SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter ended Commission File Number September 30, 1999 0-11686 DYNAMIC SCIENCES INTERNATIONAL, INC. --------------------------------------------------------- (Exact name of Registrant as specified in its charter) NEVADA 94-3226065 -------------------------------- --------------- (State or other jurisdiction (IRS Employer of incorporation) Identification No.) 6130 Variel Avenue Woodland Hills, California 91367 (818)226-6245 ------------------------------------ ------------- (Address of principal executive offices and telephone number) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ---------------------- --------------------- None None Securities registered pursuant to Section 12(g) of the Act. Common Stock - $.00l Par Value $1.00 Cumulative Convertible Preferred Stock - $.0l Par Value Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 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 No X --- --- As of September 30, 1999 , the Registrant had 32,052,031 shares of the Company's Common Stock outstanding. The aggregate market value of the voting stock held by non-affiliates was $1,282,081 computed by reference to the average of the low bid and high ask prices on September 30, 1999. Documents Incorporated By Reference NONE Item 1. Financial Statements -------- --------------------

~~Item 1. Financial Statements ------- --------------------~~ DYNAMIC SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS ( In Thousands ) ASSETS 30Current ~~June~~Assets ~~2000~~30 31Sept.1999 ~~December~~30 ~~1999~~Sept.1998 (~~Unaudited~~AUDITED) (~~Audited~~AUDITED) ~~Current Assets~~ ------------ ------------ Cash and cash equivalents $ 205 $ 01 Accounts receivable, net ~~142~~27 572 Inventories ~~954~~1004 ~~913~~1022 Prepaid expenses and other current assets 7572 6585 ------------ ------------ Total current assets ~~1191~~1108 ~~983~~1180 Property and equipment, at cost Machinery and equipment 358 358 Office furniture and fixtures 6 6 Leasehold improvements 16 16 Less accumulated depreciation and amortization ~~326~~302 ~~310~~265 ------------ ------------ Total fixed assets, net 5478 70115 ------------ ------------ Other assets Other intangible assets, net of amortization ~~1566~~1490 ~~1546~~1439 Deposits 9 8 3 ------------ ------------ Total other assets ~~1555~~1498 ~~1554~~1442 ------------ ------------ TOTAL ASSETS $ 2,~~820~~684 $ 2,~~607~~737 ============ ============

LIABILITIES & STOCKHOLDERS' EQUITY ~~June~~SEPT 30, ~~2000~~1999 ~~December~~SEPT 3130, ~~1999~~1998 (~~UNAUDITED~~AUDITED) (AUDITED) ~~------------ --------------~~ Current liabilities Short-term notes payable $ -0 $ 29 Accounts payable ~~103~~170 ~~133~~180 Payroll taxes payable 1,~~239~~191 ~~1233~~940 Income taxes payable 2 21 Deferred income 52 42 62 Current portion of long term debt 718 580 Other accrued liabilities ~~511~~462 ~~483~~302 ---------~~---~~ ---------~~----~~ Total current liabilities 1,~~914~~885 1,~~900~~574 Long-term liabilities Long-term debt, net of current portion 475 475 ---------~~---~~ ---------~~----~~ TOTAL LIABILITIES 2,~~389~~310 2,~~375~~049 Stockholders' equity Preferred stock, $.01 par value, 10,000,000 shares authorized Series A -- outstanding 2,935,000, stated at par 1,443 1,443 Series B to Series G -- outstanding 4,144,188 after deducting 1,855,800 canceled shares in treasury, started at par 60 60 Common stock, $.001 par value, 250,000,000 shares authorized 3533,~~298~~565,~~662~~329 issued and outstanding including 17,746,517 subscribed, stated at par 3532 32 Additional paid-in capital ~~629~~448 448 Notes receivable from shareholders, non-interest bearing (160) (160) Retained deficit (1,~~511~~434) (1,~~526~~070) Less treasury stock, at cost, 1,855,800 Preferred stock B-G shares (65) (65) ---------~~---~~ ---------~~----~~ TOTAL STOCKHOLDERS' EQUITY ~~431~~324 ~~232~~688 ---------~~---~~ ---------~~----~~ TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 2,~~820~~684 $ 2,~~607~~737 =========~~===~~ =========~~====~~

DYNAMIC SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF OPERATIONS Three ~~months~~Months ended ~~Six~~SEPT ~~Months Ended June~~ 30, ~~2000~~Six ~~June~~months ~~30,~~ended ~~1999~~SEPT ~~June~~ 30, ~~2000 June 30, 1999 Sales~~ ------------- -------------- ------------- ------------- 1999 1998 1999 1998 Sales TOTAL REVENUE $ ~~250~~151 $ ~~352~~336 $ ~~538~~956 $ ~~805~~682 TOTAL COST OF SALES ~~110~~81 ~~194~~164 ~~239~~446 ~~365~~303 ------------- -------------- ------------- ------------- GROSS PROFIT ~~140~~70 ~~194~~172 ~~299~~510 ~~440~~379 OPERATING EXPENSES Selling, general, and administrative ~~119~~160 ~~143~~182 ~~241~~486 ~~326~~477 Research & development net of new software 1011 911 2843 3242 ------------- -------------- ------------- ------------- TOTAL OPERATING EXPENSE ~~129~~171 ~~152~~193 ~~269~~529 ~~358~~519 ------------- -------------- ------------- ------------- INCOME (LOSS) FROM OPERATIONS 11(101) 42(21) 30(19) 82(140) OTHER INCOME AND EXPENSES Interest expense 78 108 1527 1918 Interest income -0 -0 - - ------------- -------------- ------------- ------------- TOTAL OTHER INCOME AND EXPENSES 78 108 1527 1918 INCOME (LOSS) BEFORE PROVISION FOR TAXES 4(109) 32(29) 15(46) 63(158) PROVISION FOR TAXES 0 0 0 0 NET INCOME (LOSS) $(109) 4(29) $ 32(46) $ 15(158) ~~$ 63~~ ============= ============= == =========== ============= BASIC EARNINGS (LOSS) PER SHARE $ (0.~~00001~~0034) $ (0.0009) $ (0.~~0004~~0014) $ (0.~~0019~~0049) ============= ============= == =========== ============= WEIGHTED NUMBER OF SHARES OUTSTANDING 3432,~~431~~052,~~995~~031 32,052,031 3432,~~431~~052,~~995~~031 32,052,031

DYNAMIC SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS FOR ~~SIX~~NINE MONTHS ---------------------- ENDED ~~June~~SEPT 30, ---------------------- CASH FLOWS FROM OPERATING ACTIVITIES ~~2000~~ 1999 1998 (~~UNAUDITED~~AUDITED) (RESTATED) ~~---------- ----------~~ Net income (loss) $ 15(46) $ 63(158) Adjustments to reconcile net income (loss) to net cash provided by operating activities: ~~0 0~~ Depreciation and Amoritization 114 114 Issuance of common stock for rent expenses 1 0 1 Issuance of additional paid-in capital for rent expenses 79 0 62 (Increase) decrease in: Accounts receivable (~~137~~69) ~~(186)~~5 Inventory (4121) 3531 Prepaid expenses ~~(10)~~0 0 (Decrease) increase in: Accounts payable ~~(30)~~50 929 Accrued expenses ~~(28)~~0 0 NET CASH PROVIDED ~~(USED)~~ BY OPERATING ACTIVITIES ~~(37)~~28 3584 NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES ~~Software development costs, net~~ (4610) (557) CASH FLOWS FROM FINANCING ACTIVITIES Repayment of short term debt (13) 50 Repayment of long term debt 0(10) (2526) ~~Issuance of common stock 2 0 Additional paid in capital through issuance Of common stock 102 0~~ ---------- ---------- NET CASH FLOWS (USED) PROVIDED BY FINANCING ACTIVITIES ~~103~~(13) (2026) ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 205 101 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 0 0 ---------- ---------- CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 205 $ 101 ========== ==========

Item 2. Management's Discussion and Analysis of Financial Condition and -------------------------------------------------------------------------------- Third Quarter of 1999 Compared to the Third Quarter of 1998 ----------------------------------------------------------- Total net sales for the third quarter of year 1999 decreased $ 185,000 or 55% From the third quarter of 1998, primarily due to slower sales during the period. The Company's sales volume is affected by its dependence on a market generated by governmental agency requirements and their budget allocations. Gross profit decreased by $102,000 or 59% from Q3 of 1998 as a result of decreased sales. Cost of sales were 53% in 1999 and 48% in 1998 for the period. Research and development costs remained the same at $11,000 for Q3 of 1999 Compared to Q3, 1998. As a percentage of sales, R & D expenses increased from 3% in 1998 to 7% in 1999. The increased percentage of R & D dollars shows DSII's commitment to maintaining new product development in spite of slower sales during the period. Selling, general and administrative expenses decreased $22,000 or 12% from 1998. As a percentage of sales for the period, those expenses represented 54% in 1998 and 106% in 1999. The income (loss) from DSII operations in Q3 1998 of ($21,000) increased to ($101,000) in Q3 of 1999. Operating income was a loss of $29,000 in Q3 1998 and a loss of $109,000 in Q3 1999. These losses are primarily due to the operating expenses remaining almost constant during the slower sales period. Management feels that it has reduced the operating expenses to the minimum level consistent with efficient operation of all the required functions of the company. The Company capitalized $46,000 in Q3 1999 in software development costs on new projects. These costs will be written off over the next five years. Interest expense ramained at $11,000 for the two compared periods. Liquidity and Capital Resources ---------------------------------- At September 30, 1999, the Company was not encumbered by bank debt, and its working capital was $324,000, a decrease of $364,000 from Sept. 30, 1998. The Company is presently committed to generating working capital requirements from internal operations, while external-financing resources will continue to be pursued. Due to the nature of its products, the Company has been able to negotiate prompt payment schedules with some of its customers. The process is expected to continue during 1999. Short-term liquidity problems have developed due to delayed sales and the lack of external financing resources. Long-term liquidity would be dependent on achieving sales projections. 5 Exhibits: 2.1 Copy of the Plan and Agreement of merger by and among National Pay Telephone Corporation, a Nevada corporation, NPT Acquisition, Inc., a California corporation, and Dynamic Sciences, Inc., a California corporation dated December 12, 1986, is incorporated by reference to the Registrant's Form 8-K filed December 30, 1986. 2.2 Copy of the Agreement dated September 22, 1986, by and between National Pay Telephone Corporation and Dynamic Sciences, Inc. is incorporated by reference to the Registrant's Form 8-K filed on December 30, 1986. 2.3 Copy of the Purchase and Sale Agreement dated December 26, 1986, between National Pay Telephone Corporation and David J. Stein and associates, Inc., is incorporated by reference to the Registrant's Form 8-K filed on December 30, 1986. 2.4 Financial Statements for Affiliate Company, Phoebus Secure Technologies Corporation, is incorporated by reference to the Registrant's Form 10-K for the year ended December 31, 1989. 3.1 Copy of Registrant's Articles of Incorporation and Amendment thereto is incorporated by reference to SEC File #2-86622-LA, Exhibit 3.1, filed on September 17, 1983. 3.2 Copy of Registrant's amended by-laws was filed as an Exhibit 3.1 on Form 8-K dated December 30, 1986 and is incorporated by reference. 4.1 Copy of Stock Certificate for $1.00 Cumulative Convertible Preferred Stock (Series "A"), is incorporated by reference to the Registrant's Form 10-K for the fiscal year ended July 31, 1986. 4.2 Form of Certificate of Determination for the $1.00 Cumulative Preferred Stock is incorporated by reference to Exhibit 4.2 to Registration Statement of the Registrant on Form S-l, #33-5232, as filed on or about April 30, 1986. 4.3 Copy of Stock Certificate for Cumulative Convertible Preferred Stock Series "B-G" is incorporated by reference to the Registrant's Form 10-K for fiscal year end December 31, 1986. 4.4 Copy of Certificate of Determination (corrected) filed with the Secretary of the State of Nevada in connection with the Cumulative Convertible Preferred Stock Series "B-G." Conversion rights may be exercised for Series "C" on November 14, 1987; for Series "D" on May 14, 1988; for Series "E" on November 14, 1988; for Series "F" on May 14, 1989; and for Series "G" on November 14, 1989. This document is incorporated by reference to the Registrant's Form 10-K for fiscal year ended December 31, 1986. 22.1 List of Subsidiaries of the Registrant. Form 8-K Reports ------------------ There were no filings made on Form 8-K during the quarter ending September 30, 1999. 6 SIGNATURES Pursuant to the requirements of Section 13, or 115(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: 14 September, 2000 Dynamic Sciences International, Inc. ------------------ By: /s/ Eli I. Shiri -------------------------------- Eli I. Shiri Chairman of the board

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