<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 March 31, 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 March 31, 2000
- ----------------------------- -----------------------------
Common Stock, $.001 par value 21,674,704 shares
<PAGE>
CyberSentry, Inc.
Index
Page No.
--------
CyberSentry, Inc.:
Condensed Balance Sheets at March 31, 2000 (unaudited)
and December 31, 1999 3
Condensed Statements of Operations for the three months
ended March 31, 2000 (unaudited) and 1999 (unaudited)
and for the period from January 1, 1999 through
March 24, 1999 (predecessor) 4
Condensed Statement of Stockholders' Equity for the
three months ended March 31, 2000 (unaudited) 5
Condensed Statements of Cash Flows for the three months
ended March 31, 2000 (unaudited) and 1999 (unaudited)
and for the period from January 1, 1999 through
March 24, 1999 (predecessor) 6
Notes to Condensed Financial Statements 7
Management's Discussion & Analysis 15
Item 4. Submission of Matters to a Vote of Security
Holders 22
Item 5. Other Information 23
Signatures 24
2
<PAGE>
CyberSentry, Inc.
Condensed Balance Sheets
<TABLE>
<CAPTION>
====================================================================================================================================
March 31, December 31,
2000 1999
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current
Cash $ 21,831 $ 89,477
Accounts receivable, less $79,645 and $68,463 allowance for doubtful accounts
in 2000 and 1999, respectively 102,413 173,846
Prepaid expenses and other assets 41,144 54,798
Other receivables 4,887 1,721
- ------------------------------------------------------------------------------------------------------------------------------------
Total current assets 170,275 319,842
Investment in limited partnership (Note 3) 40,500,000
Excess of cost over fair value of net assets acquired, net of $1,150,757 and
$868,101 of accumulated amortization in 2000 and 1999, respectively 9,756,829 10,039,484
ATM Technology License, net of $678,571 and $571,428 of accumulated
amortization in 2000 and 1999, respectively 2,321,429 2,428,572
CyberSentry Software License, net of $642,857 and $535,714 of accumulated
amortization in 2000 and 1999, respectively 2,357,143 2,464,286
Equipment and leasehold improvements, net 605,552 723,644
Capitalized software development costs, net of $4,361 of accumulated 85,506 52,333
Other assets 19,698 19,698
- ------------------------------------------------------------------------------------------------------------------------------------
$ 55,816,432 $ 16,047,859
====================================================================================================================================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 608,431 $ 569,562
Accrued expenses and other current liabilities 659,193 650,503
Current maturities of capital lease obligations 176,364 260,037
Due to stockholder (Note 7) 2,195,195 1,920,078
- ------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,639,183 3,400,180
Obligations under capital leases, less current maturities 1,012,689 1,000,284
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 4,651,872 4,400,464
- ------------------------------------------------------------------------------------------------------------------------------------
Redeemable convertible preferred stock, $.001 par value, 283,009 and 534,656
shares issued and outstanding in 2000 and 1999, respectively (Note 5) 424,514 801,984
- ------------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 4)
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity (Note 5)
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 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, 21,674,704
shares in 2000 and 13,878,765 shares in 1999, issued and outstanding 21,675 13,879
Additional paid-in capital 56,808,842 15,519,225
Accumulated deficit (6,095,893) (4,694,609)
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 50,740,046 10,845,411
- ------------------------------------------------------------------------------------------------------------------------------------
$ 55,816,432 $ 16,047,859
====================================================================================================================================
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE>
CyberSentry, Inc.
Condensed Statements of Operations
<TABLE>
<CAPTION>
====================================================================================================================================
(Predecessor)
For the three For the three Period from
months months ended January 1, 1999
March 31, March 31, through
2000 1999(a) March 24,
(Unaudited) (Unaudited) 1999(b)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Net Sales $ 557,576 $ 72,461 $ 811,316
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Expenses:
Telecommunications costs (excluding depreciation
and amortization, shown separately below) 442,818 99,584 643,853
Selling, general and administrative expenses 820,551 82,197 384,403
Depreciation and amortization 620,423 243,279 102,403
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 1,883,792 425,060 1,130,659
- ------------------------------------------------------------------------------------------------------------------------------------
Other (Income) Expense:
Interest expense 75,230 2,470 77,592
Other income (162) - (21,315)
- ------------------------------------------------------------------------------------------------------------------------------------
Total other expense, net 75,068 2,470 56,277
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss $ (1,401,284) (355,069) (375,620)
====================================================================================================================================
Net loss per share
Basic $ (.09) (.03) (187.81)
Diluted $ (.09) (.03) (187.81)
Weighted average number of outstanding
Basic 15,727,354 12,450,584 2,000
Diluted 15,727,354 12,450,584 2,000
</TABLE>
(a) Includes the operations of TSC from March 25, 1999 through March 31, 1999
(b) Acquisition date by CyberSentry, Inc.
See accompanying notes to condensed financial statements.
4
<PAGE>
CyberSentry, Inc.
Condensed Statements of Stockholders' Equity
(Note 3)
<TABLE>
<CAPTION>
=====================================================================================================================
Class A Preferred Class B Preferred Common
----------------- ------------------ -----------------
Shares Amount Shares Amount Shares Amount Capital
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 2000 3,916,522 3,916 3,000,000 3,000 13,878,765 13,879 15,519,225
Conversion of 745,939 shares of
Class A preferred stock for 745,939
shares of common stock in March 2000 (745,939) (746) - - 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) 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
Issuance of stock options for
30,000 shares of common stock in
January, February and March 2000 - - - - - - 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
Adjustment for mezzanine debt to
equity resulting from conversion of
Class A preferred to common stock 251,647 252 - - - - 377,219
Issuance of 10,000 shares of common
stock to a director in March 2000 - - - - 10,000 10 67,490
Net loss - - - - - - -
- ---------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2000 (unaudited) 3,422,230 $3,422 2,000,000 2,000 21,674,704 $21,675 $56,808,842
=====================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
=======================================================================
Accumulated
Deficit Total
- -----------------------------------------------------------------------
<S> <C> <C>
Balance at January 1, 2000 (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 - -
Conversion of 1,000,000 shares of
Class B preferred stock for 1,000,000
shares of common stock in March 2000 - -
Issuance of 6,000,000 shares of
common stock in March 2000 for an
investment in a limited partnership - 40,500,000
Issuance of stock options for
30,000 shares of common stock in
January, February and March 2000 - 70,948
Issuance of 40,000 shares of common
stock for partial extinguishment of
the line of credit in March 2000 - 280,000
Adjustment for mezzanine debt to
equity resulting from conversion of
Class A preferred to common stock - 377,471
Issuance of 10,000 shares of common
stock to a director in March 2000 - 67,500
Net loss (1,401,284) (1,401,284)
- -----------------------------------------------------------------------
Balance at March 31, 2000 (unaudited) $(6,095,893) $50,740,046
=======================================================================
</TABLE>
See accompanying notes to condensed financial statements.
5
<PAGE>
CyberSentry, Inc.
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
====================================================================================================================================
For the
three For the (Predecessor)
months three months Period from
March 31, ended March 31, January 1, 1999
2000 1999(a) through March 24,
(Unaudited) (Unaudited) 1999(b)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net loss $ (1,401,284) (355,069) (375,620)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 620,423 243,279 102,403
Common stock/stock options granted for services 138,448 - -
Bad debts 74,813 - -
Recovery of bad debts - - (18,576)
Inventory write down - - 26,157
Changes in operating assets and liabilities, net of
effects of acquisition and noncash transactions:
Accounts receivable 6,485 (12,699) (7,624)
Prepaid expenses and other assets 13,654 14,896 24,299
Other receivables (3,166) 50,000 (2,259)
Other assets (9,865) - -
Accounts payable 38,869 (1,980,395) 110
Accrued expenses and other current liabilities 8,690 1,571,815 166,135
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (512,933) (468,173) (84,975)
- ------------------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Purchase of property and equipment (1,028) - -
Capitalized software costs (37,534) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (38,562) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Proceeds from issuance of common stock - 500,000 -
Repayments of obligations under capital lease (71,268) -
Increase in due to stockholder 555,117 - -
Net payments on line of credit - - -
Payments on bank note payable - - -
Cash overdraft - 56,578 75,393
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 483,849 556,578 75,393
- ------------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (67,646) 88,405 (9,582)
Cash and cash equivalents at beginning of period 89,477 - 33,970
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 21,831 88,405 $ 24,388
====================================================================================================================================
Supplemental Disclosures:
Fair value of assets acquired in acquisition of TSC $ - $ 1,420,962 $ -
Liabilities assumed in acquisition of TSC $ - $ 9,828,548 $ -
Common stock and Class B preferred stock issued in
purchase of TSC $ - $ 2,500,000 $ -
Class A preferred stock and common stock issued in
connection with TSC's plan of reorganization $ - $ 6,133,549 $ -
Common stock issued in exchange for limited
partnership interests in Fianna Partners, LP $ 40,500,000 $ - $ -
Issuance of common stock for partial extinguishment of
outstanding line of credit $ 280,000 $ - $ -
====================================================================================================================================
</TABLE>
(a) Includes the operations of TSC from March 25, 1999 through March 31, 1999
(b) Acquisition date by CyberSentry, Inc.
See accompanying notes to condensed financial statements.
6
<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
7
<PAGE>
CyberSentry, Inc.
Notes to Condensed Financial Statements
(Unaudited)
================================================================================
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
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.
8
<PAGE>
CyberSentry, Inc.
Notes to Condensed Financial Statements
(Unaudited)
================================================================================
As defined in TSC's plan of reorganization,
CyberSentry Class A Preferred Shares were issued to
the Class Five Creditors in accordance with the terms
of the Plan. Additional common stock of CyberSentry
was issued to the Class Five Creditors pursuant to the
Rights Offering provided for in the Plan. Each
CyberSentry common stock that was issued and
outstanding immediately prior to the effective
purchase date continued to be issued and outstanding.
All issued and outstanding TSC common stock was
converted into 1,000,000 common shares and 1,000,000
Class B Convertible Redeemable Preferred Stock of
CybeSentry. The shares were issued to existing TSC
shareholders on a pro rata basis in accordance with
the Plan.
For financial reporting purposes TSC is the
predecessor company to CyberSentry. CyberSentry was a
development stage enterprise in 1998 with minimal
operations. Upon the acquisition of TSC, CyberSentry
ceased to be a development stage enterprise.
As discussed, the acquisition was accounted for under
the purchase method of accounting and the unaudited
statement of operations for the three months ended
March 31, 1999 includes the operations of TSC from the
date of acquisition (March 24, 1999) to March 31,
1999.
The following summarized unaudited pro forma results
of operations have been prepared as if the acquisition
of TSC had occurred January 1, 1999. The pro forma
adjustments are for interest and amortization:
<TABLE>
<CAPTION>
For the
three months ended
March 31, 1999
(Unaudited)
-----------------------------------------------------------------------
<S> <C>
Revenues $ 883,777
Net loss $ (985,575)
Pro forma loss per share - basic and diluted $ (.07)
Weighted average number of common shares outstanding -
basic and dilute 13,603,209
</TABLE>
9
<PAGE>
CyberSentry, Inc.
Notes to Condensed Financial Statements
(Unaudited)
================================================================================
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
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.
10
<PAGE>
CyberSentry, Inc.
Notes to Condensed Financial Statements
(Unaudited)
================================================================================
(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.
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
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 March
31, 2000 and 1999 are as follows:
11
<PAGE>
CyberSentry, Inc.
Notes to Condensed Financial Statements
(Unaudited)
================================================================================
For the three For the three
months ended months ended
March 31, March 31,
2000 1999
(unaudited) (unaudited)
------------- -------------
Revenues
Telecommunications $ 557,576 $ 72,461
Secured software - -
Product technology - -
------------- -------------
Total revenues $ 557,576 $ 72,461
============= =============
Net loss
Telecommunications $ 1,182,637 $ 140,783
Secured software 111,504 107,143
Product technology 107,143 107,143
------------- -------------
Total net loss $ 1,401,284 $ 355,069
============= =============
Depreciation and amortization
Telecommunications $ 401,776 $ 28,993
Secured software 111,504 107,143
Product technology 107,143 107,143
------------- -------------
Total depreciation and amortization $ 620,423 $ 243,279
============= =============
Interest expense, net
Telecommunications $ 75,230 $ 2,470
Secured software - -
Product technology - -
------------- -------------
Total interest expense, net $ 75,230 $ 2,470
============= =============
Total assets
Telecommunications $ 51,052,354 $ 12,231,315
Secured software 2,442,649 2,785,714
Product technology 2,321,429 2,750,000
------------- -------------
Total assets $ 55,816,432 $ 17,767,029
============= =============
Capital expenditures
Telecommunications $ 1,028 $ -
Secured software - -
Product technology - -
------------- -------------
Total capital expenditures $ 1,028 $ -
============= =============
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
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.
12
<PAGE>
CyberSentry, Inc.
Notes to Condensed Financial Statements
(Unaudited)
================================================================================
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.
13
<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
14
<PAGE>
unauthorized redistribution of material to secondary recipients, such as passing
along copies of protected material. The Company believes that most content
currently downloaded via the Internet can be protected using CyberSentry
Software. CyberSentry has only recently begun to market the CyberSentry Software
and to date has no sales.
ATM Technology
CyberSentry has obtained the right to develop and sell in the United States and
Canada certain ATM technology which has the potential to deliver real time
multimedia services to both consumer and business users at substantially
increased speeds and lower costs than other technologies. The Company currently
plans to sell two applications of the ATM technology. The first is a fast packet
digital switch designed for small to medium size businesses. This device allows
a business to transmit voice, video and data over a local area network using the
business' existing PABX infrastructure. The second is a set-top box designed for
applications in the home. This device will allow for the delivery of voice,
video and data into the home via the existing telephone line, cable or via
satellite. The Company believes that this product will have applications for
games, music, television based Internet browsing and video on demand. To date
the Company has no sales of ATM technology.
Telecommunications
During the last five years, TSC was a facilities-based carrier providing long
distance telecommunications services, including commercial and residential
service, long distance service, operator service for pay phones, prepaid phone
cards, calling cards and enhanced services, such as voice mail and fax services.
TSC owns and operates a Siemen's high-volume gateway switch and an IBM AS400
billing platform to accommodate anticipated growth. It is certified as an
"Alternative Local Exchange Carrier" ("ALEC") to provide local telephone
services in the State of Florida, 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.
15
<PAGE>
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 March 31, 2000 and 1999 and for TSC as predecessor
for the period from January 1, 1999 through March 24, 1999, the acquisition date
by CyberSentry.
RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED MARCH 31, 2000 COMPARED TO THE PERIOD FROM JANUARY 1,
1999 THROUGH MARCH 24, 1999 (PREDECESSOR)
Net Sales
Net sales amounted to $557,576 and $811,316 for the three months ended March 31,
2000 and for the period from January 1, 1999 through March 24, 1999,
respectively. The Company did not generate any revenues from its secured
software and product technology segments in 2000 and 1999. The net sales for the
periods resulted from the Company's telecommunications segment. Net sales
decreased by $253,740, or 31%. The decrease was primarily due to a decrease of
$193,144 in the long distance service programs (LD(1+), LD(T-1's) and Call
1-800), and a decrease of $51,928 in debit card programs. The decrease in the
long distance programs was attributable to decreased volume. 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 $442,818 and $643,853 for the three months
ended March 31, 2000 and for the period from January 1, 1999 through March 24,
1999. The costs exclusively relate to the Company's telecommunications segment.
Telecommunications costs decreased with the decrease in revenue by $201,035, or
31%. As a percentage of net sales, these amounts represented 79% for 2000 and
1999. The decrease in telecommunications costs is consistent with the decrease
in net sales.
Selling, General and Administration
Selling, general and administrative expenses increased $436,148, or 113% from
$384,403 for the period from January 1, 1999 through March 24, 1999 to $820,551
for the three months ended March 31, 2000. The overall dollar increase was
16
<PAGE>
primarily due to an increase in salaries and related costs of approximately
$75,563, an increase in consulting fees of $161,448, an increase in bad debt
expense of $74,666, an increase in legal and professional fees of $56,431 and an
increase in insurance expense of $50,320. As a percentage of net sales, these
amounts represented 47% for 1999 and 147% for 2000. The increase as a percentage
of net sales was attributable to the decrease in net sales, and the Company's
inability to maintain an efficient cost structure in 2000.
Depreciation and Amortization
Depreciation and amortization amounted to $102,403 and $620,423 for the three
months ended March 31, 2000 and for the period from January 1, 1999 through
March 24, 1999, respectively. The amount of depreciation and amortization
expense in 2000 was significantly impacted by the intangibles acquired through
the acquisition of TSC and the Company's purchase of the CyberSentry and ATM
technology in the later part of 1998. For the three months ended March 31, 2000,
the amortization expense relating to the acquired intangibles amounted to
$282,656, and the amortization of the CyberSentry and ATM technology amounted to
$214,286.
Other Expenses, Net
Other expense, net amounted to $56,277 and $75,068 for the three months ended
March 31, 2000 and for the period from January 1, 1999 through March 24, 1999,
respectively, and consists primarily of interest expense. Interest expense is
consistent between the two periods.
Net Loss
As a result of the factors described above, the Company incurred a net loss of
$(1,401,284) and $(375,620) for the three months ended March 31, 2000 and for
the period January 1, 1999 through March 24, 1999, respectively.
FOR THE THREE MONTHS ENDED MARCH 31, 1999
CyberSentry was incorporated in Delaware on August 21, 1998 and has only
recently begun marketing the CyberSentry Software. The ATM Technology is still
in the development stage. There were no sales of either product during 2000 and
1999. Since the Company purchased TSC on March 24, 1999, the accompanying
statement of operations includes the accounts of TSC for the period March 25,
1999 to March 31, 1999 under purchase accounting.
Operating expenses amounted to $425,060. This amount was comprised of $243,279
of depreciation and amortization, $82,197 of selling, general and administrative
expenses and $99,584 of telecommunications costs.
17
<PAGE>
Depreciation and amortization was comprised primarily of the amortization of the
CyberSentry Software and the ATM Technology. Selling, general and administrative
expenses were comprised primarily of professional fees and salaries.
As a result of the factors described above, CyberSentry incurred a net loss of
$(355,069) for the three months ended March 31, 1999.
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.
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
18
<PAGE>
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 $512,933 for
the three months ended March 31, 2000. This was primarily attributable to the
net loss of $1,401,284, offset by increases in accounts receivable and accrued
expenses and other current liabilities of $47,559, and adjustments for
depreciation and amortization, common stock/stock options granted for services
and bad debts totaling $758,871.
Net cash used in operating activities amounted to $468,173 for the three months
ended March 31, 1999. This was primarily attributable to the net loss of
$355,069 and the decrease in accounts payable of $1,980,395, offset by decreases
in prepaid expenses and other assets and other receivables of $64,896, and an
adjustment for common stock/stock options granted for services of $243,279.
Investing
Net cash used by investing activities amounted to $38,562 for the three months
ended March 31, 2000. This was primarily attributable to capitalized software
costs of $37,534 relating to the Company's CyberSentry Software.
Financing
Net cash provided by financing activities for the Company amounted to $483,849
for the three months ended March 31, 2000. This was attributable to increased
borrowings under the line of credit of $555,117, offset by payments on the
capital lease of $71,268.
Net cash provided by financing activities for the Company amounted to $556,578
for the three months ended March 31, 1999. This was attributable to financing
received from the sale of common stock of $500,000, and from a cash overdraft of
$56,578.
Inflation
The Company has not been materially affected by the impact of inflation.
19
<PAGE>
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.
20
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held a Special Meeting of Shareholders on March 30, 1999, 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.
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 -- --
21
<PAGE>
ITEM 5 OTHER INFORMATION
On May 12, 2000, the Company's common stock began trading on the American Stock
Exchange.
22
<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: May 15, 2000 \s\ Frank Kristan
- ------------------ -----------------
Frank Kristan
Chairman of the Board, Chief
Executive Officer and President
Date: May 15, 2000 \s\ James DeVore
- ------------------ ----------------
James DeVore
Treasurer and Chief Financial
Officer
23
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<PERIOD-START> JAN-1-2000
<PERIOD-END> MAR-31-2000
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