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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12 (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
CYBERSENTRY, INC.
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(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 22-3626108
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
412 East Madison Street, Suite 1200, Tampa, Florida 33602
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (813) 228-0688
Securities to be registered pursuant to Section 12(b) of the Act:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH EACH
TO BE SO REGISTERED CLASS IS TO BE REGISTERED
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None None
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Securities to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
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(Title of Class)
CLASS A CONVERTIBLE REDEEMABLE PARTICIPATING PREFERRED STOCK
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($1.50 LIQUIDATION VALUE), PAR VALUE $.001 PER SHARE
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(Title of Class)
CLASS B CONVERTIBLE REDEEMABLE PARTICIPATING PREFERRED STOCK
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($1.50 LIQUIDATION VALUE), PAR VALUE $.001 PER SHARE
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(Title of Class)
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The Exhibit Index is on located on Page 58
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TABLE OF CONTENTS
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ITEM 1. BUSINESS................................................................ 1
ITEM 2. FINANCIAL INFORMATION................................................... 23
ITEM 3. PROPERTIES.............................................................. 31
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......... 32
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS........................................ 38
ITEM 6. EXECUTIVE COMPENSATION.................................................. 41
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................... 44
ITEM 8. LEGAL PROCEEDINGS....................................................... 52
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS............................................. 52
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES................................. 53
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED................. 54
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS............................... 56
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................. 57
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.................................................... 57
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS....................................... 57
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ITEM 1. BUSINESS
CyberSentry Inc., a Delaware corporation (the "Company" or "CyberSentry")
is a communications software company providing our clients with numerous ways to
access the world and distribute their products and services, all while
protecting them within Internet commerce. We are concentrating on three core
lines of business - Secure Internet Software, Telecommunications, and Advanced
Product Technology-and are presently organized into four divisions: Secure
Software, Internet Services, Telecommunications and Advanced Product Technology.
CyberSentry intends to leverage its abilities and expertise in each of the areas
to assist in the development of the others. Management believes that the
combination of its CyberSentry Software, ATM products, e-commerce capabilities
and telecommunications backbone (Internet as well as conventional) offers an
opportunity to succeed in its mission to provide a secure method for individuals
and corporations to safely distribute information and sell products via the
Internet or other electronic channels.
Description of Business
Secure Software
The Company holds an exclusive, worldwide, perpetual, fully-paid license to
publish, use, distribute and sublicense a software program that provides digital
rights management technology (the "CyberSentry Software"). The CyberSentry
Software provides secure Internet commerce transactions for both the consumer
and the seller by controlling the "file" extensions, as well as access to
consumer credit information and content that can be downloaded via the Internet,
such as games, CD's, videos, copyrighted information and other transactions. The
CyberSentry Software is designed to provide the secure distribution of
copyrighted text, audio, video, graphics and software in Internet commerce. 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.
The Company acquired its license of the CyberSentry Software from Learning
Company Properties, Inc. (presently part of Mattel) for a purchase price of
3,000,000 shares of Common Stock of the Company. This exclusive license allows
CyberSentry to sell software packages (licenses, services, maintenance and
updates) to a diverse set of clients via conventional distribution channels,
partnerships, joint ventures and directly over the Internet via the Company's e-
commerce web site. Two of the biggest challenges faced by companies trying to
take advantage of e-commerce are (1) managing initial distribution of digitally
delivered products and (2) preventing unauthorized pass along distribution of
proprietary information and/or services. CyberSentry Software is a digital
rights management tool that provides a comprehensive solution to these two
critical e-commerce issues.
Receiving one subscription or license fee while watching helplessly as
their products are redistributed and/or loaded to other users not licensed is an
economic hardship and legal nightmare for companies that engage in these
businesses. Lost revenues are only the first part of this problem. Under some
circumstances, unauthorized distribution of a company's product can cause the
company to lose legal protections for its rights to that product.
Once businesses integrate the CyberSentry Software into their product
offerings, companies selling software and/or distributing proprietary
information (such as subscription-based manuals, letters and updates) via e-
commerce or similar channels are more comfortable in the security of their sales
process and legal protections.
Although the CyberSentry Software is fully developed and has been licensed
to one customer, the Company has not yet received any revenues from this
product. The Company is not yet providing dial-up Internet access and therefore
has not yet received any revenues from that service.
The Company is also a registered Alternate Local Exchange Carrier ("ALEC")
in Florida, with tariffs filed in 32 states as a long distance service provider.
As such, the Company intends to provide national Internet dial-up access to
customers. The Company expects to provide these services in conjunction with
major Internet service providers.
Internet Services
Although this group is separate from the Software division, there are
synergies between the groups in the development and distribution of products.
This group of CyberSentry 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 distribution processing, but also Internet Service Provider
("ISP")services, the CyberSentry Billing Network(TM), the Company's asynchronous
transfer mode ("ATM")process and Voice Over Internet. This group is in the
development stage and has not yet produced any revenues for the Company.
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Telecommunications
As part of its long-term plan, on March 24, 1999 CyberSentry acquired
Telecommunications Service Center, Inc. ("TSC") via merger by funding TSC's
emergence from Chapter 11 bankruptcy proceedings, TSC now operates as the third
division of CyberSentry a facilities-based telecommunications carrier. Existing
services of TSC include pre-paid (debit) calling cards; promotional value-added
calling plans, and service bureau offerings to various client groups. The assets
acquired by the acquisition of TSC provide the ability, in real time, to offer
direct billing to customers as well as billing the customers local exchange
carriers where appropriate. This forms the backbone to serve the other divisions
of the Company. The Company plans to expand the Management Information Systems
and Technical Services departments of this group to support all of the
Company's technical needs.
The Company owns and operates a Siemens high-volume gateway switch and an
IBM AS400 billing platform in its TSC division. These systems enable the Company
to provide all hardware and software for call processing, billing, tracking and
prepaid debiting, as well as call transport, client programming, and national
and international connectivity for TSC's services.
The Company is no longer focusing on being a third party provider to
telecommunications resellers, rather the infrastructure acquired with TSC will
be applied to products and services proprietary to the Company. As a result of
this decision, gross sales have decreased since the acquisition. The Company
believes that this short-term situation should correct over time, thus
significantly increasing the gross margins.
Although the Company had hoped to be in a position to resurrect sales
programs in existence prior to the bankruptcy of TSC, that has not been the
case. However, the Company is concentrating on attracting previous clients and
agents, working with existing agents on new programs and launching its own set
of value-added calling services. Combined offerings including ISP, VOIP and
calling card services are expected to be marketed over the Internet and added to
the product suite.
The Company's telecommunications products and services are fully developed
and are generating revenues for the Company.
Advanced Product Technology
CyberSentry has entered into an exclusive licensing arrangement with
LibertyOne Limited, an Australia corporation ("LibertyOne"), for the
distribution of ATM technology throughout North America. The purchase price for
this license was 2,000,000 shares of Class B Preferred Stock of the Company. ATM
enables real-time multimedia services to both consumers and commercial
enterprises. The Company believes ATM will significantly enhance corporate and
consumer communications, including video conferencing, interactive audio, and
audio/visual distribution and retrieval. The Company believes that focusing on
developing and delivering its ATM offerings will put it in a position to take
advantage of the enormous opportunity for Voice on Demand, voice and data, and
Internet services.
The Company currently plans to market and sell two applications of its ATM
technology. The first is a fast packet digital switch designed for small to
medium size businesses. This device should allow a business to transmit voice,
video and data over a local area network using the business's existing PABX
infrastructure. The second is a set-top box designed for applications in the
home. This device allows 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.
The ATM Technology is still in the developmental stage and has not
generated any revenues for the Company to date. The Company is relying on
LibertyOne and its subsidiaries to produce the hardware necessary to market the
ATM Technology. A working prototype of this hardware currently exists and is
being tested. The Company expects that a consumer model of this hardware will be
available for sale to consumers during the first half of the year 2000, although
there can be no assurance that it will be available then or ever.
The Company plans to target specific carriers for partnership and is
currently negotiating agreements to secure ATM access on terms consistent with
the Company's strategies and operational goals. The Company believes that its
approach to marketing its ATM product is innovative and unique to the industry.
This strategy involves the use by subscribers of either an existing copper line
or a coaxial cable to use an ATM device which can be purchased or leased from
the Company. The Company believes that this technology will permit a
conventional telephone line to be used to simultaneously carry voice, fax,
Internet and audiovisual over a single conventional copper line where the local
carrier has installed central office ATM switches. The Company believes that by
offering these multiple services using only one line, the Company should be
positioned as a competitive telecommunications provider of ATM services.
See Item 7 - "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ATM
Technology Acquisition" for a description of the transactions through which the
Company acquired the ATM Technology.
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Forward-looking Statements
This Registration Statement on Form 10 ("Registration Statement") includes
forward-looking statements which are based on management's beliefs and
assumptions, and on information currently available to management. Forward-
looking statements include the information concerning possible or assumed future
results of operations of the Company set forth in Item 2 - "FINANCIAL
INFORMATION - Management's Discussion and Analysis of Financial Condition and
Results of Operations". Forward-looking statements also include statements in
which words such as "expect", "anticipate", "intend", "plan", "believe",
"estimate", "consider" or similar expressions are used.
Forward-looking statements are not guarantees of future performance. They
involve risks, uncertainties and assumptions, including the risks discussed
under the heading "BUSINESS - Risk Factors" and elsewhere in this Registration
Statement. The Company's future results and stockholder values may differ
materially from those expressed in these forward-looking statements. Many of the
factors that will determine these results and values are beyond the Company's
ability to control or predict. Investors are cautioned not to put undue reliance
on any forward-looking statements.
History of Business
CyberSentry was incorporated in Delaware on August 21, 1998 as
Telecommunications Services, Inc. ("TSI ") and subsequently amended its
certificate of incorporation to change the corporation's name to its current
form. TSC was formed on July 15, 1991 and, on May 7, 1998, filed for bankruptcy
protection in Florida (the "Bankruptcy"). As of March 24, 1999, as contemplated
by TSC's Second Amended Plan of Reorganization (the "Plan"), which was funded by
CyberSentry, TSC merged into CyberSentry and TSC was dissolved, with CyberSentry
being the sole surviving corporation (the "Merger"). The Merger was treated for
accounting purposes as a purchase of TSC by CybersSentry. See Item 7 -"CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS - Bankruptcy, Merger and Related
Transactions" for a further description of the Bankruptcy, the Plan and the
Merger. In this Registration Statement, references to the "Company" refer to TSC
and CyberSentry prior to the Merger and to CyberSentry as the surviving
corporation of the Merger, and references to the business of the Company include
the businesses of TSC and CyberSentry prior to the Merger.
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The Company has from time to time received preliminary proposals, all
subject to numerous conditions and contingencies (including the completion of
due diligence and the obtaining of financing), to acquire all or part of the
Company or its stock or assets. None of the discussions regarding these
proposals has progressed beyond the preliminary stages. The Company expects to
engage continually in discussions and negotiations regarding possible
acquisitions and dispositions of assets and businesses and other strategic
alliances, some of which may be material. There can be no assurance that any
such transactions will be consummated.
Employees and Labor Relations
The Company currently has 22 full-time employees and consultants, none of
whom are represented by labor unions. The Company is not a party to any
collective bargaining agreements or labor union contracts, nor has it been
subjected to any strikes or employment disruptions in its history.
Financial Information about Industry Segments
Financial information about the Company's industry segments is included in
the financial statements attached hereto and is incorporated herein by
reference. See Footnote 13 of the Company's financial statements.
Financial Information About Geographic Areas
At present, substantially all of the Company's operations are conducted in
the United States, and the Company has no material foreign operations.
Risk Factors
Investors contemplating an investment in the Company's common stock, par
value $.001 per share (the "Common Stock"), the Company's Class A Convertible
Redeemable Participating Preferred Stock ($1.50 Liquidation Value), par value
$.001 per share (the "Class A Preferred
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Stock"), or the Company's Class B Convertible Redeemable Participating Preferred
Stock ($1.50 Liquidation Value), par value $.001 per share (the "Class B
Preferred Stock") should carefully consider the following risk factors and
investment considerations.
Risk Factors Relating to the Company as a Whole
Risk that the Company May Be Unable to Continue as a Going Concern;
Dependence on Patriot Advisors. Since the Merger of CyberSentry and TSC as of
March 24, 1999, which formed the Company and enabled TSC to emerge from its
Bankruptcy proceedings, the Company has not generated sufficient earnings or
cash flow to fund its operations and has relied on its line of credit with
Patriot Advisors, Inc.("Patriot"), a shareholder of the Company, for that
purpose. Management does not expect that the Company will be able to fund its
operations out of earnings or cash flow in the foreseeable future, and there can
be no assurance that Patriot will continue to provide the Company with funds for
operations. In the event that Patriot were to stop providing funds to the
Company, and the Company were unable to find alternative sources of funding, the
Company would be unable to continue as a going concern.
The Company has incurred significant losses from operations, negative cash
flows and a working capital deficiency as of and for the six months ended June
30, 1999 and the period ended December 31, 1998. These factors raise substantial
doubt about the Company's ability to continue as a going concern. See
explanatory paragraph in the Report of Independent Certified Public Accountants
of the Company regarding reference to the Company's ability to continue as a
going concern. The Company is currently in discussions with Patriot to
restructure the Credit Agreement to provide the Company with additional working
capital and with various investment banking firms for other additional
financing.
Recent Bankruptcy Proceedings. In order for TSC's bankruptcy proceeding to
be formally concluded, the Bankruptcy Court must issue a final decree
confirming, among other things, that TSC's plan of reorganization has been
substantially consummated. As of the date hereof, the Final Decree has not been
issued; and there can be no assurance that the final decree will ever be issued.
Limited Operating History; History of Losses and Expectation of Future
Losses. The Company (other than TSC's telecommunications business) has a limited
operating history upon which it can be evaluated. Any investment in the Company
must be considered in light of the risks, expenses and difficulties frequently
encountered by companies in an early stage of development in new and rapidly
evolving markets, including the risks described below. There can be no assurance
that the Company will be successful in addressing such risks.
CyberSentry incurred a net loss of $1.15 million for the six months ended
June 30, 1999 and a net loss of $0.33 million for the period from inception of
the Company through December 31, 1998. In addition, TSC incurred a net loss of
approximately $0.38 million for the period from January 1, 1999 through
March 24, 1999, when it was acquired by CyberSentry; a net loss of approximately
$3.41 million for the year ended December 31, 1998; a net loss of $3.04 million
for the year ended December 31, 1997; and a net loss of $1.26 million for the
year ended December 31, 1996. As of June 30, 1999 the Company had an excess
of current liabilities over current assets of approximately $1.89 million.
Neither TSC nor the Company has achieved profitability on a quarterly or
annual basis, and the Company anticipates that it will incur net losses for at
least the next several quarters. The Company expects to continue to incur
significant product development, sales and marketing, and administrative
expenses, and as a result, will need to generate significant quarterly revenues
to achieve and maintain profitability. There can be no assurance that any of the
Company's business strategies will be successful or that significant revenues or
profitability will ever be achieved or, if they are achieved, that they can be
consistently sustained or increased on a quarterly or annual basis in the
future. See Item 2 - "FINANCIAL INFORMATION" and related Exhibits.
Potential Fluctuations in Operating Results. The Company's operating
results may fluctuate significantly in the future as a result of a variety of
factors, many of which are outside of the Company's control. These factors
include demand for CyberSentry Software and ATM Technology, demand for
telecommunications services and products offered by the Company and lengthy
sales cycles, changes in the growth rate of Internet usage, customers' capital
expenditures
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and other costs relating to the expansion of the respective operations, demand
for Internet commerce, seasonal trends in sales, introduction of new products or
services by the Company or its competitors, delays in the introduction or
enhancement of products and services by the Company or its competitors, customer
order deferrals in anticipation of upgrades and new products, changes in the
Company's pricing policies or those of its competitors, the Company's ability to
anticipate and effectively adapt to developing markets and rapidly changing
technologies, changes in the mix of international and U.S. revenues, changes in
foreign currency exchange rates, mix of products and services sold and the
channels through which those products and services are sold, general economic
conditions and specific economic conditions in Internet and related industries.
Additionally, as a strategic response to a changing competitive environment, the
Company may elect from time to time to make certain pricing, service, marketing
or acquisition decisions that could have a material adverse effect on the
Company's quarterly financial performance.
Quarterly sales and operating results generated by the Company's
CyberSentry Software applications are expected to generally depend on per-usage
fees and subscription revenues received from the Company's digital rights
management customers within the quarter, which are difficult to forecast.
Transaction based revenues generated by the Company's digital rights electronic
commerce customers are all pursuant to per usage contracts and are subject to
seasonal trends in advertising sales. Revenues from per-usage fees depend on
the volume of end user electronic commerce transactions processed by the
Company's digital rights management software. The Company does not have any
substantial historical basis for predicting the volume of transactions that may
be generated by end users of on-line services provided by many of its customers.
Accordingly, a low level of usage by end users or the cancellation or deferral
of any customer contract could have a material adverse effect on the Company's
quarterly financial performance.
The Company plans to significantly increase its operating expenses to
expand its sales and marketing operations, broaden its customer support
capabilities, develop new distribution channels, and establish strategic
alliances. Because the Company's operating expenses are based on anticipated
revenue trends and because a high percentage of the Company's expenses are
fixed, delay in generating or recognizing revenue from a limited number of
license transactions could cause significant variations in operating results
from quarter to quarter and could result in operating losses. To the extent
that such expenses are not subsequently followed by increased revenues, this
could have a material adverse effect on the Company's business, financial
condition and results of operations. As a result of these and other factors,
the Company believes that period to period comparisons of its operating results
may not be meaningful and should not be relied upon as an indication of future
performance. Due to all of the foregoing factors, it is likely that in some
future quarter, the Company's operating results may be below the expectations of
public market analysts and investors. In such event, the price of the Company's
Common Stock, Class A Preferred Stock and Class B Preferred Stock would likely
be materially adversely affected. See
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"Risk Factors - Substantial Dependence on CyberSentry Software and ATM
Technology; Uncertainty of Market Acceptance; Lengthy Sales Cycle".
Need to Manage Changing Operations; Dependence Upon Key Personnel. The
ability of the Company to successfully offer products and services and implement
its business plan in a rapidly evolving market requires an effective planning
and management process. The Company has recently increased the scope of its
operations domestically, and the Company's anticipated future operations will
continue to place a significant strain on the Company's management systems and
resources. The Company expects that it will be required to continue to improve
its financial and managerial controls and reporting systems and procedures, and
will need to expand, train and manage its work force. Furthermore, the Company
expects that it will be required to manage multiple relationships with various
customers and other third parties. There can be no assurance that the Company
will be able to effectively manage these tasks, and the failure to do so could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company is dependent upon the continued efforts and abilities of Gerald
Resnick, its President and Chief Executive Officer; Hal Shankland, its Senior
Vice President Technology; and Christopher Kaisand, its Senior Vice President
and Chief Operating Officer. The loss or unavailability of any of these
individuals for any significant period could have a material and adverse effect
on the Company's continued development, business, financial condition and
results of operations. The Company's operations will also depend to a great
extent on the Company's ability to attract new key personnel and retain existing
key personnel in the future. Messrs. Resnick and Shankland are bound by
employment agreements with the Company; and Mr. Kaisand is expected to enter
into such an agreement, although the final terms of his employment agreement
have not yet been determined. See Item 6 - "EXECUTIVE COMPENSATION -Employment
Agreements". The Company does not have "key person" life insurance policies
covering any of its employees.
Control by Officers and Directors; Transactions with Affiliates. The
Company's executive officers and directors and entities affiliated with them
(collectively, "management shareholders"), in the aggregate, beneficially own
Common Stock and Preferred Stock representing in the aggregate approximately
31.5% of the Company's voting securities (assuming exercise of all options). In
addition, certain shareholders of the Company who, in the aggregate,
beneficially own Common Stock and Preferred Stock representing approximately
32.9% of the Company's voting securities (assuming exercise of all options),
have entered into agreements with the Company, pursuant to which such
shareholders have agreed, among other things, to vote all of their voting
securities in proportion to the votes cast by all of the other holders of the
Company's voting securities. See Item 7 - "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS". These agreements will have the effect of proportionately
increasing the voting power of the management shareholders, whose 31.5%
ownership interest in the Company's voting securities will give them, in effect,
approximately 46.9% of total voting power. Thus, the management shareholders
will be able to significantly influence and, possibly, control all matters
requiring approval by the shareholders of the Company, including the election of
directors and the approval of mergers or
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other business combination transactions.
The Company has in the past entered into several contracts and transactions
with its executive officers, directors, substantial shareholders and entities
affiliated with them on terms that were not negotiated on an arms'-length basis.
Management believes that the terms of these transactions were as favorable to
the Company as would have been obtained if they had been negotiated on an arms'-
length basis with unaffiliated third parties. See Item 7 - "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS". It is anticipated that any future
contracts and transactions between the Company and its executive officers,
directors, substantial shareholders and their affiliates will be on terms no
less favorable to the Company than those that would have been obtained from
unaffiliated third parties in arms'-length negotiations.
Risks Associated with International Operations. The
Company's TSC division currently is attempting to market its products and
services in Europe, and the Company is considering expanding into selected
additional international markets. The Company's entry into international markets
will require significant management attention and financial resources. If
international revenues generated by the Company are not adequate to offset the
expense of establishing and maintaining foreign operations, the Company's
business, financial condition and results of operations would be materially
adversely effected. To date, the Company has only limited experience in
developing localized versions of its product and marketing and distributing its
products. There can be no assurance that the Company will be able to
successfully market, sell and deliver its products in international markets.
International operations are subject to inherent risks, including the impact of
possible recessionary environments in economies outside the United States, the
cost of localizing products for foreign markets, longer receivables collection
periods and greater difficulty in accounts receivable collection, unexpected
changes in regulatory requirements, difficulties and costs of staffing and
managing foreign operations, reduced protection for intellectual property rights
in some countries, potentially adverse tax consequences and political and
economic instability. There can be no assurance that the Company or its
distribution partners will be able to sustain or increase international
revenues, or that the foregoing factors will not have a material adverse effect
on the Company's future international revenues and, consequently, on the
Company's business, financial condition and results of operations. International
revenues are generally denominated in local currencies. The Company does not
currently engage in currency hedging activities. Although exposure to currency
fluctuations to date has been insignificant, there can be no assurance that
fluctuations in currency exchange rates in the future will not have a material
adverse impact on revenues from international sales and thus the Company's
business, financial condition and results of operations.
Year 2000 Risks. 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 has
upgraded the billing software for its IBM
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AS400 billing platform to make it Year 2000 compliant, and has been provided
with the software upgrade which the Company believes will make its Siemens high-
volume gateway switch Year 2000 compliant. The Company's contingency plan for
the Year 2000 risk is to download copies of all records, software and data to a
mass storage media, most likely CD, in order that it may be reinstalled in
the event that any data is corrupted or lost. The Company has been advised by
its major vendors that they are Year 2000 compliant.
The Company intends to establish procedures for evaluating and managing the
risks and costs associated with the Year 2000 problem and 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. The
Company expects the total cost of upgrading its systems to make them Year 2000
complaint to be approximately $35,000, of which approximately $10,000 has been
spent to date. 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.
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 affect 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.
Risks Associated With Potential Acquisitions. The Company may in the
future pursue acquisitions of complementary products, technologies or
businesses. Future acquisitions by the Company may result in potentially
dilutive issuances of equity securities and the incurring of additional debt and
amortization expenses related to goodwill and other intangible assets, which
could adversely affect the Company's results of operations. In addition,
acquisitions involve numerous risks, including difficulties in the assimilation
of the operations, products and personnel of the acquired company, the diversion
of management's attention from other business concerns, risks of entering
markets in which the Company has no direct prior experience, and the potential
loss of key employees of the acquired company. There can be no assurance that
the Company will ever successfully complete an acquisition.
No Public Market for Common and Preferred Stock; Potential Volatility of
Common and Preferred Stock Price. Prior to the consummation of the Plan and the
Merger, there has been no public market for the Company's Common Stock, Class A
Preferred Stock or Class B Preferred Stock, and there can be no assurance that
an active trading market will develop or, if one does develop, that it will be
maintained. In addition, the securities markets have from time to time
experienced significant price and volume fluctuations that are unrelated to the
operating
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performance of particular companies. The market prices of the common stock of
many publicly held Internet companies have in the past been, and can in the
future be expected to be, especially volatile. The market price of the Company's
Common Stock, Class A Preferred Stock and Class B Preferred Stock is likely to
be highly volatile, although the volatility of the Class A and Class B Preferred
Stock will likely be limited somewhat by the fact that the Company has the right
to repurchase these shares for $1.50 until March 24, 2001 and may be subject to
wide fluctuations in response to announcements of technological innovations or
new products by the Company or its competitors, release of reports by securities
analysts, developments or disputes concerning patents or proprietary rights,
economic and other external factors, as well as period-to-period fluctuations in
the Company's financial results.
Possible Antitakeover Effect of Preferred Stock. The Company is currently
authorized to issue 10,000,000 shares of preferred stock, par value $.001 per
share (the "Preferred Stock"). See Item 11 - "DESCRIPTION OF REGISTRANT'S
SECURITIES TO BE REGISTERED". The Board of Directors has the general authority
to issue Preferred Stock in one or more series and to fix the price, rights,
preferences, privileges and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
a series or the designation of such series, without any further vote or action
by the Company's stockholders. The issuance of Preferred Stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of delaying, deterring or preventing a
change in control of the Company without further action by the stockholders and
may adversely affect the market price of the Common Stock and the voting and
other rights of the holders of Common Stock. The issuance of Preferred Stock
with voting and conversion rights may adversely affect the voting power of the
holders of Common Stock, including the loss of voting control to others. See
Item 1 - "BUSINESS", Item 7 - " CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS"
and Item 11 - "DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED" for a
description of the terms of the Class A Preferred Stock and the Class B
Preferred Stock of the Company issued to certain former creditors and
stockholders of TSC (a predecessor of the Company) and other persons pursuant to
the Plan and the Merger.
Possible Antitakeover Effect of Certain Charter Provisions and of Delaware
Law. Certain provisions of the Company's Certificate of Incorporation and
Bylaws eliminate the right of stockholders to vote cumulatively in the election
of directors (subject to compliance with Delaware corporate law), provide for a
classified Board of Directors and specify certain procedures for nominating
directors and submitting proposals for consideration at stockholder meetings.
Such provisions are intended to enhance the likelihood of continuity and
stability in the composition of the Board of Directors and in the policies
formulated by the Board of Directors, and to discourage types of transactions
which may involve an actual or threatened change of control of the Company.
Such provisions are designed to reduce the vulnerability of the Company to an
unsolicited acquisition proposal and, accordingly, could discourage potential
acquisition proposals and could delay or prevent a change in control of the
Company. Such provisions are also intended to discourage certain tactics that
may be used in proxy fights but could, however,
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have the effect of discouraging others from making tender offers for the
Company's Common Stock and, consequently, may also inhibit fluctuations in the
market price of the Company's Common Stock that could result from actual or
rumored takeover attempts. These provisions may also have the effect of
preventing changes in the management of the Company.
The Company is subject to Section 203 of the Delaware General Corporation
Law (the "Anti-Takeover Law"), which regulates corporate acquisitions. The
Anti-Takeover Law prevents certain Delaware corporations, including those whose
securities are listed for trading on the NASDAQ National Market, from engaging,
under certain circumstances, in a "business combination" with any "interested
stockholder" for three years following the time that such stockholder became an
interested stockholder. For purposes of the Anti-Takeover Law, a "business
combination" includes, among other things, a merger or consolidation involving
the Company and the interested stockholder and the sale of more than 10% of the
Company's assets to the interested stockholder. In general, the Anti-Takeover
Law defines an "interested stockholder" as any entity or person beneficially
owning 15% or more of the outstanding voting stock of the Company and any entity
or person affiliated with or controlling or controlled by such entity or person.
A Delaware corporation may "opt out" of the Anti-Takeover Law with an express
provision in its original certificate of incorporation or an express provision
in its certificate of incorporation or bylaws resulting from amendments approved
by the holders of at least a majority of the company's outstanding voting
shares. The Company has not opted out of the provisions of the Anti-Takeover
Law.
Risks Associated with Telecommunications Business
Strong Competition. The telecommunications services industry is highly
competitive, rapidly evolving and subject to constant technological change.
There are numerous other companies offering one or more of each of the services
offered by the Company. As a service provider in the long distance
telecommunications industry, the Company competes with three dominant providers,
AT&T Corp., MCI Communications Corporation and Sprint Corporation, all of which
are substantially larger and have: (i) greater financial, technical.
engineering, personnel and marketing resources; (ii) longer operating histories;
(iii) significant name recognition; and (iv) large consumer bases. These
advantages afford the Company's competitors pricing flexibility.
Telecommunications services companies may compete for consumers based on price,
with the dominant providers conducting extensive advertising campaigns to
capture market share. Competitors with greater financial resources may also be
able to provide more attractive incentive packages to retailers to encourage
them to carry services that compete with the Company's services. In addition,
competitors with greater resources than the Company may be better situated to
negotiate favorable contracts with retailers. The Company believes that existing
competitors are likely to continue to expand their service offerings to appeal
to retailers and their consumers. Moreover, since there are few, if any,
substantial barriers to entry, the Company expects that new competitors are
likely to enter the telecommunications
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market and attempt to market telecommunications services similar to the services
offered by the Company which would result in greater competition.
The ability of the Company to compete effectively in the telecommunications
services industry will depend upon its ability to provide high quality services
at prices generally competitive with, or lower than, those charged by its
competitors. Certain of the Company's competitors dominate the
telecommunications industry and have the financial resources to withstand
substantial price competition, which is expected to increase significantly, and
there can be no assurance that the Company will be able to compete successfully.
Moreover, there can be no assurance that certain of the Company's competitors
will not be better situated to negotiate contracts with suppliers of
telecommunications services which are more favorable than contracts the Company
negotiates. In addition, there can be no assurance that the competition from
existing or new competitors or a decrease in the rates charged for
telecommunications services by the major long distance carriers or other
competitors would not have a material adverse effect on the Company.
Dependence Upon Independent Marketing Agents. During 1998 and 1997, a
substantial portion of the Company's telecommunications business was obtained
through independent marketing agents ("Marketing Agents"). These Marketing
Agents obtain customers for the Company in return for payment by the Company to
such agents of a substantial portion of the fees received by the Company from
such customers. In 1998, TSC derived approximately $18.7 million (or
approximately 82%) of its approximately $22.8 million in sales revenues from
business obtained through Marketing Agents, with approximately $16 million (or
approximately 70%) of TSC's revenues coming as a result of programs generated
through Marketing Agents comprised of an affiliated group of privately owned
companies. There can be no assurance that the Company will continue to generate
business through Marketing Agents and any failure to do so, or any termination
or interruption of the Company's relationship with the affiliated group of
Marketing Agents, would have a material adverse effect on the Company's
business, financial condition and results of operations.
Need to Expand Sales and Support Organizations. To date, the Company has
sold its telecommunications products and services through master agents and
subagents, and through its direct sales organization, which as of December 31,
1998, consisted of three individuals. The Company believes that its future
success is dependent upon substantially increasing the size of its direct sales
force, both domestically and internationally. Competition for such personnel is
intense, and there can be no assurance that the Company will be able to attract,
assimilate or retain additional qualified sales personnel on a timely basis in
the future, or at all. In addition, the Company believes that its future
success is dependent upon establishing relationships with a variety of
distribution partners, including original equipment manufacturers ("OEM's"),
systems integrators, value added resellers ("VAR's") and joint marketing
partners. The Company has had discussions with only a limited number of such
distribution partners and has yet to enter into a
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written agreement with any such distributors. There can be no assurance that the
Company will be able to enter into agreements or establish relationships with
desired distribution partners on a timely basis or at all, or that such
distributors will devote adequate resources to selling the Company's products.
Failure of the Company to successfully expand the size of its sales organization
or establish appropriate distribution channels for its products would have a
material adverse effect on the Company's business, financial condition and
results of operations. Moreover, the Company believes that the complexity of its
products and the large-scale deployments anticipated by its customers will
require a number of highly trained customer service and support personnel. The
Company currently has a small customer service and support organization, which
as of December 31, 1998, consisted of twelve individuals. There can be no
assurance that the Company will be able to increase the size of its customer
service and support organization on a timely basis or at all, or that the
Company will be able to provide the high level of support required by its
customers. Failure in either of these regards could have a material adverse
affect on the Company's business, financial condition and results of operations.
Rapid Technological Change. The telecommunications services industry is
characterized by rapid technological change, new product introduction and
evolving industry standards. The Company's success will depend, in significant
part, on its ability to make timely and cost-effective enhancements and
additions to its technology and introduce new services that meet consumer
demands. The Company expects new products and services, and enhancements to
existing products and services, to be developed and introduced to compete with
the Company's services. The proliferation of new telecommunication technology,
including personal communication services and voice communication over the
Internet, may reduce demand for long distance services, including prepaid
calling cards. There can be no assurance that the Company will be successful in
developing or marketing new services or enhancements to the Company's services
that respond to these or other technological changes or evolving industry
standards. In addition, there can be no assurance that the Company will not
experience difficulties that could delay or prevent successful development,
introduction and marketing of its planned services or that new services or
enhancements thereto will adequately meet the requirements of the marketplace
and achieve market acceptance. Delay in the introduction of new services or
enhancements, the inability to develop such new services or enhancements or the
failure of such services or enhancements to achieve market acceptance could have
a material adverse effect on the Company.
Lack of Own Transmission Network. The Company does not own a transmission
network. Accordingly, the Company will depend on carriers for transmission of
its long distance calls. Further, the Company will be dependent upon local
exchange carriers for call origination and termination. The Company's ability
to maintain and expand its business depends, in part, upon its ability to obtain
telecommunications services on favorable terms from long distance carriers and
other such suppliers, as well as the cooperation of both inter exchanges and
local exchange carriers in originating and terminating service for its
commercial and residential customers in a timely manner. There can be no
assurance that the Company will not experience losses because
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of interruptions of service at any of its carriers. In addition, no assurance
can be given that the Company will be able to obtain long distance services in
the future at favorable prices, and a material increase in the price at which
the Company obtains long distance service could have a material adverse effect
on the Company.
Need to Expand Infrastructure; Risk of Interruptions in Service. The
Company owns a Siemens high-volume gateway switch and an IBM AS 400 billing
platform, which management considers sufficient to accommodate its current
business and anticipated near-term growth. In order to satisfy customer needs,
however, management expects, under current growth plans, that the Company will
be required to expand the capacity of its existing data center and to build out
additional data centers to adequately provide service. These activities require
highly specialized personnel and involve many difficult installation, tuning and
optimization tasks, and will require the Company to expend substantial financial
and management resources. The Company has in the past experienced difficulties
and delays in expanding and stabilizing its existing data center. As a result,
there can be no assurance that the Company will be able to expand its
infrastructure to meet increased customer demand on a timely basis. The Company
houses its data centers at its facilities and takes certain precautions to
protect the Company's equipment against damage from fire, earthquakes, floods,
power and telecommunications failures, sabotage, intentional acts of vandalism
and similar events. Despite such precautions, the occurrence of a natural
disaster or other unanticipated problems at current and future data centers of
the Company could result in interruptions in the services provided by the
Company. Such interruptions could result in reductions in, or terminations of,
service provided to the Company's customers, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
Risks Associated with Billing and Collection. The Company presently
performs approximately three-quarters of its own billing and collection
services. In performing these services, the Company rates calls and directly
bills the customer utilizing an IBM AS400 billing platform and a Pitney Bowes
mail processing system. With respect to the remaining one-quarter of its billing
and collection services, the Company rates calls and forwards the rated call
records to other companies ("Billing Companies") for appropriate billing through
local exchange carriers ("LEC's"). The billing LEC's collect the amount due from
the end user and remit payment through the Billing Companies to the Company.
Such payments to the Company are net of any fees collected by the LEC's as well
as a provision for uncollectible amounts. The requirement that the Company enter
into agreements with Billing Companies, which have individual contractual
arrangements with the LEC's, to bill and collect the Company's accounts could
have a material adverse effect on the Company. In addition, the Company has less
leverage in collecting amounts due from customers directly rather than billing
customers through the LEC's.
Pervasive Governmental Regulation. The Company is currently subject to
pervasive Federal and state government regulation of its long distance telephone
services. The Company is regulated at the Federal level by the FCC and is
currently required to maintain both domestic and
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international tariffs for its services containing the currently effective rates,
terms and conditions of service. The FCC has proposed, however, to eliminate the
tariffing requirement for domestic non-dominant carriers. In addition, the
Company is required to maintain a certificate, issued by the FCC, in connection
with its international services. The intrastate long distance telecommunications
operations of the Company are also subject to various state laws and
regulations, including prior certification, notification or registration
requirements. The Company generally must obtain and maintain certificates of
public convenience and necessity from regulatory authorities in most states in
which it offers services. In most of these jurisdictions, the Company must file
and obtain prior regulatory approval of tariffs for intrastate services. In
addition, the Company must update or amend the tariffs and, in some cases, the
certificates of public convenience and necessity when rates are adjusted or new
products are added to the long distance services offered by the Company. The FCC
and numerous state agencies also impose prior approval requirements on transfers
of control, including transfers of control and corporate reorganization, and
assignments of certain regulatory authorizations.
Prior to its acquisition by the Company, TSC was qualified to do business
in 48 states and was tariffed or certified as a long distance telecommunications
carrier in 42 states. As a result of the Merger, the Company is in the process
of filing qualifications to do business in all 50 states. After such
qualifications have been effected, the Company intends to file appropriate name
change amendments to its certification or tariff documentation and any other
documents necessary to reflect the Merger in the appropriate jurisdictions. TSC
was certified as an Alternative Local Exchange Carrier ("ALEC") to provide local
telephone services in the State of Florida. To reflect the Merger, the Company
has filed a name change amendment to its ALEC certification in Florida and has
filed tariffs in 32 states as a long distance service provider.
If the Federal and state regulations requiring the local exchange carriers
to provide equal access for the origination and termination of calls by long
distance subscribers (such as the Company's customers) change or if the
regulations governing the fees to be charged for such access service change,
particularly if such regulations are changed to allow variable pricing of such
access fees based upon volume, such changes could have a material adverse effect
on the Company.
The Company's long distance prepaid calling card product and other
telecommunications services are currently subject to Federal, state and
international regulation. The Company's operations are intended to be in
compliance with the requirements of the Telephone Operator Consumer Services
Improvement Act of 1990 ("TOCSIA") and the FCC's implementing regulations
regarding unblocking, branding and posting for operator services. The Company
is duly authorized under section 214 of the Communications Act of 1934, as
amended (the "Communications Act") to provide international value-added
telecommunications services. The
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Company maintains informational tariffs for its operator services and maintains
on file tariffs for its long distance and prepaid calling card services. The
Company is licensed in the States in which it operates as a long-distance
operator service provider, and, except as described in Item 7 - "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS - Grace Trust Transaction", the Company
is not aware of any instance in which there is currently or has been in the past
a substantial violation of Federal or state telecommunications regulations in
connection with the Company's services. While the Company believes that it is in
compliance with the applicable Federal, state and international regulations
governing telecommunications services, there can be no assurance that the FCC or
the regulatory authorities in one or more states or foreign countries will not
raise material issues with regard to the Company's compliance with applicable
regulations, or that Federal, state and international regulatory activities will
not have a material adverse effect on the Company. In addition, while the
Company believes that it has instituted appropriate safeguards, there can be no
assurance that a transaction similar to the Grace Trust transaction will not
arise again in the future and, if so, that it will not have a material adverse
effect on the Company.
Section 276 of the Telecommunications Act of 1996 ("Section 276") mandated
the establishment of Universal Service for the promotion of nationwide access to
telecommunications services in rural, insular and high cost areas that are
reasonably comparable in price and type to those found in urban areas and the
promotion of access to advanced services for schools, libraries and certain
health care providers. Telecommunications providers of interstate services,
including pay phone aggregators and private network operators that offer service
to others for a fee on a non-common carrier basis, must contribute toward the
funding of Universal Service. Certain government and public safety entities are
exempt, as are entities whose contribution would be less than $100 per year.
Although the Company's competition will be similarly situated, the Universal
Service Fund annual assessment may have a material adverse effect on the long-
term financial condition of the Company.
Section 276 further mandated that the FCC promulgate rules to establish a
per call compensation plan to ensure that all pay phone providers are fairly
compensated for each completed intrastate and interstate pay phone initiated
call, including calls on which pay phone providers had not heretofore received
compensation. Such calls included those placed to toll free numbers (800/888),
such as operator assisted and prepaid calling card calls, and calls placed
through network access codes. In September 1996, the FCC promulgated rules to
implement Section 276 which established a three-phase compensation plan for pay
phone providers. Under the first phase, inter exchange carriers with annual
toll revenues of more than $100 million were to pay a total of $45.85 per pay
phone per month for all toll free and access code calls for the first year,
commensurate with their portion of inter exchange revenues. All switch-based
and facilities-based inter exchange carriers were to pay $0.35 per call to each
pay phone provider during the second year (although payments could subsequently
be recovered from resellers by the carriers), after which per call compensation
rates were to be left to individual market driven rates negotiated between pay
phone providers and inter exchange carriers. On July 7, 1997, the D.C.
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Circuit Court of Appeals vacated significant portions of the FCC's rules
including the $0.35 per call rate which was found to be arbitrary and
capricious, and remanded the matter to the FCC for reconsideration. On remand,
the FCC in September of 1997 established a two-year "default" compensation rate
of $0.284 per pay phone originated toll free or access code call. At the end of
the two year interim period, the per call pay phone compensation rate will be
the deregulated market based local coin rate less $0.066. This amount is payable
by all "switch-based" inter exchange carriers (but again may be passed on to
non-facilities based resellers). The revised FCC rules became effective on
October 7, 1997, but continue to be subject to regulatory and legal challenges.
The Company is unable to predict whether this regulation or other potential
changes in the regulatory environment could have a material adverse effect on
the Company.
Risks Associated with Internet and ATM Businesses
Uncertainty of Market Acceptance; Lengthy Sales Cycle. The Company's
future growth substantially depends on the commercial success of the CyberSentry
Software and ATM Technology, which the Company first licensed in 1998. The
Company has only one customer to date, Digital Rights International, Inc.
("DRI") for the CyberSentry Software, and is initially targeting large
publishers of copyrighted materials and telecommunications carriers. There can
be no assurance that these potential customers will adopt and implement the
CyberSentry Software and/or the ATM Technology. Even if the CyberSentry
Software and ATM Technology are adopted, they may not be accepted and
implemented on a timely basis or at all. To date, other than at DRI, the
CyberSentry Software and the ATM Technology have not been installed in a large-
scale, commercial deployment, and there can be no assurance that these products
will perform desired functions, offer sufficient price/performance benefits or
meet the technical or other requirements of customers. Despite testing of the
CyberSentry Software and ATM Technology prior to their initial commercial
release, there can be no assurance that all performance errors or deficiencies
have been discovered and remedied, that additional errors or deficiencies will
not occur, or that if they occur, the Company will be able to correct such
errors and deficiencies. The Company believes that the license of the
CyberSentry Software and ATM Technology by customers will involve an enterprise-
wide decision-making process, and that the Company or its distribution partners
will need to provide a significant level of education and information to
prospective customers regarding the uses and benefits of the products. In
addition, the Company believes that the time required to deploy the CyberSentry
Software and ATM Technology will vary significantly depending on a number of
factors, including the needs and skill set of the customer, the size of the
deployment, the complexity of the customer's network environment, the quantity
of hardware and degree of hardware configuration necessary to deploy the
CyberSentry Software and ATM Technology, and the customer's installation
schedule. For these and other reasons, the license and deployment of the
CyberSentry Software and ATM Technology may be characterized by lengthy sales
and implementation cycles. Failure of the CyberSentry Software or ATM
Technology to achieve market acceptance for these or any other
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reasons would have a material adverse effect on the Company's business,
financial condition and results of operations.
Substantial Competition. The markets in which the Company expects to
compete in providing Internet services are new, intensely competitive, highly
fragmented and characterized by rapidly changing technology and evolving
standards. The Company faces competition in the overall network computing
software market as well as each of the market segments in which its products and
services compete. The Company has experienced and expects to continue to
experience increases in competition from current and potential competitors, many
of whom have significantly greater financial, technical, marketing and other
resources than the Company.
The Company's competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements or devote greater
resources to the development, promotion and sales of their products than the
Company. Certain of the Company's current and potential competitors may bundle
their products with other software or hardware, including operating systems and
browsers, in a manner that may discourage users from purchasing products offered
by the Company. Also certain current and potential competitors have greater
name recognition or more extensive customer bases that could be leveraged
thereby gaining market share to the Company's detriment. The Company expects
additional competition as other established and emerging companies enter the
secure software market and new products and technologies are introduced.
Increased competition could result in price reductions, fewer customer orders,
reduced gross margins and loss of market share, any of which could materially
adversely effect the Company's business, financial condition and results of
operations. Current and potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with third parties,
thereby increasing the ability of their product to address the needs of the
Company's prospective customers. The Company's current or future channel
partners may establish cooperative relationships with current or potential
competitors of the Company, thereby limiting the Company's ability to sell its
products through particular distribution channels. Accordingly, it is possible
that new competitors or alliances among current competitors may emerge and
rapidly gain significant market share. Such competition could materially
adversely affect the Company's ability to obtain new contracts and maintenance
and support renewals for existing contracts on terms favorable to the Company.
Further, competitive pressures could require the Company to reduce the prices of
its products and services, which could materially adversely affect the Company's
business, financial condition and results of operations. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors, and the failure to do so would have a material adverse
effect upon the Company's business, financial condition and results of
operations.
Need to Expand Sales and Support Organizations. The Company currently has
22 full-time employees and consultants. The Company intends to hire a
significant number of additional
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personnel in 1999 and beyond. Competition for qualified personnel is intense,
and there can be no assurance that the Company will be able to attract,
assimilate or retain such qualified personnel in the future. If the Company is
unable to hire and retain such personnel, particularly those in key positions,
the Company's business, financial condition and results of operations may be
materially adversely affected.
Risk of Default Under Primary Licenses. The Company's rights to the
CyberSentry Software and the ATM Technology under both the Assignment from
Templar and the Sub-Contract with Comtel, respectively, are subject to the risk
of default by Templar and Comtel, respectively, under the agreements (the
"Primary Licenses") pursuant to which these companies acquired the technology
rights assigned or sub-contracted to the Company. Any such default by Templar
or Comtel under the Primary Licenses would have a material adverse effect on the
Company's business, financial condition and results of operations. Item 7 -
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Bankruptcy, Merger and
Related Transactions."
Customer Concentration. The Company expects that a small number of
customers will account for a substantial portion of revenues of its CyberSentry
Software and ATM businesses. As a result, the loss of a major customer or a
decline in the usage of any such customer could have a material adverse effect
on the Company's business, financial condition and results of operations.
Dependence on Strategic Relationships. The Company believes that its
success in penetrating markets for its CyberSentry Software product application
will depend in part on its ability to develop and maintain strategic
relationships with key hardware and software vendors, distribution partners and
customers. The Company further believes that such relationships will be
important in order to validate the Company's technology, facilitate broad market
acceptance of the Company's products, and enhance the Company's sales, marketing
and distribution capabilities. The Company's inability to develop, attract or
retain strategic relationships, or the termination of one or more successful
relationships could have a material adverse effect on the Company's business
financial condition and results of operations. In addition, the Company expects
from time to time to license certain components from third parties, such as
security features, and to incorporate them into the Company's products. Failure
of such third parties to maintain or enhance their products could impair the
functionality of the Company's products and could require the Company to obtain
alternative products from other sources or to develop such software internally,
either of which could involve costs and delays as well as diversion of
engineering resources.
Risk Associated with New Versions of Software and New Products; Rapid
Technological Change. The Company's future growth depends on its successful and
timely introduction of new products and services in markets that do not
currently exist or are rapidly evolving. The markets for the Company's products
are characterized by rapid technological change, frequent new product
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introductions, changes in customer demands and evolving industry standards. The
introduction of products embodying new technologies and the emergence of new
industry standards can render existing products obsolete and unmarketable. The
Company's future success will depend upon its ability to address the
increasingly sophisticated needs of its customers by developing and introducing
enhancements to its software on a timely basis that keep pace with technological
developments, emerging industry standards and customer requirements. There can
be no assurance that the Company will be successful in developing and marketing
enhancements to its software that respond to technological change, evolving
industry standards or customer requirements, that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and sale of such enhancements or that such enhancements will
adequately meet the requirements of the marketplace and achieve any significant
degree of market acceptance. Companies that develop and publish software
frequently experience delays, sometimes very lengthy delays, in the release
dates of new products and product enhancements. Any material delay in the
release dates of the Company's future products or enhancements or any failure of
such future products or enhancements to achieve market acceptance when released,
could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that the
introduction or announcement of new product offerings by the Company or the
Company's competitors will not cause customers to defer or forego purchases of
current versions of the Company's software, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
Governmental Regulations. There are currently few laws or regulations
directly applicable to access to or commerce on the Internet; however, due to
the increasing popularity and use of the Internet, it is possible that a number
of laws and regulations may be adopted at the local, state, national or
international levels with respect to the Internet, covering issues such as user
privacy, pricing, taxation, advertising, intellectual property rights,
information security or the convergence of traditional communications services
with Internet communications. The Telecommunications Reform Act of 1996 imposes
criminal penalties (via the Communications Decency Act) on anyone who
distributes obscene communications on the Internet knowing that the recipient of
the communications is under 18 years of age. Other nations, including Germany,
have taken actions to restrict the free flow of material deemed to be
objectionable on the Internet. In addition, the applicability to the Internet
of existing laws governing issues such as property ownership, copyrights and
other intellectual property issues, taxation, libel and personal privacy is
uncertain. The vast majority of such laws were adopted prior to the advent of
the Internet and related technologies and, as a result, do not contemplate or
address the unique issues of the Internet and related technologies. Changes to
such laws or adoption of additional laws or regulations intended to address
these issues, including some recently proposed changes, could create uncertainty
in the marketplace which could reduce demand for the Company's products and
services, could increase the Company's cost of doing business as a result of
compliance, could result in litigation or could in some other manner have a
material adverse effect on the Company's business, financial condition and
results of operations.
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Risks of Infringement and Proprietary Rights. Because materials may be
downloaded by the search services which may be licensed by the Company to use
the CyberSentry Software, or may be copied and stored by customers that have
deployed the Company's CyberSentry Software product, and, in either case, may be
subsequently distributed to others, there is a potential that claims will be
made against the Company (directly or through contractual indemnification
provisions with customers) for negligence, copyright or trademark infringement
or other theories based on the nature and content of such materials. It is also
possible that if any information provided through the search services licensed
or facilitated by the Company or information that is copied and stored by
customers that have deployed CyberSentry Software such as stock quotes, analyst
estimates or other trading information, contains errors, third parties could
make claims against the Company for losses incurred in reliance on such
information. Although the Company carries general liability insurance, the
Company's insurance may not cover potential claims of this type or may not be
adequate to indemnify the Company for all liability that may be imposed. Any
imposition of liability or legal defense expenses that is not covered by
insurance or that is in excess of insurance coverage, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company's success and ability to compete in the Internet services
business will be substantially dependent upon its acquired and internally
developed technology. While the Company relies on copyright, trade secret and
trademark law to protect its technology, the Company believes that factors such
as the technological and creative skills of its personnel, new product
developments, frequent product enhancements and reliable product maintenance are
more essential to establishing and maintaining a technology leadership position.
There can be no assurance that others will not develop technologies that are
similar or superior to the Company's technology. The Company will generally
enter into confidentiality or license agreements with its employees, consultants
and corporate partners, and will generally control access to and distribution
of its software, documentation and other proprietary information. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy or otherwise obtain and use the Company's products or
technology. Policing unauthorized use of the Company's products is difficult,
and there can be no assurance that the steps taken by the Company will prevent
misappropriation of its technology, particularly in foreign countries where the
laws may not protect the Company's proprietary rights as fully as do the laws of
the United States. Substantial litigation regarding intellectual property
rights exists in the software industry, and the Company expects that software
products may be increasingly subject to third party infringement claims with the
growing number of competitors and the increased functionality of products in
different industry segments. There can be no assurance that third parties will
not claim infringement by the Company with respect to its software or
enhancements thereto. Any such claims, with or without merit, could be time
consuming to defend, result in costly litigation, divert management's attention
and resources, cause product shipment delays or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, if at all. A
successful claim
21
<PAGE>
of product infringement against the Company and failure or inability of the
Company to license the infringed or similar technology could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Risks Associated with Electronic Credit Card Business
The Company intends to issue a national electronic commerce credit card and
provide a clearance system for electronic credit card settlement. The Company
will generally bear the same credit risk normally assumed by other providers of
these systems arising from returned transactions caused by closed accounts,
frozen accounts, unauthorized use, disputes, theft or fraud. Any relationship
the Company establishes with providers of merchant card services such as VISA
and MasterCard could be adversely affected by excessive uncollectibles or charge
backs, which are generally higher in the telephone industry than in other
industries, particularly with respect to recharges because the transaction
typically is not on a face to face basis in which a cardholder signature is
captured. Termination of the Company's ability to offer recharge through
merchant card services would have a material adverse effect on the Company. To
minimize financial exposure, the Company will limit the amount that consumers
can recharge within specified time frames. From time to time persons may obtain
services without rendering payment to the Company by unlawfully utilizing the
Company's access numbers and personal identification numbers ("PIN's"). No
assurance can be given that future losses due to unauthorized use will not be
material. The Company will attempt to manage these credit, theft and fraud
risks through internal controls, monitoring and blocking systems. The Company
maintains no reserves for such risks. There can be no assurance that the
Company's risk management practices or reserves which it may establish in the
future will be sufficient to protect the Company from unauthorized or returned
transactions or thefts of services which could have a material adverse effect on
the Company.
22
<PAGE>
ITEM 2. FINANCIAL INFORMATION
---------------------
Selected Financial Data
The selected financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the financial statements and the notes thereto of CyberSentry and
TSC included elsewhere in this Form 10. As of March 24, 1999, TSC was acquired
by CyberSentry, with CyberSentry being the surviving corporation. CyberSentry
was a development stage enterprise with minimal operations in 1998. TSC has been
operating since 1991 and is the primary operating entity. The selected
historical financial information of TSC as of and for the years ended December
31, 1995 and 1994 are derived from unaudited financial statements of TSC not
included or incorporated by reference herein. The selected financial data set
forth below for TSC as of and for the years ended December 31, 1998, 1997 and
1996 and for CyberSentry as of December 31, 1998 and for the period from August
21, 1998 (inception) through December 31, 1998 are derived from the audited
financial statements of TSC and Cybersentry included elsewhere in this Form 10,
which have been audited by BDO Seidman L.L.P., independent accountants. The
selected historical financial information of TSC as of March 24, 1999 and for
the period from January 1, 1999 through March 24, 1999 and CyberSentry as of
June 30, 1999 and for the six months then ended are derived from unaudited
financial statements of TSC, and CyberSentry included elsewhere herein and in
the opinion of management, include all adjustments, consisting only of normal
recurring adjustments necessary for a fair representation of the financial
information. Operating results for the interim periods are not necessarily
indicative of the results of TSC or CyberSentry that may be expected for the
entire year. TSC's financial statements following its emergence from bankruptcy
will not be comparable to the historical financial statements contained herein,
which do not reflect the plan of reorganization. TSC's and CyberSentry's
historical financial statements may not be indicative of future performance.
Telecommunications Service Center, Inc./1/
Years Ended December 31,
<TABLE>
<CAPTION>
For the period from
January 1, 1999
through March 24, (Unaudited) (Unaudited)
1999 1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
(Unaudited)
-------------------
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales $ 811,316 $ 22,804,240 $ 8,341,164 $ 2,606,254 $ 2,493,409 $ 1,100,189
Operating expenses 1,130,659 26,042,048 11,024,545 3,663,781 3,266,917 1,095,621
------------------- ------------- ------------- ------------- ------------- -------------
Operating (loss) income (319,343) (3,237,808) (2,683,381) (1,057,527) (773,508) 4,568
Other (expense) income (56,277) (175,257) (354,959) (205,932) 46,671 -
------------------- ------------- ------------- ------------- ------------- -------------
Net (loss) income (375,620) (3,413,065) (3,038,340) (1,263,459) (726,837) 4,568
=================== ============= ============= ============= ============= =============
Net (loss) income per share
Basic $ (187.81) $ (1,706.53) $ (1,519.17) $ (631.73) $ (726.84) $ 4.57
Weighted average number of
outstanding shares
Basic 2,000 2,000 2,000 2,000 1,000 1,000
</TABLE>
_____________
/1/ On May 7, 1998, the Telecommunications Service Center, Inc. filed for
relief under Chapter 11 of the United Stated Bankruptcy Code in the Middle
District of Florida, Tampa Division. On March 4, 1999, the Bankruptcy Court
confirmed the plan of reorganization and on March 14, 1999 the plan of
reorganization became effective (pending the acquisition of TSC by
CyberSentry).
23
<PAGE>
<TABLE>
<CAPTION>
Balance Sheet Data:
<S> <C> <C> <C> <C> <C> <C>
Total assets 1,420,962 1,519,559 2,493,896 1,881,856 896,044 475,242
Short-term debt including
current portion of
long-term debt - - 866,127 561,032 289,586 -
Liabilities subject to
Compromise under
reorganization proceedings 8,133,313 8,097,928 - - - -
Long-term debt - - 4,409,783 2,399,352 548,675 444,675
Capital deficit (8,806,232) (8,430,612) (5,017,547) (1,979,207) (716,748) (18,062)
</TABLE>
CyberSentry, Inc.
<TABLE>
<CAPTION>
(Unaudited) For the period from
For the six August 21, 1998
months ended (inception) through
June 30, 1999 (a) December 31, 1998
--------------------- ------------------------
<S> <C> <C>
Income Statement Data:
Net sales $ 1,093,396 $ -
Operating expenses 2,208,605 326,485
--------------------- ------------------------
Operating loss (1,115,209) (326,485)
Other expense (38,710) -
--------------------- ------------------------
Net loss (1,153,919) (326,485)
===================== ========================
Net loss per share
Basic ($.09) ($.03)
Diluted ($.09) ($.03)
Weighted average number of outstanding
shares
Basic 13,108,288 10,500,000
Diluted 13,108,288 10,500,000
Balance Sheet Data:
Total assets $ 17,947,371 $ 5,814,896
Short-term debt including current portion
of long-term debt 923,521 76,181
Redeemable convertible preferred stock 801,984 -
Stockholders' equity 13,720,868 5,726,215
</TABLE>
(a) Includes the operations of TSC from March 25, 1999 through June 30, 1999
24
<PAGE>
Pro Forma Selected Financial Data
Year Ended December 31, 1998
(Unaudited)
<TABLE>
<S> <C>
Income Statement Data:
Net sales $ 22,804,240
Operating expenses 27,499,156
----------------
Operating loss (4,694,916)
Other expense, net (205,401)
----------------
Net loss (4,900,317)
================
Net loss per share
Basic ($.43)
Diluted ($.43)
Weighted average number of outstanding shares
Basic 11,500,000
Diluted 11,500,000
</TABLE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward looking statements based upon current
expectations that involve risks and uncertainties. The Company's actual results
and the timing of certain events could differ materially from those anticipated
in these forward looking statements as a result of certain factors, including
those set forth under "Risk Factors" and elsewhere in this Form 10.
25
<PAGE>
Overview
CyberSentry, Inc., a Delaware corporation ("CyberSentry"), was incorporated in
Delaware on August 21, 1998 as Telecommunications Services, Inc. and
subsequently amended its certificate of incorporation to change the
corporation's name to CyberSentry, Inc. Telecommunications Service Center, Inc.,
a Florida corporation ("TSC"), was formed on July 15, 1991 and, on May 7, 1998,
filed for bankruptcy protection in Florida. See Item 7 - "CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS - Bankruptcy, Merger and Related Transactions" for
further description. Effective March 24, 1999, CyberSentry purchased all of the
outstanding shares of TSC for common and preferred stock valued at $2,500,000
and CyberSentry is the surviving corporation (the "Corporation" or the
"Company"). See Item 7 - "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -
Bankruptcy, Merger and Related Transactions" for further description. The
acquisition was accounted for as a purchase. 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 approximately $11,306,232 is recorded as
excess of cost over fair value of net assets acquired, and is being amortized on
a straight-line basis over 10 years. Since CyberSentry is a development stage
enterprise with minimal operations in 1998, TSC is treated as the predecessor
corporation due to the significance of its operations.
CyberSentry has only recently begun to market the CyberSentry Software and to
date has no sales. CyberSentry is currently developing a CyberSentry browser
and CyberSentry card for use by customers both on and off the Internet. The
CyberSentry Software protects 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 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. See "Risk Factors."
CyberSentry has obtained the right to develop and sell in the United States and
Canada certain Asynchronous Transfer Mode technology ("ATM" or "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.
In the last five years, TSC has been 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
26
<PAGE>
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.
TSC currently provides 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. TSC offers a comprehensive service package that
includes both automated and operator-assisted programs.
CyberSentry acquired TSC effective March 24, 1999 and CyberSentry has a limited
operating history upon which it can be evaluated. Any investment in the Company
must be considered in light of the risks, expenses and difficulties frequently
encountered by companies in an early stage of development in new and rapidly
evolving markets. See "Risk Factors."
Results of Operations
The following table sets forth selected financial data of TSC stated as a
percentage of net sales:
<TABLE>
<CAPTION>
Six months Six months
ended June 30, ended June 30, Years ended December 31,
----------------------------------
1999 1998 1998 1997 1996
--------- --------- ---------
(Unaudited)/(a)/ (Unaudited)
------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Telecommunications costs 85.2 93.1 97.7 97.3 88.4
Selling, general and administrative expenses 16.5 34.9 52.1
(including depreciation and amortization expense) 49.0 18.8
Operating loss (34.2) (11.9) (14.2) (32.2) (40.5)
Other expense, net (4.4) (1.6) (.8) (4.2) (8.0)
Net loss (38.6) (13.5) (15.0) (36.4) (48.5)
</TABLE>
(a) Detailed for comparative purposes only; results include post acquisition
operations and do not reflect acquisition adjustments.
27
<PAGE>
Six months ended June 30, 1999 to 1998
Net sales decreased by $12,607,255, or 87% from $14,511,967 for the six months
ended June 30, 1998, to $1,904,712 for the six months ended June 30, 1999. Of
this decrease, $10,446,435 was due to decreased volume in the Local Exchange
Carrier ("LEC") billing programs with PCI, Accutel and Valutel. Additionally,
$1,943,089 of the decrease was due to decreased volume in the LD(1+), Call 1-800
and LD(T-1's) programs. Increased costs associated with LEC billing programs
and a more stringent regulatory environment prompted the Company to either
discontinue or cut back certain programs. The Company discontinued the Accutel
program during 1998. The Company anticipates that revenues will continue to
decrease in the LEC billing programs during 1999. The decrease in the LD(1+)
program was primarily due to the poor credit condition of the customer base
obtained through the Grace Trust Transaction. See Item 7 - "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS - Bankruptcy, Merger and Related
Transactions" for further description of the Grace Trust Transaction. The
Company will continue to build the (1+) and (T-1) programs through increased
marketing efforts and credit screening of the customer base.
Telecommunications costs decreased with the decrease in revenue by $11,891,628
or 88%, from $13,513,977 for the six months ended June 30, 1998, to $1,622,349
for the six months ended June 30, 1999. As a percentage of net sales, these
amounts represented 93% for 1998 as compared to 85% for 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.
TSC's selling, general and administrative expenses decreased $1,800,636, or 72%
from $2,514,162 for the six months ended June 30, 1998 to $713,526 for the six
months ended June 30, 1999. The overall dollar decrease in selling, general and
administrative expenses was primarily attributable to bad debts in 1998. Also
see discussion that follows for 1998 compared to 1997. As a percentage of net
sales, these amounts represented 17% for 1998 as compared to 37% for 1999. The
increase as a percentage of net sales was attributable to the decrease in net
sales and TSC's inability to maintain an efficient cost structure in 1999.
Depreciation and amortization expense decreased $2,172 from $220,186 for the six
months ended June 30, 1998 to $218,014 for the six months ended June 30, 1999.
The overall dollar decrease is insignificant.
Other expense, net decreased by $127,903, or 57%, from $222,890 for the six
months ended June 30, 1998 to $94,987 for the six months ended June 30, 1999.
Other expense, net consists primarily of interest expense. The decrease was
attributable to decreased debt balances in 1999.
Principally as a result of the factors described above, TSC incurred a net loss
of $(1,959,248) for the six months ended June 30, 1998 as compared to a net loss
of $(744,164) for the six months ended June 30, 1999.
Fiscal year ended 1998 Compared to 1997
Net sales increased by $14,463,076, or 173%, from $8,341,164 for the year ended
December 31, 1997, to $22,804,240 for the year ended December 31, 1998. Of this
increase, $13,510,034 was due to increased volume in the LEC billing programs
with PCI, Accutel and Valutel and a
28
<PAGE>
$2,274,605 increase in (1+) long distance program. Increased costs associated
with LEC billing programs and a more stringent regulatory environment prompted
the Company to either discontinue or cut back certain programs. The Company
discontinued the Accutel program during 1998. The increase in revenue from the
(1+) long distance program during 1998 was due to increased volume resulting
from the Grace Trust Transaction. See Item 7 - "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS - Bankruptcy, Merger and Related Transactions" for a
further description of the Grace Trust Transaction. Although the Company
experienced increased volume and revenue from the Grace Trust Transaction, there
was also an increase in bad debts from the poor credit condition of the customer
base. Such increases were offset by a $865,281 decrease in the travel card and
(T-1) long distance programs.
Telecommunication costs increased to support the increased revenue by
$14,170,417 or 175%, from $8,112,840 for the year ended December 31, 1997, to
$22,283,257 for the year ended December 31, 1998. As a percentage of net sales,
these amounts represented 97% for 1997 as compared to 98% for 1998. The amounts
as a percentage of net sales are consistent from 1997 to 1998.
TSC's selling, general and administrative expenses increased $786,574, or 31%,
from $2,532,845 for the year ended December 31, 1997 to $3,319,419 for the year
ended December 31, 1998. As a percentage of net sales, these expenses decreased
from 30% for 1997 to 15% for 1998. The overall dollar increase in selling,
general and administrative expenses was primarily attributable to bad debts in
1998. The increase in bad debts in 1998 was attributable to customer accounts
written off in connection with the Grace Trust Transaction and the Accutel
program that ended in 1998. See Item 7 - "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS - Bankruptcy, Merger and Related Transactions" for a further
description of the Grace Trust Transaction. To reduce bad debts during 1999 the
Company discontinued service for the customer accounts relating to the Grace
Trust Transaction, and has increased credit screening for new customers. The
decrease in these expenses as a percentage of net sales was attributable to the
increase in net sales and TSC's ability to increase revenues and maintain an
efficient cost structure in 1998.
Depreciation and amortization expense increased $60,512 or 16%, from $378,860
for the year ended December 31, 1997 to $439,372 for the year ended December 31,
1998. The overall dollar increase was attributable to equipment purchased in
mid-year 1997 that have depreciation for a portion of 1997 and a full year of
depreciation in 1998.
Other expense, net decreased by $179,702, or 51%, from $354,959 for the year
ended December 31, 1997 to $175,257 for the year ended December 31, 1998. Other
expense, net consists of gains from the sale of marketable securities in 1998
amounting to $227,251, offset by an increase of $47,549 in interest expense in
1998.
Principally as a result of the factors described above, the Company incurred a
net loss of $(3,413,065) for the year ended December 31, 1998 as compared to a
net loss of $(3,038,340) for the year ended December 31, 1997.
29
<PAGE>
Fiscal year ended 1997 Compared to 1996
Net sales increased by $5,734,910 or 220%, from $2,606,254 for the year ended
December 31, 1996, to $8,341,164 for the year ended December 31, 1997. Of this
increase, $5,369,465 was due to increases in the LEC billing programs with PCI,
Aliantel and Accutel and, a $1,723,775 increase in debit card, (T-1) and (1+)
long distance programs. Such increases were offset by a $1,515,063 decrease in
travel cards, ICB and private pay phone programs.
Telecommunications costs increased by $5,807,817, or 252%, from $2,305,023 for
the year ended December 31, 1996, to $8,112,840 for the year ended December 31,
1997. As a percentage of net sales, these amounts represented 88.4% for 1996 as
compared to 97.3% for 1997. The increase in telecommunications costs as a
percentage of revenues primarily was due to increased fees and commissions for
the Hold/PCI program.
TSC's selling, general and administrative expenses increased $1,387,606 or 121%,
from $1,145,239 for the year ended December 31, 1996 to $2,532,845 for the year
ended December 31, 1997. As a percentage of net sales, these expenses decreased
from 44% in 1996 to 30% in 1997. The overall dollar increase in selling,
general and administrative expenses was primarily attributable to a $610,107
increase in bad debts, a $203,958 increase in legal and professional fees and a
$114,081 increase in salaries and wages. The increase in bad debts was
attributable to accounts written off associated with the Call 1-800 program.
The increase in legal and professional fees resulted from increased accounting
fees for audits of prior years and increased legal fees from pending litigation.
The increase in salaries and wages was due primarily to the use of more
temporary agency employees and contract labor in 1997. The decrease in these
expenses as percentage of net sales was attributable to the increase in net
sales and TSC's ability to increase revenues and maintain an efficient cost
structure in 1997.
Depreciation and amortization expense increased $165,341 or 77%, from $213,519
for the year ended December 31, 1996 to $378,860 for the year ended December 31,
1997. The overall dollar increase was attributable to depreciation on the
Siemens switching equipment purchased under capital lease in 1997.
Other expense, net increased $149,027 or 72%, from $205,932 for the year ended
December 31, 1996 to $354,959 for the year ended December 31, 1997. The
increase was attributable to a $221,893 increase in interest expense which
consisted primarily of interest expense related to the capital lease for the
Siemens switching equipment purchased in 1997 and increased borrowings on the
bank line of credit. The increase was offset by a loss on the sale of assets of
$76,203 in 1996.
Principally as a result of the factors described above, the Company incurred a
net loss of $(3,038,340) for the year ended December 31, 1997 as compared to a
net loss of $(1,263,459) for the year ended December 31, 1996.
30
<PAGE>
The following relates to the operations of CyberSentry, Inc.
Six months ended June 30, 1999
Net sales amounted to $1,093,396 for the six months ended June 30, 1999. The
Company did not generate any revenues from its internet segment for the six
months. The net sales for the six months resulted from the Company's
telecommunications segment. Also see management's discussion and analysis
relating to TSC's results of operations for the six months ended June 30, 1999
compared to the six months ended June 30, 1998.
Telecommunications costs amounted to $919,826 for the six months ended June 30,
1999. The costs exclusively relate to the Company's telecommunications segment.
Also see management's discussion and analysis relating to TSC's results of
operations for the six months ended June 30, 1999 compared to the six months
ended June 30, 1998.
Selling, general and administrative expenses amounted to $440,386 for the six
months ended June 30, 1999. These expenses were primarily comprised of salaries
and related expenses of approximately $300,000 and various other selling,
general and administrative expenses with less significant balances.
Depreciation and amortization amounted to $848,393 for the six months ended June
30, 1999. 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. The amortization expense relating to the acquired intangibles amounted to
$302,790, and the amortization of the CyberSentry and ATM technology amounted to
$428,572.
Other expenses amounted to $38,710 for six months ended June 30, 1999 and
consists of interest expense. The Company incurred interest expense relating to
its debt outstanding during 1999.
As a result of the factors described above, the Company incurred a net loss of
$(1,153,919) for the six months ended June 30, 1999.
For the Period from August 21, 1998 (inception) through December 31, 1998
CyberSentry was incorporated in Delaware on August 21, 1998 and has only
recently begun marketing the CyberSentry Software and the ATM Technology is
still in the developmental stage. As such there was no sales of either product
during 1998.
Operating expenses amounted to $326,485. This amount was comprised of $250,000
of amortization of the CyberSentry Software and ATM technology and $76,485 of
general and administrative expenses. General and administrative expenses
primarily relate to costs incurred in connection with software support and legal
and accounting fees.
31
<PAGE>
As a result of the factors described above, CyberSentry incurred a net loss of
$(326,485) for the period from August 21, 1998 (inception) through December 31,
1998.
Liquidity and Capital Resources
On May 7, 1998, TSC filed a voluntary petition for relief under Chapter 11 of
the United States Bankruptcy Code in the Middle District of Florida, Tampa
Division. After the filing, TSC operated its business in the ordinary course as
debtor-in-possession subject to the jurisdiction of the Bankruptcy Court. On
March 4, 1999, the Bankruptcy Court confirmed TSC's Second Amended Plan of
Reorganization (the "Plan") and the Plan became effective on March 14, 1999
(pending the acquisition by CyberSentry). Effective March 24, 1999, TSC was
acquired by CyberSentry. CyberSentry was the surviving corporation and the
separate existence of TSC ceased.
The filing enabled TSC to stabilize its liquidity position because the cash
requirements for the payment of accrued interest, accounts payable and other
liabilities, which arose prior to the filing, were in most cases deferred until
the Plan was approved by the Bankruptcy Court.
Management expects to finance the Company's short-term working capital and
capital expenditure requirements through cash generated by its operations, its
existing line of credit and through financing from one of its shareholders. The
ability of the Company to receive financing from one of its shareholders is
contingent upon that shareholder's ability to sell its investment in the common
stock of the Company. There is no assurance that the shareholder will be
successful in selling the common stock. Pursuant to the purchase, 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. The Company will
pay its shareholder monthly interest payments 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. See Item 7 - "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS - Bankruptcy, Merger and Related Transactions."
Operating
Net cash used in operating activities for the Company amounted to $444,494 for
the six months ended June 30, 1999. This was primarily attributable to the net
loss of ($1,153,919) and the increase in prepaid expenses and other assets of
$140,305, offset by an adjustment for depreciation and amortization of $848,393.
Net cash used in operating activities for TSC amounted to $1,657,417 in fiscal
year 1997 as compared to $403,704 of net cash provided by operating activities
in fiscal year 1998. The favorable variance of $2,061,121 was primarily
attributable to the increase in accounts payable of $1,660,732, an increase in
bad debts of $1,312,511, offset by a decrease in accrued expenses of $423,797
and an increase of $374,725 in the net loss.
32
<PAGE>
Net cash used in operating activities for CyberSentry amounted to $126,181 for
the period from August 21, 1998 (inception) to December 31, 1998. This was
primarily attributable to the net loss of $326,485 and the increase in other
receivables and other assets of $64,896, offset by an adjustment for
amortization of $250,000.
Investing
Net cash used in investing activities for TSC decreased from $41,167 in fiscal
year 1997 to $7,833 in fiscal year 1998 as a result of TSC purchasing less
equipment in fiscal year 1998.
Financing
Net cash provided by financing activities for the Company amounted to $446,701
for the six months ended June 30, 1999. This was attributable to financing
received from the sale of common stock of $500,000, from a shareholder and
through the line of credit of $158,319, offset by payments on the bank note of
$211,618.
Net cash provided by financing activities for TSC amounted to $1,714,383 in
fiscal year 1997, reflecting $1,838,364 of net proceeds from a note payable to a
stockholder (described below), and $197,589 from the factoring line of credit,
offset by $86,952 of payments on the bank line of credit and note payable and
$234,618 of payments on capital lease obligations. This compares to net cash
used in financing activities of $408,087 in fiscal year 1998, primarily
representing repayments on bank debt, the factoring line of credit and capital
leases, offset by a $196,042 increase in note payable to a stockholder.
Net cash provided by financing activities for CyberSentry amounted to $126,181
for the period from August 21, 1998 (inception) to December 31, 1998. This was
attributable to an increase in due to shareholder of $76,181 and the proceeds
from the sale of common stock of $50,000.
TSC also had an existing line of credit collateralized by substantially all of
TSC's assets, providing for borrowings up to $300,000 (see Note 6 of "Notes to
Financial Statements" of TSC for a description of this line of credit). TSC had
outstanding borrowings of $255,000 and $260,872 under the existing line of
credit at December 31, 1998 and 1997, respectively. During 1999, the Company
exceeded the allowed borrowings under the terms of the line of credit agreement
and the bank demanded payment of the outstanding balance on the line. In July
1999, the Company paid the outstanding balance on the line of approximately
$329,000 from financing received from one of its shareholders.
33
<PAGE>
TSC had an unsecured note payable to a stockholder outstanding at December 31,
1998 amounting to $3,660,000. The amounts outstanding included accrued interest.
Pursuant to the Plan the shareholder was entitled to receive $.07 in cash and
the value of $.93 in a share of Class A Preferred Stock ($1.50 stated value) of
the Company for every $1.00 of unsecured claim. See Item 7 - "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS - Bankruptcy, Merger and Related
Transactions."
TSC also had a note payable with a bank that was collateralized by substantially
all of TSC's assets. The note was guaranteed by the TSC's stockholders. The
balance outstanding at December 31, 1998 and 1997 amounted to $222,292 and
$215,266, respectively. Pursuant to the Plan, the bank was paid in accordance
with the terms of the note. During 1999, the Company was in default of payments
on the note and the bank demanded payment of the outstanding balance. In July
1999, the Company paid the outstanding balance on the note of $181,818 from
financing received from one of its shareholders.
On July 9, 1997, TSC entered into a factoring agreement providing a line of
credit for up to $1,000,000 based on 90% of the eligible accounts receivable.
The term of the agreement was for one year with an option to extent for one year
thereafter. TSC did not exercise its options to extend the factoring agreement
in 1998.
Lease Obligations
See Note 10 of the TSC "Notes to Financial Statements" for discussion of the
TSC's lease obligations.
Future Adoption of New Accounting Statements
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 requires computer
software costs associated with internal use software to be expensed as incurred
until certain capitalization criteria are met. The Company adopted this SOP on
January 1, 1999. Adoption of this statement had no material impact on the
Company's financial position, results of operations, or cash flows.
In April 1998, the AICPA issued Statement of Position (SOP) 98-5, "Reporting on
the Costs of Start-Up Activities," provides guidance on the financial reporting
of start-up costs and organization costs. It requires costs of start-up
activities and organization costs to be expensed as incurred. The SOP is
effective for financial statements for fiscal years beginning after December 15,
1998. Adoption of this SOP had no material impact on the Company's financial
position, results of operations, or cash flows.
In June 1998, the Financial Accountant Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires
that an entity recognize all derivatives as either assets or
34
<PAGE>
liabilities in the statement of financial position and measure those instruments
at fair value. The statement applies to all entities and is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The Company did
not engage in derivative instruments or hedging activities in any periods
presented in the financial statements and management does not expect this
statement to have a material impact on the Company's financial position, results
of operations, or cash flows.
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 has made plans
to update the billing software for its IBM AS400 billing platform to make it
Year 2000 compliant, and has been provided with the software upgrade which the
Company believes will make its Siemens high-volume gateway switch Year 2000
compliant. The Company's contingency plan for the Year 2000 risk is to download
copies of all records, software and data to a mass storage media, most likely CD
Rom, in order that it may be reinstalled in the event that any data is corrupted
or lost. The Company has been advised by its major vendors that they are Year
2000 compliant.
The Company intends to establish procedures for evaluating and managing the
risks and costs associated with the Year 2000 problem and 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 spent approximately $10,000 to date on upgrading its
systems to make them Year 2000 compliant, and expects to spend approximately
$24,000 more in such efforts, primarily to upgrade the Company's computer
hardware in order to operate the new Year 2000 compliant software.
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.
35
<PAGE>
ITEM 3. PROPERTIES
The corporate headquarters and principal executive offices of the Company
are located at 412 East Madison Street, Suite 1200, Tampa, Florida. The
Company's use of this office is pursuant to two lease agreements which expire on
June 30, 2000 and June 30, 2001, respectively (the "Leases"). Copies of the
Leases are attached hereto as Exhibits 10.7 and 10.8 and are incorporated herein
by reference.
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<PAGE>
The Company believes that its leased property is in good condition, is well
maintained and is adequate for the Company's current and immediately foreseeable
operating needs.
The Company anticipates that it will be leasing additional office space and
switch facilities, as necessary, including space in New York City.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth certain information regarding beneficial
ownership of the Company's capital stock as of June 30, 1999 by (i) each person
who is known by the Company to beneficially own more than five percent of any
class of the Company's capital stock, (ii) each of the Company's directors,
(iii) each of the executive officers named in the Summary Compensation Table set
forth in Item 6 - "EXECUTIVE COMPENSATION", and (iv) all directors and
executive officers of the Company as a group. Unless otherwise indicated, the
address of each individual named in the following tables is c/o CyberSentry,
Inc., 412 East Madison Street, Suite 1200, Tampa, Florida 33602.
37
<PAGE>
Common Stock
------------
<TABLE>
<CAPTION>
Number of Shares Percentage of Total Shares
of Common Stock of Common Stock
Beneficially Owned/1/ Beneficially Owned
----------------------------- -----------------------------------
Name and Address of Beneficial Owner Outstanding Fully Diluted/2/ Outstanding Fully Diluted/2/
- ------------------------------------ ----------- ---------------- --------------- ------------------
<S> <C> <C> <C> <C>
Sinclair Partners Limited Partnership/3/
97 Church Road
Easton, Connecticut 06612 6,000,000 6,000,000 43.6% 27.4%
Digital Rights International, Inc.
c/o LibertyOne Limited
80 McLachlan Avenue
Rushcutters Bay
Sydney NSW 2011 Australia 500,000 2,500,000 3.6 11.4
Templar Corporation/4/
43 Deshon Avenue
Bronxville, New York 10708 700,000 700,000 5.1 3.2
Patriot Advisors, Inc./4, 5/
43 Deshon Avenue
Bronxville, New York 1070 500,000 500,000 3.6 2.3
David Veltman
3130 Tiffany Drive
Bellair Beach, Florida 34635 258,765 2,550,686 1.9 11.7
Raoul Boille
Marina Office, Suite 5
Sandy Bay Road
Clontral SW 2093 Australia 250,000 511,526 1.8 2.3
RSL Comm. U.S.A., Inc. /5/ - 850,062 - 3.9
c/o Westinghouse Communications
1001 Brinton Road
Pittsburgh, PA 15221-4533
Sprint Communications Company L.P./5/ - 545,705 - 2.5
8140 Ward Parkway
Kansas City, MO 64114-2006
Gerald Resnick and Helene Resnick/6/ 4,500,000 5,000,000 32.7 22.9
Hal Shankland/7/ 750,000 1,600,000 5.5 7.3
Phillip Gambell 225,000 225,000 1.6 1.0
Steven Frank/8/ - 50,000 - 0.2
All directors and executive officers as a
group (last 4 persons listed) 5,475,000 6,875,000 39.8 31.5
</TABLE>
/1/ Beneficial ownership is determined in accordance with the rules of
the Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Except as indicated by footnotes
and subject to community property laws, where
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<PAGE>
applicable, the persons named above have sole voting and investment power with
respect to all shares of Common Stock or Preferred Stock, as the case may be,
shown as beneficially owned by them.
/2/ For purposes of this table, the number of "fully diluted" shares of
Common Stock means the number of shares of Common Stock that would be
outstanding, assuming the exercise of all outstanding options and the conversion
of all outstanding shares of Preferred Stock, whether or not such options are
then exercisable or such shares of Preferred Stock are then convertible. The
number of fully diluted shares of Common Stock, and the percentage of total
fully diluted shares of Common Stock, beneficially owned by a person are equal
to the number of votes, and the percentage of total votes, which that person is
entitled to cast at a meeting of shareholders in the election of directors
(other than the director elected by the holders of shares of Class A Preferred
Stock) and on all other matters requiring a stockholder vote or other
stockholder action by the holders of Common Stock. Thus, the term "fully
diluted" is used here only as a useful shorthand description, and does not have
the same meaning as it would have in an accounting contact.
/3/ Includes 500,000 shares beneficially owned by Sinclair Advisors, Ltd.,
a Connecticut corporation ("SAL"). SAL is the sole general partner of Sinclair
Partners, Limited Partnership, a Connecticut limited partnership ("SPLP"), whose
only limited partners are Patriot Advisors, Inc ("Patriot") and Templar
Corporation ("Templar"). Pursuant to the governing documents of SPLP, SAL has
the sole voting and dispositive power over the shares of Common Stock held by
SPLP. Francis Conklin is the sole shareholder and Chief Executive Officer of
SAL. SPLP has agreed to certain restrictions on the transferability and the
exercise of voting rights with respect to the shares of Common Stock held by it.
See Item 7 - "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -Bankruptcy, Merger
and Related Transactions".
/4/ Frank Kristan is the sole shareholder and Chief Executive Officer of
Templar and Patriot. Mr. Kristan, Patriot, Templar and the Company have entered
into a shareholders' agreement which restricts the voting rights and the
transferability of the shares of the Company's capital stock held by such
persons. SPLP has also agreed to be bound by the provisions of this agreement
with respect to the shares of Common Stock held by it. See Item 7 - "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS - Bankruptcy, Merger and Related
Transactions".
/5/ Patriot has entered into Stock Purchase Agreements with each of
Sprint Communications Company L.P. ("Sprint") (the "Sprint Agreement") and RSL
Com U.S.A., Inc. ("RSL") (the "RSL Agreement") pursuant to which Patriot has
agreed to purchase at specified times specified amounts of shares of Class A
Preferred Stock owned by RSL (the "RSL Shares") and Sprint (the "Sprint
Shares"), respectively. Under the Sprint Agreement, Patriot agreed to purchase
from Sprint at $1.50 per share (i) 54,000 Sprint Shares within 30 days after
confirmation of the Plan, (ii) 74,087 Sprint Shares within 90 days after
confirmation of the Plan, (iii) at the option of Sprint, all or part of the
balance of Sprint Shares during the period (subject to extension) between 180
days and 455 days after confirmation of the Plan and (iv) if Sprint still owns
any Sprint Shares after the end of that 455-day period (as extended), all of the
remaining Sprint Shares. Under the RSL Agreement, Patriot agreed to purchase
from RSL at $1.50 per share (i) 53,564 RSL Shares
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<PAGE>
within 30 days after confirmation of the Plan, (ii) 74,395 RSL Shares within 90
days after confirmation of the Plan, (iii) at the option of RSL, all or part of
the balance of RSL Shares during the period (subject to extension) between 180
days and 455 days after confirmation of the Plan and (iv) if RSL still owns any
RSL Shares after the end of that 455-day period (as extended), all of the
remaining RSL Shares. To the extent that such options are exercised by RSL
and/or Sprint, the shares of Class A Preferred Stock owned by such entities
would decrease by such amounts and the shares of Class A Preferred Stock owned
by Patriot would increase by such amounts.
/6/ The Company has issued to Mr. Resnick an option to purchase
500,000 shares of Common Stock exercisable at $1.00 per share during the term of
his employment agreement with the Company and for one year thereafter. See Item
6 -"EXECUTIVE COMPENSATION - Employment Agreements." The table includes the
shares of Common Stock subject to that option.
/7/ The Company has issued to Mr. Shankland an option to purchase
100,000 shares of Common Stock exercisable at $1.00 per share (for the first
year) and at fair market value (after the first year) during the term of his
employment agreement with the Company. See Item 6 - "EXECUTIVE COMPENSATION -
Employment Agreements." The table includes the shares of Common Stock subject to
that option.
/8/ The Company has authorized the issuance to Mr. Frank of an
option to purchase 50,000 shares of Common Stock exercisable at $1.10 per share
for three years. The table includes the shares of Common Stock subject to that
option.
40
<PAGE>
Class A Preferred Stock/1/
-----------------------
<TABLE>
<CAPTION>
Number of Shares of Percentage of Total Shares
Class A Preferred Stock of Class A Preferred Stock
Name and Address of Beneficial Owner Beneficially Owned/2/ Beneficially Owned/2/
- ------------------------------------ --------------------------- --------------------------
<S> <C> <C>
David M. Veltman
3130 Tiffany Drive
Bellair Beach, Florida 34635 2,291,921 51.5
RSL Comm. U.S.A., Inc./3/
c/o Westinghouse Communications
1001 Brinton Road
Pittsburgh, PA 15221-4533 850,062 19.1
Sprint Communications Company L.P./3/
8140 Ward Parkway
Kansas City, MO 64114-2006 545,705 12.3
Worldcom
P.O. Box 730426
Dallas, TX 75373-0426 399,859 9.0
Raoul Bouille 11,526 0.3
Marina Office, Suite 5
Sandy Bay Road
Central SW 2011 Australia
</TABLE>
/1/ Each share of Class A Preferred Stock may be converted at the option
of the holder into one share of Common Stock (subject to adjustment in certain
events) at any time from and after March 25, 2001 and through March 24, 2004.
The holders of shares of Class A Preferred Stock are entitled to elect one
director as a class and, in addition, are entitled to cast one vote (subject to
similar adjustment) per share of Class A Common Stock on all other matters
requiring a stockholder vote or other stockholder action by the holders of
Common Stock. See Item 11 - "DESCRIPTION OF REGISTRANT'S SECURITIES TO BE
REGISTERED".
/2/ Beneficial ownership is determined in accordance with the rules of
the Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Subject to community property
laws, where applicable, the persons named above have sole voting and investment
power with respect to all shares of Class A Preferred Stock shown as
beneficially owned by them.
/3/ See note 5 above under Common Stock table.
41
<PAGE>
Class B Preferred Stock/1/
-----------------------
<TABLE>
<CAPTION>
Number of Shares of Percentage of Total Shares
Class A Preferred Stock of Class A Preferred Stock
Name and Address of Beneficial Owner Beneficially Owned/2/ Beneficially Owned/2/
- ------------------------------------ --------------------------- --------------------------
<S> <C> <C>
Digital Rights International, Inc.
c/o LibertyOne Limited
80 McLachlan Avenue
Rushcutters Bay
Sydney NSW 2011 Australia 2,000,000 66.7
Raoul Boielle
Marina Office, Suite 5
Sandy Bay Road
Clontral SW 2093 Australia 250,000 8.3
Hal Shankland 750,000 25.0
All directors and executive officers as a
group (last 1 person listed) 750,000 25.0
</TABLE>
/1/ Each share of Class B Preferred Stock may be converted at the option
of the holder into one share of Common Stock (subject to adjustment in certain
events) at any time from and after March 25, 2001 and through March 24, 2004.
The holders of shares of Class B Preferred Stock entitled to cast one vote
(subject to similar adjustment) per share of Class B Preferred Stock on all
other matters requiring a stockholder vote or other stockholder action by the
holders of Common Stock. See Item 11 - "DESCRIPTION OF REGISTRANT'S SECURITIES
TO BE REGISTERED".
/2/ Beneficial ownership is determined in accordance with the rules of
the Securities ;and Exchange Commission and generally includes voting or
investment power with respect to securities. Subject to community property
laws, where applicable, the persons named above have sole voting and investment
power with respect to all shares of Preferred Stock shown as beneficially owned
by them.
42
<PAGE>
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors and executive officers, and their ages as of
August 1, 1999 are as follows:
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<S> <C> <C>
Gerald A. Resnick 53 Chairman of the Board, Chief Executive
Officer and President
Hal Shankland 55 Director, Senior Vice President and Secretary
Kenneth Fedorcek 57 Treasurer and Chief Financial Officer
Robert Haberhorn 58 Director Technical Services (Communications)
Aamir Qazi 28 Director of Management Information Systems
Stacy Acampora 36 Executive Vice President of Marketing
Phillip Gambell 44 Director
Steven Frank 42 Director
Christopher Kaisand 38 Vice President
Chief Operating Officer
</TABLE>
The officers of the Company were appointed to the offices set forth above
pursuant to the terms of the Merger Agreement. Mr. Resnick has entered into a
five year employment agreement with the Company and Mr. Shankland has entered
into a three year employment agreement with the Company. See Item 6 -"EXECUTIVE
COMPENSATION" for a description of the terms of these employment agreements. Mr.
Shankland has served as directors of the Company since April 20, 1999. Messrs.
Resnick, Gambell and Frank have served as the directors of the Company since its
inception in August 1998. Under the Company's Restated Certificate of
Incorporation and Bylaws, the directors of the Company will be divided into
three classes and designated as Class I, Class II and Class III. Class I
directors will be initially elected for a term expiring at the first annual
meeting of stockholders, Class II directors will be initially elected for a term
expiring at the second annual meeting of stockholders, and Class III directors
will be initially elected for a term expiring at the third annual meeting of
stockholders. Members of each class will hold office until their successors are
elected and qualified. Members of each class will hold office until their
successors are elected and qualified. At each succeeding annual meeting of the
stockholders of the Corporation, the successors of the class of directors whose
term expires at that meeting will be elected to hold office for a term expiring
at the annual meeting of stockholders held in the third year following the year
of their election, and until their successors are elected and qualified. At
present, the directors have not yet been assigned to particular classes.
Gerald A. Resnick, Chairman of the Board, Chief Executive Officer and
President of the Company, has held such offices in the Company since September
1998. Mr. Resnick has practiced law for thirty years, including engaging in the
private practice of law from 1969 to 1999. His practice has embraced all aspects
of corporate and tax law. He has represented major international corporations in
acquisitions and mergers, project finance, management of intellectual
properties, governmental and regulatory
43
<PAGE>
compliance and the management of labor negotiations. Mr. Resnick served as
General Counsel to the Jersey City Planning Board (1973-1978), as adviser to
various charitable foundations, and as special tax counsel to Kern, Augustine,
Conroy & Schoppmann, P.C. (1995 to July 1999), a law firm with offices in
Bridgewater, N.J. and Lake Success, New York, specializing in the health
professions.
Mr. Resnick has extensive experience in creating successful prepaid and
enhanced credit card telecommunications sales programs, many of which are
currently marketed by major national and international financial institutions.
He is admitted and in good standing with the following legal bars: New Jersey,
New York, Florida, U.S. Tax Court and U.S. Supreme Court. Mr. Resnick graduated
from New York University with a B.A. in 1966, received his Juris Doctorate from
Brooklyn Law School in 1969 and received a Master of Laws (Tax) from the
University of Miami School of Law in 1970.
Mr. Resnick also sits on the Board of Directors of Lake Tel, Inc., a
telecommunications marketing company specializing in financial institutions and
serves as counsel to several domestic and international telecommunications
firms. Mr. Resnick was the co-founder of ION Technologies/Noise Cancellation
Technologies, Inc., a company which is listed on the NASDAQ under the symbol
NCTI and had served as a member of its Board of Directors from 1981 until 1985,
and as Vice President and General Counsel. During 1995, Mr. Resnick served as
Vice President and General Counsel of Public Switch Corp., a company engaged in
telecommunications marketing activities. Mr. Resnick has extensive experience
in the sales and marketing of intellectual properties and the development of
research and development partnerships.
Christopher M. Kaisand, Chief Operating Officer and Vice President. Mr.
Kaisand serves as Senior Vice President and C.O.O., overseeing all day-to-day
operations of the Company. He is also a Director. Mr. Kaisand presently serves
as a Director of Creative Games International, Inc. where from 1992 through 1997
he was also its Vice President and General Counsel. Mr. Kaisand has held
numerous other management positions over the past. He is a 1988 graduate of the
University of Connecticut with a Juris Doctor/MBA degree. Mr. Kaisand resides in
New Jersey with his wife and two sons.
Hal Shankland, Senior Vice President Advanced Product Tenology and a
Director of the Company, served as President of TSC from July 1991 until the
Merger and has held his current position with the Company since the Merger. He
is an entrepreneur with over 25 years experience with the computer and
telecommunications industries. Mr. Shankland has worked with Litton Industries,
Dyna Com and has served as President of Hal & Associates, Inc. of Tampa,
Florida. Mr. Shankland has been a computer consultant to numerous corporate
clients, including Southern Management, Inc. As Senior Vice President of the
Company, Mr. Shankland is responsible for operational management of the
telecommunications systems and the integration of new technologies. While
serving in the U.S. Air Force, Mr. Shankland attended Florida State University
and the University of Maryland from 1963 until 1967.
Kenneth Fedorcek, Chief Financial Officer of the Company, served as Vice
President and Chief Financial Officer of TSC from December 1997 until the Merger
and has held his current position with the Company since the Merger. He is an
accounting professional with over 25 years experience. From 1983 to 1990, Mr.
Fedorcek was the Director of Accounting for Orange-co, Inc., a large public
company, where his responsibilities included multiple divisions and the
financial and regulatory reports required of a public company. From 1990 to
1992, he was the Finance Coordinator for the Chilled Products division of Seald-
Sweet Growers, Inc. From 1992
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<PAGE>
to 1994, he was the Director of Finance for Gatsby Spa's Inc., a manufacturing
company. From 1994 to 1996, he was the Controller for Reilly Dairy & Food
Company. From 1996 to 1997, he was Accounting Supervisor at Tiger Transportation
of Florida. Inc. Mr. Fedorcek currently has overall responsibility for
accounting and cost controls for the Company. Mr. Fedorcek attended Dyke College
and earned a Bachelor of Science degree in 1972.
Robert Haberhorn, Director Technical Services (Telecommunications), has
amassed forty plus years in the computer and telecommunications industries.
Having worked 32 years with Burroughs Corp. (now UNISYS Corp.), in many
technical, training, and management positions he was able to establish a
computer business providing multi-user UNIX solutions on PCs when the world was
still having difficulty spelling DOS. One of the early customers for this
solution was the Marrakech Restaurant at EPCOT Center. He has worked with the
original staff of one of the early founders of the pre-paid calling card
business which patented the concept in 1991. Bob was involved in the initial
developing for document imaging and internet data sharing and has worked in
several management positions with both interconnect and long distance
companies, building regional networks from the southeast to New York and
overseas (London). Mr. Haberhern currently resides in Tampa, Florida with his
wife and son.
Aamir Qazi, Director of Management Information Systems of the Company,
served in such capacity with TSC from August 1998 until the Merger and has held
his current position with the Company since the Merger. Mr. Qazi has five years
of experience in research development of engineering, network and software
solutions. Prior to joining TSC in 1998, Mr. Qazi was an Assistant Professor at
Tampa Institute where he taught systems and design. From December 1996 through
January 1998, he worked for Apollo International of Delaware, Inc. as a Digital
Design Engineer working with algorithm development for Data Acquisition Systems.
In 1996, Mr. Qazi worked in the development division of Lasergate Systems, Inc.
From January 1995 through May 1996, he worked for the University of South
Florida, College of Public Health, as a Graduate Research Assistant. Mr. Qazi
graduated from the University of South Florida in 1995 with a M. S.E.E. degree,
and he received a B.S.E.E. degree in 1992 from the University of Engineering
and Technology, Peshwar, Pakistan.
Stacy Acampora, Vice President of Telecommunications Sales and Marketing of
the Company, served in such capacity with TSC from January 1998 until the Merger
and has held her current position with the Company since the Merger. Ms.
Acampora has been a telecommunications marketing professional for over 16 years,
which includes five years in alternate channel sales. Ms. Acampora has a long
list of achievements including senior management positions with Advanced
Telecommunications Corp. ("ATC") (now known as LDDS/Worldcom/MCI, Amnex) and
Intermedia Communications, Inc. ("ICI"). From 1984 through December 1991, Ms.
Acampora held several senior management positions in marketing, regulatory and
sales operation for ATC. From December 1991 until December of 1993, Ms. Acampora
served as the Director of Marketing and Product Planning for AMNEX, an Orlando-
based operator service provider. From
45
<PAGE>
December 1993 to December 1997, Ms. Acampora was Senior Director of Alternate
Channel Sales at ICI. Ms. Acampora attended Broward Community College and
Florida Atlantic University from 1980 through 1984.
Steven Frank is a Director of the Company. He is the president and sole
owner of P&F Realty, Inc., a corporation that acquires and renovates existing
low to moderate income residential properties in the South Florida area. Prior
to forming P&F Realty, Inc. in 1989, Mr. Frank was an associate and analyst at
W. Lyman Case & Company, in Ft. Lauderdale, Florida from 1982 through 1989. Mr.
Frank graduated from Boston University with a B.A. in Political Science in 1975,
Long Island University with an M.A. in Public Administration in 1976 and a J.D.
from Nova Law School in 1980.
Phillip E. Gambell is a Director of the Company. Mr. Gambell has over 15
years telecommunications experience in international and domestic carrier sales,
network design and development. Currently, President of TOSA Enterprizes, Inc.,
an international telecommunications consulting firm, which he founded in 1998,
Mr. Gambell's clients include local exchange carriers, international service
providers, operator service companies and telecommunications service bureaus.
His client list includes Grande River Communications, Inc., WorldPort
Communications, Inc., Telenational Communications, Inc. and Gulf American
Telecommunications. Prior to forming TOSA, he held national sales positions for
carrier sales with Westinghouse Communications, Inc. (1993-1996) and Digitel
Facilities, Inc. (1990-1993). From 1996 through 1998, Mr. Gambell served as a
consultant to WorldPort Communications, Inc., an international
telecommunications carrier. Mr. Gambell began his telecommunications career
with U.S. Sprint (1984-1990) as major account manager, upon completing military
service as a commissioned officer in the U.S. Marine Corps.
ITEM 6. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain summary information concerning the
aggregate compensation paid to each of the Company's executive officers by TSC
and CyberSentry in 1998.
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SUMMARY COMPENSATION TABLE
--------------------------
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
------------
Annual Compensation Securities
--------------------------------- Underlying All Other
Name and Principal Position(s) Year Salary ($) Bonus ($) Other ($) Options Compensation
- -------------------------------------- ---------- --------- -------- ------- ------------
<S> <C> <C> <C> <C> <C>
Gerald A. Resnick 1998 - - - -
Chairman of the Board,
President and CEO
Hal Shankland 1998 $90,000 - - -
Senior Vice President
Kenneth Fedorcek 1998 52,000 - - -
Vice President and CFO
Kevin White 1998 80,000 - - -
Technology Manager
Stacy Acampora 1998 70,000 $10,000 - -
Vice President of Telecommunication Sales
and Marketing
</TABLE>
Mr. White no longer works for the Company.
Stock Options; Long-Term Incentive Plans
No options were granted to, or exercised by, any of the Company's named
executive officers in 1998 by TSC or CyberSentry, and none of them held any
unexercised options at December 31, 1998. TSC and CyberSentry made no awards to
the named executive officers under any long-term incentive plan in 1998.
Compensation of Directors
Each outside director of the Company receives $1,000 for each Board of
Directors meeting attended, and $500 for each meeting not attended. The
Chairman of the Board is paid an additional $1,000 per month, regardless of the
number of meetings attended.
Employment Agreements
The Company has entered into a five year employment agreement with its
President and Chief Executive Officer, Gerald Resnick, effective January 1,
1999. Under the agreement, Mr. Resnick is entitled to receive a base salary of
$180,000, subject to annual increases of not less than 10% per year, and a bonus
in the discretion of the Board of Directors but in no event less than three
quarters of one percent of the Company's gross sales in excess of $30,000,000
annually, which
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sum may be paid, at Mr. Resnick's option, in cash or stock (valued at $1.00 per
share). During the term of his employment agreement and for a period of one year
thereafter, Mr. Resnick will have the right to purchase up to 500,000 shares of
Common Stock at $1.00 per share. Mr. Resnick also will be entitled to
participate in all executive incentive plans and other compensation plans
adopted by the Company, if any, as well as to various perquisites, including,
without limitation, fully funded whole life insurance in an amount not less than
$2 million, disability and healthcare insurance, office and legal staff, use of
an automobile, and reimbursement for business club fees and business class
travel and entertainment expenses incurred in the ordinary course of business.
Mr. Resnick will be entitled to a severance allowance in the event his
employment is terminated without cause prior to his attaining the age of 65, and
to additional benefits in the event of his death or disability, or upon the
occurrence of certain termination events described the agreement.
In addition, in the event of a "Termination" following a "Change in
Control" (as such terms are defined in the agreement), Mr. Resnick will be
entitled to receive, within 90 days of such event, an amount equal to ten times
his then annual base salary. In such event, he will also be entitled to all
retirement benefits, together with 20 years fully vested service with respect to
any of the Company's employee benefit plans. Under the Internal Revenue Code of
1986, as amended, the Company is not entitled to deduct any "excess parachute
payment", which is defined generally as an amount equal to the excess of any
"parachute payment" over three times the "base amount" allocated to such
payment. The term "parachute payment" generally means any payment contingent
upon a change in control and the term "base amount" generally means average
annual base compensation for the five year period preceding the change in
control of the Company. Accordingly, in the event of a change in control of the
Company, a substantial portion of the amounts to which Mr. Resnick would be
entitled would be deemed to be excess parachute payments and hence not
deductible by the Company.
The Company has entered into a three year employment agreement with its
Senior Vice President, Hal Shankland, which commenced upon the effectiveness of
the Merger. Under the agreement, Mr. Shankland is entitled to receive a base
salary of $120,000, subject to such annual increases as determined by the Board
of Directors, and will be entitled to participate in any employee benefit plans
available to employees generally as well as in any incentive stock option plans
and other executive incentive plans available to Company executives. In
addition, at the end of each year during the period of his employment, Mr.
Shankland will have the right to purchase up to 100,000 shares of Common Stock
at $1 per share (for the first year) and at fair market value (for subsequent
years). In the event his employment is terminated without cause or by reason of
death or disability, Mr. Shankland or his representative will be entitled to
receive his then prevailing base salary until December 31, 2001. During his
employment, Mr. Shankland will be entitled to an automobile allowance not to
exceed $500 per month and to reimbursement for travel and entertainment expenses
reasonably incurred in the performance of his duties.
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<PAGE>
At the option of the Company and upon payment by the Company to Mr.
Shankland of one year's salary, for a period of one year following termination
of his employment with the Company, Mr. Shankland has agreed not to engage in
any activity which interferes or competes with the business of the Company.
Mr. Shankland has agreed not to sell any shares of Common Stock or
Preferred Stock held by him except in accordance with Rule 144 under the
Securities Act of 1933; provided, however, that in the event that Mr. Shankland
voluntarily terminates his employment with the Company prior to December 31,
2001, he has agreed not to sell any such shares without the prior written
approval of the Company's Board of Directors.
Additional Information with Respect to Compensation Committee Interlocks and
Insider Participation in Compensation Decisions
Neither TSC nor CyberSentry had a compensation committee during the fiscal
year ended December 31, 1998. The stockholders, officers and directors of
CyberSentry who participated in board of director deliberations concerning
executive officer compensation were Phillip Gambell, Steve Frank, Frank Kristan,
Helene Resnick and Gerald Resnick. Mr. Kristan is a stockholder and former Vice
President of the Company, and Ms. Resnick is a stockholder and former Secretary
of the Company and the wife of Mr. Resnick. The only stockholder, officer or
director of TSC who participated in board of director deliberations concerning
executive officer compensation was Hal Shankland.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Bankruptcy, Merger and Related Transactions
Grace Trust Transaction
Until December 1997, the Company's predecessor, TSC, which owned and
operated the Company's telecommunications services business, was solvent and was
funding its operations through cash flow. In December 1997, TSC entered into an
agreement with Grace Trust ("Grace Trust") pursuant to which Grace Trust was to
provide sales and marketing services for TSC by undertaking telemarketing
efforts to increase TSC's long-distance customer base. Grace Trust assured TSC
that the file of customers submitted by Grace Trust did not contain any large
blocks of sequential telephone numbers and that valid customer authorization had
been obtained for every order to substitute TSC for the customer's existing
long-distance service provider, as required by the FCC. After the file was
processed and customers' long distance service changed, however, TSC received
notifications from a number of these customers disputing the change in service
providers. TSC later confirmed
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through its research that - contrary to Grace Trust's assurances -Grace Trust
had not obtained proper customer authorization for all of the business
submitted. Although TSC immediately implemented a plan to minimize the damage
caused by Grace Trust's actions, TSC remained liable under Federal law to
provide telephone service free of charge for at least 90 days to all customers
whose authorization had not been obtained properly, as well as to other very
large potential contingent liabilities to those customers. These liabilities
have been discharged as a result of TSC'S bankruptcy proceedings. See "-
Bankruptcy." TSC also become subject to regulatory proceedings by authorities in
the states where these violations had occurred. See "LEGAL PROCEEDINGS" for a
description of those proceedings.
Bankruptcy
As a result of these actions of Grace Trust, TSC elected to file for
bankruptcy protection and, on May 8, 1998, filed a voluntary petition with the
United States Bankruptcy Court for the Middle District of Florida (the
"Bankruptcy Court") seeking reorganization under Chapter 11 of the United States
Bankruptcy Code (the "Code"). On March 4, 1999 (the "Confirmation Date"), the
Bankruptcy Court entered an order (the "Order") pursuant to Section 1129 of the
Code confirming the Company's Second Amended Plan of Reorganization (the
"Plan"). The Plan became effective on March 14, 1999 pending the acquisition of
TSC by CyberSentry, which occurred on March 24, 1999.
50
<PAGE>
In order for the bankruptcy proceeding to be formally concluded, the
Bankruptcy Court must issue a final decree (the "Final Decree") confirming,
among other things, that the Plan has been substantially consummated. As of the
date hereof, the Final Decree has not been issued; and there can be no assurance
that the Final Decree will be issued.
Acquisition of TSC
Pursuant to the Plan, CyberSentry acquired TSC by means of the Merger as of
March 24, 1999, with CyberSentry remaining as the surviving corporation. Prior
to the Merger, TSC conducted the Company's current telecommunications services
business. The Merger was accomplished in accordance with the terms of an
Agreement and Plan of Merger, dated January 22, 1999, between TSC and
CyberSentry (the "Merger Agreement"). By operation of law all assets, property,
rights, liabilities and obligations of TSC have been transferred to and assumed
by the Company, as the surviving corporation of the Merger. Substantially all of
TSC's debt was converted to common stock and preferred stock of the Company.
51
<PAGE>
Transactions with Management and Others
Lake Tel Transaction
The Company (through its predecessor, TSC), Lake Tel, Inc., a New Jersey
corporation ("Lake Tel"), and Capital One Bank, a Virginia banking corporation
("Capital One"), have entered into a Carrier Agreement dated October 1998 (the
"Carrier Agreement") pursuant to which the Company has agreed to allow Capital
One to offer secured credit card products to customers of the Company for an
initial term of five years. For each account booked by Capital One under the
Carrier Agreement, Lake Tel is entitled to receive a fee from Capital One and is
obligated to pay a fee to the Company. Gerald Resnick, the Company's Chairman
and President, sits on the Board of Directors of Lake Tel, a telecommunications
marketing company specializing in financial institutions.
Patriot Transactions
The Company was a party to an advisory agreement with Patriot Advisors,
Inc. dated as of December 1, 1998 (the "Advisory Agreement") pursuant to which
Patriot agreed to render various financial and investment advisory services to
the Company including, but not limited to, (x) reviewing and analzying all
material documentation (legal, financial or otherwise) of the Company to
determine the Comany's most effective internal organizational finanical
structure for the purpose of financing, and (y) determining the Company's best
course of action, which may include (i) private placements of common or
preferred stock, or debt, for the expansion of its working capital, acquisition
financing or the restructuring of existing indebtedness, (ii) mergers and
acquisitions, (iii) initial public offerings, and (iv) any other transactions
deemed by Patriot to be in the best interests of the Company. In consideration
for such services, the Company agreed to pay Patriot an advisory fee of $10,000
per month, of which a minimum of $6,500 was to be in cash and any equity was to
be paid in the form of Common Stock at the rate of $1.00 per share. By mutual
agreement, the Advisory Agreement was terminated as of March 30, 1999. Patriot
and Templar Corporation ("Templar") are 100% owned by Mr. Frank Kristan. Mr.
Kristan benefically owns approximately 4% of the ordinary shares of LibertyOne
Ltd., which (through its subisdiary, Digital Rights International, Inc.)
benefically owns appproximately 3.6% of the Company's Common Stock and 66.7% of
the Company's Class B Preferred Stock. In addition, Mr. Kristan serves as a
consultant to LibertyOne, for which he is entitled to receive an advisory fee of
$10,000 per month in cash.
The Company has also entered into a Credit Agreement with Patriot dated
February 22, 1999 (the "Credit Agreement") pursuant to which Patriot has agreed
to extend a $3 million line of credit to the Company, with amounts outstanding
not to exceed 50% of the Company's assets. The line of credit is secured by all
of the Company's assets and will be available to the Company for a period of one
year, after which time all outstanding amounts must be repaid, subject to
various events of default
52
<PAGE>
which can accelerate the maturity of the loan. Interest on amounts outstanding
is due monthly at the rate per annum equal to two percentage points above the
highest domestic "Prime Rate" published in the Wall Street Journal on the first
day of publication in the previous month. See "RISK FACTORS -- Risk that the
Company May Be Unable to Continue as a Going Concern; Dependence on Patriot".
Mr. Kristan, Templar and Patriot have entered into a Shareholders'
Agreement with the Company dated as of March 24, 1999 (the "Shareholders'
Agreement") pursuant to which they have agreed that on all matters coming before
the shareholders of the Company for shareholder action, each of them will vote
all of the shares of voting stock of the Company that are beneficially owned by
him or it in proportion to the votes cast by all of the other holders of shares
of the Company's voting stock. Moreover, each of Mr. Kristan, Templar and
Patriot has agreed in the Shareholders' Agreement that he or it will not
transfer any shares of voting stock of the Company beneficially owned by him or
it to any person who, upon the consummation of such transfer, would beneficially
own 5% or more of the outstanding shares of any class or series of the Company's
voting stock, subject to certain limited exceptions.
Templar and Patriot are limited partners in Sinclair Partners, Limited
Partnership ("SPLP"), a Connecticut limited partnership formed on March 24, 1999
by Sinclair Advisors, Ltd., a Connecticut corporation ("SAL), as general
partner, and Patriot and Templar as limited partners. In return for their
limited partnership interests, Patriot made a capital contribution to SPLP in
the form of 3,700,000 shares of Common Stock of the Company and Templar made a
capital contribution in the form of 2,300,000 shares of Common Stock of the
Company. Pursuant to the governing documents of SPLP, SAL has the sole voting
and dispositive power over the shares of Common Stock held by SPLP. Francis
Conklin is the sole shareholder and Chief Executive Officer of SAL. SPLP has
agreed to be bound by the provisions of the Shareholders' Agreement restricting
the voting rights and transferability of the shares of voting stock of the
Company beneficially owned by it to the same extent as Patriot and Templar.
As a result of the Shareholders' Agreement and related agreements, the
voting power of the management shareholders will be proportionately increased
giving them, in effect, approximately 47.6% of total voting power of the
Company's outstanding voting securities. Thus, the management shareholders will
be able to significantly influence and, possibly, control all matters requiring
approval by the shareholders of the Company, including the election of directors
and the approval of mergers or other business combination transactions.
Mr. Resnick, the President of the Company, and Patriot entered into an
Resnick Advisory Agreement dated as of July 15, 1998 (the "Resnick Advisory
Agreement"). Under the Resnick Advisory Agreement, Mr. Resnick agreed to act as
a management and financial advisor to Patriot and to use his best efforts to
provide advice on equity or debt financing of a minimum of $2 million and a
maximum of $25 million through the end of the fiscal year June 30, 1999. In
exchange for these services, Patriot agreed to pay to Mr. Resnick (1) a
management fee of 1% per annum of the initial value of the total asset value
under management, payable in cash or equity, subject to a minimum of $10,000 per
month in cash, and (2) a bonus fee of 10% of the net increase in total asset
value above 20% per annum that Patriot receives from LibertyOne. Patriot also
agreed to reimburse Mr. Resnick for his expenses. The Resnick Advisory Agreement
expires each year on June 30 and is automatically renewed for another one-year
term unless terminated by either party not later than 90 days before the
expiration date. Patriot has agreed to issue 459,200 shares of LibertyOne to Mr.
Resnick as full payment under the Resnick Advisory Agreement, and the Resnick
Advisory Agreement has been terminated.
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<PAGE>
CyberSentry Software Acquisition
On October 2, 1998, Templar Corporation, a Delaware corporation
("Templar"), entered into a license agreement (the "Learning License Agreement")
with Learning Company Properties Inc., a Delaware corporation ("Learning"),
pursuant to which Templar obtained an exclusive, worldwide, perpetual, fully-
paid right and license to publish, use, distribute and sublicense a software
program that provides digital rights management technology (the "CyberSentry
Software"). In addition, pursuant to the Learning License Agreement, as
supplemented, Learning assigned its rights to certain trademarks and agreed to
provide engineering support to Templar through December 31, 1999. Templar has
paid Learning $187,500 in consideration for such engineering support.
Pursuant to the Learning License Agreement, Templar transferred to Learning
2,500,000 ordinary shares of LibertyOne (the "LibertyOne Shares"), theretofore
held by Templar and, in connection with this transfer, agreed to grant to
Learning the right to put the LibertyOne Shares to Templar for an aggregate
purchase price of $3,000,000, pursuant to a Put and Top Up Agreement ("Put
Agreement"), dated October 22, 1998, by and between Learning and Templar. This
put expires on December 31, 2001, unless it terminates earlier due to the
occurrence of certain Trigger Events (as defined in the Put Agreement). Templar
and Learning valued the transaction at $3,000,000, which was based on the then
anticipated initial public offering price of the LibertyOne Shares of $1.20 per
share. The initial public offering of the LibertyOne Shares closed on December
10, 1998 at a price of $2.00 per share. The closing sales price of the
LibertyOne Shares as of March 17, 1999 was $4.72 per share. Templar has informed
the Company that Learning has received more than $3,000,000 from the sale of the
LibertyOne Shares and, therefore, that the Put Agreement has been cancelled.
Templar assigned the Learning License Agreement, and all of Templar's
rights to the CyberSentry Software thereunder, to the Company pursuant to an
Assignment of Software License Agreement, effective as of November 20, 1998 (the
"Assignment"). The Company's rights to the CyberSentry Software under the
Assignment are subject to the risk of default by Templar under the Learning
License Agreement. See "BUSINESS - Risk Factors -Risk of Default Under Primary
Licenses". Pursuant to the terms of the Assignment and in consideration thereof,
the Company issued 3,000,000 shares of its Common Stock to Templar, which
thereby became a significant shareholder in the Company. As described above,
Templar transferred 2,300,000 of these shares to SPLP. Templar is 100% owned by
Mr. Frank Kristan, who may therefore be deemed the beneficial owner of the
shares of Common Stock held by Templar.
The Company has entered into a Software Sub-License Agreement (the "DRI
License Agreement"), effective as of January 1, 1999, with Digital Rights
International, Inc., a Delaware corporation ("DRI"), pursuant to which the
Company has granted DRI a non-transferable, non-exclusive, worldwide, right and
license to publish and use the CyberSentry Software solely for the protection of
celebrity digital rights and content related thereto on the websites owned or
operated by DRI, subject to the terms and conditions of the Learning License
Agreement. The Company is under no obligation to provide upgrades to the
software licensed to DRI unless DRI elects to pay the Company $150,000 for
continuing software engineering support. The term of the DRI License Agreement
is indefinite, subject to early termination by either party for cause, as
described in the
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agreement. In conjunction with entering into the DRI License Agreement, DRI
purchased 500,000 shares of the Company's Common Stock at $1.00 per share for an
aggregate purchase price of $500,000. DRI is a subsidiary of LibertyOne. A copy
of the DRI License Agreement is attached hereto as Exhibit 10.6, and is
incorporated herein by reference.
ATM Technology Acquisition
Comtel Telecommunications Pty Ltd. ("Comtel"), a wholly owned subsidiary of
LibertyOne, entered into a Patent and Know How License and Commercialization
Agreement dated as of February 4, 1998 (the "ATM License Agreement") with
Telstra Corporation Limited ("Telstra"), pursuant to which LibertyOne was
granted a non-exclusive license in relation to Telstra's Fast Packet Digital
Switch Project ("FPDX"). FPDX represents technology developed by Telstra over
11 years. FPDX utilizes ATM technology, which has the potential to deliver
"virtual" Internet services to users at substantially increased speeds and lower
costs than other technologies.
Comtel entered into a Patent and Know How Sub-Contract and
Commercialization Agreement (the "Sub-Contract") with the Company, effective as
of December 30, 1998, pursuant to which the Company has been granted the non-
exclusive right to market and sell the ATM Technology in the United States and
Canada, subject to the terms of the ATM License Agreement. The Company's rights
to the ATM Technology under the Sub-Contract are subject to the risk of default
by Comtel under the ATM License Agreement with Telstra. See "BUSINESS - Risk
Factors - Risk of Default Under Primary Licenses". Pursuant to the Sub-Contract,
the Company agreed to pay Comtel a royalty fee of 110% of the royalty rates
required pursuant to the ATM License Agreement. See Item 1 - "BUSINESS - Risk
Factors and Investment Considerations".
As consideration for Comtel entering into the Sub-Contract with the
Company, the Company agreed to issue 2,000,000 shares of its Preferred Stock to
Comtel's designee, DRI, a subsidiary of LibertyOne. Pursuant to the Merger
Agreement, these shares were converted on a one for one basis into 2,000,000
shares of the Company's Class B Preferred Stock. See Item 11 - "DESCRIPTION OF
REGISTRANT'S SECURITIES TO BE REGISTERED" for a description of the terms of the
Class B Preferred Stock.
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ITEM 8. LEGAL PROCEEDINGS
On May 7,1998, TSC, a predecessor of the Company, sought protection from
its creditors and filed for bankruptcy protection pursuant to Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the Middle District of
Florida. On March 14, 1999, TSC emerged from the Bankruptcy pursuant to the
Plan approved by the Bankruptcy Court, and, on March 24, 1999, was merged with
and into the Company in accordance with the Plan and the Merger Agreement. In
order for the Bankruptcy to be formally concluded, the Bankruptcy Court must
issue the Final Decree, confirming, among other things, that the Plan has been
consummated.
On September 16, 1998, TSC entered into an Assurance of Discontinuance with
the Attorney General of the State of Minnesota, pursuant to which TSC agreed,
among other things, (1) to absorb unbilled long-distance fees and service
charges with respect to Minnesota customers whose accounts had been improperly
switched (see "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- Bankruptcy,
Merger and Related Transactions -- Grace Trust Transaction") and to make
restitution for any such fees or charges previously collected, (2) to pay a
$10,000 civil penalty to the State of Minnesota, (3) not to engage in similar
practices in the future and (4) to pay an additional civil penalty in the amount
of $250,000 if it violates the Assurance of Discontinuance. The Company believes
that it is in compliance with the Assurance of Discontinuance.
In June 1999, also in connection with the Grace Trust transaction, the
Company entered into a Stipulation and Consent Judgment (the "Stipulation") with
the State of Idaho in order to settle allegations that the Company engaged in
improper telemarketing and other activities with respect to the marketing of its
telecommunications products to Idaho residents. In the Stipulation, the Company
agreed, among other things, to adhere to various disclosure requirements in
connection with telemarketing and sweepstakes solicitations, to obtain proper
authorizations and verifications from subscribers, to make restitution to
affected Idaho residents and to pay $7,500 to the State of Idaho for its costs
of investigation.
See Item 7 - "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -Bankruptcy,
Merger and Related Transactions".
In addition to the foregoing, the Company is, and TSC as its predecessor
was, involved from time to time in various claims and lawsuits in the ordinary
course of business, none of which is expected, individually or in the aggregate,
to have a material effect on the Company.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
As of the date hereof, neither the Company's Common Stock nor its Class A
Preferred Stock nor its Class B Preferred Stock are listed on any stock exchange
or quoted on the NASDAQ market and there is no established public trading market
for such securities. However, upon effectiveness of this Registration Statement
and satisfaction of applicable NASD requirements, the Company intends to apply
to have its Common Stock, Class A Preferred Stock and Class B Preferred Stock
listed on either the NASDAQ market or the OTC market.
From and after March 25, 2001 up until March 24, 2004, all of the Company's
Class A Preferred Stock and Class B Preferred Stock are convertible, at the
holder's option, into shares of Common Stock at a one to one ratio. See Item 11
- - "DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED".
The Company believes that under Section 1145 of the Bankruptcy Code, all
resales and subsequent transfers of the Common Stock and Class A Preferred Stock
issued pursuant to the Plan
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would be exempt from the registration requirements of the Securities Act of
1933, as amended (the "Securities Act"), unless the holder thereof is deemed to
be an "underwriter" with respect to such securities within the meaning of
Section 1145(b) of the Bankruptcy Code. Affiliates of the Company may be
entitled to rely on Rule 144 under the Securities Act for certain limited public
resales of Company securities held by them, provided the requirements of such
rule are satisfied.
As of the date hereof, there are approximately 9 holders of record of the
Company's Common Stock, approximately 78 holders of record of the Company's
Class A Preferred Stock and three holders of record of the Company's Class B
Preferred Stock. If all of the holders of the Class A Preferred Stock and the
Class B Preferred Stock exercised their right to convert their shares into
Common Stock, the Company would have approximately 86 holders of record of its
Common Stock.
The Company has never paid a cash dividend to shareholders nor does it
expect to pay a dividend in the foreseeable future.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
Prior to the Bankruptcy and the Merger, TSC was a privately held Florida
corporation owned by Hal Shankland and Raoul Boielle. Common Stock, Class A
Preferred Stock and Class B Preferred Stock of the reorganized Company were
distributed to various creditors and stockholders upon TSC's emergence from the
Bankruptcy pursuant to the Plan. See Item 7 - "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS -Bankruptcy, Merger and Related Transactions" for a further
description of the Bankruptcy, the Plan, the Merger and certain related
transactions. In addition, 258,765 shares of Common Stock were issued to David
Veltman in lieu of a cash distribution that he was otherwise entitled to receive
as a creditor under the Plan. The issuance of shares under the Plan and to Mr.
Veltman was exempt from the registration requirements of the Securities Act
pursuant to either (i) Section 1145(a)(1) of the Bankruptcy Code, which exempts
securities offered and sold under a plan of reorganization to certain classes of
persons, or (ii) the exemption from registration provided by Section 4(2) of the
Securities Act. Other than pursuant to the Bankruptcy, no securities of TSC were
issued within the past three years.
In connection with the assignment of the CyberSentry Software, 3,000,000
shares of the Company's Common Stock were issued to Templar. In connection with
the DRI License Agreement, 500,000 shares of the Company's Common Stock were
issued to DRI. See Item 7 - "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -
CyberSentry Software Acquisition". In connection with the subcontract of the
ATM technology, 2,000,000 shares of the Company's Preferred Stock were issued to
DRI. Such shares of Preferred Stock were converted on a one for one basis
into shares of Class B Preferred Stock pursuant to the Merger Agreement. See
Item 7 - "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ATM
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Technology Acquisition". All of the above issuances were exempt from the
registration requirements of the Securities Act pursuant to the exemption
provided by Section 4(2) thereof.
In connection with the founding of CyberSentry, 4,275,000 shares of Common
Stock were issued to Patriot, which is 100% owned by Frank Kristan, 4,500,000
shares of Common Stock were issued to Gerald and Helene Resnick and 225,000
shares of Common Stock were issued to Phillip Gambell. All of these shares were
issued at $.006 per share. All of the above issuances were exempt from the
registration requirements of the Securities Act pursuant to the exemption
provided by Section 4(2) thereof.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The authorized capital stock of the Company consists of 30,000,000 shares
of Common Stock and 10,000,000 shares of Preferred Stock. As of the date
hereof, there were issued and outstanding 13,758,765 shares of Common Stock,
4,451,178 shares of Class A Preferred Stock and 3,000,000 shares of Class B
Preferred Stock. Any shares of Class A Preferred Stock or Class B Preferred
Stock converted, redeemed, purchased or otherwise acquired by the Company in any
manner whatsoever shall be retired and canceled promptly after the acquisition
thereof, and, if necessary to provide for the lawful redemption or purchase of
such shares, the capital represented by such shares shall be reduced in
accordance with the applicable law. All such shares shall upon their
cancellation become authorized but unissued shares of Preferred Stock and may be
reissued as part of another series of Preferred Stock.
Redemption and Conversion Rights
Pursuant to the Plan, the Company will establish a mandatory redemption
pool for the outstanding Class A Preferred Stock at $.05 per share on each March
1 and September 1 of the years 2000, 2001, 2002, 2003 and 2004. The redemption
right is at the option of the shareholder who may choose to redeem the shares of
Class A Preferred Stock on a pro rata basis, convert them to Common Stock
(during the time period set forth below) or hold onto them. Shareholders who
redeem their preferred shares will receive a pro rata share of the redemption
pool which will be funded by the Company. Holders of Class B Preferred Stock
and holders of Common Stock are not eligible to participate in the redemption
pool. Pursuant to the Veltman Agreement, Mr. Veltman also is not entitled to
participate in the redemption pool.
From and after March 25, 2001 up until March 24, 2004, each share of Class
A Preferred Stock and each share of Class B Preferred Stock may be converted, at
the option of the holder, into shares of Common Stock at a one to one ratio,
subject to adjustment for dilution. This conversion right is separate and
distinct from the Rights Offering pursuant to the Plan. See Item 7 - "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS - Bankruptcy, Merger and Related
Transactions".
58
<PAGE>
Pursuant to the Plan, the Company has the right to redeem the Class A
Preferred Stock and the Class B Preferred Stock at $1.50 per share at any time
prior to March 4, 2001.
Voting Rights
The holders of Common Stock are entitled to one vote per share on all
matters requiring shareholder action. Pursuant to the Supplement to Second
Amended Disclosure Statement attached to the Plan (see Exhibit 2.1.2 hereto) (i)
each share of Class A Preferred Stock and each share of Class B Preferred Stock
is entitled to one vote per share on all matters requiring shareholder action,
(ii) the holders of Class A Preferred Stock, voting together as a class, have
the right to elect one member of the Company's Board of Directors, (iii) the
Company is prohibited from issuing non-voting stock, (iv) dividends to be issued
to holders of Class A Preferred Stock and Class B Preferred Stock shall be equal
to the dividends issued to holders of Common Stock, and (v) the Company may not
issue shares of Class A Preferred Stock in excess of the number of shares of
Class A Preferred Stock which are required to be issued under the Plan without
first obtaining the approval of a majority of the holders of Class A Preferred
Stock then outstanding.
The rights granted to holders of Class A Preferred Stock and Class B
Preferred Stock pursuant to the Plan terminate automatically upon redemption or
conversion of all of the Class A Preferred Stock and all of the Class B
Preferred Stock, respectively.
The holders of the Class A Preferred Stock have elected Hal Shankland to
serve on the Company's Board of Directors.
Dividends; Redemption; Conversion; Liquidation
The holders of Common Stock have no preemptive or other rights and there
are no redemption, sinking fund or conversion privileges applicable thereto.
The holders of Class A Preferred Stock have certain redemption rights, as
described above. The holders of Common Stock are entitled to receive dividends
as and when declared by the Board of Directors out of funds legally available
therefore, subject to the imposition of restrictions thereon by the Company's
regulators. The holders of Class A Preferred Stock and Class B Preferred Stock
have no dividend preference but are entitled to receive dividends in the same
amount per share as the holders of Common Stock each time dividends are paid to
the holders of Common Stock. Upon liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities. The holders of Class A Preferred Stock
and Class B Preferred Stock are entitled to a liquidation preference of $1.50
per share and no more.
All of the above described terms of the Class A Preferred Stock and the
Class B Preferred Stock are set forth in two Certificates of Designation and a
Certificate of Amendment thereto filed by the Company with the Secretary of
State of the State of Delaware. Such Certificates of
59
<PAGE>
Designation and Certificate of Amendment are attached hereto as Exhibits 4.1,
4.2 and 4.3, and are incorporated herein by reference.
Transfer Agent
The Company's transfer agent is Marine Midland Bank. The transfer agent's
mailing address is Marine Midland Bank, 140 Broadway, 12/th/ Floor, New York,
New York 10005-1180, Attention: Corporate Trust Department.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware grants
corporations the power to indemnify their directors, officers, employees and
agents in accordance with the provisions set forth therein.
The Company's Bylaws provide for indemnification of the Company's
directors, officers, employees and other agents of the Company to the extent and
under the circumstances permitted by the Delaware General Corporation Law (the
"DGCL"). The Company's Bylaws also provide that the Company will have the power
to purchase and maintain insurance covering its directors, officers and
employees against any liability or loss asserted against any of them and
incurred by any of them, whether or not the Company would have the power to
indemnify them against such liability under the DGCL. The Company currently
maintains directors' and officers' liability insurance.
Section 5.1 of Article V of the Bylaws of the Company provides for
indemnification of directors and officers of the Company to the fullest extent
authorized by the DGCL, and is set forth below:
Section 5.1 Right to Indemnification. Each person who was or is
----------- ------------------------
made a party or is threatened to be made a party to or is otherwise
involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative (hereinafter a "proceeding"), by reason
of the fact that he or she or a person of whom he or she is the legal
representative is or was a director or an officer of the Corporation or
is or was serving at the request of the Corporation as a director,
officer, employee or agent of any other corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect
to any employee benefit plan (hereinafter an "indemnitee"), whether the
basis of such proceeding is an alleged action or failure to act in an
official capacity as a director, officer, employee or agent or in any
other capacity while serving as a director, officer, employee or agent,
will be indemnified and held harmless by the Corporation to the fullest
extent authorized by the GCL, as the same exists or may hereafter be
amended (but, in the case of any such amendment, only to the extent that
such amendment permits the Corporation to provide broader
indemnification rights than said law permitted the Corporation to
provide prior to such amendment), against all expense, liability and
loss (including, without limitation, attorneys' fees, court costs,
judgments, fines, excise taxes or penalties under the Employee
Retirement Income Security Act of 1974, as amended, and amounts paid or
to be paid in settlement) reasonably incurred by such indemnitee in
connection
60
<PAGE>
therewith; provided, however, that except as provided in Section 5.3
-------- -------
with respect to proceedings seeking to enforce rights to
indemnification, the Corporation will indemnify any such indemnitee
seeking indemnification in connection with a proceeding (or part
thereof) initiated by such indemnitee only if such proceeding (or part
thereof) was authorized by the Board of Directors.
In addition, Article Ninth of the Company's Restated Certificate of
Incorporation contains provisions exculpating a director from liability for
certain breaches of fiduciary, and is set forth below:
NINTH: A director of the Corporation will not be personally liable to
the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of
the director's duty of loyalty to the Corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the GCL or (iv) for any transaction from which the
director derived an improper personal benefit.
The Company's Restated Certificate of Incorporation and Bylaws are attached
hereto as Exhibits 3.1 and 3.2, respectively, and are incorporated herein by
reference.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this Item are
filed as part of this Form 10. See Index to Financial Statement Information at
page F-1 of this Form 10.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
The financial statements of the Company are filed as part of this
Registration Statement on Form 10. See Index to Financial Statement Information
at page F-1.
61
<PAGE>
(b) Exhibits:
<TABLE>
<CAPTION>
Exhibit No.
- -----------
<S> <C>
2.1.1 Second Amended Plan of Reorganization, dated December 4,
1998, filed by Telecommunications Service Center, Inc. with
the United States Bankruptcy Court for the Middle District of
Florida*
2.1.2 Supplement to Second Amended Disclosure Statement dated
December 21, 1998*
2.1.3 Order of Conditional Confirmation of Debtor's Plan of
Reorganization dated February 16, 1999*
2.1.4 Final Order Confirming Debtor's Plan of Reorganization
dated March 4, 1999*
2.1.5 Agreement and Plan of Merger dated January 22, 1999
between Telecommunications Service Center, Inc. and
CyberSentry, Inc.*
3.1 Restated Certificate of Incorporation of CyberSentry, Inc.*
3.2 Bylaws of CyberSentry, Inc.*
4.1 Certificate of Designation for Class A Convertible
Redeemable Participating Preferred Stock ($1.50 Liquidation
Value), Par Value $.001 Per Share*
4.2 Certificate of Designation for Class B Convertible
Redeemable Participating Preferred Stock ($1.50 Liquidation
Value), Par Value $.001 Per Share*
4.3 Certificate of Amendment of Certificate of Incorporation
amending Certificates of Designation*
10.1.1 Revolving Credit Note dated April 1, 1996 and Letter
Agreements dated August 7, 1997 and May 1, 1996 among
South Trust Bank, N.A., Telecommunications Service
Center, Inc. and David Veltman*
10.1.2 Installment Note and Security Agreement dated May 1, 1996 among
South Trust Bank, N.A., Telecommunications Service
Center, Inc. and David Veltman*
10.2.1 Lease Agreement, effective April 17, 1996, between
Telecommunications Finance Group, as Lessor, and
Telecommunications Service Center, Inc., as Lessee,
Addendum dated February 5, 1999 and related Assignments
of Purchase Orders*
</TABLE>
62
<PAGE>
<TABLE>
<S> <C>
10.2.2 Software License Agreement dated May 28, 1996 between
Telecommunications Service Center, Inc. and Siemens Stromberg-Carlson*
10.3 Lease Agreement dated June 14, 1996 between Telecommunications
Service Center, Inc. and IBM Credit Corporation*
10.4 Patent and Know How Sub-Contract and Commercialisation Agreement,
effective as of December 30, 1998 between Comtel and CyberSentry, Inc.*
10.5 Assignment of Software License Agreement, effective as of
November 20, 1998, between Templar Corporation and CyberSentry, Inc.*
10.6 Software Sub-License Agreement, effective as of January 1, 1998,
between CyberSentry, Inc. and Digital Rights International, Inc.*
10.7 Lease Agreement for principal executive office dated as of July
1, 1996 between Telecommunications Service Center,
Inc. and Madison Building Inc.*
10.8 Lease Agreement for principal executive office dated as of July
1, 1995 between Telecommunications Service Center, Inc. and Madison
Building Inc.*
10.9 Employment Agreement dated December 25, 1998 between CyberSentry,
Inc. and Gerald A. Resnick*
10.10 Employment Agreement dated February 16, 1999 between
CyberSentry, Inc. and Hal Shankland*
10.11 Advisory Agreement dated December 1, 1998 between
CyberSentry, Inc. and Patriot Advisors, Inc.*
10.12 Carrier Agreement dated October 1998 among
Telecommunications Service Center, Inc., Lake Tel, Inc. and
Capital One Bank*
10.13 Distribution and Escrow Agreement dated February 22, 1999
among Marine Midland Bank, Telecommunications Service Center, Inc. and
CyberSentry, Inc.*
10.14 Credit Agreement dated February 22, 1999 between Patriot
Advisors, Inc. and CyberSentry, Inc.*
10.15 Shareholders' Agreement dated as of March 24, 1999 among
CyberSentry, Inc., Frank Kristan, Templar Corporation
</TABLE>
63
<PAGE>
<TABLE>
<S> <C>
and Patriot Advisors, Inc.; and agreement by Sinclair Partners,
Limited Partnership to be bound thereby.*
10.16 Agreement and Waiver between CyberSentry, Inc. and
David Veltman dated as of April 20, 1999.*
10.17 Advisory Agreement between Patriot Advisors, Inc. and Gerald
Resnick dated as of July 15, 1998*
27.1 Financial Data Schedule Telecommunications Service Center, Inc.
27.2 Financial Data Schedule Cybersentry, Inc.
</TABLE>
* Previously filed with the Form 10 registration statement of CyberSentry, Inc.
filed with the Securities and Exchange Commission on May 15, 1999.
64
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
CYBERSENTRY, INC.
Dated: May 14, 1999
By: /s/ Gerald A. Resnick
------------------------------
Name: Gerald A. Resnick
Title: President
65
<PAGE>
CyberSentry, Inc.
Index to Financial Statements
Page No.
--------
Telecommunications Service Center, Inc.:
Report of Independent Certified Public Accountants F-2
Balance Sheets at March 24, 1999 (acquisition date) (unaudited)
and for the years ended December 31, 1998 and 1997 F-3
Statements of Operations for the period from January 1, 1999
through March 24, 1999 (acquisition date) (unaudited) and
for the six months ended June 30, 1999 and 1998 (unaudited)
and for the years ended December 31, 1998, 1997 and 1996 F-4
Statements of Capital Deficit for the period from January 1, 1999
through March 24, 1999 (acquisition date) (unaudited) and for the
years ended December 31, 1998, 1997 and 1996 F-5
Statements of Cash Flows for the period from January 1, 1999
through March 24, 1999 (acquisition date) (unaudited) and for the six
months ended June 30, 1998 (unaudited) and for the years ended
December 31, 1998, 1997 and 1996 F-6
Notes to Financial Statements F-8
CyberSentry, Inc.:
Report of Independent Certified Public Accountants F-24
Balance Sheets at June 30, 1999 (unaudited) and December 31, 1998 F-25
Statements of Operations for the six months ended June 30, 1999
(unaudited) and for the period from August 21, 1998
(inception) through December 31, 1998 F-26
Statements of Stockholders' Equity (Deficit) for the six months ended
June 30, 1999 (unaudited) and for the period from August 21, 1998
(inception) through December 31, 1998 F-27
Statements of Cash Flows for the six months ended June 30, 1999
(unaudited) and for the period from August 21, 1998 (inception)
through December 31, 1998 F-29
Notes to Financial Statements F-30
Pro forma Financial Information F-52
CyberSentry, Inc.'s Pro Forma Statement of Operations
for the year ended December 31, 1998 (unaudited) F-53
Notes to Pro Forma Condensed Financial Statement (unaudited) F-54
F-1
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders of
Telecommunications Service Center, Inc.
We have audited the accompanying balance sheets of Telecommunications Service
Center, Inc. as of December 31, 1998 and 1997, and the related statements of
operations, capital deficit and cash flows for the years ended December 31,
1998, 1997 and 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly in all
material respects, the financial position of Telecommunications Service Center,
Inc. as of December 31, 1998 and 1997, and the results of its operations and its
cash flows for the years ended December 31, 1998, 1997 and 1996, in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, on May 7, 1998, the Company filed a petition for reorganization
under Chapter 11 of the U.S. Bankruptcy Code. The Company will continue as a
Debtor-in-Possession under Chapter 11 of the Bankruptcy Code. This event and
circumstances relating to this event, including the Company's recurring losses
from operations, negative working capital and capital deficit raise substantial
doubt about its ability to continue as a going concern. Although the Company
will operate as a Debtor-in-Possession under the jurisdiction of the Bankruptcy
Court, the continuation of business as a going concern is contingent upon, among
other things, the ability to (1) formulate a Plan of Reorganization which will
gain approval of the creditors and stockholders and confirmation by the
Bankruptcy Court, (2) achieve satisfactory levels of future operating results
and cash flows and (3) obtain additional debt and equity. The accompanying
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
Miami, Florida
February 5, 1999, except for Note 2
which is as of March 14, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
TELECOMMUNICATIONS SERVICE CENTER, INC.
(DEBTOR-IN-POSESSION)
Balance Sheets
================================================================================================================================
March 24, 1999 December 31,
----------------------------
(Unaudited) 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Current
Cash $ 24,388 $ 33,970 $ 46,186
Accounts receivable, less $56,609, $81,307 and $137,878 allowance
for doubtful accounts in 1999, 1998, and 1997, respectively (Note 8) 176,757 144,435 701,423
Prepaid expenses and other current assets 44,704 69,003 113,346
Other receivables 7,557 5,298 2,900
- --------------------------------------------------------------------------------------------------------------------------------
Total Current Assets 253,406 252,706 863,855
Equipment and Leasehold Improvements, net (Note 4) 1,057,510 1,156,807 1,588,345
Other assets 110,046 110,046 41,696
- --------------------------------------------------------------------------------------------------------------------------------
$ 1,420,962 $ 1,519,559 $ 2,493,896
- --------------------------------------------------------------------------------------------------------------------------------
Liabilities and Capital Deficit (Note 2)
Current Liabilities
Factoring line of credit (Note 8) $ - $ - $ 197,589
Cash overdraft 75,393 -
Accounts payable 1,405,430 1,405,320 1,753,018
Accrued expenses and other current liabilities 613,058 446,923 482,515
Current maturities of capital lease obligations (Note 10) - - 331,120
Line of credit (Note 6) - - 260,872
Current maturities of bank note payable (Note 9) - - 76,546
Liabilities subject to compromise under reorganization
proceedings (Note 3) 8,133,313 8,097,928 -
- --------------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 10,227,194 9,950,171 3,101,660
Note payable - stockholder (Note 7) - - 3,189,362
Obligations under capital leases, less current maturities (Note 10) - - 1,005,155
Bank note payable (Note 9) - - 215,266
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities 10,227,194 9,950,171 7,511,443
- --------------------------------------------------------------------------------------------------------------------------------
Commitments, Contingencies and Subsequent Events
(Notes 8, 12 and 14)
Capital Deficit
Common stock - $1 par, 100,000 shares authorized,
2,000 shares issued and outstanding 2,000 2,000 2,000
Accumulated deficit (8,808,232) (8,432,612) (5,019,547)
- --------------------------------------------------------------------------------------------------------------------------------
Total Capital Deficit (8,806,232) (8,430,612) (5,017,547)
- --------------------------------------------------------------------------------------------------------------------------------
$ 1,420,962 $ 1,519,559 $ 2,493,896
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
[CAPTION]
F-3
<PAGE>
Telecommunications Service Center, Inc.
(Debtor-in-Possession)
Statements of Operations
================================================================================
<TABLE>
<CAPTION>
For the period from
January 1, 1999 For the six For the six
through months ended months ended
March 24, 1999 (b) June 30, 1999 (a) June 30, 1998
(Unaudited) (Unaudited) (Unaudited)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales (Note 1) $ 811,316 $ 1,904,712 $ 14,511,967
- -------------------------------------------------------------------------------------------------------------------------
Operating Expenses:
Telecommunications costs (excluding depreciation
and amortization, shown separately below) 643,853 1,622,349 13,513,977
Selling, general and administrative expenses 384,403 713,526 2,514,162
Depreciation and amortization 102,403 218,014 220,186
- -------------------------------------------------------------------------------------------------------------------------
Total operating expenses 1,130,659 2,553,889 16,248,325
- -------------------------------------------------------------------------------------------------------------------------
Other (Income) Expense:
Loss on sale of assets - - -
Interest expense 77,592 116,302 222,890
Other income (21,315) (21,315) -
- -------------------------------------------------------------------------------------------------------------------------
Total other expense 56,277 94,987 222,890
- -------------------------------------------------------------------------------------------------------------------------
Net loss $ (375,620) $ (744,164) $ (1,959,248)
=========================================================================================================================
Net loss per share Basic $ (187.81) $ (372.08) $ (979.62)
Weighted average number of outstanding shares Basic 2,000 2,000 2,000
<CAPTION>
Years ended December 31,
-------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales (Note 1) $ 22,804,240 $ 8,341,164 $ 2,606,254
- -------------------------------------------------------------------------------------------------------------------------
Operating Expenses:
Telecommunications costs (excluding depreciation
and amortization, shown separately below) 22,283,257 8,112,840 2,305,023
Selling, general and administrative expenses 3,319,419 2,532,845 1,145,239
Depreciation and amortization 439,372 378,860 213,519
- -------------------------------------------------------------------------------------------------------------------------
Total operating expenses 26,042,048 11,024,545 3,663,781
- -------------------------------------------------------------------------------------------------------------------------
Other (Income) Expense:
Loss on sale of assets - - 76,203
Interest expense 402,508 354,959 133,066
Other income (227,251) - (3,337)
- -------------------------------------------------------------------------------------------------------------------------
Total other expense 175,257 354,959 205,932
- -------------------------------------------------------------------------------------------------------------------------
Net loss $ (3,413,065) $ (3,038,340) $ (1,263,459)
=========================================================================================================================
Net loss per share Basic $ (1,706.53) $ (1,519.17) $ (631.73)
Weighted average number of outstanding shares Basic 2,000 2,000 2,000
</TABLE>
(a) Detailed for comparative purposes only; results include post-acquisition
operations and do not reflect acquisition adjustments
(b) Acquisition date by CyberSentry
See accompanying notes to financial statements.
F-4
<PAGE>
Telecommunications Service Center, Inc.
(Debtor-in-Possession)
Statements of Capital Deficit
================================================================================
<TABLE>
<CAPTION>
Common Stock
-------------------------
Shares Amount (Deficit) Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 1,000 $ 1,000 $ (717,748) $ (716,748)
Issuance of common stock 1,000 1,000 - 1,000
Net loss - - (1,263,459) (1,263,459)
- --------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 2,000 2,000 (1,981,207) (1,979,207)
Net loss - - (3,038,340) (3,038,340)
- --------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 2,000 2,000 (5,019,547) (5,017,547)
Net loss - - (3,413,065) (3,413,065)
- --------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 2,000 2,000 (8,432,612) (8,430,612)
Net loss - - (375,620) (375,620)
- --------------------------------------------------------------------------------------------------------------------
Balance at March 24, 1999 (unaudited) 2,000 $ 2,000 $ (8,808,232) $ (8,806,232)
====================================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
Telecommunication Service Center,Inc.
(Debtor-In-Possession)
Statements of Cash Flows
(Note 11)
================================================================================
<TABLE>
<CAPTION>
For the period from
January 1, 1999 For the six
through months ended
March 24, 1999 (b) June 30, 1998
(Unaudited) (Unaudited)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities:
Net loss $ (375,620) $ (1,959,248)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization 102,403 220,186
Interest expense accrued to note payable - stockholder - -
Loss on sale of assets - -
Bad debts - 1,571,070
Recovery of bad debts (18,576) -
Inventory write down 26,157 -
Changes in assets and liabilities:
Accounts receivable (7,624) (836,132)
Prepaid expenses and other 24,299 (3,427)
Other receivables (2,259) (86)
Other assets - 3,966
Accounts payable 110 1,065,540
Accrued expenses and other current liabilities 166,135 191,649
- --------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (84,975) 253,518
- --------------------------------------------------------------------------------------------------------------------
Investing Activities:
Purchases of equipment - -
Proceeds from dispositions of property, plant and equipment - -
- --------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities - -
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
Years ended December 31,
-----------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net loss $ (3,413,065) $ (3,038,340) $ (1,263,459)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization 439,372 378,860 213,519
Interest expense accrued to note payable - stockholder 275,024 162,473 65,048
Loss on sale of assets - - 76,203
Bad debts 1,452,911 140,400 -
Recovery of bad debts - - -
Inventory write down - - -
Changes in assets and liabilities:
Accounts receivable (895,923) (692,880) (63,586)
Prepaid expenses and other 44,343 (48,141) (17,970)
Other receivables (2,398) 79,561 (82,462)
Other assets (68,350) 25,795 (43,790)
Accounts payable 2,673,982 1,013,250 153,950
Accrued expenses and other current liabilities (102,192) 321,605 74,335
- -----------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities 403,704 (1,657,417) (888,212)
- -----------------------------------------------------------------------------------------------------------------------
Investing Activities:
Purchases of equipment (7,833) (41,167) (119,127)
Proceeds from dispositions of property, plant and equipment - - 221,032
- -----------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (7,833) (41,167) 101,905
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
F-6
<PAGE>
Telecommunication Service Center,Inc.
(Debtor-In-Possession)
Statements of Cash Flows
(Note 11)
===============================================================================
<TABLE>
<CAPTION>
For the period from
January 1, 1999 For the six
through months ended
March 24, 1999(a) June 30, 1998
(Unaudited) (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financing Activities:
Proceeds from factoring line of credit, net $ - $ 503,520
(Repayments) proceeds - line of credit, net - (139,372)
Proceeds from bank note payable - -
Repayments on bank note payable - (37,301)
Proceeds from note payable-stockholder - -
Repayments on note payable-stockholder - (264,575)
Repayments of obligations under capital leases - (154,311)
Cash Overdraft 75,393 -
Repayments on other debt - -
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 75,393 (92,039)
- ---------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash (9,582) 161,479
Cash at beginning of period 33,970 46,186
- ---------------------------------------------------------------------------------------------------------------------------
Cash at end of period $ 24,388 $ 207,665
===========================================================================================================================
<CAPTION>
Years ended December 31,
-------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Financing Activities:
Proceeds from factoring line of credit, net $ (136,861) $ 197,589 $ -
(Repayments) proceeds - line of credit, net (69,519) (17,174) 304
Proceeds from bank note payable - - 400,000
Repayments on bank note payable - (69,778) (38,410)
Proceeds from note payable-stockholder 196,042 1,926,614 500,500
Repayments on note payable-stockholder - (88,250) (5,000)
Repayments of obligations under capital leases (397,749) (234,618) (50,446)
Repayments on other debt - - (11,845)
Cash Overdraft - - -
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (408,087) 1,714,383 795,103
- -----------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash (12,216) 15,799 8,796
Cash at beginning of period 46,186 30,387 21,591
- -----------------------------------------------------------------------------------------------------------------------
Cash at end of period $ 33,970 $ 46,186 $ 30,387
=======================================================================================================================
</TABLE>
(a) Acquisition date by CyberSentry
See accompanying notes to financial statements.
F-7
<PAGE>
Telecommunications Service Center, Inc.
(Debtor-In-Possession)
Notes to Financial Statements
(Unaudited with respect to
the periods ended June 30, 1999, March 24, 1999 and June 30, 1998)
================================================================================
1. Summary of Business
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 is in a specialized
telecommunications service industry. This industry
segment is subject to certain competitive pressures.
During 1999, 1998 and 1997, a significant amount of
the Company's business was acquired through
independent marketing agents. For the periods ended
March 24, 1999 and June 30, 1998, and for the years
ending December 31, 1998 and 1997, the agreements
contributed revenues of $313,115, $10,366,010
$18,659,810 and $5,359,652 and related
telecommunication costs of $261,332, $10,068,355,
$17,160,483 and $4,326,573, respectively. There were
no significant agreements in 1996.
In 1997, the Company purchased high-volume,state-of
-the-art Digital Switching equipment to accommodate
anticipated growth and targeted new markets. 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.
Basis of Presentation
---------------------
On May 7, 1998, the Company 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.
F-8
<PAGE>
Telecommunications Service Center, Inc.
(Debtor-In-Possession)
Notes to Financial Statements
(Unaudited with respect to
the period ended March 24, 1999)
================================================================================
The accompanying financial statements have been
prepared on a going concern basis which assumes
continuity of operations and realization of assets
and liquidation of liabilities in the ordinary
course of business. As a result of the
reorganization proceedings (Note 2), there are
significant uncertainties relating to the ability of
the Company to continue as a going concern. The
financial statements do not include any adjustments
that might be necessary as a result of the outcome
of the uncertainties discussed herein including the
effects of any Plan of Reorganization.
Use of Estimates
----------------
The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make estimates and
assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial
statements and the reported amounts of revenues and
expenses during the reporting period. Actual results
could differ from those estimates.
Recognition of Revenue
----------------------
The Company recognizes revenue upon completion of
telephone calls by end users. Allowances are
provided for estimated uncollectible usage.
Asset Impairment
----------------
The Company periodically reviews the carrying value
of certain of its assets in relation to historical
results, current business conditions and trends to
identify potential situations in which the carrying
value of assets may not be recoverable. If such
reviews indicate that the carrying value of such
assets may not be recoverable, the Company would
estimate the undiscounted sum of the expected future
cash flows of such assets to ascertain if a
permanent impairment exists. If a permanent
impairment exists, the Company would determine the
fair value by using quoted market prices, if
available, for such assets, or if quoted market
prices are not available, the Company would discount
the expected future cash flows of such assets.
F-9
<PAGE>
Telecommunications Service Center, Inc.
(Debtor-In-Possession)
Notes to Financial Statements
(Unaudited with respect to
the period ended March 24, 1999)
================================================================================
Financial Instruments
---------------------
The fair value of financial instruments is
determined by reference to various market data and
other valuation techniques, as appropriate, and
unless otherwise disclosed, the fair values of
financial instruments approximate their recorded
values.
Equipment and Leasehold Improvements
------------------------------------
Depreciation and amortization are provided on the
straight-line method over the estimated useful lives
of the assets. Leasehold improvements are amortized
over the term of the respective leases or the
service lives of the improvements, whichever is
shorter. Upon sale or retirement, the asset cost and
related accumulated depreciation and amortization
are removed from the accounts and any related gain
or loss is reflected in earnings.
Income Taxes
------------
Income taxes are accounted for using the liability
approach under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Under this method, deferred taxes
are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates
applicable for future years to the differences
between the financial statement and tax basis of
existing assets and liabilities.
Earnings Per Share
------------------
During 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128
"Earnings Per Share" ("SFAS No. 128"). SFAS No. 128
replaced the existing methodology for calculating
and presenting earnings per share. Under SFAS No.
128, primary earnings per share has been replaced
with a presentation of basic earnings per share and
fully diluted earnings per share has been replaced
with diluted earnings per share. Basic earnings per
share excludes dilution and is computed by dividing
income available to common shares outstanding for
the period by the weighted average of common
F-10
<PAGE>
Telecommunications Service Center, Inc.
(Debtor-In-Possession)
Notes to Financial Statements
(Unaudited with respect to
the period ended March 24, 1999)
================================================================================
shares outstanding. Diluted earnings per share is
computed similarly to fully diluted earnings per
share in accordance with the Accounting Principles
Board ("APB") Opinion No. 15. The impact of the
adoption of SFAS No. 128 has not been material.
Interim Financial Statements
----------------------------
The financial statements for the periods ended June
30, 1999, March 24, 1999 and June 30, 1998 are
unaudited. In the opinion of management, such
financial statements include all adjustments
(consisting only of normal recurring accruals)
necessary for a fair presentation of financial
position and the results of operations. The results
of operations for these periods are not necessarily
indicative of the results to be expected for the
full year. The statement of operations for the six
months ended June 30, 1999 is presented for
comparative purposes only. These results include
post-acquisition operations and do not reflect
acquisition adjustments.
New Accounting Pronouncements
-----------------------------
In March 1998, the American Institute of Certified
Public Accountants ("AICPA") issued Statement of
Position 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use
("SOP 98-1"). SOP 98-1 requires computer software
costs associated with internal use software to be
expensed as incurred until certain capitalization
criteria are met. The Company adopted SOP on January
1, 1999. Adoption of this statement had no material
impact on the Company's financial position, results
of operations, or cash flows.
In April 1998, the AICPA issued Statement of
Position (SOP) 98-5, "Reporting on the Costs of
Start-Up Activities," provides guidance on the
financial reporting of start-up costs and
organization costs. It requires costs of start-up
activities and organization costs to be expensed as
incurred. The SOP is effective for financial
statements for fiscal years beginning after December
15, 1998. Adoption of this SOP had no material
impact
F-11
<PAGE>
Telecommunications Service Center, Inc.
(Debtor-In-Possession)
Notes to Financial Statements
(Unaudited with respect to
the period ended March 24, 1999)
================================================================================
on the Company's financial position, results of
operations, or cash flows.
In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which
establishes accounting and reporting standards for
derivative instruments and for hedging activities.
It requires that an entity recognize all derivatives
as either assets or liabilities in the statement of
financial position and measure those instruments at
fair value. The statement applies to all entities
and is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. The Company did
not engage in derivative instruments or hedging
activities in any periods presented in the financial
statements and management does not expect this
statement to have a material impact on the Company's
financial position, results of operations or cash
flows.
2. Reorganization In Chapter 11, substantially all liabilities as of
the petition date are subject to resolution under
the reorganization plan (filed concurrently with the
petition for relief) which is to be voted upon by
the Company's creditors and stockholders and
confirmed by the Bankruptcy Court.
The Bankruptcy Court authorized the Company to use
the cash generated by its operations to continue to
fund its business obligations and to pay pre-
petition wages, salaries and other liabilities.
These various Bankruptcy Court authorizations
provided the Company with cash and liquidity, so
that it may conduct its operations. The reorganized
company expects to meet its working capital and
capital expenditure requirements through its
existing credit facilities (Notes 6, 7 and 9) and
through the purchase by CyberSentry, Inc.
("CyberSentry") (see Note 14).
Schedules have been filed by the Company with the
Bankruptcy Court setting forth its assets and
liabilities as of the petition date as shown by its
accounting records. Creditors holding pre-petition
date claims against the Company were required to
file proofs of claim on
F-12
<PAGE>
Telecommunications Service Center, Inc.
(Debtor-In-Possession)
Notes to Financial Statements
(Unaudited with respect to
the period ended March 24, 1999)
================================================================================
or before a date fixed by the Bankruptcy Court.
Differences between amounts shown by the Company and
claims filed by its creditors, including claims in
excess of what the Company has previously accrued,
have been or will be investigated and resolved
consensually or by order of the Bankruptcy Court.
The ultimate amount and settlement terms for such
liabilities are subject to the confirmation of the
reorganization plan.
The Bankruptcy Court confirmed the plan of
reorganization on March 4, 1999 and the Plan became
effective ("Effective Date") March 14, 1999, pending
the closing of the CyberSentry purchase.
The Plan provides for the division of creditors and
equity holders into six classes and for the
treatment of each class as follows:
The Class One Creditors (as defined in the Plan)
consist of administrative claims that were paid in
full. The aggregate payment made to the Class One
Creditors was approximately $20,000 (excluding
Westinghouse Communications and Sprint
Communications Company, L.P.). Included in accounts
payable at December 31, 1998 in the balance sheet
are post petition administrative claims of $895,692
from Westinghouse Communications ("Westinghouse")
and Sprint Communications Company L.P. ("Sprint").
The administrative amounts were allowed in full and
pre-petition claims amounting to $1,355,544 were
allowed in full as unsecured claims (see Class Five
Creditors).
With respect to the allowed administrative claims of
Westinghouse and Sprint, the companies received $.07
in cash and the value of $.93 in a share of Class A
Preferred Stock ($1.50 stated value) in CyberSentry,
Inc., for every $1.00 of unsecured claim.
Westinghouse and Sprint have also entered into an
agreement with Patriot Advisors, Inc. ("Patriot") to
sell the preferred stock of CyberSentry, Inc. to
Patriot Advisors, Inc. at $1.50 per share at certain
time intervals up to 455 days after the confirmation
date of the plan of reorganization.
The Class Two Creditors (as defined in the Plan)
consist of relatively small amount of claims of
governmental units for past due
F-13
<PAGE>
Telecommunications Service Center, Inc.
(Debtor-In-Possession)
Notes to Financial Statements
(Unaudited with respect to
the period ended March 24, 1999)
================================================================================
taxes which will be paid in full in 60 equal monthly
payments.
The Class Three Creditors (as defined in the Plan)
consist of the secured claims of Southtrust Bank
("Southtrust") and Receivable Funding Corporation
("Receivable Funding"). Southtrust is owed
approximately $477,000 at December 31, 1998 pursuant
to a Note and Mortgage on all assets, such debt
being incurred by the Company in connection with a
line of credit. Southtrust will be paid in
accordance with the terms of the Note and Mortgage.
Receivable Funding is owed approximately $10,000
pursuant to a factoring agreement. Receivable
Funding will be paid in accordance with the terms of
the agreement.
The Class Four Creditors (as defined in the Plan)
consist of the equipment lease claims of IBM
("IBM"), and Telecom Finance Group ("Telecom
Finance"). IBM's claim is pursuant to a lease
agreement for a computer system by and between TSC
and IBM (the "IBM Lease"). IBM is owed approximately
$24,000 at December 31, 1998, which will be paid in
full pursuant to the terms of the IBM Lease. Telecom
Finance's claim is pursuant to a lease agreement by
and between TSC and Telecom Finance regarding the
lease of Siemen's switch equipment (the "Siemens
Lease"). Telecom Finance is owed approximately
$1,300,000 at December 31, 1998. Within ten days of
the entry of the confirmation order, TSC shall make
a $100,000 payment to Telecom Finance to be applied
to amounts owed under the lease. Telecom Finance and
TSC shall then enter into an amended lease wherein
the past due pre-petition and post-petition
arrearage including costs, fees, charges and
interest, shall be added to the existing lease
obligations and restructured under an amended lease
with such restructured obligation paid out over a
five-year period.
The Class Five Creditors (as defined in the Plan)
consist of unsecured creditors who will receive $.07
in cash and the value of $.93 in a share of Class A
Preferred Stock ($1.50 stated value) of CyberSentry,
Inc. for every $1.00 of unsecured claim.
F-14
<PAGE>
Telecommunications Service Center, Inc.
(Debtor-In-Possession)
Notes to Financial Statements
(Unaudited with respect to
the period ended March 24, 1999)
================================================================================
The Class Five Creditors also received the right to
purchase Common Stock for $1.00 per share upon
confirmation of the Plan for each one share of
preferred stock received by the Class Five Creditor
pursuant to the Plan (the "Right's Offering"). The
Rights Offering is only available to the Class Five
Creditors.
The Class Six Creditors (as defined in the Plan)
consist of the pre-Bankruptcy shareholders of TSC
(the "TSC Shareholders") whose interest in TSC is
terminated pursuant to the Plan by cancellation of
all outstanding shares of capital stock of TSC.
Pursuant to the Plan and the acquisition (see Note
14), the TSC Shareholders were issued 1,000,000
shares of Common Stock and 1,000,000 shares of Class
B Preferred Stock in CyberSentry, Inc. on a pro rata
basis.
3. Liabilities Subject Substantially all of the Company's liabilities as of
to Compromise the Petition Date are subject to settlement under a
Under plan of reorganization.
Reorganization
Proceedings Liabilities subject to comprise under reorganization
consisted of:
<TABLE>
<CAPTION>
March 24, December 31,
1999 1998
(Unaidited)
------------ -------------
<S> <C> <C>
Priority claims $ 20,000 $ 20,000
Secured debt
Principal 1,405,544 1,415,819
General Unsecured Claims 3,047,341 3,001,681
Unsecured Debt, Principal and Interest 3,660,428 3,660,428
------------------------------------------------------------------------------------------
$ 8,133,313 $ 8,097,928
==========================================================================================
</TABLE>
Priority claims, the repayment of which the Company
is required to prioritize under bankruptcy law are
comprised principally of administrative claims.
Unsecured debt includes amounts which may ultimately
be deemed secured. It is not practicable to estimate
the fair value of the Company's liabilities subject
to compromise under reorganization proceedings.
F-15
<PAGE>
Telecommunications Service Center, Inc.
(Debtor-In_Possession)
Notes to Financial Statements
(Unaudited with respect to
the period ended March 24, 1999)
===============================================================================
4. Equipment and Equipment and leasehold improvements are as follows:
Leasehold
Improvements
<TABLE>
<CAPTION>
Estimated
March 24, Useful
1999 December 31, Lives
----------------------
(Unaudited) 1998 1997 (in years)
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Switch equipment $ 1,552,075 $ 1,552,075 $ 1,554,075 5
Switch software 336,336 335,228 334,479 5
Computer equipment 271,721 269,722 260,637 5
Furniture and equipment 56,480 56,480 56,480 5-10
Leasehold improvements 14,215 14,215 14,215 5
--------------------------------------------------------------------------------------------------
$ 2,230,827 $ 2,227,720 $ 2,219,886
Less accumulated depreciation and
amortization (1,173,317) (1,070,913) (631,541)
------------------------------------------------------------------------------------------------------
$ 1,057,510 $ 1,156,807 $ 1,588,345
======================================================================================================
</TABLE>
Substantially all of the Company's equipment is under
capital lease.
5. Income Taxes Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant
components of the Company's deferred income tax assets and
deferred income tax liabilities are as follows:
<TABLE>
<CAPTION>
March 24,
1999 December 31,
----------------------------
(Unaudited) 1998 1997
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards 3,002,000 2,816,000 1,190,000
Bad debt 21,000 - 48,000
Accrual to cash conversion 474,000 503,000 655,000
----------------------------------------------------------------------------------------------
Total deferred tax assets 3,497,000 3,319,000 1,893,000
----------------------------------------------------------------------------------------------
Deferred tax liabilities:
Tax greater than book depreciation
and amortization $ 220,000 $ 211,000 $ 108,000
----------------------------------------------------------------------------------------------
Total deferred tax liabilities 220,000 211,000 108,000
==============================================================================================
</TABLE>
F-16
<PAGE>
Telecommunications Service Center, Inc.
(Debtor-in-Possession)
Notes to Financial Statements
(Unaudited with respect to
the period ended March 24, 1999)
===============================================================================
<TABLE>
<S> <C> <C> <C>
Valuation allowance for net deferred
tax assets (3,277,000) (3,108,000) (1,785,000)
--------------------------------------------------------------------------------------------
$ - $ - $ -
============================================================================================
</TABLE>
As of December 31, 1998, the Company had Federal and Florida
net operating loss carryforwards of approximately
$7,483,000, ($7,977,000 at March 24, 1999) that expire from
2010 through 2018.
A "valuation allowance" is provided when it is more likely
than not that some portion of deferred tax assets will not
be realized. The Company has established valuation
allowances principally for that portion of the net operating
loss carryforward and other net deferred tax assets whose
future tax benefit is currently uncertain. Realization of
the benefits related to losses may be limited in any one
year due to U.S. Internal Revenue Code Section 382, change
of ownership rules.
The difference between the reported income tax (benefit) and
the tax (benefit) that would result from applying the 34%
Federal statutory rate to the (loss) from operations before
income taxes is reconciled as follows:
<TABLE>
<CAPTION>
March 24,
1999 December 31,
---------------------------------------------
(Unaudited) 1998 1997 1996
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income tax (benefit) computed
at Federal statutory rate $ (127,711) $ (1,160,442) $ (1,033,036) $ (429,576)
Increase (decrease) in Federal taxes
resulting from:
Effect of net operating
losses for which no tax
carryback benefit is
available 124,990 1,154,922 1,030,678 429,576
Other non-deductible expenses 2,721 5,520 2,358 -
------------------------------------------------------------------------------------------------------------
$ - $ - $ -
============================================================================================================
</TABLE>
F-17
<PAGE>
Telecommunications Service Center, Inc.
(Debtor-in-Possession)
Notes to Financial Statements
(Unaudited with respect to
the period ended March 24, 1999)
===============================================================================
6. Line of The Company has a revolving line of credit collateralized
Credit by all business assets, including but not limited to
accounts receivable, property and equipment, contract rights
and general intangibles, now owned or hereafter acquired,
providing for borrowings up to $300,000. The principal
balance is due on demand and interest is payable monthly at
the financial institution's base rate plus 1.5% (10.0% at
March 24, 1999 and December 31, 1998). The balance
outstanding at March 24, 1999 and December 31, 1998 amounted
to $282,000 and $255,000, respectively and is included in
liabilities subject to compromise under reorganization
proceedings in the balance sheets.
7. Note
Payable-
Stockholder The note payable-stockholder is unsecured and due on
December 31, 2000. The note bears interest at the prime rate
plus 1% (9.5% at March 24, 1999 and December 31, 1998).
Interest expense on the note amounted to $275,024, $162,473
and $65,048 for the years ended December 31, 1998, 1997 and
1996, respectively. Pursuant to TSC's Plan of
Reorganization, there was no interest expense on the note in
1999. The loan is subordinated to the line of credit and
bank note payable. Accrued interest in the amount of
$544,918, $544,918 and $332,200 was included in the note
balance at March 24, 1999, December 31, 1998 and 1997,
respectively. The balance outstanding, including accrued
interest at March 24, 1999, December 31, 1998 and 1997
amounted to $3,660,428, $3,660,428 and $3,389,361,
respectively. The balance outstanding at March 24, 1999 and
December 31, 1998 is included in liabilities subject to
compromise under reorganization proceedings in the balance
sheets.
8. Factoring On July 9, 1997, the Company entered into a factoring
Agreement agreement providing a line of credit for up to $1,000,000,
based upon 90% of the eligible accounts receivable. The
agreement provided for the line to be increased to
$1,500,000. The fee charged by the factor
F-18
<PAGE>
Telecommunications Service Center, Inc.
(Debtor-in-Possession)
Notes to Financial Statements
(Unaudited with respect to
the period ended March 24, 1999)
===============================================================================
was 16.5% per annum of amounts advanced and outstanding. The
advances were collateralized by accounts receivable. The
term of the agreement was for one year with an option to
extend for one year thereafter. The Company did not exercise
its option to extend the factoring agreement in 1998.
Factoring fees amounted to $758,683 for the year ended
December 31, 1997.
9. Bank Note The Company had a note payable with a bank collateralized
Payable by all business assets, including but not limited to
accounts receivable, property and equipment, contract rights
and general intangibles, now owned or hereafter. The note
bears interest at 8.75% with principal and interest due
monthly in the amount at $8,254 through May 2001. On May 7,
1998 the Company filed a voluntary petition for relief under
Chapter 11 (see Notes 1 and 2). As a result of the
bankruptcy filing, the Company was not in compliance with
certain covenants relating to the bank note agreement and
therefore classified the balance of the bank note payable as
a current liability. The balance outstanding at March 24,
1999, December 31, 1998 and 1997 amounted to $224,098,
$222,292 and $291,812, respectively. The balances
outstanding at March 24, 1999 and December 31, 1998 are
included in liabilities subject to compromise under
reorganization proceedings in the balance sheets.
Maturities of the bank note payable at December 31, 1998 are
as follows:
<TABLE>
<S> <C>
1999 $ 90,808
2000 91,112
2001 40,372
----------------------------------------------------------------
$222,292
================================================================
</TABLE>
F-19
<PAGE>
TELECOMMUNICATIONS SERVICE CENTER, INC.
(DEBTOR-IN-POSSESSION)
Notes to Financial Statements
(Unaudited with respect to
the period ended March 24, 1999)
===============================================================================
10. Lease Telecommunications Service Center, Inc. leases its office
Obligations facilities. Minimum rental payments required under these
leases as of December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ 77,754
2000 52,881
2001 22,672
2002 19,336
2003 4,334
----------------------------------------------------------------
Total minimum lease payments $ 176,977
================================================================
</TABLE>
Rent expense aggregated $14,136, $40,225, $72,461, $63,088
and $56,361 for the periods ended March 24, 1999 and June
30, 1998 and for the years ended December 31, 1998, 1997 and
1996, respectively.
The Company also leases certain computer
equipment, switch equipment and software under capital lease
agreements. Total future minimum lease payments under the
original terms of the agreements at December 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999 $ 596,717
2000 416,813
2001 312,610
------------------------------------------------------------------------------
Total minimum lease payments 1,326,140 Less amount
representing interest (387,614)
Less current maturities of capital lease obligations (259,845)
------------------------------------------------------------------------------
Present value of long-term obligations under
capital leases $ 678,681
==============================================================================
</TABLE>
On May 7, 1998, the Company filed a voluntary petition for
relief under Chapter 11 (See Notes 1 and 2). As a result of
the bankruptcy filing, the Company was not in compliance
with certain covenants relating to the capital lease
agreements and has therefore classified the balance of the
lease obligations as a current liability included in
liabilities subject to compromise under
F-20
<PAGE>
Telecommunications Service Center, Inc.
(Debtor-in-Possession)
Notes to Financial Statements
(Unaudited with respect to
the period ended March 24, 1999)
===============================================================================
reorganization proceedings in the balance sheet at December
31, 1998.
11. Statement of Supplemental disclosures of cash flow information:
Cash Flows
<TABLE>
<CAPTION>
Years ended December 31, 1998 1997 1996
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid for interest $ 127,726 $ 192,941 $ 67,683
Non cash transactions:
Purchase of equipment by capital leases - 438,669 1,182,670
Repayment of note payable - stockholder
through issuance of common stock - - 1,000
Interest accrued to balance of note
payable - stockholder 275,024 162,473 65,048
Services received in settlement of
accounts receivable - - 376,614
Transfer of the following to liabilities
subject to compromise under
reorganization proceedings:
Pre-petition accounts payable 3,021,681 - -
Bank line of credit 255,000 - -
Capital leases 938,526 - -
Bank note payable 222,293 - -
Note payable-stockholder 3,660,428 - -
------------
Total transferred $ 8,097,928
------------
</TABLE>
There were no supplemental disclosures of cash flow
information arising for the periods ended March 24, 1999
and June 30, 1998.
F-21
<PAGE>
Telecommunications Service Center, Inc.
(Debtor-in-Possession)
Notes to Financial Statements
(Unaudited with respect to
the period ended March 24, 1999)
================================================================================
12. Litigation In December 1997, the Company received notice of a claim
aggregating approximately $696,000 filed against the Company
pertaining to breach of certain trade agreements. The
Company is vigorously defending this claim. Management
believes the Company's maximum exposure is $696,000 which it
has recorded as of March 31, 1999 and December 31, 1998 and
is included in liabilities subject to compromise under
reorganization proceedings in the balance sheets.
Additionally, the Company is subject to various legal
proceedings, claims and liabilities which arise in the
ordinary course of its business. In the opinion of
management, the amount of ultimate liability with respect to
these matters will not materially affect the financial
statements of the Company.
13. Related Party The Company, Lake Tel, Inc., a New Jersey corporation ("Lake
Transaction Tel"), and Capital One Bank, a Virginia banking corporation
"Capital One"), have entered into a Carrier Agreement dated
October 1998 (the "Carrier Agreement") pursuant to which the
Company has agreed to allow Capital One to offer secured
credit card products to customers of the Company for an
initial term of five years. For each account booked by
Capital One under the Carrier Agreement, Lake Tel is
entitled to receive a fee from Capital One and is obligated
to pay a fee to the Company. The Chairman and President of
CyberSentry, Inc. (see Note 14) sits on the Board of
Directors of Lake Tel, a telecommunications marketing
company specializing in financial institutions.
14. Subsequent Effective March 24, 1999, CyberSentry purchased all of the
Events 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
F-22
<PAGE>
Telecommunications Service Center, Inc.
(Debtor-in-Possession)
Notes to Financial Statements
(Unaudited with respect to
the period ended March 24, 1999)
===============================================================================
sale of CyberSentry software and to sell two applications of
Asynchronous Transfer Mode Technology.
F-23
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders of
CyberSentry, Inc.
We have audited the accompanying balance sheet of CyberSentry, Inc. (a
development stage enterprise) as of December 31, 1998 and the related statements
of operations, stockholders' equity (deficit) and cash flows for the period from
August 21, 1998 (inception) through December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CyberSentry, Inc. as of
December 31, 1998 and the results of its operations and cash flows for the
period from August 21, 1998 (inception) through December 31, 1998 in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred significant
losses from operations, negative cash flows and a working capital deficiency as
of and for the period ended December 31, 1998. These factors raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regards to these matters are described in note 14. The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
Miami, Florida
February 22, 1999, except for Note 1
which is as of March 14, 1999
F-24
<PAGE>
CYBERSENTRY, INC.
(a development stage enterprise)
Balance Sheets
================================================================================
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current
Cash $ 2,027 $ -
Accounts receivable, less $94,416 allowance for doubtful accounts 196,082 -
Prepaid expenses and other assets 199,905 14,896
Other receivables 4,625 50,000
- ----------------------------------------------------------------------------------------------------------------------------
Total current assets 402,639 64,896
Excess of cost over fair value of net assets acquired, net of $302,790 of accumulated
amortization (Note 3) 11,003,442 -
ATM Technology License, net of $357,143 and $142,857 of accumulated
amortization in 1999 and 1998, respectively (Notes 1 and 2) 2,642,857 2,857,143
CyberSentry Software License, net of $321,429 and $107,143 of
accumulated amortization in 1999 and 1998, respectively (Notes 1 and 2) 2,678,571 2,892,857
Equipment and Leasehold Improvements, net (Note 4) 1,109,816 -
Other assets 110,046 -
- ----------------------------------------------------------------------------------------------------------------------------
$ 17,947,371 $ 5,814,896
============================================================================================================================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 743,606 $ -
Accrued expenses and other current liabilities 629,181 12,500
Current maturities of capital lease obligations (Note 8) 225,203 -
Line of credit (Note 6) 329,000 -
Bank note payable (Note 7) 181,818 -
Due to stockholder (Note 9) 187,500 76,181
- ----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,296,308 88,681
- ----------------------------------------------------------------------------------------------------------------------------
Obligations under capital leases, less current maturities (Note 8) 1,128,211 -
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 3,424,519 88,681
- ----------------------------------------------------------------------------------------------------------------------------
Redeemable convertible preferred stock, $.001 par value, 534,656 shares (Note 10) 801,984 -
- ----------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 11)
- ----------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity (Note 10)
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 15,180,597 6,038,700
Deficit accumulated during the development stage (555,667) (326,485)
Accumulated deficit (924,737) -
- ----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 13,720,868 5,726,215
- ----------------------------------------------------------------------------------------------------------------------------
$ 17,947,371 $ 5,814,896
============================================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE>
CyberSentry, Inc.
(a development stage enterprise)
Statements of Operations
==============================================================================
<TABLE>
<CAPTION>
For the Period from Cumulative
For the August 21, 1998 development stage
six months (inception) through enterprise through
ended June 30, December 31, March 24,
1999 1998 1999
(Unaudited)(a)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales (Note 1) $ 1,093,396 $ - $ -
- ------------------------------------------------------------------------------------------------------------------------
Operating Expenses:
Telecommunications costs (excluding
depreciation and amortization, shown
separately below) 919,826 - -
Selling, general and administrative expenses 440,386 76,485 14,896
Depreciation and amortization 848,393 250,000 214,286
- ------------------------------------------------------------------------------------------------------------------------
Total operating expenses 2,208,605 326,485 229,182
- ------------------------------------------------------------------------------------------------------------------------
Other Expense:
Interest expense 38,710 - -
- ------------------------------------------------------------------------------------------------------------------------
Total other expenses 38,710 - -
- ------------------------------------------------------------------------------------------------------------------------
Net loss $ (1,153,919) (326,485) (229,182)
========================================================================================================================
Net loss per share
Basic $ (.09) $ (.03)
Diluted $ (.09) $ (.03)
Weighted average number of outstanding shares
Basic 13,108,288 10,500,000
Diluted 13,108,288 10,500,000
</TABLE>
(a) Includes the operations of TSC from March 25, 1999 through June 30, 1999
See accompanying notes to financial statements.
F-26
<PAGE>
CyberSentry, Inc.
(a development stage enterprise)
Statements of Stockholders' Equity (Deficit)
(Note 10)
==============================================================================
<TABLE>
<CAPTION>
Class A Preferred Class B Preferred Common
----------------------- ----------------------- -----------------------
Shares Amount Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock for
cash in September 1998 at
$.006/share - $ - - $ - 8,550,000 $ 8,550
Issuance of common stock for
services in September 1998 at
$.006/share - - - - 450,000 450
Issuance of common stock for
CyberSentry Software
acquisition in November 1998
at $1.00/share - - - - 3,000,000 3,000
Issuance of Class B preferred
stock for ATM Technology
acquisition in September 1998
at $1.50/share - - 2,000,000 2,000 - -
Net loss - - - - - -
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 - - 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 3,361,252 3,361 - - - -
<CAPTION>
Deficit
Accumulated
During
Development Accumulated
Capital Stage Deficit Total
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Issuance of common stock for
cash in September 1998 at
$.006/share $ 41,450 $ - $ - $ 50,000
Issuance of common stock for
services in September 1998 at
$.006/share 2,250 - - 2,700
Issuance of common stock for
CyberSentry Software
acquisition in November 1998
at $1.00/share 2,997,000 - - 3,000,000
Issuance of Class B preferred
stock for ATM Technology
acquisition in September 1998
at $1.50/share 2,998,000 - - 3,000,000
Net loss - (326,485) - (326,485)
- -----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 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
</TABLE>
F-27
<PAGE>
CyberSentry, Inc.
(a development stage enterprise)
Statements of Stockholders' Equity (Deficit)
(Note 10)
================================================================================
<TABLE>
<CAPTION>
Class A Preferred Class B Preferred Common
-------------------- -------------------- --------------------
Shares Amount Shares Amount Shares Amount Capital
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of Class A preferred stock to
Sprint and Westinghouse in
March 1999 at $1.50/share 555,290 555 - - - - 832,380
Issuance of common stock to
unsecured creditor in March 1999
at $1.00/share - - - - 258,765 259 258,506
Issuance of stock options for
50,000 shares of common
stock in April 1999 - - - - - - 15,023
Net loss - - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 (unaudited) 3,916,522 $3,916 3,000,000 $3,000 13,758,765 $13,759 $15,180,597
===================================================================================================================================
<CAPTION>
Deficit
Accumulated
During
Development Accumulated
Stage Deficit Total
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Issuance of Class A preferred stock to
Sprint and Westinghouse in
March 1999 at $1.50/share - 832,935
Issuance of common stock to
unsecured creditor in March 1999
at $1.00/share - 258,765
Issuance of stock options for
50,000 shares of common
stock in April 1999 - 15,023
Net loss (229,182) (924,737) (1,153,919)
- --------------------------------------------------------------------------------------------------
Balance at June 30, 1999 (unaudited) $(555,667) $(924,737) $13,720,868
==================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE>
CyberSentry, Inc.
(a development stage enterprise)
Statements of Cash Flows
================================================================================
<TABLE>
<CAPTION>
For the Cumulative
Period from development
For the August 21, 1998 stage enterprise
six months (inception) to through
ended June 30, December 31, March 24,
1999 1998 1999
(Unaudited)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net loss $ (1,153,919) $ (326,485) $ (229,182)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 848,393 250,000 214,286
Common stock/stock options granted for services 15,023 2,700 -
Bad debts 10,491 - -
Changes in operating assets and liabilities, net of
effects of acquisition and noncash transactions:
Accounts receivable (19,325) - -
Prepaid expenses and other assets (140,305) - 14,896
Other receivables 52,932 (50,000) -
Other assets - (14,896) -
Accounts payable (61,407) 12,500 -
Accrued expenses and other current liabilities 3,623 - -
- ---------------------------------------------------------------------------------------------------------------------------------
Total adjustments 709,425 200,304 229,182
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) operating activities (444,494) (126,181) -
- ---------------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Proceeds from issuance of common stock 500,000 50,000 -
Increase in due to stockholder 111,319 76,181 -
Proceeds from line of credit 47,000 - -
Payments on bank note payable (211,618) - -
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 446,701 126,181 -
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 2,207 - -
Cash and cash equivalents at beginning of period - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 2,027 $ - $ -
==================================================================================================================================
Supplemental Disclosures:
Class B preferred stock issued in exchange for ATM
Technology License $ - $ 3,000,000 $ -
Common stock issued in exchange for CyberSentry Software $ - $ 3,000,000 $ -
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.
F-29
<PAGE>
CyberSentry, Inc.
(a development stage enterprise)
Notes to Financial Statements
(unaudited with respect to the period ended June 30, 1999)
================================================================================
1. Summary of Organization and Business
-------------------------
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
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, (see Note 3).
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).
F-30
<PAGE>
CyberSentry, Inc.
(a development stage enterprise)
Notes to Financial Statements
(unaudited with respect to the period ended June 30, 1999)
================================================================================
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. TSC is in a specialized telecommunications service
industry.
Use of Estimates
----------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with an
initial maturity of three months or less when purchased to
be cash equivalents.
Equipment and Leasehold Improvements
------------------------------------
Depreciation and amortization are provided on the straight-
line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the term of the
respective leases or the service lives of the improvements,
whichever is shorter. Upon sale or retirement, the asset
cost and related accumulated depreciation and amortization
are removed from the accounts and any related gain or loss
is reflected in earnings.
Goodwill
--------
The excess of the cost over the fair value of net assets
acquired is recorded as goodwill and is amortized on a
straight-line basis over 10 years.
ATM Technology and CyberSentry Software Licenses
------------------------------------------------
The ATM Technology and CyberSentry Software licenses are
carried at cost less accumulated amortization. Amortization
is computed using the straight-line method over the
estimated useful life of seven years.
New Accounting Pronouncements
-----------------------------
In March 1998, the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position 98-1,
Accounting For The Costs Of Computer Software Developed Or
Obtained For Internal Use ("SOP 98-1"). SOP 98-1 requires
computer software costs associated with internal use
software to be expensed as incurred until certain
capitalization criteria are met.
F-31
<PAGE>
CyberSentry, Inc.
(a development stage enterprise)
Notes to Financial Statements
(unaudited with respect to the period ended June 30, 1999)
================================================================================
The Company adopted this SOP on January 1, 1999. Adoption of
this statement had no material impact on the Company's
financial position, results of operations, or cash flows.
In April 1998, the AICPA issued Statement of Position (SOP)
98-5, "Reporting on the Costs of Start-Up Activities,"
provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up
activities and organization costs to be expensed as
incurred. The SOP is effective for financial statements for
fiscal years beginning after December 15, 1998. Adoption of
this statement had no material impact on the Company's
financial position, results of operations, or cash flows.
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS)
No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting
standards for derivative instruments and for hedging
activities. It requires that an entity recognizes all
derivatives as either assets or liabilities in the statement
of financial position and measures those instruments at fair
value. The statement applies to all entities and is
effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. The Company did not engage in
derivative instruments or hedging activities in any periods
presented in the financial statements and management does
not expect this statement to have a material impact on the
Company's financial position, results of operations, or cash
flows.
Revenue Recognition
-------------------
There were no revenues for the Company for the period from
August 21, 1998 (inception) through December 31, 1998. The
Company will enter into license agreements, typically with
major end user customers, which allow for the use of the
Company's software and technology products, usually
restricted by the number of employees, the number of users,
or the license term. Fees from
F-32
<PAGE>
CyberSentry, Inc.
(a development stage enterprise)
Notes to Financial Statements
(unaudited with respect to the period ended June 30, 1999)
================================================================================
licenses will be recognized as revenue upon contract
execution, provided all shipment obligations have been met,
fees are fixed or determinable, and collection is probable.
The Company recognizes revenue for its Telecommunications
segment upon completion of telephone calls by end users.
Allowances are provided for estimated uncollectible usage.
Income Taxes
------------
Income taxes are accounted for using the liability approach
under the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Under this
method, deferred taxes are recognized for the tax
consequences of temporary differences by applying enacted
statutory tax rates applicable for future years to the
differences between the financial statement and tax basis of
existing assets and liabilities.
Earnings Per Share
------------------
During 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128 "Earnings Per Share"
("SFAS No. 128"). SFAS No. 128 replaced the existing
methodology for calculating and presenting earnings per
share. Under SFAS No. 128, primary earnings per share has
been replaced with a presentation of basic earnings per
share and fully diluted earnings per share has been replaced
with diluted earnings per share. Basic earnings per share
excludes dilution and is computed by dividing income
available to common shares outstanding for the period by the
weighted average of common shares outstanding. Diluted
earnings per share is computed similarly to fully diluted
earnings per share in accordance with the Accounting
Principles Board ("APB") Opinion No. 15. The impact of the
adoption of SFAS No. 128 has not been material.
F-33
<PAGE>
CyberSentry, Inc.
(a development stage enterprise)
Notes to Financial Statements
(unaudited with respect to the period ended June 30, 1999)
================================================================================
Asset Impairment
----------------
The Company periodically reviews the carrying value of
certain of its assets in relation to historical results,
current business conditions and trends to identify potential
situations in which the carrying value of assets may not be
recoverable. If such reviews indicate that the carrying
value of such assets may not be recoverable, the Company
would estimate the undiscounted sum of the expected future
cash flows of such assets to ascertain if a permanent
impairment exists. If a permanent impairment exists, the
Company would determine the fair value using quoted market
prices, if available, for such assets, or if quoted market
prices are not available, the Company would discount the
expected future cash flows of such assets.
Financial Instruments
---------------------
The fair value of financial instruments is determined by
reference to various market data and other valuation
techniques, as appropriate, and unless otherwise disclosed,
the fair values of financial instruments approximate their
recorded values.
Interim Financial Statements
----------------------------
The financial statements for the six months ended June 30,
1999 are unaudited. In the opinion of management, such
financial statements include all adjustments (consisting
only of normal recurring accruals) necessary for a fair
presentation of financial position and the results of
operations. The results of operations for the six months
ended June 30, 1999 are not necessarily indicative of the
results to be expected for the full year.
2. Acquired CyberSentry Software License
----------------------------
Technology
On October 2, 1998, Templar Corporation, a Delaware
corporation ("Templar"), entered into a license agreement
(the "License Agreement") with Learning Company Properties,
Inc., a Delaware
F-34
<PAGE>
CyberSentry, Inc.
(a development stage enterprise)
Notes to Financial Statements
(unaudited with respect to the period ended June 30, 1999)
================================================================================
corporation ("Learning"), pursuant to which Templar obtained
an exclusive, worldwide, perpetual, fully-paid right and
license to publish, use, distribute and sublicense a
software program that provides digital rights management
technology (the "CyberSentry Software").
In addition, pursuant to the License Agreement, Learning
assigned its rights to certain trademarks, and Learning
agreed to provide engineering support through September 30,
1999. Templar agreed to pay Learning $150,000 in
consideration for such engineering support. Subsequent to
year end, the License Agreement was revised specifying that
Learning is to provide engineering support through December
31, 1999 and Templar agreed to pay Learning $187,500 for
such support. The Company agreed to reimburse Templar for
payments made to Learning
Templar transferred to Learning 2,500,000 fully paid and
ordinary shares (the "LibertyOne Shares") in the capital of
LibertyOne Ltd., ("LibertyOne") as consideration for the
license of the CyberSentry Software. In connection with the
LibertyOne Shares, Learning has been issued a right to put
the LibertyOne Shares to Templar for an aggregate purchase
price of $3,000,000, pursuant to the Put and Top Up
Agreement ("Put Agreement"), dated October 22, 1998, by and
between Learning and Templar. This put expires on December
31, 2001, unless it terminates earlier due to the occurrence
of certain Trigger Events, as defined in the Put Agreement.
Templar and Learning valued the transaction at $3,000,000
which was based on the then anticipated initial public
offering price of the LibertyOne Shares of $1.20 per share.
The initial public offering of the LibertyOne Shares closed
on December 10, 1998 at a price of $2.00 per share.
Templar assigned the License Agreement to the Company
pursuant to the terms of the Assignment of the Software
License Agreement, effective as of November 20, 1998 (the
"Assignment"). Pursuant to the terms of the Assignment and
in consideration thereof, the Company transferred 3,000,000
shares
F-35
<PAGE>
CyberSentry, Inc.
(a development stage enterprise)
Notes to Financial Statements
(unaudited with respect to the period ended June 30, 1999)
================================================================================
of its Common Stock to Templar which thereby became a
significant shareholder in the Company. The Put and Top Up
Agreement between Templar and Learning does not transfer to
CyberSentry upon Templar's assignment of the License
Agreement to CyberSentry. Templar is 100% owned by Mr. Frank
Kristan who may therefore be deemed to be the beneficial
owner of the shares of Common Stock held by Templar. The
shares of common stock issued to Templar have been valued at
Templar's carrryover basis in the CyberSentry Software.
The Company entered into a Software License Agreement (the
"DRI License Agreement"), effective as of January 19, 1999,
with Digital Right International, Inc, a Delaware
Corporation (`DRI'), pursuant to which the Company has
granted DRI a non-transferable, non-exclusive, worldwide
right and license to publish and use the CyberSentry
Software solely for the protection of celebrity digital
rights and content related thereto on the websites owned or
operated by DRI. In conjunction with entering into the DRI
License Agreement, DRI purchased 500,000 shares of the
Company's Common Stock at $1.00 per share for an aggregate
purchase price of $500,000. The Company is under no
obligation to provide upgrades to the software licensed to
DRI unless DRI elects to pay the Company $150,000 for
continuing software engineering support.
ATM Technology License
----------------------
Comtel Telecommunications Pty Ltd. ("Comtel"), a wholly
owned subsidiary of LibertyOne, entered into a Patent and
Know How License and Commercialization Agreement dated as of
February 4, 1998 (the "ATM Agreement") with Telstra
Corporation Limited ("Telstra"), pursuant to which
LibertyOne was granted a non-exclusive license to certain
applications in relation to Telstra's Fast Packet Digital
Switch Project ("FPDX"). FPDX represents technology
developed by Telstra over 11 years. FPDX utilizes
Asynchronous Transfer Mode technology ("ATM or "ATM
Technology") which has the potential to deliver "virtual"
Internet services to users at substantially increased speeds
and lower costs
F-36
<PAGE>
CyberSentry, Inc.
(a development stage enterprise)
Notes to Financial Statements
(unaudited with respect to the period ended June 30, 1999)
================================================================================
than other technologies. The ATM Agreement grants LibertyOne
the license to sell this technology as desk-top and set-top
applications.
Comtel entered into a Patent and Know How Sub-Contract and
Commercialization Agreement (the "Sub-Contract") with the
Company, effective as of September 8, 1998, pursuant to
which CyberSentry has been granted the right to develop and
sell the ATM Technology in the United States and Canada. As
consideration for Comtel entering into the Sub-Contract with
CyberSentry, CyberSentry issued 2,000,000 shares of Class B
Preferred Stock to Comtel's designee, DRI.The shares of
Class B Preferred Stock issued to DRI have been valued at
$3,000,000 which is the value of the shares issued to TSC
creditors pursuant to the plan of reorganization.
In addition, pursuant to the Sub-Contract, CyberSentry
agreed to pay Comtel a royalty fee of 110% of the royalty
rates required pursuant to the ATM Agreement. There were no
fees paid or expenses incurred in 1999 and 1998.
3. 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
F-37
<PAGE>
CyberSentry, Inc.
(a development stage enterprise)
Notes to Financial Statements
(unaudited with respect to the period ended June 30, 1999)
================================================================================
assets acquired and is being amortized on a straight line
basis over 10 years.
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 six months ended June 30, 1999 includes
the operations of TSC from the date of acquisition (March
24, 1999) to June 30, 1999.
The following summarized unaudited pro forma results of
operations have been prepared as if the acquisition of TSC
had occurred at the beginning of 1999. CyberSentry did not
exist in the beginning of 1998. The pro forma adjustments
are for interest and amortization:
F-38
<PAGE>
CyberSentry, Inc.
(a development stage enterprise)
Notes to Financial Statements
(unaudited with respect to the period ended June 30, 1999)
================================================================================
<TABLE>
<CAPTION>
For the six months
ended June 30, 1999
(unaudited)
-------------------
<S> <C>
Revenues $ 1,904,712
Net loss (1,793,523)
Pro forma loss per share - basic and diluted $ (.13)
Weighted average number of common
shares outstanding - basic and diluted 13,681,417
</TABLE>
4. Equipment and Equipment and leasehold improvements are as follows:
Leasehold
Improvements
<TABLE>
<CAPTION>
June 30, Estimated
1999 Useful Lives
(Unaudited) (in years)
---------------------------------------------------------------------------------------------
<S> <C> <C>
Switch equipment $ 1,721,413 5
Switch software 336,336 5
Computer equipment 271,721 5
Furniture and equipment 56,480 5-10
Leasehold improvements 14,215 5
---------------------------------------------------------------------------------------------
2,400,165
Less accumulated depreciation and amortization (1,290,349)
---------------------------------------------------------------------------------------------
Total $ 1,109,816
=============================================================================================
</TABLE>
5. Income Taxes Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Significant components
of the Company's deferred income tax assets and deferred
income tax liabilities are as follows:
<TABLE>
<CAPTION>
June 30,
1999 December 31,
(Unaudited) 1998
------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 3,073,000 $ 66,000
Amortization of acquired technologies 123,000 45,000
Accrual to cash conversion 398,000 -
Bad debt 32,000 -
------------------------------------------------------------------------------------------------
Total deferred tax assets 3,626,000 111,000
------------------------------------------------------------------------------------------------
</TABLE>
F-39
<PAGE>
CyberSentry, Inc.
(a development stage enterprise)
Notes to Financial Statements
(unaudited with respect to the period ended June 30, 1999)
===============================================================================
<TABLE>
<S> <C> <C>
Deferred tax liabilities:
Tax greater than book depreciation 207,000 -
----------------------------------------------------------------
Total deferred tax liabilities 207,000 -
----------------------------------------------------------------
Valuation allowance for net deferred
tax assets (3,419,000) (111,000)
----------------------------------------------------------------
$ - $ -
----------------------------------------------------------------
</TABLE>
As of December 31, 1998, the Company had a net operating
loss carryforward for Federal income tax purposes of
approximately $193,000 ($9,036,000 as of June 30,1999)
expiring in the year 2019.
A "valuation allowance" is provided when it is more likely
than not that some portion of deferred tax assets will not
be realized. The Company has established valuation
allowances principally for that portion of the net operating
loss carryforward and other net deferred tax assets whose
future tax benefit is currently uncertain. Realization of
the benefits related to losses may be limited in any one
year due to U.S. Internal Revenue Code Section 382, change
of ownership rules.
The difference between the reported income tax provision
(benefit) and the tax provision (benefit) that would result
from applying the 34% Federal statutory rate to the loss
from operations before income taxes is reconciled as
follows:
<TABLE>
<CAPTION>
June 30,
1999
(Unaudited) 1998
-------------------------------------------------------------------------------
<S> <C> <C>
Income tax (benefit) computed at Federal
statutory rate $ (449,907) $ (111,000)
Amortization of non-deductible goodwill 102,949 -
Increase in Federal taxes resulting from:
Effect on net operating losses for which no tax
carryforward benefit is available 346,577 111,000
Other non-deductible expenses 381 -
-------------------------------------------------------------------------------
$ - $ -
-------------------------------------------------------------------------------
</TABLE>
F-40
<PAGE>
CyberSentry, Inc.
(a development stage enterprise)
Notes to Financial Statements
(unaudited with respect to the period ended June 30, 1999)
===============================================================================
6. Line of Credit The Company has a revolving line of credit (through the
acquisition of TSC) collateralized by all business assets,
including but not limited to accounts receivable, property
and equipment contract rights and general intangibles, now
owned or hereafter acquired, providing for borrowings up to
$300,000. The principal balance is due on demand and
interest is payable monthly at the financial institution's
base rate plus 1.5% (10% at June 30, 1999). The balance
outstanding at June 30, 1999 amounted to $329,000. During
1999, the Company exceeded the allowed borrowings under the
terms of the line of credit agreement and the bank demanded
payment of the outstanding balance on the line. In July
1999, the Company paid the outstanding balance on the line
from financing received from one of its stockholders.
On February 22, 1999, the Company entered into a line of
credit agreement with Patriot Advisors, Inc. ("Patriot")
that expires after one year. The amount of the line of
credit is $3,000,000, and the amount outstanding may not
exceed 50% of the Company's assets. The line is
collateralized by substantially all of the Company's assets.
The Company will pay Patriot monthly interest payments 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.
The amount outstanding on the line at June 30, 1999 is
$187,500. As of June 30, 1999, the Company has approximately
$570,000 remaining to borrow under the line of credit
agreement. Patriot is a stockholder of the Company.
7. Bank Note The Company has a note payable with a bank (through the
Payable acquisition of TSC)that is collateralized by all business
assets, including but not limited to accounts receivable,
property and equipment, contract rights and general
intangibles, now owned or hereafter. The note bears interest
at 8.75% and principal and interest due monthly in the
amount at $8,254 through May 2001. The note is guaranteed by
the Company's stockholders. The balance outstanding at June
30, 1999 amounted to $181,818. During 1999, the Company was
in default of payments on the note and the bank demanded
payment
F-41
<PAGE>
CyberSentry, Inc.
(a development stage enterprise)
Notes to Financial Statements
(unaudited with respect to the period ended June 30, 1999)
===============================================================================
of the outstanding balance. In July 1999, the Company paid
the outstanding balance on the note from financing received
from one of its stockholders.
8. Lease The Company leases its office facilities. Minimum rental
Obligations payments required under these leases as of June 30, 1999 are
as follows(unaudited):
1999 $ 38,877
2000 52,881
2001 22,672
2002 19,336
2003 4,334
-------------------------------------------------------
Total minimum lease payments $ 138,100
-------------------------------------------------------
Rent expense aggregated $23,940 for the six months ended
June 30, 1999.
The Company also leases certain computer equipment, switch
equipment and software under capital lease agreements
(through the acquisition of TSC). Total future minimum lease
payments under the terms of the agreements at June 30, 1999
are as follows(unaudited):
1999 $ 174,955
2000 349,911
2001 349,911
2002 349,911
2003 349,911
2004 174,955
-----------------------------------------------------------
Total minimum lease payments 1,749,554
Less amount representing interest (396,140)
Less current maturities of capital lease
obligations (225,203)
-----------------------------------------------------------
Present value of long-term obligations
undercapital leases $ 1,128,211
-----------------------------------------------------------
F-42
<PAGE>
CyberSentry, Inc.
(a development stage enterprise)
Notes to Financial Statements
(unaudited with respect to the period ended June 30, 1999)
===============================================================================
9. Related Party During 1999 and 1998, the Company incurred various
Transactions operating expenses which were paid directly by a
stockholder of the Company. The entire amount due at June
30, 1999 and December 31, 1998 is included in "Due to
Stockholder" in the balance sheets. The amount is non-
interest bearing and due on demand.
The Company (through its predecessor, TSC), Lake Tel. Inc.,
a New Jersey corporation ("Lake Tel"), and Capital One
Bank, a Virginia banking corporation ("Capital One"), have
entered into a Carrier Agreement dated October 1998 (the
"Carrier Agreement") pursuant to which the Company has
agreed to allow Capital One to offer secured credit card
products to customers of the Company for an initial term of
five years. For each account booked by Capital One under
the Carrier Agreement, Lake Tel is entitled to receive a
fee from Capital One and is obligated to pay a fee to the
Company. Gerald Resnick, the Company's Chairman and
President, sits on the Board of Directors of Lake Tel, a
telecommunications marketing company specializing in
financial institutions.
10. 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.
Transactions in stockholders' equity during 1998
were as follows:
a) The Company issued its promoters 8,550,000 shares
of common stock at a fair value of $0.006 per share
in exchange for $50,000.
F-43
<PAGE>
CyberSentry, Inc.
(a development stage enterprise)
Notes to Financial Statements
(unaudited with respect to the period ended June 30, 1999)
===============================================================================
b) The Company issued 450,000 shares of $0.006 fair value
common stock in exchange for services rendered. The fair
market value of the services was $2,700.
c) The Company issued 3,000,000 shares of common stock at a
fair value of $1.00 per share in exchange for the
acquisition of the CyberSentry Software License (see
Note 2).
d) The Company issued 2,000,000 of Class B convertible
redeemable participating preferred stock at a fair value
of $1.50 per share in exchange for the acquisition of
the ATM Technology License (see Note 2).
Common Stock
------------
Each holder of common stock has one vote in respect of each
share of common stock held by such holder of record on the
books of the Corporation for the election of directors and
on all other matters on which stockholders of the
Corporation are entitled to vote. The holders of shares of
common stock are entitled to receive, when and if declared
by the Board of Directors, out of the assets of the
Corporation which are by law available therefor, dividends
payable either in cash, in stock or otherwise.
Class A Convertible Redeemable Participating Preferred Stock
-----------------------------------------------------------
Each holder of Class A convertible redeemable participating
preferred stock ("Class A Preferred Stock") is entitled to
one vote per share on all matters requiring shareholder
action. The holders of Class A Preferred Stock, voting
together as a class, have the right to elect one director of
the Company. The holders of shares of Class A Preferred
Stock are entitled to receive from the Company, with respect
to each share of Class A Preferred Stock held, the same
dividend or distribution received by a holder of shares of
common stock. Any such dividend or distribution shall be
declared, ordered, paid or made on the Class A Preferred
Stock
F-44
<PAGE>
CyberSentry, Inc.
(a development stage enterprise)
Notes to Financial Statements
(unaudited with respect to the period ended June 30, 1999)
===============================================================================
at the same time such dividend or distribution is declared,
ordered, paid or made on the common stock.
On each March 1 and September 1 of the years 2000, 2001,
2002, 2003 and 2004 (each such date, an "Optional Redemption
Date,") the Corporation shall set aside for payment an
amount equal to five cents ($.05) for each share of Class A
Preferred Stock then outstanding. The aggregate amount so
set aside for payment shall be referred to herein as the
"Redemption Pool." Each record holder of shares of Class A
Preferred Stock as of the Optional Redemption Date shall be
entitled to require the Corporation to redeem all or any
portion of the shares of Class A Preferred Stock then held
by such holder, up to a maximum number of shares equal to
(x) the number of shares of Class Preferred Stock held by
such holder as of the Optional Redemption Date, multiplied
by (y) $.05 cents per share of Class A Preferred Stock,
divided by (z) the redemption price per share of $1.50
("Redemption Price") of Class A Preferred Stock as of the
Optional Redemption Date (with any fractional shares being
rounded up or down to the nearest whole share), by paying
therefor in cash out of the Redemption Pool an amount equal
to the Redemption Price per share as of the Optional
Redemption Date. At June 30, 1999, holders of 1,603,967
shares of Class A preferred stock are entitled to
participate in the Redemption Pool. The maximum amount to be
funded by the Company in the Redemption Pool based on the
participating shares is $801,984 over a five year period,
representing 534,656 shares. As such, the $801,984 has been
classified as mezzanine equity in the June 30, 1999 balance
sheet.
In the event of any liquidation or dissolution of the
Company, whether voluntary or involuntary, the holders of
shares of Class A Preferred Stock are entitled to receive
out of the assets of the Company available for distribution
to its stockholders, an amount equal to the liquidation
preference per share ($1.50 per share) plus all accrued and
unpaid dividends. Liquidation distributions shall be made to
the Class A Preferred Stockholders before the common
stockholders.
F-45
<PAGE>
CyberSentry, Inc.
(a development stage enterprise)
Notes to Financial Statements
(unaudited with respect to the period ended June 30, 1999)
===============================================================================
Each share of Class A Preferred Stock is convertible after
March 25, 2001 and up to March 24, 2004, at the option of
the holder into one share of full-paid and non-assessable
common stock at a one to one ratio.
Class B Convertible Redeemable Participating Preferred Stock
-----------------------------------------------------------
Each holder of the Class B convertible redeemable
participating preferred stock ("Class B Preferred Stock") is
entitled to the same rights as the Class A Preferred Stock
except that they may not participate in the optional
redemption pool and they do not have the right as a class to
elect one director of the Company.
11. Commitments The Company entered into a five year employment agreement
and with its President and Chief Executive Officer, Gerald
Contingencies Resnick, effective January 1, 1999. Under the agreement, Mr.
Resnick is entitled to receive a base salary of $180,000,
subject to annual increases of not less than 10% per year,
and a bonus in the discretion of the Board of Directors but
in no event less than three quarters of one percent of the
Company's gross sales in excess of $30,000,000 annually,
which sum may be paid, at Mr. Resnick's option, in cash or
stock (valued at $1.00 per share). During the term of his
employment agreement and for a period of one year
thereafter, Mr. Resnick will have the right to purchase up
to 500,000 shares of Common Stock at $1.00 per share. The
Company also entered into a three year employment agreement
with its Senior Vice President, Hal Shankland, which
commenced upon the effectiveness of the Merger. Under the
agreement, Mr. Shankland is entitled to receive a base
salary of $120,000, subject to such annual increases as
determined by the Board of Directors. In addition, at the
end of each year during the period of his employment, Mr.
Shankland will have the right to purchase up to 100,000
shares of Common Stock at $1 per share (for the first year)
and at fair market value (for subsequent years).
The Company is, and TSC as its predecessor was, involved
from time to time in various claims and lawsuits in the
ordinary course of business, none of which is expected,
individually or in the aggregate, to have a material effect
on the Company's financial position, results of operations
or cash flows.
12. Stock Options During 1999, the Company granted stock options to certain
executive employees. The Company applies Accounting
F-46
<PAGE>
CyberSentry,Inc.
(a development stage enterprise)
Notes to Financial Statements
(unaudited with respect to the period ended June 30, 1999)
================================================================================
Principles Board ("APB") Opinion 25, Accounting for Stock
Issued to Employees, and related interpretations in
accounting for options granted to employees. Under APB
Opinion 25, if the exercise price of the Company's
employee stock options equals the market price of the
underlying stock on the date of grant, no compensation cost
is recognized. For the options granted during 1999, the
exercise price of each option equals the market price of the
Company's stock on the date of grant and an option's maximum
term is 6 years.
FASB Statement 123, Accounting for Stock-Based Compensation,
requires the Company to provide pro forma information
regarding net income and earnings per share as if
compensation cost for the Company's stock options has been
determined in accordance with the fair value based method
prescribed in FASB Statement 123. The Company estimates the
fair value of each stock option at the grant date by using
the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1999; no
dividend yield for all years; expected volatility of 30
percent; risk-free interest rate of 4.6 percent, and an
expected life of 5.1 years.
Under the accounting provisions of FASB Statement 123, the
Company's net (loss) and net (loss) per common share would
have been as follows:
<TABLE>
<CAPTION>
For the six months
ended June 30, 1999
(unaudited)
----------------------------
<S> <C> <C>
Net (loss) As reported $(1,153,919)
Proforma $(1,361,289)
Net (loss) per common share- basic As reported $ (.09)
and diluted Proforma $ (.10)
</TABLE>
F-47
<PAGE>
CyberSentry,Inc.
(a development stage enterprise)
Notes to Financial Statements
(unaudited with respect to the period ended June 30, 1999)
================================================================================
A summary of the status of the company's option
as June 30, 1999 and changes during the period
ending on that date is presented below:
December 31, 1998
------------------
Weighted-Average
Shares Exercise Price
------------------ ----------------
Outstanding at beginning of year - $ -
Granted 600,000 $ 1.00
Forfeited - $ -
----------
Outstanding at end of year 600,000 $ 1.00
==========
Options exercisable at year-end 600,000 $ 1.00
Weighted-average fair value of options
granted during the year $ .35
==========
The following table summarizes information about
fixed stock options outstanding at June 30,
1999.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------------------------------------------------
Number Weighted-Average Number
outstanding Remaining Weighted-Average exercisable Weighted-Average
Exercise Price at June 30, 1999 Contractual Life Exercise Price at June 30, 1999 Exercise Price
- ------------------ ---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 1.00 600,000 5.1 $ 1.00 600,000 $ 1.00
</TABLE>
13. Segment Information The Company's reportable segments are strategic
businesses 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.
F-48
<PAGE>
CyberSentry,Inc.
(a development stage enterprise)
Notes to Financial Statements
(unaudited with respect to the period ended June 30, 1999)
================================================================================
There were no business segments during 1998 and financial
information for the Company's business segment as of and for
the period ended June 30, 1999 is as follows:
For the six
months ended
June 30, 1999
(unaudited)
-------------
Revenues
- --------
Telecommunications $ 1,093,396
Internet -
-------------
Total revenues $ 1,093,396
=============
Operating (loss)
- ----------------
Telecommunications $ (377,558)
Internet (776,361)
-------------
Total operating (loss) $ (1,153,919)
=============
Depreciation and amortization
- -----------------------------
Telecommunications $ 419,822
Internet 428,571
-------------
Total depreciation and amortization $ 848,393
=============
Interest expense, net
- ---------------------
Telecommunications $ 38,710
Internet -
-------------
Total interest expense, net $ 38,710
=============
Total assets
- ------------
Telecommunications $ 12,692,712
Internet 5,254,659
-------------
Total assets $ 17,947,371
=============
F-49
<PAGE>
CyberSentry,Inc.
(a development stage enterprise)
Notes to Financial Statements
(unaudited with respect to the period ended June 30, 1999)
================================================================================
For the six
months ended
June 30, 1999
(unaudited)
--------------
Capital expenditures
- --------------------
Telecommunications $ -
Internet -
--------------
Total capital expenditures $ -
==============
14. Going Concern The Company's financial statements are presented
on the going concern basis which contemplates
the realization of assets and the satisfaction
of liabilities in the normal course of business.
During 1998 and up to March 24, 1999,
CyberSentry was a development stage enterprise
only receiving revenue from its
telecommunication division. Upon the acquisition
of TSC, CyberSentry ceased being a development
stage enterprise but to date, has
realized no revenues. The Company has been
unable to increase revenues in its
telecommunications segment and was unable to
maintain an efficient cost structure during
1999. The Company expects to restructure its
existing line of credit, which is currently
asset based lending, in October 1999 to provide
up to $3,000,000 of additional working capital.
Additionally, the Company is completing the
filing of Form 10 with the Securities and
Exchange Commission ("SEC") in order to
accommodate the sale of a stockholder's shares
of CyberSentry common stock so that the
stockholder can advance the Company funds as a
line of credit. The Company is also in
discussion with various investment banking firms
for additional financing. The Company is focused
on developing revenues pursuant to a sales and
marketing plan to be implemented in the fourth
quarter of 1999.
F-50
<PAGE>
CyberSentry,Inc.
(a development stage enterprise)
Notes to Financial Statements
(unaudited with respect to the period ended June 30, 1999)
================================================================================
The Company's continued existence is dependent
its ability to resolve its liquidity problems
principally by implementing cost reduction
strategies and obtaining positive results from
increased marketing efforts.
The financial statements do not include any
adjustments to reflect the possible future
effect on the recoverability and classification
of assets or the amounts and classification of
liabilities that may result from the possible
inability of the Company to continue as a going
concern. There is no assurance that the Company
will be able to achieve its recovery plan as
described above.
F-51
<PAGE>
CyberSentry, Inc.
Pro Forma Financial Statement
(Unaudited)
The accompanying condensed pro forma financial statement illustrates the effect
of the acquisition of 100% of the net assets of Telecommunications Service
Center ("TSC") on CyberSentry, Inc.'s ("CyberSentry") results of operations.
The transaction closed on March 24, 1999. On May 7, 1998, TSC filed a voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code in the
Middle District of Florida, Tampa Division. Pursuant to TSC's confirmed plan of
reorganization on March 4, 1999, TSC was acquired by CyberSentry. CyberSentry
is the surviving corporation in the business combination accounted for as a
purchase and the separate existence of TSC ceases. As part of the purchase and
plan of reorganization, certain creditors of TSC received $.07 in cash and the
value of $.93 in a share of Class A Preferred Stock for every $1.00 of unsecured
claim. The purchase price aggregated $12,727,194, which includes the assumption
of approximately $10,227,194 of liabilities and the issuance of 1 million shares
of common stock and 1 million shares of Class B preferred stock ($1.50 stated
value) valued at $2,500,000.
The accompanying condensed pro forma financial statement illustrates the effect
of the purchase ("Pro forma") on CyberSentry's results of operations. The pro
forma condensed statement of operations for the year ended December 31, 1998 is
based on the historical statements of operations of TSC and CyberSentry for
those periods. The pro forma condensed statement of operations assumes the
purchase took place on January 1, 1998. The pro forma condensed financial
statement may not be indicative of the results which actually would have
occurred if the above transaction had been consummated at the beginning of the
period presented; nor does it purport to present the future results of
operations.
The pro forma condensed financial statement should be read in connection with
the historical financial statements of TSC and CyberSentry.
F-52
<PAGE>
CyberSentry, Inc.
Pro Forma Condensed Statement of Operations
Year Ended December 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
CyberSentry TSC Adjustments Pro Forma
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net sales 22,804,240 22,804,240
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Expenses:
Telecommunications costs 22,283,257 22,283,257
Selling, general and administrative
expenses 326,485 3,758,791 (2) 1,130,623 5,215,899
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating expenses (326,485) 26,042,048 27,499,156
- ------------------------------------------------------------------------------------------------------------------------------------
Operating loss (326,485) (3,237,808) (4,694,916)
Other (expense), net (175,257) (1) (30,126) (205,401)
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss (326,485) (3,413,065) (4,900,317)
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss per share
Basic $ (.43)
Diluted $ (.43)
Weighted average number of outstanding shares
Basic 11,500,000
Diluted 11,500,000
</TABLE>
See notes to Pro Forma Condensed Financial Statements (Unaudited).
F-53
<PAGE>
CyberSentry, Inc.
Notes to Pro Forma Condensed Financial Statement
December 31, 1998
(Unaudited)
The pro forma adjustments to the condensed statement of operations are as
follows:
Note 1
- ------
To record interest expense of $30,126 relating to the use of the bank line of
credit, primarily attributable to the payments made to pre-petition creditors
($286,903 at 10.5%).
Note 2
- ------
To reflect amortization of goodwill over a 10 year life with a basis of
$11,306,232. Goodwill was determined as follows:
Issuance of common stock $ 1,000,000
Issuance of Class B preferred stock 1,500,000
Accounts payable and accrued expenses assumed 2,093,881
Liabilities subject to compromise under
reorganization proceedings assumed 8,133,313
-------------
Total consideration 12,727,194
Cash $ 24,388
Accounts receivable 176,757
Equipment and leasehold improvements 1,057,510
Prepaid expenses and other assets 162,307
------------
Total assets acquired 1,420,962
-------------
Excess of purchase price over the fair value of
assets and liabilities assumed $ 11,306,232
=============
F-54
