UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(AMENDMENT NO. 2)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): FEBRUARY 14, 2005
SCIENCE DYNAMICS CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 000-10690 22-2011859
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(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
7150 N. Park Drive, Suite 500
Pennsauken, NJ 08109
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(Address of principal executive offices and Zip Code)
Registrant's telephone number, including area code: (856) 910-1166
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
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act
(17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13e-4(c))
EXPLANATORY NOTE: This amended current report on Form 8-K/A is filed to include
the financial statements of Systems Management Engineering, Inc. and pro forma
financial information of Science Dynamics Corporation pursuant to Item 9.01(a)
and (b).
ITEM 1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT.
As of February 11, 2005, Science Dynamics Corporation (the "Company")
re-paid $1,322,199.01, representing all outstanding debt of the Company to
Laurus Master Fund, Ltd. ("Laurus"). On February 10, 2005, the Company amended
(the "Amendment") the conversion price of each of the Company's outstanding
convertible term notes held by Laurus to a fixed conversion rate of $0.05. On
February 11, 2005, Laurus converted $547,988.78 principal amount of convertible
notes of the Company and $223,447.28 of interest on such convertible notes into
an aggregate of 15,428,722 shares of the Company's common stock. As a result of
the conversion by Laurus of the term notes, all amounts outstanding under the
term notes were re-paid in full. In consideration for the Amendment and the
conversion by Laurus of the term notes, $550,762.95 of outstanding principal and
accrued and unpaid interest on a convertible note dated March 31, 2003 issued in
the face amount of $1,000,000 by the Company to Laurus was also re-paid. As a
result of the foregoing transactions, $1,322,199.01, representing all
outstanding debt of the Company to Laurus (except as set forth below) was
re-paid.
Subsequent to the above transactions, on February 14, 2005, the Company
entered into a Securities Purchase Agreement (the "Purchase Agreement"), dated
February 11, 2005, with Laurus for the sale of a $2,000,000 principal amount
Secured Convertible Term Note (the "Note") and a Common Stock Purchase Warrant
(the "Warrant") to purchase 6,000,000 shares of the Company's common stock. The
sale of the Note and the Warrant were made pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended
(the "Securities Act"), and Regulation D under the Securities Act.
The Company received gross proceeds of $2,000,000 from the sale of the
Note and the Warrant. The Company may only use such proceeds for (i) general
working capital purposes, (ii) no less than 80% of the equity interests of
Systems Management Engineering, Inc. ("SMEI") pursuant to the Stock Purchase
Agreement, as amended, dated as of December 16, 2004 by and among the Company,
SMEI and the shareholders of SMEI identified therein, and (iii) the acquisition
of 100% of the remaining equity interests of SMEI pursuant to a transaction in
form and substance reasonably satisfactory to Laurus.
The Note bears interest at a rate per annum equal to the prime rate
published in The Wall Street Journal from time to time, plus 3%. Interest is
calculated on the last day of each month until the maturity date (each a
"Determination Date"). Subject to the following adjustment to the interest rate,
the interest rate shall not be less than 8%. If (i) the Company has registered
the resale of the shares issuable upon conversion of the Note and upon exercise
of the Warrant on an effective registration statement with the Securities and
Exchange Commission, and (ii) the market price of the Company's common stock for
the five trading days immediately preceding a Determination Date exceeds the
then applicable fixed conversion price by at least 25%, then the interest rate
for the succeeding calendar month shall automatically be reduced by 200 basis
points, or 2%, for each incremental 25% increase in the market price of the
common stock above the then applicable fixed conversion price.
Interest is payable on the Note monthly in arrears commencing March 1,
2005 and on the first business day of each consecutive calendar month thereafter
until the maturity date, February 11, 2008 (each a "Repayment Date"). Amortizing
payments of the aggregate principal amount outstanding under the Note must begin
on June 1, 2005 and recur on the first business day of each succeeding month
thereafter until the maturity date (each an "Amortization Date"). Beginning on
the first Amortization Date, the Company must make monthly payments to Laurus on
each Repayment Date, each in the amount of $60,606.06, together with any accrued
and unpaid interest to date on such portion of the principal amount plus any and
all other amounts which are then owing under the Note, the Purchase Agreement or
any other related agreement but have not been paid (collectively, the "Monthly
Amount"). Any principal amount that remains outstanding on the maturity date is
due and payable on the maturity date.
If the Monthly Amount (or a portion of the Monthly Amount if not all of
the Monthly Amount is converted into shares of common stock) is required to be
paid in cash, then the Company must pay Laurus an amount equal to 102% of the
Monthly Amount due and owing to Laurus on the Repayment Date in cash. If the
Monthly Amount (or a portion of the Monthly Amount if not all of the Monthly
Amount is converted into shares of common stock) is required to be paid in
shares of common stock, the number of such shares to be issued by the Company to
Laurus on such Repayment Date (in respect of such portion of the Monthly Amount
converted into in shares of common stock), shall be the number determined by
dividing (x) the portion of the Monthly Amount converted into shares of common
stock, by (y) the then applicable fixed conversion price. The fixed conversion
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price of the Note is $0.10 per share, subject to adjustment for subsequent lower
price issuances by the Company, as well as customary adjustment provisions for
stock splits, combinations, dividends and the like.
Laurus is required to convert into shares of common stock all or a
portion of the Monthly Amount due on each Repayment Date according to the
following guidelines (the "Conversion Criteria"): (i) the closing price of the
common stock as reported by Bloomberg, L.P. on the Repayment Date shall be
greater than or equal to 115% of the fixed conversion price and (ii) the amount
of such conversion does not exceed 25% of the aggregate dollar trading volume of
the common stock for the 22-day trading period immediately preceding the
applicable Repayment Date. If the Conversion Criteria are not met, Laurus must
convert only such part of the Monthly Amount that meets the Conversion Criteria.
Any part of the Monthly Amount due on a Repayment Date that Laurus has not been
able to convert into shares of common stock due to failure to meet the
Conversion Criteria, must be paid by the Company in cash at the rate of 102% of
the Monthly Amount otherwise due on such Repayment Date, within three business
days of the applicable Repayment Date.
The Warrant is exercisable at a price of $0.11 per share from the issue
date through the close of business on February 11, 2012. Upon exercise of the
Warrant, payment may be made by Laurus either (i) in cash or by certified or
official bank check payable to the order of the Company equal to the applicable
aggregate exercise price, (ii) by delivery of the Warrant, or shares of common
stock and/or common stock receivable upon exercise of the Warrant, or (iii) by a
combination of any of the foregoing methods. The exercise price of the Warrant
is subject to adjustment for stock splits, combinations, dividends and the like.
In order to secure payment of all amounts due under the Note, as well
as the Company's other obligations to Laurus: (i) the Company granted Laurus a
lien on all of the Company's assets and also on all assets of the Company's
subsidiaries; (ii) the Company pledged all of the capital stock that it owns of
each of its subsidiaries; and (iii) each of the Company's subsidiaries executed
a Subsidiary Guaranty of such obligations.
Pursuant to the terms of a registration rights agreement, the Company
agreed to include the shares of common stock issuable upon conversion of the
Note and upon exercise of the Warrant in a registration statement under the
Securities Act to be filed not later than March 13, 2005 and to use its
reasonable commercial efforts to cause such registration statement to be
declared effective no later than May 12, 2005. In the event the Company does not
meet these deadlines, it may be required to pay Laurus liquidated damages in
cash equal to 2% for each 30-day period (prorated for partial periods) on a
daily basis of the original principal amount of the Note.
ITEM 2.01 COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS.
On February 14, 2005, the Company completed the acquisition of
4,177,500 shares of the outstanding common stock of Systems Management
Engineering, Inc. ("SMEI"), which shares constitute approximately 82% of the
issued and outstanding shares of capital stock of SMEI on a fully diluted basis.
As partial consideration for such shares of SMEI, the Company issued an
aggregate of 16,553,251 shares of the Company's common stock to twelve
accredited investors pursuant to Section 4(2) of the Securities Act and
Regulation D under the Securities Act. The acquisition was completed pursuant to
the terms of a Stock Purchase Agreement dated December 16, 2004, as amended,
among the Company and certain shareholders of SMEI. SMEI will continue to
operate as an independent subsidiary of the Company.
ABOUT SMEI
SMEI was incorporated on March 11, 1997 under the laws of the
Commonwealth of Virginia. SMEI was originally founded to provide the federal
government with engineering services coupled with advanced technology solutions.
SMEI has developed advanced data management applications, Internet server
technology and information systems that it markets to both public and private
sectors. SMEI's technology helps its customers reduce development time for
projects, manage the deployment of applications across the Internet to desktops
around the world and implement military grade security on all systems where the
applications are deployed. SMEI has two divisions, a consulting services
division and the Aquifer Software division.
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CONSULTING SERVICES DIVISION
SMEI provides the federal government and private industry with
engineering services coupled with innovative information technology solutions.
SMEI is committed to addressing the growing public and private sector demand for
integrated, secure, enterprise class e-business solutions built on industry
standards.
SMEI has designed, developed and implemented advanced business
management applications, integration technologies and enterprise geospatial
systems. SMEI currently supports several operational systems in all of these
categories for major organizations and defense commands using web-based
technologies and the consolidation of custom and commercial off-the-shelf
software to unite dissimilar applications into integrated systems.
GIS Service Capabilities
SMEI specializes in the design and implementation of Enterprise
Geographic Information Systems ("GIS"), enabling the vision of public and
private sector clients for cross-organization data sharing. They are experts in
the development of Web services applications and secure geospatial solutions.
SMEI architected the Naval GeoReadiness Repository in support of Base
Development, Base Realignment and Closure (BRAC), the Installation Visualization
Tool (IVT) program, force protection, anti-terrorism and homeland defense.
Administered by Naval Facilities Engineering Command Headquarters (NAVFACHQ),
the GeoReadiness Repository provides installation geospatial data and imagery
storage, integration of Navy real property data, the automation of data
submission, standards compliance checking and conversion. Web services provide
visualization, cross-services data sharing, and an advanced security model for
accessing the GIS data. SMEI performs spatial analysis and risk assessment
modeling for the military medical application. SMEI also developed GIS-R, an
Army GIS repository to provide a visual method for users to access information
from a comprehensive set of government, commercial, and installation data
sources in an expandable, user-friendly decision support application.
Implementation planning is critical to the success of Enterprise GIS
initiatives. Cross-organizational data sharing and public visualization of
corporate information through the Internet requires the understanding of data
needs across functional areas, as well as the backbone technology to support an
Enterprise approach. The SMEI team includes key in-house experts in GIS
supporting technologies such as ESRI's ArcSDE, Oracle Spatial, UNIX and Windows
to ensure a stable architecture and operating environment for enterprise
applications. As current customers of this service, the Naval Information
Technology Center (NITC) receives architectural and database support, systems
integration analysis, and technical support from SMEI.
Technical and Management Consulting Services
SMEI provides network engineering, architectural guidance, database
management, expert programming and functional area expert analysis to its
Department of Defense clients. SMEI provides strategic consulting to support
business requirements, change management, and financial analysis and metrics for
several major federal customers.
In addition, SMEI provides management, analytical, and technical
consulting to support legacy application modernization and systems reduction
goals under several major contracts including the Department of Navy's Navy
Marine Corps Intranet (NMCI).
AQUIFER SOFTWARE DIVISION
SMEI develops and markets the Aquifer(TM) Application Services
Platform, a proprietary software product for application developers. Aquifer
helps developers build a new class of software called rich Internet
applications. These applications are secure custom or commercial desktop and
mobile Windows Forms applications that use the traditional client/server model
while exploiting Web Services-based communications over the Internet.
Aquifer is a .NET application platform built on a service-oriented
architecture that delivers scalable and secure Web applications to Windows
desktop and Windows CE platforms. Aquifer helps SMEI reduce development time and
manage the deployment of applications across the Internet to desktops around the
world while implementing Department of Defense ("DOD") certified and accredited
security on all deployed systems. Aquifer addresses the needs of development
organizations to more rapidly develop custom Windows Forms applications and
lower the costs to secure, deploy and maintain them. Aquifer helps organizations
solve the following problems:
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o Reduction in application development time, cost and risk;
o Reduction of desktop and PDA application deployment time and cost;
o Increased richness of user experience;
o Elimination of security concerns inherent with Web browser
vulnerabilities;
o Decreased server software and hardware costs; and
o Optimization of network resources for best performance.
SMEI markets Aquifer as both a productivity tool and a secure
application platform. Whether modernizing legacy applications or building new
service-oriented, Web based systems, Aquifer is designed to shorten the time it
takes to develop and deliver custom solutions in Microsoft .NET environments.
Aquifer provides many common service components including:
o Data Access;
o Role-based User Profiles;
o Flexible Security Model including strong encryption;
o Configuration Management;
o Event Management;
o Integration Gateways; and
o Secure Client.
In its current version 5.4, the Aquifer Application Services Platform
can support between 500 and 1,000 concurrent active desktops against a single
server processor.
SALES AND MARKETING
SMEI markets its Aquifer Application Services Platform to mid to
large-sized commercial accounts, federal government agencies, systems
integrators and independent software vendors that are building Windows rich
Internet applications. Aquifer's products, training and services are focused on
the .NET Windows Forms application development market where enterprise IT
organizations and systems integrators are tasked with building and managing
applications that run on the Internet using the .NET Framework.
SMEI employs the following tactics to sell the Aquifer Application
Services Platform:
Direct Sales to Enterprise IT Organizations and Systems Integrators - A
direct sales force performs this activity. This segment includes all
new federal, systems integrator and commercial accounts. SMEI believes
that reference-ability is a key post-sale objective.
Targeted Marketing - With the help of extensive lead generation, public
relations and targeting marketing communication materials, SMEI hopes
to establish itself as a leader in the rich Internet application
development and management market with an emphasis on security over
both wired and wireless communications. The tactics include marketing
materials directed at DOD agencies, the financial services and health
care markets and other markets where strong security is a common
requirement. Print media, direct mail, trade shows/conferences and live
Web casts are the main components of lead generation for SMEI.
Strategic Alliances - SMEI plans to continue to form strategic
alliances with federal and commercial systems integrators and Web
services performance management vendors to sell SMEI's products as
value-added resellers and to enhance Aquifer's capabilities by
integrating with other vendor's performance monitoring capabilities.
SMEI believes that engaging marketing an delivery channels that are not
currently available to the company will broaden market reach, increase
delivery bandwidth in some instances, and yield a greater return on
sales and marketing expenditure.
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Important partnerships SMEI has developed recently include:
o Microsoft. SMEI is a Microsoft Certified Partner. Recently,
Aquifer's security model and its presence on the Navy Marine Corps
Intranet (NMCI) network have attracted interest from Microsoft
Federal and from Microsoft Business Development in Redmond. SMEI is
currently working with Redmond to develop a NMCI formal
Microsoft/SMEI case study describing the benefits of .NET and
Aquifer.
o AmberPoint. AmberPoint is a Silicon Valley-based software company
that builds and markets management solutions for Web services. SMEI
and AmberPoint co-market products to federal governmental agencies.
SMEI plans to integrate Aquifer and AmberPoint to help developers
more easily and accurately monitor the .NET applications they build.
SMEI's goal is to turn every Aquifer customer into a reference account.
SMEI believes that first hand testimonials describing the productivity gains
with Aquifer are of great value and can significantly enhance sales and
marketing efforts
COMPETITION
As a company offering IT services, SMEI's services market is fragmented
and highly competitive. SMEI faces competition from companies providing IT
outsourcing and business process outsourcing solutions. SMEI also competes with
software vendors in the .NET Web Application Services Platform market. Potential
competitors of SMEI's Aquifer software include:
o Kinitos, Inc. delivers an enterprise deployment solution that allows
IT to maintain centralized control of existing Windows Forms
clients. The Kinitos .NET platform centralizes control of the
monitoring, deployment and updating of existing Windows Forms client
applications throughout the network. It handles policy based client
deployment and rollback, enables real time monitoring and delivers
centralized reporting of client applications.
Kinitos also has a component that provides client-side "plumbing"
for creating Windows Forms applications. It handles the
communications from client to server, provides online/offline
services, reliable messaging, logging and dynamic updating of client
applications.
o ObjectWare, Inc. markets its IdeaBlades technology as an application
development platform for the rapid creation of smart client
applications. ObjectWare leverages Microsoft .NET technology to
streamline development, deployment and maintenance processes while
simplifying the supporting hardware and software environments.
SMEI believes that its Aquifer platform offers more comprehensive
features and that on this basis Aquifer has a marketing and performance
advantage over competing products. SMEI believes that its Aquifer DOD certified
and accredited security technology not only creates an advantage over
competitors, but also creates a strong barrier to entry. The following chart
demonstrates the competitive features in Aquifer and those features currently
available from the above competitors.
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APPLICATION SERVICE AQUIFER KINITOS OBJECTWARE
- ------------------------------------------------------- ----------- ----------- ---------------
Configuration Management Yes Yes Yes
- ------------------------------------------------------- ----------- ----------- ---------------
Data Access Yes No Yes
- ------------------------------------------------------- ----------- ----------- ---------------
DITSCAP Approved Security Yes No No
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Active Directory Support Yes No No
- ------------------------------------------------------- ----------- ----------- ---------------
Event Management Yes Yes No
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User, Account and Application Management Yes No No
- ------------------------------------------------------- ----------- ----------- ---------------
Management Console Yes No No
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Execute multiple applications per client instance Yes Yes No
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Multi-platforms (e.g., Win 32, Win CE) Yes N/A N/A
- ------------------------------------------------------- ----------- ----------- ---------------
Performance Management Partner No No
- ------------------------------------------------------- ----------- ----------- ---------------
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INTELLECTUAL PROPERTY
On November 12, 2003, SMEI filed an application with the United States
Patent and Trademark Office for a trademark of the name "Aquifer." On December
21, 2004 the United States Patent and Trademark Office issued trademark serial
number 78326540 for the name "Aquifer." SMEI has not yet received the
Certificate of Registration.
The description of the trademark as submitted is as follows:
INTERNATIONAL CLASS: 009
Computer application software that allows end-users to use applications and
developers to create new applications and move non-web based legacy applications
to web based applications that can operate on the Internet.
EMPLOYEES
As of February 14, 2005, SMEI had 26 full time employees and one part
time employee. None of SMEI's employees are covered by a collective bargaining
agreement. SMEI considers relations with its employees to be good.
DESCRIPTION OF PROPERTY
SMEI currently subleases a facility located at 12100 Sunset Hills Road,
Reston, Virginia 20191. The facility is comprised of 9,342 square feet of office
space. The sublease is pursuant to a Sub-Sublease Agreement dated June 22, 2001.
The sublease commenced July 15, 2001 and ends September 30, 2005. SMEI currently
pays $18,289.81 per month under the sublease, which is subject to a 3% increase
in July 2005.
LEGAL PROCEEDINGS
Neither the Company nor SMEI is currently a party to, nor is any of the
Company's or SMEI's property currently the subject of, any pending legal
proceeding. None of the Company's directors, officers or affiliates is involved
in a proceeding adverse to the Company's business or has a material interest
adverse to the Company's business.
RISK FACTORS
THERE WAS NO FORMAL VALUATION DETERMINING THE FAIRNESS OF THE CONSIDERATION FOR
THE ACQUISITION OF SMEI.
The consideration for the acquisition of SMEI was determined by arms'
length negotiations between the Company's management and the management of SMEI,
but there was no formal valuation of SMEI by an independent third party. The
Company did not obtain a fairness opinion by an investment banking firm or other
qualified appraiser. Since the acquisition of SMEI did not require the approval
of the Company's stockholders, the Company is unable to determine whether its
stockholders would have agreed with the determination by the Company's Board of
Directors that the terms of the acquisition were fair and in the best interests
of the stockholders.
THE COMPANY MAY NOT BE ABLE TO EFFECTIVELY INTEGRATE SMEI, WHICH WOULD BE
DETRIMENTAL TO THE COMPANY'S BUSINESS.
Acquisitions involve numerous risks, including potential difficulty in
integrating operations, technologies, systems, and products and services of
acquired companies, diversion of management's attention and disruption of
operations, increased expenses and working capital requirements and the
potential loss of key employees and customers of acquired companies. In
addition, acquisitions involve financial risks, such as the potential
liabilities of the acquired businesses, the dilutive effect of the issuance of
additional equity securities, the incurrence of additional debt, the financial
impact of transaction expenses and the amortization of goodwill and other
intangible assets involved in any transactions that are accounted for by using
the purchase method of accounting, and possible adverse tax and accounting
effects. Any of the foregoing could materially and adversely affect the
Company's business.
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FAILURE TO PROPERLY MANAGE THE COMPANY'S POTENTIAL GROWTH WOULD BE DETRIMENTAL
TO THE COMPANY'S BUSINESS.
Any growth in the Company's operations will place a significant strain
on its resources and increase demands on management and on operational and
administrative systems, controls and other resources. There can be no assurance
that the Company's existing personnel, systems, procedures or controls will be
adequate to support the Company's operations in the future or that the Company
will be able to successfully implement appropriate measures consistent with its
growth strategy. As part of this growth, the Company may have to implement new
operational and financial systems, procedures and controls to expand, train and
manage its employee base and maintain close coordination among technical,
accounting, finance, marketing and sales staffs. The Company cannot guarantee
that it will be able to do so, or that if it is able to do so, the Company will
be able to effectively integrate them into its existing staff and systems. The
Company may fail to adequately manage its anticipated future growth. The Company
will also need to continue to attract, retain and integrate personnel in all
aspects of operations. Failure to manage growth effectively could hurt the
Company's business.
MANAGEMENT OF THE COMPANY SUBSEQUENT TO THE ACQUISITION OF SMEI
The following are the names and certain information regarding the
Company's Directors, Director Nominees and Executive Officers following the
acquisition of SMEI. The Company plans to appoint the Director Nominees to the
Company's Board of Directors approximately ten days after the date the Company
transmits to all holders of record of the Company's common stock information
required by Rule 14f-1 under the Securities Exchange Act of 1934, as amended.
There are no family relationships among any of the Company's Directors, Director
Nominees and Executive Officers.
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NAME AGE POSITION
- ----------------------- -------- -----------------------------------------------
Paul Burgess 40 President, Chief Executive Officer and Director
- ----------------------- -------- -----------------------------------------------
Alan C. Bashforth 54 Acting Chief Financial Officer, Secretary and
Chairman of the Board of Directors
- ----------------------- -------- -----------------------------------------------
Eric D. Zelsdorf 39 Chief Technology Officer and Director Nominee
- ----------------------- -------- -----------------------------------------------
Herbert B. Quinn 68 Director Nominee
- ----------------------- -------- -----------------------------------------------
Robert E. Galbraith 61 Director Nominee
- ----------------------- -------- -----------------------------------------------
BACKGROUND OF EXECUTIVE OFFICERS AND DIRECTORS
PAUL BURGESS, PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR. From
March 1, 2003 until February 14, 2005, Mr. Burgess was Chief Operating Officer
of the Company. As of February 9, 2005, Mr. Burgess was appointed President and
Chief Executive Officer of the Company. On February 14, 2005, Mr. Burgess was
appointed a director of the Company. From January 2000 to December 2002, Mr.
Burgess was President and Chief Financial Officer of Plan B Communications.
Prior to Plan B Communications, Mr. Burgess spent three years with MetroNet
Communications, where he was responsible for the development of MetroNet's coast
to coast intra and inter city networks. Mr. Burgess was also influential in
developing the operations of MetroNet during the company's early growth stage.
Prior to joining MetroNet, Mr. Burgess was with ISM, a company subsequently
acquired by IBM Global Services, where he was responsible for developing and
deploying the company's distributed computing strategy.
ALAN C. BASHFORTH, ACTING CHIEF FINANCIAL OFFICER, SECRETARY AND
CHAIRMAN OF THE BOARD OF DIRECTORS. From April 4, 2002 to February 9, 2005, Mr.
Bashforth was President, Chief Executive Officer and the sole Director of the
Company. Mr. Bashforth continues to serve as a Acting Chief Financial Officer,
Secreatary, director and as Chairman of the Board of Directors of the Company.
Mr. Bashforth has been a member of the Company's Board of Directors since
November 1996. Since 1996, Mr. Bashforth has held various executive officer
positions with the Company. From the end of 1996 to December 15, 2000, Mr.
Bashforth was President of Cascadent Communications, a major customer of the
Company. 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 the Company in
November 1996.
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ERIC D. ZELSDORF, CHIEF TECHNOLOGY OFFICER AND DIRECTOR NOMINEE. Mr.
Zelsdorf founded SMEI in 1997 and since then he has been the Chief Technology
Officer, President and a Director of SMEI. Mr. Zelsdorf has led SMEI since its
inception and currently advises clients as well as industry standards groups on
the implementation of secure Web services and enterprise architecture and
integration. From 1992 to 1997, Mr. Zelsdorf was Vice President and Chief
Technology Officer for ECG, Inc.
HERBERT B. QUINN, DIRECTOR NOMINEE. Mr. Quinn has been Chairman and
Chief Executive Officer of SMEI since 1998 when he led the merger of Energy and
Environmental Technologies into SMEI. Mr. Quinn is a retired Army Brigadier
General, former Senior Executive for the EPA and a registered Professional
Engineer.
ROBERT E. GALBRAITH, DIRECTOR NOMINEE. Mr. Galbraith is currently a
consultant to firms seeking innovative technical solutions in the security
marketplace. Areas in which Mr. Galbraith have consulted include: data
encryption, internet telephony (VoIP), intelligent data recording, secure local
and wide area network solutions, physical security and biometric security. Prior
to consulting, Mr. Galbraith was President, owner and technical administrator of
Secure Engineering Services, Inc. ("SESI") from its inception in 1979 until the
firm was sold in 1996. During this period, SESI provided services and equipment
to the U.S. Forces and NATO component Forces in Europe. Clients included the
U.S. Army, Navy and Air Force, the SHAPE Technical Center, Euro Fighter Program,
Sandia Labs, JPL, MITRE and NATO programs.
EMPLOYMENT AGREEMENTS
On February 14, 2005, upon effectiveness of the Company's acquisition
of SMEI, the Company entered into an Executive Employment Agreement Amendment
with Paul Burgess. Under the Executive Employment Agreement Amendment, Mr.
Burgess is employed by the Company as its Chief Executive Officer for an initial
term of three years. Thereafter, the Executive Employment Agreement Amendment
may be renewed upon the mutual agreement of Mr. Burgess and the Company. Mr.
Burgess will be paid a base salary of $225,000 per year under the Executive
Employment Agreement Amendment. The Company previously agreed to grant Mr.
Burgess 2,000,000 shares of restricted stock. This grant was replaced by the
grant of fully vested options to purchase 2,000,000 shares of common stock of
the Company at an exercise price of $0.03 per share. The Company also agreed to
grant Mr. Burgess fully vested options to purchase an additional 2,000,000
shares of common stock of the Company at an exercise price of $0.05 per share as
a bonus for services rendered to the Company during 2004. Further, upon the
effective date of the Executive Employment Agreement Amendment, the Company
agreed to grant Mr. Burgess options to purchase 6,000,000 shares of the
Company's common stock at an exercise price of $0.10 per share, which will vest
one-third each year over a three-year period beginning February 14, 2006. In
addition, the Company agreed to pay Mr. Burgess an incentive bonus based on 1%
of the revenue of the most recent 12-month period of any acquisitions closed by
the Company during the term of the Executive Employment Agreement Amendment. The
Executive Employment Agreement Amendment may be terminated by Mr. Burgess at his
discretion by providing at least 30 days prior written notice to the Company. In
the event the Company is acquired, or is the non-surviving party in a merger, or
the Company sells all or substantially all of its assets, the surviving company
is bound to the provisions of the Executive Employment Agreement Amendment.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 1, 2005, the Company entered into a Consulting Agreement
with SMEI and Herbert B. Quinn, Jr., which is effective as of the date the
Company completed the acquisition of SMEI. Under the agreement, Mr. Quinn will
perform strategic analytical and advisory services as reasonably requested by
SMEI's Chief Executive Officer. For his services, the Company agreed to pay Mr.
Quinn $150,000 per year. Mr. Quinn also is eligible to receive options under the
Company's stock option plan or any similar plan that is in effect. The term of
the agreement is for one year and will automatically renew for one additional
year unless either party gives at least 30 days prior written notice of their
intent not to extend the agreement. The agreement does not contain any
termination provisions.
8
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of February 17,
2005 with respect to the beneficial ownership of the outstanding common stock by
(i) any holder of more than five (5%) percent; (ii) each of the Company's
executive officers and directors; and (iii) the Company's directors and
executive officers as a group. Except as otherwise indicated, each of the
stockholders listed below has sole voting and investment power over the shares
beneficially owned.
Common Stock Percentage of
Name of Beneficial Owner (1) Beneficially Owned (2) Common Stock (2)
- ---------------------------------------- ------------------------- -------------------
Alan C. Bashforth (3) 14,048,363 14.9%
Paul Burgess (4) 4,000,000 4.4%
Herbert B. Quinn, Jr. (5) 6,604,424 7.7%
Eric D. Zelsdorf 5,835,606 6.8%
Robert Galbraith (6) 1,245,000 1.4%
- ---------------------------------------- ------------------------- -------------------
All officers, directors and directors 31,733,393 32.3%
nominees as a group (5 persons)
(1) Except as otherwise indicated, the address of each beneficial owner is c/o
Science Dynamics Corporation, 7150 N. Park Drive, Suite 500, Pennsauken,
NJ 08109.
(2) Applicable percentage ownership is based on 86,239,910 shares of common
stock outstanding as of February 17, 2005, together with securities
exercisable or convertible into shares of common stock within 60 days of
February 17, 2005 for each stockholder. Beneficial ownership is determined
in accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities.
Shares of common stock that are currently exercisable or exercisable
within 60 days of February 17, 2005 are deemed to be beneficially owned by
the person holding such securities for the purpose of computing the
percentage of ownership of such person, but are not treated as outstanding
for the purpose of computing the percentage ownership of any other person.
(3) Includes: (a) 165,000 shares owned directly by Mr. Bashforth; (b)
1,520,000 shares owned by Innovative Communications Technology, Ltd.,
which is controlled by Mr. Bashforth; (c) 4,363,363 shares owned by
Calabash Holdings Ltd., which is controlled by Mr. Bashforth; (d) options
owned by Calabash Holdings Ltd. to purchase 2,000,000 shares exercisable
at $0.05 per share; and (e) warrants owned by Calabash Holdings Ltd. to
purchase 6,000,000 shares exercisable at $0.10 per share which expire on
February 14, 2012.
(4) Includes (a) options to purchase 2,000,000 shares of common stock
exercisable at $0.03 per share; and (b) options to purchase 2,000,000
shares of common stock exercisable at $0.05 per share.
(5) Includes 370,515 shares owned by Elizabeth L. Quinn, spouse of Herbert B.
Quinn, Jr.
(6) Includes 50,000 shares owned by Melinda Galbraith, spouse of Robert
Galbraith.
ITEM 2.03 CREATION OF A DIRECT FINANCIAL OBLIGATION.
See Item 1.01 above.
ITEM 3.02 UNREGISTERED SALES OF EQUITY SECURITIES
See Item 1.01 and Item 2.01 above.
ITEM 5.02 DEPARTURE OF DIRECTORS OR PRINCIPAL OFFICERS; ELECTION OF DIRECTORS;
APPOINTMENT OF PRINCIPAL OFFICERS.
See Item 2.01 above.
9
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
Report of Independent Registered Public Accounting Firm
Systems Management Engineering, Inc. Balance Sheets at December 31,
2004 and 2003
Systems Management Engineering, Inc. Statements of Operations for the
Years Ended December 31, 2004 and 2003
Systems Management Engineering, Inc. Statement of Shareholders' Equity
Systems Management Engineering, Inc. Statements of Cash Flows for the
Years Ended December 31, 2004 and 2003
Systems Management Engineering, Inc. Notes to Financial Statements
(b) PRO FORMA FINANCIAL INFORMATION.
Science Dynamics Corp. and Subsidiaries Unaudited Combined Pro Forma
Balance Sheet as of December 31, 2004
Science Dynamics Corp. and Subsidiaries Unaudited Combined Pro Forma
Statement of Operations for the Year ended December 31, 2004
Science Dynamics Corp. and Subsidiaries Notes to Unaudited Pro Forma
Combined Financial Statements
(c) EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
- ------- --------------------------------------------------------------------
2.1 Stock Purchase Agreement dated December 16, 2004 among Science
Dynamics Corporation, Systems Management Engineering, Inc. and the
shareholders of Systems Management Engineering, Inc. identified on
the signature page thereto (Incorporated by reference to Form 8-K
filed with the Securities and Exchange Commission on December 22,
2004)
2.2 Amendment No. 1 to Stock Purchase Agreement dated December 16, 2004
among Science Dynamics Corporation, Systems Management Engineering,
Inc. and the shareholders of Systems Management Engineering, Inc.
identified on the signature page thereto (Incorporated by reference
to Form 8-K filed with the Securities and Exchange Commission on
February 11, 2005)
4.1 Securities Purchase Agreement dated February 11, 2005 by and between
Science Dynamics Corporation and Laurus Master Fund, Ltd.
(Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on February 18, 2005)
4.2 Secured Convertible Term Note dated February 11, 2005 issued to
Laurus Master Fund, Ltd. (Incorporated by reference to Form 8-K
filed with the Securities and Exchange Commission on February 18,
2005)
4.3 Common Stock Purchase Warrant dated February 11, 2005 issued to
Laurus Master Fund, Ltd. (Incorporated by reference to Form 8-K
filed with the Securities and Exchange Commission on February 18,
2005)
4.4 Master Security Agreement dated February 11, 2005 among Science
Dynamics Corporation, M3 Acquisition Corp., SciDyn Corp. and Laurus
Master Fund, Ltd. (Incorporated by reference to Form 8-K filed with
the Securities and Exchange Commission on February 18, 2005)
4.5 Stock Pledge Agreement dated February 11, 2005 among Laurus Master
Fund, Ltd., Science Dynamics Corporation, M3 Acquisition Corp. and
10
SciDyn Corp. (Incorporated by reference to Form 8-K filed with the
Securities and Exchange Commission on February 18, 2005)
4.6 Subsidiary Guaranty dated February 11, 2005 executed by M3
Acquisition Corp. and SciDyn Corp. (Incorporated by reference to
Form 8-K filed with the Securities and Exchange Commission on
February 18, 2005)
4.7 Registration Rights Agreement dated February 11, 2005 by and between
Science Dynamics Corporation and Laurus Master Fund, Ltd.
(Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on February 18, 2005)
4.8 Second Omnibus Amendment to Convertible Notes and Related
Subscription Agreements of Science Dynamics Corporation issued to
Laurus Master Fund, Ltd. (Incorporated by reference to Form 8-K/A
filed with the Securities and Exchange Commission on March 2, 2005)
10.1 Sub-Sublease Agreement made as of June 22, 2001 by and between
Software AG and Systems Management Engineering, Inc. (Incorporated
by reference to Form 8-K filed with the Securities and Exchange
Commission on February 18, 2005)
10.2 Microsoft Partner Program Agreement (Incorporated by reference to
Form 8-K filed with the Securities and Exchange Commission on
February 18, 2005)
10.3 AmberPoint Software Partnership Agreement (Incorporated by reference
to Form 8-K filed with the Securities and Exchange Commission on
February 18, 2005)
10.4 Executive Employment Agreement Amendment made as of February 14,
2005 by and between Science Dynamics Corporation and Paul Burgess
(Incorporated by reference to Form 8-K/A filed with the Securities
and Exchange Commission on March 2, 2005)
10.5 Consulting Agreement dated January 1, 2005 between Science Dynamics
Corporation, Systems Management Engineering, Inc. and Herbert B.
Quinn, Jr. (Incorporated by reference to Form 8-K filed with the
Securities and Exchange Commission on February 25, 2005)
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SCIENCE DYNAMICS CORPORATION
Date: June 1, 2005 /s/ Paul Burgess
----------------------------
Paul Burgess
Chief Executive Officer
12
INDEX TO FINANCIAL STATEMENTS
Pages
----
Audited financial statements of Systems Management Engineering, Inc.:
Report of Independent Registered Public Accounting Firm F-1
Balance Sheets at December 31, 2004 and 2003 F-2
Statements of Operations for the Years Ended December 31, 2004 and 2003 F-3
Statement of Shareholders' Equity F-4
Statements of Cash Flows for the Years Ended December 31, 2004 and 2003 F-5
Notes to Financial Statements F-6 - F-13
Pro forma financial information of Science Dynamics Corporation and
Subsidiaries:
Unaudited Combined Pro Forma Balance Sheet as of December 31, 2004 F-15
Unaudited Combined Pro Forma Statement of Operations
for the Year ended December 31, 2004 F-16
Notes to Unaudited Pro Forma Combined Financial Statements F-17
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Shareholders of
Systems Management Engineering, Inc.
We have audited the accompanying balance sheets of Systems Management
Engineering, Inc. as of December 31, 2004 and 2003 and the related statements
of operations, stockholders' equity, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Systems Management
Engineering, Inc. as of December 31, 2004 and 2003, and results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note1 (basis of
presentation) to the financial statements, the Company is in violation of its
bank covenants and has sustained significant losses. These conditions raise
substantial doubt about the Companies ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of these uncertainties should the company be unable to continue as
a going concern.
/s/ Peter C. Cosmas Co., CPAs
Peter C. Cosmas Co., CPAs
370 Lexington Ave.
New York, NY 10017
May 2, 2005
F-1
SYSTEMS MANAGEMENT ENGINEERING, INC.
BALANCE SHEETS
DECEMBER 31,
ASSETS
2004 2003
----------- -----------
Current assets
Cash $ 5,159 $ 250
Accounts receivable 999,416 737,589
Prepaid expenses 6,588 21,360
----------- -----------
Total current assets 1,011,163 759,199
Property and equipment, net 107,573 159,718
Security deposits 2,000 34,426
Other receivables 2,100 -0-
----------- -----------
Total assets $ 1,122,836 $ 953,343
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank overdraft $ 58,340 $ 48,695
Accounts payable and accrued expenses 36,390 49,114
Accrued payroll and related liabilities 174,451 123,259
Notes payable current portion 577,000 242,000
Notes payable shareholder 35,000 65,000
----------- -----------
Total current liabilities 881,181 528,068
Notes payable-non current portion 93,750 138,750
----------- -----------
Total liabilities 974,931 666,818
Stockholders' equity
Common stock- .01 par value 45,700 45,700
10,000,000 shares authorized, 4,570,000
Issued and outstanding
Additional paid-in capital 272,695 272,695
Accumulated deficit (170,490) (31,870)
----------- -----------
Total stockholders' equity 147,905 286,525
----------- -----------
Total liabilities and stockholders' equity $ 1,122,836 $ 953,343
----------- -----------
See accompanying notes to financial statements
F-2
SYSTEMS MANAGEMENT ENGINEERING, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMER 31,
2004 2003
----------- -----------
Consulting services $ 3,714,003 $ 3,500,885
----------- -----------
Costs and expenses
Direct Labor 1,462,913 1,172,295
Other direct costs 479,997 487,732
Indirect costs 1,893,364 1,803,087
----------- -----------
Total costs and expenses 3,836,274 3,463,114
----------- -----------
Operating income (loss) (122,271) 37,771
Other Income (expenses)
Interest and other income 17,520 14,447
Interest expense (33,869) (37,575)
----------- -----------
Total other expenses (16,349) (23,128)
----------- -----------
Income (loss) before income taxes (138,620) 14,643
Proforma income taxes (a) 2,300
----------- -----------
Net income (loss) $ (138,620) $ 12,343
----------- -----------
Basic earnings per common share
Net income (loss) $ (0.03) $ 0.00
Diluted earnings per common share
Net Income (loss) $ (0.03) $ 0.00
Weighted average shares outstanding basic 4,570,000 4,570,000
Weighted average shares outstanding diluted 4,570,000 4,901,636
(a) represents proforma taxes for the year ended 2003 if the business had been
operated as a C corporation.
See accompanying notes to financial statements
F-3
SYSTEMS MANAGEMENT ENGINEERING, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL TOTAL
--------------------- PAID IN ACCUMULATED STOCKHOLDERS
SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------- ------- -------- --------- --------
Balance December 31, 2002 4,570,000 $45,700 $272,695 $(46,513) $271,882
Net Income 14,643 14,643
-----------------------------------------------------------------
Balance December 31, 2003 4,570,000 45,700 $272,695 (31,870) 286,525
Net loss ( 138,620) (138,620)
--------- --------
Balance December 31, 2004 4,570,000 $45,700 $272,695 $(170,490) $147,905
--------- ------- -------- --------- --------
See accompanying notes to financial statements
F-4
SYSTEMS MANAGEMENT ENGINEERING, INC.
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
2004 2003
--------- ---------
Cash flows provided by/(used in ) operating activities::
Net Income (loss) $(138,620) $ 14,643
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 87,982 90,814
(Increase) decrease in:
Accounts receivable (261,827) (38,414)
Prepaid expenses 14,772 (21,360)
Other Assets 30,326 1,949
Increase (decrease) in:
Accounts payable and accrued expenses (12,724) (13,214)
Accrued payroll and related liabilities 51,195 (22,212)
--------- ---------
Net cash provided by( used in) operating activities (228,896) 12,206
--------- ---------
Cash flows (used in) investing activities:
Purchases of property and equipment, (35,837) (156,525)
--------- ---------
Net cash (used in) investing activities (35,837) (156,525)
--------- ---------
Cash flows from financing activities:
Increase (decrease) in bank overdraft 9,642 (47,819)
Net borrowings (repayment under bank line of credit) 335,000 32,760
Proceeds notes payable -0- 225,000
Repayment notes payable (45,000) (55,622)
Repayment stockholders (30,000) (10,000)
--------- ---------
Net cash provided by financing activities 269,642 144,319
--------- ---------
Net increase in cash 4,909 -0-
Cash at the beginning of the year 250 250
--------- ---------
Cash at the end of the year $ 5,159 $ 250
--------- ---------
Supplemental information:
Interest $ 31,365 $ 37,575
Taxes -0- -0-
See accompanying notes to financial statements
F-5
SYSTEMS MANAGEMENT ENGINEERING, INC
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Systems Management Engineering, Inc. (the Company) is an S corporation founded
in 1997. The Company specializes in providing commercial organizations and
government agencies with computer software consulting services.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
regarding certain types of assets, liabilities, revenues, and expenses. Such
estimates primarily relate to unsettled transactions and events as of the date
of the financial statements. Accordingly, upon settlement, actual results may
differ from estimated amounts.
REVENUE RECOGNITION
A substantial portion of the Company's consulting revenue results from contracts
with agencies of the federal government. Revenue on the time-and-material
contracts is recognized based upon time (at established rates) and other direct
costs incurred.
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.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation and amortization of property and equipment is
computed using the straight line method over estimated useful lives of three to
seven years. Amortization of leasehold improvements is computed using the
straight-lined method over the shorter of the estimated useful life of the asset
or term of the related lease.
INCOME TAXES
As a S corporation, income of the Company prior to the closing (see Note 10)
passed through to the individual shareholders rather than being taxed to the
Corporation. Historical financial statements do not include a provision for
income taxes. A pro forma provision for income taxes has been made which
represents the taxes which would have been provided had the business been
operated as a C Corporation.
F-6
STOCK BASED COMPENSATION
Statement of Financial Accounting Standard no. 123 ("SFAS No. 123"), Accounting
for Stock-based Compensation, allows companies to account for stock-based
compensation using either the provisions of SFAS No.123 or the provisions of
Accounting Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees,
but requires pro forma disclosure in the notes to the financial statements as if
the measurement provisions of SFAS No. 123 had been adopted. The Company
accounts for its stock-based employee compensation in accordance with APB No.
25. No stock-based employee compensation costs are reflected in the statement of
operations, as all options granted under this plan had an exercise price equal
to the fair market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net loss as if the Company had
applied fair market provisions of SFAS NO. 123 to the stock-based employee
compensation for the years ended December 31:
2004 2003
---- ----
Net income (loss) as reported $(138,620) $ 14,643
Deduct: stock-based employee compensation expense (3,981) (42,300)
--------- --------
Pro forma net (loss) $(142,601) $(27,657)
--------- --------
FAIR VALUE DISCLOSURES
The carrying amounts reported in the Balance Sheet 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.
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 is in violation of its
bank covenants and has sustained substantial operating losses. The bank may not
make further advances and or may demand any outstanding principal, interest and
other cost payable on demand. The Company's continuation, as a going concern is
dependent upon its ability to maintain adequate financing and to achieve net
income from operations.
F-7
NOTE 2 - CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risks consist primarily of accounts receivable. To
date, these financial instruments have been derived primarily from contracts
with agencies of the federal government. Accounts receivable are generally due
within 30 days and no collateral is required. 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, 2004 and 2003.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
2004 2003
---- ----
Computer equipment $342,114 $310,887
Furniture and fixtures 62,600 86,206
Automobiles 31,501 45,386
Leasehold improvements 18,893 18,893
-------- --------
Total Assets 455,108 461,372
Less: Accumulated Depreciation and (347,535) (301,654)
-------- --------
amortization
$107,573 $159,718
-------- --------
Total depreciation and amortization expense on property and equipment totaled
$87,982 and 90,814 for the year ended December 31, 2004 and 2003, respectively.
NOTE 4- RETIREMENT PLAN
The Company maintained a 401(k) Plan under applicable Internal Revenue Service
regulations. Pursuant to the 401(k) Plan, the employees may make voluntary
contributions thereunder and employer contributions, which are discretionary,
are allocated to the employee accounts in accordance with the formula defined in
the terms of the 401(k) Plan. The Company contributed $67,673 and $48,534 to the
401(k) plan for the plan years ended December 31, 2004 and 2003, respectively.
F-8
NOTE 5- NOTES PAYABLE
Notes payable consists of the following at December 31:
2004 2003
-------- --------
Bank line of credit agreement ( maximum is the lesser of $700,000 Or 85-90% of
eligible billed government receivables and 75% of Eligible billed commercial
receivables) bearing interest at the banks Prime rate as reported in the Wall
Street Journal plus 1.0% (6.25% and 5.00% at December 31, 2004 and 2003,
respectively).This line of credit is secured by substantially all of the
Company's assets and is guaranteed by the principal stockholders of the
Company.
This agreement expires, if not renewed, on June 30, 2005.
Balance December 31, $532,000 $197,000
Note payable to the bank bearing interest at the bank's prime rate as reported
in the Wall Street Journal plus 1.5% (6.75% at December 31, 2004), maturing on
January 28, 2008, and is guaranteed by the principal stockholders of the
Company.
Balance December 31, 138,750 183,750
-------- --------
Total notes payable 670,750 380,750
Less: Non current portion 93,750 138,750
-------- --------
Current portion $577,000 $242,000
-------- --------
Interest expense paid, totaled $33,869 and $37,575 for the years ended December
31, 2004 and 2003, respectively.
Aggregate maturities for long-term debt :
2006 45,000
2007 45,000
2008 3,750
F-9
The bank line of credit agreement includes financial covenants that require the
Company to maintain a minimum tangible net worth, as well as certain financial
ratios. At December 31, 2004 the Company is in violation of these financial
covenants.
NOTE 6 - NOTES PAYABLE TO STOCKHOLDERS
Notes payable to stockholders at December 31, 2004 and 2003, were $35,000 and
$65,000 respectively. These notes are unsecured, and are subordinated to the
bank line-of-credit. In 2004 the Company repaid $30,000 of these notes and
renegotiated the remaining balance of $35,000, the note bears interest at 18%
and is due January 31, 2005. The Company received a waiver extending the terms
on a month to month basis.
NOTE 7 - EMPLOYEE STOCK OPTION PLAN
STOCK OPTION PLAN
In 2000, the Company established the Systems Management Engineering, Inc.
Incentive Stock Option Plan (the Incentive Stock Option Plan) to provide
employees with qualified incentive stock options to purchase up to 2,000,000
shares of the Company's common stock. The Plan provides that qualified incentive
stock options ( as defined by the Internal Revenue Code) have an exercise price
equal to the fair market value of the common stock on the date of the option
grant. All options granted pursuant to the Incentive Stock Option Plan vest
ratably over five years and expire after 10 years.
In 2000, the Company established the Systems Management Engineering, Inc.
Non-Qualified Stock Option Plan (the Non-qualified Stock Option Plan) to provide
non-employees with non-qualified stock options to purchase up to 500,000 shares
of the Company's common stock. The Plan provides that non-qualified stock
options (as defined by Internal Revenue Code) have an exercise price equal to
the fair market value of the common stock on the date of option determination by
the Board of Directors.
The fair value of each option granted is estimated on the grant date using the
Black-Scholes Option Pricing Model. The following assumptions were made in
estimating fair value: dividend yield of 0.0%, risk free interest rate 4.5%, and
expected life of 10 years.
F-10
A summary of incentive and non-qualified stock option transactions for December
31, 2004 and 2003 is as follows:
2004 2004 2003 2003
---- ---- ---- ----
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE
Outstanding at beginning of year 1,853,215 $0.55 975,390 $0.23
Granted 30,000 1.00 955,000 0.85
Exercised -0- -0-
Canceled (111,200) 0.20 (77,175) 0.24
--------- ---- -------- ----
Outstanding at end of year 1,772,015 0.58 1,853,215 0.23
Options Exercisable at year end 1,132,515 0.24 663,272 0.24
Weighed average fair value of
Options Granted during year $0.13 $0.39
The following table summarizes information about the stock options outstanding
under the Company's option plans as of December 31, 2004:
Range of Number of Weighed Average Weighted Weighed
Exercises prices Outstanding at Remaining Average Number Average
12/31/04 Contractual life Exercise Exercisable at Exercise
Price 12/31/04 Price
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
$0.20-$0.35 972,015 8 yrs $0.29 902,515 $0.30
$1.00 800,000 9 yrs $1.00 230,000 $1.00
1,772,015 1,132,515
At December 31, 2004 and 2003, the exercise price for outstanding incentive and
non-qualified stock options ranged from $.20 to $1.00 with a weighted average
contractual life of eight years.
In February 2005, 315,000 options were exercised for $ 66,175 and 1,457,015 were
canceled as part of the purchase agreement.
F-11
NOTE 8- COMMITMENTS
The Company leases office space and equipment under the terms of noncanelable
operating leases, which expire at various dates through July 2007. These leases
provide for annual increases to the base rent of up to 3% and require the
Company to reimburse the landlord for its pro rata share of the increases in
annual operating expenses and real estate taxes. The following is a schedule of
the future minimum lease payments required under noncancelable operating leases,
which have initial or remaining terms in excess of one year as of December 31,
2004:
2005 $217,476
2006 47,330
2007 11,960
2008 -0-
Total $276,766
NOTE 9 - INCOME TAXES:
The following is a proforma statement of taxes if the business had been operated
as a C corporation for 2004 and 2003 and followed the provision of SFAS No. 109,
Accounting for Income Taxes, which requires that deferred tax assets and
liabilities be recognized using enacted tax rates for the effect of temporary
differences between the book and tax basis of recorded assets and liabilities. .
At this time, the Company does not believe it can reliably predict profitability
for the long-term. Accordingly, the deferred tax asset applicable to 2004
operations has been reduced in its entirety by the valuation allowance.
Differences between the tax provision computed using the statutory
federal income tax rate and the effective income tax rate on operations
is as follows:
2004 2003
----- ----
Federal
Statutory rate $(24,000) $ 2,300
Tax benefit not
Provided due
To valuation
Allowance 24,000
-------- -------
$ -- $ 2,300
-------- -------
F-12
Components of the Company's deferred tax assets and liabilities are as
follows:
December 31,
2004 2003
--------- --------
Deferred tax assets:
Tax benefits related
To net operating
Loss carry forwards
And research tax Credits $24,000 $ -0-
Total deferred tax Asset 24,000 -0-
--------- --------
Valuation Allowance for
Deferred tax Assets 24,000 -0-
--------- --------
Net deferred tax Assets $ -0- $ -0-
========= ========
NOTE 10- SUBSEQUENT EVENTS
On February 14, 2005, 4,177,500 share (85%) of the issued and outstanding common
stock of the Company were sold by it's s shareholder's to Science Dynamics Corp.
As consideration for such shares of SMEI, Science Dynamics Corp. the purchaser
issued an aggregate of 16,553,251 shares of its common stock to the twelve
accredited investors pursuant to Section 4(2) of the Securities Act and
Regulation D under the Securities Act and $1,655,325 in cash. SMEI will continue
to operate as an independent subsidiary of Science Dynamics Corp.
F-13
UNAUDITED COMBINED PRO FORMA FINANCIAL STATEMENTS
On February 14, 2005, Science Dynamics Corp. (the "Company"), acquired 85% of
common stock of Systems Management Engineering, Inc. The acquisition was funded
through a convertible note of $2,000,0000.
Upon execution of the Purchase Agreement between Science Dynamics Corp. (the
"Company") and Systems Management Engineering, the Company paid $1,655,325 and
issued 16,553,251 of its common stock.
The following unaudited pro forma combined financial statements of the Company
presents the unaudited combined balance sheet as of December 31, 2004 and the
unaudited combined statements of operations for the year ended December 31,
2004, as if the acquisition of Systems Management Engineering, Inc. had occurred
January 1, 2004.
The acquisition will be accounted for as a purchase, with the assets acquired
and the liabilities assumed recorded at fair values.
The pro forma adjustments represent, in the opinion of management, all
adjustments necessary to present the Company's pro forma combined financial
position and results of its combined operations in accordance with Article 11 of
SEC Regulation S-X based upon available information and certain assumptions
considered reasonable under the circumstances.
The unaudited pro forma combined financial statements presented herein is for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have occurred if the purchase had been
consummated on such dates, nor is it necessarily indicative of future operating
results or financial position. The unaudited pro forma combined financial
statements should be read in conjunction with the audited financial statements
of the Company and the notes thereto.
F-14
SCIENCE DYNAMICS CORP. AND SUBSIDIARIES
PRO FORMA COMBINED BALANCE SHEETS
DECEMBER 31, 2004
SCIENCE DYNAMICS SYSTEMS MANAGEMENT
CORP. ENGINEERING, INC.
AUDITED AUDITED ADJUSTMENTS COMBINED
-------------------- ------------------ ------------------ ---------------
Current assets:
Cash and cash equivalents $ 192,681 $ 5,159 $ (115,000) (b) $ 120,015
1,852,500 (d)
(160,000) (e)
(1,655,325) (a)
Accounts receivable - trade 56,922 999,416 1,056,338
Inventories 51,018 - 51,018
Other current assets 2,812 6,588 40,0(d) 51,500
-------------------- ------------------ ------------------ ---------------
Total current assets 303,433 1,011,163 (37,825) 1,278,871
-------------------- ------------------ ------------------ ---------------
Property and equipment, net 39,347 107,573 146,920
Other assets 2,812 4,100 6,912
Goodwill 3,243,861 (a) 3,351,361
107,500 (d)
-------------------- ------------------ ------------------ ---------------
Total assets $ 345,592 $1,122,836 $ 3,313,536 $4,781,964
==================== ================== ================== ===============
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Short term debt $ 300,000 $ $ $ 300,000
Bank overdraft 58,340 58,340
Notes payable current portion 577,000 577,000
Revolving credit line 550,763 (550,763) (c) -
Convertible notes 965,113 - 727,273 (d) 1,144,397
(547,989) (c)
Loans payable stockholders/officers 244,240 35,000 279,240
Accounts payable 834,456 7,562 842,018
Accrued expenses 839,689 203,279 (223,447) (c) 726,127
(93,394) (e)
-------------------- ------------------ ------------------ ---------------
Total current liabilities 3,734,261 881,181 (688,320) 3,927,121
-------------------- ------------------ ------------------ ---------------
Long term liabilities:
Long term Debt 93,750 93,750
Convertible Note 1,272,727 (c) 1,272,727
-------------------- ------------------ ------------------ ---------------
Total liabilities 3,734, 261 974,931 584,407 5,293,599
Minority Interest 22,186 (a) 22,186
Shareholders' equity -
Common stock - .01 par value,
200,000,000 shares authorized,
85,946,140 issued
85,820,340 outstanding
539,642 45,700 119,833 (a) 859,462
154,287 (c)
Preferred stock, .01 par value,
no shares issued and outstanding
Additional paid-in capital 16,080,961 272,695 (346,195) (a) 18,665,166
1,167,912 (c)
Retained Earnings (Deficit) (19,611,439) (170,490) (302,920) (a) (19,660,615)
(115,000) (b)
(66,606) (e)
-------------------- ------------------ ------------------ ---------------
(2,990,836) 147,905 2,706,943 (135,988)
Common stock held in treasury,
at cost (397,833) (397,833)
-------------------- ------------------ ------------------ ---------------
Total shareholders' equity (3,388,669) 147,905 2,706,943 (533,821)
-------------------- ------------------ ------------------ ---------------
Total liabilities and shareholders'
equity $ 345,592 $ 1,122,836 $ 3,313,536 $ 4,781,962
==================== ================== ================== ===============
See accompanying notes to financial statements
F-15
SCIENCE DYNAMICS CORP. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
DECEMBER 31, 2004
SCIENCE SCIENCE
DYNAMICS SMEI DYNAMICS
UNAUDITED UNAUDITED ADJUSTMENTS COMBINED
----------------- ------------------ -------------- ----------------
NET SALES $ 1,609,717 $ 3,714,003 $ 5,323,720
----------------- ------------------ -------------- ----------------
Operating costs and expenses:
Cost of sales 344,951 1,942,910 2,287,861
Research and development 304,160 - 304,160
Selling, general 1,503,422 1,893,364 (b) 115,000 3,511,786
and administrative
----------------- ------------------ -------------- ----------------
Operating (Loss) (542,816) (122,271) (115,000) (780,087)
Other income (expenses):
NJ NOL 233,956 233,956
Other Income 82,000 17,520 99,520
Interest expense (283,740) (33,869) (e) (66,606) (384,215)
Finance Expense (66,847) - (66,847)
----------------- ------------------ -------------- ----------------
Net (Loss) before Discontinued Operations (577,447) (138,620) (181,606) (897,673)
Loss form Discontinued Operations (189,041) (189,041)
Gain on Disposition of Assets 285,310 285,310
----------------- ------------------ -------------- ----------------
Net (Loss) $ (481,178) $ (138,620) $ (181,606) $ (801,404)
----------------- ------------------ -------------- ----------------
See accompanying notes to financial statements
F-16
SCIENCE DYNAMICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(a) Represents the purchase accounting related to the acquisition of
approximately 85% of the stock of Systems Management Engineering, Inc.
(SMEI) on February 14, 2005 for $3,310,650. As consideration the
Company paid $1,655,325 in cash and $1,655,325 in the Company's common
stock. The excess of the purchase price over the carrying values of the
net assets acquired were allocated to goodwill in the amount of
$3,243,861. Consistent with purchase accounting guidelines, the
stockholder's equity section of Systems Management Inc was eliminated
with the exception of a minority interest in the amount of $22,186.
(b) The additional $115,000 of Selling General &Administrative expenses
represents the incremental cost of officer salaries as per employment
agreements issued in conjunction with the SMEI acquisition
(c) Represents the conversion of the Laurus Master Fund, Ltd. Revolving
credit line and convertible debt and accrued interest totaling
$1,322,199. This amount was converted to 15,428,722 shares of the
Company's common stock in conjunction with the SMEI acquisition.
(d) Represents the borrowing from the Laurus Master Fund, Ltd. of a
convertible note in the amount of $2,000,000 to finance the SMEI
acquisition on February 14, 2005. The Company received net proceeds
$1,852,500, $107,500 was financing expense charged to good will and
$40,000 was prepaid legal fees for future filing of SB2.
(e) Represents $160,000 of interest for $2,000,000 convertible debt off set
by $93,394 of interest accrued on original convertible notes. The net
increase in interest expense of $66,606 is from the assumption that the
$2,000,000 convertible debt was assumed January 1, 2004.
F-17