<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
___________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
For Quarter Ended ________ Commission File No. 0-26077
CyberSentry, Inc.
-----------------------------------------------------------
(Exact Name of Registrant as specified in its character)
FLORIDA 22-3626108
--------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
412 East Madison Street
Suite 1200
Tampa, FL 33602
---------------
(Address of Principal Executive Offices)
(813) 228-0688
--------------
(Registrant's Telephone Number, Including Area Code)
Not Applicable
--------------
(Former Name, Former Address and Former Fiscal Year,
if changed Since Last Report)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such report(s), and (2) has been subject to such filing requirements for the
past 90 days.
Yes [X] No. [ ]
State the number of shares outstanding of each of the registrant's classes
of common equity, as of the latest practicable date.
Class Outstanding at September 30, 1999
------- ---------------------------------
Common Stock, $.001 par value 13,758,765 shares
<PAGE>
CyberSentry, Inc.
Index to Financial Statements
<TABLE>
<CAPTION>
Page No.
--------
Telecommunications Service Center, Inc.:
<S> <C>
Balance Sheets at March 24, 1999 (acquisition date) (unaudited)
and December 31, 1998 3
Statement of Operations for the period from January 1, 1999
through March 24, 1999 (acquisition date)(unaudited) 4
Statement of Cash Flows for the period from January 1, 1999
through March 24, 1999 (acquisition date) (unaudited) 5
Notes to Financial Statements 6
CyberSentry, Inc.:
Balance Sheets at September 30, 1999 (unaudited) and December 31,
1998 8
Statements of Operations for the three and nine months ended
September 30, 1999 (unaudited) and 1998 (predecessor)(unaudited)
and for the period from August 21, 1998 (inception)
through September 30, 1998 (unaudited) 9
Statements of Stockholders' Equity (Deficit) for the nine months
ended September 30, 1999 (unaudited) 10
Statements of Cash Flows for the nine months ended September 30,
1999 (unaudited) and 1998 (predecessor)(unaudited) and for the
period from August 21, 1998 (inception) through
September 30, 1998 (unaudited) 11
Notes to Financial Statements 12
Management's Discussion & Analysis 18
Signatures 24
</TABLE>
2
<PAGE>
Telecommunications Service Center, Inc.
(Debtor-In-Possession)
Balance Sheets
<TABLE>
<CAPTION>
=================================================================================================================================
March 24, 1999 /(a)/ December 31,
(Unaudited) 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current
Cash $ 24,388 $ 33,970
Accounts receivable, less $56,609 and $81,307 allowance
for doubtful accounts in 1999 and 1998, respectively 176,757 144,435
Prepaid expenses and other current assets 44,704 69,003
Other receivables 7,557 5,298
================================================================================================================================
Total Current Assets 253,406 252,706
Equipment and Leasehold Improvements, net 1,057,510 1,156,807
Other assets 110,046 110,046
- --------------------------------------------------------------------------------------------------------------------------------
$ 1,420,962 $ 1,519,559
- --------------------------------------------------------------------------------------------------------------------------------
Liabilities and Capital Deficit
Current Liabilities
Cash overdraft $ 75,393 $ -
Accounts payable 1,405,430 1,405,320
Accrued expenses and other current liabilities 613,058 446,923
Liabilities subject to compromise under reorganization
proceedings 8,133,313 8,097,928
- --------------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 10,227,194 9,950,171
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities 10,227,194 9,950,171
- --------------------------------------------------------------------------------------------------------------------------------
Capital Deficit
Common stock - $1 par, 100,000 shares authorized,
2,000 shares issued and outstanding 2,000 2,000
Accumulated deficit (8,808,232) (8,432,612)
- --------------------------------------------------------------------------------------------------------------------------------
Total Capital Deficit (8,806,232) (8,430,612)
- --------------------------------------------------------------------------------------------------------------------------------
$ 1,420,962 $ 1,519,559
================================================================================================================================
</TABLE>
(a) Acquisition date by CyberSentry
See accompanying notes to financial statements.
3
<PAGE>
Telecommunications Service Center, Inc.
(Debtor-In-Possession)
Statement of Operations
<TABLE>
<CAPTION>
====================================================================================================================================
For the period from
January 1, 1999
through
March 24, 1999 /(a)/
(Unaudited)
- ------------------------------------------------------------------------------------------------------------
<S> <C>
Net Sales 811,316
- -------------------------------------------------------------------------------------------------------------
Operating Expenses:
Telecommunications costs (excluding depreciation
and amortization, shown separately below) 643,853
Selling, general and administrative expenses 384,403
Depreciation and amortization 102,403
- -----------------------------------------------------------------------------------------------------------
Total operating expenses 1,130,659
- -----------------------------------------------------------------------------------------------------------
Other (Income) Expense:
Interest expense 77,592
Other income (21,315)
- -----------------------------------------------------------------------------------------------------------
Total other expense 56,277
- -----------------------------------------------------------------------------------------------------------
Net loss (375,620)
- -----------------------------------------------------------------------------------------------------------
Net loss per share
Basic $ (187.81)
Weighted average number of outstanding shares
Basic 2,000
</TABLE>
(a) Acquisition date by CyberSentry
See accompanying notes to financial statements.
4
<PAGE>
Telecommunications Service Center, Inc.
(Debtor-In-Possession)
Statement of Cash Flows
<TABLE>
<CAPTION>
======================================================================================================
For the period from
January 1, 1999
through
March 24, 1999 /(a)/
(Unaudited)
- ----------------------------------------------------------------------------------------------------
<S> <C>
Operating Activities:
Net loss (375,620)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 102,403
Recovery of bad debts (18,576)
Inventory write down 26,157
Changes in assets and liabilities:
Accounts receivable (7,624)
Prepaid expenses and other 24,299
Other receivables (2,259)
Accounts payable 110
Accrued expenses and other current liabilities 166,135
- -----------------------------------------------------------------------------------------------------
Net cash used in operating activities (84,975)
- -----------------------------------------------------------------------------------------------------
Financing Activities:
Cash overdraft 75,393
- -----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 75,393
- -----------------------------------------------------------------------------------------------------
Net decrease in cash (9,582)
Cash at beginning of period 33,970
- -----------------------------------------------------------------------------------------------------
Cash at end of period 24,388
=====================================================================================================
</TABLE>
(a) Acquisition date by CyberSentry
See accompanying notes to financial statements.
5
<PAGE>
Telecommunications Service Center, Inc.
(Debtor-In-Possession)
Notes to Financial Statements
(Unaudited)
================================================================================
1. Summary of Business and Basis of Presentation
Significant ----------------------------------
Accounting
Policies Telecommunications Service Center, Inc. ("The
Company" or "TSC") is a facilities based carrier
providing long distance telecommunications
services including commercial and residential
service, international call back long distance
service, operator service for pay phones, prepaid
phone cards, and enhanced services, such as voice
and fax-mail services. The Company has high-
volume, state-of-the-art Digital Switching
equipment capable of accommodating growth. The
Company is certified to do business in forty eight
(48) states and is tariffed in forty two (42)
states. It was certified as an "Alternative Local
Exchange Carrier" (ALEC) to provide "Local
Telephone Services" in the state of Florida in
1998 and is currently filing for ALEC
certification in thirty (30) additional states.
The Company is in a specialized telecommunications
service industry. This industry segment is subject
to certain competitive pressures.
Effective March 24, 1999, CyberSentry, Inc.
("CyberSentry") purchased all of the outstanding
common stock of TSC for 1 million shares of
CyberSentry common stock and 1 million shares of
Class B preferred stock ($1.50 stated value)
valued at $2,500,000. Additionally, CyberSentry
provided a working capital line of credit in the
amount of $3,000,000. CyberSentry was incorporated
in Delaware on August 21, 1998 as
Telecommunications Services, Inc. ("TSI"). On
November 30, 1998, TSI amended its certificate of
incorporation to change the corporation's name to
CyberSentry, Inc. CyberSentry's principal business
includes the marketing and sale of CyberSentry
software and two applications of Asynchronous
Transfer Mode Technology.
On May 7, 1998, TSC filed a voluntary petition
(the "Petition") for relief under Chapter 11 of
the United States Bankruptcy Code in the Middle
District of Florida, Tampa Division. The Company
thereafter operated its business in the ordinary
course as debtors-in-possession subject to the
jurisdiction of the Bankruptcy Court. On March 4,
1999, the Bankruptcy Court confirmed the Company's
plan of reorganization ("the
6
<PAGE>
Telecommunications Service Center, Inc.
(Debtor-In-Possession)
Notes to Financial Statements
(Unaudited)
================================================================================
Plan") and on March 14, 1999, the Plan became
effective, pending the closing of the CyberSentry
purchase.
The accompanying financial statements are
unaudited; however, in the opinion of management,
the accompanying unaudited financial statements
reflect all adjustments necessary to present
fairly the financial position of TSC and the
results of its operations and its cash flows for
the stated periods that have been included. These
adjustments are of a normal recurring nature.
Selected information and footnote disclosures
normally included in financial statements prepared
in accordance with generally accepted accounting
principles have been condensed or omitted. Results
for interim periods are not necessarily indicative
of the results to be expected for an entire fiscal
year. It is suggested that these condensed
financial statements be read in conjunction with
the audited financial statements and notes thereto
as of and for the year ending December 31, 1998.
The December 31, 1998 balance sheet was derived
from audited financial statements as of that date.
7
<PAGE>
CyberSentry, Inc.
(a development stage enterprise)
Balance Sheets
<TABLE>
<CAPTION>
==============================================================================================================================
September 30, December 31,
1999 1998
(Unaudited)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current
Cash $ 31,775 $ -
Accounts receivable, less $100,167 allowance for doubtful accounts 266,599 -
Prepaid expenses and other assets 157,848 14,896
Other receivables 1,511 50,000
- -------------------------------------------------------------------------------------------------------------------------------
Total current assets 457,733 64,896
Excess of cost over fair value of net assets acquired, net of $585,446 of accumulated
amortization 10,720,786 -
ATM Technology License, net of $464,286 and $142,857 of accumulated
amortization in 1999 and 1998, respectively 2,535,714 2,857,143
CyberSentry Software License, net of $428,572 and $107,143 of
accumulated amortization in 1999 and 1998, respectively 2,571,428 2,892,857
Equipment and leasehold improvements, net of accumulated amortization of $1,400,066 830,761 -
Other assets 26,312 -
- -------------------------------------------------------------------------------------------------------------------------------
$ 17,142,734 $ 5,814,896
===============================================================================================================================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 865,626 $ -
Accrued expenses and other current liabilities 751,994 12,500
Current maturities of capital lease obligations 275,945 -
Due to stockholder 1,322,701 76,181
- -------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,216,266 88,681
Obligations under capital leases, less current maturities 951,902 -
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities 4,168,168 88,681
- -------------------------------------------------------------------------------------------------------------------------------
Redeemable convertible preferred stock, $.001 par value, 534,656 shares 801,984 -
- -------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity (Note 3)
Class A convertible redeemable participating preferred stock, $.001 par value,
7,000,000 shares authorized, 3,916,522 shares in 1999 and 0 shares in 1998,
issued and outstanding, aggregate liquidation value of $5,874,783 3,916 -
Class B convertible redeemable participating preferred stock,
$.001 par value, 3,000,000 shares authorized, 3,000,000 shares in 1999 and
2,000,000 in 1998, issued and outstanding, aggregate liquidation value of $4,500,000 3,000 2,000
Common stock, $.001 par value, 30,000,000 shares authorized,
13,758,765 shares in 1999 and 12,000,000 shares in 1998, issued and outstanding 13,759 12,000
Additional paid-in capital 15,199,971 6,038,700
Deficit accumulated during the development stage (555,667) (326,485)
Accumulated deficit (2,492,397) -
-------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 12,172,582 5,726,215
- --------------------------------------------------------------------------------------------------------------------------------
$ 17,142,734 $ 5,814,896
================================================================================================================================
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
CyberSentry, Inc.
(a development stage enterprise)
Statements of Operations
================================================================================
<TABLE>
<CAPTION>
(Predecessor) (Predecessor)
For the three For the nine For the three For the nine
months ended months ended months ended Months ended
September 30, September 30, September 30, September 30,
1999 1999/(b)/ 1998 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Sales (Note 1) 497,132 $ 1,590,528 $ 4,888,668 $ 19,400,635
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Expenses:
Telecommunications costs (excluding
depreciation and amortization, shown
separately below) 357,366 1,269,635 4,560,096 18,074,073
Selling, general and administrative expenses 769,376 1,214,709 341,520 2,855,683
Depreciation and amortization 606,659 1,455,053 109,874 330,059
- ----------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 1,733,401 3,939,397 5,011,490 21,259,815
- ----------------------------------------------------------------------------------------------------------------------------------
Other Expense:
Interest expense 164,663 372,710 66,610 289,500
- ----------------------------------------------------------------------------------------------------------------------------------
Total other expense 164,663 372,710 66,610 289,500
- ----------------------------------------------------------------------------------------------------------------------------------
Net loss $ (1,400,932) $ (2,721,579) $ (189,432) $ (2,148,680)
==================================================================================================================================
Net loss per share
Basic $ (.11) $ (.21) $ (94.72) $ (1,074.34)
Diluted $ (.11) $ (.21) $ (94.72) $ (1,074.34)
Weighted average number of outstanding shares
Basic 13,108,288 13,108,288 2,000 2,000
Diluted 13,108,288 13,108,288 2,000 2,000
<CAPTION>
For the period from Cumulative
August 21, 1998 development stage
(inception) through enterprise through
September 30, September 30,
1998 1999
(Unaudited) (Unaudited)
- -----------------------------------------------------------------------------------------------------------
Net Sales (Note 1) $ - $ -
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Expenses:
Telecommunications costs (excluding
depreciation and amortization, shown
separately below) - -
Selling, general and administrative expenses - 14,896
Depreciation and amortization 75,000 214,286
- -----------------------------------------------------------------------------------------------------------
Total operating expenses 75,000 229,182
- -----------------------------------------------------------------------------------------------------------
Other Expense:
Interest expense - -
- -----------------------------------------------------------------------------------------------------------
Total other expense - -
- -----------------------------------------------------------------------------------------------------------
Net loss $ (75,000) $ (229,182)
===========================================================================================================
Net loss per share
Basic $ (.01)
Diluted $ (.01)
Weighted average number of outstanding shares
Basic 5,048,782
Diluted 5,048,782
</TABLE>
(b) Includes the operations of TSC from March 25, 1999 through September 30,
1999
See accompanying notes to financial statements.
9
<PAGE>
CyberSentry, Inc.
(a development stage enterprise)
Statements of Stockholders' Equity (Deficit)
(Note 3)
================================================================================
<TABLE>
<CAPTION>
Class A Preferred Class B Preferred Common
--------------------------- --------------------------- ---------------------------
Shares Amount Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1999 - - 2,000,000 2,000 12,000,000 12,000
Issuance of common stock in
January 1999 at $1.00/share - - - - 500,000 500
Issuance of common stock in purchase
of TSC in March 1999 at
$1.00/share - - - - 1,000,000 1,000
Issuance of Class B preferred stock in
purchase of TSC in March
1999 at $1.50/share - - 1,000,000 1,000 - -
Issuance of Class A preferred stock to
unsecured creditors in March
1999 at $1.50/share 3,361,232 3,361 - - - -
Issuance of Class A preferred stock to
Sprint and Westinghouse in
March 1999 at $1.50/share 555,290 555 - - - -
Issuance of common stock to
unsecured creditor in March 1999
at $1.00/share - - - - 258,765 259
Issuance of stock options for
50,000 shares of common
stock in April 1999 - - - - - -
Issuance of stock options for 21,000
shares of common stock in July,
August and September 1999 - - - - - -
Net loss - - - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999
(unaudited) 3,916,522 $ 3,916 3,000,000 $ 3,000 13,758,765 $ 13,759
=================================================================================================================================
<CAPTION>
Deficit
Accumulated
During
Development Accumulated
Capital Stage Deficit Total
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1999 6,038,700 (326,485) - 5,726,215
Issuance of common stock in
January 1999 at $1.00/share 499,500 - - 500,000
Issuance of common stock in purchase
of TSC in March 1999 at
$1.00/share 999,000 - - 1,000,000
Issuance of Class B preferred stock in
purchase of TSC in March
1999 at $1.50/share 1,499,000 - - 1,500,000
Issuance of Class A preferred stock to
unsecured creditors in March
1999 at $1.50/share 5,038,488 - - 5,041,849
Issuance of Class A preferred stock to
Sprint and Westinghouse in
March 1999 at $1.50/share 832,380 - - 832,935
Issuance of common stock to
unsecured creditor in March 1999
at $1.00/share 258,506 - - 258,765
Issuance of stock options for
50,000 shares of common
stock in April 1999 15,023 - - 15,023
Issuance of stock options for 21,000
shares of common stock in July,
August and September 1999 19,374 - - 19,374
Net loss - (229,182) (2,492,397) (2,721,579)
- ------------------------------------------------------------------------------------------------------
Balance at September 30, 1999
(unaudited) $ 15,199,971 $ (555,667) $ (2,492,397) $ 12,172,582
======================================================================================================
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
CyberSentry, Inc.
(a development stage enterprise)
Statements of Cash Flows
<TABLE>
<CAPTION>
==========================================================================================================================
Cumulative
(Predecessor) development
For the nine For the nine stage enterprise
months ended months ended through
September 30, September 30, September 30,
1999 1998 1999
(Unaudited) (Unaudited) (Unaudited)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net loss $ (2,721,579) $ (189,432) $ (229,182)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization 1,455,053 109,874 214,286
Common stock/stock options granted for services 34,397 - -
Bad debts 40,602 1,584,901 -
Changes in operating assets and liabilities, net of
effects of acquisition and noncash transactions:
Accounts receivable (89,842) (2,980,379) -
Prepaid expenses and other assets (98,248) 16,507 14,896
Other receivables 56,046 (3,333) -
Other assets 83,734 (61,054) -
Accounts payable 17,841 930,224 -
Accrued expenses and other current liabilities (126,436) 724,600 -
- --------------------------------------------------------------------------------------------------------------------------
Total adjustments 1,479,769 321,340 229,182
- --------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (1,095,560) 131,908 -
- --------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Proceeds from issuance of common stock 500,000 - -
Proceeds from factoring line of credit - 231,687 -
Repayments of obligations under capital lease (125,567) (271,420)
Increase in due to stockholder 1,246,520 - -
Net payments on line of credit (282,000) (48,872) -
Payments on bank note payable (211,618) (50,073) -
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 1,127,335 (138,678) -
- --------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 31,775 (6,770) -
Cash and cash equivalents at beginning of period - 46,186 -
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 31,775 $ 39,416 $ -
==========================================================================================================================
Supplemental Disclosures:
Class B preferred stock issued in exchange for ATM
Technology License $ - $ - $ -
Common stock issued in exchange for CyberSentry
Software $ - $ - $ -
Common stock issued in purchase of TSC $ 1,000,000 $ - $ -
Class B preferred stock issued in purchase of TSC $ 1,500,000 $ - $ -
Class A preferred stock issued in connection with
TSC's plan of reorganization $ 5,874,784 $ - $ -
Common stock issued in connection with TSC's plan
of reorganization $ 258,765 $ - $ -
==========================================================================================================================
</TABLE>
See accompanying notes to financial statements.
11
<PAGE>
CyberSentry, Inc.
(a development stage enterprise)
Notes to Financial Statements
(Unaudited)
============================================================================
1. Summary of Business and Basis of Presentation
----------------------------------
Significant
Accounting CyberSentry, Inc. ("CyberSentry" or the "Company") was
Policies incorporated in Delaware on August 21, 1998 as
Telecommunication Services, Inc. ("TSI"). On November 30,
1998, TSI amended its certificate of incorporation to
change the Corporation's name to CyberSentry, Inc.
CyberSentry's principal business includes
telecommunications services, the development, marketing
and sale of CyberSentry software and to sell two
applications of Asynchronous Transfer Mode ("ATM")
Technology.
The CyberSentry Software protects Internet commerce
transactions by controlling access to both consumer credit
information and content that can be downloaded via the
Internet, i.e., games, CD's, videos, copyrighted
information and other transactions. It also restricts the
unauthorized redistribution of material to secondary
recipients, such as passing along copies of protected
material.
The two ATM applications are a fast packet digital switch
and a set-top box. The fast packet digital switch is
designed for small to medium size businesses. The device
will allow a business to transmit voice, video and data
over a local area network using the business' existing
PABX infrastructure. The set-top box is designed for
applications in the home. This device will allow for the
delivery of voice, video and data into the home via the
existing telephone line or via satellite.
Effective March 24, 1999, CyberSentry purchased all of the
outstanding common stock of Telecommunications Service
Center, Inc. ("TSC"), a Florida Corporation. TSC was
operating as a debtor-in-possession under Chapter 11 of
the United States Bankruptcy Code in the Middle District
of Florida, Tampa Division. The Bankruptcy Court confirmed
TSC's plan of reorganization ("the Plan") on March 4, 1999
and the Plan became effective March 14, 1999 (pending the
acquisition by CyberSentry).
TSC is a facilities based carrier providing long distance
telecommunications services including commercial and
residential
12
<PAGE>
CyberSentry, Inc.
(a development stage enterprise)
Notes to Financial Statements
(Unaudited)
============================================================================
service, international call back long distance service,
operator service for pay phones, prepaid phone cards, and
enhanced services, such as voice and fax-mail services.
TSC is in a specialized telecommunications service
industry.
The accompanying financial statements are unaudited;
however, in the opinion of management, the accompanying
unaudited financial statements reflect all adjustments
necessary to present fairly the financial position of
CyberSentry and predecessor and the results of its
operations and its cash flows for the stated periods that
have been included. These adjustments are of a normal
recurring nature. Selected information and footnote
disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been condensed or omitted. Results for
interim periods are not necessarily indicative of the
results to be expected for an entire fiscal year. It is
suggested that these condensed financial statements be
read in conjunction with the audited financial statements
and notes thereto as of and for the year ending December
31, 1998. The December 31, 1998 balance sheet was derived
from audited financial statements as of that date.
2. Acquisition Effective March 24, 1999, CyberSentry purchased all of the
outstanding common stock of TSC pursuant to the bankruptcy
court's confirmation of TSC's plan of reorganization that
was confirmed on March 4, 1999 and effective on March 14,
1999 (pending the acquisition by CyberSentry). CyberSentry
is the surviving corporation in the purchase and the
separate existence of TSC ceased. CyberSentry purchased
all of the outstanding shares of TSC for common and
preferred stock valued at $2,500,000. The value of the
common and preferred has been established based on the
Company's purchase of the CyberSentry Technology, and the
value ascribed to the Class B shares pursuant to the Plan
of Reorganization, (see Note 2). The transaction was
accounted for as a purchase and the excess of the purchase
price ($2,500,000) over the fair market value of the
assets acquired ($1,420,962) and liabilities assumed
($10,227,194), of $11,306,232 was recorded as excess of
cost over fair value of net assets acquired and is being
amortized on a straight line basis over 10 years.
13
<PAGE>
CyberSentry, Inc.
(a development stage enterprise)
Notes to Financial Statements
(Unaudited)
============================================================================
As defined in TSC's plan of reorganization, CyberSentry
Class A Preferred Shares were issued to the Class Five
Creditors in accordance with the terms of the Plan.
Additional common stock of CyberSentry was issued to the
Class Five Creditors pursuant to the Rights Offering
provided for in the Plan. Each CyberSentry common stock that
was issued and outstanding immediately prior to the
effective purchase date continued to be issued and
outstanding. All issued and outstanding TSC common stock was
converted into 1,000,000 common shares and 1,000,000 Class B
Convertible Redeemable Preferred Stock of CybeSentry. The
shares were issued to existing TSC shareholders on a pro
rata basis in accordance with the Plan.
For financial reporting purposes TSC is the predecessor
company to CyberSentry. CyberSentry was a development stage
enterprise in 1998 with minimal operations. Upon the
acquisition of TSC, CyberSentry ceased to be a development
stage enterprise.
As discussed, the acquisition was accounted for under the
purchase method of accounting and the unaudited statement of
operations for the nine months ended September 30, 1998
includes the operations of TSC from the date of acquisition
(March 24, 1999) to September 30, 1999.
The following summarized unaudited pro forma results of
operations have been prepared as if the acquisition of TSC
had occurred January 1, 1999. The pro forma adjustments are
for interest and amortization:
<TABLE>
<CAPTION>
For the nine months
September 30, 1999
(Unaudited)
--------------------------------------------------------------------
<S> <C>
Revenues $ 2,401,844
Net loss $ (3,361,150)
Pro forma loss per share - basic and diluted $ (.25)
Weighted average number of common 13,681,417
shares outstanding - basic and diluted
</TABLE>
14
<PAGE>
CyberSentry, Inc.
(a development stage enterprise)
Notes to Financial Statements
(Unaudited)
============================================================================
3. Stockholders' Transactions in stockholders' equity during 1999 were as
Equity follows (unaudited):
a) The Company issued 500,000 shares of common stock
at a fair value of $1.00 per share in exchange for
cash of $500,000.
b) The Company issued 1,258,765 shares of common
stock at a fair value of $1.00 per share to
previous shareholders and unsecured creditors of
TSC, pursuant to the plan of reorganization and
purchase.
c) The Company issued 1,000,000 shares of Class B
convertible redeemable participating preferred
stock at a fair value of $1.50 per share to
previous shareholders of TSC pursuant to the
purchase.
d) The Company issued 4,451,178 shares of Class A
convertible redeemable participating preferred
stock at a fair value of $1.50 per share to pre-
petition creditors pursuant to TSC's plan of
reorganization.
e) The Company issued options to a non-employee to
purchase 50,000 shares of common stock with an
exercise price of $1.10 per share, in exchange for
services. The options were valued at $15,023 using
the Black Scholes Model.
f) The company issued options to a non-employee to
purchase 21,000 shares of common stock with an
excise price of $2.50 per share in exchange for
services. The options were valued at $19,374 using
the Black Sholes Model.
15
<PAGE>
CyberSentry, Inc.
(a development stage enterprise)
Notes to Financial Statements
(Unaudited)
============================================================================
4. Segment The Company's reportable segments are strategic businesses
Information that offer different products and services. They are managed
separately because each business requires different
technology and marketing strategies. The Company primarily
evaluates the operating performance of its segments based on
the categories noted in the table below. During 1999, the
Company had no intercompany sales.
There were no business segments during 1998 and financial
information for the Company's business segments as of and
for the period ended September 30, 1999 is as follows:
16
<PAGE>
CyberSentry, Inc.
(a development stage enterprise)
Notes to Financial Statements
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
For the nine
months ended
September 30,
1999
(unaudited)
-------------
Revenues
--------
<S> <C>
Telecommunications $ 1,590,528
Secured software -
Product technology -
------------
Total revenues $ 1,590,528
============
Net loss
--------
Telecommunications $ (1,984,971)
Secured software (415,179)
Product technology (321,429)
------------
Total net loss $ (2,721,579)
============
Depreciation and amortization
-----------------------------
Telecommunications $ 812,195
Secured software 321,429
Product technology 321,429
------------
Total depreciation and amortization $ 1,455,053
============
Interest expense
----------------
Telecommunications $ 372,710
Secured software -
Product technology -
------------
Total interest expense $ 372,710
============
Total assets
------------
Telecommunications $ 11,941,841
Secured software 2,665,179
Product technology 2,535,714
------------
Total assets $ 17,142,734
============
Capital expenditures
--------------------
Telecommunications $ -
Secured software -
Product technology -
------------
Total capital expenditures $ -
============
</TABLE>
17
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis of the financial condition and results of
operations should be read in conjunction with the financial statements, related
notes, and other detailed information included elsewhere in this Quarterly
Report on Form 10-Q or previously filed SEC Forms 10 and 10A. This report
contains certain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements are statements
other than historical information or statements of current condition. Some
forward-looking statements may be identified by the use of such terms as
"believes," "anticipates," "intends," or "expects." These forward-looking
statements relate to plans, objectives and expectations of the Company for
future operations. In light of the risks and uncertainties inherent in all such
projected operational matters, the inclusion of forward-looking statements, if
any, in this report should not be regarded as a representation by the Company or
any other person that the objectives or plans of the Company will be achieved or
that any of the Company's operating expectations will be realized. The Company's
revenues and results of operations are difficult to forecast and could differ
materially from those projected in the forward-looking statements contained in
this report as a result of certain factors including, but not limited to,
dependence on operating agreements with partners, customers and suppliers,
availability of carrier services and transmission facilities, U.S. and foreign
telecommunications and general software licensing regulations, international
economic and political instability, dependence on effective billing and
information systems, customer attrition, and rapid technological change. These
factors should not be considered exhaustive; the Company undertakes no
obligation to release publicly the results of any future revisions it may make
to forward-looking statements.
OVERVIEW
CyberSentry, Inc., a Delaware corporation ("CyberSentry"), is a secure software,
e-commerce and telecommunications company. In addition, the Company acquired
Telecommunications Service Center, Inc. ("TSC") on March 24, 1999. The Company
presently services and markets its long distance and other telecommunications
services to a wide variety of customers. The Company is expanding its
telecommunications services to include Internet Service Provider ("ISP") access
and bundle packaging of services as well as (i) proceeding with the development
and deployment of the CyberSentry Secure Software suite of products (ii)
researching and developing its Asynchronous Transfer Mode Technology ("ATM" or
"ATM Technology") and (iii) refining its e-commerce systems and capabilities.
Digital Rights Management - Secure Software:
The CyberSentry Software protects digital content and other Internet commerce
transactions by controlling access to both consumer credit information and
content that can be downloaded via the Internet, such as games, CD's, videos,
copyrighted
18
<PAGE>
information and other transactions. It also restricts the unauthorized
redistribution of material to secondary recipients, such as passing along copies
of protected material. The Company believes that most content currently
downloaded via the Internet can be protected using CyberSentry Software.
CyberSentry has only recently begun to market the CyberSentry Software and to
date has no sales.
ATM Technology
CyberSentry has obtained the right to develop and sell in the United States and
Canada certain ATM technology which has the potential to deliver real time
multimedia services to both consumer and business users at substantially
increased speeds and lower costs than other technologies. The Company currently
plans to sell two applications of the ATM technology. The first is a fast packet
digital switch designed for small to medium size businesses. This device allows
a business to transmit voice, video and data over a local area network using the
business' existing PABX infrastructure. The second is a set-top box designed for
applications in the home. This device will allow for the delivery of voice,
video and data into the home via the existing telephone line, cable or via
satellite. The Company believes that this product will have applications for
games, music, television based Internet browsing and video on demand. To date
the Company has no sales of ATM technology.
Telecommunications
During the last five years, TSC was a facilities-based carrier providing long
distance telecommunications services, including commercial and residential
service, long distance service, operator service for pay phones, prepaid phone
cards, calling cards and enhanced services, such as voice mail and fax services.
TSC owns and operates a Siemen's high-volume gateway switch and an IBM AS400
billing platform to accommodate anticipated growth. It is certified as an
"Alternative Local Exchange Carrier" ("ALEC") to provide local telephone
services in the State of Florida and is currently filing for ALEC certification
in thirty (30) additional states.
CyberSentry's telecommunications division currently operates and supports all
hardware and software for call processing, billing, tracking and prepaid
debiting, as well as call transport, client programming, national and
international connectivity, systems maintenance and capital expansion
requirements for both long distance (in all states) and local residential
service in Florida for the Company.
Internet/E-commerce
Although this group is separate from the software and telecommunications
divisions, there are synergies between them in the development and distribution
of products and services. The Internet/E-Commerce group focuses on the
facilitation and advancement of core business transactions via the Internet. It
is responsible for cohesively establishing and maintaining our e-commerce
presence and overseeing the gateway for the CyberSentry Software product suite.
This group not only offers software sales and
19
<PAGE>
distribution processing, but also ISP services, CyberSentry Billing Network(TM)
and the Company's ATM process. The Company also plans to launch Voice Over
Internet services in the future. This group is in the development stage and has
not yet produced any revenues for the Company.
The Management's Discussion and Analysis of Financial Condition and Results of
Operations set forth below includes the operations of CyberSentry, Inc. and its
predecessor, TSC for the three and nine month period ended September 30, 1999
and September 30, 1998, respectively.
RESULTS OF OPERATIONS
THREE MONTH AND NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999 COMPARED TO THREE AND
NINE MONTH PERIOD SEPTEMBER 1998
Net Sales
Net sales amounted to $497,132 and $1,590,528 for the three and nine months
ended September 30, 1999, respectively. The Company did not generate any
revenues from its secured software and product technology segments for the nine
months. The net sales for the nine months resulted from the Company's
telecommunications segment. Since the Company purchased TSC on March 24, 1999,
the net sales of $1,590,528 represents TSC's net sales from the period March 25,
1999 to September 30, 1999, under purchase accounting. Net sales decreased by
$4,391,536, or 90% from $4,888,668 for the three months ended September 30, 1998
to $497,132 for the three months ended September 30, 1999. Net sales also
decreased by $17,810,107, or 92% from $19,400,635 for the nine months ended
September 30, 1998 to $1,590,528 for the nine months ended September 30, 1999.
For the nine months ended September 30, 1999, the decrease was due to decreased
volume in the Local Exchange Carrier ("LEC") billing programs with PCI, Accutel
and Valutel, attributing to approximately $14,400,000 of the decrease.
Additionally, approximately $3,000,000 of the decrease was due to decreased
volume in the LD (1+) , Call 1-800 and LD (T-1's) programs. The Company plans to
increase sales by growing its sales and support organizations while also
refining its billing and collection practices. The Company has decreased its
reliance on selling through the master agent and subagent relationships
previously utilized by TSC, in particular because Accutel, PCI and Valutel were
unable to document their on-going compliance with the revised more stringent
regulatory environment, such as independent third party verification. Thus, the
revenues derived from master agents and subagents such as Grace Trust, Valutel
and Accutel will not recur.
Programs such as direct marketed, post paid travel cards and residential local
and long distance sold or administered directly by the Company will continue.
At present these programs account for all of the sales of the Company.
Contrary to Grace Trust's assurances that they were obtaining proper customer
authorization for all of its business submitted to TSC, this was not the case.
The inability of Grace Trust to document third party verification of its
customer base was deemed an unacceptable credit risk by the Company. The Grace
Trust traffic was substantial and the termination thereof caused the decrease in
LD (1+) program revenues.
Telecommunications Costs
Telecommunications costs amounted to $357,366 and $1,269,635 for the three and
nine months ended September 30, 1999. The costs exclusively relate to the
Company's telecommunications segment. Telecommunications costs decreased with
the decrease in revenue by $4,202,730, or 92% from $4,560,096 for the three
months ended September 30, 1998 to $357,366 for the three months ended September
30, 1999. Telecommunications costs decreased as a function of lower volume for
the period and the reduced master and subagent base including Accutel, PCI, and
Valutel. Additionally,
20
<PAGE>
telecommunications costs decreased $16,804,438, or 93% from $18,074,073 for the
nine months ended September 30, 1998 to $1,269,635 for the nine months ended
September 30, 1999. As a percentage of net sales, these amounts represented 93%
for the nine months ended September 30, 1998 as compared to 80% for the nine
months ended September 30, 1999. The decrease as a percentage of net sales was
primarily attributable to an increase in the monthly fee charged each customer
in the Valutel program.
Selling, General and Administration
Selling, general and administrative expenses increased $427,856, or 125% from
$341,520 for the three months ended September 30, 1998 to $769,376 for the three
months ended September 30, 1999. The overall dollar increase was primarily due
to an increase in salaries and related costs of approximately $106,000 and an
increase of approximately $121,000 in legal and professional fees associated
with the filing of the Company's Form 10 with the Securities and Exchange
Commission.
Additionally, selling, general and administrative expenses decreased $1,640,974
or 57% from $2,855,683 for the nine months ended September 30, 1998 to
$1,214,709 for the nine months ended September 30, 1999. The overall dollar
decrease was primarily attributable to bad debts in 1998. As a percentage of net
sales, these amounts represented 15% for 1998 as compared to 76% for 1999. The
increase as a percentage of net sales was attributable to the decrease in net
sales, and the Company's inability to maintain an efficient cost structure in
1999.
Depreciation and Amortization
Depreciation and amortization amounted to $606,659 and $1,455,053 for the three
and nine months ended September 30, 1999, respectively. The amount of
depreciation and amortization in 1999 was significantly impacted by the
intangibles acquired through the acquisition of TSC and the Company's purchase
of the CyberSentry and ATM technology in the later part of 1998. For the nine
months ended September 30, 1999, the amortization expense relating to the
acquired intangibles amounted to $585,446, and the amortization of the
CyberSentry and ATM technology amounted to $642,858.
Other Expenses
Other expense amounted to $164,663 and $372,710 for the three and nine months
ended September 30, 1999, respectively, and consists of interest expense. The
Company incurred interest expense relating to its debt outstanding during 1998
and 1999.
21
<PAGE>
Net Loss
As a result of the factors described above, the Company incurred a net loss of
$(1,400,932) and $(2,721,579) for the three and nine months ended September 30,
1999, respectively as compared to a net loss of $(189,432) and $(2,148,680) for
the three and nine months ended September 30, 1998, respectively.
Liquidity and Capital Resources
Management is in the process of finalizing its Form 10 with the Securities and
Exchange Commission, which will enable certain common stock of the Company to
trade on an exchange. Once the Form 10 is complete the Company plans to pursue a
public offering sufficient to finance continued operations and projected
developmental goals. There is no assurance that the Company will be successful
in selling its shares to the public. Presently, the Company's short-term working
capital and capital expenditure requirements are being addressed through cash
generated by its operations and its existing line of credit. CyberSentry has
available a $3,000,000 line of credit through one of its shareholders. The
amount outstanding on the line may not exceed 50% of the Company's assets and is
collateralized by substantially all of the Company's assets. Interest on the
line of credit is payable monthly at an annual interest rate of two percentage
points higher than the highest domestic "Prime Rate" published in the Wall
Street Journal on the first day of publication in the previous month. The line
of credit extends for one year, and amounts outstanding after one year are
payable on demand. At September 30, 1999, the Company had approximately $900,000
available to borrow under the line of credit.
Operating
Net cash used in operating activities for the Company amounted to $1,095,560 for
the nine months ended September 30, 1999. This was primarily attributable to the
net loss of $2,721,579 and the increases in accounts receivable and prepaid
expenses and other assets of $188,090, and an increase in accrued expenses and
other current liabilities of $126,436, offset by an adjustment for depreciation
and amortization of $1,455,053, and decreases in other receivables and other
assets of $139,780.
Financing
Net cash provided by financing activities for the Company amounted to $1,127,335
for the nine months ended September 30, 1999. This was attributable to financing
received from the sale of common stock of $500,000 and from a shareholder of
$1,246,520, offset by repayments of lease obligations of $125,567, net payments
on the line of credit of $282,000 and payments on the bank note payable of
$211,618.
22
<PAGE>
Year 2000 Compliance
The potential for software failures due to processing errors arising from
calculations using the Year 2000 date is a known risk. The Company recognizes
the need to ensure that its operations, products and services will not be
adversely impacted by Year 2000 software failures. The Company is implementing
its contingency plan for the Year 2000 risk by downloading copies of all
records, software and data to a mass storage media, most likely CD or magnetic
tape. This enables the Company to reinstall all systems in the event that any
data is corrupted or lost. In addition, its major vendors and software systems
licensees have advised the Company that they are Year 2000 compliant.
The Company is in the final stages of upgrading its internal computer systems,
including its accounting, sales and technical support automation systems, to
make them Year 2000 compliant. However, there can be no guarantee that the
systems of other companies on which the Company's systems and operations rely
will be able to handle all Year 2000 problems. The Company has either spent or
committed to spend approximately $35,000 to complete these upgrades.
In addition, although the Company believes that its CyberSentry Software
applications are Year 2000 compliant, there can be no assurance that the
Company's software products contain all necessary date code changes.
Furthermore, many of the Company's customers or potential customers use Internet
protocols and maintain their Internet operations on servers that may be impacted
by Year 2000 complications. Reliance on such Internet protocols or the failure
of the Company's customers or potential customers to ensure that their servers
are Year 2000 compliant, could have a material adverse effect on the Company's
customers and on the Company's products and search services, which in turn could
have a material adverse effect on the Company's business, financial condition
and results of operations.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CyberSentry, Inc.
(Registrant)
Date: November 15, 1999 /s/ Gerald A. Resnick
- ------------------------ -----------------------------
Gerald A. Resnick
Chairman of the Board, Chief
Executive Officer and President
Date: November 15, 1999 /s/ Kenneth Fedorcek
- ------------------------ -------------------------------
Kenneth Fedorcek
Treasurer and Chief Financial
Officer
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 31,775
<SECURITIES> 0
<RECEIVABLES> 366,766
<ALLOWANCES> 100,167
<INVENTORY> 0
<CURRENT-ASSETS> 457,733
<PP&E> 2,230,827
<DEPRECIATION> 1,400,066
<TOTAL-ASSETS> 17,142,734
<CURRENT-LIABILITIES> 3,216,266
<BONDS> 0
0
6,916
<COMMON> 13,759
<OTHER-SE> 12,151,907
<TOTAL-LIABILITY-AND-EQUITY> 17,142,734
<SALES> 1,590,528
<TOTAL-REVENUES> 1,590,528
<CGS> 1,269,635
<TOTAL-COSTS> 3,939,397
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 372,710
<INCOME-PRETAX> (2,721,579)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,721,579)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,721,579)
<EPS-BASIC> (.21)
<EPS-DILUTED> (.21)
</TABLE>
