<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Annual Report to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year ended December 31, 1999.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _____________to______________
Commission File No. 0-23416
CYBERSENTRY, INC
----------------
(Exact name of registrant as specified in its charter)
DELAWARE 22-3626108
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
412, EAST MADISON STREET, SUITE 1200 TAMPA, FLORIDA 33602
- --------------------------------------------------- -----
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (813) 228-0688
--------------
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------------------- -----------------------------------------
Not Applicable None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
1
<PAGE>
Indicate by check mark whether the registrant: (1) has 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 prior that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The issuer's net sales for the most recent fiscal year were $2,599,522.
The aggregate market value of the voting stock held by non-affiliates
based upon the last sale price on March 29, 2000 was approximately $42,742,590.
As of March 29, 2000 there were 20,021,165 shares of Common Stock, par
value $.001 per share, outstanding.
2
<PAGE>
PART I
ITEM 1. BUSINESS
CyberSentry, Inc. (the "Company") is a communications software company
providing its clients with numerous ways to access the world and distribute
their products and services, while offering them the means to maintain the
security of their transactions on the Internet. It concentrates on three core
lines of business: Secure Internet Software, Telecommunications, and Advanced
Product Technology and is presently organized into three divisions: Digital
Rights Management Secure Software, Telecommunications Internet Services, and
Advanced Product Technology. The Company intends to leverage its abilities and
expertise in each of these areas to further the development of the others.
Management believes that the combination of the Company's CyberSentry Software,
ATM products, e-commerce capabilities and telecommunications backbone (Internet
as well as conventional) offers an opportunity to succeed in the goal of
providing a secure method for individuals and corporations to safely distribute
information and sell products via the Internet or other electronic channels.
DESCRIPTION OF BUSINESS
SECURE SOFTWARE
The Company holds an exclusive, worldwide, perpetual, fully-paid
license to publish, use, distribute and sub-license a software program that
provides digital rights management technology which the Company calls
CyberSentry Digital Rights Management Software (the "Software"). The Software
provides secure Internet commerce transactions for both the consumer and the
seller by controlling the file extensions, as well as access to consumer credit
information and content that can be downloaded via the Internet, such as games,
CDs, videos, copyrighted information and other transactions. The Software is
designed to provide the secure distribution of copyrighted text, audio, video,
graphics and software in Internet commerce. The Software also restricts for
payment and controls 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 the Software.
The Company acquired its license to the CyberSentry Software from a
shareholder, Templar, a licensee of The Learning Company Properties, Inc.
(presently part of Mattel) for a purchase price of 3,000,000 shares of our
common stock. This exclusive license allows the Company to sell software
packages (licenses, services, maintenance and updates) to a diverse set of
clients via conventional distribution channels, partnerships, joint ventures and
directly over the Internet via its e-commerce web site. Two of the biggest
challenges faced by companies trying to take advantage of e-commerce are
managing the initial distribution of digitally delivered products and preventing
unauthorized "pass along" distribution of proprietary information and/or
services. CyberSentry Software is a digital rights management tool that seeks to
provide a comprehensive solution to these two critical e-commerce issues.
3
<PAGE>
A company engaged in commerce over the Internet may receive a single
subscription or license fee but subsequently be forced to observe the
unauthorized redistribution or loading of its product; this entails economic
hardship and could involve severe and highly problematical and costly legal
issues. Lost revenues represent but one part of the problem. Under certain
circumstances, illicit distribution of a company's product can cause the company
to lose legal protection for its rights to that product.
A company that sells software and distributes proprietary information
(such as subscription- based manuals, letters and updates) via e-commerce or
similar channels and that has integrated CyberSentry Software into its product
offerings has greatly increased the security of its sales process, leading to a
far lesser chance that its legal protections will be compromised.
Although the CyberSentry Software is fully developed for Internet
applications and has been licensed to one customer, VisionNet one of the
Company's shareholders and a wholly owned subsidiary of LibertyOne, an
Australian public company which is the one hundred per cent owner of Comtel, our
licensor for the ATM Technology, we have not yet received any revenues from
these products. We do not yet provide dial-up Internet access and therefore have
not yet received any revenues from this proposed service.
We are a registered Alternate Local Exchange Carrier ("ALEC") in
Florida, with tariffs filed in 32 states as a long distance service provider. As
such, we intend to provide national Internet dial- up access to customers. We
expect to provide these services in conjunction with major Internet service
providers.
INTERNET SERVICES
Although the Internet Services group is a separate group from the
Software division, there are synergies between the groups in the development and
distribution of products. Internet Services concentrates on the facilities
necessary to provide local dial-up Internet service and real time billing and
collection services. It is responsible for establishing and maintaining our
ability to provide local dial-up and to contract for a national Internet dial-up
provider to effect a private label national dial- up capability in the Company
name. In addition, we are researching and negotiating joint ventures to be able
to provide voice over Internet origination and termination. We are in the
process of evaluating specific hardware and methodologies of completing
international and domestic calls utilizing the Internet backbone, together with
termination agreements with carriers. While the Software development team is
responsible for the development and implementation of the CyberSentry Digital
Rights Management Software and the ability to bill for digital assets delivered
over the Internet, the same methodology applies to prepaid telephony services.
Internet telephony is in the development stage and has not yet generated any
revenues.
TELECOMMUNICATIONS
As part of our long-term plan, on March 24, 1999 we acquired
Telecommunications Service Center, Inc. ("TSC") through a merger by funding
TSC's emergence from Chapter 11 bankruptcy
4
<PAGE>
proceedings. TSC now operates as the third division of CyberSentry as a
facilities-based telecommunications carrier. Existing services of TSC include
pre-paid (debit) calling cards, promotional value-added calling plans and
service bureau offerings to various client groups. The assets acquired through
the acquisition of TSC provide us the ability to offer billing to customers in
real time direct as well as billing the customers local exchange carriers where
appropriate. This entity forms the backbone to serve our other divisions. We
plan to expand the Management Information Systems and Technical Services
departments of this group to support all of our technical needs.
We own and operate a Siemens high-volume gateway switch and an IBM
AS400 billing platform in our TSC division. These systems enable us to provide
all hardware and software for call processing, billing, tracking and prepaid
debiting, as well as call transport, client programming, and national and
international connectivity for TSC's services.
We no longer focus on being a third party provider to
telecommunications resellers. Instead, the infrastructure acquired by the merger
with TSC will be applied to products and services proprietary to us. As a
result, gross sales have decreased since the acquisition. We believe that this
short-term situation should correct itself over time, thus significantly
increasing the gross margins.
Although we had hoped to be in a position to resurrect sales programs
in existence prior to TSC's bankruptcy, that has not proven feasible. However,
we attempt to attract previous clients and agents, working with existing agents
on new programs and launching our own set of value-added calling services.
Combined offerings, including Internet Service Providers ("ISP"), Voice-Over
Internet Protocol ("VOIP") and calling card services, are expected to be
marketed over the Internet and added to the product suite.
Our telecommunications products and services are fully developed and
generate revenues.
ADVANCED PRODUCT TECHNOLOGY
We have entered into an exclusive licensing arrangement with LibertyOne
Limited, an Australia corporation, for the distribution of our Asynchronous
Transfer Mode technology throughout North America. The purchase price for this
license was 2,000,000 shares of our Class B Preferred Stock. ATM offers
real-time multimedia services to both consumers and commercial enterprises. We
believe ATM will significantly enhance corporate and consumer communications,
including video conferencing, interactive audio, and audio/visual distribution
and retrieval. We believe that focusing on the development and delivery of our
ATM offerings will put us in a position to take advantage of the enormous
opportunity for Voice on Demand, voice, data and Internet services.
We plan to market and sell two applications of our ATM technology. The
first is a fast packet digital switch designed for small to medium size
businesses. This device should allow a
5
<PAGE>
business to transmit voice, video and data over a local area network using our
existing PABX infrastructure. The second is a set-top box designed for
applications in the home. The device allows for the delivery of voice, video and
data into the home via the existing telephone line, cable or via satellite. We
believe that this product will have applications for games, music,
television-based Internet browsing and video on demand.
The ATM technology is still in the developmental stage and has not
generated any revenues for us to date. We have reviewed the patents, acquired
the rights to the ATM technology and have performed research thereon. We expect
to launch the technology through a joint venture with a manufacturer of products
incorporating PBX technology by the first quarter of 2001. We cannot assure you,
however, that we will have established such joint venture by then if ever.
We plan to target specific carriers for partnership and are currently
negotiating agreements to secure ATM access on terms consistent with our
strategies and operational goals. We believe that our approach to marketing our
ATM product is innovative and unique to the industry. The strategy involves the
use by subscribers of either an existing copper line or a coaxial cable to use
an ATM device which can be purchased or leased from us. We believe that this
technology will permit a conventional telephone line to be used to
simultaneously carry voice, fax, Internet and audiovisual data over a single
conventional copper line where the local carrier has installed central office
ATM switches. We believe that by offering these multiple services using only one
line, we should be well positioned as a competitive telecommunications provider
of ATM services.
HISTORY OF BUSINESS
We were incorporated in Delaware on August 21, 1998 as
Telecommunications Services, Inc., referred to herein as TSI, and subsequently
amended our certificate of incorporation to change our name to CyberSentry, Inc.
TSC was formed on July 15, 1991 and, on May 7, 1998, filed for bankruptcy
protection in Florida. As of March 24, 1999, as contemplated by TSC's Second
Amended Plan of Reorganization which was funded by CyberSentry, TSC merged into
CyberSentry and TSC was dissolved through the process we refer to as the Merger,
with CyberSentry being the sole surviving corporation. The Merger was treated
for accounting purposes as a purchase of TSC by CyberSentry.
6
<PAGE>
ITEM 2. PROPERTIES
Real estate leases
The corporate headquarters and principal executive offices of the
Company are located at 412 East Madison Street, Suite 1200, Tampa, Florida. The
Company's use of this office is pursuant to two lease agreements which expire on
June 30, 2000 and June 30, 2001, respectively (the "Leases").
The Company believes that its leased property is in good condition, is
well maintained and is adequate for the Company's current and immediately
foreseeable operating needs.
The Company anticipates that it will be leasing additional office space
and switch facilities, as necessary, including space in New York City.
7
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
On May 7, 1998, TSC, our predecessor, sought protection from its
creditors and filed for bankruptcy protection pursuant to Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the Middle District of
Florida. On March 14, 1999, TSC emerged from the Bankruptcy pursuant to the plan
approved by the Bankruptcy Court, and, on March 24, 1999, was merged with and
into us in accordance with the plan and the Merger Agreement.
On September 16, 1998, TSC entered into an Assurance of Discontinuance
with the Attorney General of the State of Minnesota, pursuant to which TSC
agreed, among other things, (i) to absorb unbilled long-distance fees and
service charges with respect to Minnesota customers whose accounts had been
improperly switched and to make restitution for any such fees or charges
previously collected, (ii) to pay a $10,000 civil penalty to the State of
Minnesota, (iii) not to engage in similar practices in the future and (iv) to
pay an additional civil penalty in the amount of $250,000 if it violates the
Assurance of Discontinuance. We believe that we are in compliance with the
Assurance of Discontinuance.
In June 1999, also in connection with the Grace Trust transaction, we
entered into a Stipulation and Consent Judgment with the State of Idaho in order
to settle allegations that we engaged in improper telemarketing and other
activities with respect to the marketing of our telecommunications products to
Idaho residents. In the Stipulation, we agreed, among other things, to adhere to
various disclosure requirements in connection with telemarketing and sweepstakes
solicitations, to obtain proper authorizations and verifications from
subscribers, to make restitution to affected Idaho residents and to pay $7,500
to the State of Idaho for its costs of investigation.
In addition to the foregoing, we are, and TSC as our predecessor was,
involved from time to time in various claims and lawsuits in the ordinary course
of business, none of which is expected, individually or in the aggregate, to
have a materially adverse effect on us.
8
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held no Annual or Special Meeting during the last quarter of Fiscal
1999.
9
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK
As of the date hereof, the Company has outstanding 20,021,165 shares of
its Common Stock $.001 par value ("Common Stock"). The Company's Common Stock is
traded on the OTC Bulletin Board under the symbol "CYBY." The following table
sets forth the high and low bid prices for the Common Stock as reported on the
OTC Bulletin Board. The high and low bid prices reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not represent actual
transactions.
Common Stock
------------------
Fiscal 2000 High Low
- ----------- ---- ---
1st Quarter (1) 7.50 4.875
On March 29, 2000, there were 29 holders of record of the Company's
outstanding shares of Common Stock.
On March 29, 2000, the last bid price of the Common Stock as reported
on the OTC Bulletin Board was $ 6.00.
DIVIDEND POLICY
The Company has never paid or declared dividends on its Common Stock.
The payment of cash dividends, if any, in the future is within the discretion of
the Board of Directors and will depend upon the Company's earnings, its capital
requirements, financial condition and other relevant factors. The Company
intends, for the foreseeable future, to retain future earnings for use in the
Company's business.
- -----------------
(1) The Company's Common Stock began trading on January 24, 2000.
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the financial statements and the notes thereto of CyberSentry and
TSC included elsewhere in this Form 10-K. As of March 24, 1999, TSC was acquired
by CyberSentry, with CyberSentry being the surviving corporation. CyberSentry
was a development stage enterprise with minimal operations in 1998. TSC has been
operating since 1991 and is the primary operating entity. The selected
historical financial information of TSC as of and for the year ended December
31, 1995 is derived from unaudited financial statements of TSC not included or
incorporated by reference herein, and, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments necessary for a
fair representation of financial information. The selected financial data set
forth below for TSC as of and for the periods ended March 24, 1999, December 31,
1998, 1997 and 1996 and for CyberSentry as of and for the year ended December
31, 1999 and for the period from August 21, 1998 (inception) through December
31, 1998 are derived from the audited financial statements of TSC and
CyberSentry included elsewhere in this Form 10-K, which have been audited by BDO
Seidman L.L.P., independent accountants. TSC's financial statements following
its emergence from bankruptcy are not comparable to the historical financial
statements contained herein, which do not reflect the plan of reorganization.
TSC's and CyberSentry's historical financial statements may not be indicative of
future performance.
<TABLE>
<CAPTION>
Telecommunications Service Center, Inc. (1)
Period from
January 1, 1999 Years Ended December 31,
through March 24, ----------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------- ------------ ------------ ------------
(Unaudited)
- -----------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $ 811,316 $ 22,804,240 $ 8,341,164 $ 2,606,254 $ 2,493,409
Operating expenses 1,130,659 26,042,048 11,024,545 3,663,781 3,266,917
------------ ------------- ------------ ------------ ------------
Operating (loss) (319,343) (3,237,808) (2,683,381) (1,057,527) (773,508)
Other (expense income (56,277 (175,257 (354,959) (205,932) 46,671
------------ ------------- ------------ ------------ ------------
Net (loss) $ (375,620) $ (3,413,065) $ (3,038,340) $ (1,263,459) $ (726,837)
============ ============= ============ ============ ============
Net (loss) per share
Basic $ (187.81) $ (1,706.53) $ (1,519.17) $ (631.73) $ (726.84)
Weighted average number of
outstanding shares
Basic 2,000 2,000 2,000 2,000 1,000
BALANCE SHEET DATA:
Total assets $ 1,420,962 $ 1,519,559 $ 2,493,896 $ 1,881,856 $ 896,044
Short-term debt including
current portion of
long-term debt -- -- 866,127 561,032 289,586
Liabilities subject to
Compromise under
reorganization
proceedings 8,133,313 8,097,928 -- -- --
Long-term debt -- -- 4,409,783 2,399,352 548,675
Capital deficit (8,806,232) (8,430,612) (5,017,547) (1,979,207) (716,748)
- -----------------
(1) On May 7, 1998, the Telecommunications Service Center, Inc. filed for relief
under Chapter 11 of the United Stated Bankruptcy Code in the Middle District of
Florida, Tampa Division. On March 4, 1999, the Bankruptcy Court confirmed the
plan of reorganization and on March 14, 1999 the plan of reorganization became
effective (pending the acquisition of TSC by CyberSentry).
</TABLE>
11
<PAGE>
CyberSentry, Inc.
Period from
Year ended August 21, 1998
December 31, (inception) through
1999(c) December 31, 1998
------------ -----------------
INCOME STATEMENT DATA:
Net sales $ 2,599,522 $ --
Operating expenses 6,884,059 326,485
------------ ------------
Operating loss (4,284,537) (326,485)
Other expense (83,587) --
------------ ------------
Net loss $ (4,368,124) $ (326,485)
============ ============
Net loss per share
Basic ($ .33) ($ .03)
Diluted ($ .33) ($ .03)
Weighted average number of outstanding
shares
Basic 13,438,603 10,500,000
Diluted 13,438,603 10,500,000
BALANCE SHEET DATA:
Total assets $ 16,047,859 $ 5,814,896
Short-term debt including current portion
of long-term debt 2,180,115 76,181
Long-term debt 1,000,284 --
Redeemable convertible preferred stock 801,984 --
Stockholders' equity 10,845,411 5,726,215
(c) Includes the operations of TSC from March 25, 1999 through December 31,
1999.
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
When used in this Form 10-K and in future filings by the Company with
the Securities and Exchange commission, the words or phrases "will likely
result" and "the company expects," "will continue," "is anticipated,"
"estimated," "project," or "outlook" or similar expressions are intended to
identify "forward-looking statements." The Company wishes to caution readers not
to place undue reliance on any such forward-looking statements, each of which
speak only as of the date made. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
has no obligation to publicly release the result of any revisions which may be
made to any forward-looking statements to reflect anticipated or unanticipated
events or circumstances occurring after the date of such statements.
13
<PAGE>
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") effective 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 - Product Technology
CyberSentry has obtained the right to develop and sell in the United States and
Canada certain ATM Technology which has the potential to deliver real time
multimedia services to both consumer and business users at substantially
increased speeds and lower costs than other technologies. The Company currently
plans to sell two applications of the ATM Technology. The first is a fast packet
digital switch designed for small to medium size businesses. This device allows
a business to transmit voice, video and data over a local area network using the
business' existing PABX infrastructure. The second is a set-top box designed for
applications in the home. This device will allow for the delivery of voice,
video and data into the home via the existing telephone line, cable or via
satellite. The Company believes that this product will have applications for
games, music, television based Internet browsing and video on demand. To date
the Company has no sales of ATM Technology.
Telecommunications
During the last five years, TSC was a facilities-based carrier providing long
distance telecommunications services, including commercial and residential
service, long distance service, operator service for pay phones, prepaid phone
cards, calling cards and enhanced services, such as voice mail and fax services.
TSC owns and operates a Siemen's high-volume gateway switch and an IBM AS400
billing platform to accommodate anticipated growth. It is certified as an
"Alternative Local Exchange Carrier" ("ALEC") to provide local telephone
services in the State of Florida and is currently filing for ALEC certification
in thirty (32) additional states.
14
<PAGE>
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 CyberSentry's operations and liquidity for
the year ended December 31, 1999 and for the period from August 21, 1998
(inception) through December 31, 1998 and TSC's results of operations, the
predecessor, for the years ended December 31, 1998 and 1997.
RESULTS OF OPERATIONS
The following table sets forth selected financial data of TSC stated as a
percentage of net sales:
Years ended December 31,
-------------------------
1998 1997
--------- ----------
Net sales 100.0% 100.0%
Telecommunications costs 97.7 97.3
Selling, general and administrative expenses
(including depreciation and amortization
expense) 16.5 34.9
Operating loss (14.2) (32.2)
Other expense, net (.8) (4.2)
Net loss (15.0) (36.4)
15
<PAGE>
The following relates to the operations of TSC.
FISCAL YEAR ENDED 1998 COMPARED TO 1997
Net sales increased by $14,463,076, or 173%, from $8,341,164 for the year ended
December 31, 1997, to $22,804,240 for the year ended December 31, 1998. Of this
increase, $13,510,034 was due to increased volume in the LEC billing programs
with PCI, Accutel and Valutel and a $2,274,605 increase in (1+) long distance
program. Increased costs associated with LEC billing programs and a more
stringent regulatory environment prompted the Company to either discontinue or
cut back certain programs. The Company discontinued the Accutel program during
1998. The increase in revenue from the (1+) long distance program during 1998
was due to increased volume resulting from the Grace Trust Transaction. See Item
7 - "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Bankruptcy, Merger and
Related Transactions" for a further description of the Grace Trust Transaction.
Although the Company experienced increased volume and revenue from the Grace
Trust Transaction, there was also an increase in bad debts from the poor credit
condition of the customer base. Such increases were offset by a $865,281
decrease in the travel card and (T-1) long distance programs.
Telecommunication costs increased to support the increased revenue by
$14,170,417 or 175%, from $8,112,840 for the year ended December 31, 1997, to
$22,283,257 for the year ended December 31, 1998. As a percentage of net sales,
these amounts represented 97% for 1997 as compared to 98% for 1998. The amounts
as a percentage of net sales are consistent from 1997 to 1998.
TSC's selling, general and administrative expenses increased $786,574, or 31%,
from $2,532,845 for the year ended December 31, 1997 to $3,319,419 for the year
ended December 31, 1998. As a percentage of net sales, these expenses decreased
from 30% for 1997 to 15% for 1998. The overall dollar increase in selling,
general and administrative expenses was primarily attributable to bad debts in
1998. The increase in bad debts in 1998 was attributable to customer accounts
written off in connection with the Grace Trust Transaction and the Accutel
program that ended in 1998. See Item 7 - "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS - Bankruptcy, Merger and Related Transactions" for a further
description of the Grace Trust Transaction. To reduce bad debts during 1999 the
Company discontinued service for the customer accounts relating to the Grace
Trust Transaction, and has increased credit screening for new customers. The
decrease in these expenses as a percentage of net sales was attributable to the
increase in net sales and TSC's ability to increase revenues and maintain an
efficient cost structure in 1998.
Depreciation and amortization expense increased $60,512 or 16%, from $378,860
for the year ended December 31, 1997 to $439,372 for the year ended December 31,
1998. The overall dollar increase was attributable to equipment purchased in
mid-year 1997 that have depreciation for a portion of 1997 and a full year of
depreciation in 1998.
Other expense, net decreased by $179,702, or 51%, from $354,959 for the year
ended December 31, 1997 to $175,257 for the year ended December 31, 1998. Other
expense, net consists of gains from the sale of marketable securities in 1998
amounting to $227,251, offset by an increase of $47,549 in interest expense in
1998.
16
<PAGE>
Principally as a result of the factors described above, the Company incurred a
net loss of $(3,413,065) for the year ended December 31, 1998 as compared to a
net loss of $(3,038,340) for the year ended December 31, 1997.
The following relates to the operations of CyberSentry, Inc., and its
predecessor TSC.
FOR THE YEAR ENDED DECEMBER 31, 1999
NET SALES
Net sales amounted to $2,599,522 for the year ended December 31, 1999. The
Company did not generate any revenues from its secured software and product
technology segments for the year. The net sales for the year resulted from the
Company's telecommunications segment. Since the Company purchased TSC on March
24, 1999, the net sales of $2,599,522 represents TSC's net sales from the period
March 25, 1999 to December 31, 1999, under purchase accounting. Net sales
decreased $20,204,718, or 89% from $22,804,240 for the year ended December 31,
1998 to $2,599,522 for the year ended December 31, 1999. The decrease was due to
decreased volume in the Local Exchange Carrier ("LEC") billing programs with
PCI, Accutel and Valutel, attributing to $17,244,713 of the decrease.
Additionally, $2,683,803 of the decrease was due to decreased volume in the
LD(1+), Call 1-800 and LD (T-1's) long distance service programs. The Company
plans to increase sales by growing its sales and support organizations while
also refining its billing and collection practices. The Company has decreased
its reliance on selling through the master agent and subagent relationships
previously utilized by TSC, in particular because Accutel, PCI and Valutel were
unable to document their on-going compliance with the revised more stringent
regulatory environment, such as independent third party verification. Thus, the
revenues derived from master agents and subagents such as Grace Trust, Valutel
and Accutel will not recur.
Programs such as direct marketed, post paid travel cards and residential local
and long distance sold or administered directly by the Company will continue. At
present, these programs account for all of the sales of the Company.
TELECOMMUNICATIONS COSTS
Telecommunications costs amounted to $2,108,418 for the year ended December 31,
1999. The costs exclusively relate to the Company's telecommunications segment.
Telecommunications costs decreased $20,174,839, or 91% from $22,283,257 for the
year ended December 31, 1998 to $2,108,418 for the year ended December 31, 1999.
Telecommunications costs decreased as a function of lower volume for the period
and the reduced master and subagent base including Accutel, PCI and Valutel. As
a percentage of net sales, these amounts represented 98% for the year ended
December 31, 1998 as compared to 81% for the year ended December 31, 1999. The
decrease as a percentage of net sales was primarily attributable to an increase
in the monthly fee charged each customer in the Valutel program.
SELLING, GENERAL AND ADMINISTRATION
Selling, general and administrative expenses decreased $624,295, or 19% from
$3,319,419 for the year ended December 31, 1998 to $2,695,124 for the year ended
December 31, 1999. The overall dollar decrease was primarily attributable to bad
debts in 1998. As a percentage of net sales, these amounts represented 15% for
17
<PAGE>
1998 as compared to 104% for 1999. The increase as a percentage of net sales was
attributable to the decrease in net sales, and the Company's inability to
maintain an efficient cost structure in 1999.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization amounted to $2,080,517 for the year ended December
31, 1999. The amount of depreciation and amortization in 1999 was significantly
impacted by the intangibles acquired through the acquisition of TSC and the
Company's purchase of the CyberSentry and ATM Technology in the later part of
1998. For the year ended December 31, 1999, the amortization expense relating to
the acquired intangibles amounted to $868,101, and the amortization of the
CyberSentry and ATM Technology amounted to $857,142.
OTHER EXPENSES
Other expenses, net decreased $91,670, or 52% from $175,257 for the year ended
December 31, 1998 to $83,587 for the year ended December 31, 1999. The decrease
was attributable to a decrease in interest expense, net of $281,781 offset by a
decrease in other income of $190,111. Interest expense, net decreased due to
lower average debt balances outstanding during 1999. Other income in 1998
resulted from a gain on the sale of marketable securities; the Company did not
have securities transactions during 1999. Other income in 1999 was attributable
to commission income from pay phones.
NET LOSS
As a result of the factors described above, the Company incurred a net loss of
$(4,368,124) for the year ended December 31, 1999, as compared to a net loss of
$(3,413,065) for the year ended December 31, 1998.
FOR THE PERIOD FROM AUGUST 21, 1998 (INCEPTION) THROUGH DECEMBER 31, 1998
CyberSentry was incorporated in Delaware on August 21, 1998 and has only
recently begun marketing the CyberSentry Software. The ATM Technology is still
in the development stage. There were no sales of either product during 1998.
Operating expenses amounted to $326,485. This amount comprised $250,000 of
amortization of the CyberSentry Software and ATM Technology and $76,485 of
general and administrative expenses. General and administrative expenses
primarily relate to costs incurred in connection with software support and legal
and accounting fees.
As a result of the factors described above, CyberSentry incurred a net loss of
$(326,485) for the period from August 21, 1998 (inception) through December 31,
1998.
LIQUIDITY AND CAPITAL RESOURCES
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
18
<PAGE>
line of credit until December 31, 2000 and has agreed to convert principal and
interest payments at the rate of $7.50 per share, if necessary, for the period
ending December 31, 2000 to make additional funds available under the line of
credit. Subsequent to year end, 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. At December
31, 1999 we had approximately $1,080,000 available to borrow.
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 in cash. The Company
will attempt to negotiate with its preferred stockholders to convert to common
stock and save 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 an efficient cost
structure during 1999. 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 $1,606,374 for
the year ended December 31, 1999. This was primarily attributable to the net
loss of $4,368,124 and the decrease in accounts payable, offset by an adjustment
for depreciation and amortization of $2,080,517, common stock/stock options
granted for services of $353,771, bad debts of $190,347 and interest and
penalties on the capitalized lease of $169,338.
Net cash used in operating activities for TSC amounted to $1,657,417 in 1997 as
compared to $403,704 of net cash provided by operating activities in 1998. The
favorable variance of $2,061,121 was primarily attributable to the increase in
accounts payable of $1,660,732, an increase in bad debts of $1,312,511, offset
by a decrease in accrued expenses of $423,797 and an increase of $374,725 in the
net loss.
19
<PAGE>
Net cash used in operating activities for CyberSentry amounted to $126,181 for
the period from August 21, 1998 (inception) to December 31, 1998. This was
primarily attributable to the net loss of $326,485 and the increase in other
receivables and other assets of $64,896, offset by an adjustment for
amortization of $250,000.
INVESTING
Net cash used in investing activities amounted to $73,739 for the year ended
December 31, 1999. This amount was comprised of $21,406 expended for the
purchases of equipment and $52,333 of capitalized software development costs.
Net cash used in investing activities for TSC decreased from $41,167 in 1997 to
$7,833 in 1998 as a result of TSC purchasing less equipment in 1998.
FINANCING
Net cash provided by financing activities for the Company amounted to $1,769,590
for the year ended December 31, 1999. This was attributable to financing
received from the sale of common stock of $500,000 and from a shareholder of
$1,843,897, offset by repayments of lease obligations of $80,689, net payments
on the line of credit of $282,000 and payments on the bank note payable of
$211,618.
Net cash provided by financing activities for TSC amounted to $1,714,383 in
1997, reflecting $1,838,364 of net proceeds from a note payable to a
stockholder, and $197,589 from the factoring line of credit, offset by $86,592
of payments on the bank line of credit and note payable and $234,618 of payments
on capital lease obligations. This compares to net cash used in financing
activities of $408,087 in 1998, primarily representing repayments on bank debt,
the factoring line of credit and capital leases, offset by a $196,042 increase
in note payable to a stockholder.
Net cash provided by financing activities for CyberSentry amounted to $126,181
for the period from August 21, 1998 (inception) to December 31, 1998. This was
attributable to an increase in due to stockholder of $76,181 and the proceeds
from the sale of common stock of $50,000.
See Note 7 of the CyberSentry "Notes to Financial Statements" for discussion of
the Company's lease obligations.
FUTURE ADOPTION OF NEW ACCOUNTING STATEMENTS
In June 1998, the Financial Accountant Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
statement applies to all entities and is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company did not engage in
derivative instruments or hedging activities in any periods presented in the
financial statements and management does not expect this statement to have a
material impact on the Company's financial position, results of operations, or
cash flows.
20
<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
expended approximately $35,000 in 1999 in Year 2000 related expenses and
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 or
significant costs, related to Year 2000 issues, for the year 2000.
21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
CYBERSENTRY, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE NO.
CYBERSENTRY, INC.:
Report of Independent Certified Public Accountants 23
Balance Sheets at December 31, 1999 and 1998 24
Statements of Operations for the year ended December 31, 1999
and for the period from August 21, 1998
(inception) through December 31, 1998 25
Statements of Stockholders' Equity for the year ended
December 31, 1999 and for the period from August 21, 1998
(inception) through December 31, 1998 26
Statements of Cash Flows for the year ended December 31, 1999
and for the period from August 21, 1998
(inception) through December 31, 1998 28
Notes to Financial Statements 30
TELECOMMUNICATIONS SERVICE CENTER, INC.:
Report of Independent Certified Public Accountants 55
Balance Sheets at March 24, 1999 (acquisition date) and
December 31, 1998 56
Statements of Operations for the period from January 1, 1999
through March 24, 1999 (acquisition date) and
for the years ended December 31, 1998 and 1997 57
Statements of Capital Deficit for the period from January 1, 1999
through March 24, 1999 (acquisition date) and for the
years ended December 31, 1998 and 1997 58
Statements of Cash Flows for the period from January 1, 1999
through March 24, 1999 (acquisition date)
and for the years ended December 31, 1998 and 1997 59
Notes to Financial Statements 61
22
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
CyberSentry, Inc.
Tampa, Florida
We have audited the accompanying balance sheets of CyberSentry, Inc. as of
December 31, 1999 and 1998 and the related statements of operations,
stockholders' equity and cash flows for the year ended December 31, 1999 and for
the period from August 21, 1998 (inception) through December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CyberSentry, Inc. as of
December 31, 1999 and 1998 and the results of its operations and its cash flows
for the year ended December 31, 1999 and for the period from August 21, 1998
(inception) through December 31, 1998 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred significant
losses from operations, negative cash flows and a working capital deficiency.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regards to these matters are described in
note 1. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
Miami, Florida BDO Seidman, LLP
March 17, 2000
23
<PAGE>
<TABLE>
<CAPTION>
CYBERSENTRY, INC.
BALANCE SHEETS
===========================================================================================================
December 31, December 31,
1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS (NOTE 6)
CURRENT
Cash $ 89,477 $ --
Accounts receivable, less $68,463 allowance for doubtful accounts in 1999 173,846 --
Prepaid expenses and other assets 54,798 14,896
Other receivables 1,721 50,000
- -----------------------------------------------------------------------------------------------------------
Total current assets 319,842 64,896
Excess of cost over fair value of net assets acquired, net of $868,102
accumulated amortization in 1999 (Note 3) 10,039,484 --
ATM Technology License, net of $571,428 and $142,857 accumulated
amortization in 1999 and 1998, respectively (Notes 1 and 2) 2,428,572 2,857,143
CyberSentry Software License, net of $535,714 and $107,143 accumulated
amortization in 1999 and 1998, respectively (Notes 1 and 2) 2,464,286 2,892,857
Equipment and leasehold improvements, net (Note 4) 723,644 --
Capitalized software development costs 52,333 --
Other assets 19,698 --
- -----------------------------------------------------------------------------------------------------------
$ 16,047,859 $ 5,814,896
===========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 569,562 $ --
Accrued expenses and other current liabilities 650,503 12,500
Current maturities of capital lease obligations (Note 7) 260,037 --
Due to stockholder (Note 6) 1,920,078 76,181
- -----------------------------------------------------------------------------------------------------------
Total current liabilities 3,400,180 88,681
Obligations under capital leases, less current maturities (Note 7) 1,000,284 --
- -----------------------------------------------------------------------------------------------------------
Total liabilities 4,400,464 88,681
- -----------------------------------------------------------------------------------------------------------
Redeemable convertible preferred stock, $.001 par value, 534,656 shares 801,984 --
issued and outstanding (Note 9)
- -----------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 10)
- -----------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (NOTE 9)
Class A convertible redeemable participating preferred stock, $.001 par value,
7,000,000 shares authorized, 3,916,522 shares in 1999 and 0 shares in 1998
issued and outstanding; aggregate liquidation value of $5,874,783 3,916 --
Class B convertible redeemable participating preferred stock,
$.001 par value, 3,000,000 shares authorized, 3,000,000 shares in 1999
and 2,000,000 in 1998 issued and outstanding; aggregate liquidation value
of $4,500,000 and $3,000,000, respectively 3,000 2,000
Common stock, $.001 par value, 30,000,000 shares authorized, 13,878,765
shares in 1999 and 12,000,000 shares in 1998 issued and outstanding 13,879 12,000
Additional paid-in capital 15,519,225 6,038,700
Deficit (4,694,609) (326,485)
- -----------------------------------------------------------------------------------------------------------
Total stockholders' equity 10,845,411 5,726,215
- -----------------------------------------------------------------------------------------------------------
$ 16,047,859 $ 5,814,896
===========================================================================================================
See accompanying notes to financial statements.
</TABLE>
24
<PAGE>
CYBERSENTRY, INC.
STATEMENTS OF OPERATIONS
================================================================================
Period from
August 21, 1998
(inception)
Year Ended through
December 31, December 31,
1999(A) 1998
- --------------------------------------------------------------------------------
NET SALES (Note 1) $ 2,599,522 $ --
- --------------------------------------------------------------------------------
OPERATING EXPENSES:
Telecommunications costs (excluding
depreciation and amortization) 2,108,418 --
Selling, general and administrative expenses 2,695,124 76,485
Depreciation and amortization 2,080,517 250,000
- --------------------------------------------------------------------------------
Total operating expenses 6,884,059 326,485
- --------------------------------------------------------------------------------
OTHER (INCOME) EXPENSE:
Interest expense, net 120,727 --
Other income (37,140) --
- --------------------------------------------------------------------------------
Total other expenses, net 83,587 --
- --------------------------------------------------------------------------------
Net loss $ (4,368,124) $ (326,485)
================================================================================
Net loss per share
Basic $ (.33) $ (.03)
Diluted $ (.33) $ (.03)
Weighted average number of outstanding shares
Basic 13,438,603 10,500,000
Diluted 13,438,603 10,500,000
(a) Includes the operations of TSC from March 25, 1999 through December 31, 1999
See accompanying notes to financial statements.
25
<PAGE>
<TABLE>
<CAPTION>
CYBERSENTRY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
===========================================================================================================================
Class A Preferred Class B Preferred Common
------------------- ------------------- -------------------
Shares Amount Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock for
cash in September 1998 at
$.006/share -- $ -- -- $ -- 8,550,000 $ 8,550
Issuance of common stock for
services in September 1998 at
$.006/share -- -- -- -- 450,000 450
Issuance of Class B preferred
stock for ATM Technology
acquisition in September 1998
at $1.50/share -- -- 2,000,000 2,000 -- --
Issuance of common stock for
CyberSentry Software
acquisition in November 1998
at $1.00/share -- -- -- -- 3,000,000 3,000
Net loss -- -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 -- -- 2,000,000 2,000 12,000,000 12,000
Issuance of common stock for cash in
January 1999 at $1.00/share -- -- -- -- 500,000 500
Issuance of common stock for purchase
of TSC in March 1999 at -- -- -- -- 1,000,000 1,000
Issuance of Class B preferred stock for
purchase of TSC in March
1999 at $1.50/share -- -- 1,000,000 1,000 -- --
Issuance of Class A preferred stock to
unsecured creditors of TSC in March
1999 at $1.50/share 3,361,232 3,361 -- -- -- --
Additional
Paid-in
Capital Deficit Total
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Issuance of common stock for
cash in September 1998 at
$.006/share $ 41,450 $ -- $ 50,000
Issuance of common stock for
services in September 1998 at
$.006/share 2,250 -- 2,700
Issuance of Class B preferred
stock for ATM Technology
acquisition in September 1998
at $1.50/share 2,998,000 -- 3,000,000
Issuance of common stock for
CyberSentry Software
acquisition in November 1998
at $1.00/share 2,997,000 -- 3,000,000
Net loss -- (326,485) (326,485)
- ----------------------------------------------------------------------------------------
Balance at December 31, 1998 6,038,700 (326,485) 5,726,215
Issuance of common stock for cash in
January 1999 at $1.00/share 499,500 -- 500,000
Issuance of common stock for purchase
of TSC in March 1999 at 999,000 -- 1,000,000
Issuance of Class B preferred stock for
purchase of TSC in March
1999 at $1.50/share 1,499,000 -- 1,500,000
Issuance of Class A preferred stock to
unsecured creditors of TSC in March
1999 at $1.50/share 5,038,488 -- 5,041,849
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Class A Preferred Class B Preferred Common
-------------------- -------------------- -------------------
Shares Amount Shares Amount Shares Amount
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of Class A preferred stock to
Sprint and Westinghouse in
March 1999 at $1.50/share 555,290 555 -- -- -- --
Issuance of common stock to
unsecured creditor in March 1999
at $1.00/share -- -- -- -- 258,765 259
Issuance of stock options for
50,000 shares of common
stock in April 1999 -- -- -- -- -- --
Issuance of stock options for 42,000
shares of common stock in July,
August, September, October,
November and December 1999 -- -- -- -- -- --
Issuance of common stock to financial
consultants in December 1999 -- -- -- -- 120,000 120
Net loss -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 3,916,522 $ 3,916 3,000,000 $ 3,000 13,878,765 $ 13,879
Additional
Paid-in
Capital Deficit Total
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Issuance of Class A preferred stock to
Sprint and Westinghouse in
March 1999 at $1.50/share 832,380 -- 832,935
Issuance of common stock to
unsecured creditor in March 1999
at $1.00/share 258,506 -- 258,765
Issuance of stock options for
50,000 shares of common
stock in April 1999 15,023 -- 15,023
Issuance of stock options for 42,000
shares of common stock in July,
August, September, October,
November and December 1999 38,748 -- 38,748
Issuance of common stock to financial
consultants in December 1999 299,880 -- 300,000
Net loss -- (4,368,124) (4,368,124)
- ----------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 15,519,225 $ (4,694,609) $ 10,845,411
========================================================================================
</TABLE>
See accompanying notes to financial statements.
27
<PAGE>
<TABLE>
<CAPTION>
CYBERSENTRY, INC.
STATEMENTS OF CASH FLOWS
========================================================================================================
Period from
August 21, 1998
Year Ended (Inception) to
December 31, December 31,
1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(4,368,124) $ (326,485)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization 2,080,517 250,000
Common stock/stock options issued for services 353,771 2,700
Capital lease interest and penalties included in lease obligation 169,338 --
Bad debts 190,347 --
Changes in operating assets and liabilities, net of
effects of acquisition and noncash transactions:
Accounts receivable (8,943) --
Prepaid expenses and other assets 4,802 --
Other receivables 55,836 (50,000)
Other assets 12,251 (14,896)
Accounts payable (133,614) 12,500
Accrued expenses and other current liabilities 37,445 --
- --------------------------------------------------------------------------------------------------------
Total adjustments 2,761,750 200,304
- --------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,606,374) (126,181)
- --------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of equipment (21,406) --
Capitalized software development costs (52,333) --
- --------------------------------------------------------------------------------------------------------
Net cash used in investing activities (73,739) --
- --------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 500,000 50,000
Increase in due to stockholder 1,843,897 76,181
Repayment of line of credit, net (282,000) --
Repayments of obligations under capital leases (80,689) --
Payments on bank note payable (211,618) --
- --------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,769,590 126,181
- --------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 89,477 --
Cash and cash equivalents at beginning of period -- --
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 89,477 --
=========================================================================================================
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Period from
August 21, 1998
Year Ended (Inception) to
December 31, December 31,
1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES:
Class B preferred stock issued in exchange for ATM Technology License $ -- $ 3,000,000
Common stock issued in exchange for CyberSentry Software $ -- $ 3,000,000
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 $ --
</TABLE>
See accompanying notes to financial statements.
29
<PAGE>
CYBERSENTRY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. SUMMARY OF ORGANIZATION AND BUSINESS
SIGNIFICANT
ACCOUNTING CyberSentry, Inc. ("CyberSentry" or the "Company") was
POLICIES incorporated in Delaware on August 21, 1998 as
Telecommunication Services, Inc. ("TSI"). On November
30, 1998, TSI amended its certificate of incorporation
to change its 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 satellite.
Effective March 24, 1999, CyberSentry purchased all of
the outstanding common stock of Telecommunications
Service Center, Inc. ("TSC"), a Florida Corporation,
(see Note 3). TSC was operating as a
debtor-in-possession under Chapter 11 of the United
States Bankruptcy Code in the Middle District of
Florida, Tampa Division. The Bankruptcy Court confirmed
TSC's plan of reorganization ("the Plan") on March 4,
1999 and the Plan became effective March 24, 1999, the
date CyberSentry acquired TSC.
TSC is a facilities based carrier providing long
distance telecommunications services including
commercial and residential
30
<PAGE>
CYBERSENTRY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
service, international call back long distance service,
operator service for pay phones, prepaid phone cards,
and enhanced services, such as voice and fax-mail
services. TSC is in a specialized telecommunications
service industry.
USE OF ESTIMATES
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the
date of the financial statements and the reported
amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with
an initial maturity of three months or less when
purchased to be cash equivalents.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Depreciation and amortization are provided on the
straight-line method over the estimated useful lives of
the assets. Leasehold improvements are amortized over
the term of the respective leases or the service lives
of the improvements, whichever is shorter. Upon sale or
retirement, the asset cost and related accumulated
depreciation and amortization are removed from the
accounts and any related gain or loss is reflected in
earnings.
GOODWILL
The excess of the cost over the fair value of net assets
acquired is recorded as goodwill and is amortized on a
straight-line basis over 10 years.
31
<PAGE>
CYBERSENTRY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
ATM TECHNOLOGY AND CYBERSENTRY SOFTWARE LICENSES
The ATM Technology and CyberSentry Software licenses are
carried at cost less accumulated amortization.
Amortization is computed using the straight-line method
over estimated useful lives of seven years.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which establishes accounting
and reporting standards for derivative instruments and
for hedging activities. It requires that an entity
recognizes all derivatives as either assets or
liabilities in the statement of financial position and
measures those instruments at fair value. The statement
applies to all entities and is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000.
The Company did not engage in derivative instruments or
hedging activities in any periods presented in the
financial statements and management does not expect this
statement to have a material impact on the Company's
financial position, results of operations, or cash
flows.
REVENUE RECOGNITION
There were no revenues for the Company's secured
software and product technology business segments during
1998 and 1999. The Company will enter into license
agreements, typically with major end user customers,
which allow for the use of the Company's software and
technology products, usually restricted by the number of
employees, the number of users, or the license term.
Fees from licenses will be recognized as revenue upon
contract execution, provided all shipment obligations
have been met, fees are fixed or determinable, and
collection is probable.
All of the Company's telecommunications services are
recognized as service is provided. Allowances are
provided for estimated uncollectible usage.
32
<PAGE>
CYBERSENTRY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
INCOME TAXES
Income taxes are accounted for using the liability
approach under the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income
Taxes." Under this method, deferred taxes are recognized
for the tax consequences of temporary differences by
applying enacted statutory tax rates applicable for
future years to the differences between the financial
statement and tax basis of existing assets and
liabilities.
EARNINGS PER SHARE
Basic earnings per share are computed on the basis of
the weighted average number of common shares outstanding
during each year. Diluted earnings per share are
computed on the basis of the weighted average number of
common shares and dilutive securities outstanding.
Dilutive securities having an anti-dilutive effect on
diluted earnings per share are excluded from the
calculation.
Options to purchase 692,000 shares of common stock
(including options granted to non-employees) from $1.00
to $2.50 were not included in diluted EPS, as their
effect would be anti-dilutive.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Product development costs, including product
enhancements, are capitalized after technological
feasibility has been established. These costs are
reported at the lower of unamortized cost or net
realizable value and are being amortized on a
straight-line basis over two to five years, the
estimated economic life of the products. The Company
capitalized approximately $52,000 in 1999 of product
development costs relating to its CyberSentry Software
product.
ASSET IMPAIRMENT
The Company periodically reviews the carrying value of
its long-lived assets in relation to historical results,
current business conditions
33
<PAGE>
CYBERSENTRY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
and trends to identify potential situations in which the
carrying value of assets may not be recoverable. If such
reviews indicate that the carrying value of such assets
may not be recoverable, the Company would estimate the
undiscounted sum of the expected future cash flows of
such assets to ascertain if a permanent impairment
exists. If a permanent impairment exists, the Company
would determine the fair value using quoted market
prices, if available, for such assets, or if quoted
market prices are not available, the Company would
discount the expected future cash flows of such assets.
The Company reviews the carrying value of its goodwill
for impairment using the market value method under
Accounting Principles Board No. 17. Under this method
the Company compares its historical net book value to
the value indicated by the market price of its equity
securities (quoted market price for its free trading
common stock and fair value for its preferred stock and
restricted common stock). If the net book value exceeds
market capitalization, the difference would be the
impairment loss to recognize on the goodwill. There was
no impairment loss recognized by the Company in 1999 and
1998.
FINANCIAL INSTRUMENTS
The fair value of financial instruments is determined by
reference to various market data and other valuation
techniques, as appropriate, and unless otherwise
disclosed, the fair values of financial instruments
approximate their recorded values.
STOCK BASED COMPENSATION
The Company recognizes compensation expense for its
stock option incentive plans using the intrinsic value
method of accounting. Under the terms of the intrinsic
value method, compensation cost is excess, if any of the
quoted market price of the stock at the grant date, or
other measurement date, over the amount an employee must
pay to acquire the stock.
34
<PAGE>
CYBERSENTRY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
GOING CONCERN
The Company's financial statements are presented on the
going concern basis which contemplates the realization
of assets and the satisfaction of liabilities in the
normal course of business. During 1998 and up to March
24, 1999, CyberSentry was a development stage enterprise
and had no revenues. Upon the acquisition of TSC,
CyberSentry ceased being a development stage enterprise
but to date, has realized no revenues, other than those
attributable to TSC. The Company has been unable to
increase revenues in its telecommunications segment and
was unable to maintain an efficient cost structure
during 1999. The Company is in the process of
integrating its 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.
The Company has negotiated an agreement with Patriot
subsequent to December 31, 1998 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.
Additionally, Patriot extended the due date on the line
of credit to December 31, 2000 and has the option to
accept shares of common stock of the Company in lieu of
principal and interest payments through December 31,
2000 at a value of $7.50 a share. The Company will also
attempt to negotiate with its option holders to exercise
their stock options that may potentially generate
$750,000 in cash. The Company is also currently
negotiating with Class A and B preferred stockholders to
convert their shares to common stock on a one for one
basis. This would save the Company approximately
$100,000 in cash flow by not having to fund the Optional
Redemption Pool.
The Company's continued existence is dependent upon its
ability to resolve its liquidity problems principally by
implementing cost reduction strategies, obtaining
positive results from increased marketing efforts and
accomplishing the aforementioned negotiations with
shareholders.
35
<PAGE>
CYBERSENTRY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
The financial statements do not include any adjustments
to reflect the possible future effect on the
recoverability and classification of assets or the
amounts and classification of liabilities that may
result from the possible inability of the Company to
continue as a going concern. There is no assurance that
the Company will be able to achieve its recovery plan as
described above.
2. ACQUIRED CYBERSENTRY SOFTWARE LICENSE
TECHNOLOGY
On October 2, 1998, Templar Corporation, a Delaware
corporation ("Templar"), entered into a license
agreement (the "License Agreement") with Learning
Company Properties, Inc., a Delaware corporation
("Learning"), pursuant to which Templar obtained an
exclusive, worldwide, perpetual, fully-paid right and
license to publish, use, distribute and sublicense a
software program that provides digital rights management
technology (the "CyberSentry Software").
In addition, pursuant to the License Agreement, Learning
assigned its rights to certain trademarks, and Learning
agreed to provide engineering support to Templar through
December 31, 1999. Templar agreed to pay Learning
$187,500 in consideration for such engineering support.
The Company agreed to reimburse Templar for payments
made to Learning. The Company paid Templar $187,500
during 1999 and recognized software support expense for
such amount in the accompanying statement of operations.
The Company did not extend the engineering support
agreement in 2000.
Templar transferred to Learning 2,500,000 fully paid and
ordinary shares (the "LibertyOne Shares") in the capital
of LibertyOne Ltd., ("LibertyOne") as consideration for
the license of the CyberSentry Software. In connection
with the LibertyOne Shares, Learning has been issued a
right to put the LibertyOne Shares to Templar for an
aggregate purchase price of $3,000,000, pursuant to the
Put and Top Up Agreement ("Put Agreement"), dated
October 22, 1998, by and between Learning and Templar.
This put expires on December 31, 2001, unless it
terminates
36
<PAGE>
CYBERSENTRY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
earlier due to the occurrence of certain Trigger Events,
as defined in the Put Agreement. Templar and Learning
valued the transaction at $3,000,000 which was based on
the then anticipated initial public offering price of
the LibertyOne Shares of $1.20 per share. The initial
public offering of the LibertyOne Shares closed on
December 10, 1998 at a price of $2.00 per share. Templar
informed the Company that Learning has received more
than $3,000,000 from the sale of the LibertyOne shares
and that the Put Agreement has therefore been cancelled.
Templar assigned the License Agreement to the Company
pursuant to the terms of the Assignment of the Software
License Agreement, effective as of November 20, 1998
(the "Assignment"). Pursuant to the terms of the
Assignment and in consideration thereof, the Company
transferred 3,000,000 shares of its Common Stock to
Templar which thereby became a significant shareholder
in the Company. The Put and Top Up Agreement between
Templar and Learning does not transfer to CyberSentry
upon Templar's assignment of the License Agreement to
CyberSentry. Templar is 100% owned by Mr. Frank Kristan
who may therefore be deemed to be the beneficial owner
of the shares of Common Stock held by Templar. The
shares of common stock issued to Templar have been
valued at Templar's carrryover basis in the CyberSentry
Software.
The Company entered into a Software License Agreement
(the "DRI License Agreement"), effective as of January
1, 1999, with VisionNet's predecessor Digital Rights
International, Inc., a Delaware Corporation ("DRI"), a
subsidiary of Liberty One. Pursuant to the agreement,
the Company has granted VisionNet a non-transferable,
non-exclusive, worldwide right and license to publish
and use the CyberSentry Software solely for the
protection of celebrity digital rights and content
related thereto on websites owned or operated by
VisionNet. In conjunction with entering into the DRI
License Agreement, VisionNet purchased 500,000 shares of
the Company's Common Stock at $1.00 per share for an
aggregate purchase price of $500,000. The Company is
under no obligation to provide upgrades to the software
licensed to VisionNet
37
<PAGE>
CYBERSENTRY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
unless VisionNet elects to pay the Company $150,000 for
continuing software engineering support.
ATM TECHNOLOGY LICENSE
Comtel Telecommunications Pty Ltd. ("Comtel"), a wholly
owned subsidiary of LibertyOne, entered into a Patent
and Know How License and Commercialization Agreement
dated as of February 4, 1998 (the "ATM Agreement") with
Telstra Corporation Limited ("Telstra"), pursuant to
which LibertyOne was granted a non-exclusive license to
certain applications in relation to Telstra's Fast
Packet Digital Switch Project ("FPDX"). FPDX represents
technology developed by Telstra over 11 years. FPDX
utilizes Asynchronous Transfer Mode technology ("ATM or
"ATM Technology") which has the potential to deliver
"virtual" Internet services to users at substantially
increased speeds and lower costs than other
technologies. The ATM Agreement grants LibertyOne the
license to sell this technology as desk-top and set-top
applications.
Comtel entered into a Patent and Know How Sub-Contract
and Commercialization Agreement (the "Sub-Contract")
with the Company, effective as of September 8, 1998,
pursuant to which CyberSentry has been granted the right
to develop and sell the ATM Technology in the United
States and Canada. As consideration for Comtel entering
into the Sub-Contract with CyberSentry, CyberSentry
issued 2,000,000 shares of Class B Preferred Stock to
Comtel's designee, DRI. The shares of Class B Preferred
Stock issued to DRI have been valued at $3,000,000 which
is the value of the shares issued to TSC creditors
pursuant to the plan of reorganization.
In addition, pursuant to the Sub-Contract, CyberSentry
agreed to pay Comtel a royalty fee of 110% of the
royalty rates required pursuant to the ATM Agreement.
There were no fees paid or expenses incurred in 1999 and
1998 as there were no sales.
38
<PAGE>
CYBERSENTRY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
3. ACQUISITION Effective March 24, 1999, CyberSentry purchased all of
the outstanding common stock of TSC pursuant to the
bankruptcy court's confirmation of TSC's plan of
reorganization that was confirmed on March 4, 1999 and
effective on March 14, 1999 (pending the acquisition by
CyberSentry). CyberSentry is the surviving corporation
in the purchase and the separate existence of TSC
ceased. CyberSentry purchased all of the outstanding
shares of TSC for common and preferred stock valued at
$2,500,000. The value of the common and preferred has
been established based on the Company's purchase of the
CyberSentry Technology, and the value ascribed to the
Class B shares pursuant to the Plan of Reorganization,
(see Note 2). The transaction was accounted for as a
purchase and the excess of the purchase price
($2,500,000) over the fair market value of the assets
acquired ($1,420,962) and liabilities assumed
($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 and certain Class One Creditors in accordance
with the terms of the Plan. Additional common stock of
CyberSentry was issued to certain Class Five Creditors
in accordance with the Plan. Each share of 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 CyberSentry. 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 statement of
operations for the year ended December 31, 1999 includes
39
<PAGE>
CYBERSENTRY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
the operations of TSC from March 25, 1999 to December
31, 1999.
The following summarized unaudited pro forma results of
operations have been prepared as if the acquisition of
TSC had occurred January 1, 1998, although the Company
began August 21, 1998:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1999 1998
--------------------------------------------------------------------------------
<S> <C> <C>
Revenues $ 3,410,838 $ 22,804,240
Net loss $ (4,998,630) $ (4,860,453)
Pro forma loss per share - basic and
diluted $ (.36) $ (.41)
Weighted average number of common shares
outstanding - basic and diluted 13,721,395 11,758,765
</TABLE>
4. EQUIPMENT AND Equipment and leasehold improvements are as follows:
LEASEHOLD
IMPROVEMENTS
<TABLE>
<CAPTION>
Estimated
December 31, Useful Lives
1999 (in years)
---------------------------------------------------------------------
<S> <C> <C>
Switch equipment $ 1,552,075 5
Switch software 341,273 5
Computer equipment 288,190 5
Furniture and equipment 56,480 5-10
Leasehold improvements 14,215 5
---------------------------------------------------------------------
2,252,233
Less accumulated depreciation and
amortization (1,528,589)
---------------------------------------------------------------------
Total $ 723,644
=====================================================================
</TABLE>
5. INCOME TAXES Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes.
Significant components of the Company's deferred income
tax assets and deferred income tax liabilities are as
follows:
40
<PAGE>
CYBERSENTRY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 2,809,000 $ 66,000
Amortization of acquired technologies 201,000 45,000
Accrual to cash conversion 1,103,000 --
Bad debt 50,000 --
Other 19,000 --
------------------------------------------------------------------------
Total deferred tax assets 4,182,000 111,000
------------------------------------------------------------------------
Deferred tax liabilities:
Tax greater than book depreciation (110,000) --
------------------------------------------------------------------------
Total deferred tax liabilities (110,000) --
------------------------------------------------------------------------
Valuation allowance for net deferred
tax assets (4,072,000) (111,000)
------------------------------------------------------------------------
$ -- $ --
========================================================================
</TABLE>
As of December 31, 1999, the Company had a net operating
loss carryforward for Federal income tax purposes of
approximately $8,261,000 expiring between the years 2010
through 2019.
A "valuation allowance" is provided when it is more
likely than not that some portion of deferred tax assets
will not be realized. The Company has established
valuation allowances principally for that portion of the
net operating loss carryforward and other net deferred
tax assets whose future tax benefit is currently
uncertain. Realization of the benefits related to losses
may be limited in any one year due to U.S. Internal
Revenue Code Section 382, change of ownership rules.
The Company recorded a deferred tax asset for net
operating loss carryovers associated with the
acquisition of TSC in the amount of approximately
$3,002,000. The Company has established a valuation
allowance associated with the net operating loss
carryovers. If the Company utilizes these carryovers,
they will be recognized as a reduction of goodwill.
41
<PAGE>
CYBERSENTRY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
The difference between the reported income tax provision
(benefit) and the tax provision (benefit) that would
result from applying the 34% Federal statutory rate to
the loss from operations before income taxes is
reconciled as follows:
<TABLE>
<CAPTION>
Period from
August 21,
1998
(inception)
through
December 31, December 31,
1999 1998
--------------------------------------------------------------------------------
<S> <C> <C>
Income tax (benefit) computed at Federal
statutory rate $ (1,485,000) $ (111,000)
Amortization of non-deductible goodwill 295,000 --
Increase in Federal taxes resulting from:
Effect of net operating losses for which
no tax carryforward benefit is
available 1,128,000 111,000
Other non-deductible expenses 62,000 --
--------------------------------------------------------------------------------
$ -- $ --
================================================================================
</TABLE>
6. DUE TO The Company has a $3,000,000 line of credit agreement
STOCKHOLDER with Patriot Advisors, Inc. ("Patriot"), a stockholder,
that expires after one year. The amount outstanding may
not exceed 50% of the Company's assets. The line is
collateralized by substantially all of the Company's
assets. The Company pays Patriot monthly interest
payments at an annual interest rate of two percentage
points higher than the highest domestic "Prime Rate"
published in the Wall Street Journal on the first day of
publication in the previous month (10.5% at December 31,
1999). The amounts outstanding on the line at December
31, 1999 and 1998 are $1,920,078 and $76,181,
respectively. As of December 31, 1999, the Company has
approximately $1,080,000 remaining to borrow under the
line of credit agreement. In February 2000, Patriot
agreed to extend the line of credit until December 31,
2000. Additionally, effective February 21, 2000, the
Company converted $280,000 of accrued interest and
principal relating to the line of credit into 40,000
shares of common stock at $7.00 per share, the market
value of the common stock on that day. Patriot is a
stockholder of the Company and Frank Kristan, the
Company's Chairman, President and Chief Executive
42
<PAGE>
CYBERSENTRY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
Officer is the President and Chief Executive Office of
Patriot Advisers, Inc.
Since the interest rate on the line of credit is at a
variable rate, the carrying amount of such debt
approximates fair value.
7. LEASE The Company leases its office facilities and certain
OBLIGATIONS office equipment. Minimum rental payments required under
these leases as of December 31, 1999 are as follows:
2000 $ 52,840
2001 22,632
2002 17,296
2003 4,324
-----------------------------------------------------
Total minimum lease payments $ 97,092
=====================================================
Rent expense aggregated $70,531 and $0 for the year
ended December 31, 1999 and for the period from August
21, 1998 through December 31, 1998, respectively.
The Company also leases certain computer equipment,
switch equipment and software under capital lease
agreements (through the acquisition of TSC). Total
future minimum lease payments under the terms of the
agreements at December 31, 1999 are as follows:
2000 $ 395,825
2001 349,911
2002 349,911
2003 349,911
2004 174,955
-----------------------------------------------------
Total minimum lease payments 1,620,513
Less amount representing interest (360,192)
Less current maturities of capital
lease obligations (260,037)
-----------------------------------------------------
Present value of long-term obligations
under capital leases $ 1,000,284
=====================================================
43
<PAGE>
CYBERSENTRY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
8. RELATED PARTY The Company (through its predecessor, TSC), Lake Tel,
TRANSACTIONS Inc., a New Jersey corporation ("Lake Tel"), and Capital
One Bank, a Virginia banking corporation ("Capital
One"), have entered into a Carrier Agreement dated
October 1998 to offer secured credit card products to
customers of the Company for an initial term of five
years. For each account opened by Capital One under the
Carrier Agreement, Lake Tel is entitled to receive a fee
from Capital One and is obligated to pay a fee to the
Company. Gerald Resnick, the Company's former Chairman
and President, is a member of the Board of Directors of
Lake Tel, a telecommunications marketing company
specializing in financial institutions.
Gerald Resnick, the Company's former President, and
Patriot entered into an Advisory Agreement dated as of
July 15, 1998 (the "Resnick Advisory Agreement"). Under
the Resnick Advisory Agreement, Mr. Resnick acted as a
management and financial advisor to Patriot and provided
advice on equity or debt financing. The Resnick Advisory
Agreement has expired. In exchange for these services,
Patriot paid Mr. Resnick a fee of $250,000.
9. STOCKHOLDERS' Transactions in stockholders' equity during 1999 were as
EQUITY follows:
a) The Company issued 500,000 shares of common
stock at a fair value of $1.00 per share in
exchange for cash of $500,000.
b) The Company issued 1,258,765 shares of
common stock at a fair value of $1.00 per
share to previous shareholders and
unsecured creditors of TSC, pursuant to the
plan of reorganization and purchase.
c) The Company issued 1,000,000 shares of
Class B convertible redeemable
participating preferred stock at a fair
value of $1.50 per share to previous
shareholders of TSC pursuant to the
purchase.
44
<PAGE>
CYBERSENTRY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
d) The Company issued 4,451,178 shares of
Class A convertible redeemable
participating preferred stock at a fair
value of $1.50 per share to pre-petition
creditors pursuant to TSC's plan of
reorganization of which 534,656 shares have
been treated as redeemable convertible
preferred stock in the accompanying balance
sheet.
e) The Company issued options to a
non-employee to purchase 50,000 shares of
common stock with an exercise price of
$1.10 per share, in exchange for legal
services. The options were valued at
$15,023 using the Black Scholes Model.
f) The Company issued options to a
non-employee to purchase 42,000 shares of
common stock with an exercise price of
$2.50 per share in exchange for financial
consulting services. The options were
valued at $38,748 using the Black Scholes
Model.
g) The Company issued 120,000 shares of common
stock at a fair value of $2.50 per share to
its financial consultants for financial
consulting services.
Transactions in stockholders' equity during 1998 were as
follows:
a) The Company issued its promoters 8,550,000
shares of common stock at a fair value of
$0.006 per share in exchange for $50,000.
b) The Company issued 450,000 shares of $0.006
fair value common stock in exchange for
services rendered. The fair market value of
the services was $2,700.
c) The Company issued 2,000,000 of Class B
convertible redeemable participating
preferred stock at a fair value of $1.50
per share in exchange for the acquisition
of the ATM Technology License (see Note 2).
45
<PAGE>
CYBERSENTRY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
d) The Company issued 3,000,000 shares of
common stock at a fair value of $1.00 per
share in exchange for the acquisition of
the CyberSentry Software License (see Note
2).
COMMON STOCK
Each holder of common stock has one vote in respect of
each share of common stock held by such holder of record
on the books of the Company for the election of
directors and on all other matters on which stockholders
of the Company are entitled to vote. The holders of
shares of common stock are entitled to receive, when and
if declared by the Board of Directors, out of the assets
of the Company which are by law available therefor,
dividends payable either in cash, in stock or otherwise.
CLASS A CONVERTIBLE REDEEMABLE PARTICIPATING PREFERRED
STOCK
Each holder of Class A convertible redeemable
participating preferred stock ("Class A Preferred
Stock") is entitled to one vote per share on all matters
requiring shareholder action. The holders of Class A
Preferred Stock, voting together as a class, have the
right to elect one director of the Company. The holders
of shares of Class A Preferred Stock are entitled to
receive from the Company, with respect to each share of
Class A Preferred Stock held, the same dividend or
distribution received by a holder of shares of common
stock. Any such dividend or distribution shall be made
on the Class A Preferred Stock at the same time such
dividend or distribution is made on the common stock.
On each March 1 and September 1 of the years 2000, 2001,
2002, 2003 and 2004 (each such date, an "Optional
Redemption Date,") the Corporation shall set aside for
payment an amount equal to five cents ($.05) for each
share of Class A Preferred Stock then outstanding. The
aggregate amount so set aside for payment shall be
referred to herein as the "Redemption Pool." Each record
holder of shares of Class A Preferred Stock as of the
Optional Redemption Date shall be entitled to require
the Corporation to redeem all or any portion of the
46
<PAGE>
CYBERSENTRY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
shares of Class A Preferred Stock then held by such
holder, up to a maximum number of shares equal to (x)
the number of shares of Class Preferred Stock held by
such holder as of the Optional Redemption Date,
multiplied by (y) $.05 cents per share of Class A
Preferred Stock, divided by (z) the redemption price per
share of $1.50 ("Redemption Price") of Class A Preferred
Stock as of the Optional Redemption Date (with any
fractional shares being rounded up or down to the
nearest whole share), by paying therefor in cash out of
the Redemption Pool an amount equal to the Redemption
Price per share as of the Optional Redemption Date. At
December 31, 1999, holders of 1,603,967 shares of Class
A preferred stock are entitled to participate in the
Redemption Pool. The maximum amount to be funded by the
Company in the Redemption Pool based on the
participating shares is $801,984 over a five year
period, representing 534,656 shares. As such, the
$801,984 has been classified as mezzanine equity in the
December 31, 1999 balance sheet.
In the event of any liquidation or dissolution of the
Company, the holders of shares of Class A Preferred
Stock are entitled to receive out of the assets of the
Company available for distribution to its stockholders,
an amount equal to the liquidation preference per share
($1.50 per share) plus all accrued and unpaid dividends.
Liquidation distributions shall be made to Class A
Preferred Stockholders before common stockholders.
Each share of Class A Preferred Stock is convertible
during the period March 25, 2001 to March 24, 2004, at
the option of the holder, into one share of common
stock.
CLASS B CONVERTIBLE REDEEMABLE PARTICIPATING PREFERRED
STOCK
Each holder of the Class B convertible redeemable
participating preferred stock ("Class B Preferred
Stock") is entitled to the same rights as the Class A
Preferred Stock except that they may not participate in
the optional Redemption Pool and they do not have the
right as a class to elect one director of the Company.
47
<PAGE>
CYBERSENTRY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
In March 2000, the Company offered the Class A and B
stockholders the right to convert all of their shares to
common stock on a one for one basis. The offer expires
March 31, 2000.
10. COMMITMENTS AND The Company entered into a five year employment
CONTINGENCIES agreement with its former President and Chief Executive
Officer, Gerald Resnick, effective January 1, 1999.
Under the agreement, Mr. Resnick is entitled to receive
a base salary of $180,000, subject to annual increases
of not less than 10% per year, and a bonus in the
discretion of the Board of Directors but in no event
less than three quarters of one percent of the Company's
gross sales in excess of $30,000,000 annually, which sum
may be paid, at Mr. Resnick's option, in cash or stock
(valued at the market price on date of approval). During
the term of his employment agreement and for a period of
one year thereafter, Mr. Resnick will have the right to
purchase up to 500,000 shares of Common Stock at $1.00
per share. Effective March 6, 2000, Frank Kristan was
voted to be the Chairman of the Board of Directors,
Chief Executive Officer and President of the Company.
Under an amendment to Gerald Resnick's employment
agreement dated March 6, 2000, Resnick will receive an
annual severance allowance of $200,000 payable in
monthly installments beginning March 1, 2000 until
December 31, 2008. All provisions of his employment
agreement will remain in effect, including but not
limited to Resnick's stock options and stock ownership,
except that Resnick will no longer be defined as any
"executive" or an employee of the Company as defined by
the agreement, but will serve as an "Advisor for
Strategic Alliance" which position will entitle him to
all the benefits and protections set forth in the
agreement.
The Company also entered into a three-year employment
agreement with its Senior Vice President, Hal Shankland,
which commenced upon the effective date of the purchase
of TSC. Under the agreement, Mr. Shankland is entitled
to receive a base salary of $120,000, subject to such
annual increases as determined by the Board of
Directors. In addition, at the end of each year during
the period of his employment, Mr. Shankland will have
the right to purchase up to 100,000 shares of Common
48
<PAGE>
CYBERSENTRY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
Stock at $1 per share for the first year and at fair
market value for subsequent years.
The Company is, and TSC as its predecessor was, involved
from time to time in various claims and lawsuits in the
ordinary course of business, none of which is expected,
individually or in the aggregate, to have a material
adverse effect on the Company's financial position,
results of operations or cash flows.
11. STOCK OPTIONS During 1999, the Company granted stock options to
certain executive employees. The Company applies
Accounting Principles Board ("APB") Opinion 25,
Accounting for Stock Issued to Employees, and related
interpretations in accounting for options granted to
employees. Under APB Opinion 25, if the exercise price
of the Company's employee stock options equals the
market price of the underlying stock on the date of
grant, no compensation cost is recognized. For options
granted during 1999, the exercise price of each option
equals the fair value of the Company's stock on the date
of grant.
FASB Statement 123, Accounting for Stock-Based
Compensation, requires the Company to provide pro forma
information regarding net income and earnings per share
as if compensation cost for the Company's stock options
has been determined in accordance with the fair value
based method prescribed in FASB Statement 123. The
Company estimates the fair value of each stock option at
the grant date by using the Black-Scholes option-pricing
model with the following weighted-average assumptions
used for grants in 1999; no dividend yield for all
years; expected volatility of 30 percent; risk-free
interest rate of 4.6 percent, and an expected life of
5.1 years. No options were granted prior to 1999.
Under the accounting provisions of FASB Statement 123,
the Company's net (loss) and net (loss) per common share
would have been as follows:
49
<PAGE>
CYBERSENTRY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
Year ended
December 31,
1999
-------------
<S> <C> <C>
Net (loss) As reported $(4,368,124)
Proforma $(4,490,044)
Net (loss) per common share- basic As reported $ (.33)
and diluted Proforma $ (.33)
</TABLE>
A summary of the status of the Company's options as of
December 31, 1999 and changes during the period ending
on that date is presented below:
<TABLE>
<CAPTION>
Weighted-Average
Shares Exercise Price
-------------- --------------
<S> <C> <C>
Outstanding at beginning of year -- $ --
Granted 600,000 $ 1.00
Forfeited -- $ --
--------------
Outstanding at end of year 600,000 $ 1.00
--------------
Options exercisable at year-end 600,000 $ 1.00
Weighted-average fair value of
options granted during the year $ .21
==============
</TABLE>
The following table summarizes information about fixed
stock options outstanding at December 31, 1999.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------- -------------------------------------
Number Weighted-Average Number
Outstanding at Remaining Weighted-Average Exercisable at Weighted-Average
Exercise Price December 31, 1999 Contractual Life Exercise Price December 31, 1999 Exercise Price
- -------------- ----------------- ---------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
$1.00 600,000 1.95 $ 1.00 600,000 $ 1.00
</TABLE>
50
<PAGE>
CYBERSENTRY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
12. 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 1999, the Company had
no intersegment sales.
CyberSentry secured software and product technology
segments are in their development stage and, as such,
there currently is no internal reporting associated with
these segments. Therefore, the department managers are
continuously assessing their areas of responsibility and
corresponding needs on a go-forward basis through weekly
meetings with the chief executive officer ("CEO") and
the Company's licensors. The internal financial
reporting associated with the telecommunications segment
consists of normal monthly analysis of the results of
operations. The CEO and department managers meet weekly
to assess and update the following:
a. Telecommunications - The Company is assessing
potential new carrier relationships to reduce the
cost of services, together with the evaluation of
potential hardware and software required to
integrate potentially new services with such new
carriers. Included in the telecommunications
segment is a new department the Company is
developing - Internet. In this area, the
telecommunications sales and marketing staff is
investigating and meeting with potential providers
of broadband technology and Internet backbone
service providers to identify and define a product
line and marketing program for small businesses
and consumers which will integrate the CyberSentry
software and telecommunications billing platform;
b. Secured Software - CyberSentry is currently
focused on creating job descriptions and functions
for system engineers, sales and marketing and
other appropriate personnel. This segment is in a
51
<PAGE>
CYBERSENTRY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
final development stage with its licensor, The
Learning Company. Once job descriptions have been
fully defined, a budget, time frame and
implementation schedule will be completed; and
c. Product Technology - The Company's director of
management information systems ("MIS") conducts
various meetings with the Company's licensor,
VisionNet to assess the current status of this
technology as it applies to the development of a
potential new product line. This segment is in its
development stage, preliminary to budgeting for
prototype development and the evolution of a sales
and marketing plan.
There were no business segments during 1998 and
financial information for the Company's business
segments as of and for the year ended December 31, 1999
is as follows:
REVENUES
Telecommunications $ 2,599,522
Secured software -
Product technology -
---------------
Total revenues $ 2,599,522
===============
NET LOSS
Telecommunications $ (3,323,482)
Secured software (616,071)
Product technology (428,571)
---------------
Total net loss $ (4,368,124)
===============
DEPRECIATION AND AMORTIZATION
Telecommunications $ 1,223,375
Secured software 428,571
Product technology 428,571
---------------
Total depreciation and amortization $ 2,080,517
===============
52
<PAGE>
CYBERSENTRY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
INTEREST EXPENSE, NET
Telecommunications $ 120,727
Secured software --
Product technology --
---------------
Total interest expense, net $ 120,727
===============
TOTAL ASSETS
Telecommunications $ 11,102,668
Secured software 2,516,619
Product technology 2,428,572
---------------
Total assets $ 16,047,859
===============
CAPITAL EXPENDITURES
Telecommunications $ 21,406
Secured software 52,333
Product technology --
---------------
Total capital expenditures $ 73,739
===============
13. VALUATION AND The additions charged to costs and expenses, and the
QUALIFYING deductions relating to the Company's valuation
ACCOUNTS allowances for the year ended December 31, 1999, and for
the period from August 21, 1998 to December 31, 1998 are
as follows:
<TABLE>
<CAPTION>
Balance Additions
at charged to Balance
beginning costs and at end
Description of Year Expenses Deductions of year
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1999
Accounts receivable valuation
allowance $ -- $ 112,250 $ 43,787 $ 68,463
For the period from August 21, 1998
(inception) through December 31, 1998
Accounts receivable valuation
allowance $ -- $ -- $ -- $ --
Year ended December 31, 1999
Other assets valuation allowance $ -- $ 78,097 $ -- $ 78,097
</TABLE>
53
<PAGE>
CYBERSENTRY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
14. SUBSEQUENT EVENT In March 2000, the Company issued Fianna Partners, LP
("Fianna"), six million shares of its common stock in
exchange for 420 of Fianna's limited partnership
interests, each of the latter valued at $100,000. The
Company and Fianna plan to enter into a joint venture
for additional E-Commerce services.
54
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Telecommunications Service Center, Inc.
Tampa, Florida
We have audited the accompanying balance sheets of Telecommunications Service
Center, Inc. as of March 24, 1999 and December 31, 1998, and the related
statements of operations, capital deficit and cash flows for the period from
January 1, 1999 to March 24, 1999 and for the years ended December 31, 1998 and
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly in all
material respects, the financial position of Telecommunications Service Center,
Inc. as of March 24, 1999 and December 31, 1998, and the results of its
operations and its cash flows for the years ended December 31, 1998 and 1997, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred significant
losses from operations, negative cash flows, and had a working capital
deficiency. These factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regards to these matters are
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
Miami, Florida
March 17, 2000 BDO Seidman, LLP
55
<PAGE>
<TABLE>
<CAPTION>
TELECOMMUNICATIONS SERVICE CENTER, INC.
BALANCE SHEETS
=============================================================================================================
March 24, 1999 December 31, 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT
Cash $ 24,388 $ 33,970
Accounts receivable, less $56,609 and $81,307 allowance for doubtful
accounts in 1999 and 1998, respectively (Note 8) 176,757 144,435
Prepaid expenses and other current assets 44,704 69,003
Other receivables 7,557 5,298
- -------------------------------------------------------------------------------------------------------------
Total Current Assets 253,406 252,706
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net (Note 4) 1,057,510 1,156,807
OTHER ASSETS 110,046 110,046
- -------------------------------------------------------------------------------------------------------------
$ 1,420,962 $ 1,519,559
=============================================================================================================
LIABILITIES AND CAPITAL DEFICIT (NOTE 2)
CURRENT LIABILITIES
Factoring line of credit (Note 8) $ -- $ --
Cash overdraft 75,393 --
Accounts payable 1,405,430 1,405,320
Accrued expenses and other current liabilities 613,058 446,923
Current maturities of capital lease obligations (Note 10) -- --
Line of credit (Note 6) -- --
Current maturities of bank note payable (Note 9) -- --
Liabilities subject to compromise under reorganization
proceedings (Note 3) 8,133,313 8,097,928
- -------------------------------------------------------------------------------------------------------------
Total Current Liabilities 10,227,194 9,950,171
Note payable - stockholder (Note 7) -- --
Obligations under capital leases, less current maturities (Note 10) -- --
Bank note payable (Note 9) -- --
- -------------------------------------------------------------------------------------------------------------
Total liabilities 10,227,194 9,950,171
- -------------------------------------------------------------------------------------------------------------
COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENTS
(Notes 8, 12 and 14)
CAPITAL DEFICIT
Common stock - $1 par, 100,000 shares authorized,
2,000 shares issued and outstanding 2,000 2,000
Accumulated deficit (8,808,232) (8,432,612)
- -------------------------------------------------------------------------------------------------------------
Total Capital Deficit (8,806,232) (8,430,612)
- -------------------------------------------------------------------------------------------------------------
$ 1,420,962 $ 1,519,559
=============================================================================================================
See accompanying notes to financial statements
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
TELECOMMUNICATIONS SERVICE CENTER, INC.
STATEMENTS OF OPERATIONS
============================================================================================================
For the period from
January 1, 1999 Years Ended December 31,
through ---------------------------------
March 24, 1999 (A) 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES (NOTE 1) $ 811,316 $ 22,804,240 $ 8,341,164
- ------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Telecommunications costs (excluding depreciation
and amortization, shown separately below) 643,853 22,283,257 8,112,840
Selling, general and administrative expenses 384,403 3,319,419 2,532,845
Depreciation and amortization 102,403 439,372 378,860
- ------------------------------------------------------------------------------------------------------------
Total operating expenses 1,130,659 26,042,048 11,024,545
- ------------------------------------------------------------------------------------------------------------
OTHER (INCOME) EXPENSE:
Loss on sale of assets -- -- --
Interest expense 77,592 402,508 354,959
Other income (21,315) (227,251) --
- ------------------------------------------------------------------------------------------------------------
Total other expense 56,277 175,257 354,959
- ------------------------------------------------------------------------------------------------------------
Net loss $ (375,620) $ (3,413,065) $ (3,038,340)
============================================================================================================
Net loss per share
Basic $ (187.81) $ (1,706.53) $ (1,519.17)
- ------------------------------------------------------------------------------------------------------------
Weighted average number of outstanding shares
Basic 2,000 2,000 2,000
============================================================================================================
(a) Acquisition date by CyberSentry
See accompanying notes to financial statements
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
TELECOMMUNICATIONS SERVICE CENTER, INC.
STATEMENTS OF CAPITAL DEFICIT
======================================================================================
Common Stock
--------------------
Shares Amount (Deficit) Total
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 2,000 2,000 (1,981,207) (1,979,207)
Net loss -- -- (3,038,340) (3,038,340)
- --------------------------------------------------------------------------------------
Balance at December 31, 1997 2,000 2,000 (5,019,547) (5,017,547)
Net loss -- -- (3,413,065) (3,413,065)
- --------------------------------------------------------------------------------------
Balance at December 31, 1998 2,000 2,000 (8,432,612) (8,430,612)
Net loss -- -- (375,620) (375,620)
- --------------------------------------------------------------------------------------
BALANCE AT MARCH 24, 1999 2,000 $ 2,000 $(8,808,232) $(8,806,232)
======================================================================================
See accompanying notes to financial statements
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
TELECOMMUNICATIONS SERVICE CENTER, INC.
STATEMENTS OF CASH FLOWS
(NOTE 11)
=============================================================================================================================
For the period from
January 1, 1999 Years ended December 31,
through ----------------------------
March 24, 1999 (a) 1998 1999
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (375,620) $(3,413,065) $(3,038,340)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization 102,403 439,372 378,860
Interest expense accrued to note payable - stockholder -- 275,024 162,473
Loss on sale of assets -- -- --
Bad debts -- 1,452,911 140,400
Recovery of bad debts (18,576) -- --
Inventory write down 26,157 -- --
Changes in assets and liabilities:
Accounts receivable (7,624) (895,923) (692,880)
Prepaid expenses and other 24,299) 44,343 (48,141)
Other receivables (2,259) (2,398) 79,561)
Other assets -- (68,350) 25,795)
Accounts payable 110 2,673,982 1,013,250
Accrued expenses and other current liabilities 166,135 (102,192) 321,605
- -----------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (84,975) 403,704 (1,657,417)
- -----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of equipment -- (7,833) (41,167)
Proceeds from dispositions of property, plant and equipment -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities -- (7,833) (41,167)
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Acquisition date by CyberSentry
59
<PAGE>
<TABLE>
<CAPTION>
TELECOMMUNICATIONS SERVICE CENTER, INC.
STATEMENTS OF CASH FLOWS
(NOTE 11)
=============================================================================================================================
For the period from
January 1, 1999 Years ended December 31,
through ----------------------------
March 24, 1999 (a) 1998 1999
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Proceeds from factoring line of credit, net $ -- $ (136,861) $ 197,589
(Repayments) proceeds - line of credit, net -- (69,519) (17,174)
Proceeds from bank note payable -- -- --
Repayments on bank note payable -- -- (69,778)
Proceeds from note payable-stockholder -- 196,042 1,926,614
Repayments on note payable-stockholder -- -- (88,250)
Repayments of obligations under capital leases -- (397,749) (234,618)
Repayments on other debt -- -- --
Cash overdraft 75,393 -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 75,393 (408,087) 1,714,383
- -----------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash (9,582) (12,216) 15,799
Cash at beginning of period 33,970 46,186 30,387
- -----------------------------------------------------------------------------------------------------------------------------
Cash at end of period $ 24,388 $ 33,970 $ 46,186
=============================================================================================================================
See accompanying notes to financial statements
</TABLE>
60
<PAGE>
TELECOMMUNICATIONS SERVICE CENTER, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. SUMMARY OF BUSINESS
SIGNIFICANT
ACCOUNTING Telecommunications Service Center, Inc. ("The Company"
POLICIES or "TSC") is a facilities based carrier providing long
distance telecommunications services including
commercial and residential service, international call
back long distance service, operator service for pay
phones, prepaid phone cards, and enhanced services, such
as voice and fax-mail services. The Company is in a
specialized telecommunications service industry. This
industry segment is subject to certain competitive
pressures.
During 1999, 1998 and 1997, a significant amount of the
Company's business was acquired through independent
marketing agents. Under these agreements independent
marketing agents provide the Company with customers for
the Company to provide telecommunications services to.
The independent marketing agents charge the Company a
commission. The resulting revenue and related costs are
recognized as service is provided. For the period ended
March 24, 1999 and for the years ending December 31,
1998 and 1997, the agreements contributed revenues of
$313,115, $18,659,810 and $5,359,652 and related
telecommunication costs of $261,332, $17,160,483 and
$4,326,573, respectively.
In 1997, the Company purchased high-volume,
state-of-the-art Digital Switching equipment to
accommodate anticipated growth and targeted new markets.
The Company is certified to do business in forty eight
(48) states and is tariffed in forty two (42) states. It
is certified as an "Alternative Local Exchange Carrier"
(ALEC) to provide "Local Telephone Services" in thirty
two (32) states.
BASIS OF PRESENTATION
On May 7, 1998, the Company filed a voluntary petition
(the "Petition") for relief under Chapter 11 of the
United States Bankruptcy Code in the Middle District of
Florida, Tampa Division. The Company thereafter operated
its business in the ordinary course as
debtors-in-possession subject to the jurisdiction of the
Bankruptcy Court. The Bankruptcy Court confirmed the
plan of reorganization ("the Plan") on March 4, 1999 and
61
<PAGE>
TELECOMMUNICATIONS SERVICE CENTER, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
the Plan became effective March 24, 1999, the date
CyberSentry, Inc. acquired the Company.
The accompanying financial statements have been prepared
on a going concern basis which assumes continuity of
operations and realization of assets and liquidation of
liabilities in the ordinary course of business. The
Company has incurred significant losses from operations,
negative cash flows and a working capital deficiency.
These factors raise substantial doubt about the
Company's ability to continue as a going concern.
Effective March 24, 1999, the Company was purchased by
CyberSentry, Inc. ("CyberSentry"). As part of the plan
of reorganization, prepetition creditors of TSC were
paid through the issuance of Preferred A and B stock and
common stock of CyberSentry and cash. The management of
CyberSentry plans to integrate TSC's telecommunications
business into its product technology and secured
software business segments to increase revenues.
The financial statements do not include any adjustments
that might be necessary as a result of the outcome of
the uncertainties discussed herein.
USE OF ESTIMATES
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the
date of the financial statements and the reported
amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
RECOGNITION OF REVENUE
All of the Company's telecommunications services
described in note 1 are recognized as service is
provided. Allowances are provided for estimated
uncollectible usage.
62
<PAGE>
TELECOMMUNICATIONS SERVICE CENTER, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
ASSET IMPAIRMENT
The Company periodically reviews the carrying value of
certain of its assets in relation to historical results,
current business conditions and trends to identify
potential situations in which the carrying value of
assets may not be recoverable. If such reviews indicate
that the carrying value of such assets may not be
recoverable, the Company would estimate the undiscounted
sum of the expected future cash flows of such assets to
ascertain if a permanent impairment exists. If a
permanent impairment exists, the Company would determine
the fair value by using quoted market prices, if
available, for such assets, or if quoted market prices
are not available, the Company would discount the
expected future cash flows of such assets.
FINANCIAL INSTRUMENTS
The fair value of financial instruments is determined by
reference to various market data and other valuation
techniques, as appropriate, and unless otherwise
disclosed, the fair values of financial instruments
approximate their recorded values.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Depreciation and amortization are provided on the
straight-line method over the estimated useful lives of
the assets. Leasehold improvements are amortized over
the term of the respective leases or the service lives
of the improvements, whichever is shorter. Upon sale or
retirement, the asset cost and related accumulated
depreciation and amortization are removed from the
accounts and any related gain or loss is reflected in
earnings.
INCOME TAXES
Income taxes are accounted for using the liability
approach under the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income
Taxes." Under this method, deferred taxes are recognized
for the tax consequences of temporary differences by
applying enacted statutory tax rates applicable for
future years to the differences between the financial
statement and tax basis of existing assets and
liabilities.
63
<PAGE>
TELECOMMUNICATIONS SERVICE CENTER, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
EARNINGS PER SHARE
During 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128 "Earnings Per
Share" ("SFAS No. 128"). SFAS No. 128 replaced the
existing methodology for calculating and presenting
earnings per share. Under SFAS No. 128, primary earnings
per share has been replaced with a presentation of basic
earnings per share and fully diluted earnings per share
has been replaced with diluted earnings per share. Basic
earnings per share excludes dilution and is computed by
dividing income available to common shares outstanding
for the period by the weighted average of common shares
outstanding. Diluted earnings per share is computed
similarly to fully diluted earnings per share in
accordance with the Accounting Principles Board ("APB")
Opinion No. 15.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified
Public Accountants ("AICPA") issued Statement of
Position 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use ("SOP
98-1"). SOP 98-1 requires computer software costs
associated with internal use software to be expensed as
incurred until certain capitalization criteria are met.
The Company adopted SOP on January 1, 1999. Adoption of
this statement had no material impact on the Company's
financial position, results of operations, or cash
flows.
In April 1998, the AICPA issued Statement of Position
(SOP) 98-5, "Reporting on the Costs of Start-Up
Activities," which provides guidance on the financial
reporting of start-up costs and organization costs. It
requires costs of start-up activities and organization
costs to be expensed as incurred. The SOP is effective
for financial statements for fiscal years beginning
after December 15, 1998. Adoption of this SOP had no
material impact on the Company's financial position,
results of operations, or cash flows.
64
<PAGE>
TELECOMMUNICATIONS SERVICE CENTER, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which establishes accounting
and reporting standards for derivative instruments and
for hedging activities. It requires that an entity
recognize all derivatives as either assets or
liabilities in the statement of financial position and
measure those instruments at fair value. The statement
applies to all entities and is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000.
The Company did not engage in derivative instruments or
hedging activities in any periods presented in the
financial statements and management does not expect this
statement to have a material impact on the Company's
financial position, results of operations or cash flows.
2. REORGANIZATION On May 7, 1998, the Company filed a voluntary petition
(the "Petition") for relief under Chapter 11 of the
United States Bankruptcy Code in the Middle District of
Florida, Tampa Division. The Company thereafter operated
its business in the ordinary course as
debtors-in-possession subject to the jurisdiction of the
Bankruptcy Court. The Bankruptcy Court confirmed the
plan of reorganization on March 4, 1999 and the Plan
became effective ("Effective Date") March 24, 1999, the
date that CyberSentry purchased TSC.
The Plan provided for the division of creditors and
equity holders into nine classes and for the treatment
of each class as follows:
The Class One Creditors (as defined in the Plan)
consisted of administrative claims that were paid in
full. The aggregate payment made to the Class One
Creditors was approximately $20,000 (excluding
Westinghouse Communications and Sprint Communications
Company, L.P.). Included in accounts payable at December
31, 1998 in the balance sheet are post petition
administrative claims of $895,692 from Westinghouse
Communications ("Westinghouse") and Sprint
Communications Company L.P. ("Sprint"). The
administrative amounts were allowed in full and
pre-petition claims amounting to $1,355,544 were allowed
in full as unsecured claims (see Class Five Creditors).
With respect to the allowed administrative claims of
Westinghouse and Sprint, the companies received $.07 in
65
<PAGE>
TELECOMMUNICATIONS SERVICE CENTER, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
cash and the value of $.93 in a share of Class A
Preferred Stock ($1.50 stated value) in CyberSentry,
Inc., for every $1.00 of unsecured claim. Westinghouse
and Sprint also entered into an agreement with Patriot
Advisors, Inc. ("Patriot") to sell the preferred stock
of CyberSentry, Inc. to Patriot Advisors, Inc. at $1.50
per share at certain time intervals up to 455 days after
the confirmation date of the plan of reorganization.
The Class Two Creditors (as defined in the Plan)
consisted of a relatively small amount of claims of
governmental units for past due taxes which were paid in
full.
The Class Three Creditors (as defined in the Plan)
consisted of the secured claims of Southtrust Bank
("Southtrust") and Receivable Funding Corporation
("Receivable Funding"). Southtrust was owed
approximately $477,000 at December 31, 1998 pursuant to
a Note and Mortgage on all assets, such debt being
incurred by the Company in connection with a line of
credit. Southtrust was paid in accordance with the terms
of the Note and Mortgage. Receivable Funding was owed
approximately $10,000 pursuant to a factoring agreement.
Receivable Funding was paid in accordance with the terms
of the agreement.
The Class Four Creditors (as defined in the Plan)
consisted of the equipment lease claims of IBM ("IBM"),
and Telecom Finance Group ("Telecom Finance"). IBM's
claim was pursuant to a lease agreement for a computer
system by and between TSC and IBM (the "IBM Lease"). IBM
was owed approximately $24,000 at December 31, 1998,
which is being paid pursuant to the terms of the IBM
Lease. Telecom Finance's claim was pursuant to a lease
agreement by and between TSC and Telecom Finance
regarding the lease of Siemen's switch equipment (the
"Siemens Lease"). Telecom Finance was owed approximately
$1,300,000 at December 31, 1998. Within ten days of the
entry of the confirmation order, TSC paid $100,000 to
Telecom Finance to be applied to amounts owed under the
lease. Effective July 1, 1999, Telecom Finance and TSC
entered into an amended lease wherein the past due
pre-petition and post-petition arrearage including
costs, fees, charges and interest, were added to the
existing lease obligations and restructured under an
amended lease with such restructured obligation to be
paid out over a five-year period.
66
<PAGE>
TELECOMMUNICATIONS SERVICE CENTER, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
The Class Five Creditors (as defined in the Plan)
consisted of unsecured creditors who received $.07 in
cash and the value of $.93 in a share of Class A
Preferred Stock ($1.50 stated value) of CyberSentry,
Inc. for every $1.00 of unsecured claim.
The Class Five Creditors also received the right to
purchase Common Stock for $1.00 per share upon
confirmation of the Plan for each one share of preferred
stock received by the Class Five Creditor pursuant to
the Plan (the "Right's Offering"). The Rights Offering
was only available to the Class Five Creditors.
The Class Nine Creditors (as defined in the Plan)
consisted of the pre-Bankruptcy shareholders of TSC (the
"TSC Shareholders") whose interest in TSC was terminated
pursuant to the Plan by cancellation of all outstanding
shares of capital stock of TSC. Pursuant to the Plan and
the acquisition (see Note 14), the TSC Shareholders were
issued 1,000,000 shares of Common Stock and 1,000,000
shares of Class B Preferred Stock in CyberSentry, Inc.
on a pro rata basis.
3. LIABILITIES Substantially all of the Company's liabilities as of the
SUBJECT TO Petition Date are subject to settlement under a plan of
COMPROMISE reorganization.
UNDER
REORGANIZATION Liabilities subject to comprise under reorganization
PROCEEDINGS proceedings consisted of:
<TABLE>
<CAPTION>
March 24, December 31,
1999 1998
-------------- ---------------
<S> <C> <C>
Priority claims $ 20,000 $ 20,000
Secured debt
Principal 1,405,544 1,415,819
General Unsecured Claims 3,047,341 3,001,681
Unsecured Debt, Principal and Interest 3,660,428 3,660,428
------------------------------------------------------------------------------
$ 8,133,313 $ 8,097,928
==============================================================================
</TABLE>
Priority claims, the repayment of which the Company is
required to prioritize under bankruptcy law are
comprised principally of administrative claims.
Unsecured debt includes amounts which may ultimately be
67
<PAGE>
TELECOMMUNICATIONS SERVICE CENTER, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
deemed secured. It is not practicable to estimate the
fair value of the Company's liabilities subject to
compromise under reorganization proceedings.
4. EQUIPMENT AND Equipment and leasehold improvements are as follows:
LEASEHOLD
IMPROVEMENTS
<TABLE>
<CAPTION>
Estimated
Useful
March 24, December 31, Lives
1999 1998 (in years)
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Switch equipment $ 1,552,075 $ 1,552,075 5
Switch software 336,336 335,228 5
Computer equipment 271,721 269,722 5
Furniture and equipment 56,480 56,480 5-10
Leasehold improvements 14,215 14,215 5
------------------------------------------------------------------------------------
2,230,827 2,227,720
Less accumulated depreciation and
amortization (1,173,317) (1,070,913)
------------------------------------------------------------------------------------
$ 1,057,510 $ 1,156,807
====================================================================================
</TABLE>
Substantially all of the Company's equipment is under
capital lease.
5. INCOME TAXES Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes.
Significant components of the Company's deferred income
tax assets and deferred income tax liabilities are as
follows:
<TABLE>
<CAPTION>
March 24, December 31,
1999 1998
------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 3,002,000 $ 2,816,000
Bad debt 21,000 --
Accrual to cash conversion 474,000 503,000
------------------------------------------------------------------------
Total deferred tax assets 3,497,000 3,319,000
------------------------------------------------------------------------
Deferred tax liabilities:
Tax greater than book depreciation
and amortization 220,000 211,000
------------------------------------------------------------------------
Total deferred tax liabilities 220,000 211,000
------------------------------------------------------------------------
Valuation allowance for net deferred
tax assets (3,277,000) (3,108,000)
------------------------------------------------------------------------
$ -- $ --
========================================================================
</TABLE>
68
<PAGE>
TELECOMMUNICATIONS SERVICE CENTER, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
As of March 24, 1999, the Company had Federal and
Florida net operating loss carryforwards of
approximately $7,977,000 that expire from 2010 through
2018.
A "valuation allowance" is provided when it is more
likely than not that some portion of deferred tax assets
will not be realized. The Company has established
valuation allowances principally for that portion of the
net operating loss carryforward and other net deferred
tax assets whose future tax benefit is currently
uncertain. Realization of the benefits related to losses
may be limited in any one year due to U.S. Internal
Revenue Code Section 382, change of ownership rules.
The difference between the reported income tax (benefit)
and the tax (benefit) that would result from applying
the 34% Federal statutory rate to the (loss) from
operations before income taxes is reconciled as follows:
<TABLE>
<CAPTION>
December 31,
March 24, ----------------------------
1999 1998 1997
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax (benefit) computed
at Federal statutory rate $ (127,711) $ (1,160,442) $ (1,033,036)
Increase (decrease) in Federal taxes
resulting from:
Effect of net operating
losses for which no tax
carryback benefit is
available 124,990 1,154,922 1,030,678
Other non-deductible expenses 2,721 5,520 2,358
-------------------------------------------------------------------------------------
$ -- $ --
=====================================================================================
</TABLE>
6. LINE OF CREDIT The Company has a revolving line of credit
collateralized by all business assets, including but not
limited to accounts receivable, property and equipment,
contract rights and general intangibles, now owned or
hereafter acquired, providing for borrowings up to
69
<PAGE>
TELECOMMUNICATIONS SERVICE CENTER, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
$300,000. The principal balance is due on demand and
interest is payable monthly at the financial
institution's base rate plus 1.5% (10.0% at March 24,
1999 and December 31, 1998). The balance outstanding at
March 24, 1999 and December 31, 1998 amounted to
$282,000 and $255,000, respectively and is included in
liabilities subject to compromise under reorganization
proceedings in the balance sheets.
7. NOTE PAYABLE- The note payable-stockholder is unsecured and due on
STOCKHOLDER December 31, 2000. The note bears interest at the prime
rate plus 1% (9.5% at March 24, 1999 and December 31,
1998). Interest expense on the note amounted to $275,024
and $162,473 for the years ended December 31, 1998 and
1997, respectively. Pursuant to TSC's plan of
reorganization, there was no interest expense on the
note in 1999. The loan is subordinated to the line of
credit and bank note payable. Accrued interest in the
amount of $544,918 and $544,918 was included in the note
balance at March 24, 1999 and December 31, 1998,
respectively. The balance outstanding, including accrued
interest at March 24, 1999 and December 31, 1998
amounted to $3,660,428, and $3,660,428, respectively.
The balance outstanding at March 24, 1999 and December
31, 1998 is included in liabilities subject to
compromise under reorganization proceedings in the
balance sheets.
8. FACTORING On July 9, 1997, the Company entered into a factoring
AGREEMENT agreement providing a line of credit for up to
$1,000,000, based upon 90% of the eligible accounts
receivable. The agreement provided for the line to be
increased to $1,500,000. The fee charged by the factor
was 16.5% per annum of amounts advanced and outstanding.
The advances were collateralized by accounts receivable.
The term of the agreement was for one year with an
option to extend for one year thereafter. The Company
did not exercise its option to extend the factoring
agreement in 1998. Factoring fees amounted to $758,683
for the year ended December 31, 1997.
9. BANK NOTE The Company had a note payable with a bank that was
PAYABLE collateralized by all business assets, including but not
limited to accounts receivable, property and equipment,
contract rights and general intangibles, now owned or
hereafter. The note bears interest at 8.75% with
principal and interest due monthly in the amount at
70
<PAGE>
TELECOMMUNICATIONS SERVICE CENTER, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
$8,254 through May 2001. On May 7, 1998 the Company
filed a voluntary petition for relief under Chapter 11
(see Notes 1 and 2). As a result of the bankruptcy
filing, the Company was not in compliance with certain
covenants relating to the bank note agreement and
therefore classified the balance of the bank note
payable as a current liability. The balance outstanding
at March 24, 1999 and December 31, 1998 amounted to
$224,098 and $222,292, respectively. The balances
outstanding at March 24, 1999 and December 31, 1998 are
included in liabilities subject to compromise under
reorganization proceedings in the balance sheets.
Maturities of the bank note payable at March 24, 1999
are as follows:
1999 $ 92,614
2000 91,112
2001 40,372
-------------------------------------------------------
$ 224,098
=======================================================
10. LEASE Telecommunications Service Center, Inc. leases its
OBLIGATIONS office facilities and certain office equipment. Minimum
rental payments required under these leases as of March
24, 1999 are as follows:
1999 $ 77,754
2000 52,881
2001 22,672
2002 19,336
2003 4,334
-------------------------------------------------------
Total minimum lease payments $ 176,977
=======================================================
Rent expense aggregated $14,136, $72,461 and $63,088 for
the period ended March 24, 1999 and for the years ended
December 31, 1998 and 1997, respectively.
71
<PAGE>
TELECOMMUNICATIONS SERVICE CENTER, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
The Company also leases certain computer equipment,
switch equipment and software under capital lease
agreements. Total future minimum lease payments under
the original terms of the agreements at March 24, 1999
are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 596,717
2000 416,813
2001 312,610
-----------------------------------------------------------------------
Total minimum lease payments 1,326,140
Less amount representing interest (387,614)
Less current maturities of capital lease obligations (259,845)
-----------------------------------------------------------------------
Present value of long-term obligations under
capital leases $ 678,681
=======================================================================
</TABLE>
On May 7, 1998, the Company filed a voluntary petition
for relief under Chapter 11 (See Notes 1 and 2). As a
result of the bankruptcy filing, the Company was not in
compliance with certain covenants relating to the
capital lease agreements and has therefore classified
the balance of the lease obligations as a current
liability included in liabilities subject to compromise
under reorganization proceedings in the balance sheet at
March 24, 1999 and December 31, 1998.
11. STATEMENT OF Supplemental disclosures of cash flow information:
CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31, 1998 1997
--------------------------------------------------------------------------------
<S> <C> <C>
Cash paid for interest $ 127,726 $ 192,941
Non cash transactions:
Purchase of equipment by capital leases -- 438,669
Repayment of note payable - stockholder
through issuance of common stock -- --
Interest accrued to balance of note
payable - stockholder 275,024 162,473
</TABLE>
72
<PAGE>
TELECOMMUNICATIONS SERVICE CENTER, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
<S> <C> <C>
Services received in settlement of
accounts receivable -- --
Transfer of the following to liabilities
subject to compromise under
reorganization proceedings:
Pre-petition accounts payable 3,021,681 --
Bank line of credit 255,000 --
Capital leases 938,526 --
Bank note payable 222,293 --
Note payable-stockholder 3,660,428 --
------------
Total transferred $ 8,097,928
------------
</TABLE>
There were no supplemental disclosures of cash flow
information arising for the period ended March 24, 1999.
12. LITIGATION In December 1997, the Company received notice of a claim
aggregating approximately $696,000 filed against the
Company pertaining to breach of certain trade
agreements. The Company is vigorously defending this
claim. Management believes the Company's maximum
exposure is $696,000 which it has recorded as of March
24, 1999 and December 31, 1998 and is included in
liabilities subject to compromise under reorganization
proceedings in the balance sheets.
Additionally, the Company is subject to various legal
proceedings, claims and liabilities which arise in the
ordinary course of its business. In the opinion of
management, the amount of ultimate liability with
respect to these matters will not materially affect the
financial statements of the Company.
13. RELATED PARTY The Company, Lake Tel, Inc., a New Jersey corporation
TRANSACTION ("Lake Tel"), and Capital One Bank, a Virginia banking
corporation "Capital One"), have entered into a Carrier
Agreement dated October 1998 (the "Carrier Agreement")
pursuant to which the Company has agreed to allow
Capital One to offer secured credit card products to
customers of the Company for an initial term of five
years. For each account booked by Capital One under the
Carrier Agreement, Lake Tel is entitled to receive a fee
from Capital One and is obligated to pay a fee to the
Company. The Chairman and President of CyberSentry, Inc.
(see Note 14) sits on the Board of Directors of Lake
Tel, a telecommunications marketing company specializing
in financial institutions.
73
<PAGE>
14. SUBSEQUENT Effective March 24, 1999, CyberSentry purchased all of
EVENTS the outstanding common stock of TSC for 1 million shares
of CyberSentry common stock and 1 million shares of
Class B preferred stock ($1.50 stated value) valued at
$2,500,000. Additionally, CyberSentry provided a working
capital line of credit in the amount of $3,000,000.
CyberSentry was incorporated in Delaware on August 21,
1998 as Telecommunications Services, Inc. ("TSI"). On
November 30, 1998, TSI amended its certificate of
incorporation to change the corporation's name to
CyberSentry, Inc. CyberSentry's principal business
includes the marketing and sale of CyberSentry software
and to sell two applications of Asynchronous Transfer
Mode Technology.
15. VALUATION AND The additions charged to costs and expenses, and the
QUALIFYING deductions relating to the Company's valuation
ACCOUNTS allowances for the period from January 1, 1999 through
March 24, 1999, and for the years ended December 31,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Balance Additions
at charged to Balance
beginning costs and at end
Description of Year Expenses Deductions of year
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For the period from January 1, 1999
through March 24, 1999
Valuation allowance $ 81,307 $ -- $ 24,698 $ 56,609
Year ended December 31, 1998
Valuation allowance $ 137,878 $ 1,452,911 $ 1,509,482 $ 81,307
Year ended December 31, 1997
Valuation allowance $ 160,090 $ 140,400 $ 162,612 $ 137,878
</TABLE>
74
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
We have had no changes in or disagreements with our Accountants.
75
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSON
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The Officers and Directors of the Company, and further information concerning
them, are as follows:
<TABLE>
<CAPTION>
NAME AGE CLASS POSITION(S)
- ---- --- ----- -----------
<S> <C> <C> <C>
Frank Kristan 41 I Chairman of the Board, CEO and President
Frank Conklin 42 III Director
Hal Shankland 55 III Director, Senior Vice President and Secretary
Edward Dowling, Jr 36 I Director
Gilbert Raker 56 II Director
James DeVore 49 --- Chief Financial Officer
Aamir Qazi 28 --- Director of Information Systems
Robert Haberhorn 58 --- Director of Technical Services
</TABLE>
Frank Kristan, the Company's Chairman and CEO effective March 6, 2000,
is the President and CEO of Patriot Advisers, Inc., a provider of investment
advisory services to investment funds, corporations and individuals. From 1994
to 1997, Patriot managed funds on behalf of Templar Corporation. When Mr.
Kristan concluded his involvement in managing third party assets, total assets
under management exceeded $50 million. Patriot Advisors has been involved in
development-stage financing of Inktomi Corporation and LibertyOne, Ltd. and the
Company. Prior to forming Patriot Advisors, Mr. Kristan was the Principal and
CEO of Kristan Associates, a financial consulting firm that provided various
financial advisory services for the telecommunications and financial services
industries. He began his career at Affiliated Computer Systems where he provided
computer and operational advisory services to banking and financial services
institutions involved in merger and acquisition transactions. Mr. Kristan earned
his BS in Mathematics from the University of Western Australia.
Hal Shankland, Senior Vice President for Advanced Product Technology,
served as President of TSC from July 1991 until the Merger and has held his
current position with us since the Merger. Mr. Shankland has served as one of
the Company's directors since April 20, 1999. He is an entrepreneur with over 25
years of experience in the computer and telecommunications industries. Mr.
Shankland has worked with Litton Industries, Dyna Com and has served as
President of Hal & Associates, Inc. of Tampa, Florida. Mr. Shankland has been a
computer consultant to numerous corporate clients, including Southern
Management, Inc. As the Company's Senior Vice President, Mr. Shankland is
responsible for operational management of the telecommunications systems and the
integration of new technologies. While serving in the U.S. Air Force, Mr.
Shankland attended Florida State University and the University of Maryland from
1963 until 1967. Mr. Shankland has entered into a three year employment
agreement with the Company.
76
<PAGE>
Frank Conklin, a Director since March 2000, is the President and
Founder of Sinclair Ventures, LLC. Sinclair Ventures is the Managing Partner of
Fianna Partners, L.P. Sinclair Ventures, LLC, has developed a new strategy for
integrated benefits development. Mr. Conklin has twenty years of experience in
the commercial insurance, specialty financial-insurance and healthcare services
industries. He has served as an Officer in the Financial Services Division of
Alexander & Alexander, where he specialized in political and export-credit risk
insurance and financial guarantees; he was a co-founder of Credit Enhancement
Services Corp., a specialty insurance broker, and was a Senior Marketing
Representative with the FCIA-US Export/Import Bank. In 1988, Mr. Conklin entered
the retained executive search industry with engagements focused on the
insurance, managed care, and financial services industries. In addition thereto,
Mr. Conklin has served as a financial and investment advisory consultant over
the last few years. He is an investor in another e-business venture, CyberSoft,
Inc, a company engaged in technology farming in the secure electronic data
transmission industry. Mr. Conklin received his BA from Bradley University and
its Institute of International Studies in 1980 and completed graduate coursework
in finance at Baruch College.
Edward R. Dowling, Jr, a Director since March 2000, has served as a
Director of ours since the beginning of March of this year. He is the President
of the Edward R. Dowling Agency, Inc., a full-service insurance agency, and has
held this position since 1996. Mr. Dowling has a great deal of experience in
analyzing the market value of financial services companies, particularly their
corporate strategies and strategic relationships. Mr. Dowling has also been the
Edward R. Dowling Agency's Branch Manger since 1990. Mr. Dowling is the founder,
Chairman and CEO of CARBONEK Financial Services, Inc., a company that provides
vendor-neutral insurance services online. Mr. Dowling has served on numerous
boards of inter-industry associations in the financial services industry, and on
several insurance review boards in New Jersey. He was educated at Wagner
College, where he concentrated on business and economics until 1983.
Gilbert Raker, a Director since March 2000, is the Chairman, President
and Chief Executive Officer of the SEMX Corporation, a manufacturer of specialty
materials and provider of special services to the microelectronics and
semiconductor industries, which he has led since 1988. Prior thereto, Mr. Raker
served as a Managing Director and Partner of Ditri Associates, Inc. (1987-1990)
and Executive Vice President and CFO of Kenmare Capital Corporation (1984-1987),
both of which were private investment companies. He had previously held
executive positions with three companies listed on the NYSE; Combustion
Equipment Associates, Inc.(1979-1984), Barber Oil Corporation (1976-1979) and IU
International Corporation (1972-1976). Mr. Raker completed his Ph.D. course work
in Finance and received an MBA in Production Management from Syracuse University
in 1969, and received a BA from Eastern College in 1965. Mr. Raker is not only
an alum but also a Trustee of Eastern College.
James DeVore, the Company's Chief Financial Officer, has served as
Controller since November 1999 and is a career corporate consultant with a broad
range of experience over a period of 27 years in diverse industries such as oil
and lubricant manufacturing and distribution, city government, software
development and telecommunications. Prior to his employment with the Company, Mr
DeVore was from 1998 to 1999 the CFO of Global Paycom, Inc., a small
Florida-based inter-exchange carrier, and from 1997 to 1998 he was the CFO of
Fiserv, Inc., where he served in the network integration division. Mr. DeVore
was the CFO for the John H. Harland company,a developer of data-base marketing
software for the financial industry between 1991 and 1996. Mr. DeVore graduated
from Auburn University with a degree in accounting in 1973 and received his CPA
certification in Oklahoma City in 1978.
Aamir Qazi, the Company's Director of Management Information Systems,
served in this capacity with TSC from August 1998 until the Merger and has held
his current position with the
77
<PAGE>
Company since the Merger. Mr. Qazi has five years of experience in the research
and development of engineering, network and software solutions. Prior to joining
TSC in 1998, Mr. Qazi was an Assistant Professor at the Tampa Institute where he
taught systems and design. From December 1996 through January 1998, he worked
for Apollo International of Delaware, Inc. as a Digital Design Engineer working
with algorithm development for Data Acquisition Systems. In 1996, Mr. Qazi
worked in the development division of Lasergate Systems, Inc. From January 1995
through May 1996, he worked for the University of South Florida, College of
Public Health, as a Graduate Research Assistant. Mr. Qazi graduated from the
University of South Florida in 1995 with a M.S.E.E. degree, and he received a
B.S.E.E. degree in 1992 from the University of Engineering and Technology,
Peshawar, Pakistan.
Robert Haberhorn, the Director Technical Services (Telecommunications),
has amassed over forty years in the computer and telecommunications industries.
Having worked 32 years with Burroughs Corp. (now UNISYS Corp.) in many
technical, training, and management positions he was able to establish a
computer business providing multi-user UNIX solutions on PCs at a time when the
term DOS held no meaning for most people. Mr. Haberhorn was involved in the
initial development of document imaging and Internet data sharing and has worked
in several management positions with both interconnect and long distance
companies, building regional networks from the southeast to New York and London.
Mr. Haberhorn currently resides in Tampa, Florida with his wife and son.
Under the Company's Restated Certificate of Incorporation and Bylaws,
its directors will be divided into three classes and designated as Class I,
Class II and Class III. Class I directors will initially be elected for a term
expiring at the first annual meeting of stockholders, Class II directors will
initially be elected for a term expiring at the second annual meeting of
stockholders, and Class III directors will initially be elected for a term
expiring at the third annual meeting of stockholders. Members of each class will
hold office until their successors are elected and qualified. At each succeeding
annual meeting of the stockholders of the Corporation, the successors of the
class of directors whose term expires at that meeting will be elected to hold
office for a term expiring at the annual meeting of stockholders held in the
third year following the year of their election, and until their successors are
elected and qualified. At present, Messrs. Conklin and Shankland have been
designated as Class III, Mr. Raker as Class II and Messrs. Kristan and Dowling
as Class I.
There is no family relationship between any of the above named officers
or directors.
The directors' term of office is one year for Class I directors, two
years for Class II directors and three years for Class III directors.
Under the securities laws of the United States, the Company's
directors, its executive (and certain other) officers, and any persons holding
ten percent or more of the Company's Common stock must report on their ownership
of the Company's Common Stock and any changes in that ownership to the
Securities and Exchange Commission and to the National Association of Securities
Dealers, Inc. The Company believes, based upon a review of copies of forms
pertaining to Section 16 (a) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") furnished it, and written representations from its
executive officers and directors, that all persons subject to the requirements
of the Exchange Act are in compliance therewith.
78
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation paid
by the Company during each of the last three fiscal years to the Company's Chief
Executive Officer and to each of the Company's executive officers who earned in
excess of $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation ($) Long Term Compensation
----------------------------- -----------------------------------------------
Awards Payouts
----------------------- ----------------------
Securities
Restricted Underlying
Name and Other Annual Stock Options/ LTIP All Other
Principal Position Year Salary Bonus Compensation Awards SARs(#) Payouts Compensation
- ------------------ ---- ------ ----- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C>
GERALD RESNICK 1999 127,000 21,800 (3) 500,000
Chairman, CEO and 1998
President (1) 1997
HAL SHANKLAND 1999 115,371 3,500 (4) 100,000
Senior VP, Secretary 1998
and Director (2) 1997
</TABLE>
(1) Effective March 6, 2000, Gerald Resnick is no longer an employee or director
of the Company. The Company has agreed to reimburse Mr. Resnick for the
difference between the $127,000 actually disbursed and his salary, as provided
by the Amendment to the Employment Agreement.
(2) Hal Shankland joined the Company on February 16, 1999. His employment
agreement stipulates that he will be paid $120,000 annually. For 1999, Mr.
Shankland's salary was paid by TSC until May 24, 1999 and by CyberSentry
thereafter. Mr. Shankland received $54,231 from TSC and $61,500 from the
Company.
(3) $12,000 was earned from service as Director and $9,800 was provided as car
allowance.
(4) CyberSentry pays Mr. Shankland $500.00 per month in car allowance, and has
done so since the May 24, 1999.
79
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning stock options
granted to each of the executives named in the Summary Compensation Table for
the fiscal year ending December 31,1999:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
Potential
Realizable
Value At
Assumed Annual
Rates of Stock
Price
Appreciation for
Option Term
Number of
Shares Percentage of Total
Underlying of Options Granted Exercise
Options to Employees Price Expiration
Name Granted During Fiscal Year per Share Date 5% ($)
- ---- ------- ------------------- --------- ---------- ------
<S> <C> <C> <C> <C> <C>
GERALD RESNICK (1) 500,000 83% $ 1.00 03-06-01 2,775,000
HAL SHANKLAND 100,000 17% $ 1.00 12-31-05 902,543
</TABLE>
(1) Effective March 6, 2000, Mr. Resnick is no longer with the Company. The
terms provided herewith are stipulated in an Amendment to Mr. Resnick's
Employment Agreement.
80
<PAGE>
FISCAL YEAR-END OPTION VALUES
Number of Shares Value of
Subject to Unexercised In-the-Money Options At
Options At Fiscal Year-end Fiscal Year End(1)
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
GERALD RESNICK 500,000 750,000
HAL SHANKLAND 100,000 150,000
- -------------
(1) Based on the fair value of the Company's Common Stock at 12-31-99 ($2.50).
81
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 29, 2000
with respect to each beneficial owner of five percent (5%) or more of the
outstanding shares of Common Stock of the Company, each officer and director of
the Company and all officers and directors as a group. The table does not
include securities exercisable into common stock that have not yet vested or are
not exercisable within 60 days of the date hereof. Unless otherwise indicated,
the address of each such person or entity is 412 East Madison Street, Suite
1200, Tampa, Florida, 33602.
<TABLE>
<CAPTION>
COMMON STOCK
Number of Shares of Percentage of Total Shares of
Outstanding Common Stock Outstanding Common Stock
Name and Address of Beneficial Owner Beneficially Owned (1) Beneficially Owned
- ------------------------------------ ------------------- ------------------
<S> <C> <C>
Chinon Investments 2,000,000 9.9%
Suite 23, 19 Broad Court
Covent Garden
London, WC2b 5QN Great Britain
Templar Corporation 775,000 3.9%
43 Deshon Avenue
Bronxville, NY 10708
Patriot Advisors, Inc. (3) 62,400 0.31%
43 Deshon Avenue
Bronxville, NY 10708
Phrygia Financial Group, Inc. (4) 500,000 2.5%
97 Church Road
Easton, CT 06612
Gerald Resnick and Helene Resnick (5) 5,000,000 24.4%
429 East 64th Street, E.PHE
New York, NY 10021
Frank Kristan (6) 50,000 0.25%
Hal Shankland (2) (6) (7) 900,000 4.5%
Frank Conklin (6) 50,000 0.25%
Edward Dowling, Jr (6) 50,000 0.25%
Gilbert Raker (6) 50,000 0.25%
Fianna Partners, L.P. (8) 6,000,000 29.9%
97 Church Road
Easton, CT 06612
Sinclair Advisors, Ltd. (9) 185,000 0.92%
97 Church Road
Easton, CT 06612
Carbonek Financial Services, Inc. (10) 125,000 0.62%
1126 Broadway
W Long Branch, NJ 07764
James DeVore -- --
Aamir Qazi -- --
Robert Haberhorn -- --
All Directors and Executive Officers 8,747,400 42%
as a Group
(11 Entities Listed) (11) (12)
</TABLE>
(1) Pursuant to the rules and regulations of the Securities and Exchange
Commission, shares of Common Stock that an individual or group has a right to
acquire within 60 days pursuant to the exercise of options or warrants are
deemed to be outstanding for the purposes of computing the percentage ownership
of such individual or group, but are not deemed to be outstanding for the
purposes of computing the percentage ownership of any other person shown in the
table.
82
<PAGE>
(2) Does not include shares of Preferred Stock owned by such individual. For a
list of the holders of Preferred Stock see the following preferred stock charts.
Each share of Preferred Stock is entitled to one vote on all matters requiring a
stockholder vote or other stockholder action.
(3) Patriot entered into Stock Purchase Agreements with each of Sprint
Communications Company L.P. (The "Sprint Agreement") and RSL Com U.S.A., Inc.
(The "RSL Agreement") pursuant to which Patriot agreed to purchase, at specified
times and specified amounts, shares of Class A Preferred Stock owned by RSL (the
"RSL shares") and Sprint (the "Sprint Shares"), respectively. These purchases
have been made.
(4) Phrygia is co-owned by Sinclair Advisors, Ltd. and Patriot Advisors, Inc.,
who own 61% and 39%, respectively. Phrygia was issued its 500,000 shares of
Common Stock by Patriot Advisors.
(5) The Company has issued to Mr. Resnick an option to purchase 500,000 shares
of Common Stock exercisable at $1.00 Per share during the term of his employment
with the Company and for one year thereafter. The table includes the shares of
Common Stock subject to that option. Mr. Resnick is no longer employed by the
Company, nor is he one of its Directors, but the Company anticipates executing a
consulting agreement forming part of an amicable resolution to Mr. Resnick's
resignation incorporating the appropriate terms of his employment agreement. The
Company also anticipates executing a mutual release and indemnification
agreement with Mr. Resnick, such indemnification to be subject to the terms of
Mr. Resnick's employment agreement.
(6) While Messrs. Kristan, Conklin, Dowling and Raker own no shares of the
Company's Common Stock in their own name, the Company has, pursuant to certain
resolutions adopted by its Board of Directors, granted options on 50,000 shares
thereof in return for service on such Board for the first year of service
thereon. Hal Shankland has also been granted options therefor, which options
were issued pursuant to the same terms as apply to the above.
(7) The Company has issued to Mr. Shankland an option to purchase 100,000 shares
of Common Stock exercisable at $1.00 Per share (for the first year) and at fair
market value (after the first year) during the term of his employment with the
Company. The table includes the shares of Common Stock subject to that option.
(8) On March 6, 2000, the Company issued 6,000,000 of its shares of Common Stock
to Fianna Partners, L.P., In exchange for 420 Limited Partnership Interests, at
$100,000 each, of Fianna Partners. Frank Conklin is the President and Founder of
Sinclair Ventures, LLC, the Managing Partner of Fianna Partners, L.P.
(9) Frank Conklin is the sole shareholder of Sinclair Advisors, Ltd.
(10) Carbonek is co-owned by Mr. Dowling and Sinclair Advisors, Ltd., each of
whom hold a 49.5% stake therein.
(11) Includes the shares of Common Stock held by Messrs. Kristan through Patriot
Advisors, Inc., Phrygia and Templar Corporation, Conklin through Fianna
Partners, LP, Phrygia and Sinclair Advisors and Shankland.
83
<PAGE>
(12) FIGURES may not add up due to rounding in the calculation of individual
percentages.
84
<PAGE>
<TABLE>
<CAPTION>
CLASS A PREFERRED STOCK (1)
Number of Shares of Percentage of Total Shares of
Outstanding Common Stock Outstanding Common Stock
Name and Address of Beneficial Owner Beneficially Owned (1) Beneficially Owned
- ------------------------------------ ------------------- ------------------
<S> <C> <C>
Raoul Bouille 11,526 0.26%
Marina Office, Suite 5
Sandy Bay Road
Clontral SW 2093 Australia
RLS Comm. U.S.A., Inc. (3) 127,959 2.9%
c/o Westinghouse Communications
1001 Brinton Road
Pittsburgh, PA 15221-4533
RSL Comm.USA Inc. (3) 722,103 16.2%
c/o John H. Mueller
Smith, Clark, Delesie, Bierley, Mueller & Kadyk
P.O. Box 2939
Tampa, FL 33601
Qwest Communications 123,184 2.8%
555 17th Street
Denver, CO 80202
Sprint Communications Company L.P. (3) 545,705 12.3%
8140 Ward Parkway
Kansas City, MO 64114-2006
Worldcom . 399,859 8.9%
P.O. Box 730426
Dallas, TX 75373-0426
David Veltman 2,291,921 51.5%
3130 Tiffany Drive
Bellair Beach, Florida 34635
</TABLE>
- -----------
(1) Each share of Class A Preferred Stock may be converted, at the option of the
holder, into one share of common stock (subject to adjustment in certain events)
at any time from and after March 25, 2001 and through March 24, 2004. The
holders of shares of Class A Preferred Stock are entitled to elect one director
as a class and, in addition, are entitled to cast one vote (subject to similar
adjustment) per share of Class A Preferred Stock on all other matters requiring
a stockholder vote or other stockholder action by the holders of common stock.
The Company has recently offered its stockholders of Preferred Stock the
opportunity to convert such Preferred Stock into shares of Common Stock on a
one-for-one basis. The offer will expire March 31, 2000. The Company anticipates
that the great majority of its Preferred stockholders will elect to accept its
offer.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Subject to community property laws, where
applicable, the persons named above have sole voting and investment power with
respect to all shares of Class A Preferred Stock shown that they beneficially
own.
(3) See note 4 above under the Common Stock table.
85
<PAGE>
<TABLE>
<CAPTION>
CLASS B PREFERRED STOCK (1)
Number of Shares of Percentage of Total Shares of
Outstanding Common Stock Outstanding Common Stock
Name and Address of Beneficial Owner Beneficially Owned (1) Beneficially Owned
- ------------------------------------ ------------------- ------------------
<S> <C> <C>
VisionNet, Inc. 2,000,000 66.7%
c/o LibertyOne Limited
80 McLachlan Avenue
Rushcutters Bay
Sydney NSW 2011 Australia
Lewco Securities Corp. 250,000 8.3%
P.O. Box 2023
Jersey City, NJ 07303
Hal Shankland 750,000 25%
All directors and executive officers 750,000 25%
</TABLE>
as a group (last 1 person listed)
(1) Each share of Class B Preferred Stock may be converted at the option of the
holder into one share of Common Stock (subject to adjustment in certain events)
at any time from and after March 25, 2001 and through March 24, 2004. The
holders of shares of Class B Preferred Stock entitled to cast one vote (subject
to similar adjustment) per share of Class B Preferred Stock on all other matters
requiring a stockholder vote or other stockholder action by the holders of
Common Stock.
The Company has recently offered its shareholders of Preferred Stock the
opportunity to convert such Preferred Stock into shares of common stock on a
one-for-one basis. The offer will expire March 31, 2000. The Company does not
know, as of March 29, 2000, how many of its Preferred shareholders will elect to
accept its offer, but anticipates that the great majority thereof will do so.
Beneficially ownership is determined in accordance with the Rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Subject to community property laws, where
applicable, the persons named above have sole voting and investment power with
respect to all shares of Preferred Stock shown as beneficially owned by them.
86
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
BANKRUPTCY, MERGER AND RELATED TRANSACTIONS
Grace Trust Transaction
Until December 1997, our predecessor, Telecommunications Services, Inc.
("TSC"), which owned and operated our telecommunications services business, was
solvent and was funding its operations with cash flow. In December 1997, TSC
entered into an agreement with Grace Trust pursuant to which Grace Trust was to
provide sales and marketing services for TSC by undertaking telemarketing
efforts to increase TSC's long-distance customer base. Grace Trust assured TSC
that the file of customers submitted by Grace Trust did not contain any large
blocks of sequential telephone numbers and that valid customer authorization had
been obtained for every order to substitute TSC for the customer's existing
long-distance service provider, as required by the FCC. After the file was
processed and customers' long distance service changed, however, TSC received
notifications from a number of these customers disputing the change in service
providers. TSC later confirmed through its research that - contrary to Grace
Trust's assurances - Grace Trust had not obtained proper customer authorization
for all of the business submitted. Although TSC immediately implemented a plan
to minimize the damage caused by Grace Trust's actions, TSC remained liable
under federal law to provide telephone service free of charge for at least 90
days to all customers whose authorization had not been obtained properly, as
well as to other very large potential contingent liabilities to those customers.
These liabilities have been discharged as a result of TSC's bankruptcy
proceedings. TSC also became subject to regulatory proceedings by authorities in
the states where these violations had occurred.
Bankruptcy
As a result of these actions on the part of Grace Trust, TSC elected to
file for bankruptcy protection and, on May 8, 1998, filed a voluntary petition
with the United States Bankruptcy Court for the Middle District of Florida (the
"Bankruptcy Court") seeking reorganization under Chapter 11 of the United States
Bankruptcy Code (the "Code"). On March 4, 1999 (the "Confirmation Date"), the
Bankruptcy Court entered an order (the "Order") pursuant to Section 1129 of the
Code confirming the Second Amended Plan of Reorganization (the "Plan"). The Plan
became effective on March 14, 1999 pending the acquisition of TSC by
CyberSentry, which occurred on March 24, 1999.
Acquisition of TSC
Pursuant to the Plan, we acquired TSC through a merger on March 24,
1999, after which we were the surviving corporation. Prior to the Merger, TSC
conducted our current telecommunications services business. The Merger was
accomplished in accordance with the terms of an Agreement and Plan of Merger,
dated January 22, 1999, between TSC and CyberSentry (the "Merger Agreement"). By
operation of law all assets, property, rights, liabilities and obligations of
TSC have been transferred to and assumed by CyberSentry as the surviving
corporation of the Merger. Substantially all of TSC's debt was converted into
shares of our common and preferred stock.
87
<PAGE>
TRANSACTIONS BETWEEN MANAGEMENT AND OTHERS
Lake Tel Transaction
We have entered, through our predecessor, TSC, into a Carrier Agreement
dated October 1998 with Lake Tel, Inc., a New Jersey corporation, and Capital
One Bank, a Virginia banking corporation. Pursuant to this agreement, we have
agreed to allow Capital One to offer secured credit card products to our
customers for an initial term of five years. For each account booked by Capital
One under the Carrier Agreement, Lake Tel is entitled to receive a fee from
Capital One and is obligated to pay a fee to us. Gerald Resnick, our former
Chairman and President, sits on the Board of Directors of Lake Tel, a
telecommunications marketing company specializing in financial institutions.
Transactions with Patriot, Templar and Liberty One
Patriot Advisors, Inc. and Templar Corporation are 100% owned by Mr.
Frank Kristan, our current Chairman, CEO and President. Mr. Kristan beneficially
owns approximately 4% of the ordinary shares of LibertyOne Ltd., which (through
its subsidiary, VisionNet, Inc.) beneficially owns approximately 66.7% of the
Company's Preferred Class B Preferred Stock.
The Company has entered into a Credit Agreement with Patriot dated
February 22, 1999 (the "Credit Agreement") pursuant to which Patriot has agreed
to extend a $3 million line of credit to the Company, with amounts outstanding
not to exceed 50% of our assets. The line of credit is secured by all of our
assets and will be available to the Company until December 31, 2000, after which
time all outstanding amounts must be repaid, subject to various events of
default which can accelerate the maturity of the loan. Interest on amounts
outstanding is due monthly at the rate per annum equal to two percentage points
above the highest domestic "Prime Rate" published in the Wall Street Journal on
the first day of publication in the previous month.
The Company paid principal and interest of $280,000 due Patriot on the
Company's line of credit with forty thousand shares of its Common Stock rather
than in cash.
Mr. Resnick, our former Chairman and President, and Patriot entered
into an Advisory Agreement dated as of July 15, 1998 (the "Resnick Advisory
Agreement"). Under the Resnick Advisory Agreement, Mr. Resnick acted as a
management and financial advisor to Patriot and provided advice on equity or
debt financing. The Resnick Advisory Agreement has expired. In exchange for
these services, Patriot paid Mr. Resnick a fee of $250,000.
88
<PAGE>
CyberSentry Software Acquisition
On October 2, 1998, Templar entered into a license agreement (the
"Learning License Agreement") with Learning Company Properties Inc., a Delaware
corporation ("Learning"), pursuant to which Templar obtained an exclusive,
worldwide, perpetual, fully-paid right and license to publish, use, distribute
and sublicense a software program that provides digital rights management
technology (the "CyberSentry Software"). In addition, pursuant to the Learning
License Agreement, as supplemented, Learning assigned its rights to certain
trademarks and agreed to provide engineering support to Templar through December
31, 1999. Templar has paid Learning $187,500 in consideration for such
engineering support.
Pursuant to the Learning License Agreement, Templar transferred to
Learning 2,500,000 ordinary shares of LibertyOne (the "LibertyOne Shares"),
previously held by Templar and, in connection with this transfer, agreed to
grant to Learning the right to sell the LibertyOne Shares to Templar for an
aggregate purchase price of $3,000,000, pursuant to a Put and Top Up Agreement
("Put Agreement"), dated October 22, 1998, by and between Learning and Templar.
This put expires on December 31, 2001, unless terminated earlier due to the
occurrence of certain Trigger Events (as defined in the Put Agreement). Templar
and Learning valued the transaction at $3,000,000, which was based on the then
anticipated initial public offering price of the LibertyOne Shares of $1.20 per
share. The initial public offering of the LibertyOne Shares closed on December
10, 1998 at a price of $2.00 per share. The closing sales price of the
LibertyOne Shares as of March 17, 1999 was $4.72 per share. Templar has informed
us that Learning has received more than $3,000,000 from the sale of the
LibertyOne Shares and that the Put Agreement has therefore been cancelled.
Templar assigned the Learning License Agreement and all of Templar's
rights to the CyberSentry Software thereunder to us pursuant to an Assignment of
Software License Agreement, effective as of November 20, 1998 (the
"Assignment"). Our rights to the CyberSentry Software under the Assignment are
subject to the risk of default by Templar under the Learning License Agreement.
Pursuant to the terms of the Assignment and in consideration therefor, we issued
3,000,000 shares of our common stock to Templar, which thereby became one of our
significant stockholders. As described above, Templar transferred 2,300,000 of
these shares to SPLP.
We have entered into a Software Sub-License Agreement (the "DRI License
Agreement"), effective as of January 1, 1999, with VisionNet's predecessor DRI,
a subsidiary of LibertyOne. Pursuant to the DRI License Agreement, we have
granted VisionNet a non-transferable, non- exclusive, worldwide, right and
license to publish and use the CyberSentry Software solely for the protection of
celebrity digital rights and content related thereto on the websites owned or
operated by VisionNet, subject to the terms and conditions of the Learning
License Agreement. We are under no obligation to provide upgrades to the
software licensed to VisionNet unless VisionNet elects to pay us $150,000 for
continuing software engineering support. The term of the DRI License Agreement
is indefinite, subject to early termination by either party for cause, as
described in the agreement. In conjunction with entering into the DRI License
Agreement, VisionNet purchased 500,000 shares of the Company's Common Stock at
$1.00 per share for an aggregate purchase price of $500,000. VisionNet is a
subsidiary of LibertyOne.
89
<PAGE>
ATM Technology Acquisition
Comtel Telecommunications Pty Ltd., a wholly owned subsidiary of
LibertyOne, entered into a Patent and Know How License and Commercialization
Agreement dated as of February 4, 1998 (the "ATM License Agreement") with
Telstra Corporation Limited , pursuant to which LibertyOne was granted a
non-exclusive license in relation to Telstra's Fast Packet Digital Switch
Project ("FPDX"). FPDX represents technology developed by Telstra over 11 years,
and utilizes ATM technology, which has the potential to deliver "virtual"
Internet services to users at substantially increased speeds and at lower costs
than other technologies.
Comtel entered into a Patent and Know How Sub-Contract and
Commercialization Agreement (the "Sub-Contract") with us, effective as of
December 30, 1998, pursuant to which we have been granted the non-exclusive
right to market and sell the ATM Technology in the United States and Canada,
subject to the terms of the ATM License Agreement. Our rights to the ATM
Technology under the Sub-Contract are subject to the risk of default by Comtel
under the ATM License Agreement with Telstra. Pursuant to the Sub-Contract, we
agreed to pay Comtel a royalty fee of 110% of the royalty rates required
pursuant to the ATM License Agreement.
As consideration for Comtel entering into the Sub-Contract with us, we
agreed to issue 2,000,000 shares of our preferred stock to Comtel's designee,
VisionNet, a subsidiary of LibertyOne. Pursuant to the Merger Agreement, these
shares were converted on a one for one basis into 2,000,000 shares of our Class
B Preferred Stock.
RECENT EVENTS
The Company and its former Chairman, CEO and President Gerald A.
Resnick signed an amendment (the "Amendment") to Mr. Resnick's employment
agreement (the "Employment Agreement") on March 6, 2000. The Amendment
stipulates the conditions under which Mr. Resnick's employment with the Company
was to terminate, which termination has at present been effected. The Amendment
provides that: (i) the Company will pay a Severance Allowance of $200,000 per
year through December 31, 2008; (ii) the Company will pay Mr. Resnick $ 80,000,
such amount to cover accrued expenses and back pay; (iii) the Company will
provide Mr. Resnick with a $ 2,000,000 life insurance policy, disability
insurance and maintain health coverage for Mr. Resnick and his family; (iv) the
Company will indemnify and hold harmless Mr. Resnick from any and all acts
arising from his actions in his capacity as a director and officer thereof and
list him in the Employment Practices Liability Insurance Policy and the
Directors, Officers and Corporate Liability policy "D&D Gold" as an additional
insured; (v) Mr. Resnick waive the effect of any provision in the Employment
Agreement as such provision may relate to a change of control of the Company,
and (vi) all other provisions in the Employment Agreement remain in full force
and effect with the exceptions that: (a) Mr. Resnick will no longer be defined
as an executive or employee as such terms are used in the Employment Agreement,
and; (b) the Competition provision therein is null and void.
The Company held a Shareholders' Meeting on March 6, 2000 at 10:30,
during which Hal Shankland was nominated and elected as Director. During a
Directors' Meeting later that day, Mr. Shankland, pursuant to Section 3.3 of the
Company's By-laws, appointed Mr. Frank Kristan
90
<PAGE>
Chairman and Frank Conklin as Director. The newly constituted Board then
nominated and elected Edward Dowling, Jr as Director. The Board then appointed
Mr. Kristan CEO and President and confirmed Mr. Shankland as Vice President and
Secretary.
The Directors' Meeting of March 16, 2000, delineated with greater
specificity the quality in which Directors serve on the Company's Board,
pursuant to its Certificate of Incorporation and By- laws, which state that
Directors of the Company shall be elected by class. The Company's Directors
resolved that its Directors be elected accordingly, which elections are to be
confirmed at the Company's Special Shareholders' Meeting on March 31, 2000.
The Special Shareholders' Meeting will vote on three proposals: the
nomination of Directors, the retention of BDO Seidman, LLP, as the Company's
auditors, and the resolution adopted by the Directors during their Meeting of
March 17, 2000, to authorize an additional twenty million (20,000,000) of its
Common Stock.
. The Company issued Fianna Partners, LP ("Fianna"), six million shares
of its Common Stock in exchange for 420 of Fianna's Limited Partnership
Interests, each of the latter valued at one hundred thousand US dollars
($100,000). The Company and Fianna plan to enter into a joint venture agreement.
The Company intends to file a registration statement on Form S-1,
whereby it would register all its shares of Common Stock under the Securities
Act of 1933, as amended, as soon as reasonably practicable.
91
<PAGE>
ITEM 14. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
92
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized.
CYBERSENTRY, INC.
By: /s/ FRANK KRISTAN
-----------------------------
Frank Kristan, CEO, President and
Chairman of the Board
In accordance with the Exchange Act, this report has been signed below
by the following persons and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ FRANK KRISTAN President and Chairman March 29, 2000
- ----------------------- of the Board
Frank Kristan
/s/ HAL SHANKLAND Senior Vice President, March 29, 2000
- ----------------------- Secretary and Director
Hal Shankland
/s/ JIM DEVORE Chief Financial Officer March 29, 2000
- -----------------------
Jim DeVore
/s/ FRANK CONKLIN Director March 29, 2000
- -----------------------
Frank Conklin
/s/ EDWARD DOWLING, JR Director March 29, 2000
- -----------------------
Edward Dowling, Jr
/s/ GILBERT BAKER Director March 29, 2000
- -----------------------
Gilbert Raker
93
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 89,477
<SECURITIES> 0
<RECEIVABLES> 244,030
<ALLOWANCES> 68,463
<INVENTORY> 0
<CURRENT-ASSETS> 319,842
<PP&E> 2,252,233
<DEPRECIATION> 1,528,589
<TOTAL-ASSETS> 16,047,859
<CURRENT-LIABILITIES> 3,400,180
<BONDS> 3,180,399
0
7,451
<COMMON> 13,879
<OTHER-SE> 10,824,616
<TOTAL-LIABILITY-AND-EQUITY> 16,047,859
<SALES> 2,599,522
<TOTAL-REVENUES> 2,599,522
<CGS> 2,108,418
<TOTAL-COSTS> 6,884,059
<OTHER-EXPENSES> 83,587
<LOSS-PROVISION> 190,347
<INTEREST-EXPENSE> 120,727
<INCOME-PRETAX> (4,368,124)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,368,124)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,368,124)
<EPS-BASIC> (0.33)
<EPS-DILUTED> (0.33)
</TABLE>
