-----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, Nv8JzMIr3WLHJyU5sAHCDscbw0LVIU5bxAa2Q7li6/m3gh8gL4meamWOH6yTq4qM TujxlW+vvkshWAGBVipxQQ== 0000350644-02-000011.txt : 20021113 0000350644-02-000011.hdr.sgml : 20021113 20021113153932 ACCESSION NUMBER: 0000350644-02-000011 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021113 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: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-10690 FILM NUMBER: 02819911 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 10QSB 1 qsb3q-2002.txt 10QSB PERIOD ENDING SEPTEMBER 30, 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-QSB (Mark One) [x] QUARTERLY REPORT UNDER SECTION 13 0R 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2002 ------------------ [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from ______________ to ______________ Commission file number 010690 ____________________ Science Dynamics Corporation ------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) Delaware ------------------------------------------------------------ (State or other jurisdiction of incorporation or organization) 22-2011859 ------------------------------- (IRS Employer Identification No.) 2059 Springdale Road, Suite 100, Cherry Hill, New Jersey 08003 ---------------------------------------------------------------- (Address of principal executive offices) ( 856 ) 424-0068 ----------------------------------------------------- (Issuer's telephone number) N/A --------------------------------------------------------------- (Former name, former address, and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the registrant filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 11/12/2002 40,657,790 shares of common stock were outstanding. S C I E N C E D Y N A M I C S C O R P O R A T I O N INDEX ----- PAGE NO. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 2002 1 (unaudited) and December 31, 2001 (audited) Consolidated Statements of Operations for the nine months 2 and three months ended September 30, 2002 (unaudited) and the nine and three months ended September 30, 2001 (unaudited) Consolidated Statements of Cash Flows for nine months ended September 30, 2002 (unaudited) and for the nine months ended September 30, 2001 (unaudited) 3 Notes to Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition 5-14 and Results of Operations Item 3. Controls and Procedures 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings 15 Item 2. Changes in Securities 15 Item 3. Defaults upon Senior Securities 16 Item 4. Submission of Matters to Vote of Security Holders 16 Item 5. Other Information 16 Item 6. Exhibits and Reports 17 Item 7. Signatures 18 SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
ASSETS September 30, December 31, 2002 2001 Unaudited Audited --------- ------- Current assets: Cash and cash equivalents $ 12,457 $ 17,075 Accounts receivable - trade 66,903 13,234 Accounts receivable - other - 60,721 Inventories 225,158 310,857 Other current assets 34,562 125,446 ---------- --------- Total current assets 339,080 527,333 ---------- --------- Property and equipment, net 714,067 805,727 Deferred Financing costs 159,268 154,268 Other assets 25,363 25,363 ---------- --------- Total assets $1,237,778 $1,512,691 ========== ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of capital lease obligation $ 128,413 $ 69,615 Bank Note 58,323 99,535 Customer Deposits 140,596 289,368 Short term loan payable 158,000 195,000 Accounts payable 1,098,140 800,460 Accrued expenses 339,340 152,151 ---------- --------- Total current liabilities 1,922,812 1,606,129 Long Term liabilities: Non current portion of bank note 33,327 - Non current portion of capital lease obligation - 58,798 Convertible Debenture 1,776,982 1,431,949 ---------- --------- Total liabilities $3,733,121 $3,096,876 ---------- --------- Commitments Shareholders' equity (deficit) Common stock - .01 par value, 45,000,000 shares authorized, 40,783,590 and 20,879,501 issued 40,657,790 and 20,753,701 outstanding in 2002 and 2001 respectively. 407,836 208,795 Additional paid-in capital 15,536,398 14,681,858 (Deficit) (18,041,744) (16,077,005) ---------- --------- (2,097,510) (1,186,352) Common stock held in treasury, at cost (397,833) (397,833) ---------- --------- Total shareholders' equity (deficit) (2,495,343) (1,584,185) ---------- --------- Total liabilities and shareholders' Equity $1,237,778 $1,512,691 ========== ========= The accompanying notes are an integral part of these consolidated financial statements.
- -1- SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Nine Months Ended Three Months Ended September 30 September 30, 2002 2001 2002 2001 ---- ---- ---- ---- NET SALES $ 812,143 $ 506,134 $ 156,266 $ 133,521 ---------- ---------- ---------- ---------- Operating costs and expenses: Cost of sales 357,611 381,509 80,969 92,983 Research and development 593,707 1,107,916 170,636 353,126 Selling, general and administrative 1,483,794 2,560,369 394,649 719,229 ---------- ---------- ---------- ---------- 2,435,112 4,049,794 646,254 1,165,338 ---------- ---------- ---------- ---------- Operating (loss) (1,622,969) (3,543,660) (489,988) (1,031,817) Other income (expenses): Sale of NJ NOL 90,000 90,000 Interest Expense (120,577) (253,986) (50,250) (28,100) Finance Expense (311,193) (119,989) - ---------- ---------- ---------- ---------- Net (loss) $(1,964,739) $(3,797,646) $(570,227) $(1,059,917) ========== ========== ======== ========== Net(loss)per common share basic and diluted $ (0.06) $ (0.21) $ (0.02) $ (0.06) ========== ========== ======== ========== The accompanying notes are an integral part of these consolidated financial statements.
- -2- SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30 2002 2001 ---- ---- Cash flows from operating activities: Net (loss) $(1,964,739) $(3,797,646) ----------- ----------- Adjustments to reconcile net (loss) to net cash used for operating activities: Depreciation 255,115 189,453 Financing expense non cash 311,193 212,524 Amortization of intangible assets - 225,000 Changes in operating assets and liabilities: (Increase) decrease in: Accounts receivable (53,669) 38,566 Other receivable 60,721 1,401 Inventories 85,699 (157,573) Other current assets 90,884 (2,214) Increase (Decrease) in: Accounts Payable and accrued expenses 484,869 383,437 customer deposits (148,772) 420,200 ----------- ----------- Total adjustments 1,056,040 1,310,794 ----------- ----------- Net cash used for operating activities (908,699) (2,486,852) ----------- ----------- Cash flows from investing activities: Purchase of property and equipment - net (133,455) (120,062) ----------- ----------- Net cash used in investing activities (133,455) (120,062) ----------- ----------- Cash flows from financing activities: Increase (decrease)in Line of Credit (7,885) 97,741 Issuance of Convertible Debt 1,082,421 1,362,710 Short term loan Payable (37,000) - Payment on capitalized lease - (47,225) ----------- ----------- Net cash provided by financing activities 1,037,536 1,413,226 ----------- ----------- Net increase (decrease) in cash and cash equivalents (4,618) (1,193,688) Cash and cash equivalents - beginning of period 17,075 1,351,641 ----------- ----------- Cash and cash equivalents - end of period $ 12,457 $ 157,953 The accompanying notes are an integral part of these consolidated financial statements.
- -3- SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Item 1. Basis of Presentation --------------------- The unaudited financial statements included in the Form 10-QSB have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation SB. The financial information furnished herein reflects all adjustments, which in the opinion of management are necessary for a fair presentation of the Company's financial position, the results of operations and the cash flows for the periods presented. Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed, or omitted, pursuant to such rules and regulations. These interim statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2001. The Company presumes that users of the interim financial information herein have read or have access to the audited financial statements for the preceding fiscal year and that the adequacy of additional disclosure needed for a fair presentation may be determined in that context. The results of operations for any interim period are not necessarily indicative of the results for the full year. Income per share ---------------- Per-share data has been computed on the basis of the weighted average number of shares of common stock outstanding during the periods. - -4- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 2002 AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002. Business Overview - ----------------- Science Dynamics made significant efforts in the past twelve months to react to the tremendous slowdown in the global communications market. The focus was to concentrate on all potential revenue opportunities and eliminate those that could not produce revenue in the short-term. This resulted in drastic reductions in the workforce especially in the area of Voice over Internet technologies. The sales revenue potential of the IP product line was deemed to have a long-term sales cycle with no short-term revenue opportunity. Unforeseen was the continued decline in the telecom market combined with the step response to critical failures in major telecom industry giants. This has set in motion an uncertain future for this sector along with predictable reductions in capital spending. These reductions along with refocused efforts on core business markets helped sustain SciDyn during the early portion of 2002. SciDyn set in motion an early effort to enter new avenues for sustained revenue during this period of reduced capital spending. These include new sales models for the Commander Call Control System including lease and transaction based offerings. These new financing options have opened the door to allow many vendors access to the Commander product line. In addition to forging new customer relationships, many of the traditional SciDyn customers such as the major long distance and local exchange carriers, are exploring how these financing options allow them to continue to improve operational costs in an increasingly competitive market without the up-front capital expenditure. New SciDyn revenue initiatives included the launching of an operations center to provide value-added enhancements to key industry services. These services focus on the needs of the corrections market and extend the value of a typical equipment sale into a multi-year contract for transaction-based services. The operations center is now in full production mode and the initial invoicing commenced during the latter part of June. In the first five months of operation the operations center has experienced a growth of 133% in daily transactions processed. SciDyn is also exploring other established markets that are considered more viable in the short term following the telecom disruption currently facing the industry. One such market is the pre-paid and debit calling card industry. SciDyn is embracing this industry by offering a new entry-level product for pre-paid and debit card carriers. The new product known as MinuteMan offers advanced pre-paid services comparable with many of the legacy systems on the market today at a price that is targeted at allowing providers the chance to transition from a pure resale mode into the first step of creating a network infrastructure. Over the past year, several new software releases have been produced for the Commander I and II models that have repositioned the product for a greater segment of the inmate call control market. This has opened the door to allow the Commander product to fill the needs of all service providers, both large and small. Heretofore, the Commander product was designed solely for the needs of the large Local Exchange Carrier (LEC) customers. SciDyn has recently engaged several nascent independent inmate call control service providers that are now competing equitably with LECs. These smaller companies are winning contracts on the merits, strength and reputation of the Commander platform. SciDyn continues to embrace the benefits and competitive advantages that a converged voice/data network holds for communications carriers in many market sectors. As such, SciDyn will continue to maintain a forward pace in the development of integrated voice over data technology. - -5- SciDyn expects operating losses and negative cash flow for the foreseeable future, as we must obtain orders, continue to introduce additional services and offer optional procurement methods. We believe that increasing our revenues will depend in large part on our ability to offer products that are attractive to our customers, increase customer awareness of our product offerings by developing effective marketing and promotional activities and developing strategic relationships. We intend to continue to increase the scope of our operations while also facing the challenge of maximizing resources effectively. PRODUCTS - -------- Commander Call Control System The Commander call control system is built on SciDyn's unique BubbleLINK(R) software architecture. This open system platform is a combination of integrated Computer Telephony (CTI) hardware and software, which can handle thousands of call transactions per hour and provide correctional facility officials with effective tools to manage and control inmate telephone calls using the Commander system software. The Commander I models are designed for the small to midsize municipal and county correctional facilities requiring control for up to 40 inmate telephone lines. The Commander I base system provides telephone control for 4 lines and can be expanded in 4 line increments. This modular design provides a cost effective solution with an abundance of inmate phone control features. Commander call control systems are supported by an integrated array of administrative and investigative programs that provide a management solution suite. All programs interact in real-time with Commander calls and databases via an Ethernet Local Area Network (LAN) or a Wide Area Network (WAN). Commander provides state of the art call control and some of the first tools targeted at investigation and law enforcement in the inmate telephone control industry. The Commander Live Monitoring, Debit and Recording continue to be some of the leading features required within the industry today. The latest software release for Commander enhances the debit capability of the product by providing an extensive pre-paid card system. The new DebitCard feature set provides flexible capability in card creation and management. DebitCard supports specialized tariffs and call timing. By being totally integrated with the Commander, no external network facility is necessary. This provides complete control and security when using pre-paid cards. None of the Commander call control functions are jeopardized when a pre-paid card is used. Currently under development is the next generation Commander system. This next generation Commander will be produced on the latest technology and provide greater capabilities for new features. This generation of Commander system will introduce SciDyn's first totally internal recording solution. This new recording component will provide great cost savings over the traditional recording equipment used today. This generation of Commander will no longer be assembled exclusively from components purchased from a single vendor. Currently two vendors have been selected to source components in the next generation Commander. This will provide SciDyn greater flexibility and reliability in producing and supporting new systems. Also in development is the integration of new biometric technology interfaces to the Commander. Biometric technology is fast becoming a realistic tool for increasing system security at many levels. SciDyn and the Commander product will lead the industry with practical and effective biometric solutions. - -6- Development will also continue in the area of more powerful investigative tools. The Investigator's File Cabinet will provide a single repository for storing call records, recordings and other documents related to a specific case or investigation. Development has begun on a new Commander system targeted at multi-facility centralized control. This solution will allow Inmate phone providers a method to bring all of the Commander features including the extensive call control, debit, and pre-paid solutions to the smallest facilities. This system provides an aggregated point of switching and control for the provider. This minimizes on-site equipment and maintenance costs. The Commander will still maintain per facility branding and rating without the need for dedicated switching equipment at the institution. SciDyn continues to explore opportunities with the major telephone companies in providing the Commander inmate phone control system with call transaction (price per call) programs. Management believes that the recent and continued drive to develop new capabilities for the Commander will establish the Commander and SciDyn as the leader in inmate telephone control. IP Telephony One of the impacts of IP Telephony has been that of driving the convergence of the IT and telecom markets. This together with the dramatic over capacity in the bandwidth market place and the corresponding reduction of demand in the IP telephony and networking product has meant that Scidyn has taken the decision not to compete directly against the large manufacturers of such equipment. SciDyn's modular approach to the design of these "next generation" products has positioned it well to now focus on adding value and driving toward the promise of enhanced functionality that these converged networks can ultimately provide. Building on it's core BubbleLINK(R) technology the company is continuing to develop products, concepts and services that will bring such enhanced value added propositions to those systems provided by the larger suppliers of networking equipment. The SciDyn modular architecture permits our customers to add new product and service features without significant cost or development time. Based on publicly available data provided by large telecommunications service providers, we believe our modular architecture enables the provision of new and existing communications services at a lower cost than the provision of communications services by traditional telephone companies. The IP Integrator gateway product line addresses the various market segments. The IntegratorC-2100(R) Series focus is corporate enterprises, the IntegratorC- 2300(R) Series focus is large ISPs and Telco Carriers and the IntergratorC- 2500(R) Series focus is intended to address the needs of PTT/Telco Carriers. SciDyn's IP Telephony products aim to enhance the new operators' abilities to combine the technologies of the new IP-based networks with the traditional feature-rich circuit networks without forfeiting the key functionality of IP network adaptability. SciDyn offers its proprietary BubbleLINK(R) software architecture throughout its current IP Telephony Gateway product line. This includes our high capacity versatile IntegratorC-2308(R), which has one of the smallest footprints in the industry. During 2001 the Integrator product was enhanced with additional capabilities. System enhancements included support for SNMP, Radius Authentication and Interoperability testing with various other vendor products. The system hardware was revised and a cost reduction cycle was executed to lower the per-port cost and conversely the entry-level price of the IntegratorC-2300(R). Due to the slowdown of Internet Telephony networks, development efforts in this area have been re-directed to align with areas in which Internet telephony has managed to sustain growth. Specifically the enterprise marketplace including IP-PBX and inter-office gateway applications. SciDyn is exploring this market and developing technology to supplement these applications. SciDyn expects to make new product announcements in this area later this year or in early 2003. - -7- MinuteMan The MinuteMan product, built on SciDyn's core BubbleLINK(R) technology, is a complete turnkey system providing all aspects of a pre-paid and debit card platform. MinuteMan provides PSTN interface, card databases, IVR and SMDR collection. The MinuteMan is ideal for smaller pre-paid card vendors that want to break free from the resale only mode of the card business. MinuteMan is also the ideal front end for VoIP carriers that are looking to complete their offerings for low cost international traffic. Most VoIP Gateways do not offer a robust solution for pre-paid calling. Most of these carriers have been forced to purchase or lease expensive adjunct systems to integrate pre-paid solutions into their VoIP networks. The MinuteMan provides all of the necessary functions to convert an existing VoIP toll bypass network into a full-featured international pre-paid network. MinuteMan development is continuing based on requirements from customers and other industry trends. Enhancements to the original MinuteMan include expanded rating capabilities for specialized charges and dynamic rates. Initial installations of the MinuteMan are scheduled for completion before the end of this year. Voice Response System SciDyn's Voice Response System (VRS) is an automatic intercept product designed to provide a cost-effective solution for implementing announcement capabilities at the central office location. This non-BubbleLINK(R) product has reached its mature stage of the product life cycle and has been discontinued. A base line revenue stream will be generated from support of this product. SciDyn maintains a small but steady revenue from the maintenance of VRS and VRI platforms. There are currently several hundred of these systems still actively installed and operational. SciDyn is currently investigating the need to provide a technology upgrade to customers using these traditional platforms. Product Development New applications are also being investigated within our product development team. We believe that new vertical markets exist and can be penetrated with ongoing platform enhancements. We believe that the robust capabilities of our current technology along with the ability to integrate a voice over packet interface can combine traditional network systems with new market requirements. SciDyn's products have primarily been designed and developed by its internal engineering staff. SciDyn considers the features and performance of its products to be generally competitive to those of other available applications. We believe that continual enhancements of our products will be required to enable SciDyn to maintain its competitive position. SciDyn intends to focus its principal future product development efforts on developing new, innovative, technical products and updating existing products in the communications arena to enable the Company to take advantage of opportunities resulting from the expected direction of technology. SciDyn continues to refine its core BubbleLINK(R) software architecture. This software architecture provides the foundation for hosting applications for various Telephony and transaction oriented processes. Currently the BubbleLINK(R) architecture supports existing Company products such as the Commander family of inmate products, the MinuteMan pre-paid card system, and the IntegratorC-2000(R) Series of IP Telephony gateway products. Management believes that the product design strategy will keep SciDyn competitive in the changing communications marketplace. - -8- Video over Frame Relay In 1997, SciDyn launched its new way to carry video conferencing. The VFX- 250S is a hardware-based Frame Relay Access Device (FRAD) designed to carry video streams through the frame relay network. As the largest data network protocol in the world, frame relay seemed an obvious choice for adding video connectivity to its wide complement of features. SciDyn continues to market the VFX-250S products in markets where ISDN and leased-line services are not available or are cost prohibitive. As Frame Relay becomes more prolific, so does the need for value added services to maximize the efficiency of the network. In June, a contract was signed with Mercury Corporation for exclusive rights to distribute the VFX within Korea. The first systems have been shipped and are currently undergoing the approval process in Korea. We have had additional sales in Germany, China, Mexico, Brazil, Peru and Canada, extending the reach of the VFX across six continents. We expect continued sales from these opportunities to proceed steadily throughout the year. Error Correction Algorithm In 1999, SciDyn acquired the "Error Detection and Correction System for Use with Address Translation Memory Controller" patent, in exchange for 172,029 shares of common stock then valued at $100,000. Such a patent provides the Company with the ability to embed in certain technology an error correction method that should substantially reduce data transmission errors. This correction device (FEC) is designed to reduce costly retransmission and can be utilized across various data transport mediums. The Patent, which has been issued in the United States with application in many foreign countries, is for a data transmission system for use in a mass memory system, which includes an EDAC that corrects all single component errors and detects all double component errors. High-speed operation permits use of the EDAC on address and control lines as well as on data lines. In memory systems, which use virtual memory addressing, further efficiency and economy is achieved by incorporating a partial implementation of the EDAC encoding in the same virtual memory address translation unit in which the virtual memory address is calculated. We intended to make the patent available to others on a royalty basis. SciDyn has explored the use of its FEC patent with several entities during the past few years. We have continually been advised that the prime difficulty of incorporating this new method of Error Correction is that it is so different in approach and incompatible with the long used Reed-Solomon Error correction system. It is difficult to supplant Reed-Solomon, particularly in today's Telecom environment. In spite of the advantages of lower cost, smaller footprint, because of fewer components, and the inherent better correction performance, uprooting R-S would be a major undertaking. The SciDyn FEC must be at both ends of the data stream. This, in turn, means that only new installations are candidates for the Company's system. To date a suitable entity has not been identified to exploit this new technology in the near term. SciDyn's near term strategy and capital priorities preclude it from investing additional time and funds into exploiting this patent independently. As stated in previous reports its carrying value of $89,700 has been written off. SciDyn believes that the underlying patent may still have practical applications. - -9- RESULTS OF OPERATIONS - --------------------- The following table summarizes the basic results of operations for the periods indicated in the Consolidated Statement of Operations. Nine Months ended September 30, 2002 (unaudited) compared to the Nine Months ended September 30, 2001 (unaudited). Nine Months Ended September 30, 2002 2001 ---- ---- Sales $812,143 $506,134 Net (Loss) (1,964,739) (3,797,646) Net (Loss) Per Share $(0.06) $(0.21) OPERATING EXPENSES PERCENT OF SALES 2002 2001 2002 2001 ---- ---- ---- ---- Cost of Goods Sold $ 357,611 $ 381,509 44% 75% Research & Development 593,707 1,107,916 73% 219% Sales, General & Admin 1,483,794 2,560,369 183% 505% Total Operating Costs and Expenses $2,435,112 $4,049,794 300% 799% Sales for the nine months ended September 30, 2002 were $812,143 an increase of $306,009 from sales of $506,134 for the nine months ended September 30, 2001. Our revenue in 2002 was predominantly derived from the Commander Product Line with sales of the VFX Product Line. Cost of Goods Sold decreased to $357,611 in the nine months ended September 30, 2002 from $381,509 in the corresponding nine months ended September 30, 2001. The decrease in the cost of goods sold was related to the decrease in overhead. The percentage decrease of cost of goods sold as a percentage of sales was due to the increase in sales and improved margins on the Commander and VFX product lines. Research & Development expenses decreased to $593,707 in the nine months ended September 30, 2002 as compared to $1,107,916 in the comparable nine months ended September 30, 2001. The decrease in research and development expenses during the first nine months of 2002 was due to the reduction in the development staff for the IP Telephony Integrator product line. The sales revenue potential of the IP product line was long term and we had to reduce our expenses to survive in this very difficult market place. We believe that continual enhancements of our products will be required to enable SciDyn to maintain its competitive position. SciDyn intends to focus its principal future product development efforts on developing new, innovative, technical products and updating existing products in the communications arena which will enable the Company to explore other established markets that are considered "safe" from the telecom disruption currently facing the industry. One such market is the pre-paid and debit calling card industry. In June, we introduced the MinuteMan Calling Card/Billing System, which is described above in the product section. - -10- Sales, General & Administrative expenses decreased to $1,483,794 in the nine months ended September 30, 2002, compared to $2,560,369 in the nine months ended September 30, 2001. The decrease is related to a reduction in force and other cost saving initiatives. Interest Expense in the first nine months ended September 30, 2002 is interest accrued on our convertible notes, paid on the line of credit and the interest due for the loans from two stockholders. Finance Expense in the first nine months ended September 30, 2002 was $311,193. The finance expense includes $216,819 relating to the recognition of a debt discount resulting from a beneficial conversion feature embedded in the convertible notes issued between February 6, 2002 and October 16, 2002. The finance expense also includes the amortization of the finance cost. Per Emerging Issues Task Force (EITF) Number 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios," this beneficial conversion feature was assigned an intrinsic value of $216,819, as calculated under the provisions of the EITF. This amount was immediately expensed, as the Notes were convertible into common shares of the Company at the time of the signing of the Agreement. RESULTS OF OPERATIONS - --------------------- The following table summarizes the basic results of operations for the periods indicated in the Consolidated Statement of Operations. Three Months ended September 30, 2002 (unaudited) compared to the Three Months ended September 30, 2001 (unaudited). Three Months Ended September 30, 2002 2001 ---- ---- Sales $156,266 $133,521 Net (Loss) (570,227) (1,059,917) Net (Loss) Per Share $(0.02) $(0.06) OPERATING EXPENSES PERCENT OF SALES 2002 2001 2002 2001 ---- ---- ---- ---- Cost of Goods Sold $ 80,969 $ 92,983 52% 70% Research & Development 170,636 353,126 109% 264% Sales, General & Admin 394,649 719,229 253% 539% Total Operating Costs and Expenses $ 646,254 $1,165,338 414% 873% - -11- Sales for the three months ended September 30, 2002 were $156,266 an increase of $22,745 from sales of $133,521 for the three months ended September 30, 2001. Our revenue in the three months ended September 2002 was predominantly derived from the Commander Product Line with sales of the VFX Product Line progressively increasing. Contributing factors to the sales performance in the third quarter ended September 30, 2002 were the overall reduction in capital spending for products and services in the telecom industry and the continued economic downturn. The sales results in the third quarter of 2001 were due to a combination of the slowdown in telecommunications spending and the loss of the Cascadent contract. Cost of Goods Sold decreased to $80,969 in the three months ended September 30, 2002 from $92,983 in the corresponding three months ended September 30, 2001. The decrease in the cost of goods sold was related to the decrease in overhead. The percentage decrease of cost of goods sold as a percentage of sales was due to the increase in sales and improved margins on the Commander. Research & Development expenses decreased to $170,636 in the three months ended September 30, 2002 as compared to $353,126 in the comparable three months ended September 30, 2001. The decrease in research and development expenses during the three months ended September 2002 was due to the reduction in the development staff for the IP Telephony Integrator product line. The sales revenue potential of the IP product line was long term and we had to reduce our expenses to survive in this very difficult market place. We believe that continual enhancements of our products will be required to enable SciDyn to maintain its competitive position. SciDyn intends to focus its principal future product development efforts on developing new, innovative, technical products, updating existing products in the communications arena, which will enable us to explore other established markets. The MinuteMan Calling Card/Billing System, which is described above in the product section, was introduced in June to address the pre-paid and debit calling card industry. Sales, General & Administrative expenses decreased to $394,649 in the three months ended September 30, 2002, compared to $719,229 in the three months ended September 30, 2001. The decrease is related to a reduction in force and other cost saving initiatives that were implemented. Interest Expense is interest accrued on our convertible notes, paid on the line of credit and the interest due for the loans from the two stockholders. Finance Expense in the three months ended September 30, 2002 was $119,989. The finance expense includes $81,642 relating to the recognition of a debt discount resulting from a beneficial conversion feature embedded in the convertible note issued between July 5, 2002 and October 16, 2002. The finance expense also includes the amortization of the finance cost. Per Emerging Issues Task Force (EITF) Number 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios," this beneficial conversion feature was assigned an intrinsic value of $81,642, as calculated under the provisions of the EITF. This amount was immediately expensed, as the Notes were convertible into common shares of the Company at the time of the signing of the Agreement. - -12- LIQUIDITY AND CAPITAL RESOURCES: - ------------------------------- Cash and cash equivalents decreased to $12,457 for the nine months ended September 30, 2002 from $17,075 at December 31, 2001. Net cash used for operating activities was $908,699 during the nine months ended September 30, 2002 compared to $2,486,852 in the corresponding nine months ended September 30, 2001. Net cash used in investing activities was $133,455 for the nine months ended September 30, 2002 compared to $120,062 in the corresponding nine months ended September 30, 2001. Net cash provided by financing activities in the nine months ended September 30, 2002 amounted to $1,037,536. This compares to $1,413,226 in the corresponding nine months ended September 30, 2001. The cash requirements for funding our operations have greatly exceeded cash flows from operations. We have satisfied our capital needs primarily through issuance of convertible debentures and equity financing. Our liabilities consist of over extended accounts payable, arrearages to the landlord and we are in default on the capital lease obligation. We are attempting to negotiate payment arrangements with our vendors, landlord and an alternate arrangement with the leasing company. We cannot guarantee that any of these discussions will be successful. If we are unable to obtain successful negotiations, our business may well be severely affected. The short-term loan payable consists of loans from two stockholders. One stockholder has exchanged debt for equity. The equipment against the customer deposits have not been shipped to date as the customer has two delivered systems they have not yet deployed. The bank line of credit has been converted to a loan and shall be repaid over a term of three years during which we shall make equal monthly payments of $3,046.79 each, including interest, which for the purpose of maintaining level monthly payments has been calculated at the assumed rate of 6.25% per annum. Monthly payments shall commence on the tenth (10th) day of July 2002 and continue on the same day of each month thereafter during the term with a final payment to be due and payable on the tenth (10th) day of June 2005. This final payment shall consist of all unpaid principal and any interest which shall have accrued thereon. We are seeking and continually investigating other business ventures and strategic relationships that may have applications directly related to our product offerings. Due to general economic conditions, rapid technological advances being made in the telecom industry and shortages of available capital we believe other companies will be seeking joint ventures and partnerships to augment their sales potential. We anticipate that we may be able to participate in only limited potential business ventures because we have nominal assets and limited financial resources. However, we believe perceived benefits of our technology will provide the interest to implementing joint ventures. Our failure to develop strategic relationships could inhibit our ability to grow. We believe that, in order to market our technology, we need to enter into strategic relationships and business ventures to develop commercial applications of our technology directed at other vertical markets. We intend to concentrate on identifying preliminary prospective business opportunities, which may be brought to our attention through present affiliations and relationships. We do not presently have any agreements relating to strategic relationships, we may never enter into such agreements, and our failure to develop such relationships could impair our ability to grow. We may be unable to respond to the rapid technological changes in our industry. Rapidly changing technologies, frequent new product and service introductions and evolving industry standards characterize the telecom and telecommunications industries. Our future success will depend on our ability to adapt to rapidly changing technologies by continually improving the performance, features and reliability of our services, particularly with respect to other companies. The sales revenue shortfall has greatly impacted cash on hand. SciDyn's currently anticipated levels of revenue and cash flow are subject to many uncertainties and cannot be assured. In order to have sufficient cash to meet our anticipated cash requirements for the next twelve months we must increase sales to provide cash flow from operations. We have reduced our expenses and continue to investigate further cost cutting initiatives. However, SciDyn does not have sufficient cash on hand to continue its operations without successfully raising additional funds to implement the business plan. The inability to generate sufficient cash from operations or to obtain the required additional funds could require SciDyn to reduce or curtail operations. While negotiations are underway to secure additional funds, SciDyn cannot guarantee that such negotiations will be successful. On August 21, 2002, we were notified by a note holder, Laurus Master Fund, Ltd., that we are in default on our notes because we do not have enough shares of common stock registered or authorized to convert such notes into shares of common stock if requested. Laurus Master Fund, Ltd. has orally indicated to us that it will not take action at this time and declare all sums under such notes due immediately if we increase our authorized common stock and file a registration statement covering the shares of common stock underlying all of the notes we issued to Laurus Master Fund, Ltd. In response to such request, we have filed a definitive proxy to increase our authorized common stock and plan on filing a registration statement to cover the shares of common stock underlying the Laurus notes by early December. Forward Looking Statements - -------------------------- The Company is making this statement in order to satisfy the "safe harbor" provisions contained in the Private Securities Litigation Reform Act of 1995. This Form 10-QSB includes forward-looking statements relating to the business of SciDyn. Forward-looking statements contained herein or in other statements made by SciDyn are made based on management's expectations and beliefs concerning future events impacting SciDyn and are subject to uncertainties and factors relating to the Company's operations and business environment, all of which are difficult to predict and many of which are beyond the control of the Company, that could cause actual results of the Company to differ materially from those matters expressed in or implied by forward-looking statements. The Company believes that the following factors, among others, could affect its future performance and cause actual results of the Company to differ materially from those expressed in or implied by forward-looking statements made by or on behalf of the Company: (a) the effect of technological changes; (b) increases in or unexpected losses; (c) increased competition; (d) fluctuations in the costs to operate the business; (e) uninsurable risks; and (f) general economic conditions. Item 3. CONTROLS AND PROCEDURES. As of September 30, 2002, an evaluation was performed under the supervision and with the participation of the Company's management, including the Principal Executive Officer and the Principal Accounting Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the Principal Executive Officer and the Principal Accounting Officer, concluded that the Company's disclosure controls and procedures were effective as of September 30, 2002. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to September 30, 2002. - -14- PART II. OTHER INFORMATION SCIENCE DYNAMICS CORPORATION AND SUBSIDIARIES - --------------------------------------------- Item 1. Legal Proceedings No material developments. Item 2. Changes in Securities RECENT SALES OF UNREGISTERED SECURITIES The securities described below represent our securities sold by us for the period ending September 30, 2002 that were not registered under the Securities Act of 1933, as amended, (the "Securities Act") all of which were issued by us pursuant to exemptions under the Securities Act. Underwriters were involved in none of these transactions. Private Placements of Common Stock and Warrants for Cash None. Sales of Debt and Warrants for Cash From January 1, 2002 to September 30, 2002, we entered into securities purchase agreements with one accredited investor, Laurus Master Fund, Ltd. for the issuance of 8% convertible debentures in the aggregate amount of $1,164,853. Date Conv Notes ------------------------------------- 2/6/2002 $ 50,000 2/8/2002 $ 94,000 2/13/2002 $ 30,000 2/20/2002 $ 131,500 3/25/2002 $ 147,380 3/27/2002 $ 98,800 3/28/2002 $ 75,250 4/1/2002 $ 35,950 6/20/2002 $ 106,000 7/5/2002 $ 105,000 7/12/2002 $ 40,000 7/23/2002 $ 45,000 7/29/2002 $ 100,000 8/5/2002 $ 56,000 8/8/2002 $ 49,973 Total 2002: $ 1,164,853 ------------------------------------- - -15- The debentures are convertible into common stock at a conversion price of the lower of 85% of the average of the three lowest closing bid prices for the common stock thirty days prior to the closing date or 85% of the average of the three lowest closing bid prices for the common stock thirty days prior to conversion. We paid a fund management fee of 8%. The offering of convertible debentures was exempt from registration under Rule 506 of Regulation D and under Section 4(2) of the Securities Act. No advertising or general solicitation was employed in offering the securities. All persons were accredited investors, represented that they were capable of analyzing the merits and risks of their investment. Option Grants None. Issuances of Stock for Services or in Satisfaction of Obligations None. Item 3. Defaults Upon Senior Securities On August 21, 2002, we were notified by a note holder, Laurus Master Fund, Ltd., that we are in default on our notes because we do not have enough shares of common stock registered or authorized to convert such notes into shares of common stock if requested. Laurus Master Fund, Ltd. has orally indicated to us that it will not take action at this time and declare all sums under such notes due immediately if we increase our authorized common stock and file a registration statement covering the shares of common stock underlying all of the notes we issued to Laurus Master Fund, Ltd. In response to such request, we have filed a definitive proxy to increase our authorized common stock and plan on filing a registration statement to cover the shares of common stock underlying the Laurus notes by early December. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information On October 16, 2002, we entered into securities purchase agreement with one accredited investor, Laurus Master Fund, Ltd. for the issuance of 8% convertible debenture in the amount of $66,667. The debenture is convertible into common stock at a conversion price of the lower of 85% of the average of the three lowest closing bid prices for the common stock thirty days prior to the closing date or 85% of the average of the three lowest closing bid prices for the common stock thirty days prior to conversion. We paid a fund management fee of 8%. In addition, we entered into a Security Agreement with Laurus Master Fund, Ltd, in order to secure all of our obligations to it. Pursuant to this Security Agreement, we granted a security interest in all of our assets, including the following: all accounts, inventory, equipment, goods, documents, instruments, contract rights, general intangibles, chattel paper, supporting obligations, investment property, letter-of-credit right, and trademarks and trade styles. The offering of the convertible debenture was exempt from registration under Rule 506 of Regulation D and under Section 4(2) of the Securities Act. No advertising or general solicitation was employed in offering the securities. All persons were accredited investors, represented that they were capable of analyzing the merits and risks of their investment. - -16- Item 6. Exhibits and Reports (a) Exhibits. Exhibit Number Description - -------------- ----------- 10.1 Security Agreement with Laurus Master Fund, Ltd. 99.1 Certification of the Chief Executive Officer of Science Dynamics Corporation Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of the Chief Financial Officer of Science Dynamics Corporation Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) No reports on Form 8-K were filed during the fiscal quarter ended September 30, 2002. - -17- Item 7. Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, registrant has duly caused this report to be signed in its behalf by the undersigned thereunto duly authorized. SCIENCE DYNAMICS CORPORATION BY: /s/ Alan C. Bashforth --------------------- CEO/President DATED: November 13,2002 ---------------- In accordance with the Securities Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Signature Title Date --------- ----- ---- BY: /s/ Alan C. Bashforth CEO/President November 13, 2002 --------------------- Chairman of the Board ----------------- Alan C. Bashforth Secretary BY: /s/ Joy C. Hartman CFO November 13, 2002 --------------------- ----------------- Joy C. Hartman - -18- CERTIFICATION I, Alan C. Bashforth, CEO and President, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Science Dynamics Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's Board of Directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. November 13, 2002 /s/Alan C. Bashforth, CEO and President Alan C. Bashforth, CEO and President - -19- CERTIFICATION I, Joy C. Hartman, Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Science Dynamics Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's Board of Directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. November 13, 2002 /s/ Joy C. Hartman Joy C. Hartman, Chief Financial Officer - -20- EX-10.1 3 security-agreement.txt SECURITY AGREEMENT WITH LAURUS MASTER FUND, LTD. EXHIBIT 10.1 SECURITY AGREEMENT This Security Agreement, made as of the ___ day of October, 2002 is entered into by and between Laurus Master Fund, Ltd. ("Laurus") and Science Dynamics Corporation, a Delaware company (the "Company") (the "Agreement"). 1. To secure the payment of all Obligations (as hereafter defined), the Company hereby grants to Laurus a continuing security interest in all of the following property now owned or at any time hereafter acquired by the Company, or in which the Company now has or at any time in the future may acquire any right, title or interest (the "Collateral"): all accounts (the "Accounts"), inventory, equipment, goods, documents, instruments (including, without limitation, promissory notes), contract rights, general intangibles (including, without limitation, payment intangibles), chattel paper, supporting obligations, investment property, letter-of-credit rights, trademarks and tradestyles in which the Company now has or hereafter may acquire any right, title or interest, all proceeds and products thereof (including, without limitation, proceeds of insurance) and all additions, accessions and substitutions thereto or therefor. Terms used in this paragraph which are defined in the Uniform Commercial Code as enacted and in effect from time to time in the State of New York (the "Code") are used herein as so defined in the Code. 2. The term "Obligations" as used herein shall mean and include all debts, liabilities and obligations owing by the Company to Laurus and all loans, advances, extensions of credit, endorsements, guaranties, benefits and/or financial accommodations heretofore or hereafter made, granted or extended by Laurus to the Company or which Laurus has or will become obligated to make, grant or extend to us or for the Company's account or any of its accounts and any and all interest, charges and/or expenses heretofore or hereafter owing by the Company to Laurus and any and all renewals or extensions of any of the foregoing, no matter how or when arising, direct or indirect, absolute or contingent, liquidated or unliquidated, and whether under any present or future agreement or instruments between the Company, Laurus and any or all subsidiaries or otherwise, including, without limitation, all obligations owing by the Company to Laurus under the Subscription Agreement of even date herewith and related Note in the original principal amount of $66,667 (as amended, modified and supplemented from time to time, the "Note"). 3. The Company hereby warrants and covenants to Laurus that: (a) it is a corporation validly existing, in good standing and formed under the laws of the State of Delaware and it will provide Laurus thirty days prior written notice of any change in its state of formation; (b) it is the lawful owner of the Collateral, and has the sole right to grant a security interest therein and will defend the Collateral against all claims and demands of all persons and entities; (c) it will keep the Collateral free and clear of all attachments, levies, taxes, liens, security interests and encumbrances of every kind and nature; (d) it will not without Laurus' prior written consent, sell, exchange or otherwise dispose of the Collateral or any of the Company's rights therein or permit any lien or security interest to attach to same; (e) it will allow Laurus and/or Laurus' representatives free access to and the right of inspection of the Company's premises where the books and records relating to the Collateral are located; and (f) it hereby indemnifies and saves Laurus harmless from all loss, costs, damage, liability and/or expense, including reasonable attorneys' fees, that Laurus may sustain or incur to enforce payment, performance or fulfillment of any of the Obligations or in the enforcement of this Agreement or in the prosecution or defense of any action or proceeding either against Laurus or the Company concerning any matter growing out of or in connection with this Agreement and/or any of the Obligations and/or any of the Collateral. 4. Laurus agrees to terminate the security interest in the Collateral upon the Company tendering the final payment in satisfaction of the Obligations. Laurus agrees to join with the Company in executing termination statements and other instruments pursuant to the Code in form satisfactory to the Company and in executing such other documents or instruments as may be required or deemed necessary by the Company for purposes of terminating the security interest in the Collateral. Furthermore, in the event that the Company enters into a bona fide sale of certain of its assets, so long as no Event of Default has occurred and is continuing, following agreement between Laurus and the Company negotiating in good faith as to which portion of the proceeds shall be remitted to Laurus to cover the Obligations, Laurus will agree to release its security interest in such assets to be sold. 5. The Company shall be in default under this Agreement upon the happening of any of the following events or conditions (each, a "Default"): (a) it shall fail to pay when due or punctually perform any of the Obligations; (b) any covenant, warranty, representation or statement made or furnished to Laurus by the Company or on its behalf was false in any material respect when made or furnished and such failure shall have a material adverse effect on the Company; (c) it shall fail to comply with any term or provision set forth in this Agreement and such failure (to the extent not covered by any other clause of this Section 4) shall remain uncured for a period of two (2) business days after the date on which Laurus notified the Company of such failure; and (d) a default shall occur under the Note. 6. Upon the occurrence of any Default and at any time thereafter, Laurus may declare all Obligations immediately due and payable and Laurus shall have the remedies of a secured party provided in the Code, this Agreement and other applicable law. Upon the occurrence of any Default and at any time thereafter, Laurus will have the right to take possession of the Collateral and to maintain such possession on our premises or to remove the Collateral or any part thereof to such other premises as you may desire, including, without limitation, the right to contact account debtors liable in respect of the Accounts for the purpose of engaging in collection activities with respect thereto. Upon Laurus' request, the Company shall assemble the Collateral and make it available to Laurus at a place designated by Laurus. If any notification of intended disposition of any Collateral is required by law, such notification, if mailed, shall be deemed properly and reasonably given if mailed at least ten business days before such disposition, postage prepaid, addressed to us either at our address shown herein or at any address appearing on Laurus' records for the Company. Any proceeds of any disposition of any of the Collateral shall be applied by Laurus to the payment of all expenses in connection with the sale of the Collateral, including reasonable attorneys' fees and other legal expenses and disbursements and the reasonable expense of retaking, holding, preparing for sale, selling, and the like, and any balance of such proceeds may be applied by Laurus toward the payment of the Obligations in such order of application as Laurus may elect, and the Company shall be liable for any deficiency. - -2- 7. If the Company defaults in the performance or fulfillment of any of the terms, conditions, promises, covenants, provisions or warranties on our part to be performed or fulfilled under or pursuant to this Agreement, Laurus may, at its sole option without waiving its right to enforce this Agreement according to its terms, immediately or at any time thereafter and without notice to the Company, perform or fulfill the same or cause the performance or fulfillment of the same for the Company's account and at its sole cost and expense, and the cost and expense thereof (including reasonable attorneys' fees) shall be added to the Obligations and shall be payable on demand with interest thereon at the highest rate permitted by law. 8. The Company appoints Laurus, any of its officers, employees or any other person or entity whom Laurus may designate as the Company's attorney, with power to execute such documents in its behalf and to supply any omitted information and correct patent errors in any documents executed by the Company or on its behalf; to file financing statements against the Company covering the Collateral; to sign the Company's name on public records; and to do all other things Laurus deem necessary to carry out this Agreement. The Company hereby ratifies and approves all acts of the attorney and neither Laurus nor the attorney will be liable for any acts of commission or omission, nor for any error of judgment or mistake of fact or law. This power being coupled with an interest, is irrevocable so long as any Obligations remains unpaid. 9. No delay or failure on Laurus' part in exercising any right, privilege or option hereunder shall operate as a waiver of such or of any other right, privilege, remedy or option, and no waiver whatever shall be valid unless in writing, signed by Laurus and then only to the extent therein set forth, and no waiver by Laurus of any default shall operate as a waiver of any other default or of the same default on a future occasion. Laurus' books and records containing entries with respect to the Obligations shall be admissible in evidence in any action or proceeding, shall be binding upon the Company for the purpose of establishing the items therein set forth and shall constitute prima facie proof thereof. Laurus shall have the right to enforce any one or more of the remedies available to Laurus, successively, alternately or concurrently. The Company agrees to join with Laurus in executing financing statements or other instruments pursuant to the Code in form satisfactory to Laurus and in executing such other documents or instruments as may be required or deemed necessary by Laurus for purposes of affecting or continuing Laurus' security interest in the Collateral. 10. This Agreement shall be governed by and construed in accordance with the laws of the State of New York and cannot be terminated orally. All of the rights, remedies, options, privileges and elections given to Laurus hereunder shall enure to the benefit of its successors and assigns. The term "Laurus" as herein used shall include Laurus, any parent of Laurus, any of Laurus' subsidiaries and any co-subsidiaries of its parent, whether now existing or hereafter created or acquired, and all of the terms, conditions, promises, covenants, provisions and warranties of this Agreement shall enure to the benefit of and shall bind the representatives, successors and assigns of each of the Company and them. Laurus and the Company hereby (a) waive any and all right to trial by jury in litigation relating to this Agreement and the Company agrees not to assert any counterclaim in such litigation, (b) submit to the nonexclusive jurisdiction of the state and federal courts located in the State of New York and (c) waive any objection Laurus or the Company may have as to the bringing or maintaining of such action with any such court. - -3- 11. All notices and other communications hereunder shall be deemed given three (3) business days after delivered or deposited in the mails, first class postage prepaid (provided, however, that notices given by telegram, telex or telefax shall be deemed given when dispatched by telegram, telex or telefax, as the case may be) and if to (a) the Company addressed as set forth beneath the Company's name on the signature page unless the Company shall give notice in writing of a different address or telefax number in the manner provided herein, and (b) Laurus, at the address set forth for Laurus on the last page of this Agreement unless Laurus shall give the Company notice in writing of a different address. 12. No amendment, modification, termination, or waiver of any provision of this Agreement shall be effective unless the same shall be in writing and signed by Laurus, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 13. No course of dealing between Laurus and the Company, nor any failure or delay on Laurus' part in exercising any right, power, or remedy under this Agreement shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power, or remedy preclude any other or further exercise thereof or the exercise of any other right, power, or remedy under this Agreement. The rights and remedies provided in this Agreement and the Note are cumulative, and are not exclusive of any other rights, powers, privileges, or remedies, now or hereafter existing, at law or in equity or otherwise. The Company hereby waives in favor of Laurus all suretyship defenses and waives notice of (a) acceptance hereof and of all notices and demands of any kind to which the Company may be entitled and (b) presentment to or demand of payment from anyone whomsoever liable upon the Accounts or the Obligations, protest, notices of presentment, non- payment or protest and notice of any sale of the Collateral or any default of any sort. The Company further waives all of the Company's rights of subrogation, reimbursement, indemnity, exoneration, contribution or any other claim which any of the Company or Laurus may now or hereafter have against any party liable for the Obligations. 14. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. In no event shall any payments hereunder (if deemed interest under applicable law or regulation) exceed the maximum rate permitted under applicable law or regulation. If any provision of this Agreement is in contravention of any such law or regulation, then such provision shall be deemed amended to provide for interest at said maximum rate and any excess amount shall be applied to the Obligations in such order as Laurus shall elect. - -4- SCIENCE DYNAMICS CORPORATION By: /s/ Alan C. Bashforth --------------------------- Name: Alan C. Bashforth Title: CEO/President Address: 2059 Springdale Rd Cherry Hill, NJ 08003 LAURUS MASTER FUND, LTD. By:_________________________ Name: Title: Address: c/o Ironshore Corporate Services, Ltd. P.O. Box 1234 G.T. Queensgate House South Church Street Grand Cayman, Cayman Islands - -5- [Security Agreement Signature Page] EX-99 4 exhibit99-1.txt CEO CERTIFICATION PURSUANT TO SECTION 906 EXHIBIT 99.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 I, Alan C. Bashforth, the Chief Executive Officer of Science Dynamics Corporation (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of my knowledge: (1) the Quarterly Report on Form 10-QSB of the Company for the fiscal quarter ended September 30, 2002 (the "Report") fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 13, 2002 /s/ Alan C. Bashforth --------------------- Name: Alan C. Bashforth Title: Chief Executive Officer EX-99 5 exhibit99-2.txt CFO CERTIFICATION PURSUANT TO SECTION 906 EXHIBIT 99.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 I, Joy C. Hartman, the Chief Financial Officer of Science Dynamics Corporation (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of my knowledge: (1) the Quarterly Report on Form 10-QSB of the Company for the fiscal quarter ended September 30, 2002 (the "Report") fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 13, 2002 /s/Joy C. Hartman ----------------- Name: Joy C. Hartman Title: Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----