<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
-------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
For Quarter Ended ________ Commission File No. __________
CyberSentry, Inc.
--------------------------------------------------------------------------------
(Exact Name of Registrant as specified in its character)
FLORIDA 22-3626108
-------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
412 East Madison Street
Suite 1200
Tampa, FL 33602
----------------------------------------
(Address of Principal Executive Offices)
(813) 228-0688
(Registrant's Telephone Number, Including Area Code)
Not Applicable
----------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if changed Since Last Report)
Check whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such report(s), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No. [ ]
State the number of shares outstanding of each of the registrant's
classes of common equity, as of the latest practicable date.
Class Outstanding at September 30, 2000
----------------------------- ---------------------------------
Common Stock, $.001 par value 21,932,928 shares
<PAGE>
<TABLE>
<CAPTION>
CyberSentry, Inc.
Condensed Balance Sheet
September 30, December 31,
2000 1999
(Unaudited)
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current
Cash $17,560 $89,477
Accounts receivable, less $83,490 and $68,463 allowance for doubtful accounts in 2000
and 1999, respectively 119,554 173,846
Prepaid expenses and other assets 53,202 54,798
Other receivables 5,444 1,721
-----------------------------------------------------------------------------------------------------------------------------
Total current assets 195,760 319,842
Investment in limited partnership 600,000
Excess of cost over fair value of net assets acquired, net of $1,716,069 and $868,101 of
accumulated amortization in 2000 and 1999 respectively 9,191,517 10,039,484
ATM Technology License, net of $892,856 and $571,428 of accumulated amortization in
2000 and 1999, respectively 2,107,143 2,428,572
CyberSentry Software License, net of $878,679 and $535,714 of accumulated amortization
in 2000 and 1999 respectively 2,142,857 2,464,286
Equipment and leasehold improvements, net 367,546 723,644
Capitalized software development costs, net of $21,537 accumulated amortization in 2000 98,473
Other assets 19,698 19,698
-----------------------------------------------------------------------------------------------------------------------------
$14,722,995 $16,047,859
=============================================================================================================================
Liabilities and Stockholder's Equity
Current Liabilities
Accounts payable $665,632 $569,562
Accrued expenses and other current liabilities 793,943 650,503
Current maturities of capital lease obligations 254,958 260,037
Due to stockholder (Note *) 1,182,495 1,920,078
-----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,897,028 3,400,180
Obligations under capital leases, less current maturities 952,239 1,000,284
-----------------------------------------------------------------------------------------------------------------------------
Total liabilities 3,849,267 4,400,464
-----------------------------------------------------------------------------------------------------------------------------
Redeemable convertible preferred stock, $.001 par value, 283,009 and 534,656 shares
issued and outstanding in 2000 and 1999, respectively 424,514 801,984
-----------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note *)
-----------------------------------------------------------------------------------------------------------------------------
Stockholder's Equity (Note *)
Class A convertible redeemable participating preferred stock, $.001 par
value, 7,000,000 shares authorized, 3,422,230 shares in 2000 and
3,916,522 shares in 1999 issued and outstanding, aggregate liquidation
value of $5,133,345 and $5,874,783 in 2000 and 1999, respectively 3,422 3,916
Class B convertible, redeemable, participating preferred stock, $.001 par value,
3,000,000 shares authorized, 2,000,000 shares in 2000 and 3,000,000 shares
in 1999, issued and outstanding, aggregate liquidation value of $3,000,000 and
$4,500,000, respectively 2,000 3,000
Common stock, $.001 par value, 50,000,000 shares authorized, 21,932,938 shares
in 2000 and 13,878,765 shares in 1999, issued and outstanding, respectively 21,933 13,879
Additional paid-in capital 18,199,732 15,519,225
Accumulated deficit (7,777,874) (4,694,609)
-----------------------------------------------------------------------------------------------------------------------------
Total stockholder's equity 10,449,214 10,845,411
-----------------------------------------------------------------------------------------------------------------------------
$14,722,995 $16,047,859
=============================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CyberSentry, Inc
Condensed Statements of Operations
For the three For the nine For the three For the nine
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
2000 2000 1999 1999
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales 767,429 1,891,596 497,132 1,590,528
-----------------------------------------------------------------------------------------------------------------
Operating Expenses
Telecommunications costs (excluding depreciation
and amortization, shown separately below 678,951 1,524,710 357,366 1,269,635
Selling, general and administrative expenses 226,844 1,381,860 769,376 1,214,709
Depreciation and amortization 628,876 1,869,722 606,659 1,455,053
-----------------------------------------------------------------------------------------------------------------
Total operating expenses 1,534,671 4,776,292 1,733,401 3,939,397
-----------------------------------------------------------------------------------------------------------------
Other (Income) Expense:
Interest expense 37,695 199,387 164,663 372,710
Other income (193) (818) 0 0
-----------------------------------------------------------------------------------------------------------------
Total other expense, net 37,502 198,570 164,663 372,710
Net loss (804,744) (3,083,266) (1,400,932) (2,721,579)
=================================================================================================================
Net loss per share
Basic (.04) (.14) (.11) (.21)
Diluted (.04) (.14) (.11) (.21)
Weighted average number of outstanding shares
Basic 21,932,938 21,932,938 13,108,288 13,108,288
Diluted 21,932,938 21,932,938 13,108,228 13,108,288
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CyberSentry, Inc.
Condensed Statements of Cash Flows
For the nine For the nine
months ended months ended
September 30, September 30,
2000 1999
(Unaudited) (Unaudited)
-----------------------------------------------------------------------------------------------------------------
Operating activities:
<S> <C> <C>
Net loss (3,083,266) (2,721,579)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,869,722 1,455,053
Common stock/stock options granted for services 138,438 34,397
Bad debts 78,935 40,602
Recovery of bad debts 84 -
Inventory write down - -
Changes in operating assets and liabilities, net of
effects of acquisition and non-cash transactions:
Accounts receivable 54,292 (89,842)
Prepaid expenses and other assets 1,596 (98,248)
Other receivables (3,723) 56,046
Other assets - 83,734
Accounts payable 96,070 17,841
Accrued expenses and other current liabilities 143,440 (126,436)
-----------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (704,412) (1,095,560)
-----------------------------------------------------------------------------------------------------------------
Investing Activities:
Purchase of property and equipment (1,263) -
Capitalized software costs (67,676) -
-----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (68,939) -
-----------------------------------------------------------------------------------------------------------------
Financing Activities:
Proceeds from issuance of common stock - 500,000
Repayments of obligations under capital lease (53,124) (125,567)
Increase in due to stockholder 754,558 1,246,520
Net payments on line of credit - (282,000)
Payments on bank note payable - (211,618)
Cash overdraft - -
-----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 701,434 1,127,335
-----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (71,917) 31,775
Cash and cash equivalents at beginning of period 89,477 -
-----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period 17,560 31,775
=================================================================================================================
Supplemental Disclosures:
Class B preferred stock issued in exchange for ATM
Technology License -
Common stock issued in exchange for Cybersentry software -
Common stock issued in purchase of TSC - $1,000,000
Class B preferred stock issued in purchase of TSC - $1,500,000
Class A preferred stock issued in connection with TSC's
plan of reorganization - $5,874,784
Common stock issued in connection with TSC's plan
of reorganization - $258,765
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CyberSentry, Inc
Statement of Changes In Stockholder's Equity
Class A Preferred Class B Preferred
----------------- -----------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance at January 1, 2000 3,916,522 3,916 3,000,000 3,000
Conversion of 745,939 shares of Class A
preferred stock for 745,939 shares of common
stock in March 2000 (745,939) (746) - -
Conversion of 1,000,000 shares of Class B
preferred stock for 1,000,000 shares of
common stock in March 2000 - - (1,000,000) (1,000)
Issuance of 6,000,000 shares of common stock
in March 2000 for an investment in a limited
partnership - - - -
Issuance of stock options for 30,000 shares
of common stock in January, February and
March 2000 - - - -
Issuance of 40,000 shares of common stock for
partial extinguishment of the line of credit
in March 2000 - - - -
Adjustment for mezzanine debt to equity
resulting from conversion of Class A
preferrred to common stock during quarter
ended March 2000. 251,647 252 - -
Issuance of 10,000 shares of common stock to
a director in March 2000 - - - -
Issuance of 258,224 shares of common stock
for partial extinguishment of the line of
credit in June 2000 - - - -
Adjustment of value of shares issued to a
limited partnership to the closing market
price at June 30 2000 - - - -
Adjustment of value of shares issued to a
limited partnership to the closing market
price at September 30, 2000
Net loss
- - - -
----------------------------------------------------------------
Balance at September 30, 2000 (unaudited) 3,422,230 $3,422 2,000,000 $2,000
================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Common Accumulated
------ -----------
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance at January 1, 2000 13,878,765 13,879 15,519,225 (4,694,609) 10,845,411
Conversion of 745,939 shares of Class A
preferred stock for 745,939 shares of common
stock in March 2000 745,939 746 - -
Conversion of 1,000,000 shares of Class B
preferred stock for 1,000,000 shares of
common stock in March 2000 1,000,000 1,000 - -
Issuance of 6,000,000 shares of common stock
in March 2000 for an investment in a limited
partnership 6,000,000 6,000 40,494,000 40,500,000
Issuance of stock options for 30,000 shares
of common stock in January, February and
March 2000 - - 70,948 - 70,948
Issuance of 40,000 shares of common stock for
partial extinguishment of the line of credit
in March 2000 40,000 40 279,960 - 280,000
Adjustment for mezzanine debt to equity
resulting from conversion of Class A
preferrred to common stock during quarter
ended March 2000. - - 377,219 - 377,471
Issuance of 10,000 shares of common stock to
a director in March 2000 10,000 10 67,490 - 67,500
Issuance of 258,224 shares of common stock
for partial extinguishment of the line of
credit in June 2000 258,224 258 1,290,863 - 1,291,121
Adjustment of value of shares issued to a
limited partnership to the closing market
price at June 30 2000 - - (34,875,000) - (34,875,000)
Adjustment of value of shares issued to a
limited partnership to the closing market
price at September 30, 2000 (5,025,000) (5,025,000)
Net loss - - - (3,083,266) (3,083,266)
--------------------------------------------------------------------------------------
Balance at September 30, 2000 (unaudited) 21,932,928 $21,933 $18,199,705 $(7,777,875) $10,449,185
======================================================================================
</TABLE>
<PAGE>
CyberSentry, Inc.
Notes to Condensed Financial Statements
(Unaudited)
================================================================================
1. Summary of Business and Basis of Presentation
Significant
Accounting CyberSentry, Inc. ("CyberSentry" or the "Company") was
Policies incorporated in Delaware on August 21, 1998 as
Telecommunication Services, Inc. ("TSI"). On November
30, 1998, TSI amended its certificate of incorporation
to change the Corporation's name to CyberSentry, Inc.
CyberSentry's principal business includes
telecommunications services, the marketing and sale of
CyberSentry software and two applications of
Asynchronous Transfer Mode ("ATM") Technology.
The CyberSentry Software protects Internet commerce
transactions by controlling access to both consumer
credit information and content that can be downloaded
via the Internet, i.e., games, CD's, videos,
copyrighted information and other transactions. It
also restricts the unauthorized redistribution of
material to secondary recipients, such as passing
along copies of protected material.
The two ATM applications are a fast packet digital
switch and a set-top box. The fast packet digital
switch is designed for small to medium size
businesses. The device will allow a business to
transmit voice, video and data over a local area
network using the business' existing PABX
infrastructure. The set-top box is designed for
applications in the home. This device will allow for
the delivery of voice, video and data into the home
via the existing telephone line or via satellite.
Effective March 24, 1999, CyberSentry purchased all of
the outstanding common stock of Telecommunications
Service Center, Inc. ("TSC"), a Florida Corporation.
TSC was operating as a debtor-in-possession under
Chapter 11 of the United States Bankruptcy Code in the
Middle District of Florida, Tampa Division. The
Bankruptcy Court confirmed TSC's plan of
reorganization ("the Plan") on March 4, 1999 and the
Plan became effective March 24, 1999, the date
CyberSentry acquired TSC.
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.
The accompanying condensed financial statements are
unaudited; however, in the opinion of management, the
accompanying unaudited condensed financial statements
reflect all adjustments necessary to present fairly
the financial position of CyberSentry and predecessor
and the results of its operations and its cash flows
for the stated periods that have been included. These
adjustments are of a normal recurring nature. Selected
information and footnote disclosures normally included
in condensed financial statements prepared in
<PAGE>
accordance with generally accepted accounting
principles have been condensed or omitted. Results for
interim periods are not necessarily indicative of the
results to be expected for an entire fiscal year. It
is suggested that these condensed financial statements
be read in conjunction with the audited financial
statements and notes thereto as of and for the year
ending December 31, 1999. The December 31, 1999
condensed balance sheet was derived from audited
financial statements as of that date.
2. Acquisition Effective March 24, 1999, CyberSentry purchased all of
the outstanding common stock of TSC pursuant to the
bankruptcy court's confirmation of TSC's plan of
reorganization that was confirmed on March 4, 1999 and
effective on March 24, 1999, the date CyberSentry
acquired TSC. 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. 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 ($9,828,548), of $10,907,586
was recorded as excess of cost over fair value of net
assets acquired and is being amortized on a straight
line basis over 10 years.
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 three months ended
March 31, 1999 includes the operations of TSC from the
date of acquisition (March 24, 1999) to March 31,
1999.
3. Investment in On March 6, 2000, the Company issued Fianna Partners,
Limited LP (Fianna"), six million shares of its common stock
Partnerships at a market value of $6.75 per share for 420 of
Fianna's limited partnership interests. The Company
and Fianna plan to enter into a joint venture for
<PAGE>
additional E-Commerce services in the insurance
industry. The limited partnership was formed on
February 3, 2000 and there has been no transactions in
the partnership other than CyberSentry's investment of
6 million shares of common stock. A director of the
Company is also the President of the general partner
of Fianna.
4. Commitments and On March 6, 2000, the Company issued Fianna Partners,
Contingencies LP (Fianna"), six million shares of its common stock
at a market value of $6.75 per share for 420 of
Fianna's limited partnership interests. The Company
and Fianna plan to enter into a joint venture for
additional E-Commerce services in the insurance
industry. The limited partnership was formed on
February 3, 2000 and there has been no transactions in
the partnership other than CyberSentry's investment of
6 million shares of common stock. A director of the
Company is also the President of the general partner
of Fianna.
5. Stockholders' Transactions in stockholders' equity during 2000 were
Equity as follows (unaudited):
(a) The Company issued 745,939 shares of common stock
in connection with the conversion of 745,939
shares of Class A preferred stock.
(b) The Company issued 1,000,000 shares of common
stock in connection with the conversion of
1,000,000 shares of Class B preferred stock.
(c) The Company issued 6,000,000 shares of common
stock at a market value of $6.75 per share in
exchange for 420 of Fianna Partners, L.P., limited
partnership interests.
(d) The Company issued options to a non-employee to
purchase 30,000 shares of common stock with an
exercise price of $2.50 per share in exchange for
financing consulting services. The options were
valued at $32,336 using the Black Scholes Model.
(e) The Company issued 40,000 shares of common stock
at a market value of $5 per share in exchange for
the extinguishment of $280,000 of principal and
interest relating to the line of credit.
(f) The Company reduced its mezzanine debt relating to
the optional redemption pool by 251,647 shares as
a result of the conversion of 745,939 shares of
Class A preferred to common stock.
(g) The Company issued 10,000 shares of common stock
at a market value of $6.75 per share in exchange
for financial consulting services.
(h) The Company revalued its investment of 6,000,000
shares in 420 of Fianna Partners, L.P., limited
partnership interests to $.10 per share.
6. Segment The Company's reportable segments are strategic
Information 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
<PAGE>
operating performance of its segments based on the
categories noted in the table below. During 2000 and
1999, the Company had no intercompany sales.
Financial information for the Company's business
segments as of and for the three months ended
September 30, 2000 and 1999 are as follows
<TABLE>
<CAPTION>
For the nine For the nine
months ended months ended
September 30, September 30,
2000 1999
(unaudited) (unaudited)
------------- -------------
<S> <C> <C>
Revenues
--------
Telecommunications $ 1,891,596 $ 1,590,528
Secured software - -
Product technology - -
------------- -------------
Total revenues $ 1,891,596 $ 1,590,528
============= =============
Net loss
--------
Telecommunications $ 2,418,873 $ (1,984,971)
Secured software 342,965 (415,179)
Product technology 321,428 (321,429)
------------- -------------
Total net loss $ 3,083,266 $ (2,721,579)
============= =============
Depreciation and amortization
-----------------------------
Telecommunications $ 1,205,329 $ 812,195
Secured software 342,965 321,429
Product technology 321,428 321,429
------------- -------------
Total depreciation and amortization $ 1,869,722 $ 1,455,053
============= =============
Interest expense, net
---------------------
Telecommunications $ 199,387 $ 372,710
Secured software - -
Product technology - -
------------- -------------
Total interest expense, net $ 199,387 $ 372,710
============= =============
Total assets
------------
Telecommunications $ 10,374,522 $ 11,941,841
Secured software 2,241,330 2,665,179
Product technology 2,107,143 2,535,714
------------- -------------
Total assets $ 14,772,995 $ 17,142,734
============= =============
Capital expenditures
--------------------
Telecommunications $ 1,028 $ -
Secured software - -
Product technology - -
------------- -------------
Total capital expenditures $ 1,028 $ -
============= =============
</TABLE>
7. Subsequent On May 12, 2000, the Company's stock began trading on
Event the American Stock Exchange. Upon the Company's
listing on the American Stock Exchange, Patriot
<PAGE>
Advisors, Inc. ("Patriot") agreed to extend the due
date of the line of credit until December 31, 2001.
Additionally, upon the listing Patriot also agreed to
convert the outstanding balance on the line of credit
to common stock based on the closing market price of
the Company's common stock on May 12, 2000, sufficient
enough to provide the Company with availability on the
line of credit of at least two million dollars.
On April 18, 2000, the Company entered into a software
license agreement with CyberSoft, Inc. ("CyberSoft") a
Delaware corporation whereby the Company grants to
CyberSoft and its affiliates, for a term of 10 years,
an irrevocable, non-exclusive, non-transferable,
worldwide license to use the CyberSentry Software for
internal business purposes, demonstrate and promote
the software to customers or prospective customers and
sub-license the software to customers by entering into
a non-exclusive and non-assignable end-user agreement.
In consideration of the license and the maintenance
and support services, CyberSoft paid CyberSentry with
500,000 shares of CyberSoft preferred stock with a
preliminary estimated fair value of $1.00 per share,
representing approximately 3% of the total outstanding
shares of CyberSoft. Additionally, CyberSoft will pay
the Company 15% of the total sublicense revenue
received by CyberSoft. The Company will also receive a
quarterly maintenance fee in an amount to be mutually
agreed to in writing by both parties. The President of
CyberSoft is a former director of the Company.
Subsequently, the Board decided, with agreement by all
parties, that the license and maintenance agreement
would be cancelled.
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis of the financial condition and results of
operations should be read in conjunction with the financial statements, related
notes, and other detailed information included elsewhere in this Quarterly
Report on Form 10-Q or previously filed SEC Forms 10 and 10A. This report
contains certain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements are statements
other than historical information or statements of current condition. Some
forward-looking statements may be identified by the use of such terms as
"believes," "anticipates," "intends," or "expects." These forward-looking
statements relate to plans, objectives and expectations of the Company for
future operations. In light of the risks and uncertainties inherent in all such
projected operational matters, the inclusion of forward-looking statements, if
any, in this report should not be regarded as a representation by the Company or
any other person that the objectives or plans of the Company will be achieved or
that any of the Company's operating expectations will be realized. The Company's
revenues and results of operations are difficult to forecast and could differ
materially from those projected in the forward-looking statements contained in
this report as a result of certain factors including, but not limited to,
dependence on operating agreements with partners, customers and suppliers,
availability of carrier services and transmission facilities, U.S. and foreign
telecommunications and general software licensing regulations, international
economic and political instability, dependence on effective billing and
information systems, customer attrition, and rapid technological change. These
factors should not be considered exhaustive; the Company undertakes no
obligation to release publicly the results of any future revisions it may make
to forward-looking statements
OVERVIEW
CyberSentry, Inc., a Delaware corporation ("CyberSentry"), is a secure software,
e-commerce and telecommunications company. In addition, the Company acquired
Telecommunications Service Center, Inc. ("TSC") on March 24, 1999. The Company
presently services and markets its long distance and other telecommunications
services to a wide variety of customers. The Company is expanding its
telecommunications services to include Internet Service Provider ("ISP") access
and bundle packaging of services as well as (i) proceeding with the development
and deployment of the CyberSentry Secure Software suite of products (ii)
researching and developing its Asynchronous Transfer Mode Technology ("ATM" or
"ATM Technology") and (iii) refining its e-commerce systems and capabilities.
Digital Rights Management - Secure Software:
The CyberSentry Software protects digital content and other Internet commerce
transactions by controlling access to both consumer credit information and
content that can be downloaded via the Internet, such as games, CD's, videos,
copyrighted information and other transactions. It also restricts the
unauthorized redistribution of material to secondary recipients, such as passing
along copies of protected material. The Company believes that most content
currently downloaded via the Internet can be protected using CyberSentry
Software. CyberSentry has only recently begun to market the CyberSentry Software
and to date has no sales.
ATM Technology
CyberSentry has obtained the right to develop and sell in the United States and
Canada certain ATM technology which has the potential to deliver real time
multimedia services to both consumer and business users at substantially
increased speeds and lower costs than other technologies. The Company currently
plans to sell two applications of the ATM technology. The first is a fast packet
digital switch designed for small to medium size businesses. This device allows
a business to transmit voice, video and data over a local area network using the
business' existing PABX infrastructure. The second is a set-top box designed for
applications in the home. This device will allow for the delivery of voice,
video and data into the home via the existing telephone line, cable or via
satellite. The Company believes that this product will have applications for
games, music, television based Internet browsing and video on demand. To date
the Company has no sales of ATM technology.
<PAGE>
Telecommunications
During the last five years, TSC was a facilities-based carrier providing long
distance telecommunications services, including commercial and residential
service, long distance service, operator service for pay phones, prepaid phone
cards, calling cards and enhanced services, such as voice mail and fax services.
TSC owns and operates a Siemen's high-volume gateway switch and an IBM AS400
billing platform to accommodate anticipated growth. It is certified as an
"Alternative Local Exchange Carrier" ("ALEC") to provide local telephone
services in the State of Florida, with tariffs filed in 32 states as a long
distance service provider.
CyberSentry's telecommunications division currently operates and supports all
hardware and software for call processing, billing, tracking and prepaid
debiting, as well as call transport, client programming, national and
international connectivity, systems maintenance and capital expansion
requirements for both long distance (in all states) and local residential
service in Florida for the Company.
Internet/E-commerce
Although this group is separate from the software and telecommunications
divisions, there are synergies between them in the development and distribution
of products and services. The Internet/E-Commerce group focuses on the
facilitation and advancement of core business transactions via the Internet. It
is responsible for cohesively establishing and maintaining our e-commerce
presence and overseeing the gateway for the CyberSentry Software product suite.
This group not only offers software sales and distribution processing, but also
ISP services, CyberSentry Billing Network(TM) and the Company's ATM process. The
Company also plans to launch Voice Over Internet services in the future. This
group is in the development stage and has not yet produced any revenues for the
Company.
The Management's Discussion and Analysis of Financial Condition and Results of
Operations set forth below represents the Company's operations and liquidity for
the three month period ended September 30, 2000 and 1999.
RESULTS OF OPERATIONS
THREE MONTH AND NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000 COMPARED TO THE
THREE MONTH AND NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999
Net Sales
Net sales amounted to $767,429 and $1,891,596 for the three and nine months
ended September 30, 2000, respectively. The Company did not generate any
revenues from its secured software and product technology segments for the nine
months. The net sales for the nine months resulted from the Company's
telecommunications segment. Net sales increased by $301,068 or 19% from the nine
months ended September 30, 1999 due to revenues generated from a contract with a
major LD carrier. The Company plans to increase sales by growing its sales and
support organizations while also refining its billing and collection practices.
Programs such as direct marketed, post paid travel cards and residential local
and long distance sold or administered directly by the Company will continue. At
present, these programs account for all of the sales of the Company.
Telecommunications Costs
Telecommunications costs amounted to $678,951 and $1,524,710 for the three and
nine months ended September 30, 2000, respectively. The costs exclusively relate
to the Company's telecommunications segment. Telecommunications costs increased
along with the increase in revenue by $255,075, or 20% from the nine months
ended September 30, 1999. Telecommunications costs as a percent of revenue
<PAGE>
remained flat at 20%. The increase in telecommunications costs is consistent
with the increase in net sales.
Selling, General and Administration
Selling, general and administrative expenses were $226,844 and $1,381,860 for
the three and nine months ended September 30, 2000, respectively. Selling,
general and administrative expenses decreased $167,151, or 14% from the nine
months ended September 30, 1999. This decrease was primarily due to a program of
downsizing in personnel and general overhead related to the telecommunications
segment. As a percentage of net sales, these amounts represented 30% and 73% for
the three and nine months ended September 30, 2000, respectively.
Depreciation and Amortization
Depreciation and amortization amounted to $628,876 and $1,869,722 for the three
and nine months ended September 30, 2000, respectively. Depreciation and
amortization expenses increased by $414,669 or 28% from the nine months ended
September 30, 1999. Depreciation of property, plant and equipment was $357,361
for the nine months ended September 30, 2000. Amortization expense on Goodwill,
CyberSentry and ATM technology amounted to $847,968, $342,965 and $321,428
respectively.
Other Expenses, Net
Other expense, net amounted to $37,502 and $198,570 for the three and nine
months ended September 30, 2000, respectively and consists primarily of interest
expense on capital leases.
Net Loss
As a result of the factors described above, the Company incurred a net loss of
$(804,744) and $(3,083,266) for the three and nine months ended September 30,
2000, respectively.
Liquidity and Capital Resources
Our management expects to finance our short-term working capital and capital
expenditure requirements through cash generated by our operations, our existing
line of credit and potentially a private placement of our equity and/or debt
securities. Patriot Advisors, Inc. has agreed to extend the $3 million dollar
line of credit until December 31, 2001 and has agreed to convert principal and
interest outstanding on the line to common stock based on the market price of
the Company's common stock on May 12, 2000 (the day the Company's common stock
began trading on the American Stock Exchange) sufficient enough to provide the
Company with availability on the line of credit of at least two million dollars.
On March 14, 2000, the Company negotiated with Patriot to accept 40,000 shares
of common stock in satisfaction of $280,000 of accrued interest and principal on
the line of credit, thereby providing the Company with additional funds. The
amount outstanding on the line of credit may not exceed 50% of our assets and is
collateralized by all of the Company assets. The amounts outstanding at the end
of the term are payable on demand.
The Company believes that it has sufficient cash flow from operations and its
existing line of credit to meet the cash flow requirements for the next 12
months. The Company intends to increase that capital by a placement of its
securities, significant cost cutting and possible sale of some of the assets
that do not strategically enhance its business objectives.
The Company will also attempt to negotiate with its option holders to exercise
their stock options that could generate another $750,000 to $1,000,000 in cash.
The Company also negotiated with its preferred stockholders to convert to common
stock which saved approximately $100,000 per year in funding the redemption
pool.
<PAGE>
There can be no assurance that the Company will be able to finance its operation
from the existing sources of capital or receive additional capital from the sale
of its securities. In the event that our operations are not sufficient and
outside financing is not available on reasonable terms, we may be required to
cut cost significantly or sell assets of the business.
The Company's financial statements are presented on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. The Company has been unable to increase revenues
in its telecommunications segment and was unable to maintain in efficient cost
structure. These factors raise substantial doubt about the Company's ability to
continue as a going concern. The Company is in the process of integrating its
secured software with the telecommunications business that would allow the
download of its software to be part of a billing transaction that would increase
revenues. This would present new sales and marketing opportunities for the
Company.
Operating
Net cash used in operating activities for the Company amounted to $704,412 for
the nine months ended September 30, 2000. This was primarily attributable to the
net loss of $3,083,266, offset by a decrease in accounts receivable of $54,292,
an increase in accounts payable of $96,070, an increase in accrued expenses and
other current liabilities of $143,440, and adjustments for depreciation and
amortization, common stock/stock options granted for services and bad debts
totaling $2,016,055.
Investing
Net cash used by investing activities amounted to $68,939 for the nine months
ended September 30, 2000. This was primarily attributable to capitalized
software costs of $67,676 relating to the Company's CyberSentry Software.
Financing
Net cash provided by financing activities for the Company amounted to $701,434
for the nine months ended September 30, 2000. This was attributable to increased
borrowings under the line of credit of $754,558, offset by payments on the
capital lease of $53,124.
Inflation
The Company has not been materially affected by the impact of inflation.
Year 2000 Compliance
The potential for software failure due to Year 2000 calculations is a known
risk. The Company recognizes the need to ensure that its operations, products
and services are not adversely impacted by the Year 2000 risks. The Company has
been advised by its major vendors that they are Year 2000 compliant. The Company
does not anticipate any significant future costs relating to Year 2000, but
continues to monitor the situation for any disruptions due to Year 2000 related
issues. The Company has not had its operations, products or services disrupted
with any Year 2000 issues and does not expect any material disruptions related
to Year 2000 issues, for the year 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held a Special Meeting of Shareholders on March 30, 2000, for which we
solicited votes by proxy. The following is a brief description of the matters
voted upon at the meeting and a statement of the number of votes cast for and
against, and the number of abstentions as to each matter.
<PAGE>
1. Election of Directors:
For Withheld Against
Frank Kristan 10,208,826 -- --
Frank Conklin 10,208,826 -- --
Hal Shankland 10,208,826 -- --
Edward Dowling, Jr. 10,208,826 -- --
Gilbert Raker 10,208,826 -- --
Messrs. Kristan and Dowling were elected as Class I Directors, Raker as a Class
II Director and Shankland and Conklin as Class III Directors. Class I Directors
serve for a period expiring at the next Annual Meeting of Stockholders, Class II
Directors serve for a period expiring at the second Annual Meeting of
Stockholders and Class III Directors serve for a period expiring at the third
Annual Meeting of Stockholders.
2. Ratification of the appointment of BDO Seidman, LLP, as the Company's
independent Certified Public Accountants.
For Withheld Against
10,208,826 -- --
3. Ratification of an amendment to our Certificate of Incorporation increasing
the total number of authorized shares of common stock from thirty million to
fifty million shares of common stock.
For Withheld Against
10,208,826 -- --
ITEM 5 OTHER INFORMATION
On May 12, 2000, the Company's common stock began trading on the American Stock
Exchange.
The company has signed a licensing agreement for its software with CyberSoft,
Inc. for 500,000 shares of Cybersoft Preferred Stock valued at $1.00 per share.
CyberSoft, Inc. has a former director as an officer and has shareholders that
are affiliated with both companies. The company also received a 4.9% interest in
NetLabs.com, Inc. pursuant to a software licensing agreement valued at $500,000.
NetLabs.com, Inc. does not have any affiliated officers, directors or
shareholders. The company has elected to defer the $1,000,000 in revenue for
software sales this quarter until the company has either realized cash from the
sale of their interests or it is included in an audited statement for the year
ended December 31, 2000. If the company was to realize the revenue this quarter
on an unaudited basis, it would have a material impact on its financial
statements. It would have a reported 200% increase in sales and a profitability
of approximately $120,000. The company has previously disclosed that it intended
to realize software sales by the end of the first quarter of 2001.
<PAGE>
The company has executed a telecommunications service agreement with a
Tampa-based long distance company to provide wholesale long distance termination
services. The agreement is expected to provide a minimum of at least $3,000,000
dollars in revenue to the company in the next twelve months.
The company on June 22, 2000, completed a Final Settlement Agreement with
Mattel, Inc. whereby the company received an additional $3,000,000 in
consideration due to the fact that Templar Corporation had paid Mattel, Inc. an
additional $3,000,000 in cash subsequent to assigning all its right, title and
interest to the company. The cash cost basis of the 3,000,000 common shares to
the company and The Templar Corporation is $2.00 per share. The Mattel
Settlement Agreement included a final assignment of all right, title and
interest to CyberSentry, including an interest in the patent-pending technology.
The company also received an OEM license from Mattel, Inc. for its CyberPatrol
products. The license has been subsequently assigned by Mattel, Inc. to JSB
Technology pursuant to the sale of CyberPatrol. Mattel has subsequently
announced that the CyberPatrol division was sold in July 2000 to JSB
Technologies for $100,000,000.
The company was informed that Fianna Partners had not completed an acquisition
of an insurance company by June 30, 2000. The partnership will continue to look
for insurance-related opportunities in the near future and continues to hold the
6,000,000 shares of CyberSentry common stock. The company has elected to account
for the value of their interest in the partnership at the closing price of the
company's stock on September 30, 2000. The company will continue to mark the
investment to market until such time as the partnership has diversified its
portolio, made a distribution or decided to terminate the partnership.
The company made an offer for LibertyOne, an Australian company, in May 2000.
The disclosure of this offer was required by Australian Corporations Law. The
offer was subject to the acceptance of the offer by the board of LibertyOne
Limited. The offer for Liberty One Limited was withdrawn due to the fact that
the board of LibertyOne limited had not accepted the offer. The company also
confirmed that the share split and subsequent shareholders meeting would not
proceed, as they were also conditions of the offer being accepted.
The company announced a dividend of shares of First Australian Resources Ltd.
The shares required a registration statement before being distributed. The
company has been unable to obtain the necessary information for the registration
statement and the costs of the registration and option letters would have
exceeded the value of the distribution. Consequently, the company has determined
that it is in the company's best interest that the shares be sold and the net
proceeds be used for working capital.
The company's present total market capitalization of less than $15,000,000, its
trading market capitalization of less than $5,000,000 and its bid price of less
than $1 for the last thirty days do not meet the listing requirements of the
AMEX. The company is reviewing its options with its legal counsel and the
NASDAQ-AMEX listing department. There can be no assurance that the company will
be able to maintain its listing on the AMEX.
The company has accepted the resignation of three of its directors, Gilbert
Raker, Edward Dowling and Francis Conklin, from the board of CyberSentry, Inc.
The company is in the process of appointing new directors. There can be no
assurance tht the company will be able to obtain the necessary outside directors
to maintain its AMEX listing qualifications.
On September 15, 2000, the Company accepted the resignation of its President,
CEO and Chairman, Frank Kristan, On September 30, 2000, James DeVore Jr, CFO of
CyberSentry was appointed to the Board of Directors.
The company has previously disclosed the risk factors associated with its
ability to obtain working capital from its lines of credit, private placements,
option holders and other sources of capital. There can be no assurance that the
company will be successful in its continuing efforts to obtain additional
capital to operate, develop and expand its business.
<PAGE>
The company has been notified that Patriot Advisors, Inc. and The Templar
Corporation had completed transfers of its shares that it had received pursuant
to an exemption from the registration requirements of Section 1145 of the United
States Bankruptcy Code. These transfers were made pursuant to settlement
agreements and for services prior to its listing on AMEX.
The company has been in ongoing discussions with Siemens concerning a
restructuring of the lease. As of October 26, 2000 the switching equipment was
returned to Siemens. The Company is negotiating to minimize any shortfall in
equipment value compared to the remaining balance due.
The company has disclosed its agreement with Gerald Resnick. It is presently
operating under the agreement and a subsequent amendment to the agreement. The
company has had a number of conversations, meetings and proposals with respect
to Mr. Resnick revising his agreement. These discussions and meetings have not
produced a revised signed agreement.
The company has received signed conversion agreements for 4,453,742 Series A
preferred shares and 3,000,000 Series B preferred shares. This represents 97% of
the Series A preferred shares and 100% of the Series B preferred shares. This
represents 7,453,742 additional shares of common stock that will be issued
pursuant to a lock up agreement. The lock up agreement restricts the common
shareholders to the sale of 20% of the common shares on the effective date of a
company S-1 registration statement and 80% of the common shares 180 days from
the effective date of the company S-1 registration statement.
The company is making its best efforts to file an S-1 registration statement.
There can be no assurance that the company will be able to file an S-1
registration or that if the S-1 registration was filed that it would be declared
effective by the Securities and Exchange Commission.
Patriot Advisors, Inc., as of May 15, 2000, made an additional capital
contribution of $1,716,212 to the company. Patriot Advisors, Inc. has made a
total of $2,426,091 in cash contributions to the company. Patriot Advisors, Inc.
through its wholly owned subsidiary, The Templar Corporation, has previously
contributed $6,000,000 in cash to the company for the purchase of the
CyberSentry software, making the total cash contribution $8,426,091. The
company, as of August 21, 2000, owes Patriot Advisors, Inc. a total of $616,909.
Patriot Advisors, Inc. has advised the company that it is reviewing the
eligibility of certain assets to maintain its availability under the line of
credit. Patriot Advisors, Inc. is wholly owned by Frank Kristan, the Chairman
and Chief Executive Officer of the company.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CyberSentry, Inc.
(Registrant)
Date: November 21, 2000 \s\ Harold Shankland
----------------------- ---------------------
Harold Shankland
Chairman of the Board, Chief
Executive Officer and President
Date: November 21, 2000 \s\ James DeVore Jr
----------------------- ---------------------
James DeVore Jr
Treasurer and Chief Financial
Officer
