4,370,520 in revenue for the
year. The Agreement was terminated on January 4, 2001, upon
receiving official word that Cascadent was placed into receivership.
Alan Bashforth, one of Cascadent's principals, is Chairman of the
Company's Board of Directors, CEO/President and Secretary.
12) Subsequent Events
During the period ending March 31, 2002, we entered into securities
purchase agreements with one accredited investor, for the issuance
of 8% convertible debentures in the aggregate amount of $672,930.
The debentures were convertible into common stock at a conversion
price of the lower of 85% of the average of the three lowest closing
bid prices for the common stock thirty days prior to the closing date
or 85% of the average of the three lowest closing bid prices for the
common stock thirty days prior to conversion. The commission for the
transactions was 8%. The offering of convertible debentures was exempt
from registration under Rule 506 of Regulation D and under Section 4(2)
of the Securities Act. No advertising or general solicitation was
employed in offering the securities. All persons were accredited
investors, representing that they were capable of analyzing the
merits and risks of their investment.
Subsequent to year end the following directors resigned due to personal
reasons: John Innes, Joy C. Hartman, Sheldon Hofferman, Louis Padulo,
Kenneth Ray, and Michael Hone. We will be announcing the appointment of
the new directors within the next few weeks. In addition, we accepted
the resignation of Joy C. Hartman as CEO and President and the appointment
of Alan C. Bashforth as CEO, President, Chairman and Secretary on
April 4, 2002.
-F10-
We have not authorized any dealer, salesperson or other person to
give any information or represent anything not contained in this
prospectus. You must not rely on any unauthorized information or
representations. This prospectus is an offer to sell only the shares
offered hereby, but only under circumstances and in jurisdictions where
it is lawful to do so. The information contained in this prospectus is
current only as of its date.
------------------
TABLE OF CONTENTS
Page
Prospectus Summary 4
Risk Factors 7
Use of Proceeds 12
Dividend Policy 13
Capitalization 14
Dilution 15
Management's Discussion
and Analysis of Financial
Condition and Results of
Operations 17
Business 21
Management 29
Certain Transactions 36
Principal Security
Holders 37
Description of
Securities 39
Selling Shareholder 40
Plan of Distribution 41
Legal Matters 42
Experts 42
How to Get More
Information 42
Financial Statements 43
------------------
Until , 2003, 25 days after the date of this prospectus, all
dealers that buy, sell or trade these securities, whether or not
participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus
when acting as underwriters and with respect to their unsold allotments
or subscriptions.
-50-
______________
116,148,774 Shares
Common Stock
______________
______________
Prospectus
______________
Science Dynamics Corporation
, 2002
-51-
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION AND LIMITATION OF LIABILITY OF MANAGEMENT
As permitted by the Delaware General Corporation Law, we
have included in our Certificate of Incorporation a provision to
eliminate the personal liability of it's directors for monetary
damages for breach or alleged breach of their fiduciary duties as
directors, subject to certain exceptions. In addition, our Bylaws
require us to (i) indemnify the officers and directors under
certain circumstances, including those circumstances in which
indemnification would otherwise be discretionary, and (ii) advance
expenses to the officers and directors as incurred in connection with
proceedings against them for which they may be indemnified.
We have entered into indemnification agreements with the officers
and directors containing provisions that are in some respects
broader than the specific indemnification provisions contained in
the Delaware General Corporation Law. The indemnification agreements
may require the companies, among other things, to indemnify such
officers and directors against certain
liabilities that may arise by reason of their status or service as
directors or officers (other than liabilities arising from willful
misconduct of a culpable nature), to advance expenses incurred as a
result of any proceeding against them as to which they may be
indemnified, and to obtain directors' and officers' insurance if
available on reasonable terms. We believe that these charter provisions
and indemnification agreements are necessary to attract and retain
qualified persons as directors and officers.
We understand that the staff of the Securities and Exchange
Commission is of the opinion that statutory, charter and contractual
provisions as are described above have no effect on claims arising
under the federal securities laws.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection
with the sale and distribution of the securities being registered. All
of the amounts shown are estimates except the Securities and Exchange
Commission registration fee.
SEC Registration Fee $427.43
Legal Fees and Expenses 10,000.00
Accounting Fees and Expenses $2,000.00
Printing Expenses $2,000.00
TOTAL(1) $14,427.43
(1) Except for the SEC registration fee, all fees and expenses are
estimates.
-52-
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following information sets forth certain information
for all securities of the Science Dynamics Corporation, sold during the
past three years without registration under the Securities Act of 1933
(the "Securities Act"). The following pertains to each of the
transactions:
- There were no underwriters involved in any of the transactions.
- All of the securities issued were restricted common stock, and
each of the certificates issued was stamped with the following
restrictive legend:
"The shares represented by this certificate have
not been registered under the Securities Act of
1933. The shares have been acquired for
investment and may not be sold, transferred or
assigned in the absence of an effective
registration statement for these shares under the
Securities Act of 1933 or an opinion of the
Company's counsel that registration is not
required under such
Act."
- No form of advertising or general solicitation was utilized in
connection with any of the offers or sales of such securities.
- Redistribution of the common stock was subject to the
provisions of Rule 144 of the Securities Act.
- Each of the offerees either had access to the information or
were furnished with the Registrant's latest Form 10-KSB, Form 10-QSB's
for the fiscal periods subsequent to the end of the fiscal period, and
all forms 8-K filed by the Registrant since the end of the fiscal
period.
- Each of the purchasers represented that the purchaser was
acquiring the securities for the purchaser's own account, for investment
only, and not with a view toward the resale, fractionalization, division
or distribution thereof, and further, the investors each represented
that they had no present plans to enter into any contract, undertaking,
agreement, or arrangement for
any such resale, distribution, division or fractionalization thereof.
In March 1999, we acquired a patent for the "Error Detection and
Correction System for Use with Address Translation Memory Controller" in
exchange for an aggregate of 172,029 shares of common stock valued at
$100,000 issued to three shareholders of Gorca Memory Systems, Inc. Such
shares were issued in reliance upon Section 4(2) of the Securities Act.
-53-
During the period from May 20, 1999 through Dec. 21st 1999 we sold
1,178,000 shares of our common stock for an aggregate consideration of
$1,843,000 to six accredited investors pursuant to an offering in
reliance upon the exemption provided by Rule 506 of Regulation D of the
Securities Act.
During the period from May 12, 2000 through July 17, 2000, we sold
200,650 shares of our common stock for an aggregate consideration of
$1,705,525 to eight accredited investors pursuant to an offering in
reliance upon the exemption provided by Rule 506 of Regulation D of the
Securities Act.
On May 22, 2001, we issued an aggregate of $1,200,000 of
convertible notes and warrants to purchase 872,727 shares of common
stock to three investors. The offering of such securities was made to
accredited investors in reliance upon the exemption provided by Rule 506
of Regulation D of the Securities Act of 1933.
From August 2001 through October 2002, we issued an aggregate of
$1,471,650 of convertible note and warrants to purchase 1,130,909 shares
of common stock. The offering of such securities was made to accredited
investors in reliance upon the exemption provided by Rule 506 of
Regulation D of the Securities Act of 1933.
In December 2002, we issued an aggregate of $9,000 of convertible
notes to one investor. The offering of such securities was made to
accredited investors in reliance upon the exemption provided by Rule 506
of Regulation D of the Securities Act of 1933.
ITEM 27. EXHIBITS
3.1(1) The Articles of Incorporation dated 5/23/73, and
amendments dated 10/31/80 and 11/25/80
3.1.1(5) Amendment to Articles of Incorporation dated 5/23/84
3.1.2(5) Amendment to Articles of Incorporation dated 7/13/87
3.1.3(5) Amendment to Articles of Incorporation dated 11/8/96
3.1.4(5) Amendment to Articles of Incorporation dated 12/15/98
3.1.5(6) Amendment to Articles of Incorporation dated 12/04/02
3.2(1) By-Laws
5.1(2) Opinion of Sichenzia Ross Friedman Ference LLP
10.01(3) 1992 Incentive Stock Option Plan of the Registrant
10.02(4) Note - Laurus Master Fund, Ltd. (filed as exhibit 10.06
to Form 8-K)
10.03(4) Note - The Keshet Fund, L.P. (filed as exhibit 10.07 to
Form 8-K)
10.04(4) Note - Keshet L.P. (filed as exhibit 10.08 to Form 8-K)
10.05(4) Warrant - Laurus Master Fund, Ltd. (filed as exhibit
10.09 to Form 8-K)
10.06(4) Warrant - The Keshet Fund, L.P. (filed as exhibit
10.10 to Form 8-K)
-54-
10.07(4) Warrant - Keshet, L.P. (filed as exhibit 10.11 to Form
8-K)
10.08(4) Subscription Agreement re Laurus Funding (filed as
exhibit 10.12 to Form 8-K)
10.09(4) Security Agreement re Laurus Funding (Filed as exhibit
10.13 to Form 8-K)
10.10(5) Employment Agreement between Registrant and Joy C.
Hartman, President & CEO
10.11(5) Lease Agreement between Registrant and Cherry Hill
Industrial Sites, Inc. dated August 8, 1990
10.12(5) Lease Modification and Extension Agreement between
Registrant and Cherry Hill Industrial Sites, Inc.
dated March 28, 1995
10.13(5) Sublease between Registrant and Pro Circuits, Inc.
dated June 4, 1998
10.14(5) Agreement between the Registrant and @IPbell Inc, dated
February 11, 2000
10.15 (2) Subscription Agreement dated August 2001 re: Laurus Funding
10.16 (2) Note - Laurus Master Fund LP dated August 2001
10.17 (2) Note - Keshet LP dated August 2001
10.18 (2) Warrant - Laurus Master Fund, Ltd. dated August 2001
10.19 (2) Subscription Agreement dated February 2002 re: Laurus Funding
10.20 (2) Note - Laurus Master Fund LP dated February 2002
10.21 (2) Subscription Agreement dated February 2002 re: Laurus Funding
10.22 (2) Note - Laurus Master Fund LP dated February 2002
10.23 (2) Subscription Agreement dated February 2002 re: Laurus Funding
10.24 (2) Note - Laurus Master Fund LP dated February 2002
10.25 (2) Subscription Agreement dated February 2002 re: Laurus Funding
10.26 (2) Note - Laurus Master Fund LP dated February 2002
10.27 (2) Subscription Agreement dated March 2002 re: Laurus Funding
10.28 (2) Note - Laurus Master Fund LP dated March 2002
10.29 (2) Warrant - Laurus Master Fund, Ltd. dated March 2002
10.30 (2) Subscription Agreement dated March 2002 re: Laurus Funding
10.31 (2) Note - Laurus Master Fund LP dated March 2002
10.32 (2) Subscription Agreement dated March 2002 re: Laurus Funding
10.33 (2) Note - Laurus Master Fund LP dated March 2002
10.34 (2) Subscription Agreement dated April 2002 re: Laurus Funding
10.35 (2) Note - Laurus Master Fund LP dated April 2002
10.36 (2) Subscription Agreement dated June 2002 re: Laurus Funding
10.37 (2) Note - Laurus Master Fund LP dated June 2002
10.38 (2) Warrant - Laurus Master Fund, Ltd. dated June 2002
10.39 (2) Subscription Agreement dated July 2002 re: Laurus Funding
10.40 (2) Note - Laurus Master Fund LP dated July 2002
10.41 (2) Warrant - Laurus Master Fund, Ltd. dated July 2002
10.42 (2) Subscription Agreement dated July 2002 re: Laurus Funding
10.43 (2) Note - Laurus Master Fund LP dated July 2002
10.44 (2) Note - Laurus Master Fund LP dated July 2002
10.45 (2) Warrant - Laurus Master Fund, Ltd. dated July 2002
10.46 (2) Subscription Agreement dated July 2002 re: Laurus Funding
-55-
10.47 (2) Note - Laurus Master Fund LP dated July 2002
10.48 (2) Warrant - Laurus Master Fund, Ltd. dated July 2002
10.49 (2) Subscription Agreement dated August 2002 re: Laurus Funding
10.50 (2) Note - Laurus Master Fund LP dated August 2002
10.51 (2) Warrant - Laurus Master Fund, Ltd. dated August 2002
10.52 (2) Subscription Agreement dated August 2002 re: Laurus Funding
10.53 (2) Note - Laurus Master Fund LP dated August 2002
10.54 (2) Warrant - Laurus Master Fund, Ltd. dated August 2002
10.55 (2) Subscription Agreement dated October 2002 re: Laurus Funding
10.56 (2) Note - Laurus Master Fund LP dated October 2002
10.57 (2) Warrant - Laurus Master Fund, Ltd. dated October 2002
10.58 (2) Subscription Agreement dated October 2002 re: Laurus Funding
10.59 (2) Note - Laurus Master Fund LP dated October 2002
10.60 (2) Consulting Agreement entered between the Company and Calabash
Consulting Ltd.
23.1(2) Consent of Peter C. Cosmas, CPA's
23.2(2) Consent of Sichenzia Ross Friedman Ference LLP (included
in Exhibit 5.1)
24.1(2) Power of Attorney (see page II-5)
(1) Filed as like-numbered exhibits to Registration Statement, Form
S-18, File Number 33-20687, effective April 21, 1981, incorporated
by reference.
(2) Filed herewith
(3) Incorporated by reference from the Registrant's Quarterly
Report on Form 10-QSB for the three months ended March 31, 1996).
(4) Incorporated by reference from the Registrant's Form 8-K filed
May 24, 2001.
(5) Filed as like-numbered exhibits to Registration Statement, Form
SB-2, File Number 333-62226, incorporated by reference.
(6) Incorporated by reference from the Registrant's Schedule 14C
Information Statement filed November 12, 2002.
ITEM 28. UNDERTAKING
The undersigned registrant hereby undertakes to:
1. File, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement
to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
-56-
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement; and Notwithstanding the
forgoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that which
was registered) and any deviation From the low or high end of the
estimated maximum offering range may be reflected in the form of
prospects filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in the volume and price represent no more than a
20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement.
(iii) Include any additional or changed material information on
the plan of distribution.
2. For determining liability under the Securities Act, treat
each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to
be the initial bona fide offering.
3. File a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
4. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
-57-
SIGNATURES
In accordance with the requirements of the Securities Act of
1933, the registrant certifies that it has reasonable grounds to believe
that it meets all the requirements of filing on Form SB-2 and authorized
this registration statement to be signed on its behalf by the
undersigned, in the City of Cherry Hill, State of New Jersey, on
December 26, 2002.
SCIENCE DYNAMICS CORPORATION
/s/ Alan C. Bashforth
---------------------
Alan C. Bashforth
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, the undersigned hereby
constitute and appoint Alan C. Bashforth, and each of them, his true and
lawful attorney-in-fact and agent, each with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and
all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, or any related registration
statement filed pursuant to Rule 462(b) under the Securities Act of
1933, and to file the same, with exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform each and every act and thing
requisite or necessary to be done in connection therewith, as fully to
all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that each of said attorneys-in-fact and
agents, or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the
capacities and on the dates stated.
Signature Title Date
--------- ----- -----
BY: /s/ Alan C. Bashforth Chairman, CEO December 26, 2002
---------------------- and President
Alan C. Bashforth
BY: /s/ Joy C. Hartman CFO December 26,2002
----------------------
Joy C. Hartman
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