-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DSyDyTz4d/I9xr1NkXo4MlrQeZvov6QbAdMM+m+0E6KnfsWXZVtquJ9LEcTAl+6R Y8zu1Mn8Eu8JhN2B+7ZSSQ== 0000350644-01-500011.txt : 20010905 0000350644-01-500011.hdr.sgml : 20010905 ACCESSION NUMBER: 0000350644-01-500011 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20010904 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCIENCE DYNAMICS CORP CENTRAL INDEX KEY: 0000350644 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 222011859 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-62226 FILM NUMBER: 1730493 BUSINESS ADDRESS: STREET 1: 1919 SPRINGDALE RD CITY: CHERRY HILL STATE: NJ ZIP: 08003 BUSINESS PHONE: 8564240068 MAIL ADDRESS: STREET 1: SCIENCE DYNAMICS CORP STREET 2: 1919 SPRINGDALE RD CITY: CHERRY HILL STATE: NJ ZIP: 08003 SB-2/A 1 sb-2amd2.txt FORM SB-2/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON September 4, 2001 Registration No.:333-62226 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Amendment No. 2 to 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) 1919 Springdale Road, Cherry Hill, New Jersey, 08003 (856) 424-0068 (ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL PLACE OF BUSINESS) Joy C. Hartman, President 1919 Springdale Road, Cherry Hill, New Jersey, 08003 (856) 424-0068 (ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE) Copies to: Gregory Sichenzia, Esq. Thomas A. Rose, Esq. Sichenzia, Ross, Friedman & Ference LLP 135 W. 50th Street New York, New York 10020 Phone (212) 664-1200, Fax (212) 664-7329 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. 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 Price (1) Fee be registered - ------------------------------------------------------------------------------ Common stock, 2,941,176 $0.81 (1) $ 2,382,353 (1) $596 par value $.01 per share - ------------------------------------------------------------------------------ Common stock, 872,727 $0.81 $706,909 $177 par value $.01 per share issuable upon exercise of warrants - ------------------------------------------------------------------------------ Total 3,813,903 $773 1. Based on the closing bid price of the common stock on June 1, 2001. 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. Prospectus SCIENCE DYNAMICS CORPORATION 3,813,903 shares of common shares Up to 3,813,903 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 August 29, 2001 the closing price of our common stock was $.20 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 __________, 2001 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 Science Dynamics Corporation has 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 1919 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 - ---------------------------------------------------------------------------- Total shares of common stock outstanding as of May 31, 2001 17,657,901 - ---------------------------------------------------------------------------- Common stock offered for sale by Up to 3,813,903 shares, assuming the selling shareholders the issuance of all of the shares registered in connection with the convertible notes and exercise of all warrants by the selling shareholders. - ---------------------------------------------------------------------------- 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. - ---------------------------------------------------------------------------- OTC BB Symbol "SIDY" - ---------------------------------------------------------------------------- - -3- Summary Financial Data You should read the following summary financial data together with the section of this prospectus entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and notes thereto included elsewhere in this prospectus. Year Ended Six Months Ended December 31, June 30, 2000 1999 2001 2000 ---- ---- ---- ---- Statement of operations data: Revenues $5,269,377 $2,347,984 $372,614 $3,547,753 Cost of revenues 1,891,484 1,330,886 288,526 1,284,270 Gross margin 3,377,893 1,017,098 84,088 2,263,483 Selling, general and administrative 4,747,424 3,059,765 1,839,340 1,408,305 Income (loss) from operations (1,369,531) (2,042,667) (2,510,042) 328,644 Interest expense, net of interest income 30,269 (12,219) (225,886) 8,438 Net (loss) (1,339,262) (2,054,886) (2,735,928) 337,082 Basic and diluted earnings (loss) per share $(0.08) $(0.12) $(0.15) $0.02 Shares used in basic and diluted earnings (loss) per share 17,549,993 16,777,070 17,783,710 16,777,070 As of As of December June 31, 2000 30,2001 ---------- ---------- Balance sheet data: Total working capital (deficit) $ 1,142,948 $ (218,682) Total assets $ 3,008,152 $ 1,646,019 Total liabilities $ 662,890 $ 2,005,452 Total stockholders' equity (deficit) $ 2,345,262 $ (359,833) - -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 $1,339,262 for the year ended December 31, 2000 and $2,054,886 for the year ended December 31, 1999. For the six months ended June 30, 2001, we incurred a net loss of $2,735,928. 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 $1,600,000 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. 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. If Natural Micro Systems were unable to deliver certain key components, it could take us from three to six months to port our software to a suitable alternative board. 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. - -5- A customer which accounted for 83% of our sales in 2000 was placed into receivership and future sales to this customer are unlikely. Another customer accounting for 15% of our 2000 sales will also discontinue purchases. It is common that a very small number of customers will account for a high percentage of our revenue, therefore the loss of a major customer would significantly decrease our revenues and increase our losses. 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 2000, two customers accounted for 83% and 15% of total sales. During 1999, three customers and their operating subsidiaries accounted for 64%, 10% and 10% of total sales. The customer accounting for 83% of total 2000 sales was Cascadent Communications, with whom we had a supply agreement. Our former president, chief executive officer and chairman of the board, Alan Bashforth, became president of Cascadent subsequent to his service as an officer of Science Dynamics. Mr. Bashforth continues to serve as a member of our board of directors. 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 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. Bell South Communications, which accounted for 15% of our sales in 2000, recently 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, the recent losses have 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. 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. - -6- Changes in technology and our ability to enhance our existing products, including research and development, will require technical and financial resources, the unavailability 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 recently delisted from the Nasdaq Stock Market ; our common stock now 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. 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. If we are required for any reason to repay the $1,200,000 of convertible debentures we issued in May 2001, we would be required to deplete our working capital, if available, or raise additional funds. Our failure to repay the convertible notes, if required, could result in legal action against us which could require the sale of substantial assets. In May 2001, we issued $1,200,000 principal amount of convertible debentures. The convertible debentures are due and payable, with 8% interest, in May 2003, unless sooner converted into shares of our common stock. In addition, any event of default as described in the convertible notes could require the early repayment of the convertible notes, including a premium of 30% of the outstanding principal balance of the note at the time of the - -7- default. We anticipate that the full amount of the convertible notes, together with accrued interest, will be converted into shares of our common stock, in accordance with the terms of the convertible notes. If we are required to repay the convertible notes, we would be required to use our limited working capital and raise additional funds. If we were unable to repay the notes when required, the note holders could commence legal action against us to recover the amounts due which ultimately could require the disposition of some or all of our assets. Any such action would require us to curtail or cease operations. The continuously adjustable conversion price feature of our $1,200,000 principal amount convertible notes may encourage the note holders to make short sales of our common stock, which could have a depressive effect on the price of our common stock and could require us to issue a substantially greater number of shares. The convertible notes which we issued in May 2001 are convertible into shares of our common stock at a 15% discount to the trading price of the common stock either prior to the issuance of the notes or prior to the conversion, whichever is lower. The conversion feature may encourage the note holders to make short sales of the common stock prior to their conversions. Such sales could significantly depress the price of the common stock, allowing the note holders to convert into a substantially larger number of shares of common stock. For instance, if the price of our common stock was $.40 per share, we would be obligated to issue 3,529,411 shares. If the price of our common stock fell to $.10, we would be obligated to issue 14,117,647 shares. Our obligation to issue shares upon conversion is essentially limitless. Our commitments to issue additional common stock may dilute the value of your stockholdings, adversely affect the market price of our common stock and impair our ability to raise capital. We currently have outstanding commitments in the form of convertible notes and warrants to issue a substantial number of new shares of our common stock. The shares subject to these issuance commitments are included in this prospectus and thus will be freely tradable. Furthermore, the number of shares issuable upon conversion of these securities is subject to adjustment, depending on the market price of our common stock. To the extent that the price of our common stock decreases, we will be required to issue additional shares upon conversion. There is essentially no limit to the number of shares that we may be required to issue. An increase in the number of shares of our common stock that will become available for sale in the public market may adversely affect the market price of our common stock and, as a result, could impair our ability to raise additional capital through the sale of our equity securities or convertible securities. 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. - -8- 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 2,941,176 shares of common stock underlying $1,200,000 of 8% convertible debentures, due May 22, 2003, issued 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. 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 is 1,470,588, based on a conversion price of $0.816 per share. We are required to register 200% of this amount, for a total of 2,941,176 shares. The actual conversion price will depend on the market price of our common stock prior to the conversion. In addition, 872,727 shares underlying warrants are being registered. These warrants, which expire May 22, 2006, have an exercise price of $1.4339 per share. 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 - - 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 $96,000 as payment for their services as finders. In addition, they will receive an aggregate of 8% of the proceeds upon the exercise of the warrantsissued to the investors. - -9- USE OF PROCEEDS We will not receive any proceeds from the resale of shares of common stock by the selling stockholders. However, we will receive the sale price of any common stock we sell to the selling stockholders 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. 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. - -10- HIGH BID LOW BID -------- ------- FISCAL 1999 First Quarter $ 0.75 $0.44 Second Quarter $ 0.88 $0.71 Third Quarter $ 1.21 $0.92 Fourth Quarter $ 4.85 $2.50 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 As of June 30, 2001, there were approximately 350 holders of record of our 17,657,901 outstanding shares of common stock. However, we believe that there are more than 850 shareholders because of stock held in street name by various broker-dealers. 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. - -11- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following management's discussion and analysis of the financial condition and results of operations should be read in conjunction with our financial statements and the accompanying notes appearing elsewhere in this prospectus. In addition to historical information, this management discussion and analysis of financial condition and results of operations contain forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors, including those set forth under "Risk Factors" and in other parts of this prospectus. Overview In 1998, management made a strategic decision to divert most of our development efforts towards the IP system. Advances in public and private IP-based networks now enable businesses to use the Internet Protocol to by-pass the Public Switched Telephone Network for national and international long distance voice, fax, and video communications. We continue to gain knowledge and experience in enhancing the development of the system for IP Telephony. We have revised our development and implementation of the products according to the direction of the marketplace. Management believes that the penetration of the IP Telephony market along with renewed interest and development in the Commander II call control series will provide significant growth potential. During the year, we changed the size and structure of our sales force. The sales team has increased from two UK based sales people in 1999 to a 10-person team (8 in the US and 2 in the UK) led by our new Vice President of Sales and Marketing. This team was fully in place by October 2000. Given typical sales lead times and the current state of the Telco market, we do not anticipate significant revenues to be generated by the new team until the second half of 2001. Our net sales results for the year ended December 31, 2000 were $5,269,377, an increase of $2,921,393 from sales of $2,347,984 for the year ended December 31, 1999. Our revenue in 2000 was predominantly derived from the Integrator Product Line. The results were largely due to the beginning of the deployment of the Cascadent supply agreement during 2000. This agreement provided $4,370,520 in revenue for the year 2000. This agreement was terminated upon our receipt of official word that Cascadent was placed into receivership. Our former president, chief executive officer and chairman of the board, Alan Bashforth, became president of Cascadent subsequent to his service as an officer of Science Dynamics. Mr. Bashforth continues to serve as a member of our board of directors. The strategy for 2001 is to generate sales revenue from the IP system via the efforts of our expanded sales team and to reinvigorate the Commander I and II product lines, as well as, to exploit the VFX-250S product. Although the sales of the VFX-250S did not reach the anticipated level, the market awareness of the functionality and quality of the product has been recognized. The sales for this product, while immaterial to total revenues, have been primarily in South America, with future sales opportunities generating from China and Russia. All sales made outside of the United States are denominated in US dollars, so currency fluctuations are not a factor. We are continuously exploring new niche opportunities, introducing new product offerings and marketing and sales initiatives to increase market share and value for our customers. The focus of our strategy included providing the core technology needed to deliver a broad range of telephony services; targeting key growth markets worldwide; promoting strategic relationships between our customers; delivering added value through customer support and services; and continuing to actively pursue business alliance candidates that complement or support our core competencies. - -12- RESULTS OF OPERATIONS - --------------------- 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, 2000 1999 ---- ---- Sales $5,269,377 $2,347,984 Net Loss $(1,339,262) $(2,054,886) Net Loss Per Share $(0.08) $(0.12) OPERATING EXPENSES PERCENT OF SALES ------------------ ---------------- 2000 1999 2000 1999 ---- ---- ---- ---- Cost of Goods Sold $1,891,484 $1,330,886 35.9% 56.7% Research & Development 1,141,656 1,331,521 21.7% 56.7% Selling, General & Admin 3,605,768 1,728,244 68.4% 73.6% Total Operating Costs and Expenses $6,638,908 $4,390,651 126.0% 187.0% Sales for the fiscal year ended December 31, 2000 were $5,269,377 compared to sales of $2,347,984 in the 1999 fiscal year. The sales revenue consists of sales primarily of our Integrator and Commander products, as well as revenue generated from the maintenance and support of those products. The primary factor that affected the increased sales performance was initiation of the roll out of the Cascadent supply agreement, which provided $4,370,520 of sales for the year. In the fourth quarter, at the request of Cascadent, we did not supply any further products to them. The unanticipated lack of revenue from Cascadent led to a loss of $1,693,774 in the fourth quarter of 2000. We committed our resources to the continual research and development of the IP Telephony Integrator gateway product. Management believes the effect of this strategy, as well as, the introduction of IP technology to its existing Commander call control product will provide changes in the composition of our customer base resulting in sales growth, customer advantage, and ultimately increased shareholder value. Sales of our Integrator product in 2000 were $4,380,520 or 83% of total revenue compared to zero in 1999, as the product was introduced in 2000. Sales of the Commander product in 2000 were $507,989 or 10% of total revenue compared to $1,024,098 or 44% of total revenue in 1999, this decrease was due to decreased sales to Bell South during 2000 and our emphasis on promoting our Voice over internet protocol solutions. Sales of our VFX product in 2000 were $116,235 or 2.2% of total revenue compared to $360,024 or 15% of total revenue in 1999. This decrease is due to an unusually large sale of $250,000 in 1999 to a Brazilian company. Maintenance and support is billed hourly at varying rates per hour depending on the expertise of the technician required to resolve the issue. In addition, any equipment needed to resolve a problem is also billed to the client. There were no maintenance contracts in place during 2000 or 1999, nor is maintenance and support included in our software license. Maintenance revenues for 2000 and 1999 were $58,046 and $138,282, respectively. Equipment sales related to maintenance for 2000 and 1999 were $41,407 and $399,752, respectively. - -13- Cost of Goods Sold decreased 20.8% as a percentage of sales from a 56.7% for the year ended December 1999 to 35.9% for the year ended December 2000. This decrease is related to the difference in the sales mix in the year 2000, with higher margin Integrator gateway sales replacing lower margin Commander call control sales. Research and Development expenses decreased from $1,331,521 in 1999 to $1,141,656 in 2000, a decrease of $189,865. 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 dollar decreases in research and development expenses were attributable to an increase and reallocation of the number of research and development personnel and expenses related to establishing a new testing facility during 1999. We believe that the research and development activities are crucial to maintaining a competitive edge in the rapid growth of the telecommunications marketplace. We expect to continue to make substantial investments in the research and development team to maintain a highly skilled force of design engineers for new product development, the key to the future. Selling, general and administration expenses decreased 68.4% as a percentage of sales in 2000 to $3,605,768 as compared to $1,728,244 or 73.6% as a percentage of sales in 1999. 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 decrease on a percentage basis is due to the significant increase in sales during 2000. The actual dollar increase of $1,877,524 is attributed to the addition of eight sales and marketing personnel along with increased trade show and advertising activity during 2000. We expect to incur substantial expenditures related to sales and marketing activities, the recruitment of additional sales and marketing personnel, and the expansion of our domestic and international distribution channels. Sales, General and Administration increased nearly $612,000 during the fourth quarter of 2001 over the third quarter of 2001. This increase was due to the following: write-off of bad debt of $151,560, the write-off of the forward error correction patent in the amount of $100,104, an increase is sales and marketing expenses mainly salaries and tradeshows in the amount of $145,000, an increase in consulting of $92,224, an increase in employment placement fees of $65,000, and the write-off of obsolete inventory in the amount of $65,078, these increases were offset by immaterial fluctuations in other areas. Bad debts for the year were $151,559. As a result of the Cascadent issue, we wrote off $100,159 in receivables, the receiver recently informed us that it is unlikely that we will recover any of this amount. We also reserved an amount of $51,400 against a receivable due from a sub-tenant, Pro-Circuits, Inc. Science Dynamics has recently entered into a payment agreement with the sub-tenant and believe that the amount is probable of collection. There were no bad debt write offs in 1999. - -14- Six Months ended June 30, 2001 (unaudited) compared to the Six Months ended June 30, 2000 (unaudited). The following table summarizes the basic results of operations for the periods indicated in the Consolidated Statement of Operations. Six Months Ended June 30, 2001 2000 ---- ---- Sales 372,614 3,547,753 Net (Loss)/Income (2,735,928) 337,082 Net (Loss)/Income Per Share $ (0.15) $ 0.02 OPERATING EXPENSES PERCENT OF SALES 2001 2000 2001 2000 ---- ---- ---- ---- Cost of Goods Sold 288,526 1,284,270 77% 36% Research & Development 754,790 526,534 203% 15% Sales, General & Admin. 1,839,340 1,408,305 494% 40% Total Operating Costs and Expenses 2,882,656 3,219,109 774% 91% - -15- Sales for the six-month period ending June 30, 2001were $372,614, a decrease of $3,175,139 from sales of $3,547,753 for the six-month period ended June 30, 2000. Our revenue in 2000 was predominantly derived from the Integrator product line. Those results were 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 first half of the year. We have received word that Cascadent will not emerge from receivership. Our former president, chief executive officer and chairman of the board, Alan Bashforth, became president of Cascadent subsequent to his serving as an officer of Science Dynamics. Mr. Bashforth continues to serve as a member of our board of directors. Cost of Goods sold decreased to $288,526 in the first six months of 2001from $1,284,270 in the corresponding six-month period of 2000. The decrease in the cost of goods sold was directly related to the decrease in sales revenue. The percentage increase of cost of goods sold as a percentage of sales was due to the change in mix of sales between the quarters with high margin Integrator equipment sales in 2000 compared to lower margin legacy products and services in 2001. Research and Development expenses increased to $754,790 in the first six months of 2001 as compared to $526,534 in the comparable six-month period of 2000. The increase in research and development expenses is related to continued work on adding additional functionality to our product mix, specifically introducing VoIP, live monitoring and recording to our Commander II series. We believe our success will depend, in part, on our ability to develop and introduce new products and enhancements to our existing products. We continue to work on expanding our engineering team and intend to continue to makesignificant investments in research and development. Sales, General and Administrative expenses increased to $1,839,340 in the first six months of 2001, compared to $1,408,305 in the corresponding period of 2000. The increase is related to the addition of sales and administrative staff during the second half of 2000 and increased consulting fees during 2001. We increased our sales and marketing department from two people in the first quarter of 2000 to eight in the second quarter of 2001. The major directive is to carry out a full-scale sales and marketing program to promote awareness and recognition of our products in the marketplace. We expect to continue to incur substantial expenditures related to sales and marketing activities, the recruitment of additional sales and marketing personnel and the expansion of our domestic and international distribution channels. Interest Expense increased to $230,524 for the period ended June 30, 2001 as compared to $0 for the same period in 2000. We entered into a $1,200,000 Convertible Note on May 22, 2001, which contained a "beneficial conversion feature" (see the Liquidity section below for a description of the Note). 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 $212,524, as calculated under the provisions of the EITF. This amount was immediately expensed, as the Notes were convertible into common shares at the time of the signing of the agreement. The remaining $18,000 in interest expense is accrued interest on the Convertible Notes. LIQUIDITY & CAPITAL RESOURCES Net cash used for operating activities for the years ended December 31, 2000 and 1999 was $628,040 and $874,925 respectively. The use of cash in operating activities in 2000 resulted primarily from the net loss of $1,339,262 and a decrease in accounts payable of $163,207, offset by decreases in accounts receivable of $54,846, inventory of $273,416, and other assets of $108,413. Net cash used in investing activities was $704,246 in 2000 and $123,555 in 1999. The increase in cash used for investing activities in 2000 was primarily attributable to capital expenditures for the purchase of computers and software for development of our current and new products and for leasehold improvements. We expect to increase its capital expenditures to maximize development efforts of our new products and applications as necessary. We had no significant commitments as of December 31, 2000 for capital expenditures. - -16- Net cash provided by financing activities was $2,009,134 for the year ended December 31, 2000. This amount is related to the sale of 200,650 common shares at $8.50 per share which netted $1,570,149, the finders fee from this transaction included the issuance of 13,115 warrants to purchase common shares. The remaining increase in financing activities of $438,985 was related to the exercise of stock options by our employees, the sale of net operating losses, offset by the payment on the capitalized lease. Cash and cash equivalents decreased to $187,774 for the period ended June 30, 2001 from $1,351,641 at December 31, 2000. Net cash used for operating activities was $2,041,134 for the six months period ended June 30, 2001 compared to $962,932 cash used for operating activities in the six month period ended June 30, 2000. Absent significant sales in the near term, it is anticipated that we will need to raise additional funds in the approximate amount of $600,000 in the late September timeframe in order to maintain our operations at the current levels through the November of 2001. Based on our current cash flow projections and our operational budget the Company may need to raise an additional $1,000,000 to support its business plans in the December 2001 or January 2002 timeframe, anticipating thereafter that revenue will increase sufficiently to fund our operational goals and additional infusions of cash will not be required to sustain operations. In order to preserve cash, we have reduced the number of employees from 37 to 29 since June 2001, which we anticipate will save us $847,187 per year. In addition to reducing the number of employees, we changed the mix of employees to more efficiently address our needs, so that the decrease in the actual number of employees did not have an adverse impact on our operations. Net cash used in investing activities was $109,176 during the six-month period of 2001 compared to $305,384 in the corresponding six-month period of 2000. 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. 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 is 1,470,588, based on a conversion price of $0.816 per share. We are required to register 200% of this amount, for a total of 2,941,176 shares. The actual conversion price will depend on the market price of our common stockprior 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. Net cash provided by financing activities during the six-month period ended June 30, 2001 was $986,443 this is related to the convertible debt described above, offset by the payment on capitalized leases. Net cash provided by financing for the six-month period ended June 30, 2000 was $1,724,057. This amount is related to the sale of 200,650 common shares at $8.50 per share which netted $1,570,149, the finders fee from this transaction included the issuance of 13,115 warrants to purchase common shares. The remaining increase in financing activities of $153,908 was related to the exercise of stock options by employees of the Company. The sales revenue shortfall in the first six months, due to a combination of the slowdown in telecommunications spending and the loss of the Cascadent contract, has greatly impacted cash on hand. Our currently anticipated levels of revenue and cash flow are subject to many uncertainties and cannot be assured. The amount of funds we require will depend on many factors, including the extent and timing of sales, product costs, engineering and customer/technical support requirements. The inability to obtain the required financing and to generate sufficient cash from operations could require us to reduce or eliminate expenditures for marketing of its products and research and development, or curtail its operations. - -17- Although we have no material commitments for capital expenditures, management anticipates a substantial increase in the need for working capital and capital expenditures consistent with our anticipated growth plan. By means of the growth plan, we seek to retain the services of persons who are now employees and consultants, to secure and retain the services of new employees and/or consultants as needed and to provide incentives for such persons to exert maximum efforts for the success of Science Dynamics. The amounts and timing of these expenditures will vary depending on a number of factors, including the amount of cash generated by our operations, competitive and technological developments and the rate of growth of our business. - -18- BUSINESS Corporate Background We were incorporated in the State of Delaware in May 1973 and started business in July 1977 under the name Science Dynamics Corporation. Recently we have been using the trade name SciDyn. Overview We develop and market product lines that we sell to telephone companies and other telecommunications companies. Our products include devices and software for processing telephone calls on the traditional and still prominent telephone networks. We also have developed and are marketing devices and software for voice and video communications using the Internet. Industry Overview - IP Telephony Voice over InternetProtocol or IP Telephony refers to communication services - voice, facsimile, and voice messaging applications - that are transported via the Internet, rather than the traditional telephone network. The basic steps involved in originating an Internet telephone call are conversion of the analog signal to digital format and compression and translation of the signal into Internet protocol packets for transmission over the Internet. The process is reversed at the receiving end. Packet vs. Circuit switching. To understand the difference between circuit switching and packet switching, think of a highway between two cities. Traditional telephone technology would use an entire lane of the highway for one car for the duration of its trip. Packet switching technologies, like IP Telephony, fill all of the lanes with lines of cars in each lane. IP simply makes much more efficient use of the transmission path. Circuit switching technology uses traditional telephone networks inefficiently when it opens and maintains a dedicated line for every call, regardless of the density of the information being transmitted. The result is wasted bandwidth, as the end-to-end connection remains in place even during those moments when no actual information is being transmitted. IP packet technology breaks the information down into pieces, places them into electronic packets and then fills the pipe with these packets of information. The packets not only fill the pipe, but are also directed along the way by routers that read the address information. They direct each packet along the fastest route to the destination, where all of the pieces of information are reassembled, ready for receipt by fax, computer or listener. All of this takes place in only a fraction of a second. Market Forces Driving Growth of IP Telephony Growth of the Internet The Internet is a very large global data network that has experienced most of its growth within the last five years. The Internet is largely a separate network from the traditional circuit-switched telephone network. - -19- The volume of data traffic now exceeds the volume of voice calls, and is growing at a faster pace. The physical infrastructure of the Internet has expanded dramatically to accommodate rapid growth in data traffic over the Internet around the world, and such growth is expected to continue. Deregulation Deregulation of communications markets around the world has been a driving force in the adoption of IP Telephony. Regulatory barriers that restricted service providers to a particular geography and regulated rates and service offerings are disappearing. New competitive service providers are entering the market, challenging incumbent monopolies and offering voice services where none existed before. The flexibility and cost-effectiveness of IP Telephony networks, compared to circuit switched technology, are particularly important in an increasingly deregulated and competitive market environment. Once competitors enter new markets and deploy IP Telephony-based networks, the incumbent service providers frequently upgrade their network to include IP Telephony technology so that they can compete with the new entrants. Technological and quality improvements in IP Telephony Developments in IP Telephony technology have significantly bridged the voice quality gap between the circuit-switched system and IP Telephony systems. Today a voice call placed over an IP Telephony network can sound virtually indistinguishable from the same call made over the traditional telephone system. Cost savings opportunities Voice over IP offers service providers cost savings and operational efficiencies relative to circuit switched networks: Efficiencies of a shared network. The Internet was initially developed as a data network that is separate from and parallel to the circuit-switched traditional voice network. Each network--the Internet and the circuit-switched network--has its own dedicated equipment. Each network has operational support systems built around it (provisioning, installation, etc.) and personnel that manage and maintain those systems. The unification, also called convergence, of these two networks by moving voice traffic from the circuit-switched network onto this Internet data network will enable service providers to share traffic, equipment and operational support systems rather than maintaining completely separate networks dedicated to their own applications of voice or data. Efficiency of IP transport. When calls are routed over the Internet, the calls are compressed. Advanced speech compression technology can compress a call to consume as little as 10% of the network capacity that an uncompressed circuit-switched call would take up. Because the call takes up less space, it allows for more efficient use of the data network. - -20- Savings on international settlement charges. When phone calls travel between countries over the circuit-switched network, there is usually a per-minute settlement charge placed on each call. The originating phone company pays the terminating phone company this settlement charge, which can be in excess of $.20 per minute, depending on the countries exchanging traffic. In most places, Internet traffic is generally excluded from these per minute settlement charges. When phone calls are sent over the Internet, they become Internet data like any other Internet traffic and are, therefore, not subject to these settlement charges. This reduces the cost of transporting a phone call over the Internet and provides a financial incentive for international telecommunications service providers to route their phone traffic over the Internet. The circuit switched settlement charges are dropping internationally and are expected to decline over time. Market outlook - size and growth Telecommunication industry analysts predict strong industry growth for the IP Telephony market. Synergy Research Group, a telecommunications market analyst, stated in their first quarter, 2001 report, that "the market while still small, is beginning to take off. A recent study shows the market grew from $34.1 million in 1999 to $268.0 million in 2000, but it was still just a tiny piece of the $20 billion traditional phone system market." The Net-based phone market will eat into the traditional voice equipment market within five years, growing to $532 million this year and $3.8 billion by 2005, according to the Synergy report. Cisco and 3Com, which entered the market in 1998 by acquiring start-up companies, have captured most of the revenue, with Cisco leading the way with 40 percent, followed by 3Com with 15 percent, according to the Synergy market research report. With rapid growth expected in the market, telecommunications equipment makers that have built the traditional phone systems, called PBXs, can't ignore the Net-based phone systems, the Synergy analysts say. Lucent Technologies' spinoff Avaya, Nortel Networks, Alcatel and others initially entered the market by creating hybrid technologies that combined internet technology with traditional voice products. Now they are in various stages of releasing Net-based phone systems according to the analysts. For example, Avaya began selling its Net phone system in late November, "Clearly, this is something Alcatel, Nortel and Siemens (and others) have to pay attention to because phone system are a significant cash cow for their business," said Synergy Founder and Principal Analyst Jeremy Duke. Our Product for the IP Telephony Industry IntegratorC-2000 Series of IP Gateways We develop software and use other companies' hardware to provide equipment that we call the IntegratorC-2000 Series of IP Gateways. Our equipment delivers simultaneous transmission of voice, fax and data over the Internet. This is commonly referred to in our industry as voice over Internet protocol or IP Telephony. - -21- Using our technology to simultaneously transmit voice, fax and data, our customers should be able to more efficiently and cost effectively use the available capacity of their networks. Our product offers service providers an opportunity to generate new revenue and enhance their competitive position by offering their customers personalized, enhanced services and features. Our Integrator IP Gateways are based on our proprietary BubbleLINK(R) software that permits our customers to add new product and service features without extensive product cost or development time. Our primary customer to date has been Cascadent Communications. This company was placed in receivership after completing purchases of $4,370,520 pursuant to its contract with us. Our former president, chief executive officer and chairman of the board, Alan Bashforth, became president of Cascadent subsequent to his service as an officer of Science Dynamics. Mr. Bashforth continues to serve as a member of our board of directors. Additional potential customers include: service providers, system integrators, resellers and enterprises. Service provider customers include traditional local, international and wholesale long distance telecommunication companies, as well as next generation service providers, including Internet service providers, application service providers and others employing Internet-based business models. Traditional telecommunication service providers and next generation service providers are addressing business challenges and service demands that result from a worldwide movement towards deregulation of telecommunications markets, a trend that has been reinforced by a mandate from the World Trade Organization. Benefits of Our IP Telephony Solution Total solution We offer a suite of IP Telephony products that allow service providers to offer services to consumers and to small, medium and large business customers. Our products can support small or large networks; local or long distance networks; and limited or extensive features. We provide a consistent and flexible set of solutions to enable the processing of calls and centralized network management functions. New revenue streams for service providers Our flexible, customized client-server software allows our customers to quickly design and deliver new features and services to their customers. In a deregulated telecommunications marketplace these services can provide sources of revenue to the next generation communications service providers. Distributed architecture Our software is comprised of distinct units that can be spread across a network. Compared to a circuit-switched network, a network using our product may be modified quickly to accommodate new features, support new protocols or handle new end-user devices, such as IP telephones, as they become widely-used or available. Voice quality Calls over our product generally have sound quality that is indistinguishable from the sound quality of calls over the traditional network. In addition, our product enables the simultaneous transmission of voice, fax and data traffic, by using standard compression and echo cancellation technologies. - -22- Competition in the IP Telephony Industry Our market is new, rapidly evolving, highly competitive and fragmented, and we expect competition to intensify in the future. We believe that the main competitive factors in our market are product quality, features, cost and customer relationships. We believe a critical component to success in this market is the ability to establish and maintain strong customer relationships with a wide variety of service providers around the world and to facilitate relationships between those service providers increasing the geographic coverage of their services. Our current principal competitors include large networking equipment manufacturers, such as Cisco Systems, Inc.; large telecommunications equipment manufacturers, such as Lucent Inc. and Nortel Networks Corporation; and IP telephony technology companies, such as Clarent Corporation and VocalTec Communications, Ltd. We also expect new competitors to emerge. Many of our competitors are substantially larger than we are and have significantly greater financial, sales and marketing , technical, manufacturing and other resources, and more established distribution channels and stronger relationships with service providers. These competitors may be able to respond more rapidly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sale of their products than we can. In addition, they may be able to compete more effectively because they will be able to add IP telephony features to their existing equipment or bundle these features as part of a broader solution. Furthermore, we believe some of our competitors may offer aggressive sales terms, including financing alternatives, which we might not be able to match. These competitors may enter our existing or future markets with solutions that may be less expensive, provide higher performance or additional features or be introduced earlier than our solutions. Given the market opportunity, we also expect that other companies may enter our market with better products and technologies. If any technology that is competing with ours is more reliable or faster or less expensive or has other advantages over our technology, then the demand for our products and services could decrease. We expect our competitors to continue to improve the performance of their current products and introduce new products or new technologies. Successful new product introductions or enhancements by our competitors could reduce the sales or market acceptance of our products and services, perpetuate intense price competition or make our products obsolete. To be competitive, we must continue to invest significant resources in research and development , sales and marketing and customer support. We cannot be sure that we will have sufficient resources to make these investments or that we will be able to make the technological advances necessary to be competitive. Increased competition is likely to result in price reductions, reduced gross margins and loss of market share. Our failure to compete successfully against current or future competitors could seriously harm our business, financial condition and results of operations. Industry Overview - U.S. Corrections According to the U.S. Bureau of Justice Statistics as of December 1999 - - 6.3 million adults were under some form of correctional supervision - - approximately 4.25 million adults were under parole or probation sanction - - there were approximately 2.5 million inmates in state and federal and local prisons - - from 1990 to 1999 the number of inmates increased by an average of 6.0 percent annually - - there are approximately 4,500 correctional facilities in the U.S. - -23- Calls from inmates of federal, state, and local correctional facilities comprise an important segment of the public communications market. Inmates typically may only place calls for a limited duration, which generates a high volume of calls per phone, and generally may only place collect calls. Consequently, the inmate calling market is an attractive segment of the corrections industry to established telephone companies and other telecommunications service providers. The inmate calling market presents unique and substantial challenges to the telecommunications service provider. Correctional authorities generally favor telecommunications service providers who can manage the inmate phone systems themselves, maintain consistent service and easily process new inmates into the systems. Correctional authorities generally require control features that limit the length of calls, limit the time of day calls are made, and restrict the ability of inmates to make harassing or unapproved telephone calls. The telecommunications service provider must be able to customize the call control features by facility, cellblock, telephone and, in some cases, each inmate. One of the unique challenges is to prevent the fraudulent bypassing of these controls through three-way calling. Inmates attempt to bypass traditional control features by calling an accomplice at an approved number and having the accomplice use three-way calling to conference a non-allowed party. Through this method, inmates have been known to harass and intimidate people such as witnesses, whose numbers would otherwise be blocked, and to call merchants to conduct fraudulent activities. Correctional authorities generally select telecommunications service providers on the basis of services and features provided and on the level of commissions paid to the facilities. Competition is intense among the telecommunications service providers and this has led to commission payments to correctional facilities at very high levels. In addition, to win new contracts and renew existing contracts, telecommunications service providers must differentiate their services from those of the competition. We are willing to customize our product and give our customers an advantage to win new contracts and renew existing ones. Correctional authorities recognize the benefits of outsourcing to telecommunications service providers that provide leading edge technology that can assist their goal of improving efficiency in operations. Our Product for the U.S. Corrections Industry Commander Inmate Telephone Control System (ITCS) We develop software and use other companies' hardware to provide specialized call processing equipment that we call the Commander to the corrections industry. Our corrections products were originally designed in 1986 to provide timing and call control for collect phone calls made by inmates from U.S. correctional institutions. We sell our product through relationships with telecommunications companies or telecommunication service providers. Our primary customer to date has been Bell South Public Communications. Bell South is in the process of phasing out its correctional telephone systems, and we do not expect additional sales to this customer. Additional potential customers include: AT&T, Verizon (including GTE), Qwest (including US West), Sprint, WorldCom and other companies that provide telecommunications services to the corrections industry. It is our intent to replace Bell South and to increase the number of customers using our products. We intend to do this through increased relationship management efforts and by offering flexible business arrangements including transaction based fees and revenue sharing. Our products can be used at the smallest local correctional facility or the largest state or federal correctional facility. - -24- Specialized call processing within the corrections industry requires the development of advanced capabilities such as fraud control of outgoing calls and flexible call rating systems. We sell a product specifically designed for this industry. However, since we design our product from a modular systems approach, we believe that with minimal effort the product could be adapted to meet call processing needs in other industries. Industry applications such as Hotel, Customer Relation Management (CRM), and Calling Card and International Callback service providers can be handled from the foundation of the Commander call processing system. Many of the Commander system modules provide core capabilities common to all call processing applications. The call rating module, voice prompting module, and call detail records are a requirement for any application which processes calls such as calling card, international call back or custom calling service applications. Another key aspect is in the software design of the Commander application processor. This software component was specifically designed to allow for fast adaptation to specialized call scripts. The call script is the heart of any call processing application. This is the vital component that interacts with a caller to deliver the service or feature desired. Our Commander II product can handle thousands of lines and thousands of call transactions per hour to provide correctional facility officials with effective tools to manage and control inmate telephone calls using the Commander system software. The Commander I products are designed for the small to mid sized 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. The Commander product line provides dialing instructions, call announcement and acceptance messages and error prompts in multiple languages. A flexible inmate account option allows for management of inmate personal identification numbers. System control features applicable to each inmate telephone such as call blocking, call timers, system reports, alarm parameters and real-time display of activity allow for expanded control. The product may be configured to have one inmate phone for every one outbound telephone line or can be configured to concentrate multiple inmate phones to one outbound telephone line. This line concentration allows for cost savings in the provisioning of the number of inmate telephone lines. The Commander I and II Call Control Systems can be configured using one or more AdminManager workstations. The AdminManager provides real-time administration of the Commander through an Ethernet Local Area Network (LAN) or a Wide Area Network (WAN). - -25- Competition in the U.S. Corrections Industry 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. 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 have included the design for this feature in our software development plan. Both of these technical issues will be resolved in early 2002 for the inmate call processing systems. We estimate our current market share at approximately 3% of the total equipment market for inmate collect calling from U.S. Federal, State and County adult facilities. The largest competitor in the market is a publicly traded company, T Netix Inc., which has approximately a 30% market share and acts as both an equipment provider and a telecommunications service provider. Additionally, we estimate that Evercom, Inc. has an equal or greater market share compared to T-Netix. We view both T-Netix and Evercom as both competitors and potential customers for our equipment. Other equipment competitors include Global TelLink (a wholly owned subsidiary of Schlumberger Technologies, Inc.), Radical System Solutions, Omniphone, Value Added Communications and Panda Systems. Recent Developments for Commander Our Voice over Internet Protocol technology is now available on the Commander Inmate Telephone Control System. This enhancement reduces the number of inmate telephone lines that are required to operate an inmate calling system. It does this by compressing the telephone call into data packets, thereby eliminating the need for traditional phone lines from the facility. This new enhancement allows our customers to aggregate all of the telephone calls from multiple locations to a central location, therefore reducing the amount of individual phone lines needed at each facility. This may give our customers the potential to reduce per minute charges incurred to terminate phone calls and possibly increase their profitability. Patents for Commander Our Commander product line also includes our patented three-way call detection and prevention technology that prevents inmates from bypassing control features through three-way calling. This patent expires in 2015. Our VFX Product for Video Conferencing over Frame Relay Industry Overview - Frame Relay Frame Relay has been in existence for several years, and is now the most widely deployed data transmission means in the world. Frame Relay, therefore seemed an obvious choice for adding video connectivity to its wide complement of features. - -26- Traditionally, video conferencing has been carried via leased lines or ISDN circuits. In the US market, due to the proliferation of ISDN availability, video conferencing has been able to take off with a relatively high growth curve. This is not true in the international markets where leased lines and ISDN circuits are either not readily available or prove to be rather costly. By leveraging the proliferation of frame relay networks throughout the world, SciDyn intends to market the VFX-250S products in markets where ISDN and leased line services are not available. As Frame Relay becomes more prolific, so does the need for value added services which maximize efficiency of the network. This has proven very successful in the past in markets such as Brazil. Three countrywide frame relay networks are presently under construction in China. Trials are continuing and we continue to anticipate possible business opportunities in the latter part of 2001. Sales of the VFX-250S have been slow throughout 2000. There are a number of large-scale projects quoted late last year, which have not yet been awarded. These include opportunities in China and Russia. Brazil continues to proceed steadily and is anticipated to provide sales. VFX Product Competition 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. The advantage of video over Frame Relay is the substantial cost savings. A customer can get maximum efficiency from their existing Frame Relay infrastructure to satisfy all their communications needs. There are no additional monthly expenses for other services, in comparison to all the traditional video conferencing solutions. For example: International ISDN call prices frequently exceed $1 per minute per line. By eliminating this substantial cost, the return on investment for video, voice and data over a single Frame Relay network, even with the higher international rates for Frame Relay, is dramatic. Sales and Marketing During the last two years, we have significantly increased our sales and marketing staff, launched new web initiatives and implemented a complete sales automation process. This has increased our efficiency and effectiveness to evaluate opportunities generated from web inquiries, trade shows, press releases, and partner relationships. Our intent is to diversify our customer base, thereby limiting the business risk of only having several key customers. Research and Development The majority of the research and development activities are conducted at our facility using our array of telephony resources and the technical expertise of its engineering staff. We have fourteen employees currently engaged in engineering and research and development. We plan to devote a substantial portion of our resources to research and development and to continue utilizing subcontractors to enhance our engineering staff. - -27- During 2000 and 1999, we spent $1,141,656 and $1,331,521 on research and development. We anticipate that an increase in future research and development expenditures will be necessary to remain competitive in the rapidly changing telecommunications industry. We intend to utilize other companies to accelerate the development of new product offerings, although we have no specific plans to do so as of the date hereof. The Voice Enabled Commander, Voice over IP technology on the Call Control Platform which we announced January 22, 2001, was developed internally. There have been no sales generated to date. Materials and Principal Suppliers Our IntegratorC-2000 product lines use our proprietary BubbleLINK(R) software. We use a combination of industry standard computer telephony hardware including commercial grade personal computer technology, telephone voice cards, the Windows NT operating system, and our Integrator software. Our primary effort is the software design of products, limited hardware design and system integration of purchased products. We purchase equipment then integrate our custom software. We try to purchase equipment for use in our products by establishing relationships with industry leaders in the networking, telecom, and personal computer industry. We selected Natural Microsystems as the hardware vendor for the telephony voice card used in our products. We chose Natural Microsystems for its technical expertise, high level of service and worldwide support. Natural Microsystems is the sole source supplier for certain circuit boards we use, however, we do not have any formal supply agreement with them. We selected Crystal Group, Inc. as the hardware integration source for our IP Telephony gateways. By integrating our software with Crystal Group's hardware platform, we believe based upon past performance that the two companies should be capable of a high level of service and support to telecommunications companies worldwide. Our Commander product lines are built on our proprietary BubbleLINK(R) software. We use a combination of industry standard computer telephony hardware including commercial grade personal computer technology, telephone voice cards, and the Windows NT operating system, and our Integrator software. Our VFX Video over Frame Relay product line manufacturing is outsourced to third party contract hardware manufacturers. Customers During 2000, two customers accounted for 83% and 15% of total sales. During 1999, three customers and their operating subsidiaries accounted for 64%, 10% and 10% of total sales. The customer accounting for 83% of total 2000 sales was Cascadent Communications, with whom we had a supply agreement. Our former president, chief executive officer and chairman of the board, Alan Bashforth, became president of Cascadent subsequent to his service as an officer of Science Dynamics. Mr. Bashforth continues to serve as a member of our board of directors. The agreement was terminated on January 4, 2001, - -28- 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. Bell South Communications, which accounted for 15% of our sales in 2000, recently announced that it was withdrawing from the public phone market, so future sales to Bell South are unlikely. With the introduction of the new product lines and the expansion of the sales team from two to 10 people, we anticipate less reliance on any single customer or market in the future. Employees As of July 1, 2001, we employed 29 persons on a full time basis. We supplement full-time employees with subcontractors and part- time individuals, according to our workload requirements. 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. Such sublease is currently in default, and we have engaged legal counsel who has filed a complaint to evict such tenant. The tenant is currently in negotiations with us to cure the default and reinstate the sublease. We also lease a small office space in Crawley, United Kingdom, on a month to month basis. Legal Proceedings We have been named as a defendant in a lawsuit brought on March 5, 2001, by prisoners of correctional institutions in which our Commander systems have been installed. The lawsuit, which seeks unspecified damages, is entitled Mildred Fair, et al., v. Sprint Payphone Services, Inc.,et al., U.S. District Court, District of South Carolina, Greenville Division, Docket No.: CA No. 6:01-626-20. This is a class action lawsuit brought against numerous defendants, including a number of telephone companies. We believe that we have adequate defenses against such lawsuit, and given the nature of our involvement with the transactions set forth in the complaint, we do not believe the lawsuit to be material. Except for the foregoing, we are not 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. - -29- MANAGEMENT The following table sets forth certain information regarding our directors and executive officers as of September 4, 2001. Name Age Position with the Company and term served ---- --- ----------------------------------------- Sheldon Hofferman 56 Chairman of the Board since November 30, 2000 and Director since September 17, 1997 Joy C. Hartman 52 President and Chief Executive Officer since January 28, 2000, and Director since May 7, 1991 Kenneth P. Ray 67 Director since May, 1990 Alan C. Bashforth 51 Director since November 7, 1996 John Innes 68 Director since October 12, 2000 L. Michael Hone 51 Director since October 12, 2000 Louis Padulo 64 Director since January 17, 2001 Robert O'Connor 39 Vice President of Finance and Administration since May 15, 2000 Joseph Giegerich 34 Vice President of Sales and Marketing since October 10, 2000 Thomas Spadaro 40 Vice President of Technology since December 12, 2000 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. Sheldon C. Hofferman, has been an Attorney and Private Investor since 1971. Mr. Hofferman graduated from the University of Pennsylvania in 1966 and Temple University Law School in 1971. He was in private law practice in Washington, D.C., specializing in communications law, from 1971 to 1974. He served as Senior Trial Attorney for the Federal Trade Commission from 1974 to 1983, and re-entered private law practice thereafter. Mr. Hofferman has also served as General Partner of Golden Phoenix Limited Partnership, an investment concern, since 1983. Joy C. Hartman became President and Chief Executive Officer in January 2000, and continues to serve as Assistant Secretary and Treasurer. Ms. Hartman joined us in January 1982. In addition to holding these positions, other positions she has held with us 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. - -30- Kenneth P. Ray has been President of DelRay, Inc., an active telecommunications consulting firm, for more than the past five years. From 1964 to 1987, he was associated with ITT in various responsible positions and in 1976 became Vice President of ITT Telecommunications, with responsibility for engineering, marketing and sales departments. In 1981, he became Vice President and Director of Operations for the Transmission Division of ITT Space Communications. In January 1987, ITT's telecommunications group was acquired by Alcatel and Mr. Ray became Vice President of Marketing and Development for Alcatel Network Systems. From 1988 to 1991, he was Vice President for Technology and Business Development for Alcatel North America, a telecommunications company. Mr. Ray received a BSEE from Polytechnic Institute of New York in 1954 and a Masters in Economics from North Carolina State University in 1970. Alan C. Bashforth, President and Chief Executive Officer of SciDyn until January 2000, relinquished those positions and served as Chairman of the Board until November 15, 2000. He was President of Cascadent Communications, a major customer of SciDyn 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. Mr. Bashforth also serves as a Director of Satellite Media Services Ltd. John Innes, has been Chairman since December 1997 of ACHP, a company started to meet the need of electronic banking/funds transfer marketing and processing. From 1994 through December 1997, he was engaged in his own practice as an attorney, investor and consultant. He has 30 years of experience managing, reorganizing, and financing public and private companies. Since 1971, he has been an attorney, consultant and investor in companies in various industries including investment banking, media, aviation, waste management and electronic commerce. From 1992 to 1994, Mr. Innes was Chairman of Commonwealth Associates, a New York based investment- banking firm. Mr. Innes served as Vice-Chairman of Wheeling-Pittsburgh Steel Corporation; Managing Director of Sabre Insurance Company Limited from 1986 - 1991; he also served as General Counsel of Gulfstream Aerospace Corporation from 1976 - 1986. Mr. Innes graduated from Williams College and from Temple University Law School. L. Michael Hone, was the President and Chief Executive Officer of Centennial Technologies, Inc., a publicly traded company, from August 1997 through June 2001. Previously he was Chairman and Chief Executive Officer of PSC, Inc., a publicly held manufacturer of hand-held and fixed-position laser-based bar code scanners, scan engines and other scanning products from 1992 to 1997. Mr. Hone also served as director of Rochester Healthcare Information Group, Inc., a company principally engaged in providing data processing management to the healthcare industry. Mr. Hone served as director of the Association for the Blind and Visually Impaired, Inc., which is principally engaged in assisting the blind and visually impaired to achieve vocational and social independence. Mr. Hone was previously chairman of AIM USA and AIM International. Mr. Hone is a named inventor on six United States patents. He attended Ohio State University where he majored in Business. - -31- Louis Padulo, a President Emeritus of University City Science Center in Philadelphia Pennsylvania since 1997, served as President and Chief Executive Officer of the non-profit consortium of leading universities and organizations, between 1991 and 1996. Previously, he served as President of the University of Alabama in Huntsville and has held a number of administrative and faculty positions with Boston University, Stanford University, Morehouse College, Massachusetts Institute of Technology, and the University of Tokyo among others. Additionally, Mr. Padulo possesses extensive industry and consulting experience, and has held and continues to hold a number of board and directorship positions with both public and private organizations. Mr. Padulo received a Bachelor of Science degree from Fairleigh Dickinson University, a Master of Science degree in Electrical Engineering from Stanford University, and a Ph.D. from the Georgia Institute of Technology. Robert O'Connor came to us from PricewaterhouseCoopers, L.L.P in Philadelphia, PA, where he served from January 1998 to May 2000, as a manager of middle market advisory services. Form May 1996 to June 1997, he served as controller of Optic Image Software Corporation. Mr. O'Connor served as vice president of finance and administration at AW Computer Systems from May 1993 to September 1996. Mr. O'Connor received his MBA from Rutgers-Graduate School of Management, BS from Kean University in Union, NJ, and he is a Certified Public Accountant. Joseph Giegerich has more than 11 years of product marketing, product introduction, and marketing strategy experience in the telecommunications field, specializing in advanced and emerging technologies. He has been involved in new business development, including two startups, an acquisition, and a successful IPO. Most recently from November 1999 to September 2000, he served as Vice President of Sales for iFace.com, a telecommunications equipment provider specializing in Internet and Computer Telephony applications. Previously, from May 1998 to November 1999, he served as Director of Key Accounts with Philips Speech Processing, a division of Philips Electronics NA, where he directly managed $40 million in strategic channel relationships for Philips core speech technology. He was one of the original founders November 1991 to April 1998, of Voice Systems Technology (VST), a company offering network-based enhanced service platforms and pre-paid wireless applications. VST was subsequently sold to Boston Communications Group and went public shortly after. Earlier in his career, he built and launched a successful voice messaging service bureau. He earned a degree from Rutgers University in Economics, with a minor in Computer Science. Thomas Spadaro, who has been with Science Dynamics for the past 18 years, manages the development and design of all major product offerings for us. Presently, his main task is to develop solutions that facilitate the transition from a circuit-switched network to a digital, packet-based communications environment. Among the projects he has spearheaded since joining SciDyn in 1983 are the Integrator Series of IP gateways, the Call Control System for correctional facilities and the VFX-250S, Video over Frame Relay Access Device. He previously served as our Director of Engineering. - -32- 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 $100,000.
SUMMARY COMPENSATION TABLE Annual Compensation Long term compensation ----------------------- -------------------------- Name and Year Salary Bonus Other Awards All Principal ($) ($) Annual Restrict- Options/ LTIP Other Position Compen- ed Stock SARs(#) Pay- Compensa- sation ($) Award(s)($) outs($) tion ($) - ---------- ---- ------ ----- ---------- --------- ---------- ------ -------- Joy C.Hartman, 2000 161,185 -0- 1,666 -0- 100,000 -0- -0- President and 1999 113,237 -0- -0- -0- 10,000 -0- -0- CEO (1) 1998 111,000 -0- 5,632 -0- -0- -0- -0-
1 Ms. Hartman was appointed our President and CEO in January 2000. Option Grants in Fiscal 2000 The following table shows information regarding stock options granted to our executive officers during the fiscal year ended December 31, 2000
Name and Position No. of Securities % of Total Options Exercise Expiration Underlying Granted to Employees price Date Options Granted in Fiscal Year - -------------------------------------------------------------------------------------- Joy C. Hartman President and CEO 100,000 24.5% $5.00 1/5/2010 Robert C. O'Connor, Vice President of Finance and Administration, Chief Financial Officer 20,000 4.9% $7.625 8/2/2010 Thomas Spadaro, Vice President of Technology 25,000 6.1% $7.625 6/5/2010 Joseph Geigerich, Vice President Sales and Marketing 60,000 14.7% $1.87 10/16/2010
- -33- Stock Options Exercised During Fiscal Year None of our executive officers or directors exercised stock options or stock appreciation rights during the fiscal year ended December 31, 2000. Fiscal Year-end Option Values The following table shows information regarding the value of unexercised options held by executive officers as of December 31, 2000:
Number of Securities Value of Unexercised Underlying In-The-Money Options (1) Unexercised Options - ------------------------------------------------------------------------------------ Name & Position Exerciseable Unexerciseable Exerciseable Unexerciseable - ------------------------------------------------------------------------------------ Joy Hartman, President and CEO 155,000 - $8,469 - Joseph Giegerich, Vice President - Sales and Marketing 60,000 60,000 - - Thomas R. Spadaro, Vice President - Technology 56,200 - $5,167 - Robert O'Connor, Vice President - Finance and Administration, Chief Financial Officer 20,000 - - - ____________
____________ (1)Value of unexercised options is based on the closing bid price of our common stock on the Nasdaq SmallCap Market on December 31, 2000, minus the exercise price. Employment Contracts We have an employment agreement with Joy C. Hartman, our President, CEO and a Director. The employment agreement contains change in control provisions that would entitle her to receive up to 2.99 times the annual salary if there is a change in control of our company (as defined) and a subsequent termination of employment. The maximum contingent liability under this agreement in such event is approximately $523,250. - -34- 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 505,700 common shares are underlying outstanding stock option grants and 873,250 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 former President, chief executive officer and Chairman of the Board, Alan Bashforth, became president of Cascadent subsequent to his service as an officer of Science Dynamics. Mr. Bashforth continues to serve as a member of our board of directors. 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. - -35- 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; - - 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 17,657,901 shares outstanding before this offering and 21,471,804 shares to be outstanding after the completion of this offering.
Percentage of Common Stock Beneficially Owned - --------------------------------------------------------------------------------------------- Name, Address and Title of Number of Shares Beneficial Owner Beneficially Owned Before Offering After Offering - --------------------------------------------------------------------------------------------- Sheldon C. Hofferman, Chairman (1) PO Box 350 Fairfax Station, VA 22039 2,619,921 14.84% 12.20% Alan C. Bashforth, Director (2) Le Virage La Route de Sainte Marie, St. Mary, Jersey, UK JE3 3DB 1,520,000 8.61% 7.08% Edwin S. Marks, 5% owner 135 East 57th Street 27th Floor New York, New York 10022 1,129,000 6.39% 5.26% Charles Bresler, 5% owner 401 M Street SW Washington, DC 1,322,666 7.49% 6.16% Joy C. Hartman, President, CEO (3) 27 Hogan Way Moorestown, NJ 08057 215,185 1.22% 1.00% - -36- Kenneth P. Ray, Director (4) 909 Darfield Drive Raleigh, NC 27615 46,300 0.26% 0.22% Joseph Giegerich, Vice President Sales & Marketing 46 Longbridge Dr. Mount Laurel, NJ 08054 25,000 0.14% 0.12% Thomas Spadaro (5) Vice President of Engineering 41 Fountain Blvd Burlington, NJ 08016 82,455 0.47% 0.38% Robert O'Connor (6) Vice President of Finance and Administration 53 Sorrel Run Mt. Laurel, NJ 08054 20,000 0.11% 0.09% All executive officers, directors, and director nominees as a group (7 persons) 6,980,527 39.53% 32.51%
______________ (1)The total includes 2,619,921 shares owned by Golden Phoenix, LP., of which Mr. Hofferman is General Partner. (2)Shares in the name of Innovative Communications Technology, LTD., a corporation, controlled by Mr. Bashforth. (3)The 215,185 shares in Ms. Hartman's name include incentive options, exercisable within sixty days to acquire 155,000 shares, and 20,000 warrants, and 300 shares owned by Ms. Hartman's children. (4)The 46,300 shares owned by Mr. Ray include incentive options, exercisable within sixty days to acquire 30,000 shares. (5)The 82,455 shares owned by Mr. Spadaro include incentive options, exercisable within sixty days to acquire 56,200 shares. (6)The 20,000 shares owned by Mr. O'Connor include incentive options, exercisable within sixty days to acquire 20,000 shares. - -37- DESCRIPTION OF SECURITIES Our authorized capital stock consists of 45,000,000 shares of common 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. Warrants On November 7, 1996, we issued warrants to purchase 20,000 shares of our common stock at an exercise price of $.78125 per share, to Joy C. Hartman, our President and CEO. The warrant terminates on November 7, 2001 and may be exercised at any time until such date. 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%. The number of shares of common stock issuable upon conversion of the convertible debentures is 1,730,103, based on a conversion price of $0.816 per share. We are required to register 200% of this amount, for a total of 2,941,176 shares. The actual conversion price will depend on the market price of our common stock prior to the conversion. The following table illustrates the effect of a decline in the market price of our common stock as it relates to the number of shares we will be required to issue upon conversion: - -38- Stock Shares Price Issuable ----------------------------- $.816 1,730,103 $.60 2,352,941 $.40 3,529,411 $.20 7,058,823 $.10 14,117,647 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. Transfer Agent The Transfer Agent and Registrar for the common stock and the warrants described above is Continental Stock Transfer & Trust Company. - -39- SELLING SHAREHOLDERS The table below sets forth information concerning the resale of the shares of common stock by the selling stockholders. We will not receive any proceeds from the resale of the common stock by the selling stockholders. We will receive proceeds from the exercise of the warrants. Assuming all the shares registered below are sold by the selling stockholders, 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 Beneficial Percentage Common Stock Percentage of Common Stock Ownership Common Stock Ownership of Common Issuable Upon Common Stock, Included in Before Owned Before After the Stock Conversion of Assuming Full Prospectus(1) the Offering(2) Offering Offering Owned After Notes and/or Conversion (3) Offering(3) Warrants - ------------------------------------------------------------------------------------------------------------------------- Laurus Master Fund, Ltd. (4)(5)(6) 1,952,763 9.96 3,178,253 927,406 4.99 -- -- The Keshet Fund, L.P. (4)(5)(7) 195,276 1.77 317,825 195,276 1.77 -- -- Keshet L.P. (4)(5)(7) 195,276 1.77 317,825 195,276 1.77 -- --
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) Includes 200% of the shares issuable on conversion of the convertible notes, based on the market price of our common stock on May 23, 2001, as required by our agreement with the selling shareholders. 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. - -40- (2) Represents shares of common stock issuable upon conversion of debentures of the selling shareholder at an assumed conversion price of $0.81 per share and/or exercise of warrants of the selling shareholder at a conversion price of $0.81 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 Securityholder Principal authority ------------------------------------------------------------------- Laurus Master Fund, Ltd. Eugene Grin Eugene Grin & David Grin & David Grin The Keshet Fund, L.P. Abraham Grin John Clark Keshet L.P. Abraham Grin John Clark (5) Laurus Master Fund, Ltd., Keshet Fund LP and Keshet LP are under common control and all shares registered hereunder may be deemed to be beneficially owned by such control person. All such selling stockholders may be deemed to be a purchasing group for purposes of Rule 13d, but are not required to file a Form 13d because of the limitation of their beneficial ownership to 4.99%, as a group. (6) Includes 727,273 shares issuable upon exercise of warrants presently exercisable at a price of $1.4339 per share. (7) Includes 72,727 shares issuable upon exercise of warrants presently exercisable at a price of $1.4339 per share. Plan of Distribution The selling stockholders 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 stockholders may use any one or more of the following methods when selling shares: - -41- - - 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 stockholders 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 stockholders may arrange for other broker-dealers to participate in sales. Broker-dealers may receive commissions or discounts from selling stockholders 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 stockholders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved. The selling stockholders 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. Because the following selling shareholders are deemed "underwriters" within the meaning of Section 2(11) of the Securities Act, they will be subject to the prospectus delivery requirements: Laurus Master Fund, Ltd. The Keshet Fund, L.P. Keshet L.P. 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 - -42- 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, 2000 and 1999, 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. 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 reques t 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. - -43- INDEX TO FINANCIAL STATEMENTS Page Report of Independent Accountants dated March 10, 2001 F-2 Consolidated Balance Sheets as of December 31, 2000 and 1999 F-3 Consolidated Statements of Operations, two years ended December 31, 2000 F-4 Consolidated Statements of Cash Flows, two years ended December 31, 2000 F-5 Consolidated Statements of Changes in Shareholders' Equity, two years ended December 31, 2000 F-6 Notes to Consolidated Financial Statements F-7 - F-13 Consolidated Balance Sheets as of June 30, 2001 (unaudited) and December 31, 2000 (audited) F-14 Consolidated Statements of Operations for six months ended June 30, 2001 (unaudited) and sixe months ended June 30, 2000 (unaudited) F-15 Consolidated Statements of Cash Flows for six months ended June 30, 2001 (unaudited) and six months ended June 30, 2000 (unaudited) F-16 Notes to Consolidated Financial Statements - -1- REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Science Dynamics Corporation We have audited the accompanying consolidated balance sheets of Science Dynamics Corporation and subsidiary as of December 31, 2000 and 1999 and the related consolidated statements of operations, shareholders' equity and cash flows for the years ended December 31, 2000 and 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material resects, the consolidated financial position of Science Dynamics Corporation and Subsidiary as of December 31, 2000 and 1999 and the consolidated results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. Peter C. Cosmas Co., CPAs /s/Peter C. Cosmas Co., CPA's - ----------------------------- 370 Lexington Avenue Suite 1205 New York, NY 10017 March 10, 2001 - -F2- SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2000 AND 1999
ASSETS December 31, 2000 1999 ---- ---- Current assets: Cash and cash equivalents $1,351,641 $ 674,793 Accounts receivable - trade 102,194 157,040 Accounts receivable - other 51,401 63,677 Inventories 87,623 361,039 Other current assets 84,566 50,185 ---------- --------- Total current assets 1,677,425 1,306,734 ---------- --------- Property and equipment, net 1,005,364 260,543 Deferred income taxes - 308,000 Intangible Assets, net of accumulated amortization of $1,200,000 in 2000 and $900,000 in 1999. 300,000 600,000 Other assets 25,363 133,776 ---------- --------- Total assets $3,008,152 $2,609,053 ========== ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of capital lease obligation $ 57,598 $ - Accounts payable 358,820 215,409 Accrued expenses 118,059 424,677 ---------- --------- Total current liabilities 534,477 640,086 ---------- --------- Non current portion of capital lease obligation 128,413 - ---------- --------- Total liabilities 662,890 640,086 Commitments Shareholders' equity - Common stock - .01 par value, 45,000,000 shares authorized, 17,783,700 and 17,286,278 issued 17,657,901 and 17,160,478 outstanding in 2000 and 1999 respectively. 177,837 172,862 Additional paid-in capital 14,266,787 12,556,205 (Deficit) (11,701,529) (10,362,267) ---------- --------- 2,743,095 2,366,800 Common stock held in treasury, at cost (397,833) (397,833) ---------- --------- Total shareholders' equity 2,345,262 1,968,967 ---------- --------- Total liabilities and shareholders' Equity $3,008,152 $2,609,053 ========== ========= The accompanying notes are an integral part of these consolidated financial statements. - -F3-
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999 ---- ---- NET SALES $5,269,377 $2,347,984 ---------- ---------- Operating costs and expenses: Cost of sales 1,891,484 1,330,886 Research and development 1,141,656 1,331,521 Selling, general and administrative 3,605,768 1,728,244 ---------- ---------- 6,638,908 4,390,651 ---------- ---------- Operating Loss (1,369,531) (2,042,667) Other income (expenses): Interest income 40,647 Interest expense (10,378) (12,219) ---------- ---------- Net Loss $(1,339,262) $(2,054,886) ========== ========== Net Loss per common share basic and diluted $ (0.08) $ (0.12) ========== ========== The accompanying notes are an integral part of these consolidated financial statements. - -F4-
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,2000 AND 1999
2000 1999 ---- ---- Cash flows from operating activities: Net Loss $(1,339,262) $(2,054,886) ----------- ----------- Adjustments to reconcile net loss to net cash used for operating activities: Depreciation 159,859 94,101 Amortization of capitalized software - 138,996 Amortization of Intangible assets 300,000 300,000 Changes in operating assets and liabilities: (Increase) decrease in: Accounts receivable 54,846 109,363 Other receivable 12,276 596,223 Inventories 273,416 117,455 Other current assets (34,381) (3,919) Other assets 108,413 7,642 Decrease in: Accounts Payable and accrued expenses (163,207) (179,900) ----------- ----------- Total adjustments 711,222 1,179,961 ----------- ----------- Net cash used for operating activities (628,040) (874,925) ----------- ----------- Cash flows from investing activities: Purchase of property and equipment - net (704,246) (123,555) ----------- ----------- Net cash used in investing activities (704,246) (123,555) ----------- ----------- Cash flows from financing activities: Increase (decrease) in: Payment on loan payable - (100,000) Payment on capitalized lease (14,423) - Proceeds from sale of state income tax NOL 308,000 - Issuance of common stock and warrants 1,715,557 1,741,024 ----------- ----------- Net cash provided by financing activities 2,009,134 1,641,024 ----------- ----------- Net increase in cash and cash equivalents 676,848 642,544 Cash and cash equivalents - beginning of period 674,793 32,249 ----------- ----------- Cash and cash equivalents - end of period 1,351,641 674,793 =========== =========== Noncash transactions: Increase in Capital Lease Obligations $ 200,434 $ - =========== =========== The accompanying notes are an integral part of these consolidated financial statements. - -F5-
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE TWO YEARS ENDED DECEMBER 31, 2000 AND 1999
Common Stock Additional Treasury ------------ Paid-In -------- Shares Amount Capital (Deficit) Shares Amount ------ ------ ------- --------- ------ ------ Balance December 31, 1998 15,861,449 $158,614 $ 10,729,429 $ (8,307,381) 125,800 $397,833 ========== ======== ============ ============= ======= ======= Exercise of Stock Options 34,800 348 26,984 - - - Issuance of common stock net of related expenses 1,218,000 12,180 1,701,512 - - - Common Stock issued for patent 172,029 1,720 98,280 Net loss - - - (2,054,886) - - 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 ========== ======== ============ ============= ======= ======= The accompanying notes are an integral part of these consolidated financial statements. - -F6-
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. 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. - -F7- 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. The Company follows SOP 97-2, "Software Revenue Recognition," as such the Company recognizes product revenue upon shipment if a signed contract exists, the fee is fixed or determinable, collection of resulting receivables is probable and product returns are reasonable estimable. 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: In June 1998, the Financial Accounting Standards Board ("FASB"), issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and in June 2000 issued SFAS No. 138, accounting for certain Derivative Instruments and Certain Hedging Activities, an amendment of SFAS No. 133. These new standards require companies to record derivative financial instruments on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the fair value of those derivatives would be accounted for based on the use of the derivative and whether the instrument qualified for hedge accounting, as defined in SFAS 133 and 138. The Company is required to implement these statements in the first quarter of fiscal 2001. The company has not used derivative instruments and believes the impact of adoption of this statement will not have a significant effect on the financial statements. - -F8- In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB No. 101"), which provided guidance on the recognition, presentation and disclosure of revenue in financial statements. SAB No. 101 did not impact the Company's revenue recognition policies. In March 2000, the Financial Accounting Standards Board, released FASB Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25," which provides clarification of Opinion No. 25 for certain issues, such as the determination of who is an employee, the criteria for determining whether a plan qualifies as a non-compensatory plan, the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and the accounting for an exchange of stock compensation awards in a business combination. The Company believes that its practices are in conformity with this guidance, and therefore Interpretation No. 44 will have no impact on its financial statements. 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, 2000 and 1999. 3 Property and Equipment: A summary of the major components of property and equipment is as follows: 2000 1999 ---- ---- Computer and software $ 889,923 $189,394 Leasehold improvements 204,150 - Machinery and equipment 310,146 310,146 Furniture 48,235 48,235 Less accumulated depreciation (447,090) (287,232) Totals $1,005,364 $ 260,543 The computer and software includes $221,862 of capitalized software which was related to contracted labor to provide SNMP, an additional feature, to our 2308 Gateway series. SNMP is widely used in the industry and the project was to integrate its functionality into our existing software using known integration techniques. Detailed plans for the integration were provided by the vendor and the requirement of technological feasibility as defined under Financial Accounting Standard 86 was satisfied. The SNMP feature will be included in all future shipments of the 2308 series and is being amortized over 24 months. Amortization expense related to this capitalized software will begin in 2002 as the new release containing the SNMP feature became available in January. 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. Inc. 1992, the effect of the change was to decrease the net loss by $308,000 (.10 per share). The deferred tax asset recognized in the accompanying balance sheet at December 31, 1999 was recovered through the sale of New Jersey State net-operating loss carryovers as permitted by the State in the amount of $308,000. At this time, the Company does not believe it can reliably predict profitability for the long-term. Accordingly, the deferred tax asset applicable to 2000 and 1999 operations has been reduced in its entirety by the valuation allowance. As a result of the operating losses for the years ended December 31, 1990 and 1992-2000 the Company has available to offset future taxable income a net operating loss of $12,722,364 expiring 2005-2020. In addition, research credits expiring 2005-2014 are available to offset future taxes. - -F9- The components of the provision (credit) for income taxes from continuing operations is as follows: 2000 1999 ----- ---- 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: 2000 1999 ---- ---- Federal Statutory rate $(455,349) $(698,661) Research tax Credits - - Tax benefit not Provided due To valuation Allowance 455,349 698,661 ------- ------- - - ======= ======= Components of the Company's deferred tax assets and liabilities are as follows: December 31, 2000 1999 ---- ---- Deferred tax assets: Tax benefits related To net operating Loss carry forwards And research tax Credits $4,298,635 $3,843,286 Total deferred tax Asset 4,298,635 3,843,286 Valuation Allowance for Deferred tax Assets 4,298,635 3,843,286 ---------- --------- Net deferred tax Assets $ -0- $ -0- ---------- --------- - -F10- 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, 2000 are as follows: 2001 $193,622 2002 185,483 2003 185,483 2004 183,052 2005 181,836 After 2005 60,612 Total minimum lease payments $990,088 -------- b Employment Agreement: The Company has an employment agreement with one officer, who is also a director of the company. The employment agreement contains change in control provisions that would entitle the officer to receive up to 2.99 times the annual salary if there is a change in control in the Company (as defined) and a termination of employment. The maximum contingent liability under this agreement in such event is approximately $523,250. 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 2000 and 1999 was $300,000 for each year. 7 Stock Options and Warrants: On November 17, 1999 the Company amended the Incentive Stock Option Plan, authorizing an additional 1,088,000 shares, which increased the total number of shares available under the Plan to 1,378,950. Options may be granted under the Plan to employees and directors at no less than 100% of the fair value on the date of grant. The options expire ten years after the date of grant. Changes in shares under the Plan were as follows: Shares Weighted Under Average Option per Share Balance January 1, 1999 177,500 $ 0.81 Options Granted 60,000 $ 0.50 Options Terminated Options Exercised (34,800) $ 0.79 Balance December 31, 1999 202,700 $ 0.97 Options Granted 587,173 $ 3.83 Options Terminated (500) $ 7.62 Options Exercised (283,673) $ 0.54 Balance December 31, 2000 505,700 $ 4.76 The total amount of shares granted and not exercised at December 31, 2000 amount to 505,700 at exercise prices ranging from 0.50 to 10.75 per share. The total amount of shares exercisable at the end of the year was 293,200 with a weighted average exercise price of $6.94. The weighted average remaining contractual life of the options at the end of the year was 7 years. - -F11- 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 2000 and 1999, 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 1999 and 2000 grants. As such, the impacts are not necessarily indicative of the effects on reported net income of future years. 8 Major Customers: During 2000 two customers accounted for 83% and 15% of total sales. During 1999 three customers and their operating subsidiaries accounted for 64.63%, 10.31% and 9.71% of total sales. 9 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 17,549,993 in 2000 and 16,777,070 in 1999. 10 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 a member of the Company's Board of Directors. 11 Subsequent Events In March 2001 the Company entered into a $40,000,000 Equity line of Credit arrangement with the Alpha Group. Under the terms of the equity line agreement, the Company will have the right to sell up to $40 million of its common stock. The Company has sole discretion, subject to certain volume limitations and conditions, to draw down upon such funds as its capital needs dictate. The sale price of the common stock will not exceed ten percent of an average closing bid price to be calculated at the time of each sale. In connection with such financing Alpha has been issued warrants to purchase up to 500,000 shares of the Company's common stock at exercise prices of $5.00 per share. Additional warrants to purchase up to 500,000 shares of the Company's common stock at an exercise price equal to the current bid price will be issued on a pro rata basis at the time of each sale. The term of the equity line is for eight months with an automatic one-year extension if at least ten percent or $4 million is drawn down during the initial eight-month period. 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%. - -F12- The equity financing draw downs are subject to a limit of 300 percent of the "Average Daily Trading Volume", defined as the dollar amount of the average daily trading volume of shares of the Company's common stock, calculated based upon the average bid price and average daily trading volume traded over the twenty trading days preceding multiple put dates. As such, SciDyn's ability to access these funds in sufficient amounts will be directly related to the average daily trading volume as defined. The agreement contains other provisions, which may have the potential to limit SciDyn's ability to draw down funds. The agreement can be accessed in its entirety as an exhibit to an 8-K filing made with the Securities and Exchange Commission. Funding under the agreement is also subject to completion of certain terms and conditions, including the filing of a registration statement with the Securities and Exchange Commission. No public offering of the Company's common stock will be made except by means of a prospectus under an effective registration statement. On May 21, 2001, an agreement was executed to cancel all provisions of the $40,000,000 Equity Line of Credit arrangement with the Alpha Group. The agreement with Alpha was a good deal in which all parties were ready to move ahead. However, the Company had immediate capital requirements, which would not be satisfied by the Alpha agreement. In particular, funds would only be provided to the Company by Alpha after the effective date of a registration statement. In order to obtain other financing, the Company was required to cancel the Alpha deal. Alpha was contacted and agreed to cancel the agreement, in exchange for a payment of $30,000 to Alpha to cover its expenses. The 500,000 warrants that were issued to Alpha on March 2, 200l, were terminated. - -F13- SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
ASSETS June 30, December 31, 2001 2000 (Unaudited) (Audited) --------- ---------- Current assets: Cash and cash equivalents $ 187,774 $ 1,351,641 Accounts receivable - trade 113,925 102,194 Accounts receivable - other 48,447 51,401 Inventories 78,640 87,623 Other current assets 67,562 84,566 --------- ---------- Total current assets 496,348 1,677,425 --------- ---------- Property and equipment, net 974,308 1,005,364 Intangible Assets, net of accumulated amortization of $1,350,000 in 2001 and $1,200,000 in 2000. 150,000 300,000 Other assets 25,363 25,363 --------- ---------- Total assets $1,646,019 $ 3,008,152 ========= ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of capital lease obligation $ 63,322 $ 57,598 Accounts payable 490,062 358,820 Accrued expenses 161,646 118,059 --------- ---------- Total current liabilities 715,030 534,477 --------- ---------- Convertible Notes 1,200,000 - Non Current portion of capital lease obligation 90,422 128,413 --------- ---------- Total liabilities 2,005,452 662,890 Commitments Shareholders' equity - Common stock - .01 par value, 45,000,000 shares authorized, 17,783,701 issued and 17,657,901 outstanding in 2001 and 2000 respectively. 177,837 177,837 Additional paid-in capital 14,298,021 14,266,787 (Deficit) (14,437,458) (11,701,529) ---------- ---------- 38,400 2,743,095 Common stock held in treasury, at cost (397,833) (397,833) ---------- ---------- Total shareholders' (deficit)/ equity (359,433) 2,345,262 ---------- ---------- Total liabilities and shareholders' equity $ 1,646,019 $ 3,008,152 ========== ==========
- -F14- SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) ---------
Six Months Ended June 30, Three Months Ended June 30, 2001 2000 2001 2000 ---- ---- ---- ---- NET SALES $ 372,614 $3,547,753 $ 178,501 $2,104,271 ---------- ---------- ---------- --------- Operating costs and expenses: Cost of sales 288,526 1,284,270 151,679 712,227 Research and development 754,790 526,534 334,268 270,826 Selling, general and administrative 1,839,340 1,408,305 983,123 803,039 ---------- ---------- ---------- --------- 2,882,656 3,219,109 1,424,070 1,786,092 ---------- ---------- ---------- --------- Operating (loss) income (2,510,042) 328,644 (1,245,569) 318,179 Other (expenses): Interest income 4,638 8,438 4,638 5,540 Interest expense (230,524) - (230,524) - ---------- ---------- ---------- --------- Net (loss) income $(2,735,928) $ 337,082 $(1,471,455) $ 323,719 ========== ========== ========== ========= Net loss per common share and net income per share-basic and diluted $ (0.15) $ 0.02 $ (0.08) $ 0.02 ========== ========== ========== =========
- -F15- SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) ---------
Six Months Ended June 30, 2001 2000 ---- ---- Cash flows from operating activities: Net (loss)Income $(2,735,928) $ 337,082 ----------- ---------- Adjustments to reconcile net (loss)income to net cash used for operating activities: Depreciation 140,231 59,880 Amortization of Intangible assets 150,000 150,000 Interest expense 212,524 - Changes in operating assets and liabilities: (Increase) decrease in: Accounts receivable (11,731) (1,413,777) Other receivable 2,954 1,962 Inventories 8,983 (31,536) Other current assets 17,004 (79,065) Other assets - 3,821 Increase (decrease) in: Accounts Payable and accrued expenses 174,829 8,701 ----------- ---------- Total adjustments 694,794 (1,300,014) ----------- ---------- Net cash used for operating activities (2,041,134) (962,932) ----------- ---------- Cash flows from investing activities: Purchase of property and equipment - net (109,176) (305,384) ----------- ---------- Net cash used in investing activities (109,176) (305,384) ----------- ---------- Cash flows from financing activities: Increase (decrease) in Issuance of Convertible debt, net 1,018,710 - Payment on capitalized leases (32,267) - Issuance of common stock and warrants - 1,724,057 ----------- ---------- Net cash provided by financing activities 986,443 1,724,057 ----------- ---------- Net (decrease) increase in cash and cash equivalents (1,163,867) 455,741 Cash and cash equivalents - beginning of period 1,351,641 674,793 ----------- ---------- Cash and cash equivalents - end of period $ 187,774 $1,130,534 =========== ==========
- -F16- SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) PART I Item 1. (continued) 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, 2000. 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 period. Common equivalent shares, including warrants and stock options, are included in the calculation of diluted earnings per common and common equivalent shares to the extent that they are dilutive and excluded to the extent they are anti-dilutive. - -F17- 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 Selected Financial Information 16 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 , 2001, 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. ______________ 3,813,903 Shares Common Stock ______________ ______________ Prospectus ______________ Science Dynamics Corporation , 2001 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 $773 Accounting Fees and Expenses $2,500 Printing and Engraving $2,000 Legal Fees and Expenses $35,000 Blue Sky Fees and Expenses $2,500 Miscellaneous Expenses $2,227 Total $45,000 II-1 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 December 1998, we sold 1,200,000 shares of our common stock for an aggregate consideration of $600,000 to three accredited investors pursuant to an offering in reliance upon the exemption provided by Rule 506 of Regulation D of the Securities Act. 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. 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. II-2 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 3.2(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) 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(2) agreement between the Registrant and @IPbell Inc, dated february 11, 2000 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) 23.3(5) Consent of Synergy Research Group, Inc. 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) Previously filed herewith. ITEM 28. UNDERTAKING A. Undertaking Pursuant to Rule 415 The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) to include any prospectus required by Section 10(a)(3) Securities Act of 1933 (the "Securities Act"); (ii) to reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, II-3 represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, 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 prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in 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) to include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement; (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; (3) To remove from registration by means of a post-effective amendment any of the securities being registered that remain unsold at the termination of this offering. B. Undertaking In Respect of Indemnification 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 SEC 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. C. Undertaking Pursuant to Rule 430A The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of the prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 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 September 4, 2001. SCIENCE DYNAMICS CORPORATION /s/ JOY C. HARTMAN Joy C. Hartman President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, the undersigned hereby constitute and appoint Joy C. Hartman and Robert O'Connor, 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. II-5 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/ Sheldon C. Hofferman Chairman of the Board September 4, 2001 ------------------------ Sheldon C. Hofferman BY: /s/ Joy C. Hartman President, CEO September 4, 2001 ------------------------ Joy C. Hartman BY: /s/ Alan C. Bashforth Director September 4, 2001 ------------------------ Alan C. Bashforth BY: /s/Kenneth P. Ray Director September 4, 2001 ------------------------ Kenneth P. Ray BY: /s/ L. Michael Hone Director September 4, 2001 ------------------------ L. Michael Hone BY: /s/ John Innes Director September 4, 2001 ------------------------ John Innes BY: /s/ Louis Padulo Director September 4, 2001 ------------------------ Louis Padulo BY: /s/ Robert O'Connor Vice President of September 4, 2001 ------------------------ Finance and Robert O'Connor Administration and Chief Financial Officer (Principal Accounting Officer) INDEX TO 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 3.2(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) 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(2) agreement between the Registrant and @IPbell Inc, dated february 11, 2000 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) 23.3(5) Consent of Synergy Research Group, Inc. 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) Previously filed herewith. EX-5.1 3 opinion.txt OPINION OF SICHENZIA, ROSS, FRIEDMAN & FERENCE LLP SICHENZIA, ROSS, FRIEDMAN & FERENCE LLP Attorneys At Law 135 West 50th Street, 20th Floor New York, New York 10020 --------------------- Telephone: (212) 664-1200 Facsimile: (212) 664-7329 September 4, 2001 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, DC 20549 Re: Science Dynamics Corporation Form SB-2 Registration Statement (File No. 333-62226) Ladies and Gentlemen: We refer to the above-captioned registration statement on Form SB-2 (the "Registration Statement") under the Securities Act of 1933, as amended (the "Act"), filed by Science Dynamics Corporation, a Delaware corporation (the "Company"), with the Securities and Exchange Commission. We have examined the originals, photocopies, certified copies or other evidence of such records of the Company, certificates of officers of the Company and public officials, and other documents as we have deemed relevant and necessary as a basis for the opinion hereinafter expressed. In such examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as certified copies or photocopies and the authenticity of the originals of such latter documents. Based on our examination mentioned above, we are of the opinion that the securities being sold pursuant to the Registration Statement are duly authorized and will be, when issued in the manner described in the Registration Statement, legally and validly issued, fully paid and non-assessable. We hereby consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement and to the reference to our firm under "Legal Matters" in the related Prospectus. In giving the foregoing consent, we do not hereby admit that we are in the category of persons whose consent is required under Section 7 of the Act, or the rules and regulations of the Securities and Exchange Commission. Very truly yours, /s/ SICHENZIA, ROSS FRIEDMAN & FERENCE LLP Sichenzia, Ross, Friedman & Ference LLP EX-10.14 4 ipbellagreement.txt AGREEMENT BETWEEN REGISTRANT AND @IPBELL Supply Agreement Between @IPbell Inc. and Science Dynamics Corporation Dated February 11, 2000 Supply Agreement Between @IPbell and Science Dynamics Corporation TABLE OF CONTENTS 1 SCOPE OF AGREEMENT 1 2 PRICING 3 3 MOST FAVORED CUSTOMER 3 4 DELIVERY AND FORECAST 3 5 INVOICING AND TERMS OF PAYMENT 4 6 TAXES 4 7 TITLE AND RISK OF LOSS 5 8 REPRESENTATIONS AND WARRANTIES 5 9 WARRANTY 6 10 INDEMNITY 6 11 TERMINATION 7 12 FORCE MAJEURE 8 13 CONFIDENTIALITY 8 14 RELATIONSHIP 10 15 ENTIRE AGREEMENT 10 16 NOTICES 10 17 FURTHER ACTION 11 18 NO PARTNERSHIP OR JOINT VENTURE 11 19 SURVIVAL OF REPRESENTATIONS AND WARRANTIES AND CERTAIN COVENANTS AND AGREEMENTS 11 20 EXPENSES 12 21 ASSIGNMENT 12 22 AMENDMENT; WAIVER 12 23 ENTIRE AGREEMENT 13 24 SEVERABILITY 13 25 SUCCESSORS AND ASSIGNS; NO THIRD-PARTY BENEFICIARIES 13 26 REMEDIES 13 27 GOVERNING LAW 13 28 WAIVER OF JURY TRIAL 14 29 JURISDICTION; SERVICE OF PROCESS 14 30 PREPARATION AND NEGOTIATION OF THIS AGREEMENT 15 31 HEADINGS 15 32 EXHIBITS 15 33 COUNTERPARTS 15 34 DELIVERY VIA TELECOPIER 15 - -2- SCHEDULE 1 17 WARRANTY AND MAINTENANCE. 17 SCHEDULE 2 20 EQUIPMENT COSTS 20 SCHEDULE 3 22 PRODUCT SPECIFICATION 23 - -3- SUPPLY AGREEMENT ---------------- This Supply Agreement (the "Agreement") is made and entered into as of the latest date set forth in the signature section of this Agreement (the "Effective Date"), BY AND BETWEEN: SCIENCE DYNAMICS CORPORATION, a Delaware corporation having its principal place of business at 1919 Springdale Road, Cherry Hill, NJ 08003 (hereinafter referred to as "SCIDYN"), and @IPbell Inc., having its principal place of business at Suite 505, 1115 Main Street Fairfax, Virginia, 22030 (hereinafter referred to as "@IPbell"). 1 SCOPE OF AGREEMENT - -------------------- WHEREAS: (1) SCIDYN desires to sell to @IPbell and @IPbell desires to buy the Products (as set forth in Schedule 3 hereof) and related Services (as defined below) for the amount of $4,180,800 for use on the terms and conditions as set forth herein. @IPbell presently intends to purchase, directly or through a third party vendor, additional equipment amounting to approximately $13,000,000 from SCIDYN over the next twelve months; (2) @IPbell wishes under this contract to procure the initial provisioning of its world-wide IP telephony and data network comprising the 'super-POPs' in Los Angeles, New York and London together with the test facility located at SCIDYN's New Jersey premises and 10 in-country 'POPs'; (3) @IPbell has indicated to SCIDYN its present understanding that this initial provisioning will require the purchase of up to 6,432 ports mounted in SCIDYN's Integrator C-2308 IP Telephony Gateway product in either the El or T1 configuration (the precise specifications to be notified to SCIDYN under a call-off procedure); and (4) @IPbell has agreed with SCIDYN that such equipment is to be provided at a cost to @IPbell of $650.00 per port. NOW THEREFORE the parties hereto agree as follows: (A) SCIDYN shall supply @IPbell with IP telephony equipment in accordance with the Product Specification in Schedule 3. (B) @IPbell hereby agrees to place an initial purchase order for 6432 ports worth at a value of $4,180,800. Such purchase order shall be placed within 10 working days of the signing of this agreement and shall include a call off schedule as set out in and in accordance with Clause 11 below. - -1- (C) It is agreed that SCIDYN will supply the Integrator C-2308 IP Telephony Gateways priced on a per port basis. Schedule 2 of this agreement sets out the specifications of the El and T1 gateways respectively. In the relevant call off schedule @IPbell will specify the product mix as between El and T1 requirements. (D) The consulting and professional personnel provided by SCIDYN hereunder shall have appropriate technical and application skills to enable them to efficiently perform the services and their duties hereunder including, without limitation, the design, development, upgrades, delivery, testing, implementation, consultancy, training, maintenance and other services (collectively, the "Services"). (E) Other than as expressly provided hereunder, SCIDYN shall provide the Services under this Agreement at no additional cost to @IPbell upon delivery and payment of the Products pursuant to the terms of this Agreement, provided, however, that any new functionalities of the Products shall be mutually agreed upon by the parties hereto. (F) It is agreed that within two (2) weeks following the Effective Date the parties hereto will enter into an agreement to specify the reasonable and customary extent and nature of the Services hereunder. Unless otherwise agreed in writing, the Services shall be performed during SCIDYN's normal business hours; provided that at all times SCIDYN shall provide to @IPbell and its equipment service providers a 24-hour, 7-day per week hotline technical assistance center, which center will be responsible to ensure that remote software configuration and hardware fault and isolation support is always available. SCIDYN shall select any suitable qualified person(s), which person(s) may include subcontractors, to perform the Services. SCIDYN shall be responsible for the performance of any subcontractors which it appoints. (G) Scope of Project: (a) SCIDYN shall deliver the Products and provide the Services at @IPbell's site in accordance with the terms and conditions contained herein. (b) @IPbell acknowledges and agrees that SCIDYN's ability to provide the Products and the Services is dependent on the full and timely co-operation of @IPbell (which @IPbell agrees to provide) and third parties (which to the extent that @IPbell is responsible for such, @IPbell agrees to procure) as well as the accuracy and completeness of any information and data provided to SCIDYN by @IPbell. (c) If any delay arising out of or in connection with any dispute between the parties causes a delay by SCIDYN in providing the Products or the Services, then any target date and all subsequent target dates shall be extended accordingly by such time period which is reasonably necessary to enable SCIDYN to compensate for such delay. Further, SCIDYN shall use its reasonable endeavors to notify @IPbell as soon as reasonably practicable if it becomes clear that a target date is likely to be missed or any target date has been missed or delayed due to a failure by @IPbell to meet any obligation; provided, however, that, for the avoidance of doubt, such notification obligation shall not in any way be a condition of, or prejudice or otherwise affect, the extension of any time period in accordance with this provision. - -2- (d) The parties hereto agree that acceptance tests shall be drafted so as to test substantial compliance of the Products with agreed criteria or specifications. (e) It is agreed that SCIDYN, with @IPbell's input, will provide @IPbell, on a timely basis, a development schedule based upon market developments as well as @IPbell's operational requirements. This schedule, developed in cooperation with @IPbell, will provide @IPbell with a commitment from SCIDYN concerning future product developments and enhancements. 2 PRICING - --------- Schedule 2 is hereby incorporated by reference into this Agreement. 3 MOST FAVORED CUSTOMER - ----------------------- SCIDYN shall treat @IPbell as its most favored customer. SCIDYN hereby represents and warrants that the representations, warranties, covenants, agreements, and indemnities contained herein are in all material respects comparable to, or more favorable to, @IPbell than the equivalent terms applicable to any existing customer of SCIDYN. If SCIDYN hereafter enters into any agreement or arrangement with any other Person, the equivalent terms and conditions of which are more favorable to such Person than the terms and conditions hereof, SCIDYN shall promptly notify @IPbell of such more favorable terms and conditions, and each such Person shall have the right unilaterally to amend this Agreement to incorporate such more favorable terms and conditions effective as of the date such terms and conditions became effective with respect to such other Person. @IPbell may from time to time require SCIDYN to certify in writing that it is in compliance with this section. "Person" shall mean any individual, partnership, firm, corporation, limited liability company, joint venture, association, trust, unincorporated organization, or other entity. 4 DELIVERY AND FORECASTS - ------------------------ The Products will be delivered by SCIDYN within thirty (30) days of the placement of the order by @IPbell; provided that any order placed within thirty (30) days of the Effective Date will be delivered by SCIDYN within sixty (60) days of the placement of the order by @IPbell. In the event of an actual or an anticipated delay in the delivery as per the agreed forecast of equipment under this Agreement, SCIDYN will use its best efforts to eliminate or mitigate such delay. - -3- In order to facilitate SCIDYN's manufacturing and production capacity planning for its requirements, @IPbell will provide SCIDYN with good faith estimates of its equipment requirement for the immediately succeeding calendar quarter. Notwithstanding the delivery of the aforereferenced estimate, @IPbell shall have the right to deliver purchase orders to SCIDYN at any time and from time to time. 5 INVOICING AND TERMS OF PAYMENT - -------------------------------- Upon shipment SCIDYN will invoice @IPbell for the value of the goods shipped. The invoice for the outstanding value will be due net thirty (30) days. All other non-equipment charges are to be paid in full thirty (30) days after receipt of invoice. All payments under this Agreement shall be made in U.S. Dollars by check or wire transfer. In respect of any invoiced amount which is outstanding for thirty (30) days, other than as a consequence of a bona fide dispute, SCIDYN shall, in addition to any other recourse available to it hereunder or at law, be entitled to withhold acceptance of any new purchase order or delivery of Products under previously accepted purchase orders. 6 TAXES - ------- The amounts set forth on Schedule 2 hereto do not include any taxes or duties. @IPbell shall either furnish SCIDYN with an appropriate exemption certificate applicable thereto. 7 TITLE AND RISK OF LOSS - ------------------------ Title to all Products and risk of loss for Products sold to @IPbell hereunder shall pass to @IPbell upon completion of shipment of the Products F.O.B. SCIDYN's premises at Cherry Hill, NJ. 8 REPRESENTATIONS AND WARRANTIES - -------------------------------- SCIDYN hereby represents and warrants to @IPbell as follows: (a) SCIDYN guarantees that the Products, as delivered, installed, and maintained (to the extent maintenance is provided by SCIDYN) comply with all applicable laws and regulations; provided that such representation and warranty will survive for only one year after each applicable Product (on a Product-by-Product basis) is installed; - -4- (b) SCIDYN is the owner of the Products and has the right to sell the Products to @IPbell as contemplated by this Agreement without violating any rights of any third party, and there is currently no actual or threatened suit or legal proceeding by any third party based on an alleged violation of intellectual property rights by SCIDYN; (c) the Products will conform, as to all substantial operational features, to SCIDYN's current published specifications when installed and will be free from any defects which substantially affect performance; provided that such representation and warranty will survive for only two (2) years after each applicable Product (on a Product-by-Product basis) is installed; (d) the Products (and each component thereof) installed will conform to and perform in accordance with the functional and technical specifications therefore provided that such representation and warranty will survive for only one year after each applicable Product (on a Product-by-Product basis) is installed; (e) the Products shall not contain any defects and shall function properly and in conformity with the description, specifications and documentation set forth in this Agreement, including, without limitation, any specifications and other documentation to be delivered to @IPbell by SCIDYN for the performance of SCIDYN's obligations hereunder; provided that such representation and warranty will survive for only two (2) years after each applicable Product (on a Product-by-Product basis) is installed; (f) the Products (and each component thereof) installed will properly interface with other hardware and software of @IPbell which SCIDYN knows or should reasonably know that the Products will be used in conjunction with without rendering any such hardware or software less functional in any material respect (1) without any error; (2) without the necessity of any human intervention or system modification; and (3) regardless of the particular date, year, century, or other chronological variable; provided that such representation and warranty will survive for only two (2) years after each applicable Product (on a Product-by-Product basis) is installed; (g) SCIDYN has full power and authority and the sole and exclusive right to grant the rights (including all intellectual property rights) granted under this Agreement; and (h) neither the Products nor any component thereof do or will, and neither SCIDYN's nor @IPbell's use of the Products or any component thereof will, infringe any intellectual property right of any Person. 9 WARRANTY - ---------- (a) SCIDYN shall perform the Services contemplated by this Agreement in a professional, workmanlike and timely manner and in accordance with generally accepted commercial practices in the IT industry. SCIDYN shall ensure that the personnel who are carrying out the work are suitably trained, qualified and skilled and perform their duties with all reasonable skill and care. - -5- (b) @IPbell acknowledges that SCIDYN shall not be responsible for any failure to provide Services if such failure is the result, either directly or indirectly, of the inability of any products in @IPbell's computer environment to process, provide or receive date data (i.e., representations for day, month and year) and to properly exchange date data with any products supplied by SCIDYN in accordance with this Agreement. (c) All warranties given by SCIDYN hereunder do not apply to defects resulting from unauthorized, improper or inadequate maintenance or calibration by @IPbell or any third party; hardware, software, interfacing or supplies not supplied by SCIDYN; unauthorized modification or improper use of the Products (or any part thereof) by @IPbell; operation outside of published environmental specifications: improper site preparation or maintenance of the Products (or any part thereof) by @IPbell or any third party; or use by @IPbell of any third party products. (d) SCIDYN's warranty and advanced replacement program are outlined in Schedule 1 and incorporated herein by reference. 10 INDEMNITY - ------------ (a) Each party shall indemnify and hold harmless the other party, each affiliate of such other party, each successor and permitted assign of each such person and each representative of each of the foregoing against any Losses suffered or incurred by them in any Action (whether brought or otherwise initiated by any of them) arising out of or relating to the breach or alleged breach by the other party of any representation, warranty, covenant or other provision of this Agreement. In addition, SCIDYN shall indemnify and hold harmless @IPbell, each of its Affiliates (as defined below), each successor and permitted assign of each such person and each representative of each of the foregoing arising out of or relating to any claim that @IPbell's use or possession of the Products (or any constituent part thereof) infringes or violates the copyright, trade secret, patent or other proprietary right of any third party. In no event shall @IPbell settle any such action without SCIDYN's prior written approval. If, as a result of any claim of infringement against any copyright, trade secret, patent or other property right, @IPbell is enjoined from using the Products (or any material portion thereof), SCIDYN shall use its best efforts to procure the right for @IPbell to continue to use the Products, or replace or modify the Products so as to make it non-infringing. (b) Notwithstanding anything to the contrary contained herein, neither party hereto nor any of its Affiliates shall be liable to the other party hereto under or in connection with this Agreement for any consequential, incidental, indirect, punitive, exemplary, remote, speculative, or special damages of any kind, nature, or description whatsoever, whether or not such party has been advised of the possibility of such damages. "Action" shall mean any claim, action, suit, arbitration, inquiry, proceeding, notice of violation or investigation by or before any Governmental Authority. - -6- "Affiliate" shall mean, with respect to any specified Person, any other Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such specified Person. For purposes of this definition, "control" (including "controlled by" and "under common control with") means, with respect to the relationship between or among two or more Persons, the possession, directly or indirectly, or as trustee, personal representative, or executor, of the power to direct or cause the direction of the affairs or management of a Person, whether through the ownership of voting securities, as trustee, personal representative, or executor, by contract or otherwise, including, without limitation, the ownership, directly or indirectly, of securities having the power to elect a majority of the board of directors or similar body governing the affairs of such Person. "Governmental Authority' shall mean any national, federal, state, municipal, local, or other government, governmental, regulatory, or administrative authority, agency, or commission, or any court, tribunal, or judicial or arbitral body. "Law" shall mean any national, federal, state, municipal or local or other statute, law, ordinance, regulation, rule, code, order, other requirement or rule of law. "Losses" shall mean, with respect to any specified Person, all liabilities, losses, damages, claims, costs, expenses, amounts paid in settlement, interest, awards, judgments, penalties, or fines of any kind, nature, or description whatsoever (including, without limitation, all reasonable fees and disbursements of counsel, accountants, experts, and consultants) suffered, incurred, or sustained by such Person or to which such Person becomes subject (including, without limitation, in connection with any Action brought or otherwise initiated by or on behalf of such Person), resulting from, arising out of, or relating to any specified facts or circumstances. 11 TERMINATION - -------------- (a) This Agreement shall terminate on the earlier to occur of (i) thirty (30) days after any notice of termination shall have been delivered, in the event that the breach upon which such notice of termination shall have been based shall not have been cured prior to such date, and (ii) the expiration of the term of this Agreement on the second anniversary of the Effective Date. (b) Either party hereto may terminate this Agreement by delivery of written notice of termination to the other party in the event that: (i) any representation or warranty of the other party contained in this Agreement shall not be true, complete and correct in all material respects on any date of determination; (ii) the other party shall not have complied in all material respects with each covenant or agreement contained in this Agreement to be complied with by it; or (iii) the other party shall make a general assignment for the benefit of creditors, or any proceeding shall be instituted by the other party seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up or reorganization, arrangement, adjustment, protection, relief or composition of its debts under any law relating to bankruptcy, insolvency or reorganization. - -7- 12 FORCE MAJEURE - ---------------- (a) Neither party shall be liable for any failure to perform or any delay in performance of its obligations hereunder caused by circumstances beyond its reasonable control, including but not limited to fire, storm, flood, earthquake, explosion, accident, acts of the public enemy, war, rebellion, third party disputes, sabotage, epidemic, quarantine restrictions, transportation embargoes, acts of God, acts of any government or any agency thereof, judicial action and other like external circumstances. In the case of either party such cause will only be considered Force Majeure if it is not attributable to the willful act, neglect or failure to take reasonable precautions of such party, its servants, agents, employees or subcontractors. (b) If either of the parties shall become aware of the circumstances of Force Majeure which give rise to or which are likely to give rise to any failure or delay on its part, it shall promptly notify the other and shall inform the other of the period which it is estimated that such failure or delay shall continue. In the event of such a delay, delivery dates shall be appropriately adjusted. Upon such failure to perform or delay in performance exceeding one (1) month, either party may cancel this Agreement forthwith without penalty by giving written notice of termination to the other party. 13 CONFIDENTIALITY - ------------------ (a) The Receiving Party shall, and shall cause each of its representatives to, hold in strict confidence all Confidential Information of the Disclosing Party, and the Receiving Party shall not disclose any Confidential Information to any of its Representatives except to the extent the Receiving Party reasonably determines is necessary or desirable in connection with the consummation of the transactions and the performance of the obligations contemplated hereby. Except as provided in the immediately preceding sentence, the Receiving Party shall not, and shall cause its Representatives not to, directly or indirectly, copy, reproduce, use, publish, disseminate, misuse, misappropriate, sell, assign, or otherwise transfer or disclose to any Person any Confidential Information of the Disclosing Party. Notwithstanding the foregoing: (i) @IPbell may disclose to any Person engaged by @IPbell to support, maintain, or enhance the Products or any equipment with which the Products are being used such information relating to the Products as is reasonably required in connection with the performance of such support, maintenance, or enhancement services; and (ii) the Receiving Party may disclose to prospective acquirers, strategic partners, and joint venturers such information relating to the existence, terms, and conditions hereof as is reasonably required in connection with any prospective acquisition of such party by any other Person or any prospective strategic alliance or joint venture between such party and any other Person. (b) In the event that the Receiving Party or any of its Representatives is requested pursuant to, or becomes compelled by, any applicable law to disclose any Confidential Information of the Disclosing Party, the Receiving Party shall provide the Disclosing - -8- Party with prompt written notice thereof so that the Disclosing Party may seek a protective order or other appropriate remedy or, in the Disclosing Party's sole discretion, waive compliance with the terms hereof. In the event that no such protective order or other remedy is obtained, or the Disclosing Party waives compliance with the terms hereof, the Person requested or compelled to disclose Confidential Information of the Disclosing Party shall furnish only that portion of such Confidential Information which it is advised in writing by counsel is legally required, and shall cooperate with the Disclosing Party in its efforts to obtain reliable assurance that confidential treatment will be accorded such Confidential Information. "Receiving Party" means any party hereto which receives hereunder or in connection with the transaction contemplated hereby any Confidential Information of any other party hereto. "Disclosing Party" means any party hereto which discloses hereunder or in connection with the transaction contemplated hereby any of its Confidential Information to any other party hereto. "Confidential Information" means, with respect to any Disclosing Party: (a) all information relating to the authorization, preparation, negotiation, execution, delivery, administration, and performance of this Agreement, including, without limitation, the terms, conditions, and existence hereof; and (b) all information, whether communicated orally or in writing, or by electronic or magnetic media, visual observation, or other means which is confidential or proprietary information of the Disclosing Party; and all notes, analyses, compilations, studies, interpretations, or other documents which contain, reflect, or are based upon, in whole or in part, any such confidential or proprietary information; provided, however, that Confidential Information shall not include information which: (c) is or becomes generally available or known to the public, other than as a result of any disclosure by the Receiving Party or any of its representatives in violation hereof; (d) is or becomes available to the Receiving Party on a nonconfidential basis from any source other than the Disclosing Party or any of its representatives, other than any such source that the Receiving Party or any of its Representatives knows or should know is prohibited by a legal, contractual, or fiduciary obligation to the Disclosing Party from disclosing such information; or (e) is independently developed by the Receiving Party. 14 RELATIONSHIP - --------------- This is an agreement between separate entities and neither is the agent of the other for any purpose whatsoever. @IPbell and SCIDYN are independent contractors and neither has any power nor will it represent itself as having any power to in any way bind or obligate the other or to assume or create any expressed or implied obligation or responsibility on behalf of the other or in the other's name, and neither party shall have authority to represent itself as an agent of the other. This Agreement shall not be construed as constituting a partnership or any other form of legal association, which would impose liability upon one party for the act or failure to act of the other. 15 ENTIRE AGREEMENT - ------------------- This Agreement and its Schedules constitute the entire agreement - -9- between the parties with respect to the subject matter set forth and supersedes any and all prior agreements between the parties either oral or written. Unless specifically otherwise provided for herein, this Agreement may not be amended, waived or extended, in whole or in part, except by a writing signed by both parties hereto. 16 NOTICES - ---------- All notices, requests, and demands given to or made upon the parties hereto shall, except as otherwise specified herein, be in writing and be delivered by fax, express delivery, in person, or mailed to any such party at the address of such party set forth below. Any party may, by notice hereunder to the other party, designate a changed address for such party. Any notice, if faxed, shall be deemed received upon confirmation of the receipt thereof; if sent by express delivery, shall be deemed received upon delivery as set forth on the express delivery receipt; if personally delivered, shall be deemed received upon delivery; and if mailed properly addressed, postage prepaid, registered or certified mail, shall be deemed dispatched on the registered date or that stamped on the certified mail receipt, and shall be deemed received the fifth business day thereafter, or when it is actually received, whichever is sooner. Attempted delivery, in person or by express delivery at the correct address, shall be deemed received on the date of such attempted delivery. All references to hours of the day shall mean the official time in effect on the date in question in the State of New Jersey. If to SCIDYN: SCIENCE DYNAMICS CORPORATION 1919 Springdale Road Cherry Hill, NJ 08003 Attention: Joy C. Hartman, CEO Telephone: (856) 424-0068 Facsimile: (856) 751-7361 If to @IPbell: @IPbell Holdings, Inc. c/o Dechert Price & Rhoads 4000 Bell Atlantic Tower 1717 Arch Street Philadelphia, PA 19103 Attention: Gary L. Green, Esq. Telephone: (215) 994-2656 Facsimile: (215) 994-2222 - -10- 17 FURTHER ACTION - ----------------- Except as specifically set forth herein, each party hereto shall, promptly after any request therefore by the other party hereto and at the requesting party's sole cost and expense, take or cause to be taken all actions, do or cause to be done all things, and execute and deliver or cause to be executed and delivered all documents, instruments, certificates, further assurances, or other papers, which the requesting party may reasonably deem necessary, appropriate, or desirable in connection with this Agreement and the consummation of the transactions contemplated hereby. 18 NO PARTNERSHIP OR JOINT VENTURE - ---------------------------------- Nothing in this Agreement is intended or shall be construed to constitute or establish any agency, joint venture, partnership, or fiduciary relationship of any kind, nature, or description whatsoever between the parties, and neither party hereto shall have the right or authority to act for or on behalf of the other party. 19 SURVIVAL OF REPRESENTATIONS AND WARRANTIES AND CERTAIN COVENANTS - ------------------------------------------------------------------- AND AGREEMENTS - -------------- Notwithstanding anything to the contrary contained herein, each party's representations and warranties contained herein, and all statements contained in any document delivered by such party under this Agreement or in connection herewith, and the covenants and agreements contained in Sections 8, 9, 10, 13 and 15-34 shall survive the termination or expiration hereof. Neither the period of survival nor the liability of either party with respect to its representations and warranties shall be reduced by any investigation made at any time by or on behalf of such party. If either party hereto gives the other party written notice of a claim prior to the expiration of the applicable representation or warranty, then the relevant representation or warranty, as the ease may be, shall survive as to such claim until such claim has been finally resolved. 20 EXPENSES - ----------- Except as otherwise provided herein, each party hereto shall pay its own costs and expenses, including, without limitation, all fees and disbursements of counsel to such party and its Affiliates, incurred by or on behalf of such party in connection with the preparation, negotiation, execution, and delivery of this Agreement. 21 ASSIGNMENT - ------------- SCIDYN and @IPbell shall not assign their rights or interests or delegate their obligations under this Agreement without the express written consent of the other party (which consent may be granted or withheld in such party's sole discretion; provided, however, that (a) @IPbell may freely assign its rights and delegate its obligations under this Agreement to (i) any affiliated Person, in which case @IPbell shall not be relieved from its obligations hereunder, and (ii) any Person acquiring all or substantially all of @IPbell's assets; and (b) SCIDYN may freely assign its rights - -11- and delegate its obligations under this Agreement to any Person acquiring all or substantially all of SCIDYN's assets. 22 AMENDMENT; WAIVER - -------------------- No amendment or restatement hereof or supplement or other modification hereto shall be valid or effective unless such amendment, restatement, supplement, or other modification is in writing, expressly refers hereto, and is signed by each party hereto. No consent to, or waiver, discharge, or release of, any term or provision or breach hereof shall be valid or effective unless such consent, waiver, discharge, or release is in writing, expressly refers hereto, and is signed by the party to be bound thereby, and no such consent, waiver, discharge, or release shall constitute a consent, waiver, discharge, or release of any other term or provision hereof or any subsequent breach hereof, whether or not similar in nature, or a subsequent consent, waiver, discharge, or release of the same term, provision, or breach hereof. No failure to exercise or delay in exercising any right, power, or remedy hereunder by either party hereto, including any failure to insist in any instance upon strict, complete, or timely performance or observance by the other party hereto of any term or provision hereof or obligation hereunder, shall constitute a consent, waiver, discharge, or release of any such right, power, or remedy, and no single or partial exercise of any right, power, or remedy by either party hereto shall preclude any other or further exercise of any such right, power, or remedy. 23 ENTIRE AGREEMENT - ------------------- This Agreement, including all annexes, appendices, exhibits, and schedules hereto, constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior or contemporaneous negotiations, covenants, agreements, representations, warranties, undertakings, and understandings, written or oral, and courses of conduct and dealing between the parties hereto, with respect to the subject matter hereof. 24 SEVERABILITY - --------------- If any term or other provision hereof is determined by any court of competent jurisdiction to be invalid, illegal, or unenforceable, in whole or in part, by reason of any applicable law or public policy now or hereafter existing, and such determination becomes final and nonappealable, such term or other provision shall remain in full force and effect to the fullest extent permitted by applicable law, and all other terms and provisions hereof shall remain in full force and effect in their entirety. - -12- 25 SUCCESSORS AND ASSIGNS; NO THIRD-PARTY BENEFICIARIES - ------------------------------------------------------- This Agreement shall be binding upon and inure solely to the benefit of the parties hereto and their respective successors and permitted assigns, and nothing herein, whether express or implied, is intended to or shall confer upon any other Person any legal or equitable right, power, or remedy of any kind, nature, or description whatsoever under or by reason hereof; provided, however, that the terms and provisions hereof relating to indemnification of any Indemnitee not a party hereto shall inure to the benefit of such Indemnitee. 26 REMEDIES - ----------- All rights, powers, and remedies hereunder of each party hereto shall, to the fullest extent permitted by law, be cumulative and not alternative, and in addition to all other rights, powers, and remedies of such party, whether specifically granted hereunder or otherwise existing under any applicable law, and may be exercised from time to time and as often and in such order as such party may deem necessary, appropriate, or desirable, and the exercise or the beginning of the exercise of any right, power, or remedy shall not be construed to be a waiver of the right to exercise at the same time or thereafter any other right, power, or remedy. 27 GOVERNING LAW - ---------------- This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York. 28 WAIVER OF JURY TRIAL - ----------------------- Each party hereto hereby unconditionally and irrevocably waives all right to trial by jury in any action, suit, or proceeding (whether based on contract, tort, or otherwise) based upon, resulting from, arising out of, or relating to this Agreement or any transaction or agreement contemplated hereby. 29 JURISDICTION; SERVICE OF PROCESS - ----------------------------------- Each party hereto hereby unconditionally and irrevocably submits, for itself and its property, to the exclusive jurisdiction of the Designated Courts, over any Designated Action. All claims with respect to any Designated Action shall be heard and determined in a Designated Court. Neither party hereto shall commence any Designated Action except in a Designated Court. Neither party hereto shall, and each party hereto hereby waives any right it may have to: plead or make any objection to the venue of any Designated Court; plead or make any claim that any Designated Action brought in any Designated Court has been brought in an improper or otherwise inconvenient forum; plead or make any claim that any Designated Court lacks personal jurisdiction over it; or seek any punitive damages in any Designated Action. Any final Governmental Order in any Designated Action shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. The summons and complaint or any other process in any Designated Action may be served by mailing to any of the addresses set forth herein or by hand delivery to a person of suitable age and discretion at any such address, and that any such service shall be deemed to be complete three (3) Business Days following the date such process is so mailed or upon receipt by such addressee when delivered in person and to have the same force and effect as personal service within the State of New York. - -13- "Business Days" shall mean any day except a Saturday, Sunday or other day on which banks are required or authorized by law to be closed in the City of New York. "Designated Action" shall mean any Action based upon, resulting from, arising out of, or relating to this Agreement or any transaction or agreement contemplated hereby, or for the recognition or enforcement of any judgment resulting from any such Action. "Designated Court" shall mean any court of the State of New York and any federal court of the United States of America, in either case, sitting in the City and County of New York, and any appellate court therefrom. "Governmental Order" shall mean any order, writ, judgment, injunction, decree, stipulation, determination, or award entered by or with any Governmental Authority. 30 PREPARATION AND NEGOTIATION OF THIS AGREEMENT - ------------------------------------------------ Each party hereto has participated equally in the preparation and negotiation of this Agreement, including all annexes, appendices, exhibits, and schedules hereto, and each party hereto hereby unconditionally and irrevocably waives to the fullest extent permitted by law any rule of interpretation or construction requiring that this Agreement, including any annex, appendix, exhibit, or schedule hereto; be interpreted or construed against the drafting party. 31 HEADINGS - ----------- The descriptive headings contained herein are for convenience of reference only and shall not affect in any way the meaning, construction, or interpretation of any term or provision hereof. 32 EXHIBITS - ----------- Each annex, appendix, exhibit, and schedule hereto is hereby incorporated herein by reference in its entirety. 33 COUNTERPARTS - --------------- This Agreement may be executed in any number of counterparts and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original, and all of which taken together shall constitute one and the same agreement with the same effect as if such signatures were upon the same instrument. - -14- 34 DELIVERY VIA TELECOPIER - -------------------------- Delivery of an executed counterpart hereof via telecopier shall be as effective as delivery of a manually executed counterpart hereof. - -15- IN WITNESS WHEREOF, the parties hereto have executed this Agreement, which shall become effective on the latest date set forth below. SCIENCE DYNAMICS CORPORATION SIGNATURE: /s/ Joy C. Hartman --------------------- NAME: Joy C. Hartman POSITION: President Date: 2/11/00 @IPbell SIGNATURE: /s/ Graham Butler --------------------- NAME: Graham Butler POSITION: Director Date: 2/11/00 - -16- Schedule 1 ---------- WARRANTY AND MAINTENANCE Science Dynamics Corporation (SCIDYN) warrants to its customers that its hardware and software shall be free from defects in design, material and workmanship for a period of one year from date of shipment. During this period, SCIDYN will furnish software maintenance at no charge for those items that directly effect system operation (as defined by the System's User Documentation) and/or reliability. All SCIDYN's products are serialized and the ship date can be determined by the serial number. Products sold as part of SCIDYN's system, but manufactured by others such as, but not limited to, tape drives, printers, and PC's, carry the full SCIDYN warranty. Customers (Telephone Company or end user) must return directly to SCIDYN, at the customer s risk and expense, any SCIDYN product that has failed in normal service during said warranty period(s). The failed product will be repaired or replaced, at the option of SCIDYN, and returned to the customer at the risk and expense of SCIDYN. The satisfactory correction of defects by repair or replacement shall constitute the fulfillment of all obligations of SCIDYN with respect to the product's warranty. If the customer is experiencing an outage due to an item, and a customer support representative indicates that an item is required, SCIDYN will ship to the Customer that item within 24hrs of the service call during a normal working week. Should a unit be found to be DOA (Dead on Arrival) SCIDYN will incur the cost of shipping the DOA unit back to SCDYN's premises. The faulty item must be returned to SCIDYN within fifteen (15) working days, or the customer will be billed in full for the item shipped. If customer is billed for an item due to the lack of return, that item becomes the possession of the customer and will require a RA number for SCIDYN for repairs. WARRANTY EXCLUSIONS - ------------------- SCIDYN shall have no obligation to honor warranty for any of the following occurrences: - - Installation of customer initiated software unrelated to SCIDYN software - - Alterations, modifications and/or repairs contrary to SCIDYN instructions - - Lack of general maintenance [filter cleaning, etc], other than maintenance to be provided by SCIDYN - - Damage resulting from abuse and/or misuse - - Failure or surge due to electrical power - - Failure due to environmental conditions [climate control] - - Failure due to Force Majeure - -17- SCIDYN HEREBY DISCLAIMS ALL OTHER WARRANTIES EXPRESSED OR IMPLIED FOR OUR PRODUCTS INCLUDING, BUT NOT LIMITED TO, THE WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. REPAIRS GENERAL INFORMATION - --------------------------- SCIDYN provides full product support for warranty repair. SCIDYN's Field Service Department provides prompt analysis and repair of subassemblies returned by the customer. SCIDYN's repair turnaround objective is five working days in-house, excluding OEM materials that must be repaired by the original manufacture. RETURN AUTHORIZATION A Return Authorization (RA) number must accompany all units returned to SCIDYN for repair. This number may be obtained by telephone from SCIDYN's TAC (Technical Assistance Center) or Help Desk Department, both of which warrant to be readily available and accessible via a hotline 24 hours per day, 7 days per week. This number should be used for all paperwork or telephone transactions between the customer and SCIDYN. It should also be included with the returned unit and clearly marked on the outside of the shipping container. All repair and return components are handled in the following manner: 1. Customer telephones SCIDYN's TAC or Help Desk. 2. SCIDYN's representative will provide the customer with an RA number. 3. The customer will provide the failed component's serial number, contact, phone number, and the return address for the repaired component. A description of the type of failure or trouble symptoms exhibited should also accompany the unit in order to assist SCIDYN in expediting the repair. SCIDYN's repair turnaround objective is five working days in-house, excluding OEM materials that must be repaired by the original manufacture. WARRANTY REPAIR In-warranty components are repaired at no charge to the customer. Shipping and insurance costs to SCIDYN for in-warranty components are borne by the customer and are prepaid by SCIDYN upon return shipment. Repair items within warranty will be covered by the original warranty (one year from date of ship). NON- WARRANTY REPAIR [including warranty exclusions] - -18- Post-warranty repair costs are one fourth of the component's list price, with a minimum repair charge of $300. These charges apply even if no failure or damage is found. Shipping and insurance costs to and from SCIDYN for post- warranty components are borne by the customer. Out of warranty items will carry a 90 day warranty from date of repair. UNAUTHORIZED REPAIRS Material returned to SCIDYN for repair will be held at the receiving area if received without: - - RA Number - - purchase order number [if required] - - return delivery address - - billing address EMERGENCY REPLACEMENTS FOR NON WARRANTY PRODUCTS Science Dynamics does not provide advance replacements for its equipment on non-warranty systems. Emergency shipment constitutes material that is requested to be shipped before the normal 60 day Sales Order delivery. The Customer must provide to SCIDYN a purchase order before the material is shipped. There is a standard $50.00 handling charge for an emergency replacement and the customer will be billed for the component at the list price, plus shipping. A purchase order number and a billing address must be received before an emergency shipment can be processed. - -19- SCHEDULE 2 ---------- Equipment Costs C-2308 IP Telephony El Single Chassis Gateway 190214-1 Base System, including CPU, chassis, modem, 1 Windows NT 4.0, PC Anywhere 80311 TX-3210 1 80475 Dual T1 Telephony Card 80477 Dual E1 Telephony Card 2 8852-01 H.323 Runtime Licence (per port) 120 8853-01 G.723.1 Vocoder (per port) 120 IVR Software Licence (per port) 120 Belle Billing Interface (per chassis) 1 SCIDYN BubbleLink IP Telephony GW Software Licence (per port) 120 Price: $78,000.00 C-2308 IP Telephony T1 Single Chassis Gateway 190214-1 Base System, including CPU, chassis, modem, Windows NT 4.0, PC Anywhere 1 80311 TX-3210 1 80475 Dual T1 Telephony Card 2 30477 Dual El Telephony Card 8852-01 H.323 Runtime Licence (per port) 96 8853-01 G.723.1 Vocoder (per port) 96 IVR Software Licence (per port) 96 Belle Billing Interface (per chassis) 1 SCIDYN BubbleLink IP Telephony GW Software Licence (per port) 96 Price: $62,400.00 190215-1 Rack Adapter assembly with QuickConnect(R) For the adaptation of two chassis to one shelf. Needs to be ordered with first pair of chassis Upgrade Kit 80475 Dual T1 Telephony Card 2 80311 TX-3210 1 Related Software 1 Price: $62,400.00 - -20- 80447 Dual El Telephony Card 2 80311 TX-3210 1 Related Software 1 Price $78,000.00 Note: A node will consist of two chassis with an initial port capacity of either 192 or 240 ports Orders will be placed on a per node basis All orders must include: IP Address for each node ISDN Routing Instructions GateKeeper Lite Instructions This information is not necessary for Upgrade Kits Upgrade kits will include all relevant software as specified in base chassis System Training - --------------- @IPbell Test Center Training shall be included at no charge to @IPbell employees or @IPbell's business partners limited to the following -Cisco, Hewlett Packard, Oracle, Belle, Open Systems, Iceland Telecom and Simplified Telesys for a 12 month duration commencing with the signing of this contract. All other @IPbell affiliates shall be charged at the following rates: Administration Training @IPbell related business partners 4 per quarter Free of Charge SCIDYN will charge $1000 per trainee for a Three-day residential course in our classroom facilities at SCIDYN offices New Jersey. Cost covers course only and excludes all other expenses. Engineering Training @IPbell related business partners 4 per quarter Free of Charge SCIDYN will charge $1500 per trainee for a Five-day residential course in our class room facilities at SCIDYN offices New Jersey. Cost covers course only and excludes all other expenses. Extended Software Warranty - -------------------------- Provides access to software upgrades, does not include functional upgrades where hardware changes may be involved. Price is based upon amount of ports and charged as an annual fee (Subject to annual review). Charge $10 per port per annum commencing one year from receipt of equipment by @IPbell. - -21- SCHEDULE 3 ---------- PRODUCT SPECIFICATION IntegratorC-2300TM C-2308 Basic Configuration (T1) 48 Ports expandable to 192 per chassis C-2308 Basic Configuration (El) 60 Ports expandable to 240 per chassis System Specification - -------------------- Size: C2308 - 8.75" (22cm) Width x 8.75(22cm) Height Rack-mount Chassis with CPU & PSU With Crystal QuickConnect(R) cable management system Power: 95 to 135V AC or 180 to 270V AC 300 Watts Maximum Temperature: 10 to +4O.C Humidity: 10 to 90% non-condensing Altitude: 10,000ft (3050 M) Compression algorithm: G723 Interfaces - ---------- Telephony ports: DSX-1 (T1) and CEPT G.703 (El) interfacing with D3/D4 (T1) and CAS (El) Framing Pulse, DTMF and MF dialing and detection DID, OGT, E&M & MFC/R1/R2 protocols World-wide approvals (list of countries available on request) LAN Interfaces: Standard 10BaseT Other Interfaces: Dial-in Modem for remote support & software upgrades - -22- Software - -------- System: Bubble-LinkTM Software Architecture Chassis Inter-connect Bubble-LinkTM Software Belle Systems Real Time Interface Call Detail Record Output Voice: MSGSM & G.723.1 Voice Compression Algorithms (13.4Kbps & 6.4Kbps) Echo Cancellation Silence Suppression Background Regeneration Gain Control Fax: Real Time Store and Forward Additional Optional Features - ---------------------------- New Compression Algorithms New Compression Algorithms are becoming available and can be provided as an upgrade at a customer's request. Cost available on request. Additional Voice Prompts Provides multi lingual voice prompts for automated operator collect toll services. Cost available on request. SS7 Interface This provides standard interface to the public network carriers using standard messaging protocols such as Q931. Analog Interfaces. Cost available on request. Analog Interfaces Provides standard US analogue interface ports to standard POTS telephones on terminating units. Cost available on request. - -23- EX-23.1 5 cosmas.txt CONSENT OF PETER C. COSMAS, CPA INDEPENDENT ACCOUNTANTS' CONSENT We consent to use in this registration Statement of Science Dynamics Corporation on Form SB-2 of our report dated March 10, 2001 on the consolidated financial statements of Science Dynamics and its subsidiary appearing in the Prospectus, which is a part of this Registration Statement. We also consent to the reference to us under the heading " Experts" in such Prospectus. PETER C. COSMAS CO., CPA'S /s/Peter C. Cosmas Co., CPA's ----------------------------- New York, New York September 4, 2001 -----END PRIVACY-ENHANCED MESSAGE-----