Filed Pursuant to Rule 424(b)(3)
Registration No. 333-146193
PROSPECTUS
CYBER DIGITAL, INC.
3,200,000
Shares
of Common Stock
Laurus Master Fund, Ltd., a selling shareholder, is hereby offering 3,200,000
shares of common stock, par value $0.0066667 per share, of Cyber Digital, Inc.,
a New York corporation. The shares of common stock to be sold by Laurus include
shares of common stock issuable to Laurus pursuant to a secured convertible term
note, which we sometimes refer to as the note, in initial outstanding principal
amount of $1,307,338.26, at a fixed conversion price of $0.50, subject to
specified adjustments. The note was issued to Laurus pursuant to a securities
purchase agreement entered into between us and Laurus on June 22, 2007 for
effectiveness as of June 1, 2007. We are not selling any securities in this
offering, and will not receive any proceeds from the sale of the shares of
common stock in this offering. We will pay all expenses of registering this
offering of securities.
Our common stock is listed on the Over-the-Counter Bulletin Board under the
symbol "CYBD." On October 15, 2007, the closing price for a share of our common
stock was $0.15.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE THE SECTION
CAPTIONED "RISK FACTORS" BEGINNING ON PAGE 3.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is October 18, 2007.
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY
RISK FACTORS
USE OF PROCEEDS
DETERMINATION OF OFFERING PRICE
SELLING SHAREHOLDER
PLAN OF DISTRIBUTION
LEGAL PROCEEDINGS
DIRECTORS AND EXECUTIVE OFFICERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
DESCRIPTION OF SECURITIES
INTEREST OF NAMED EXPERTS AND COUNSEL
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
CERTAIN RELATIONSHIPS AND TRANSACTIONS AND CORPORATE GOVERNANCE
DESCRIPTION OF BUSINESS 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
DESCRIPTION OF PROPERTY
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MARKET FOR OUR COMMON STOCK
EXECUTIVE COMPENSATION 30
FINANCIAL STATEMENTS F-1
HISTORICAL FINANCIAL STATEMENTS OF SUBSIDIARIES P-1
PRO FORM FINANCIA STATEMENTS P-14
PROSPECTUS
SUMMARY
This summary highlights certain information we present more fully in the rest
of this prospectus. We encourage you to read the entire prospectus
carefully.
Business
We design, develop software for, manufacture and market a vast array of
high-performance Internet infrastructure systems, such as routers, gateways,
firewalls and servers used by Internet service providers to create
next-generation digital broadband and virtual private network, or VPN, services.
We also design, develop software for, manufacture and market a range of advanced
digital-voice-switching infrastructure equipment for private and public
switched-voice-network operators worldwide, especially in developing countries.
Our mission is to become the leading supplier of digital broadband systems in
the United States and digital voice switches to developing countries. We believe
that service providers can offer affordable yet modern voice and broadband
Internet services by exclusively using our vast array of voice and Internet
systems without buying any equipment from our competitors.
The Offering
This prospectus covers up to 3,200,000 shares of our common stock for resale
by Laurus Master Fund, Ltd., or Laurus.
On June 22, 2007, in connection with our acquisition through our wholly-owned
subsidiary, CYBD Acquisition, Inc., of 100% of the issued and outstanding shares
of common stock of New Rochelle Telephone Corp., or NRT, a New York corporation,
from eLEC Communications Corp., or eLEC, and our acquisition through our
wholly-owned subsidiary, CYBD Acquisition II, Inc., of 100% of the issued and
outstanding shares of common stock of Telecarrier Services, Inc., or TSI, a
Delaware corporation, from eLEC, we issued to Laurus a secured convertible term
note, or the note, in outstanding principal amount of $1,307,338.26, the
proceeds of which were used to finance the acquisitions from eLEC described
above, subsequently applying such proceeds to repay certain outstanding indebted
owing by eLEC to Laurus. We issued the note to Laurus pursuant to a securities
purchase agreement, dated as of June 22, 2007, for effectiveness as of June 1,
2007.
The note matures on July 1, 2010. Interest will accrue on the unpaid
principal of the note at a rate per annum equal to the "prime rate" published in
The Wall Street Journal
from time to time, plus two percent, provided
that this interest rate shall not at any time be less than nine percent. As of
October 9, 2007, the annual interest rate on the note was
9.75%. All or a
portion of the outstanding principal and interest due under the note may be
converted into shares of our common stock upon satisfaction of specified
conditions. The note is convertible into shares of our common stock at a price
of $0.50 per share, subject to specified adjustments for reclassifications,
stock splits, combinations, stock dividends and the like.
The note is secured by a lien on substantially all of our assets, other than
intellectual property assets, pursuant to the terms of a master security
agreement dated as of June 22, 2007 for effectiveness as of June 1, 2007. In
addition, we have pledged to Laurus our ownership interests in our subsidiaries
pursuant to a stock pledge agreement, dated as of June 22, 2007 for
effectiveness as of June 1, 2007, to secure our obligations under the note. If
an event of default occurs under the master security agreement, the stock pledge
agreement or the note, Laurus has the right to accelerate payments under the
note and, in addition to any other remedies available to it, to foreclose upon
the assets securing the note.
Laurus is not entitled to receive shares of our common stock upon payment of
principal or interest on the note or upon conversion of the note if such receipt
would cause Laurus to be deemed to beneficially own in excess of 9.99% of the
outstanding shares of our common stock on the date of the issuance of such
shares. This provision may be waived by Laurus upon 61 days' prior written
notice to us.
In connection with the securities purchase agreement, we also entered into a
registration rights agreement, dated as of June 22, 2007 for effectiveness as of
June 1, 2007, providing for the filing of a registration statement with the
Securities and Exchange Commission registering the shares of our common stock
issuable upon conversion of the note. We are obligated to file the registration
statement no later than 90 days from the date of closing of the issuance of the
notes and to use our best efforts to cause the registration statement to be
declared effective no later than 180 days after the date of such closing. If the
registration statement is not timely filed or declared effective within the
timeframe described, or if the registration is suspended other than as permitted
in the registration rights agreement, we will be obligated to pay Laurus a fee
equal to 1.0% of the original principal amount of the note for each 30-day
period (pro rated for partial periods) that such registration obligations are
not satisfied, provided that in no event will we be required to pay Laurus an
aggregate fee equal to more than 15.0% of the original principal amount of the
note. This prospectus forms a part of such registration statement.
Summary Financial Data
The following summary financial information has been derived from our
financial statements, and should be read in conjunction with the financial
statements and the notes related thereto appearing elsewhere in this prospectus:
|
Fiscal Year Ended
|
|
Three Months Ended
|
|
March 31, 2007 (audited)
|
|
June 30, 2005 (unaudited
)
|
Balance Sheet Data:
|
|
|
|
Total Assets
|
$354,734
|
|
$3,654,336
|
Total Liabilities
|
$2,352,680
|
|
$5,801,116
|
Total Stockholders' Equity (Deficit)
|
$(1,997,946)
|
|
$(2,146,780)
|
Statement of Operations:
|
|
|
|
Net Sales
|
$0
|
|
$445,049
|
Total Operating Expenses
|
$613,062
|
|
$258,591
|
Other Income (Expense)
|
$(179,426)
|
|
$(50,755)
|
Net Income (Loss)
|
$(932,643)
|
|
$(145,708)
|
Income (Loss) Per Share
|
$(.028)
|
|
$(.004)
|
Shares Outstanding
|
33,502,101
|
|
33,509,013
|
Company Information
Our executive offices are located at 400 Oser Avenue, Suite 1650, Hauppauge,
New York 11788, and our telephone number is (631) 231-1200.
RISK FACTORS
Any investment in our common stock involves a high degree of risk. You should
carefully consider the following risks relating to our business and our common
stock, together with the other information described elsewhere in this
prospectus. If any of the following risks actually occur, our business could be
materially affected, the trading price of our common stock could decline, and
you might lose all or part of your investment. The risks and uncertainties
described below are, however, not the only ones facing us. Additional risks and
uncertainties not currently known to us or that we currently consider immaterial
may also impair our business and operations.
We have a history of operating losses and we anticipate future
losses.
Since inception, we have generated limited revenues from the sale of our
products. We incurred losses of $932,643 and $562,346, respectively, for the
fiscal years ending March 31, 2007 and 2006, and we anticipate that losses will
continue until such time, if ever, as revenue from operations is sufficient to
offset our operating costs.
We will need significant additional funds, which we may not be able to
obtain.
We have historically satisfied our working capital requirements through the
public and private issuances of equity securities and borrowings from government
agencies as well as from our chief executive officer and a shareholder. We will
continue to seek additional funds through such channels and from collaborative
and other arrangements with corporate partners. However, we may not be able to
obtain, from these or other sources, adequate funds when needed or funding that
is on terms acceptable to us. If we fail to obtain sufficient funds, we may need
to delay, scale back or terminate some or all of our research and development
programs and our anticipated expansion or otherwise curtail our
operations.
We expect to have foreign sales, so our business is subject to the additional
risks associated with doing business overseas.
We expect that a portion of our revenues may be derived from sales of our
products in foreign markets. Accordingly, we will be subject to all of the risks
associated with foreign trade. These risks include shipping delays, increased
credit risks, trade restrictions, export duties and tariffs, fluctuations in
foreign currency, and uncertainties in international, political, regulatory and
economic developments. In addition, we anticipate that our foreign operations
will require us to devote significant resources to system installation, training
and service, areas in which we have limited experience.
We may be unable to adapt to the rapid technological change that
characterizes our industry.
The technology related to digital voice switching and networking systems,
including Internet Protocol (IP) packet-based high-speed broadband systems, is
evolving at a rapid pace. To ensure that our current systems do not become
obsolete, we will need to invest significant time and resources in research and
development and testing.
We cannot guarantee that there will be a market for our systems and
services.
The market for UNE-P migration services for both local-loop digital voice and
IP packet-based broadband data is in the early stages of development.
Consequently, we cannot accurately predict whether the market for our systems or
services will fail to develop, grow more slowly than anticipated, or become
saturated with competitors. It is expected that nascent UNE-P migration service
providers will emerge and perhaps, some have already entered this emerging
market ahead of us without our knowledge. Although we have resolved certain
critical issues facing commercial use of local-loop digital voice and broadband
data systems for Internet and local area network access, including security,
reliability, ease and cost of access and quality of service, we cannot guarantee
market acceptance of our systems and hence, the underlying services.
Our limited marketing activity may materially adversely affect our
business.
If our systems or services are to be accepted by the market, we will need to
create an awareness of, and demand for, our systems and services. We have not
yet engaged in such marketing activities to any degree, as we lack the resources
to do so. Furthermore, any such marketing activities that we engage in may prove
unsuccessful.
The market in which we operate is intensely competitive, and we may not be
able to compete effectively, especially against established industry
competitors.
We operate in an intensely competitive business. Among our principal
competitors are well-established foreign and domestic companies, including
Alcatel-Lucent Technologies, Nortel Networks, Siemens Corp., L.M. Ericsson
Corp., Alcatel Telecom, and others that have developed systems that perform many
of the same functions as our systems. In addition, computer networking companies
engaged in empowering the Internet include companies such as Cisco Systems Inc.,
Juniper Networks, Check Point Software Technologies, Novell Inc., 3Com, and IBM
Corp. which dominate the industry. All of these companies have substantially
greater financing, marketing personnel and other resources than we do. In
addition, they have established reputations for success in developing, selling,
and servicing digital switching and networking and related systems and have
established significant market penetration for their systems. These competitors
also have the research-and-development capabilities and financial and technical
resources necessary to enable them to respond to technological advances as well
as evolving industry standards.
Our operating results may fluctuate.
Our operating results could vary from period to period as a result of the
time it takes to complete a sale. Our sales cycle for foreign contracts
generally starts when a prospective customer issues a request for a proposal and
ends when we sign a sales contract with that customer, and typically lasts from
6 to 36 months. The period from signing of the sales contract until delivery,
installation, and acceptance of a system (which is when we recognize revenues)
typically ranges from 3 to 9 months. The principal factors affecting delivery
and installation time are the configuration and complexity of the system and the
availability of third-party hardware components. Other factors contributing to
fluctuation of our operating results include the timing of introduction of new
systems by us and by our competitors and fluctuation in expenses, whether
related to sales and marketing, product development, or administration.
We have obtained and expect to continue to secure a portion of our foreign
contracts through competitive bidding.
Competitive bidding is typically a lengthy process that often results in
resources being expended on bids that are not accepted. Additionally, inherent
in the competitive bidding process is the risk that actual costs may exceed
projected costs used in calculating the bid price. Moreover, we may be required
to post bid or performance bonds in connection with contracts with foreign
agencies. To date, our limited capital resources have restricted our ability to
obtain bonds and to bid on larger contracts, and we may find ourselves similarly
restricted in the future.
We depend on third parties to market and sell of our systems and
services.
We rely significantly on indirect sales channels to market and sell our
systems and services. Our current agreements with indirect sales channels are
non-exclusive, and we anticipate that any such agreements we enter into in the
future will also be non-exclusive. Non-exclusivity allows these sales channels
to resell systems or services offered by our competitors. Furthermore, our
agreements are generally short-term, and can be cancelled by these sales
channels without significant financial consequence. We cannot control how these
sales channels perform and cannot be certain that either our customers or we
will be satisfied by their performance. Also, many of these companies compete
with us.
Our ability to compete will suffer if we are unable to protect our patent
rights and trade secrets or if we infringe the proprietary rights of third
parties.
We rely solely on trade secret, copyright, and trademark laws to protect our
proprietary software and hardware technology. We do not hold any patents and we
have not filed any patent applications that relate to any of our technology. Our
competitors may learn our trade secrets or develop them independently. In
addition, we seek to protect our trade secrets and other proprietary information
in part by means of confidentiality agreements with our collaborators,
employees, and consultants. If any of these agreements is breached, we may be
without adequate remedies. Costs related to settling any disputes that may arise
from our need to protect our proprietary rights may be significant. Although we
do not believe that we are infringing on any patent or other proprietary rights,
others may claim that we are doing so. Any such claim would likely be
time-consuming and expensive to defend, particularly if we are unsuccessful, and
could prevent us from selling our products or services. In addition, we may also
be forced to enter into costly and burdensome royalty and licensing
agreements.
The loss of J.C. Chatpar would likely have an adverse effect on our
business.
Our future success will depend largely on our ability to retain the services
of J.C. Chatpar, our founder, President and Chief Executive Officer. Mr. Chatpar
is primarily responsible for developing our proprietary technology and managing
our company, including its business development and marketing functions. We
currently have a three-year employment contract with Mr. Chatpar that prevents
him from competing with us during his employment. We do not have a "key person"
life insurance policy for any of our personnel, including Mr. Chatpar. If we
lose Mr. Chatpar's services, it would have a material adverse effect on our
business.
Our President and Chief Executive Officer controls a significant percentage
of our common stock.
As of October 9, 2007, J.C. Chatpar, our President and Chief Executive
Officer, beneficially owned approximately 48% of our outstanding common stock.
Mr. Chatpar is able to influence all matters requiring shareholder approval,
including election of directors and approval of significant corporate
transactions. This concentration of ownership, which is not subject to any
voting restrictions, could limit the price that investors might be willing to
pay for our common stock. In addition, Mr. Chatpar is in a position to impede
transactions that may be desirable for other shareholders. He could, for
example, make it more difficult for a potential acquiror to take control of
us.
Our success depends on our ability to hire and retain management
personnel.
Our success also depends on our ability to hire and retain skilled operating,
marketing, technical, financial and management personnel. In the
telecommunications and network systems business sectors, competition in
connection with hiring and retaining skilled and dependable personnel is
intense. We may not offer salaries or benefits that are competitive with those
offered by our competitors or by universities, research entities and other
organizations, which may have significantly more resources than we have. We may
not succeed in hiring and retaining such personnel.
Our business and results of operations could be materially and adversely
impacted if we fail to successfully integrate NRT, TSI and any other businesses
we may acquire in the future.
As part of our growth strategy, we acquired NRT and TSI in June 2007, and may
acquire additional businesses in the future. The integration of NRT, TSI and any
businesses we may acquire in the future may not be successful or improve our
revenues. We believe that the acquisitions of NRT and TSI will enhance our
business opportunities and our growth prospects. However, these acquisitions,
and any other acquisitions we may make in the future, involve risks that could
materially and adversely affect our business and results of operations. These
risks include, among others:
-
distraction of management from our existing business operations;
-
loss of key personnel and other employees;
-
costs, delays and inefficiencies associated with integrating the
operations and personnel of the acquired business;
-
the impairment of acquired assets and goodwill; and
-
acquiring the contingent and other liabilities of the acquired
business.
In addition, businesses we acquire may not provide us with the desired
increase in business opportunities or result in the growth that we anticipate.
Furthermore, integrating acquired operations is a complex, time-consuming and
expensive process. Combining acquired operations with our existing operations
may result in lower overall operating margins, greater volatility in the price
of our common stock and fluctuations in our quarterly earnings. Also, cultural
incompatibilities, career uncertainties and other factors related to our
acquisitions may result in the loss of employees. Failure to successfully
integrate complementary practices of acquired businesses, or to achieve the
business synergies or other anticipated benefits of our acquisitions, could
materially and adversely affect our business and results of operations.
We have incurred significant indebtedness in connection with our acquisitions
of New Rochelle Telephone Corp. and Telecarrier Services, Inc., which may
adversely affect our ability to finance our operations, pursue desirable
business opportunities and successfully run our business in the future.
Pursuant to the terms of our securities purchase agreement with Laurus, we
issued a secured convertible term note to Laurus in outstanding principal amount
of $1,307,338.26, the proceeds of which were used to acquire NRT and TSI from
eLEC. The note is secured by a lien on substantially all of our assets, other
than intellectual property assets, pursuant to the terms of a master security
agreement we executed in favor of Laurus. The note matures on July 1, 2010.
Interest will accrue on the unpaid principal of the note at a rate per annum
equal to the "prime rate" published in
The Wall Street Journal
from time
to time, plus two percent, provided that this interest rate shall not at any
time be less than nine percent. As of October 9, 2007, the annual interest rate
on the note was 9.75%
.
From July 1, 2007 through and until July 1, 2010,
the maturity date of the note, interest on the note is payable monthly.
Beginning on January 2, 2008, we will be required to make monthly amortizing
principal payments of $39,616.31 to Laurus, in addition to the required interest
payments. Although we believe that our operating cash flows will be sufficient
for us to comply with our payment obligations under the note and to continue to
fund our operating requirements, this indebtedness could materially and
adversely affect our business and operating results. For example:
-
The terms of our securities purchase agreement with Laurus contain
numerous restrictive covenants which, among other things, will restrict us in
our ability to incur additional indebtedness, declare or pay dividends on our
common stock or materially change the scope of our business. If we do not
comply with these or any of our other obligations under the securities
purchase agreement, an event of default may result which, if not cured or
waived, could require us to repay the outstanding indebtedness immediately.
-
We may be more vulnerable in the event of downturns and adverse changes in
our business, our industry or the economy generally due to our need for
increased cash flow to service this indebtedness.
-
We may have difficulty obtaining additional financing, if necessary, at
favorable interest rates to meet requirements for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes.
-
We will be required to dedicate a substantial portion of our cash flows to
the payments of principal and interest on this indebtedness, which will reduce
the amount of funds available to us for operations, capital expenditures and
future acquisitions.
We are dependent on third-party suppliers.
We depend on others to manufacture all of the component parts we incorporate
into our systems. We purchase our component parts from numerous third-party
manufacturers and believe that numerous alternative sources of supply are
readily available for most component parts. We depend on our suppliers to
satisfy performance and quality specifications and to dedicate sufficient
production capacity for components within scheduled delivery times. We do not
maintain contracts with any of our suppliers; instead, we purchase our system
components pursuant to purchase orders placed from time to time in the ordinary
course of business. This means we are vulnerable to unanticipated price
increases.
We depend on a single supplier for certain semiconductor chips, such as
embedded processors and Pentium processors from Intel Corporation, telecom chips
from Motorola, Texas Instruments and National Semiconductor, PLDs and FPGAs from
Altera, and T1/T3 chips from Rockwell Semiconductors and PMC-Sierra Corp. If any
of these semiconductor chips are discontinued, we would have to redesign some of
our systems by using other vendors' components. This would likely result in
delays.
We are subject to various governmental regulations.
The telecommunications and related networking industries in which we compete
are highly regulated in both the United States and internationally. Imposition
of public carrier tariffs and taxation of telecommunications services could
significantly reduce demand for our systems. Furthermore, regulation or
deregulation of public carrier services in the United States or elsewhere, may
determine the extent to which we will be able to enter and penetrate markets in
the United States and internationally and may result in significantly increased
competition. Furthermore, our systems must comply with equipment, interface, and
installation standards promulgated by communications regulatory authorities and
industry standards imposed by domestic and foreign carriers. Changes in these
standards could result in our incurring additional expenses.
Trading in our common stock may be limited.
Our common stock is quoted on the Over-the-Counter Bulletin Board. The
Over-the-Counter Bulletin Board is not, however, an exchange, and trading in
securities on the Over-the-Counter Bulletin Board is often more sporadic than
trading in securities listed on an exchange or NASDAQ. Consequently, our
shareholders may have difficulty reselling any shares of our common
stock.
Because "penny stock" rules apply to trading in our common stock, our
shareholders may find it difficult to sell the shares.
Our common stock is a "penny stock," as it is not listed on an exchange and
trades at less than $5.00 a share. Broker-dealers who sell penny stocks must
provide purchasers of these stocks with a standardized risk-disclosure document
prepared by the SEC. This document provides information about penny stocks and
the nature and level of risks involved in investing in the penny-stock market. A
broker must also give a purchaser, orally or in writing, bid and offer
quotations and information regarding broker and salesperson compensation, make a
written determination that the penny stock is a suitable investment for the
purchaser, and obtain the purchaser's written agreement to the purchase.
Consequently, the penny stock rules may make it difficult for our shareholders
to sell their shares of our common stock.
Issuance of our shares of common stock to fund our UNE-P migration services
business may significantly dilute the equity interest of existing shareholders.
We will need significant additional funds to enter UNE-P migration services
business, which will require us to issue more shares of our common stock.
Accordingly, this causes a greater risk of dilution. The perceived risk of
dilution may cause some of our shareholders to sell their shares, which could
have a depressive effect on the price of our common stock.
We expect that our stock price will be volatile.
Like the stock of many small-capitalization companies, the market price for
our common stock has been volatile for reasons not necessarily related to our
performance or asset value, and we expect that it will continue to be so for the
foreseeable future. In the past, securities class action litigation has often
been brought against companies following periods of volatility in the market
price of their securities. If securities class action litigation is brought
against us, such litigation could result in substantial costs and would divert
management's attention and resources.
USE OF PROCEEDS
We will not receive any proceeds from any sales of the shares by the selling
shareholder.
DETERMINATION OF OFFERING
PRICE
The selling shareholder may sell shares from time to time in negotiated
transactions, brokers' transactions or a combination of such methods at market
prices prevailing at the time of the sale or at negotiated prices.
SELLING SHAREHOLDER
Laurus Master Fund, Ltd.
The selling shareholder is Laurus Master Fund, Ltd., or Laurus, a Cayman
Islands company. Laurus invests in small and micro cap companies for its own
account. The offices of its investment manager, Laurus Capital Management, LLC,
are located at 335 Madison Avenue, 10
th
Floor, New York, New York
10017. Other than its right to acquire our common shares under the note, Laurus
has no other commitments or arrangements to purchase or sell any of our
securities. There are no business relationships between Laurus and us other than
as contemplated by the securities purchase agreement.
This prospectus covers up to 3,200,000 shares of our common stock issuable
upon the conversion of the secured convertible term note that we issued to
Laurus in connection with the securities purchase agreement.
PLAN OF DISTRIBUTION
We anticipate that the selling shareholder may sell all or a portion of the
shares offered by this prospectus from time to time on the Over-the-Counter
Bulletin Board, on securities exchanges or in private transactions, at fixed
prices, at market prices prevailing at the time of sale, at prices reasonably
related to the market price or at negotiated prices. Sale of the shares offered
by this prospectus may be effected by one or more of the following methods:
-
ordinary brokerage transactions and transactions in which the broker
solicits purchases;
-
sales to one or more brokers or dealers as principal, and resale by those
brokers or dealers for their account, including resales to other brokers and
dealers;
-
block trades in which a broker or dealer attempts to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction; or
-
privately negotiated transactions with purchasers.
We are not aware as of the date of this prospectus of any agreements between
Laurus and any broker-dealers regarding the sale of the shares offered by this
prospectus, although we have made no inquiry in that regard.
We will file, during any period during which we are required to do so under
our registration rights agreement with Laurus, one or more post-effective
amendments to the registration statement of which this prospectus is a part to
describe any material information with respect to the plan of distribution not
previously disclosed in this prospectus or any material change to such
information in this prospectus.
The selling shareholder may be deemed to be an "underwriter" within the
meaning of the Securities Act. Any broker, dealer or other agent executing a
sell order on behalf of the selling shareholder may be considered to be an
underwriter within the meaning of the Securities Act, in which case commissions
received by any of these brokers, dealers or agents and profit on any resale of
the shares may be considered to be underwriting commissions under the Securities
Act. These commissions received by a broker, dealer or agent may be in excess of
customary compensation.
All costs, fees and expenses of registration incurred in connection with the
offering will be borne by us. All selling and other expenses incurred will be
borne by the selling shareholder.
LEGAL PROCEEDINGS
There are no legal proceedings against us and we are not aware of any such
proceedings contemplated against us.
DIRECTORS AND EXECUTIVE
OFFICERS
The directors, executive officers and key employees of our company
are:
Name
|
Age
|
Office
|
Jawahar C. Chatpar
|
60
|
Chairman of the Board, President and Chief Executive
Officer
|
Jack P. Dorfman
|
70
|
Director
|
Terry L. Jones
|
60
|
Director
|
Jawahar C. Chatpar
is the founder of our company and has served as Chief
Executive Officer since our inception. Mr. Chatpar has served as Chairman of the
Board since March 1991. He served as President of our company from inception
until November 1986, and has again served as President of our company from March
1991 until present. Mr. Chatpar also served as Secretary from November 1986
until March 1991. Mr. Chatpar has also served as a director since inception. Mr.
Chatpar founded our company in 1983 as a successor to a Canadian corporation of
the same name, which he founded in 1982. Mr. Chatpar is primarily responsible
for developing our proprietary technology and managing our company, including
its business development and marketing functions. Mr. Chatpar holds a B.Tech
(honors) degree in Electrical Engineering from the Indian Institute of
Technology, Bombay, India and an M.S. degree in Electrical Engineering from the
University of Waterloo, Canada.
Jack P. Dorfman
joined our company as a Director in November 1993, and
has served as Secretary from October 1995 until March 2000. Mr. Dorfman has
otherwise been retired since June 1996.
Terry L. Jones
has served as a Director of our company since November
1997. He has been the President of Syndicated Communications, Inc., or Syncom, a
communications venture capital investment company, since 1990. Mr. Jones serves
in various capacities, including director, president, general partner and vice
president, for various other entities affiliated with Syncom. He also serves on
the Board of Directors of Radio One, Inc. Mr. Jones earned his B.S. degree from
Trinity College, his M.S. from George Washington University and his M.B.A. from
Harvard Business School.
There are no family relationship among our directors and officers. All our
executive officers are appointed by and serve at the discretion of the board of
directors. All our executive officers and key employees are at-will
employees.
Section 16(a) of the Securities Exchange Act of 1934, as amended, or the 1934
Act, requires our directors and executive officers, and persons who own more
than ten (10%) percent of a registered class of our equity securities, to file
with the SEC initial reports of ownership and reports of changes in ownership of
our common stock and other equity securities in us. Reporting persons are
required by SEC regulations to furnish our company with copies of all Section
16(a) forms they file. To our knowledge, based solely on our review of the
copies of such reports furnished to us, all such persons, on a timely basis,
filed the reports required by Section 16(a) of the 1934 Act.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our company's common stock as of October 9, 2007, for (i) each
person or group that is known to us to be a beneficial owner of more than 5% of
the outstanding shares of our common stock, (ii) each of the named officers and
directors, and (iii) all directors and executive officers of our company as a
group. Except as otherwise indicated, we believe that such beneficial owners,
based on information furnished by such owners, have sole investment and voting
power with respect to such shares, subject to community property laws, where
applicable.
Name and Address of Beneficial Owner
|
Number of Shares of
Common Stock
Owned
|
|
Percentage Owned (1)(2)
|
J.C. Chatpar (3)
c/o Cyber Digital, Inc.
400 Oser
Avenue
Hauppauge, NY 11788
|
31,558,318
|
|
47.6%
|
Jack P. Dorfman (4)
|
420,000
|
|
*
|
Terry L. Jones (5)
|
1,501,845
|
|
2.3%
|
Prem Chatpar (6)
|
7,399,611
|
|
11.2%
|
Laurus Master Fund, Ltd. (7)
|
3,200,000
|
|
9.5%
|
All directors and executive officers as a group
(three (3) persons)
|
33,480,163
|
|
50.5%
|
* - denotes less than 1%
(1) For purposes of computing the percentage of outstanding shares of our
common stock held by each person or group of persons named above, any security
which such person or persons have or have the right to acquire within 60 days is
deemed to be outstanding, but is not deemed to be outstanding for the purpose of
computing the percentage of ownership of any other person.
(2) Assumes the exercise of all of the outstanding options and warrants to
purchase in the aggregate 19,277,350 and 13,477,500, respectively, shares of our
common stock.
(3) Includes 13,328,500 shares as to which Mr. J.C. Chatpar holds
non-qualified stock options, which are exercisable at any time. Includes
warrants to purchase 10,672,500 shares. Excludes 4,500,000 shares, as to which
Mr. J.C. Chatpar holds non-qualified stock options, which are not exercisable,
until certain conditions are attained. Does not include 714,000 shares owned by
his wife, Sylvie Chatpar, to which shares Mr. J.C. Chatpar disclaims beneficial
ownership.
(4) Includes 330,000 shares as to which Mr. Dorfman holds a non-qualified
stock option, which are exercisable at any time. Does not include 540,000 shares
owned by his wife, Sandra Dorfman, to which shares Mr. Dorfman disclaims
beneficial ownership.
(5) Mr. Terry Jones is a general partner of a limited partnership that is the
general partner of Syndicated Communications Venture Partners III, L.P., a fund
which, on April 14, 1998, converted all of its outstanding Series B-1 preferred
stock into 1,291,845 shares of our common stock at a conversion price of $1.93
per share. Includes 210,000 shares as to which Mr. Jones holds non-qualified
stock options which are exercisable at any time.
(6) Includes warrants to purchase 2,745,000 shares. Mr. Prem Chatpar is an
individual shareholder and is the brother of Mr. J.C. Chatpar.
(7) Laurus holds a secured convertible term note that is convertible into
3,200,000 shares of common stock. The note contains a provision know as an
"exercise cap" which prohibits the holder of the note (and its affiliates) from
converting the note to the extent that, giving effect to such conversion or
exercise, such holder would beneficially own in excess of 9.99% of our company's
outstanding common stock. The holder can waive this 9.99% limit, but such waiver
will not become effective until the 61st day after such notice is delivered to
our company.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 100,000,000 shares, of which
90,000,000 shares are common stock, par value $0.0066667 per share, of which
33,529,813 shares were issued and outstanding at October 9, 2007, and 10,000,000
shares are preferred stock, par value $0.05 per share. At October 9, 2007, 310
shares of our Series C Preferred Stock were issued and outstanding and 50 shares
of our Series E Preferred Stock were issued and outstanding.
Common Stock
Holders of shares of our common stock are entitled to one vote for each share
on all matters to be voted on by our shareholders. Holders of our common stock
do not have cumulative voting rights. Holders of our common stock are entitled
to share ratably in dividends, if any, as may be declared from time to time by
our board of directors in its discretion from funds legally available therefor.
In the event of a liquidation, dissolution or winding up of our company, the
holders of our common stock are entitled to share pro rata in all assets
remaining after payment in full of all liabilities. All of the outstanding
shares of our common stock are fully paid and non-assessable.
Holders of our common stock have no preemptive rights to purchase our common
stock. There are no conversion or redemption rights or sinking fund provisions
with respect to our common stock
Preferred Stock
We are authorized to issue 10,000,000 shares of our preferred stock which may
be issued in one or more series with such rights and designations, including
without limitation, voting powers, preferences and relative, participating,
optional or other special rights and qualifications, limitations and
restrictions thereof, conversion rights, liquidation privileges, dividend
rights, redemption price or prices and terms of redemption, including sinking
funds provision, as may be determined by the action of the board of director
without any further vote or action by our shareholders.
Series C Preferred Stock
At October 9, 2007, 310 shares of our Series C Preferred Stock were issued
and outstanding. Our Series C Preferred Stock entitles each holder thereof
dividends at a rate of 6% of the original issue price per annum and is
convertible into restricted shares of our common stock at a price to be
determined based upon the following:
-
if the notice of conversion is given within ninety days of issuance of the
preferred shares, the conversion will be $4.00 per restricted common share,
adjusted for 3-for-2 stock split effective June 26, 2006; or
-
if the notice of conversion is given after ninety days of the issuance of
the preferred shares, the conversion price will be the lesser of the fixed
conversion price of $4.00 per restricted common share or 85% of the average
closing price of our common stock for the five trading days prior to the
conversion date, but not less than 50% of the fixed conversion price.
The company has a right to redeem the Series C Preferred Stock at a price of
120% of the original Series C Preferred Stock issue price, plus all unpaid
dividends at the date of redemption. Holders of Series C Preferred Stock do not
vote with our common shareholders, other than as required by New York
law.
Series E Preferred Stock
At October 9, 2007, 50 shares of our Series E Preferred Stock were issued and
outstanding. Our Series E Preferred Stock entitles each holder thereof to
receive a cumulative annual dividend equal to 25% of the Series E Preferred
Stock issue price. The dividend shall be payable in cash or in shares of our
common stock upon conversion or at the end of the three-year term.
The Series E Preferred Stock is convertible into restricted shares of our
common stock at a price to be determined based upon the following:
-
if the notice of conversion is given within one year of issuance of the
preferred shares, the conversion will be $1.33 per restricted common share,
adjusted for 3-for-2 stock split effective June 26, 2006; or
-
if the notice of conversion is given after one year of the issuance of the
preferred shares, the conversion price will be the lesser of the fixed
conversion price of $1.333 per restricted common share or 100% of the average
closing price of our common stock for the ten trading days prior to the
conversion date, but not less than 10% of the fixed conversion price.
We have the right to redeem the Series E Preferred Stock at a price of 100%
of the original Series E issue price, plus all unpaid dividends at the date of
redemption. Holders of Series E Preferred Stock do not vote with our common
shareholders, other than as required by New York law.
INTEREST OF NAMED EXPERTS AND
COUNSEL
The financial statements included in this prospectus have been duly audited
by Blanchfield, Kober & Company, P.C., independent auditors, and have been
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
The legality of the shares being offered will be passed upon by Kramer Levin
Naftalis & Frankel LLP. Such firm holds shares of our common stock.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
To the fullest extent that limitations on the liability of directors and
officers are permitted by the New York Business Corporation Law, no director or
officer of our company shall have any liability to our company or its
shareholders for damages. This limitation on liability applies to events
occurring at the time a person serves as a director or officer of the Company
whether or not such person is a director or officer at the time of any
proceeding in which liability is asserted.
Our company shall indemnify and advance expenses to its currently acting and
its former directors to the fullest extent that indemnification of directors is
permitted by the New York Business Corporation Law. Our company shall indemnify
and advance expenses to its officers to the same extent as its directors and to
such further extent as is consistent with law. The Board of Directors may,
through a by-law, resolution or agreement, make further provisions for
indemnification of directors, officers, employees and agents to the fullest
extent permitted by the New York Business Corporation Law.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 ("the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the small business issuer of expenses incurred or paid by a director,
officer or controlling person of the small business issuer in the successful
defense of any action, suit or proceeding) is asserted by a director, officer or
controlling person in connection with the securities being registered, the small
business issuer will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
CERTAIN RELATIONSHIPS AND TRANSACTIONS AND
DIRECTOR INDEPENDENCE
Related Party Transactions
See "Certain Relationships and Related Transactions."
Director Independence
The Board has determined that each of Messrs. Dorfman and Jones
is an independent director under applicable SEC rules.
DESCRIPTION OF BUSINESS
OVERVIEW
We are a designer, software developer and manufacturer of a range of unique
distributed digital-voice-switching and Internet Protocol (IP) broadband
infrastructure equipment such as Class 5 local digital central office switches,
Class 4 regional tandem digital central office switches, IP soft-switches,
routers, gateways, firewalls, voice-over IP (VoIP) and virtual private network
(VPN) systems for public-switched-telephone-network (PSTN) operators and
Internet Service Providers (ISP) worldwide.
With our latest generation of software based switching systems, we can offer
affordable voice and broadband data local switching services. Our mission is to
become (i) a leading alternative local switching service provider offering
aggregated VoIP and broadband services in the United States, and (ii) a
cost-effective supplier of our digital voice switches and broadband data
equipment to developing countries. In the U.S., we expect to generate recurring
revenues from selling aggregated VoIP and managed IP digital broadband services
to small businesses and residential customers. We believe that we are one of the
first companies to offer aggregated VoIP services on existing telephone lines
without requiring any additional customer premise equipment (CPE) or any changes
to current wiring or network connection.
Unlike our competitor's systems, our systems are neither labor nor capital
intensive but are software intensive. This capability, in contrast to that of
our competitor's, makes our systems more compact, less power consuming and more
affordable. Our digital voice switching and Internet Protocol (IP)
infrastructure systems are based on our proprietary operating system software,
which provides high performance, reliability and functionality. We own the
source code of our operating system. This allows us the flexibility to meet
market demands without depending on third party operating systems. We believe
that we are one of a very few companies in the world with proprietary hardware
and software technology of distributed digital switching. We have expended over
$20 million dollars on the development of our rock solid proprietary
state-of-the-art technologies, which is built on 24 years of experience. Our
systems are ideally suited for the U.S. pursuant to the recent Federal
Communications Commission (FCC) rulings.
Beginning March 2005, FCC decided to phase out UNE-P rules that forced the
Bells to lease its local switching networks to competitive local exchange
carriers (CLECs) at cut-rate prices. FCC further rules that CLECs must migrate
all customers to non-Bell networks by March 2006 or pay rates to the Bells for
using their local switching facilities. Today, CLECs lease 17 million lines for
$4.5 billion per year from the Bells, creating an immediate market opportunity.
Moreover, the Bells own 173 million lines creating a huge migration services
opportunity for many years to come. This ruling favors us to evolve as an
alternative local switching network provider, that is, as an UNE-P migration
service provider, to these CLECs as well as directly sell aggregated VoIP and
digital broadband services to small businesses and residential customers.
We intend to be the leading company to offer local switching (UNE-P)
migration services to CLECs by deploying our vast array of local voice and IP
broadband data switching infrastructure systems by co-locating our systems in
various Bell central offices. In anticipation of this, we signed an agreement
with Level 3 Communications who will provide for global voice and data
termination services to all traffic originating on our local switching systems.
In the U.S., providers of local switching networks retain substantial portion of
the recurring revenues as call origination services, and payout insignificant
portion for call termination services. We will provide our local switching
(UNE-P) migration services to CLECs at affordable rates on recurring basis for
local, long distance and international calls as well as broadband Internet
access, aggregated VoIP and virtual private network (VPN) services.
We were formed on April 4, 1983, in the state of New York. Our executive
offices are located at 400 Oser Avenue, Suite 1650, Hauppauge, NY 11788 and our
telephone number is (631) 231-1200. Our Website is
www.cyberdigitalinc.com.
INDUSTRY BACKGROUND
International Target Market
The tremendous growth of the Internet has revolutionized the communications
industry. Today, the Internet connects millions of people around the world who
are able to share information instantly without geographic boundaries. The
Internet is bound only by the voice-network upon which it resides; without this
network in place users cannot take advantage of powerful Internet applications.
In developed countries, such as the United States, the requisite voice
network is already in place, hence the number of Internet users is growing at
unprecedented rates. In developing countries, there is some basic voice network,
leaving many of these nations struggling to take part in the Internet
revolution.
The demand for Internet applications, such as distance learning, municipal
virtual private networks and medical/emergency communications systems have
induced developing countries to aggressively invest in communications
infrastructure. These countries must first build a basic voice network, the
platform of the Internet, before they can become part of this information
revolution.
Unlike technologically advanced countries, where the existing public voice
telephone network consists of monolithic centralized digital switches,
developing countries are seeking an alternative cost-effective approach, such as
our distributed digital switching systems with wireless backhaul network
connectivity. We believe that the trend in the telecommunications industry
towards distributed switching from monolithic centralized switching is similar
to the trend in the computer industry towards distributed networking personal
computers from monolithic centralized mainframe computers. Similar to the
computer industry where personal computing has been brought closer to the users,
our distributed switching systems are also being installed closer to groups of
subscribers, thereby dramatically reducing the cost of cabling. We believe that
with our distributed switching system with wireless backhaul capability, the
public telephone operating companies in developing countries can rapidly provide
telephone services to their customers. It is substantially easier to install
small, distributed switches than large monolithic centralized switches with
their corresponding long cabling infrastructure. We believe that our digital
voice switches are well suited for developing countries.
Domestic Market
We believe that an emerging market opportunity has been created in the United
States due to the recent FCC policy, as follows:
Emerging Market Opportunity in the FCC Regulated Market
On June 15, 2004, Supreme Court approved the FCC's new ruling on phone policy
released on August 21, 2003, requiring the Bells' competitors, such as
competitive local exchange carriers (CLECs) and long distance carriers (LDC), to
use their own voice and data switches for connecting calls instead of leasing
the Bells' voice and data switches (hereinafter referred to as "UNE-P Phase Out
Policy"). UNE-P is an acronym for Unbundled Network Element - Platform, where
Platform means the Bells' voice and data switches, the leasing of which is being
phased out.
Prior to this UNE-P Phase Out Policy, there was no incentive for
CLECs or LDCs to build their local voice and data switching networks in the
U.S
. On October 12, 2004 the Supreme Court declined to hear an appeal by
AT&T and MCI and other CLECs that had requested access to the Bells' voice
and data switches. As a result of the court's and FCC's decisions, AT&T and
MCI have pulled back in their marketing of residential and small business
telephone services. On December 15, 2004, FCC issued the UNE-P Phase Out Policy
and associated tariffs with effectiveness beginning March 11, 2005. We believe
that the UNE-P Phase Out Policy has created an emerging growth market
opportunity, because CLECs and LDCs are forced to allocate capital towards
building their local switching infrastructure or obtain UNE-P migration services
from companies, like Cyber Digital, that are envisioning to enter this market.
As of now, there are no UNE-P migration service providers in the U.S.
The UNE-P Phase Out Policy enforces the CLECs, LDCs, and ISPs collectively as
CSPs to transition off to other local telephone and broadband switching
infrastructure instead of using the Bells' local switching networks. This is
expected to create a metamorphosis in local voice and data switching
infrastructure expansion by Cyber Digital as a nascent UNE-P migration provider
to CSPs. The economics of building local switching networks is vastly different
from that of long distance networks. The capital investment required to build a
local switching networks is five to six times higher than the capital costs of
long distance networks, because such networks must extend all the way into the
offices and homes of their customers. The UNE-L policy permits Cyber Digital to
lease the copper wires to subscriber premises at cut-rate prices from the Bells.
This would allow us to co-locate our switches in numerous central offices owned
by the Bells to offer UNE-P migration service to CSPs. Therefore, we believe
that the FCC's UNE-P Phase Out Policy has created an enormous market opportunity
in the UNE-P migration service provision area for us.
The following is the full News Release issued by FCC on December 15, 2004,
which became effective as of March 11, 2005:
FOR IMMEDIATE RELEASE:
December 15, 2004
FCC ADOPTS NEW RULES FOR NETWORK UNBUNDLING OBLIGATIONS OF
INCUMBENT LOCAL PHONE CARRIERS
New Network Unbundling Rules Preserve Access to Incumbents'
Networks by Facilities-Based Competitors Seeking to Enter the Local
Telecommunications Market
Washington, D.C. - The Federal Communications Commission today adopted rules
concerning incumbent local exchange carriers' (incumbent LECs') obligations to
make elements of their network available to other carriers seeking to enter the
local telecommunications market. The new framework builds on actions by the
Commission to limit unbundling to provide incentives for both incumbent carriers
and new entrants to invest in the telecommunications market in a way that best
allows for innovation and sustainable competition.
The rules directly respond to the March 2004 decision by the U.S. Court of
Appeals for the D.C. Circuit which overturned portions of the Commission's
Unbundled Network Element (UNE) rules in its Triennial Review Order. We provide
a brief summary of the key issues resolved in today's decision below.
-
Unbundling Framework.
We clarify the impairment standard adopted in
the
Triennial Review Order
in one respect and modify its application
in three respects.
First
, we clarify that we evaluate impairment with
regard to the capabilities of a
reasonably efficient
competitor.
Second
, we set aside the
Triennial Review Order
's "qualifying
service" interpretation of section 251(d)(2), but prohibit the use of UNEs
for the provision of telecommunications services in the mobile wireless and
long-distance markets, which we previously have found to be competitive.
Third
, in applying our impairment test, we draw reasonable inferences
regarding the prospects for competition in one geographic market based on
the state of competition in other, similar markets.
Fourth
, we
consider the appropriate role of tariffed incumbent LEC services in our
unbundling framework, and determine that in the context of the local
exchange markets, a general rule prohibiting access to UNEs whenever a
requesting carrier is able to compete using an incumbent LEC's tariffed
offering would be inappropriate.
-
Dedicated Interoffice Transport.
Competing carriers are impaired
without access to DS1 transport except on routes connecting a pair of wire
centers, where both wire centers contain at least four fiber-based
collocators or at least 38,000 business access lines. Competing carriers are
impaired without access to DS3 or dark fiber transport except on routes
connecting a pair of wire centers, each of which contains at least three
fiber-based collocators or at least 24,000 business lines. Finally,
competing carriers are not impaired without access to entrance facilities
connecting an incumbent LEC's network with a competitive LEC's network in
any instance. We adopt a 12-month plan for competing carriers to transition
away from use of DS1- and DS3-capacity dedicated transport where they are
not impaired, and an 18-month plan to govern transitions away from dark
fiber transport. These transition plans apply only to the embedded customer
base, and do not permit competitive LECs to add new dedicated transport UNEs
in the absence of impairment. During the transition periods, competitive
carriers will retain access to unbundled dedicated transport at a rate equal
to the higher of (1) 115% of the rate the requesting carrier paid for the
transport element on June 15, 2004, or (2) 115% of the rate the state
commission has established or establishes, if any, between June 16, 2004 and
the effective date of this Order.
-
High-Capacity Loops.
Competitive LECs are impaired without access to
DS3-capacity loops except in any building within the service area of a wire
center containing 38,000 or more business lines and 4 or more fiber-based
collocators. Competitive LECs are impaired without access to DS1-capacity
loops except in any building within the service area of a wire center
containing 60,000 or more business lines and 4 or more fiber-based
collocators. Competitive LECs are not impaired without access to dark fiber
loops in any instance. We adopt a 12-month plan for competing carriers to
transition away from use of DS1- and DS3-capacity loops where they are not
impaired, and an 18-month plan to govern transitions away from dark fiber
loops. These transition plans apply only to the embedded customer base, and
do not permit competitive LECs to add new high-capacity loop UNEs in the
absence of impairment. During the transition periods, competitive carriers
will retain access to unbundled facilities at a rate equal to the higher of
(1) 115% of the rate the requesting carrier paid for the transport element
on June 15, 2004, or (2) 115% of the rate the state commission has
established or establishes, if any, between June 16, 2004 and the effective
date of this Order.
-
Mass Market Local Circuit Switching.
Incumbent LECs have no
obligation to provide competitive LECs with unbundled access to mass market
local circuit switching. We adopt a 12-month plan for competing carriers to
transition away from use of unbundled mass market local circuit switching.
This transition plan applies only to the embedded customer base, and does
not permit competitive LECs to add new switching UNEs. During the transition
period, competitive carriers will retain access to the UNE platform
(
i
.
e
., the combination of an unbundled loop, unbundled local
circuit switching, and shared transport) at a rate equal to the higher of
(1) the rate at which the requesting carrier leased that combination of
elements on June 15, 2004, plus one dollar, or (2) the rate the state public
utility commission establishes, if any, between June 16, 2004, and the
effective date of this Order, for this combination of elements, plus one
dollar.
Action by the Commission, December 15, 2004 by Order on Remand (FCC 04-290).
Chairman Powell, Commissioners Abernathy and Martin, with Commissioners Copps
and Adelstein dissenting. Chairman Powell, Commissioners Abernathy, Copps and
Adelstein issuing separate statements.
We believe that for the first time in our history, market opens for our
digital voice switches and broadband systems for the creation of local switching
network services, especially referring to
Mass Market Local Circuit Switching
and High-Capacity Loops
. We believe that metamorphosis in wireline local
voice and broadband switching infrastructure expansion will begin soon and will
support our growth for many years. We believe that a high growth market
opportunity has been created by the UNE-P Phase Out Policy, because CLECs and
LDCs are forced to allocate capital towards building their local switching
infrastructure or seek for such UNE-P migration services from other providers,
such as Cyber Digital.
These competitors CLECs and LDCs have lost the battle with the Bells.
Beginning year 2005, the Bells will begin to virtually shut off access to their
local voice and data switches or the CLECs must pay exorbitant rates to the
Bells for using their local switching facilities. The local voice switch access
charges will be rising dramatically, making local voice switch ownership by
CLECs and LDCs an increasingly key factor for their future or seek UNE-P
migration services from other providers. However, CLECs, LDCs and nascent UNE-P
migration providers would be able to lease the copper wires to subscriber
premises at cut-rate prices from the Bells, under the UNE-L policy. UNE-L is an
acronym for Unbundled Network Element - Line, where Line means the copper wires
to subscriber premises. This would permit CLECs, LDCs and nascent UNE-P
migration providers (such as Cyber Digital) to co-locate their voice and data
switches in the Bells' central offices. Hence, CLECs, LDCs and nascent UNE-P
migration providers must rapidly build their own local switching facilities and
networks. FCC further rules that CLECs and LDCs must also provide broadband data
services along with voice services. So also FCC mandates that Internet service
providers (ISP) must also provide voice along with broadband data services.
Hence, CLECs, LDCs and ISPs must build their own local voice and broadband
switching facilities and networks to serve their business and residential
customers or obtain such services from nascent UNE-P migration providers. This
means huge demand for our digital voice switches and broadband systems by
nascent UNE-P migration providers and competitive service providers (CSPs)
(hereinafter includes CLECs, LDCs and ISPs). We believe that combined power of
our digital voice switches and broadband Internet systems offers nascent UNE-P
migration providers and CSPs affordable one-stop solution for their local
switching needs.
We believe that we are at the threshold of the local telephone switching
metamorphosis in the U.S. According to data released by FCC, to-date less than 6
million local-loop switched lines were owned by the CSPs as compared to 163
million such lines owned by the Bells. Hereafter, CSPs have to continuously
invest, year after year, in bringing their local voice switching infrastructure
at par with those of the Bells or obtain such services from nascent UNE-P
migration providers such as Cyber Digital. We expect nascent UNE-P migration
providers and CSPs to increase their capital expenditures towards that end. We
intend to serve this high growth market, expected to be rising from almost zero
to $4.5 billion annually.
We believe that the telecommunication service provision business will be
rapidly consolidating in the next few years, especially in response to the UNE-P
Phase Out Policy by FCC. The distinction between the services offered by LDCs,
CLECs and ISPs are being eroded, and moreover, a greater emphasis is being
placed on the build out and ownership of local switching network for both voice
and broadband data. Since, the building of local switching networks is highly
capital intensive, we project that we are at the threshold of a local switching
networks metamorphosis and that it is expected to continue for many years. This
marks the beginning of the Next Revolution in telecommunication (i.e. the
deregulation of the local voice and data services) as a successor to the First
Revolution in January 1984 (i.e. the break-up of AT&T creating deregulation
of long distance service). During the last 20 years, LDCs such as Sprint, MCI,
and others have competed fiercely against AT&T by building their own long
distance networks. This has resulted in long distance charges to be about 30% of
a typical telephone bill. While, the local voice charges are about 70% today,
largely controlled by the Bells. We want to be the premier provider of UNE-P
migration services on wholesale basis to non-facilities based CSPs as well as
supplier of local voice and broadband switches to those CSPs electing to build
their own local networks. Moving forward, we see ourselves offering UNE-P
migration services to these CSPs at affordable rates instead of them obtaining
from the Bells at uneconomical rates.
CSPs must incorporate several fundamental changes into their current business
models to effectively compete with the Bells. In the aftermath of the telecom
meltdown and due to the UNE-P Phase Out Policy, the new facilities based CSPs
will emerge along with nascent UNE-P migration providers, offering business and
residential customers a broad range of voice and Internet scalable services and
solutions. CSPs and UNE-P migration providers will significantly lower the cost
of voice services, which are usage based, to their customers as the Bells
currently control it. However, CSPs will not be able to lower the cost of
Internet services using DSL, which are flat fee based, using "narrowband" Bells'
copper wires. CSPs and nascent UNE-P migration providers will have to offer
other more reliable broadband services based on carrier grade T1 (1.5 Mbps) to
T3 (45 Mbps) rates using private line (PPP) packet switching protocols as well
as Ethernet rates of 10/100 Mbps. According to FCC findings, the Bells have
artificially maintained very high tariffs for T1 and T3 transport. Hence, FCC
mandates the competition with the Bells in this area. Such broadband competition
is expected to enhance productivity for business-to-business e-commerce
applications. Hence, CSPs and nascent UNE-P migration providers will effectively
compete with the Bells by offering business and residential customers superior
network performance, reliability, security and applications.
Our CDCO, CTSX and CIAN systems are essential for CSPs and UNE-P migration
providers to effectively compete against the Bells. Our unique systems are
positioned to address the inherent problems facing the telecom market today:
-
CSPs and nascent UNE-P migration providers must build 'critical' local
wireline voice and data switching networks and ensure cost efficient, high
quality service to their customers .
-
Businesses demand greater cost reduction in voice services than broadband
data.
-
Businesses demand scalable broadband connectivity solutions, not offered
by the Bells.
-
The limitations of Dial-up, ISDN and DSL.
-
The emergence of Managed IP Private Line and Ethernet packet switched
"broadband" technology.
Competitive service providers (CSPs) and nascent UNE-P migration providers
must build 'critical' local wireline voice and data switching networks and
ensure cost efficient, high quality service to their customers.
Currently, virtually all local wireline switching networks are owned by the
Bells, which deliver 91.5% of the nations voice and data traffic. The Bells have
complete control over the installation, service and maintenance of this portion
of the network. As a result, CSPs face lengthy installations, maintenance errors
and frequent service interruptions. CSPs will not survive if they continue to
rely on their competitor's network. Due to the UNE-P Phase Out Policy, CSPs have
no choice but to build wireline local switching networks for both voice and data
by co-locating their switching equipment in the Bells' central offices or seek
for such UNE-P migration services from other providers. Our compact CDCO and
CTSX digital voice switches, and CIAN routers enable us (as UNE-P migration
provider) and CSPs to efficiently build next generation wireline local switching
voice and data networks, thus bypassing the Bells' switching network. Under the
UNE-L policy, by co-locating our CDCO, CTSX and CIAN gives us and CSPs complete
control over their local switching network and end their reliance on the Bells.
In the aftermath of the telecom meltdown, CSPs recognize the need to control the
local switching in order to maintain quality of service for their customers.
FCC's UNE-P Phase Out Policy further enforces CSPs to build their own local
switching networks for their customers instead of leasing such facilities from
the Bells or seek for UNE-P migration services from other providers.
Businesses demand greater cost reduction in voice services than broadband
data.
Since the divestiture of AT&T in 1984, businesses have seen dramatic cost
reduction in long distance voice services due to aggressive competition by LDCs
such as MCI and Sprint, who built their long distance networks. The Telecom Act
of 1996 favored broadband competition by allowing such carriers and ISPs to
add-on abundant IP enabled backbone networks that led to very low, flat fee
broadband rates. Currently, businesses find their local voice services costs to
be unjustifiably many folds higher than their long distance and broadband costs.
FCC's UNE-P Phase Out Policy is expected to encourage competition in this area
through greater investment in building local voice networks. To-date the Bells
have the monopoly of the local voice networks and there are no alternatives
available to businesses.
Businesses demand scalable broadband connectivity solutions, not offered by
the Bells.
Currently, the Bells utilize older technology that prohibits network access
scalability between T1 (1.5 Mbps) and T3 (45 Mbps). This rigid network structure
is cost prohibitive for many businesses that require broadband access between
this range. Our innovative CIAN router enables CSPs to offer businesses complete
scalability in this range for their broadband access needs. CSPs are able to
capture this market by utilizing our proprietary software technology embedded in
our CIAN router. In addition, CSPs benefit from our CIAN's ability to offer
control of local data switching within an area as well as cost savings derived
from local aggregation of services by co-locating our CIANs in the Bells'
central offices.
Limitations of Dial-up, ISDN and DSL
The vast majority of Internet users access data networks through slow dial-up
modems, an integrated services digital network (ISDN) line or a digital
subscriber line (DSL) line offering typically 56 Kbps, 128 Kbps and 640 Kbps
respectively. DSL technology is very sensitive to the quality of the existing
analog voice grade lines. Therefore, DSL service is severely limited by the
length of wire from the Bells' central office to a subscriber location. This is
generally less than 18,000 feet, which represents less than 45% of the total
market. This shortcoming is created by the Bells' existing analog voice grade
lines and is incurable. However, under the UNE-L policy, CSPs and UNE-P
migration providers will be able to lease from the Bells at cut-rate prices T1
and T3 digital carrier grade lines to their business customers. Our co-located
CIAN distribution router provides 1.5 Mbps (T1) to 45 Mbps (T3) or 10/100 Mbps
Ethernet broadband service without any distance limitations or degradation of
bandwidth.
Emergence of Managed IP Private Line and Ethernet Packet Switched "broadband"
Technology
Managed Internet Protocol (IP) enabled private-line (PPP) and Ethernet
(PPPoE) are packet-switching based "broadband" technologies that dramatically
increases the reliability of packet data transmission over standard T1 or T3
digital carrier grade copper lines. It also dramatically increases the
reliability of packet data transmission because of end-to-end integrity. We
believe IP enabled PPP or PPPoE packet-based networks are significantly more
efficient than traditional point-to-point networks, and allow end users to
connect to any location that can be assigned an IP address. Traditional
point-to-point networks, including the traditional telephone network and private
data networks, are less efficient because they require a dedicated connection
between two locations. Our CIAN router's IP enabled private-line or Ethernet
packet-based networks allow multiple users to share broadband access to
Internet.
OUR BUSINESS STRATEGY
Our strategy is to be a leading niche provider of UNE-P services to CSPs by
deploying our distributed digital voice and broadband data switching systems in
the United States. We intend to implement the following strategies to achieve
our goal:
Growth Through Acquisitions
Our industry is consolidating, creating merger and acquisitions opportunities
for us. Those entities that do not want to build their local switching networks
have no choice but to merge with those that have it or merge with those that
have the technology, such as Cyber Digital. Our strategy is to acquire those
CSPs who do not want to build their own local voice and broadband data switching
facilities despite the FCC's recent local switching phase-out ruling. While
these CSPs are, generally, excellent marketing companies and have already
established a customer base, they lack the technical and network engineering
aspects of building and maintaining local voice and data switching facilities,
which are among our core competences. These companies totally rely on the Bells
for their local switching needs and currently, face erosion of their customer
base due to FCC's recent rulings. We intend to acquire as many small to medium
sized profitable CSPs. Our objective is to roll-out our local switching services
nationally, which will take many years even through acquisitions.
Exploit Early Market Entrance
We intend to exploit our early market entrance by offering our UNE-P
migration services to numerous non-facilities based resellers (NFRs) and CSPs by
using our innovative local voice and broadband data switching systems. We expect
NFRs and CSPs will demand our services and technology for their UNE-P to UNE-L
migration. We believe that we are perhaps one of the first companies to
implement and offer a total solution that includes voice Time Division Multiplex
(TDM), broadband IP Frame Relay (FR), IP Private Line (PPP) and IP Ethernet
(PPPoE) technologies in one integrated cabinet using our CDCO, CTSX and CIAN
systems. With our systems, we can offer full range of voice and broadband data
services to business and residential customers of NFRs and CSPs without using
the Bells' local voice and data switching facilities. We believe that our UNE-P
migration services derived from our proprietary technology offers NFRs and CSPs
the unique opportunity to immediately reduce their network costs and increase
quality of service to their business and residential customers. In addition, we
have the advantage that we have already developed and tested our systems,
increasing the speed-to-market our UNE-P migration services.
Establish Market in High Density Areas
Pursuant to the UNE-P Phase Out Policy, we believe that revenues of CSPs from
business and residential customers will erode as the Bells cut into their
markets while also denying access to them. We intend to leverage the existing
customer relationships established by these NFRs and CSPs, especially in
high-density areas such as industrial parks, campuses, office complexes,
residential urban and inter-urban areas. We believe that we can provide on a
full service basis UNE-P migration services to NFRs and CSPs at affordable rates
for local voice and broadband network services with no investment on their part.
Hence, NFRs and CSPs would benefit from re-capturing, maintaining or gaining
customers without owning their local network. As value-added services, we would
help NFRs and CSPs, generate greater revenues by offering e-commerce solutions,
virtual private network services, secure email services, secure VPNs, video
conferencing and multimedia services. We believe that the entire
telecommunications service provision business will continue to consolidate from
several hundred to less than a hundred of NFRs and CSPs competing with the
Bells. We also believe that only those NFRs and CSPs will exist that either owns
their local switching networks or seek UNE-P migration services from companies
such as Cyber Digital. We believe that we could offer savings of 30% to NFRs and
CSPs, on wholesale basis, from rates they are currently accustomed to paying to
the Bells. The NFRs and CSPs would simply transfer all their current customer
accounts onto our UNE-P migration network. Our UNE-P migration network would be
neutral to and shared by any NFR and CSP, thereby eliminating stranded capital.
This would help us gain market share in this niche market quite rapidly, without
resorting to direct marketing to each customer or consumer, which could be
prohibitive in early stages of this emerging market.
Provide Superior Customer Service
As part of our strategy to serve and retain NFRs and CSPs, we intend to
provide superior maintenance and service of our switching systems at no cost to
them. Besides delivering high-quality systems that provide carrier-grade voice
and broadband services, we will provide remote maintenance on our installed
systems, 24 hours a day, seven days a week. Our objective in providing
outstanding service to our NFRs and CSPs is to provide a high level of customer
satisfaction, achieve customer loyalty and accelerate the adoption rate of our
UNE-P migration services for both voice and broadband data.
OUR RANGE OF DIGITAL VOICE SWITCHES
We offer a full array of distributed digital switching systems for modern
digital telecommunications applications and networks. These systems are Cyber
Distributed Central Office (CDCO) and Cyber Tandem Exchange (CTSX), primarily
for use by UNE-P migration providers and CSPs, who are forced to bypass the
Bells' local switching networks pursuant to the UNE-P Phase Out Policy. Our
commitment to research and development has enabled us to create new systems,
employing SS7 or C7 signaling. Most importantly, we have developed specialized
Advanced Intelligent Network (AIN) software for modern wireline, wireless and
fiber optic networks. We intend to constantly develop additional new
technologies and software for our systems.
Cyber Distributed Central Office
Our Cyber Distributed Central Office (CDCO) is designed to provide digital
voice communications to subscribers in densely populated urban areas. Intended
for Class 5 local central office exchange applications, CDCO features a modular
distributed architecture with condensed hardware elements, as it is primarily
driven by software. Our CDCO switching systems serve as the core of Integrated
Services Digital Networks (ISDN), wired and wireless services, microcellular
services, and personal communication services (PCS). The CDCO provides flexible
digital interfaces for microwave systems, copper wire metallic systems, radio
relay systems, wireless systems, fiber optic systems and satellite systems. Our
CDCO system consists of nodes connected by standard digital links, which permit
optimization of the network with respect to specific size, required traffic
capacity and desired applications. The modular nature of the nodal structure of
our CDCO provides an economical digital switching exchange from as little as a
few hundred lines to as many as several million subscriber lines of capacity.
The control functions of our CDCO system are totally distributed in
autonomous processing sub-systems or nodes. Node processors are loosely coupled
and exchange information through standardized inter-nodal communication digital
links. The distributed approach permits switching systems to be co-located at
the Bells' central offices as it is extremely compact and small. Moreover, a
failure in one node does not affect other nodes. In addition, the distributed
approach eliminates bottlenecks, as the system offers multiple routes for call
completion.
Cyber Tandem Exchange
Our Cyber Tandem Exchange (CTSX) serves as an inter-city exchange for long
distance voice and data trunk services as well as a regional trunk exchange
connecting to various local CDCO exchanges by fiber optic or digital wireline or
wireless transmission. Intended for Class 4 tandem exchange applications, CTSX
has only digital interfaces, which offer capacities ranging from 20 T1s to
20,000 T1s digital trunks. CTSXs are compact and can be co-located at the Bells'
central offices. Our proprietary Cybermesh software permits seamless operation
with synchronous optical networks (SONET) or point-to-multi-point digital
wireless networks. Our proprietary Cybermesh software allows all CTSXs connected
in a mesh to provide virtually non-blocking service with excellent traffic
handling capacity (not possible with centralized monolithic switches). We also
offer a version of CTSX strictly for international gateway functions for Class 3
applications, which utilizes our specialized proprietary software.
Cyber Rural Exchange
Our Cyber Rural Exchange (CRX) is a small distributed Class 5 central office
exchange, primarily intended for rural, remote or community telephone
applications. Our CRX is used by local telephone operating companies to provide
switched connections for local subscriber-to-subscriber communications and
subscriber to the long distance networks. Our CRX is cost effective for
applications requiring from a few hundred subscribers up to a few thousand
subscribers.
Cyber Switch Exchange
Our Cyber Switch Exchange (CSX) is a digital switching system designed for
use as a private branch exchange (PBX) for offices, universities, hospitals and
other large organizations.
OUR RANGE OF BROADBAND INTERNET PROTOCOL SYSTEMS
We have developed our Internet infrastructure systems such as Cyber Business
Internet Gateway (CBIG), Cyber Internet Access Network (CIAN) distribution
router, Cyber Firewall (CFW) IPSec based firewall appliance and Cyber Web Server
(CWEB). We intend to enhance our systems by new technologies and software when
the market requires.
Cyber Business Internet Gateway
Our Cyber Business Internet Gateway (CBIG) a powerful Internet Protocol (IP)
Frame Relay and Private Line based gateway that replaces many single function
equipment such as router, network address translator, Ethernet-to-T1 converter,
IP frame-relay and private-line equipment, CSU/DSU, firewall equipment, e-mail
server and web server. We believe that our CBIG gateway is unique in the
industry as it combines all the functions and features required by a
customer-end network in one box, about the size of a reference handbook. Our
CBIG dramatically increases the reliability of the customer-end network by
eliminating many such devices while also lowering the overall cost of network
acquisition by 40% to 50%.
Our CBIG offers built-in standard security features, making it what we
believe to be an ideal enterprise-wide virtual private network (VPN). The
firewalls are provided by IP filtering, IP masquerading and IP tunneling. Our
CBIG is based on PC architecture using Intel Pentium processors and Linux
Operating Software.
Cyber Internet Access Network
Our Cyber Internet Access Network (CIAN) is a high-end distribution
router/soft-switch, which permits numerous business users to simultaneously
access the Internet at a fixed committed bandwidth rate (CBR) on "always on"
basis. Our CIAN creates a 'Mini-POP' (Points of Presence) at co-location site of
the Bells' central offices and brings the Internet closer to users thus
eliminating bottlenecks, reducing network delays and increasing reliability. We
offer two models of CIANs. Our CIAN1 distribution router has the capacity of 0.5
Gbps and is suitable for T1 (1.5 Mbps) to T3 (45 Mbps) carrier grade
applications (for T-POPs). Our CIAN2 distribution router has the capacity of 1.0
Gbps and is suitable for Ethernet from 10 Mbps to 100 Mbps IP over Ethernet
grade applications (for E-POPs). Our CIAN distribution routers are specifically
designed to allow UNE-P migration providers and CSPs to build their local
broadband networks by using the UNE-L from the Bells. Our CIAN is based on PC
architecture using Intel Pentium processors and Linux Operating
Software.
Cyber Firewall
Our proprietary standalone Cyber Firewall (CFW) series IPSec firewall
appliance offers simple-do-it-yourself installation software for
business-to-business e-commerce secure access and virtual private network
applications. IPSec is an industry-wide standard for assuring the privacy,
integrity and authenticity of information crossing public IP networks. Adhering
to IPSec standards makes Internet "wiretapping" impractical. Based on our
proprietary software technology, our CFW IPSec firewall provides a
cost-effective way of creating an enterprise-wide virtual private network (VPN)
by enabling secure use of the Internet. Our CFW series firewall appliance is
standalone device totally independent of customer's computing operating system
platform. Our CFW is based on PC architecture using Intel Pentium processors and
Linux Operating Software.
Cyber Web Server
Our Cyber Web Server (CWEB) and Cyber Domain Name Server (CDNS) are based on
Linux Operating System and Intel Pentium processors. We believe that our servers
are robust and proven-in for high performance web applications.
CUSTOMER, SALES AND MARKETING
Internet Systems
Under the AT&T Alliance program, we provided Internet services to many
medium and small businesses in Boston area for a period of one-year ending
February 2001, when we terminated our agreement with AT&T due to
telecommunications meltdown. During this period we successfully tested all our
Internet systems, including CBIG, CIAN, CFW and CWEB, for both local-loop
digital broadband and VPN applications. Our Internet systems provided network
availability in excess of 99.999% when we provided Internet services in alliance
with AT&T. We believe that our systems are ideally suited for the
next-generation of local-loop digital broadband networks requiring increased
reliability, performance, scalability, interoperability and flexibility. Our
strategy is to provide UNE-P migration services using our Internet systems to
Internet service providers who are, generally, non-facilities reseller and lack
the technical ability or willingness to build the next-generation local-loop
digital broadband networks in the aftermath of the telecommunications meltdown
in the U.S.
Digital Voice Switches
To date, we have sold approximately 76 previous generations of our digital
voice switches to the defense agencies of the U.S. federal government and to
China serving over 60,000 lines.
We were selected, over established companies such as Alcatel and Siemens, to
provide Nigeria with a 10,000-line telephone network. Since we offer an
affordable telecommunications as well as Internet capability, the Nigerian
authorities have selected us as one of the suppliers of telephone and Internet
systems.
Due to March 2005 FCC UNE-P phase out policy, our strategy is to provide
UNE-P migration services with our latest generation of digital voice switches to
CSPs, who are, generally, non-facilities reseller and lack the technical ability
or willingness to build the next-generation local-loop digital voice networks in
the U.S.
COMPETITION
The competition in both VoIP and digital broadband services is intense.
Almost all VoIP service providers need a broadband connection through which they
provide VoIP service. They cannot provide VoIP services on existing telephone
lines unless converted to DSL, a costly network conversion process. Moreover,
current VoIP deployments can handle one or two telephone line service and cannot
serve small businesses with multi-line analog trunks. Our unique technology
allows us to serve small businesses by enabling their analog trunk lines to be
converted to an aggregated VoIP platform. Our aggregated VoIP technology can
also serve mass markets comprising of residential users without requiring any
changes to current wiring or network connection. Our aggregated VoIP service is
provided on our managed secure private IP network and does not use the public
Internet. We also intend to offer carrier grade managed IP broadband service on
T1 or multi-T1s to small businesses, similar to the offerings of Cbeyond
Communications, at lower prices than our competitors.
Digital Voice Switches for UNE-P Migration Services
Currently, there is no direct competition in providing UNE-P migration
services or supplying digital voice switches for the UNE-P migration services
due to the newness of this market. However, there is indirect competition by DSL
equipment suppliers that co-locate equipment in central offices for broadband
services. Since, DSL cannot provide the full array of voice and special access
services as required by businesses, minimal competition from DSL equipment
suppliers is expected. Since, our competitor's digital voice switches are both
bulky and heavy and cannot be co-located in the Bells' central offices, we find
ourselves with limited competition in this upcoming high growth market. We
believe that we are uniquely poised to take significant part of this market. The
telecommunications and related networking industries are characterized by
intense competition. We compete with numerous well-established foreign and
domestic companies, many of which possess substantially greater financial,
marketing, personnel and other resources than us. These companies have
established reputations for success in the development, sale and service of
digital switching and networking and related products.
Systems that perform many of the functions similar to our CDCO and CTSX
digital voice switches are readily available from a limited number of
competitors, namely Alcatel-Lucent Technologies, Nortel Networks, Alcatel and
Siemens. However, our competitors systems are based on previous generation
single-function monolithic centralized switching technology offering poor
reliability, low performance, no scalability, no flexibility and are unsuitable
for the UNE-P migration services that requires co-location at the Bells' central
offices. Furthermore, these systems are large in physical size with fixed
capacity, suffer from stranded capital, consume more power, and are cumbersome
to use with modern wireless and optical backhaul network technologies. We have
developed our systems on a next generation multi-function distributed switching
technology offering superior reliability, performance, scalability and
flexibility. Our systems offer modular growth in increments of 1,000 to
unlimited number of subscribers and typically occupy 1/100
th
the
space that of our competitor's offerings; making our systems ideally suited for
co-location in the Bells' central offices for UNE-P migration services. Most
importantly, we have developed specialized software for modern wireless and
optical backhaul network technologies, such as our CyberMesh software. We can
easily and rapidly implement future advancements in our systems through
software. On the other hand, our competitors also have the research and
development capabilities, and financial and technical resources necessary to
enable them to respond to technical advances as well as evolving industry
requirements and standards.
Unlike the existing Bells' public voice telephone network that consists of
monolithic centralized digital switches, the CSPs will be seeking for an
alternative cost-effective approach, such as our CDCO and CTSX distributed
digital switching systems. We believe that the upcoming trend in the
telecommunications industry towards distributed switching for local switching
networks from monolithic centralized switching will follow a similar trend in
the computer industry towards distributed networking personal computers from
monolithic centralized mainframe computers, which began the PC revolution in
1980s. We believe that with our distributed switching systems, the CSPs or
nascent UNE-P migration service provider can rapidly provide telephone services
to their customers by migrating from UNE-P to UNE-L. It is substantially easier
to install small, distributed switches than large monolithic centralized
switches with their corresponding long cabling infrastructure. We believe that
our digital voice switches are well suited for the local switching needs of CSPs
or nascent UNE-P migration service providers.
We believe that our systems have the following three strengths:
-
the installed cost of our digital voice switches (wireless backhaul or
wireline) for local switching applications is less than those of the
competition;
-
our switches can be co-located at the Bells' central offices and put
into service rapidly, and
-
distributed architecture of our switches eliminates stranding capacity
and capital.
Broadband Systems For UNE-P Migration Services
The Internet related networking products business is characterized by intense
competition. We compete with numerous well-established foreign and domestic
companies, many of which possess substantially greater financial, marketing,
personnel and other resources than we do. These companies have established
reputations for success in the development, sale and service of Internet
products.
Currently, there is limited competition in the UNE-P broadband data migration
services market due to the newness of this market. Cisco Systems and others are
focusing on increasing the bandwidth capacity of their existing centralized IP
backbone core routers i.e. increasing the bandwidth of the POPs. Our focus is to
introduce an intermediate stage distribution router or Mini-POP on co-location
basis at the Bells' central offices. This provides nascent UNE-P migration
providers and CSPs with an alternate to the Bells' local broadband switching
network, which is being phased out pursuant to the UNE-P Phase Out Policy. Our
solution will alleviate congestion of IP data and TDMoIP/MPLS/E traffic between
customer-end point and POP. In addition, CSPs will be able offer FR or PPP with
scalable bandwidth from T1 to T3 as well as Ethernet speeds up to 100 Mbps. Our
CIANs are ideally suited for co-location at the Bells' central offices because
of small size when compared to separate centralized routers and softswitches.
Our CIAN is an integrated distribution softswitch plus router that by software
handles various IP broadband technologies and protocols including but not
limited to Frame Relay, Private Line, PPP, PPPoE, TDMoIP, MPLS, etc.
PROPRIETARY TECHNOLOGY
We do not hold any patents or copyrights and have no patent or copyright
applications pending. We regard our software technology and certain components
of our system hardware as proprietary and rely for protection upon copyright and
trade secret laws and confidentiality agreements with our employees. In
addition, we require our customers to enter into a license and confidentiality
agreement permitting the customer the exclusive use of the system operating
software, which is furnished to the customer in object or binary form only.
We believe that these protections are sufficient to protect our rights to our
systems and software. Despite these protections, however, it is possible that
competitors, employees, licensees or others may copy one or more of our systems
or our technology or obtain information that we regard as proprietary. In
addition, there can be no assurance that others will not independently develop
systems or technologies similar to those of ours, that confidentiality
agreements will not be breached or that we will have adequate resources to
protect our proprietary technology. We believe that because of the rapid pace of
technological change in the digital switching and networking industries,
protection for our systems is less significant than the knowledge, ability and
experience of our employees, the frequency of product enhancements and the level
of service and support provided to customers by us.
GOVERNMENT REGULATIONS AND INDUSTRY STANDARDS
The telecommunications and related networking industries in which we compete
are highly regulated in both the United States and internationally. Imposition
of public carrier tariffs and taxation of telecommunications services could
materially adversely affect demand for our systems. Furthermore, regulation or
deregulation of public carrier services by the United States and other
governments, including permitting local carriers to manufacture switching
equipment, may determine the extent to which we will be able to penetrate
markets in the United States and internationally and may result in significantly
increased competition, which would significantly impact our future operating
results. In addition, our systems must comply with equipment, interface and
installation standards promulgated by communications regulatory authorities,
including the Federal Communications Commission.
We are required to obtain a license from the Department of Commerce prior to
exporting to certain countries. A denial of an export license to us, however,
would probably be based upon a policy, which would also affect other U.S.
companies exporting similar systems.
Industry standards organizations, such as International Telephone Union
("ITU"), Telcordia (Bellcore) in the U.S., and Internet Engineering Task Force
("IETF") have created committees to address the matter of standards within the
telecommunications and Internet industries. The purpose of such standards is to
facilitate the inter-operability of products from various vendors and, through
standardization, create a competitive environment, which is anticipated to
result in lower product costs. During the past few years, many new standards
have been adopted and more are pending. The International Standards Organization
(ISO), one of the primary standard setting bodies in the communications
industry, has developed a framework for network standards called the Open System
Interconnection Reference Model (the "OSI Model"). The OSI Model represents a
standard approach by which information can be communicated throughout a network,
so that a variety of independently developed computer and communications devices
can inter-operate. The design of our systems incorporates the OSI Model and
accommodates most existing and pending ISDN, AIN, SS7, C7, X.25, Frame Relay,
Private Line, and IPSec standards, including applicable ITU, Telcordia
(Bellcore) and IETF specifications. In most foreign countries, government
departments or ministries set industry standards.
Changes in government policies, regulations and interface and installation
standards or industry standards imposed by domestic and foreign carriers in the
future could require our company to alter methods of operation, resulting in
additional costs, which could have a material adverse effect on our
company.
PRODUCTION AND SUPPLY
We are engaged in manufacturing, software programming, assembly, system
testing and quality assurance at our facility in Hauppauge, New York. Our
operations involve the creation of the required system software, the inspection
of system components manufactured by third parties, programming of microchips
and microprocessors, assembly of the components of the system hardware and
quality control and testing to certify final performance specification. We
believe that we have sufficient excess production capacity to satisfy any
increased demand for our systems in the foreseeable future.
We are dependent on third-party manufacturers for the production of all of
the component parts incorporated into our systems. We purchase our component
parts from numerous third-party manufacturers and believe that numerous
alternative sources of supply for most component parts are readily available,
except for a few semiconductor components purchased from single source vendors.
These are embedded processors and Pentium processors from Intel Corp.,
programmable gate array chips from Altera Corp., and certain telecom chips from
Motorola, Inc., Rockwell Semiconductors Systems and PMC-Sierra Corp. If their
respective manufacturers discontinue these, we would be required to redesign
some of our systems by using other vendors' components, which could cause delays
in delivery of systems. We believe that alternative sources of supply for such
components are available. We are substantially dependent on the ability of our
suppliers, among other things, to satisfy performance and quality specifications
and dedicate sufficient production capacity for parts within scheduled delivery
times. We do not maintain contracts with any of our suppliers. We purchase
components pursuant to purchase orders placed from time to time in the ordinary
course of business. Our ability to deliver systems on timely and competitive
basis could be adversely affected due to failure or delay in delivery of parts
caused by our suppliers.
We offer a one-year warranty for sales covering operating defects, during
which period we will replace parts and make repairs to the system components at
our expense.
RESEARCH AND DEVELOPMENT
Since the inception we have devoted substantial resources to the design and
development of our systems. For the fiscal years ended March 31, 2007 and 2006,
we expended approximately $25,000 and $18,269, respectively, on research and
development. For the past few years, we substantially reduced our research and
development expenditures due to lack of capital. Although our systems are fully
developed such as our CDCO, CTSX, CRX, CSX, CBIG, CIAN, CFW and CWEB, we are
continually seeking to refine and enhance our systems, including enhancements to
comply with emerging regulatory or industry standards or the requirements of a
particular customer or country. We believe that with our latest generation of
CDCO, CTSX and CIAN systems we can provide UNE-P migration services for both
voice and broadband data.
The markets for our systems are characterized by rapidly changing technology
and evolving industry standards, often resulting in rapid systems obsolescence.
Accordingly, our ability to compete depends on timely introduction of our
systems to the marketplace, continual enhancements to our systems, and adapting
to technological changes and advances in the communications industry, including
assuring continuing compatibility with evolving industry standards. There can be
no assurance that we will be able to compete successfully, that competitors will
not develop technologies or products that render our systems obsolete or less
marketable, or that we will be able to keep pace with the technological demands
of the marketplace or successfully enhance and adapt our systems to satisfy
industry standards.
SERVICE SUPPORT
We believe that service, support and training are important factors in
promoting sales and customer satisfaction. Services we provide our CSP and
nascent UNE-P migration service customers include feasibility studies, site
surveys, engineering planning, project estimating, network planning, network
design, system planning, site preparation, system installation, customer
training and maintenance. However, we believe that CSPs and nascent UNE-P
migration service providers are not yet ready to build their local-loop voice
and broadband networks, due to their lack of technical ability and capital. We
expect them to rely on our ability to provide UNE-P migration services to
them.
Since, our system hardware consists of a cabinet with shelves having printed
circuit boards inserted into physical slots, a substantial part of repair and
maintenance can be accomplished by simply substituting the component in need of
repair. In addition, our systems are designed to be accessible by computer from
our headquarters, allowing our service personnel to remotely call up, diagnose
and otherwise support systems, thereby reducing response time and cost.
EMPLOYEES
As of October 9, 2007, we have
30 employees. At our headquarters, we
have five employees engaged in general management, marketing, research and
development, and administration. At our recently acquired wholly owned
subsidiaries, New Rochelle Telephone Corp. and Telecarrier Services, Inc., we
have 25 employees engaged in marketing, customer service, billing and
provisioning. None of our employees is represented by a labor union. We consider
our employee relations satisfactory.
GLOSSARY OF TERMS
|
Analog
|
Analog transmission employs continuously variable
signal.
|
Backbone
|
An element of the network infrastructure that provides high-speed, high
capacity connections among the network's physical points of presence. The
backbone is used to transport end user traffic across the metropolitan
areas and across the United States.
|
Bandwidth
|
Refers to the maximum amount of data that can be transferred through a
communication channel in a given time. It is usually measured in bits per
second for digital communications.
|
Broadband
|
Broadband systems transmit data at high speed using high bandwidth
capacity communication channel.
|
Central Office
|
Incumbent carrier facility where subscriber lines are connected to ILEC
switching equipment.
|
Collocation
|
A location where a competitive carrier network interconnects with the
network of an incumbent carrier's central office.
|
Competitive Local Exchange Carrier (CLEC)
|
Category of telephone service provider that offers local exchange
services in competition with those of the incumbent
carrier.
|
Copper Line or Loop
|
A pair of traditional copper telephone lines using electric current to
carry signals.
|
Digital
|
Digital transmission and switching technologies employ a sequence of
binary digits to convey information.
|
DSL
|
Digital Subscriber Line. An analog transmission technology where binary
digits are sent over analog transmission lines or local copper
loop.
|
E-Commerce
|
Electronic Commerce. An internet service that supports electronic
transactions between customers and vendors to purchase goods and
services.
|
Firewall
|
A computer device that separates a local area network from the internet
and prevents unauthorized access to the local area network through the use
of electronic security mechanisms.
|
Frame Relay
|
A form of packet switching with variable length frames that may be used
with a variety of communication protocols.
|
Incumbent Local Exchange Carrier (ILEC)
|
A company providing local exchange services, such as the
Bells.
|
Internet
|
An array of interconnected networks using a common set of protocols
defining the information coding and processing requirements that can
communicate across hardware platforms and over many
links.
|
Internet Protocol
|
A standard network protocol that allows computers with different
architectures and operating system software to communicate with other
computers on the internet. Advanced packet systems employ the Internet
Protocol (IP) standard.
|
ISDN
|
Integrated Services Digital Network. A transmission method that
provides circuit-switched access to the public network at speeds of 64 or
128 Kbps for voice or data transmission.
|
Internet Service Provider
|
A company that provides direct access to the
internet.
|
Kbps.
|
Kilobits per second. 1,000 bits per second.
|
Mbps
|
Megabits per second. 1,000,000 bits per second.
|
Modem
|
An abbreviation of Modulator-Demodulator. An electronic
signal-conversion device used to convert digital signals from a computer
to analog form for transmission over the telephone
network.
|
Packets
|
Information represented as bytes grouped together through a
communication node with a common destination address and other attribute
information.
|
Private Line
|
A form of packet switching with fixed length bytes that may be used
with a variety of communication protocols.
|
Router
|
A device that accepts the Internet Protocol from a local area network
and switches/routes Internet Protocol packets across a network
backbone.
|
T-1
|
This is a Bell System term for a digital transmission link with a
capacity of 1.544 Mbps.
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward Looking Statements
When used in this discussion, press releases and elsewhere by the management
of our company from time to time, the words "believes," "anticipates," and
"expects" and similar expressions are intended to identify forward-looking
statements that involve risks and uncertainties. Additionally, certain
statements contained in this discussion may be deemed forward-looking statements
that involve a number of risks and uncertainties. Among the factors that could
cause actual results to differ materially or adversely are the following: the
ability of our company to meet its working capital and liquidity needs, the
status of relations between our company, its primary customers and distributors,
the availability of long-term credit, unanticipated changes in the U.S. and
international economies, business conditions and growth in the international and
the U.S. telecommunications industry, level of growth in both voice and internet
systems sales generally, the timely development and acceptance of new products,
the impact of competitive products and pricing, changes in the cost of component
materials, changes in product mix, the outcome of litigation in which our
company may become involved, along with product delays and other risks detailed
from time to time in our company's SEC reports, including but not limited our
Annual Report on Form 10-KSB for the year ended March 31, 2005. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. Our company undertakes no obligation to
publicly release the results of any events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events
Overview
Cyber Digital, Inc. ("we" or "the Company" or "CYBD") is a designer, software
developer and manufacturer of a range of unique distributed
digital-voice-switching and Internet Protocol (IP) broadband infrastructure
equipment as well as a competitive local exchange carrier ("CLEC") through its
subsidiaries. Our technology division produces Class 5 local digital central
office switches, Class 4 regional tandem digital central office switches, IP
soft-switches, routers, gateways, firewalls, voice-over IP (VoIP) and virtual
private network (VPN) systems for public-switched-telephone-network (PSTN)
operators and Internet Service Providers (ISP) worldwide. Our recently acquired
CLEC subsidiaries provide communication services to small businesses and
residential subscribers in the states of New York, New Jersey and Pennsylvania.
As of June 30, 2007, we provided services to approximately 10,000
subscribers.
With our latest generation of software based switching systems, we offer
affordable voice and broadband data local switching services. Our mission is to
become a leading alternative local switching service provider offering
aggregated VoIP and digital broadband services in the United States. We expect
to generate recurring revenues from selling aggregated VoIP and managed IP
digital broadband services to small businesses and residential customers. We
believe that we are one of the first companies to offer aggregated VoIP services
on existing telephone lines without requiring any additional customer premise
equipment (CPE) or any changes to current wiring or network connection.
Unlike our competitor's systems, our systems are neither labor nor capital
intensive but are software intensive. This capability, in contrast to that of
our competitors, makes our systems more compact, less power consuming and more
affordable. Our digital voice switching and Internet Protocol (IP)
infrastructure systems are based on our proprietary operating system software,
which provides high performance, reliability and functionality. We own the
source code of our operating system. This allows us the flexibility to meet
market demands without depending on third party operating systems. We believe
that we are one of a very few companies in the world with proprietary hardware
and software technology of distributed digital switching. We have expended over
$20 million dollars on the development of our rock solid proprietary
state-of-the-art technologies, which is built on 24 years of experience. Our
systems are ideally suited for the United States pursuant to the recent Federal
Communications Commission (FCC) rulings.
On June 1, 2007, we acquired two profitable CLECs, New Rochelle Telephone
Corp. ("NRT") and Telecarrier Services, Inc. ("TSI"), based in White Plains, New
York for approximately $1.3 million. These acquisitions allow us to expand our
market presence in the states of New York, New Jersey and Pennsylvania. It will
allow us to become a facilities based provider of voice and data services as we
build our network by deploying our proprietary network equipment. Upon migrating
these customers on to our network, we significantly improve profitability
through operating synergies.
Market Opportunity
Beginning March 2005, FCC decided to phase out UNE-P rules that forced the
Bells to lease its local switching networks to competitive local exchange
carriers (CLECs) at cut-rate prices. FCC further rules that CLECs must move all
customers to non-Bell networks by March 2006 or pay exorbitant rates to the
Bells for using their local switching facilities. Today, CLECs lease 17 million
lines for $4.5 billion per year from the Bells, creating an immediate market
opportunity. Moreover, the Bells own 173 million lines creating a huge migration
services opportunity for many years to come. This ruling favors us to evolve as
an alternative local switching network provider, and directly sell aggregated
VoIP and digital broadband services to small businesses and residential
customers.
We intend to deploy our vast array of local voice and IP broadband data
switching infrastructure systems by co-locating our systems in various Bell
central offices. In anticipation of this, we signed an agreement with Level 3
Communications who will provide for global voice and data termination services
to all traffic originating on our local switching systems. In the United States,
providers of local switching networks retain substantial portion of the
recurring revenues as call origination services, and payout smaller portion for
call termination services. As we acquire more CLECs, we will be able to benefit
from operating synergies by migrating the customer lines onto our network. We
provide affordable local, long distance and international calls as well as
broadband Internet access, aggregated VoIP and virtual private network (VPN)
services.
Our Range of Digital Voice Switches and Broadband Internet
Protocol Systems for 'Last Mile' Solutions and UNE-P Migration Services
Cyber Distributed Central Office (CDCO) is a Class 5 local switch with packet
and circuit switching technolgies providing aggregated VoIP enabled POTS, ISDN,
analog trunks for PBXs - FX, DID, EM, T1, WSPSN, SS7, etc.
Cyber Tandem Exhange (CTSX) is a Class 4 switch with packet and circuit
switching technolgies providing numerous T1 carrier grade VoIP enabled voice and
IP enabled data trunks for business users.
Cyber Internet Access Network (CIAN) is a high performance IP distribution
softswitch/router providing numerous business customers simultaneous broadband
access at multiple T1 speeds up to DS3 and Ethernet 10/100 Mbps.
Cyber Business Internet Gateway (CBIG) is a customer-end, enterprise-wide
virtual private network (VPN). CBIG is an IP private line based multi-function
gateway, featuring a router, network address translator, Ethernet-to-T1
converter, CSU/DSU, firewall equipment, e-mail server and web server.
Competition
The competition in both VoIP and digital broadband services is intense.
Almost all VoIP service providers need a broadband connection through which they
provide VoIP service. They cannot provide VoIP services on existing telephone
lines unless converted to DSL, a costly network conversion process. Moreover,
current VoIP deployments can handle one telephone line service and cannot serve
small businesses with multi-line analog trunks. Our unique technology allows us
to serve small businesses by enabling their analog trunk lines to be converted
to an aggregated VoIP platform. Our aggregated VoIP technology can also serve
mass markets comprising of residential users without requiring any changes to
current wiring or network connection. Our aggregated VoIP service is provided on
our managed secure private IP network and does not use the public Internet. We
also intend to offer carrier grade managed IP broadband service on T1 or
multi-T1s to small businesses at much lower prices than our competitors.
Key Advantages
-
Exploit early entrance in metropolitan service areas, before the Bells
raise their charges second time or virtually shut off service to
non-facilities based CLECs in about three years.
-
Ideally suited to establish market in high density areas covering Mass
Market Switching for both residential and small businesses, including T1
carrier grade managed IP broadband services exclusively for businesses.
-
Our unique technological advantage is 'No Truck-rolls'; service offered on
'Hot-cut' basis requiring no additional customer premise equipment (CPE). We
require no service technician to be dispatched to customer site nor any CPE
installed by customer. Unlike other VoIP providers that require an ATA adapter
(CPE) to be installed by service technician or the customer. Such ATA adapters
fail to operate without local power and suffer from low reliability.
-
Minimal investment required by CYBD for marketing; customer acquisition
cost estimated at $45 per line.
-
We have not included additional high margin revenues from value added
offerings in conjunction with our current product line such as managed IP VPN,
IP MPLS, etc.
-
One stop solution for voice, data and video, high-speed Internet access,
broadband data for IP VPN, VoIP, etc.
-
Typically, valuation of a non-facilities based CLEC is about $300 per
line, while that of a facilities based is $3,500 to $4,000 per line. Hence, if
we grow through acquisition of CLECs, we substantially increase valuation in
addition to increasing profit margins.
Business Development and Strategic Plan
CYBD has determined that it can grow rapidly through acquisition of certain
non-facilities based CLECs, who do not want to build their own local voice and
broadband data switching facilities, despite the FCC's local switching (UNE-P)
phase-out ruling. While these CLECs are, generally, excellent marketing
companies and have already established a customer base, they lack the technical
and network engineering aspects of owning and maintaining local voice and data
switching facilities, which are among CYBD's core competences. Since, we are
expecting to invest heavily in building the local voice and data switching
facilities, we expect to acquire only profitable CLECs.
On December 14, 2006, we entered into definitive purchase agreements to
acquire two CLECs, namely New Rochelle Telephone Corp. ("NRT") and Telecarrier
Services, Inc. ("TSI"), on a cashless basis through the issuance of convertible
secured debt. Effective June 1, 2007, we acquired NRT and TSI as an acquisition
subsidiary wholly owned by CYBD. These profitable companies were acquired on a
cashless basis through an assumption of approximately $1.3 million in debt with
an accredited institutional investor. In addition, CYBD also received 808,000
restricted shares on common stock of eLEC Communications Corp, the seller. NRT
is licensed to provide services in the states of New York, New Jersey,
Pennsylvania, Massachusetts, Ohio and Florida. TSI is licensed to provide
services in the states of New York, New Jersey, Pennsylvania and Massachusetts.
Both NRT and TSI have certificate of authority under Section 214 of the
Communications Act of 1934, as amended, from FCC. As of June 1, 2007,
collectively, NRT and TSI had approximately 10,000 customer lines in service in
New York, New Jersey and Pennsylvania.
By acquiring NRT and TSI we have instant customer base of about 10,000 lines.
This allows us to launch our network roll-out at a faster pace than that if we
were to build the customer base from zero. Currently, NRT and TSI have a gross
profit margin of 37%. Upon migration of the customer lines to our network, the
gross margins improve to 56%, resulting in net income increasing over 250%. We
intend to expand through acquisitions while, at the same time, migrating those
customer lines that, in the aggregate, reach several hundred lines per
co-location Bell central office. We will use NRT and TSI proven management,
marketing and sales team, customer services and provisioning facilities as a
platform to build our migration services business, while our technology
development and manufacturing division supplies the requisite network equipment
comprising of CDCO, CTSX, CIAN and CBIG.
Our overall strategy is to grow through acquisitions, as it provides for
large-scale expansion and rapid deployment of our networks, with minimal cost of
customer acquisition. We are in negotiations with a number of other profitable
non-facilities based CLECs for potential acquisitions.
Results of Operations
For The Three Months Ended June 30, 2007
Net sales
Net sales for the quarter ended June 30, 2007 was $445,049 as compared to $0
for the quarter ended June 30, 2006. Net sales consist of local and long
distance telephone service provided by NRT and TSI from June 1, 2007, the date
of acquisition. We are in early stages of developing the local voice and data
migration services market in the U.S. due to newness of the market. We were
waiting for the FCC's deregulation policies on local voice and data switching in
order to enter this lucrative market with our systems.
Cost of Sales
Cost of sales for the quarter ended June 30, 2007 was $281,411 as compared to
$0 for the quarter ended June 30, 2006. Cost of sales predominantly consists of
purchasing communication services from Verizon and Qwest on a resale basis. We
also include in our cost of sales the materials and labor used, subcontractor
costs and overhead incurred in the manufacture of our systems as well as any
change in the valuation of our inventory, which was $0 and $0 for quarters ended
June 30, 2007 and 2006, respectively.
Gross Profit
Gross profit for the quarter ended June 30, 2007 was $163,638 as compared to
$0 for the quarter ended June 30, 2006. Gross profit as a percentage of sales
was 37% for the quarter ended June 30, 2007 as compared to 0% for the quarter
ended June 30, 2006.
Selling, general and administrative
Selling, general and administrative expenses increased from $210,695 in
quarter ended June 30, 2006 to $252,822 in quarter ended June 30, 2007,
representing an increase of $42,127 or approximately 20%, principally due to
selling, general and administrative expenses of NRT and TSI.
Research and development
Research and development expenses decreased from $6,731 in quarter ended June
30, 2006 to $5,769 in quarter ended June 30, 2007, representing a decrease of
$962 or approximately 14%. All development costs are expensed in the period
incurred.
Net Income (loss) from operations
Net loss from operations in quarter ended June 30, 2007 was $(145,708) or
$(.004) per share as compared with a loss of $(262,314) or $(.008) per share in
quarter ended June 30, 2006.
Net income (loss) available to Common Shareholders
Preferred stock dividend was $3,125 and $3,125 in quarter ended June 30, 2007
and 2006, respectively. As a result of the foregoing, the net loss available to
common shareholders in quarter ended June 30, 2007 was $(148,833) or $(.004) per
share as compared to a net loss of $(265,439) or $(.008) per share in quarter
ended June 30, 2006.
Liquidity and Capital Resources
Our ability to generate cash adequate to meet our needs results primarily
from sale of preferred and common stock, cash flow from operations, issuance of
debt, and cash advances in the form of loan from our Chief Executive Officer and
a shareholder.
Cash and cash equivalents were $63,867 and $33,506 for quarter ended June 30,
2007 and June 30, 2006, respectively.
Net cash used in operating activities was $218,506 and $240,337 for quarter
ended June 30, 2007 and June 30, 2006, respectively.
Net cash provided by investing activities was $175,547 and $0 for quarter
ended June 30, 2007 and June 30, 2006, respectively, principally due to cash
portion of the acquisitions.
Net cash provided by financing activities was $73,320 and $237,866 for
quarter ended June 30, 2007 and June 30, 2006, respectively.
On November 3, 2005, we entered into definitive agreement with an accredited
institutional investor for a $10 million private equity line of credit to be
drawn upon until December 8, 2008. At our discretion, we may draw down on the
line up to $100,000 for each 7-day period, as defined. If we do not utilize the
line of credit during the 7-day period, the line reduces by $100,000. As of June
30, 2007, approximately $5 million was available under the line of credit. The
ability to draw down depends on a number of factors such as price, volume and
liquidity of our shares of common stock traded.
As of the quarter ended June 30, 2007, our company has received cash advances
of $ 1,256,300 and $350,000 from our Chief Executive Officer and a shareholder,
respectively.
Effective June 1, 2007, we acquired two telephone companies, New Rochelle
Telephone Corp. and Telecarrier Services, Inc., from eLEC Communications Corp.
These profitable companies were acquired on cashless basis through the issuance
of secured convertible debt of approximately $1,300,000 with an accredited
institutional investor. We also received 808,000 restricted shares of common
stock of eLEC Communications Corp., which is included as marketable securities
for quarter ended June 30, 2007.
Effective June 1, 2007, the Company issued a secured convertible term note in
the principal amount of approximately $1,300,000. The note is due July 1, 2010
and bears interest at prime plus 2% but no less than 9%. The note may be paid in
cash or common stock based on the Company's stock price, as defined. In
addition, the Company entered into a Registration Rights Agreement with the
purchaser that requires the Company to register its securities for resale to the
purchaser. The Registration Rights Agreement includes liquidating damages for
failure to file the Registration Statement by certain date, as defined.
Although, the acquisition of NRT and TSI provide earnings and positive cash
flow resulting in reasonable growth, additional financing will be needed to
support our growth plans through multiple acquisitions of CLECs. We are in
negotiations with a number of other profitable non-facilities based CLECs for
potential acquisitions.
Impact of Inflation
Inflation has historically not had a material effect on our
operations.
DESCRIPTION OF PROPERTY
Our executive offices and assembly operations are located in approximately
8,200 square feet of leased space in Hauppauge, New York. The lease provides for
annual base rent of $58,220 and expires on May 31, 2009. We believe that our
facility is adequate for our current needs. We believe that additional physical
capacity at our current facility will accommodate expansion, if required.
Our recently acquired wholly owned subsidiaries, NRT and TSI, are located in
approximately 4,000 square feet of leased space in White Plains, New York. The
lease provides for annual base rent of $77,000 and expires November 30, 2008.
This facility is adequate for our current needs.
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
On December 30, 1996, we consummated a private placement of our Series B-1
convertible preferred stock, par value $.05 per share, to Syncom III. We issued
2,000 shares of our Series B-1 stock to Syncom III in return for $2,000,000. On
April 14, 1998, Syncom III converted all of its outstanding Series B-1 preferred
stock into 1,291,845 shares of our common stock at a conversion price of $1.93
per share.
Mr. Terry Jones, one of our directors, is the general partner of WJM Partners
III, L.P. ("WJM"), the general partner of Syncom III. Pursuant to the terms of
the stock purchase agreement, so long as Syncom III holds our common stock, our
Board of Directors shall consist of not less than five members, and we must use
our best efforts to cause Terry Jones (or another partner of WJM) to be elected
as a director.
MARKET FOR OUR COMMON STOCK
Our common stock is quoted on the Over-the-Counter Bulletin Board under the
symbol "CYBD." The following table shows the quarterly high and low trade prices
on the Over-the-Counter Bulletin Board. The prices reflect inter-dealer prices,
without retail mark-up, mark-down, or commission and may not represent actual
transactions.
|
Price Per Share
|
|
|
High
|
|
Low
|
Fiscal Year Ending March 31, 2008
|
|
|
|
|
Third quarter (through October 10, 2007)
|
$
|
0.22
|
$
|
0.15
|
Second Quarter
|
|
0.48
|
|
0.15
|
First Quarter
|
|
0.50
|
|
0.25
|
|
|
|
|
|
Fiscal Year Ended March 31, 2007
|
|
|
|
|
Fourth Quarter
|
$
|
0.35
|
$
|
0.11
|
Third Quarter
|
|
0.28
|
|
0.12
|
Second Quarter
|
|
0.30
|
|
0.12
|
First Quarter
|
|
0.29
|
|
0.13
|
|
|
|
|
|
Fiscal Year Ended March 31, 2006
|
|
|
|
|
Fourth Quarter
|
$
|
0.36
|
$
|
0.09
|
Third Quarter
|
|
0.11
|
|
0.04
|
Second Quarter
|
|
0.14
|
|
0.09
|
First Quarter
|
|
0.27
|
|
0.09
|
On October 10, 2007, the last reported sale price of our common stock as
reported on the Over-the-Counter Bulletin Board was $0.15 per share. On that
date, there were 33,529,813
shares of our common stock outstanding, held
of record by approximately 500
holders. Also on that date, we believe
that there were more than 2,400 beneficial holders of our common stock.
We have not paid cash dividends in the past and do not intend to pay cash
dividends in the foreseeable future.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information concerning the compensation for
services in all capacities for the fiscal years ended March 31, 2007, 2006 and
2005 of those persons who were, at March 31, 2007 the chief executive officer
(the "named officer"). During such periods, no executive officer of our company
received compensation in excess of $100,000.
Annual Compensation
|
Long Term Compensation
|
All Other Compensation
|
Awards
|
Payouts
|
Name and Principal Position
|
Year
|
Salary ($)
|
Bonus ($)
|
Other Annual Compens-ation ($)(1)
|
Restricted Stock Awards ($)
|
Securities Underlying Options/
SARs (#)
|
LTIP Payouts ($)
|
J.C. Chatpar, Chairman of the Board, President and Chief Executive
Officer
|
2007
2006
2005
|
$92,500
$92,500
$92,500
|
None
None
None
|
None
None
None
|
None
None
None
|
1,927,500 (4)
1,500,000 (3)
1,500,000 (2)
|
None
None
None
|
None
None
None
|
____________
(1) We have concluded that the aggregate amount of perquisites and other
personal benefits paid to each of the named officers named in the table did not
exceed the lesser of 10% of such officer's total annual salary and bonus for the
2007, 2006 and 2005 fiscal years or $50,000, thus, such amounts are not included
in the table.
(2) In fiscal year 2005, Mr. Chatpar was granted options to purchase
1,500,000 shares of our common stock at an exercise price of $0.07 per
share.
(3) In fiscal year 2006, Mr. Chatpar was granted options to purchase
1,500,000 shares of our common stock at an exercise price of $0.10 per
share.
(4) In fiscal year 2007, Mr. Chatpar was granted options to purchase
1,927,500 shares of our common stock at an exercise price of $0.20 per
share.
Option Grants In Last Fiscal Year
The following table sets forth information concerning stock option grants
made during fiscal year 2007 to the named officers. We have not granted any
stock appreciation rights.
Individual Grants
Name
|
Number of Securities Underlying Options Granted
(#)
|
% of Total Options Granted to Employees in Fiscal Year End
(1)
|
Exercise Price ($/Share) (2)
|
Expiration Date (3)
|
J.C. Chatpar
|
1,927,500
|
95%
|
$0.20
|
05/23/16
|
_________________
(1) During fiscal year 2007, options to purchase an aggregate of 1,927,500
shares of our common stock were granted to Mr. Chatpar and options to purchase
an aggregate of 90,000 shares of our common stock were granted to two other
directors.
(2) The exercise price of the options granted was equal to the fair market
value of the underlying stock on the date of grant.
(3) Options are immediately exercisable.
Aggregated Fiscal Year End Option Values
The following table sets forth information concerning the number of
unexercised options and the fiscal 2007 year-end value of unexercised options on
an aggregated basis held by the named officers. We have not granted any stock
appreciation rights in Fiscal 2007.
|
|
Number of Securities Underlying Unexercised
Options at
Fiscal Year-End (#)
|
|
Value of Unexercised
In-The-Money
Options at
Fiscal Year-End ($)
|
Name
|
|
Exercisable
|
|
Unexercisable
|
|
Exercisable
|
|
Unexercisable
|
J.C. Chatpar
|
|
11,828,500
|
|
4,500,000
|
|
$2,834,315
|
|
0
|
____________
(1) Options are "in-the-money" if, on March 31, 2007 the market price of the
Common Stock ($0.29) exceeded the exercise price of such options. The value of
such options is calculated by determining the difference between the aggregate
market price of our common stock underlying the options on March 31, 2007 and
the aggregate exercise price of such options.
Compensation of Directors
We pay our directors $250 per board meeting. During fiscal 2007, the board of
directors met three times and each director attended each of these meetings. In
addition, we currently reimburse each director for expenses incurred in
connection with his attendance at each meeting of the board of directors.
Committees of the Board of Directors
We have a standing compensation committee composed of all members of the
board of directors. The compensation committee reviews and acts on matters
relating to compensation levels and benefit plans for our executive officers and
key employees, including salary and stock options. The compensation committee is
also responsible for granting stock awards, stock options and stock appreciation
rights and other awards to be made under our existing incentive compensation
plans. We also have a standing audit committee composed of our two independent
directors, Jack Dorfman and Terry Jones. The audit committee assists in
selecting our independent auditors and in designating services to be performed
by, and maintaining effective communication with, those auditors.
Employment Agreements and Insurance
We have entered into an amended and restated employment agreement with Mr.
J.C. Chatpar dated as of August 4, 1997 (the "Employment Agreement") for a three
year term. Such three-year term shall be automatically extended for successive
three-year terms unless either party gives the other party 120 days prior
written notice of termination before the end of any such three-year period. Our
board, however, has the authority to terminate such extension upon cause.
"Cause" is defined as conviction of a felony or willful misconduct. Mr. Chatpar
is entitled to receive a salary of $150,000 per annum, with an annual increase
of 10%. In recognition of the complex scientific and technical leadership which
Mr. Chatpar brings to our company, we have also agreed that our board of
directors may raise his salary during the term of his employment as soon as our
financial resources and other business conditions permit. In such event, Mr.
Chatpar's salary shall be at a level comparable to that of chief executive
officers of other comparable technology-driven publicly held companies.
In addition to his base salary, Mr. Chatpar shall be entitled to receive a
bonus based upon the following formula: (a) 1% of gross revenues for each fiscal
year in excess of $3 million
provided
,
however
, that our company
shall be profitable, plus (b) 5% of net income after deduction of the bonus
provided for in (a) above, and plus (c) 10% of the increase in net income over
that of the prior fiscal year after deduction of the bonus provided for in (a)
above.
In the event of a termination of Mr. Chatpar's employment due to disability,
he shall receive royalty payments of 5% of the gross revenues earned by our
company ("Royalties") for a period of 15 years following termination. In the
event of Mr. Chatpar's death, his wife, if any, or his estate, shall receive a
payment equal to six months of his base salary and Royalties for 15 years. In
the event of a termination of Mr. Chatpar's employment for any reason other than
pursuant to disability, death or for cause, or if there is a change of control
(as defined in the Employment Agreement) of our company which results in an
actual or constructive termination of employment (as defined therein), he shall
receive a payment equal to three years of his base salary plus three times his
prior year's bonus, Royalties for 15 years, and all of his outstanding options
will be deemed immediately vested and exercisable for a period of one year from
the effective termination date.
We do not have employment contracts with any other officer or
director.
Employee Benefit Plan
We offer basic health, major medical and life insurance to our employees. We
have not adopted any retirement, pension or similar programs.
________________________
INDEX TO FINANCIAL STATEMENTS OF CYBER DIGITAL, INC.
|
TABLE OF CONTENTS
|
|
|
Page
|
|
|
Report of Independent Registered Public Accounting Firm
|
F-1
|
|
|
Financial Statements:
|
|
|
|
|
|
Consolidated Balance Sheets
|
F-2
|
|
|
|
|
Consolidated Statements of Operations
|
F-3
|
|
|
|
|
Consolidated Statements of Changes in Shareholders' Equity (Deficit)
|
F-4
|
|
|
|
|
Consolidated Statements of Cash Flows
|
F-5
|
|
|
|
|
Notes to Consolidated Financial Statements
|
F-6 - F-15
|
|
|
|
B L A N C H F I E L D, K O B E R & C O M P A N Y, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
Report of Independent Registered Public Accounting
Firm
To the Board of
Directors and Shareholders
Cyber Digital,
Inc.
Hauppauge, New
York
We have audited the accompanying consolidated balance sheets of
Cyber Digital, Inc. and Subsidiaries as of March 31, 2007 and 2006, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the two years in the period ended March 31, 2007. 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 the standards of the
Public Company Accounting Oversight Board (United States). 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 amount 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 consolidated financial statements referred
to above present fairly, in all material respects, the financial position of the
Company as of March 31, 2007 and 2006, and the results of its operations and its
cash flows for each of the two years in the period ended March 31, 2007 in
conformity with U.S. generally accepted accounting principles.
/s/ Blanchfield, Kober & Company, P.C.
Hauppauge, New
York
June 27, 2007
1200 VETERANS MEMORIAL HIGHWAY, SUITE 350, HAUPPAUGE, NEW YORK
11788
TEL: (631) 234-4200 FAX: (631) 234-4272
|
CYBER DIGITAL, INC. and subsidiaries
|
|
|
CONSOLIDATED BALANCE SHEETS
|
|
|
March 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
33,506
|
$
|
5,551
|
|
Inventories
|
|
248,996
|
|
388,996
|
|
Prepaid and other current assets
|
|
9,205
|
|
9,205
|
|
|
|
|
|
|
|
Total Current Assets
|
|
291,707
|
|
403,752
|
|
|
|
|
|
Property and Equipment, net
|
|
28,760
|
|
36,069
|
|
|
|
|
|
|
Other Assets
|
|
34,267
|
|
52,041
|
|
|
|
|
|
|
TOTAL ASSETS
|
$
|
354,734
|
$
|
491,862
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
Accounts payable, accrued expenses, and taxes
|
$
|
308,168
|
$
|
259,295
|
|
Accrued interest shareholders
|
|
458,352
|
|
293,596
|
|
Officer/ shareholder notes payable
|
|
1,531,300
|
|
1,158,300
|
|
Accrued dividend payable
|
|
32,344
|
|
19,818
|
|
Note payable - current portion
|
|
7,108
|
|
6,692
|
|
Settlement payable-current portion
|
|
0
|
|
2,583
|
|
Total Current Liabilities
|
|
2,337,272
|
|
1,740,284
|
|
|
|
|
|
|
Long Term Debt
|
|
|
|
|
|
Note payable
|
|
15,408
|
|
22,307
|
|
|
|
|
|
|
Total Liabilities
|
|
2,352,680
|
|
1,762,591
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
Shareholders' Equity (Deficit)
|
|
|
|
|
|
Preferred stock - $.05 par value; cumulative, convertible
and
|
|
|
|
|
|
|
Participating; authorized 10,000,000 shares
|
|
|
|
|
|
|
Series C; issued and outstanding - 310 shares at
|
|
|
|
|
|
|
March 31, 2007 and 2006
|
|
16
|
|
16
|
|
|
Series E; issued and outstanding - 50 and 50 shares at
|
|
|
|
|
|
|
March 31, 2007 and 2006, respectively
|
|
3
|
|
3
|
|
Common stock - $.0066667 par value; authorized 90,000,000
shares;
|
|
|
|
|
|
|
Issued and outstanding 33,504,813 and 33,489,813
|
|
|
|
|
|
|
Shares at March 31, 2007 and 2006, respectively
|
|
223,366
|
|
223,266
|
|
Additional paid-in-capital
|
|
19,090,089
|
|
18,872,237
|
|
Accumulated deficit
|
|
(21,311,420)
|
|
(20,366,251)
|
|
|
|
|
|
|
|
Total Shareholders' Equity (Deficit)
|
|
(1,997,946)
|
|
(1,270,729)
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY
|
$
|
354,734
|
$
|
491,862
|
|
|
|
|
|
|
See independent accountant's report and notes to financial
statements.
|
|
CYBER DIGITAL, INC. and subsidiaries
|
|
|
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
March 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
Net Sales
|
$
|
0
|
$
|
0
|
|
|
|
|
|
Cost of Sales
|
|
140,000
|
|
137,616
|
|
|
|
|
|
|
Gross Profit
|
|
(140,000)
|
|
(137,616)
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
Selling, general and administrative expenses
|
$
|
588,062
|
$
|
266,489
|
|
Research and development
|
|
25,000
|
|
18,269
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
613,062
|
|
284,758
|
|
|
|
|
|
|
Loss from Operations
|
|
(753,062)
|
|
(422,374)
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
Interest expense
|
|
(166,312)
|
|
(117,339)
|
|
Other expense
|
|
(13,114)
|
|
(22,950)
|
|
|
|
|
|
|
|
|
Total Other Income (Expense
)
|
|
(179,426)
|
|
(140,289)
|
|
|
|
|
|
|
|
|
Loss before Income Taxes
|
|
(932,488)
|
|
(562,663)
|
|
|
|
|
|
|
Provision for Income Taxes
|
|
155
|
|
157
|
|
|
|
|
|
|
Net Loss
|
|
(932,643)
|
|
(562,820)
|
|
|
|
|
|
|
Preferred Stock Dividend
|
|
12,526
|
|
12,526
|
|
|
|
|
|
|
Income Available to Common Shareholders
|
$
|
(945,169)
|
$
|
(575,346)
|
|
|
|
|
|
|
Net Loss Per Share of Common Stock (See Note 8)
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations Basic
|
$
|
(.028)
|
$
|
(.017)
|
|
|
Diluted
|
$
|
(.028)
|
$
|
(.017)
|
|
|
|
|
|
|
|
|
Net Loss Basic
|
$
|
(.028)
|
$
|
(.017)
|
|
|
Diluted
|
$
|
(.028)
|
$
|
(.017)
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
33,502,101
|
|
33,489,813
|
|
|
|
|
|
|
See independent accountant's report and notes to financial
statements.
|
|
|
CYBER DIGITAL, INC. and subsidiaries
|
|
|
|
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DEFICIT)
|
|
|
Years ended March 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
|
|
Shareholders'
|
|
Series C
|
Series E
|
Common Stock
|
Paid in
|
Accumulated
|
Equity
|
|
Shares
Amount
|
Shares
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2005
|
310
|
$ 16
|
50
|
$ 3
|
33,489,813
|
$ 223,266
|
$ 18,866,737
|
$ (19,790,905)
|
$ (700,883)
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock options
|
|
|
|
|
|
|
5,500
|
|
5,500
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
(562,820)
|
(562,820)
|
|
|
|
|
|
|
|
|
|
|
Accrued Dividend on E Preferred
|
|
|
|
|
|
|
|
(12,526)
|
(12,526)
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2006
|
310
|
$ 16
|
50
|
$ 3
|
33,489,813
|
$ 223,266
|
$ 18,872,237
|
$ (20,366,251)
|
$ (1,270,729)
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
|
|
15,000
|
100
|
2,370
|
|
2,470
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock options
|
|
|
|
|
|
|
215,482
|
|
215,482
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
(932,643)
|
(932,643)
|
|
|
|
|
|
|
|
|
|
|
Accrued Dividend on E Preferred
|
|
|
|
|
|
|
|
(12,526)
|
(12,526)
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2007
|
310
|
$ 16
|
50
|
$ 3
|
33,504,813
|
$ 223,366
|
$ 19,090,089
|
$ (21,311,420)
|
$ (1,997,946)
|
|
|
|
|
|
|
|
|
|
|
See independent accountant's report and notes to financial
statements.
|
|
|
CYBER DIGITAL, INC. and subsidiaries
|
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
Years ended March 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
Net loss
|
$
|
(932,643)
|
$
|
(562,820)
|
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
Depreciation
|
|
8,284
|
|
10,388
|
|
|
Amortization
|
|
0
|
|
0
|
|
|
Bad debt expense
|
|
0
|
|
22,950
|
|
|
Inventory valuation allowance
|
|
140,000
|
|
137,579
|
|
|
Stock based compensation
|
|
215,482
|
|
0
|
|
|
Accrued shareholder interest
|
|
164,756
|
|
114,120
|
|
|
(Increase) decrease in operating assets:
|
|
|
|
|
|
|
Prepaid and other current assets
|
|
0
|
|
3,021
|
|
|
Other assets
|
|
17,774
|
|
(22,500)
|
|
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
Accounts payable, accrued expenses and taxes
|
|
48,873
|
|
32,808
|
|
|
Settlement payable
|
|
(2,583)
|
|
(14,262)
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Operating Activities
|
|
(340,057)
|
|
(278,716)
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
Purchase of equipment
|
|
(975)
|
|
(37,814)
|
|
|
|
|
|
|
|
|
Net Cash Used in Investing Activities
|
|
(975)
|
|
(37,814)
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
Issuance of common stock
|
|
2,470
|
|
0
|
|
Note payable
|
|
(6,483)
|
|
28,999
|
|
Proceeds from officer/shareholder loan
|
|
373,000
|
|
277,000
|
|
|
|
|
|
|
|
|
Net Cash Provided by Financing Activities
|
|
368,987
|
|
305,999
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
|
27,955
|
|
(10,531)
|
|
|
|
|
|
|
Cash and Cash Equivalents at Beginning of Period
|
|
5,551
|
|
16,082
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period
|
$
|
33,506
|
$
|
5,551
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
Income taxes
|
$
|
155
|
$
|
157
|
|
|
Interest
|
|
1,556
|
|
3,219
|
|
|
|
|
|
|
|
Noncash Operating and Financing Activities
|
|
|
|
|
|
Accrued preferred stock dividend
|
$
|
12,526
|
$
|
12,526
|
|
Stock option issued for services
|
|
0
|
|
5,500
|
|
|
|
|
|
|
See independent accountant's report and notes to financial
statements.
|
CYBER DIGITAL, INC. and subsidiaries
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
MARCH 31, 2007 AND
2006
|
Note 1 - Summary of Significant Accounting
Policies
Description of Business
Cyber Digital, Inc. (the "Company") was incorporated in the
State of New York in April 1983. The Company designs, develops, manufactures and
markets digital switching, internet and networking systems that enable
simultaneous communication of voice and data to a large number of users. The
Company's systems are based on its proprietary software
technology.
Principles of Consolidation
The financial statements include the accounts of Cyber Digital,
Inc. and two wholly owned subsidiaries, CYBD Acquisition, Inc. and CYBD
Acquisition II, Inc. These subsidiaries were formed on October 11, 2006, in the
State of New York. These subsidiaries had no assets and have not begun
operations at March 31, 2007.
Operating
and Financing Matters
Since inception, the Company has devoted substantial resources
to the design and development of the Company's systems and technology. As such,
the Company has not achieved revenue growth and has incurred operating losses.
At March 31, 2007, the Company had an accumulated deficit of $21,311,419 and a
shareholders' deficit of $1,997,946. The decrease in equity from March 31, 2006
to March 31, 2007 is due mainly to a net operating loss during the fiscal year
ended March 31, 2007. During the fiscal years ended March 31, 2007, 2006 and
2005, the Company received cash advances of $373,000, $277,000 and $209,000
respectively, from the Chief Executive Officer and a shareholder. The Company
historically has generated sufficient cash flow to support its operations mainly
from issuances of debt and equity securities. The Company anticipates additional
issuances of debt and/or equity. The viability of the Company is dependent upon
future revenues and additional issuances of equity.
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.
Fair Value of Financial Instruments
The carrying amounts of financial instruments including cash
and cash equivalents, accounts receivable, prepaid expenses, accounts payable
and accrued expenses, approximate fair value due to the relatively short
maturity of these instruments. The estimated fair value amounts have been
determined by the Company using available market information and the appropriate
valuation methodologies. Considerable judgment is necessarily required in the
interpreting of market data to develop the estimates of fair value, and,
accordingly, the estimates are not necessarily indicative of the amounts that
the Company could realize in a current market exchange.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company
considers highly liquid temporary cash investments with an original maturity of
three months or less to be cash equivalents.
CYBER DIGITAL, INC. and subsidiaries
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
MARCH 31, 2007 AND
2006
|
Note 1 - Summary of Significant Accounting Policies
(continued)
Inventories
The Company uses a cost system, which approximates the
first-in, first-out method. Inventories are valued at the lower of cost or
market.
Property and Equipment
Property and equipment are stated at cost, less accumulated
depreciation. Depreciation and amortization are computed by the straight-line
method over their estimated useful lives. Repairs and maintenance are charged
against operations as incurred.
Deferred Financing Costs
The Company amortizes deferred financing costs on a straight
line basis over the term of the credit agreement.
Revenue Recognition
The Company recognizes product system sales upon shipment and
acceptance by the customer. Component parts and software sales are recognized
upon shipment to the customer.
Income Taxes
Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes currently due plus
deferred taxes related primarily to differences between the bases of assets and
liabilities for financial and income tax reporting. The deferred tax assets and
liabilities represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and liabilities are
recovered or settled.
Deferred taxes also are recognized for operating losses that
are available to offset future federal income taxes. The Company accounts for
investment tax credits using the flow-through method, and thus reduces income
tax expense in the year the related assets are placed in service.
Advertising
The Company follows the policy of charging the costs of
advertising to expense as incurred.
Research and Development Costs
Research and development costs are charged to expense when
incurred.
CYBER DIGITAL, INC. and subsidiaries
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
MARCH 31, 2007 AND
2006
|
Note 1 - Summary of Significant Accounting Policies
(continued)
Impairment
of Long Lived Assets
The Company periodically reviews its assets for impairment in accordance with
Financial Accounting Standards Board ("FASB") Statement No. 121 "Accounting for
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of". As a
result, the Company has recognized an impairment loss $10,774 that is included
in other expense in the statement of operations. The loss is due to the write
off of intangible assets that were incurred in connection with business
opportunities outside the United States. The Company no longer intends to pursue
these business opportunities.
Stock-Based Compensation
In January 2006, the Company adopted Statement of Financial Accounting
Standards No. 123R which requires the Company to recognize the cost of employee
compensation and services in exchange for awards of stock options and warrants
based on the grant date fair value of those awards. Stock based compensation for
the year ended March 31, 2007, is in accordance with SFAS No. 123R
For the year ended March 31, 2006, the Company accounted for stock based
compensation in accordance with Accounting Principles Board Opinion No. 25.("APB
25"). In accordance with APB 25, no compensation cost is recognized for the year
ended March 31, 2006, since the option exercise price was not less than the
market price of the underlying stock on the date of the grant. Pro forma
information is presented in the stock based compensation footnote (See note
9).
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 "Business Combinations" ('SFAS 141")
which requires the Company to account for future business combinations using the
purchase method. The statement of operations for the year ended March 31, 2007,
includes indirect and general expenses related to business acquisitions that
have been expensed as required by SFAS 141.
Concentration of Credit Risk
The Company places most of temporary cash investments with
financial institutions and may exceed the FDIC limit. The Company has not
experienced any losses to date resulting from this policy.
Note 2 - Inventories
Inventories consist of the following at March 31:
|
|
2007
|
|
2006
|
Raw materials
|
$
|
248,996
|
$
|
388,996
|
Finished goods
|
|
0
|
|
0
|
|
$
|
248,996
|
$
|
388,996
|
For the years ended March 31, 2007 and 2006, the Company has
provided valuation allowances of $140,000 and $137,616, respectively, against
its inventory.
CYBER DIGITAL, INC. and subsidiaries
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
MARCH 31, 2007 AND
2006
|
Note 3 - Property and Equipment
Major classes of property and equipment consist of the
following at March 31:
|
|
2007
|
|
2006
|
Useful Lives
|
Machinery and equipment
|
$
|
339,932
|
$
|
339,394
|
5 years
|
Furniture and fixtures
|
|
64,355
|
|
64,355
|
7 years
|
Vehicle
|
|
37,814
|
|
37,814
|
5 years
|
Leasehold improvements
|
|
4,786
|
|
4,786
|
Lease term
|
|
|
446,887
|
|
446,349
|
|
Less: Accumulated depreciation
|
|
418,127
|
|
410,280
|
|
|
$
|
28,760
|
$
|
36,069
|
|
Note 4 - Other Assets
Other assets consist of various security deposits and deferred financing
costs of $18,667 and $25,667, respectively. Amortization expense for the years
ended March 31, 2007 and 2006 was $7,000 and $2,333, respectively.
Note 5 - Officer/ Shareholder Loans Payable
During the 2002 fiscal year the Company issued a promissory
note to its Chief Executive Officer, J.C Chatpar, in the amount of $325,000. The
note is secured by all assets of the Company. The note was due on March 11, 2003
with interest accrued at 10%. Overdue principal and, to the extent permitted by
applicable law, overdue interest shall bear interest at the applicable rate plus
2% per annum and shall be payable upon demand. The Company received additional
advances from J.C. Chatpar of $275,000, $277,000 and $209,000 during the years
ended March 31, 2007, 2006 and 2005, respectively. These additional advances
bear interest at 10% and are due on demand.
During the year ended March 31, 2004, the Company received advances from a
shareholder in the amount of $177,000. During the year ended March 31, 2007, the
Company received additional advances of $98,000. These advances are due on
demand and bear interest at 10%.
The loans payable to Officer/ Shareholder at March 31, 2007 and 2006 was
$1,531,300 and $1,158,300, respectively. Accrued interest was $458,352 and
$293,596 and interest expense was $164,756 and $ 96,372 for the years ended
March 31, 2007 and 2006, respectively.
Note 6 - Line of Credit
On November 3, 2005, the Company entered into definitive
agreement with an accredited institutional investor for a $10 million private
equity line of credit to be drawn upon until December 8, 2008. The Company, at
its option, may draw down on the line up to $100,000 for each 7-day increment,
as defined. If the Company does not utilize the line of credit during the 7-day
period, the line reduces by $100,000. At March 31, 2007, approximately $6
million was available under the line of credit. In June 2006, the Company drew
down $2,470 against the equity line and issued 10,000 shares of common stock.
The ability to draw down depends on a number of factors such as price, volume
and liquidity of our shares of common stock traded.
CYBER DIGITAL, INC. and subsidiaries
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
MARCH 31, 2007 AND
2006
|
Note 7 - Notes Payable
In April 2005, the Company financed the purchase of a vehicle
with a note payable. The note bears interest at 5.79% and is secured by the
vehicle. The note requires future payments as follows:
2008
|
$ 6,868
|
2009
|
$ 7,276
|
2010
|
$ 7,709
|
2011
|
$ 663
|
Total
|
$22,516
|
Note 8 - Earnings (Loss) Per Share
On June 26, 2006, the Company declared 3-for-2 stock split. The
weighted average common shares outstanding have been adjusted for all periods
presented to give effect to the stock split. Earnings per share ("EPS") has been
computed and presented pursuant to the provisions of Statement of Financial
Accounting Standards No. 128, Earnings per Share.
|
|
2007
|
|
2006
|
Net Loss
|
$
|
(932,643)
|
$
|
(562,820)
|
Dividends on Preferred Stock
|
|
12,526
|
|
12,526
|
Income Available to Common Shareholders
|
$
|
(945,169)
|
$
|
(575,346)
|
Weighted Average Common Shares Outstanding
|
|
33,502,101
|
|
33,489,813
|
Basic EPS
|
$
|
(.028)
|
$
|
(.017)
|
Diluted EPS
|
$
|
(.028)
|
$
|
(.017)
|
Diluted earnings per share does not include any stock warrants,
options, or convertible preferred stock as the inclusion of these items would be
antidilutive to earnings per share.
Note 9 - Stock Option Plans
The Company's Board of Directors adopted, on November 7, 1997,
the 1997 Stock Incentive Plan (the "1997 Plan"). The 1997 plan is a successor to
the 1993 plan, which has been terminated. Under the terms of the 1997 Plan,
1,276,499 shares were reserved for issuance to officers, directors, other
employees and consultants meeting certain qualifications. During March 2001, the
1997 plan was amended to increase the number of shares reserved for issuance
from 1,276,499 to 4,276,499. Under the 1997 Plan, incentive stock options are
granted at 100% of fair market value on the date of grant. The right to exercise
the options accrues equally on each of the first, second, third and fourth
anniversaries of the date of grant. Options granted under the plan expire on the
day before the tenth anniversary of the plan.
Pursuant to the 1997 Plan, incentive stock options,
nonqualified stock options, restricted stock and stock appreciation rights may
be granted to such officers, directors, and employees of the Company, and to
such consultants to the Company and such other persons or entities, as the Stock
Option Committee of the Board of Directors (the "Committee") shall select. All
incentive stock options ("ISO"), which may be granted only to employees and
which provide certain tax advantages to the optionee, must have an exercise
price of at least 100 percent of the fair market value of a share of common
stock on the date the option is granted. No ISOs will be exercisable more than
10 years after the date of grant. ISOs granted to ten percent shareholders must
have an exercise price of at least 110 percent of fair market value and may not
be exercisable after the expiration of five years from grant. The exercise price
and the term of nonqualified stock options will be determined by the Committee
at the time of grant.
CYBER DIGITAL, INC. and subsidiaries
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
MARCH 31, 2007 AND
2006
|
Note 9 - Stock Option Plans (continued)
Stock appreciation rights ("SARS") may be granted independently
or in connection with all or any part of any option granted under the 1997 Plan,
either at the time of grant of the option or at any time thereafter. The holder
of a SAR has the right to receive from the Company, in cash or in shares as the
Committee shall determine, an amount equal to the excess of the fair market
value of the shares covered by the SAR at the date of exercise over the exercise
price set at the date of grant of the SAR. At the request of the holder of an
option, the committee may at its discretion substitute for the exercise of the
option, compensation (in cash or in shares) in an amount equal to or less than
the excess of the fair market value of the shares covered by the option at the
request date over the exercise price set at the grant of the option.
A restricted stock award, entitling the recipient to acquire
shares of common stock for a purchase price at least equal to par value may be
granted to such persons and in such amounts and subject to such terms and
conditions as the Committee may determine. Shares of restricted stock may not be
sold, assigned, transferred, pledged or otherwise encumbered or disposed of
except as specified in the 1997 Plan or the written agreement governing the
grant. The Committee, at the time of grant, will specify the date or dates on
which the nontransferability of the restricted stock shall lapse. During the 90
days following the termination of the grantee's employment for any reason, the
Company has the right to require the return of any shares to which restrictions
on transferability apply, in exchange for which the Company shall repay to the
grantee any amount paid by the grantee for such shares.
Unless sooner terminated by the Board, the provisions of the
1997 Plan regarding the grant of ISOs shall terminate on the tenth anniversary
of the adoption of the 1997 Plan by the Board. No ISOs shall thereafter be
granted under the Plan, but all ISOs granted theretofore shall remain in effect
in accordance with their terms.
In addition to these plans, the Company has issued
non-qualified stock options and warrants upon the approval by the Board of
Directors. Such options and warrants are granted at 100% of fair market value on
the date of the grant. Information with respect to non-qualified stock options
and warrants is summarized as follows:
|
Price
|
Shares
|
Outstanding, April 1, 2006
|
$0.10 to $1.81
|
25,696,450
|
|
Granted options
|
$0.20
|
2,017,500
|
|
Granted warrants
|
$0.20
|
3,825,900
|
|
Expired
|
$3.00 to $4.00
|
(165,000)
|
Outstanding, March 31, 2007
|
|
31,374,850
|
|
Options and Warrants Outstanding
|
|
Options Exercisable
|
|
Range of
Exercise Prices
|
Outstanding at
3/31/07
|
Weighted Average Remaining
Contractual
Life
|
Weighted Average
Exercise Price
|
Exercisable as
of 3/31/07
|
Weighted Average
Exercise Price
|
$0.07 to $0.26
|
$ 21,204,850
|
4.31
|
$ 0.13
|
$ 17,494,227
|
$ 0.13
|
$0.27 to $1.00
|
8,325,000
|
2.36
|
0.35
|
8,321,250
|
0.35
|
$1.62 to $2.00
|
1,845,000
|
1.72
|
1.79
|
1,845,000
|
1.79
|
|
$ 31,374,850
|
3.64
|
$ 0.29
|
$ 27,660,477
|
$ 0.31
|
CYBER DIGITAL, INC. and subsidiaries
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
MARCH 31, 2007 AND
2006
|
Note 9 - Stock Option Plans (continued)
The Company uses the Black-Scholes model to value its stock and
warrants. The following assumptions were employed to estimate the fair value of
stock options granted:
|
Fiscal Years Ended March 31
|
|
2007
|
2006
|
Expected dividend yield
|
0.00%
|
0.00%
|
Expected price volatilities
|
4.6%
|
4.6%
|
Risk-free interest rate
|
3.05%
|
3.05%
|
Expected life (years)
|
5
|
5
|
As of January 1, 2006, the Company adopted Statement of
Financial Accounting Standards No. 123R (SFAS No. 123R) which requires that
stock options and warrants issued for compensation or services be recorded at
their estimated fair value using option pricing models. The Company uses the
"Modified Prospective Method" as a result prior periods have not been
restated.
Pro forma information, as required for the period prior to the
adoption of SFAS 123R, is as follows:
|
|
2007
|
|
2008
|
Weighted average fair value of
|
|
|
|
|
Options granted
|
$
|
0.055
|
$
|
0.033
|
Net Loss
|
|
|
|
|
As reported
|
$
|
(932,643)
|
$
|
(562,820)
|
Pro Forma
|
|
(932,643)
|
|
(603,843)
|
Net Loss Per Share
|
|
|
|
|
As reported
|
|
|
|
|
Basic
|
$
|
(.028)
|
$
|
(0.25)
|
Diluted
|
$
|
(.028)
|
$
|
(0.25)
|
Pro Forma
|
|
|
|
|
Basic
|
$
|
(.028)
|
$
|
(.027)
|
Diluted
|
$
|
(.028)
|
$
|
(.027)
|
Note 10 - Convertible, Cumulative and Participating Preferred
Stock
In August 2004, the Company issued 50 shares of Series E
convertible preferred stock and 50,000 warrants to purchase common stock in a
private placement. The Series E preferred stock is entitled to receive a
cumulative annual dividend equal to 25% of the Series E issue price. The
dividend shall be payable in cash or in shares of the Company upon conversion or
at the end of the three year term. Accrued dividend payable on the Series E
preferred stock was $32,343 at March 31, 2007 and $19,818 at March 31, 2006.
The Series E preferred stock is convertible from August 2005
through August 2007. The conversion price is the lesser of $2.00 or the variable
conversion price as defined, but not less than $0.20.
In July 1999, the Company completed a private placement of its
6% Series C preferred stock. The Company sold 310 shares at $1,000 per share.
The private placement resulted in the Company receiving proceeds of $310,000. As
of March 31, 2002, there are undeclared dividends of $86,002 on the Series C
preferred stock.
CYBER DIGITAL, INC. and subsidiaries
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
MARCH 31, 2007 AND
2006
|
Note 10 - Convertible, Cumulative and Participating Preferred
Stock (continued)
The 6% Series C preferred stock is convertible into restricted
common shares at a price to be determined based upon the
following:
If the notice of conversion is given within ninety (90) days of issuance
of the preferred shares, the conversion will be $6.00 per restricted common
share.
If the notice of conversion is given after ninety (90) days of the
issuance of the preferred shares, the conversion price will be the lesser of
the fixed conversion price of $6.00 per restricted common share or eighty-five
percent (85%) of the average closing price of the Company's common stock for
the five trading days prior to the conversion date, but not less than 50% of
the fixed conversion price.
The Company has a right to redeem the Series C preferred stock
at a price of 120% of the original Series C issue price, plus all unpaid
dividends at the date of redemption.
However, the holder has the right to block the redemption by
delivering a notice of conversion to the Company within seven (7) trading days
of the stockholder's receipt of a notice of general redemption.
In September 1999, the Company completed a private placement of
its 8% Series D-1 preferred stock. The Company sold 3,000 shares at $1,000 per
share. The private placement resulted in proceeds of $2,700,000, which is net of
the stock issuance costs.
The 8% Series D-1 preferred stock is convertible into common
shares at a price to be determined based upon the following:
If the Company fails to list all its shares of common stock on the New
York Stock Exchange, the NASDAQ SmallCap Market or the NASDAQ National Market
within ninety (90) days of the original issuance date, the conversion price
will be the lesser of:
115% of the arithmetic average of the closing bid price of the common
stock for the ten (10) trading days preceding the issuance date.
80% of the lesser of the average of the three lowest closing sales
prices of common stock during the twenty (20) consecutive trading days prior
to the conversion or the closing bid price on such date.
The Company has a right to redeem the Series D-1 preferred stock if
the conversion price drops below $3.00 per common share at the following
prices:
Prior to April 4, 2000, a price of $1,150 per share plus all accrued
dividends.
Between April 5, 2000 and October 4, 2000, a price of $1,200 per
share plus all accrued dividends.
After October 4, 2000, the preferred stock cannot be redeemed
by the Company.
During the fiscal years ended March 31, 2003 and 2002, the
Company did not pay dividends to the Series D-1 preferred stockholders who
converted their Series D-1 preferred stock.
CYBER DIGITAL, INC. and subsidiaries
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
MARCH 31, 2007 AND
2006
|
Note 11 - Income Taxes
The Company has net operating loss carryforwards for tax
purposes amounting to approximately $13 million that may be offset against
future taxable income which expire through 2027.
Deferred income taxes are recognized for differences between
the bases of assets and liabilities for financial statement and income tax
purposes. The utilization of these tax attributes is contingent upon the
Company's ability to generate future taxable income and tax before the tax
attributes expire as well as Internal Revenue Code limitations. As a result, a
valuation allowance equal to the full extent of the deferred tax asset has been
established.
The change in the deferred tax asset (as well as the valuation
account) was approximately $129,000 and $85,000 for the fiscal years ended March
31, 2007 and 2006, respectively.
Note 12 - Commitments and Contingencies
Employment Contract
On August 3, 2001, the Company renewed the employment agreement
with the Chairman. This agreement is automatically renewable for successive
three-year periods. The current agreement is for a three year period covering
August 4, 2004 through August 3, 2007.
Under this employment agreement, the Company is obligated to
pay the Chairman $150,000 for the period ending August 3, 1998 with an annual
increase of 10% for each subsequent year under the terms of employment. The
Company also agrees that its Board of Directors may raise the Chairman's salary
as soon as the financial resources of the Company and other business conditions
permit. In such event, the Chairman's salary shall be comparable to that of
chief executive officers of other technology driven publicly held companies.
This employment agreement can terminate for one of the
following reasons: (1) disability, (2) death, (3) for cause, and (4) without
cause, change in control.
The following payout terms apply if this agreement is
terminated:
-
In the case of disability, the Chairman shall be paid until the end of the
month in which such disability occurs. The Chairman will receive royalties of
5% of the gross revenues earned by the Company each month for a period of
fifteen years from the effective date of termination.
-
If the agreement terminates due to the death of the Chairman, the
agreement shall terminate immediately, except that the Chairman's wife, if
any, or otherwise his estate, shall receive the Chairman's salary until the
termination date, payments in the amount of the Chairman's base salary for a
period of six months from the date of termination and the aforementioned
royalty.
-
If the agreement terminates due to cause, the Chairman shall receive his
regular salary until the end of the month in which such termination occurs.
Cause is defined as willful misconduct by the executive or the conviction of a
felony. The Chairman must be notified at least ten days prior of his
termination.
-
If the agreement terminates due to a change in control or without cause,
the Chairman shall receive his salary until the end of the month in which he
is terminated in an amount equal to three years base salary plus three times
the prior year bonus, the aforementioned royalties and all of the Chairman's
outstanding options will be deemed immediately vested and exercisable for a
period of one year from the effective date of termination.
CYBER DIGITAL, INC. and subsidiaries
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
MARCH 31, 2007 AND
2006
|
Operating Leases
The Company leases space under a noncancelable operating lease
in Hauppauge, New York. This lease is for a five-year period and expires on May
31, 2009. This location is the Company's executive offices and operations. Rent
expense was $72,839 and $70,471 for the years ended March 31, 2007 and 2006,
respectively.
Future minimum rentals are as follows:
For years ending
|
March 31, 2008
|
$58,220
|
|
March 31, 2009
|
$58,220
|
|
March 31, 2010
|
$15,703
|
Government Regulation
The Company's operations are highly sensitive to regulations
promulgated by the United States and throughout the world in which the Company
has targeted its marketing efforts. These regulations or deregulations could
affect both the competition for the Company's product as well as the costs
associated with doing business abroad.
Litigation
The Company is subject to legal proceedings and claims that
arise in the ordinary course of business. In the opinion, of management, the
amount of any liability is not likely to have a material effect on the financial
statements.
Note 13 - Subsequent Event
Effective June 1, 2007, the Company issued a secured
convertible term note in the principal amount of
approximately $1,300,000. The note is due July 1, 2010 and
bears interest at prime plus 2% but no less than 9%. The note may be paid in
cash or common stock based on the Company's stock price, as defined. In
addition, the Company entered into a Registration Rights Agreement with the
purchaser that requires the Company to register its securities for resale to the
purchaser. The Registration Rights Agreement includes liquidating damages for
failure to file the Registration Statement by certain date, as defined.
Effective June 1, 2007, the Company acquired two telephone
companies, New Rochelle Telephone Corp. and Telecarrier Services, Inc., from
eLEC Communications Corp., ("Seller"). These companies were acquired on cashless
basis through the issuance of approximately $1.3 million of secured convertible
debt. The Company also received 808,000 restricted shares of common stock of the
Seller.
In addition, the Seller has indemnified the Company against
certain liabilities of the acquired companies. Selected information related to
the acquired companies for the year ended November 30, 2006 is as
follows:
|
|
2006
|
|
2005
|
Total assets
|
$
|
839,769
|
$
|
2,963,765
|
Revenue
|
|
8,153,328
|
|
15,849,561
|
Operating income (loss)
|
|
913,791
|
|
(660,794)
|
Net income (loss)
|
$
|
903,224
|
$
|
(666,308)
|
CYBER DIGITAL, INC. and Subsidiaries
CONSOLIDATED
BALANCE SHEETS
|
|
|
June 30, 2007
|
|
March 31, 2007
|
ASSETS
|
|
(Unaudited)
|
|
(Audited)
|
Current Assets
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
63,867
|
$
|
33,506
|
|
Marketable securities
|
|
275,000
|
|
0
|
|
Accounts receivable, net
|
|
603,733
|
|
0
|
|
Inventories
|
|
248,996
|
|
248,996
|
|
Prepaid and other current assets
|
|
90,311
|
|
9,205
|
|
Total Current Assets
|
|
1,281,907
|
|
291,707
|
|
|
|
|
|
Property and Equipment, net
|
|
|
|
|
|
Equipment
|
$
|
403,068
|
$
|
339,932
|
|
Furniture and Fixtures
|
|
64,355
|
|
64,355
|
|
Vehicle
|
|
37,814
|
|
37,814
|
|
Leasehold Improvements
|
|
4,786
|
|
4,786
|
|
|
$
|
510,023
|
$
|
446,887
|
|
Accumulated depreciation
|
|
444,439
|
|
418,127
|
|
Total Property and Equipment
|
$
|
65,584
|
$
|
28,760
|
|
|
|
|
|
|
Other assets
|
|
73,581
|
|
34,267
|
Customer contracts
|
|
1,934,514
|
|
0
|
Other intangible assets
|
|
298,750
|
|
0
|
TOTAL ASSETS
|
$
|
3,654,336
|
$
|
354,734
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
Accounts payable, accrued expenses, and taxes
|
$
|
1,322,517
|
$
|
308,168
|
|
Accrued interest
|
|
508,789
|
|
458,352
|
|
Officer/ shareholder notes payable
|
|
1,606,300
|
|
1,531,300
|
|
Accrued dividend payable
|
|
35,469
|
|
32,344
|
|
Equipment loan payable- current portion
|
|
7,108
|
|
7,108
|
|
Convertible note payable-current portion
|
|
237,698
|
|
0
|
|
Deferred revenue
|
|
125,566
|
|
0
|
|
Total Current Liabilities
|
|
3,843,447
|
|
2,337,272
|
|
|
|
|
|
|
Long Term Liabilities
|
|
|
|
|
|
Equipment loan payable
|
|
13,728
|
|
15,408
|
|
Convertible note payable
|
|
1,069,640
|
|
0
|
|
Other liabilities
|
|
874,301
|
|
0
|
Total Liabilities
|
|
5,801,116
|
|
2,352,680
|
|
|
|
|
|
|
Shareholders' Equity (Deficit)
|
|
|
|
|
Preferred stock - $.05 par value; cumulative, convertible
and
|
|
|
|
|
|
Participating; authorized 10,000,000 shares
|
|
|
|
|
|
Series C; issued and outstanding - 310 shares at
|
|
|
|
|
|
June 30, 2007 and March 31, 2007
|
|
16
|
|
16
|
|
Series E; issued and outstanding -50 shares at
|
|
|
|
|
|
June 30, 2007 and March 31, 2007
|
|
3
|
|
3
|
Common stock - $.0066667 par value; authorized 90,000,000
shares;
|
|
|
|
|
|
issued and outstanding 33,529,813 and 33,504,813
|
|
|
|
|
|
shares at June 30, 2007 and March 31, 2007, respectively
|
|
223,533
|
|
223,266
|
Additional paid-in-capital
|
|
19,098,255
|
|
19,090,089
|
Accumulated deficit
|
|
(21,468,587)
|
|
(21,311,420)
|
|
Total Shareholders' Equity (Deficit)
|
|
(2,146,780)
|
|
(1,997,946)
|
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY
|
$
|
3,654,336
|
$
|
354,734
|
|
The accompanying notes are an integral part of these
statements.
|
CYBER DIGITAL, INC. and Subsidiaries
|
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
(Unaudited)
|
|
|
|
Three months ended June 30,
|
|
|
2007
|
|
2006
|
|
|
|
|
|
Net Sales
|
$
|
445,049
|
$
|
0
|
|
|
|
|
|
Cost of Sales
|
|
281,411
|
|
0
|
|
|
|
|
|
|
Gross Profit
|
|
163,638
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
Selling, general and administrative expenses
|
$
|
252,822
|
$
|
210,695
|
|
Research and development
|
|
5,769
|
|
6,731
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
258,591
|
|
217,426
|
|
|
|
|
|
|
Loss from Operations
|
|
(94,953)
|
|
(217,426)
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
Interest expense
|
|
(50,755)
|
|
(44,888)
|
|
Other expense
|
|
0
|
|
0
|
|
|
|
|
|
|
|
|
Total Other Income (Expense
)
|
|
(50,755)
|
|
(44,888)
|
|
|
|
|
|
|
Net Loss
|
|
(145,708)
|
|
(262,314)
|
|
|
|
|
|
|
Preferred Stock Dividend
|
|
3,125
|
|
3,125
|
|
|
|
|
|
|
Income Available to Common Shareholders
|
$
|
(148,833)
|
$
|
(265,439)
|
|
|
|
|
|
|
Net Loss Per Share of Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations - Basic
|
$
|
(.004)
|
$
|
(.008)
|
|
Diluted
|
$
|
(.004)
|
$
|
(.008)
|
|
|
|
|
|
|
|
Net Loss - Basic
|
$
|
(.004)
|
$
|
(.008)
|
|
Diluted
|
$
|
(.004)
|
$
|
(.008)
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
33,509,013
|
|
33,504,813
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
statements.
|
|
CYBER DIGITAL, INC. and Subsidiaries
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
(Unaudited)
|
|
|
|
Three months ended, June 30,
|
|
|
2007
|
|
2006
|
|
|
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
Net loss
|
$
|
(145,708)
|
$
|
(262,314)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
Depreciation
|
|
2,802
|
|
1,962
|
|
Amortization intangible assets
|
|
49,096
|
|
0
|
|
Accrued interest
|
|
50,437
|
|
44,564
|
|
Deferred revenue
|
|
(3,184)
|
|
0
|
|
(Increase) decrease in operating assets:
|
|
|
|
|
|
Accounts receivable
|
|
(113,771)
|
|
0
|
|
Prepaid expenses
|
|
(56,432)
|
|
(155)
|
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
Accounts payable, accrued expenses and taxes
|
|
(1,746)
|
|
8,189
|
|
Settlement payable
|
|
0
|
|
(2,583)
|
|
Net Cash Used in Operating Activities
|
|
(218,506)
|
|
(240,337)
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
Purchase of equipment
|
$
|
0
|
$
|
0
|
|
Cash portion of acquisition
|
|
175,547
|
|
0
|
|
Net Cash Used in Investing Activities
|
$
|
175,547
|
$
|
0
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
Issuance of common stock
|
$
|
0
|
$
|
2,470
|
|
Equipment loan payable
|
|
(1,680)
|
|
(1,055)
|
|
Issuance of options and warrants
|
|
0
|
|
139,451
|
|
Proceeds from officer/ shareholder loan
|
|
75,000
|
|
97,000
|
|
Net Cash Provided by Financing Activities
|
|
73,320
|
|
237,866
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
|
30,361
|
|
(2,471)
|
|
|
|
|
|
|
Cash and Cash Equivalents at Beginning of Period
|
|
33,506
|
|
5,551
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period
|
$
|
63,867
|
$
|
3,080
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
Income taxes
|
$
|
0
|
$
|
0
|
|
|
|
|
|
|
Supplemental Disclosure of Non Cash Investing and Financing
Activities
|
|
|
|
|
|
Acquisition financed through issuance of convertible debt
|
$
|
1,307,338
|
$
|
0
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
statements.
|
|
CYBER DIGITAL, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying unaudited financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended June 30, 2007 are
not necessarily indicative of the results that may be expected for the year
ending March 31, 2008. For further information, refer to the financial
statements and footnotes thereto included in the Company's Form 10-KSB, for the
year ended March 31, 2007.
Note 2. Inventories
Inventory of purchased parts for eventual resale to customers
are valued at the lower of cost or market, as determined by the first-in,
first-out (FIFO) method and consisted of the following:
|
|
June 30, 2007
|
|
March 31, 2007
|
Raw Materials
|
$
|
248,996
|
$
|
248,996
|
|
$
|
248,996
|
$
|
248,996
|
Note 3. Stock Options and Warrants
On January 1, 2006, the Company adopted Statement of Financial
Accounting Standards No. 123R (SFAS No. 123R) which requires that stock options
and warrants issued for compensation or services be recorded at their estimated
fair value using option pricing models. The Company uses the Black-Scholes model
to value its stock option and warrants. The Company used an interest rate of
3.05% and expected volatility of 4.6% in valuing its stock options. During the
quarter ended June 30, 2007, the Company issued no options and warrants.
A summary of option and warrant activity as of June 30, 2007 is as
follows:
|
Shares
|
Weighted Average Exercise Price $
|
Average Remaining Life
|
|
Outstanding, April 1, 2007
|
31,374,850
|
0.29
|
3.64
|
|
Granted options and warrants
|
0
|
|
|
|
Options exercised
|
25,000
|
0.33
|
|
|
Expired
|
50,000
|
0.33
|
|
|
Outstanding, June 30, 2006
|
31,299,850
|
|
|
|
|
|
|
|
|
Note 4. Stock Split
On June 6, 2006, the Company declared a 3-for-2 stock split to be paid in the
form of a 50% stock dividend to the stockholders of record as of June 26, 2006.
Accordingly, the financial statements reflect the adjustments to common stock,
options and warrants outstanding.
Note 5. Intangible Assets
Intangible assets consists of the following:
|
Useful Life
|
Carrying Amount
|
Accumulated Amortization
|
Net Amount
|
Customer contracts
|
4 years
|
$ 1,975,674
|
$ 41,160
|
$ 1,934,514
|
FCC and state licenses
|
20 years
|
300,000
|
1,250
|
298,750
|
Total
|
|
$ 2,275,674
|
$ 42,410
|
$ 2,233,264
|
Note 6. Acquisitions
Effective June 1, 2007, the Company acquired 100% of two
telephone companies, New Rochelle Telephone Corp. (NRT) and Telecarrier
Services, Inc. (TSI), from eLEC Communications Corp., ("Seller"). These
companies were acquired on cashless basis through the issuance of approximately
$1.3 million of secured convertible debt and the assumption of certain
liabilities. The Company also received 808,000 restricted shares of common stock
of the Seller. Both NRT and TSI provide services in the states of New York, New
Jersey and Pennsylvania. Collectively, they serve about 10,000 subscriber lines.
The Company expects to benefit from operating synergies upon migrating NRT and
TSI subscriber lines onto its network. The results of NRT and TSI for the period
June 1 through June 30, 2007 are included in the results of operations.
Effective June 1, 2007, the Company issued a secured
convertible term note in the principal amount of approximately $1,300,000. The
note is due July 1, 2010 and bears interest at prime plus 2% but no less than
9%. The note is convertible at a fixed conversion price of $0.50 per share. The
note and interest may be paid in cash or stock depending on the Company's stock
price, as defined. In addition, there are limits on how much of the note may be
converted based on trading volume, as defined. In addition, the Company entered
into a Registration Rights Agreement with the purchaser that requires the
Company to register its securities for resale to the purchaser. The Registration
Rights Agreement includes liquidating damages for failure to file the
Registration Statement by certain date, as defined. In addition, the Seller has
indemnified the Company against certain liabilities of the acquired
companies.
Pro forma results of operations for the current and prior
reporting periods, including adjustments for the acquisitions, to the beginning
of the periods are as follows:
|
Three months ended, June 30,
|
|
2007
|
2006
|
Revenue
|
$ 1,396,028
|
$ 2,057,709
|
Operating expenses
|
1,174,119
|
1,873,355
|
Amortization of intangibles
|
127,230
|
127,230
|
Interest expense
|
33,498
|
33,498
|
Net income (loss)
|
$ 61,181
|
$
23,626
|
Purchase price assigned to each major asset and liability
caption is presented in the following combined condensed balance sheet:
Current assets
|
$ 964,984
|
Fixed assets
|
39,826
|
Intangible assets and other assets
|
2,321,674
|
Total Assets
|
3,326,484
|
|
|
Accounts payable
|
$ 1,016,095
|
Pre-acquisition contingencies
|
874,301
|
Other liabilities
|
128,750
|
Convertible debt
|
1,307,338
|
Total Liabilities
|
$ 3,326,484
|
_____________________
Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
We have had no disagreements on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures with
any of our accountants for the years ended March 31, 2007 and 2006.
_____________________________
NEW ROCHELLE TELEPHONE CORP. AND
TELECARRIER SERVICES INC.
(Wholly owned subsidiaries of eLEC
Communications, Corp.)
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 2006 AND 2005
___________________________
TABLE OF CONTENTS
|
Page
|
Independent Auditors
=
Report
|
1
|
Financial Statements
|
|
Consolidated Balance Sheets
|
2
|
Consolidated Statements of Operations
|
3
|
Consolidated Statements of Changes in Shareholders
=
Equity (Deficit)
|
4
|
Consolidated Statements of Cash Flows
|
5
|
Notes to Consolidated Financial Statements
|
6-12
|
|
|
|
|
___________________________________
BLANCHFIELD, KOBER
& COMPANY, P.C.
CERTIFIED PUBLIC
ACCOUNTANTS
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
New Rochelle Telephone Corp. and
Telecarrier Services, Inc.
White Plains, New York
We have audited the Consolidated balance sheets of New Rochelle
Telephone Corp. and Telecarrier Services, Inc. as of November 30, 2006 and 2005,
and the related consolidated statements of operations, stockholders' equity
deficiency, and cash flows for the years ended November 30, 2006 and 2005. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits.
We conducted our audits in accordance with the auditing
standards generally accepted in the United States of America. 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 Consolidated financial statements referred
to above present fairly, in all material respects, the Consolidated financial
position of New Rochelle Telephone Corp. and Telecarrier Services, Inc. as of
November 30, 2006 and 2005, and the Consolidated results of their operations and
cash flows for the years ended November 30, 2006 and 2005, in conformity with
accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As further
discussed in Note 2 to the financial statements, the Company has suffered
recurring losses from operations and is in default of its financing agreements
with its principal lender which raises substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Blanchfield,
Kober & Co., P.C.
Hauppauge, New
York
August 28, 2007
NEW ROCHELLE TELEPHONE CORP. AND TELECARRIER SERVICES,
INC.
|
(Wholly owned subsidiaries of eLEC Communications,
Corp.)
|
CONSOLIDATED BALANCE SHEETS
|
November 30,
|
|
|
2006
|
|
2005
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
181,127
|
$
|
173,370
|
|
Accounts receivable, net of allowance of
|
|
|
|
|
|
$258,337 in 2006 and $213,202 in 2005
|
|
579,999
|
|
984,503
|
|
Due from affiliate
|
|
0
|
|
1,727,609
|
|
Prepaid expenses and other current assets
|
|
16,911
|
|
12,875
|
|
Deferred tax asset
|
|
0
|
|
248,906
|
|
Total Current Assets
|
|
778,037
|
|
3,147,263
|
|
|
|
|
|
|
Property and Equipment, net
|
|
46,067
|
|
23,433
|
|
|
|
|
|
|
Other Assets
|
|
18,000
|
|
49,209
|
|
TOTAL ASSETS
|
|
$ 842,104
|
|
$ 3,219,905
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS'
DEFICIENCY
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
Accounts payable and accrued expenses
|
$
|
1,539,181
|
$
|
1,679,403
|
|
Due to affiliates
|
|
51,838
|
|
2,595,319
|
|
Taxes collected from customers
|
|
555,172
|
|
621,935
|
|
Deferred revenue
|
|
166,100
|
|
278,200
|
|
Total Current Liabilities
|
|
2,312,291
|
|
5,174,857
|
|
|
|
|
|
|
Stockholders' Equity (Deficiency)
|
|
|
|
|
|
Common stock
|
|
4,000
|
|
4,000
|
|
Additional paid-in capital
|
|
2,285,008
|
|
2,285,008
|
|
Deficit
|
|
(3,759,195
)
|
|
(4,243,960
)
|
|
Total Stockholders' (Deficiency)
|
|
(1,470,187
)
|
|
(1,954,952
)
|
TOTAL LIABILITIES AND STOCKHOLDER'S
DEFICIENCY
|
$
|
842,104
|
$
|
3,219,905
|
|
|
|
|
|
|
See auditors' report and accompanying notes to
consolidated financial statements.
|
Page 2
|
NEW ROCHELLE TELEPHONE CORP. AND TELECARRIER SERVICES,
INC.
|
(Wholly owned subsidiaries of eLEC Communications,
Corp.)
|
CONSOLIDATED STATEMENT OF OPERATIONS
|
FOR THE YEAR ENDED NOVEMBER 30,
|
|
|
2006
|
|
2005
|
|
|
|
|
|
REVENUE
|
$
|
8,178,969
|
|
15,939,881
|
|
|
|
|
|
COSTS AND EXPENSES
|
|
|
|
|
|
Costs of services
|
|
5,184,534
|
|
9,352,784
|
|
Selling, general and administrative
|
|
1,926,799
|
|
3,631,193
|
|
Bad debts
|
|
155,462
|
|
3,612,005
|
|
Depreciation
|
|
11,384
|
|
4,694
|
|
TOTAL COSTS AND EXPENSES
|
|
7,278,179
|
|
16,600,676
|
|
|
|
|
|
|
INCOME (LOSS) FROM OPERATIONS
|
|
900,790
|
|
(660,795
)
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
Miscellaneous income
|
|
37,817
|
|
24,256
|
|
Interest expense
|
|
-
|
|
(1,076
)
|
TOTAL OTHER INCOME
|
|
37,817
|
|
23,180
|
|
|
|
|
|
|
I
NCOME (LOSS) BEFORE INCOME TAXES
|
|
938,607
|
|
(637,615
|
|
|
|
|
|
|
INCOME TAX EXPENSE (BENEFIT)
|
|
300,744
|
|
(248,906
)
|
NET INCOME (LOSS)
|
$
|
637,863
|
$
|
(388,709
)
|
|
|
|
|
|
|
|
|
|
|
|
|
See auditors' report and accompanying notes to
consolidated financial statements.
|
Page 3
|
NEW ROCHELLE TELEPHONE CORP. AND TELECARRIER SERVICES,
INC.
|
(Wholly owned subsidiaries of eLEC Communications,
Corp.)
|
CONSOLIDATED STATEMETNS OF STOCKHOLDERS'
EQUITY
|
FOR THE YEARS ENDED NOVEMBER 30
|
|
|
|
|
|
|
Common Stock
|
Additional
|
Retained
|
Total Equity
|
|
Shares Amount
|
Paid-In Capital
|
Earnings (Deficit)
|
(Deficit)
|
|
|
|
|
|
Balance, November 30, 2004
|
$ 4,000
|
$ 2,285,008
|
$ (3,855,251
|
$ (1,566,243)
|
|
|
|
|
|
Net income (loss)
|
|
|
(388,709
|
(388,709
)
|
|
|
|
|
|
Balance, November 30, 2005
|
$ 4,000
|
$ 2,285,008
|
$ (4,243,960)
|
$ (1,954,952)
|
|
|
|
|
|
Net income (loss)
|
|
|
637,863
|
637,863
|
|
|
|
|
|
Dividend see note
|
|
|
(153,098
|
(153,098
|
|
|
|
|
|
Balance, November 30, 2006
|
$ 4,000
|
$ 2,285,008
|
$ (3,759,195
)
|
$ (1,470,187
)
|
|
|
|
|
|
|
|
|
|
|
See auditors' report and notes to consolidated financial
statements
|
Page 4
|
NEW ROCHELLE TELEPHONE CORP. AND TELECARRIER SERVICES,
INC.
|
(Wholly owned subsidiaries of eLEC Communications,
Corp.)
|
CONSOLIDATED STATEMENT OF CASH FLOWS
|
FOR THE YEARS ENDED NOVEMBER 30,
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
Net income (loss)
|
$
|
637,863
|
$
|
(388,709)
|
Adjustments to reconcile net income (loss)
|
|
|
|
|
to net cash provided by operating activities
|
|
|
|
|
|
Depreciation
|
|
11,384
|
|
4,695
|
|
Bad debt expense
|
|
(45,135
|
|
(289,431)
|
|
Deferred tax expense (benefit)
|
|
248,906
|
|
(248,906)
|
|
(Increase) decrease in:
|
|
|
|
|
|
Accounts receivable
|
|
449,639
|
|
551,991
|
|
Prepaid and other current assets
|
|
(4,036)
|
|
3,259
|
|
Other assets
|
|
31,209
|
|
(1,209)
|
|
Increase (decrease):
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
(140,224)
|
|
25,481
|
|
Taxes payable
|
|
(66,762)
|
|
(41,546)
|
|
Deferred revenue
|
|
(112,100
)
|
|
(63,501
)
|
|
Net Cash Provided by (Used In) Operating Activities
|
|
1,010,744
|
|
(447,876
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
Purchase of property and equipment
|
|
(34,017
)
|
|
(17,618
)
|
|
Net Cash (Used In) Investing Activities
|
|
(34,017
)
|
|
(17,618
)
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
Due from affiliates
|
|
1,554,749
|
|
(1,316,325)
|
|
Due to affiliates
|
|
(2,523,719
)
|
|
1,659,889
|
|
Net Cash (Used In) Financing Activities
|
|
(968,970
)
|
|
343,564
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
7,757
|
|
(121,930)
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
173,370
|
|
295,300
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR
|
|
$ 181,127
|
|
$ 173,370
|
|
|
|
|
|
|
CASH PAID DURING THE YEAR FOR
|
|
|
|
|
|
Interest
|
|
$ 13,000
|
|
$ 1,076
|
|
|
|
|
|
|
|
|
|
|
|
|
See auditors' report and notes to consolidated financial
statements.
|
Page 5
|
NEW ROCHELLE
TELEPHONE CORP. AND TELECARRIER SERVICES INC.
(Wholly owned
subsidiaries of eLEC communications Corp.)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
NOVEMBER 30, 2006 and 2005
A.
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Description of Business and Concentrations
New Rochelle Telephone Corp. and Telecarrier Services Inc. (collectively the
"Company") are wholly owned subsidiaries of eLEC Communications Corp.( the
"Parent Company"). The Company is a full-service telecommunications company that
focus on developing integrated telephone service in the competitive local
exchange carrier ("CLEC") industry services. The Company offers small and
medium-sized businesses and residential customers an integrated set of
telecommunications products and services, including local exchange, local
access, and domestic and international long distance telephone.
The principal focus of the Company, as a communications provider, is to
resell and provide low-cost alternative telecommunication services and other
bundled services, focusing on small business users and residential customers.
Principles of Consolidation
The Consolidated financial statements include the accounts of the Company
after elimination of significant intercompany balances and transactions.
Property, Plant and Equipment and Depreciation
Property, plant and equipment are recorded at cost. Depreciation is computed
primarily by use of accelerated and straight-line methods over the estimated
useful lives of the assets. The estimated useful lives are three to five years
for computer equipment and software, five to ten years for machinery and
equipment, and five years for furniture and fixtures.
Income Taxes
The Company accounts for income taxes according to the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." Under the liability method specified by SFAS No. 109, deferred
tax assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities, as measured by the
enacted tax rates that will be in effect when these differences reverse, and the
effect of net operating loss carryforwards. Deferred tax expense is the result
of changes in deferred tax assets and liabilities. A valuation allowance has
been established to eliminate the portion of the deferred tax assets that the
Company believes will not be realized.
Revenue Recognition
Revenues from voice, data and other telecommunications-related services are
recognized in the period in which subscribers use the related services. Revenues
for carrier interconnection and access are recognized in the period in which the
service is provided. Deferred revenue represents the unearned portion of
telephone service plans that are billed a month in advance.
Collectibility of Accounts Receivable
Trade receivables potentially subject the Company to credit risk. The Company
extends credit to its customers and generally does not require collateral.
During fiscal years ended November 30, 2006 and 2005, the Company accepted most
new customers and extended initial credit based upon credit scored lists and
payment history of telephone bills,
Page 6
NEW ROCHELLE
TELEPHONE CORP. AND TELECARRIER SERVICES INC.
(Wholly owned
subsidiaries of eLEC communications Corp.)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED NOVEMBER 30, 2006 and 2005
A.
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
(continued)
when available. Once a customer is billed for services, the Company actively
manages the accounts receivable to minimize credit risk. Approximately $ 39,539
and $ 92,555 as of November 30, 2006 and 2005 represented net amounts due (after
allowance for doubtful collection) from entities in the telecommunications
industry related to carrier interconnection and access.
In order to record the Company's accounts receivable at
their net realizable value, the Company must assess their collectibility. A
considerable amount of judgment is required in order to make this assessment,
including an analysis of historical bad debts and other adjustments, a review of
the aging of the Company's receivables, and the current creditworthiness of the
Company's customers. Generally, when a customer account reaches a certain level
of delinquency, the Company disconnects the customer's service and provides an
allowance for the related amount receivable from the customer. The Company
writes off the accounts receivable balance from a customer and the related
allowance established when it believes it has exhausted all reasonable
collection efforts. As of November 30, 2006 and 2005, the Company had no
individual customer that constituted more than 10% of its accounts receivable.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future forecasted net
undiscounted cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair values.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the 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.
Significant estimates relate to the allowance for doubtful accounts receivable,
accrued amounts for sales and gross receipts taxes, income tax valuation
allowance, and conclusions regarding the impairment of long-lived assets. On a
continual basis, management reviews its estimates, utilizing currently available
information, changes in facts and circumstances, historical experience and
reasonable assumptions. After such reviews, and if deemed appropriate, those
estimates are adjusted accordingly. Actual results could differ from those
estimates.
Advertising
Advertising costs are expensed as incurred. Such costs were not significant
in any of the years presented herein.
Page 7
NEW ROCHELLE
TELEPHONE CORP. AND TELECARRIER SERVICES INC.
(Wholly owned
subsidiaries of eLEC communications Corp.)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
NOVEMBER 30, 2006 and 2005
A.
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
(continued)
Fair Value of Financial Instruments
Financial instruments consists of cash and cash equivalents and accounts
receivable. The carrying amount of these instruments approximates their fair
value.
Taxes collected from customers and remitted to government
authorities
The Company presents revenue net of taxes collected from customers and
remitted to government authorities
B.
GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the ordinary course of business. However, the Parent Company's
annual report has been qualified for a going concern due to recurring losses and
is in default of its financing agreements with its principal lender. As of
November 30, 2006, substantially all of the Company assets had been pledged as
security under the Parent Company's debt agreements. In June 2007, the Company
was sold to Cyber Digital Inc.
The Company anticipate generating positive cash flow in the near future,
however, the Company will need to expend additional funds on marketing to
maintain its customer base and attract new customers. Competition for customers
is fierce and certain of the Company's competitors are better capitalized.
The Company may not be able to maintain current levels of cash flow, may not
be able to raise additional debt or equity financing or achieve certain other
business plan objectives. These could have a material adverse effect on the
Company's ability to continue as a going concern.
Management's plans include (1) increasing marketing efforts to maintain and
attract new customers, (2) seeking additional financing to acquire additional
customers or business to increase cash flow and, (3) cut certain operating cost
to achieve more profitable operations.
There can be no assurance that the Company will be able to achieve its
business plan objectives or that it will achieve or maintain cash flow positive
operating results. If the Company are unable to maintain adequate cash flow or
obtain additional financing, they will be unable to continue as a going concern.
The financial statements do not include any adjustments that might result from
this uncertainty.
C.
PROPERTY, PLANT AND
EQUIPMENT
|
|
2006
|
2005
|
Machinery and equipment
|
|
$ 27,411
|
$ 2,073
|
Computers and software
|
|
35,726
|
27,046
|
|
|
63,137
|
29,119
|
Less : accumulated depreciation
|
|
17,070
|
5,686
|
|
|
$ 46,067
|
$ 23,433
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended November 30, 2006 and 2005 was
$11,384 and $4,695.
Page 9
NEW ROCHELLE
TELEPHONE CORP. AND TELECARRIER SERVICES INC.
(Wholly owned
subsidiaries of eLEC communications Corp.)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
NOVEMBER 30, 2006 and 2005
D.
INCOME TAXES
The company and its parent file a consolidated federal income tax return.
Income tax expense has been allocated on the basis of the Company's estimated
taxable income as if it were a separate taxpayer.
The components of income tax expense (benefit) for the years ended November
30, were as follows:
|
2006
|
2005
|
Current:
|
|
|
Federal
|
$ 42,191
|
$ 0
|
State
|
9,647
|
0
|
|
|
|
Deferred
|
|
|
Federal
|
202,236
|
(202,236
|
State
|
46,670
|
(46,670
)
|
Income tax expense (benefit)
|
$ 300,744
|
$ (248,906
)
|
Income tax expense (benefit) differed from the amounts computed by applying
the U.S. federal statutory rate of 34% to pre-tax income as a result of the
following:
|
2006
|
2005
|
Expected Federal Income
|
$ 319,127
|
$ 0
|
Change in deferred tax asset
|
248,906
|
(248,906)
|
Benefit of net operating loss carryforward
|
(264,462)
|
0
|
State taxes net of Federal benefit
|
6,367
|
0
|
Effect of tax brackets
|
(9,194
)
|
0
|
Income tax expense (benefit)
|
$ 300,744
|
$ (248,906
)
|
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 tax assets as of November 30, 2006 and 2005 were as
follows:
Deferred Tax Assets:
|
2006
|
2005
|
Net operating loss carryforwards
|
$ 596,792
|
$ 845,697
|
Allowance for doubtful accounts receivable
|
68,225
|
82,668
|
|
665,017
|
928,365
|
Less: Valuation allowance
|
665,017
|
679,459
|
Net deferred tax asset
|
$ 0
|
$ 248,906
|
Page 10
NEW ROCHELLE
TELEPHONE CORP. AND TELECARRIER SERVICES INC.
(Wholly owned
subsidiaries of eLEC communications Corp.)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
NOVEMBER 30, 2006 and 2005
D.
INCOME TAXES
Federal Income tax purposes of approximately $1,865,000 expiring in the year
2023 through 2025.
At November 30, 2006, the Company's net operating loss carryforwards are
scheduled to expire as follows:
2023
|
$ 766,000
|
2025
|
1,099,000
|
|
$ 1,865,000
|
The Company has provided a full valuation allowance against its deferred tax
assets as of November 30, 2006. Based on the level of historical taxable income
and projections for future taxable income are uncertain, the Company determined
that it was more likely than not that these assets may not be realized.
E.
COMMITMENTS AND CONTINGENCIES
Litigation
The Company is subject to legal proceedings and claims that arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability, if any, is not likely to have a material effect on the
financial condition, results of operations or liquidity of the Company.
However, as the outcome of litigation or legal claims is difficult to
predict, significant changes in the estimated exposures could occur.
At November 30, 2006, the Company is disputing payment on invoices from
Verizon amounting to approximately $400,000 because it believes Verizon
overcharged the Company for certain calls made by the Company's customers.
Although the Company is not currently required to pay the disputed amount,
Verizon has initially rejected the claim. The Company has escalated the claim
and has hired a firm that specializes in telecom disputes to analyze past call
records, resubmit and pursue the claim. The Company cannot be certain how much,
if any, of the claim will be honored. Consequently, the full amount of the
disputed charges has been recorded as a liability.
Purchase Commitments
New Rochelle Telephone Company ("NRTC"), completed its negotiations with
Verizon Services Corp. ("Verizon") and signed a Wholesale Advantage Services
Agreement (the "Agreement") effective January 1, 2005. The Agreement is a
long-term commercial alternative to the unbundled network elements platform
("UNE-P") and allows NRTC to purchase from Verizon wholesale dial tone services
on terms that preserve, in all material respects, the features, functionality
and ordering processes previously available to NRTC under Verizon's UNE-P
service offering. The rates and charges for such services are fixed at agreed
upon price levels that should allow NRTC to continue to offer its existing
telephone services at competitive prices. Pursuant to the Agreement, NRTC and
eLEC Communications Corp. are required to keep confidential all additional terms
and provisions of the Agreement. The Company has minimum line commitments in
connection with the Agreement.
Operating Leases
The Company leases facilities under noncancelable operating lease agreements
which expire through 2008.
Page 11
NEW ROCHELLE
TELEPHONE CORP. AND TELECARRIER SERVICES INC.
(Wholly owned
subsidiaries of eLEC communications Corp.)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
NOVEMBER 30, 2006 and 2005
E.
COMMITMENTS AND CONTINGENCIES
(continued)
Rent expense was approximately $82,000 in each of the fiscal years 2006 and
2005. In addition to the annual rent, the Company pays real estate taxes,
insurance and other occupancy costs on its leased facilities.
The minimum annual commitments under all operating leases that have remaining
noncancelable terms in excess of one year are approximately as follows:
Year ended November 30,
|
|
2007
|
$ 67,000
|
2008
|
69,000
|
|
$ 136,000
|
F.
RELATED PARTY TRANSACTIONS
At November 30, the Company had the following amounts receivable/ (payable)
from its Parent Company or other wholly owned subsidiaries;
|
2006
|
2005
|
Telco
|
$ 0
|
$ 109,846
|
Vox
|
0
|
969,990
|
eLEC Communications Corp
|
51,838
|
(1,985,503)
|
Line One
|
0
|
7,957
|
|
$ 51,838
|
$ (897,710
)
|
During the fiscal year ended November 30, 2006, the Company consolidated its
various loans receivable from affiliates against its loan payable to the Parent
Company and charged the net balance to retained earnings as a dividend. These
advances are non interest bearing and due within one year.
G.
SUBSEQUENT EVENTS
In June 2007 the Company was acquired by Cyber Digital Inc. for approximately
$1.3 million.
Page 12
CYBER DIGITAL, INC.
AND SUBSIDIARIES
INTRODUCTION TO
PRO-FORMA CONSOLIDATED FINANCIAL INFORMATION
(Unaudited)
On June 22, 2007, the Company completed its acquisition of New Rochelle
Telephone Corp. and Telecarrier Services, Inc.("NRT and TSI") Effective June 1,
2007, the acquired entities became wholly owned subsidiaries of the Company.
The pro-forma consolidated balance sheets as of November 30, 2006 and 2005
and the pro-forma consolidated statements of operations for the years then ended
present the accounts of the Company and NRT and TSI. The pro-forma consolidated
balance sheet as of May 31, 2007 and the pro-forma consolidated statement of
operations for the six months then ended present the accounts of the Company and
NRT and TSI.
These pro-forma statements include all material adjustments necessary to
present pro-forma historical results of the above described transaction. The
pro-forma information does not purport to be indicative of the financial
position or the results of operations that would actually been obtained if the
acquisition transaction had actually been consummated on the date indicated. In
addition, the pro-forma financial information does not purport to be indicative
of the financial position or the results of operations that may be obtained in
the future.
The pro-forma information has been prepared by the Company and all
assumptions used in the preparation of the pro-forma information are deemed
appropriate under the circumstances. Certain of these assumptions are set forth
under the Notes to Pro-forma Consolidated Financial Information.
The pro-forma financial information should be read in conjunction with the
historical financial statements and notes thereto of Cyber Digital, Inc. and NRT
and TSI.
Cyber Digital, Inc. and Subsidiaries
|
Pro-forma Balance Sheets
|
March 31, 2007
|
|
Cyber
|
|
NRT and
|
|
Pro-forma
|
|
|
|
Digital, Inc.
|
|
TSI
|
|
Adjustments
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$ 33,506
|
|
$ 181,127
|
|
|
|
$ 214,633
|
Marketable securites
|
|
|
|
|
275,000
|
|
275,000
|
Accounts receivable, net
|
|
|
579,999
|
|
|
|
579,999
|
Inventories
|
248,996
|
|
|
|
|
|
248,996
|
Prepaid and other current assets
|
9,205
|
|
16,911
|
|
|
|
26,116
|
Deferred tax assets
|
|
|
|
|
|
|
-
|
Total Current assets
|
291,707
|
|
778,037
|
|
|
|
1,344,744
|
|
|
|
|
|
|
|
|
Property and equipment , net
|
28,760
|
|
46,067
|
|
|
|
74,827
|
|
|
|
|
|
|
|
|
Other assets
|
34,267
|
|
18,000
|
|
2,275,674
|
|
2,327,941
|
|
|
|
|
|
|
|
|
Total assets
|
$ 354,734
|
|
$ 842,104
|
|
|
|
$ 3,747,512
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS, EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilites
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
$ 308,168
|
|
$1,539,181
|
|
|
|
$ 1,847,349
|
Taxes payable
|
|
|
555,172
|
|
|
|
555,172
|
Accrued interest
|
458,352
|
|
|
|
|
|
458,352
|
Due to affiliates
|
|
|
51,838
|
|
|
|
51,838
|
Officer/ shareholder loans
|
1,531,300
|
|
|
|
|
|
1,531,300
|
Deferred revenue
|
|
|
166,100
|
|
|
|
166,100
|
Dividend payable
|
32,344
|
|
|
|
|
|
32,344
|
Current portion long term debt
|
7,108
|
|
|
|
|
|
7,108
|
Total current liabilities
|
2,337,272
|
|
2,312,291
|
|
|
|
4,649,563
|
|
|
|
|
|
|
|
|
Long term debt
|
15,408
|
|
|
|
1,307,338
|
|
1,322,746
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
Preferred stock
|
19
|
|
|
|
|
|
19
|
Common stock
|
223,366
|
|
4,000
|
|
(4,000)
|
|
223,366
|
Additional paid in capital
|
19,090,088
|
|
2,285,008
|
|
(2,285,108)
|
|
19,089,988
|
Accumulated (deficit)
|
(21,311,419)
|
|
(3,759,195)
|
|
3,532,444
|
|
(21,538,170)
|
Total shareholders equity equity
|
(1,997,946)
|
|
(1,470,187)
|
|
|
|
(2,224,797)
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
$ 354,734
|
|
$ 842,104
|
|
|
|
$ 3,747,512
|
|
|
|
|
|
|
|
|
Cyber Digital, Inc. and subsidiaries
|
Pro-forma statement of operations
|
For the year ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cyber
|
|
NRT
|
|
Pro-forma
|
|
Consolidated
|
|
Digital, Inc.
|
|
and TSI
|
|
Adjustments
|
|
Total
|
|
|
|
|
|
|
|
|
Revenue
|
$ -
|
|
$8,178,969
|
|
|
|
$8,178,969
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
|
|
|
|
|
Cost of services
|
140,000
|
|
5,184,534
|
|
|
|
5,324,534
|
Selling, general and administrative
|
613,062
|
|
1,926,799
|
|
|
|
2,539,861
|
Bad debts
|
|
|
155,462
|
|
|
|
155,462
|
Depreciation and amortization
|
|
|
11,384
|
|
508,920
|
|
520,304
|
|
|
|
|
|
|
|
|
Total cost and expenses
|
753,062
|
|
7,278,179
|
|
|
|
8,031,241
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
(753,062)
|
|
900,790
|
|
|
|
147,728
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
Miscellaneous income
|
(13,114)
|
|
37,817
|
|
|
|
24,703
|
Interest expense
|
(166,312)
|
|
-
|
|
(133,992)
|
|
(300,304)
|
|
|
|
|
|
|
|
|
Total other income
|
(179,426)
|
|
37,817
|
|
|
|
(275,601)
|
|
|
|
|
|
|
|
|
Income before income taxes
|
(932,488)
|
|
938,607
|
|
|
|
(127,873)
|
|
|
|
|
|
|
|
|
Income tax (expense) benefit
|
(155)
|
|
(300,744)
|
|
|
|
(300,899)
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$ (932,643)
|
|
$ 637,863
|
|
|
|
$ (428,772)
|
|
|
|
|
|
|
|
|
Preferred stock dividend
|
12,526
|
|
|
|
|
|
12,526
|
|
|
|
|
|
|
|
|
Available to common shareholders
|
(945,169)
|
|
|
|
|
|
(441,298)
|
|
|
|
|
|
|
|
|
Earnings per share
|
$ (0.028)
|
|
|
|
|
|
$ (0.013)
|
|
|
|
|
|
|
|
|
Weighted average number of shares
|
33,502,101
|
|
|
|
|
|
33,502,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CYBER DIGITAL, INC.
AND SUBSIDIARIES
NOTES TO PRO-FORMA
CONSOLIDATED FINANCIAL INFORMATION
(Unaudited)
The pro-forma consolidated balance sheet as of March 31, 2007, and the
pro-forma consolidated statement of operations for the year then ended present
the accounts of Cyber Digital, Inc. and NRT and TSI.
Cyber Digital, Inc. acquired NRT and TSI on June 22, 2007, through the
issuance of a convertible note payable. A significant portion of the purchase
price was allocated to customer contracts and is being amortized over a four
year period. The pro-forma consolidated financial information include the
historical financial statements of the Company for the fiscal year ended March
31, 2007 and the historical consolidated financial statements of NRT and TSI for
the fiscal year ended November 30, 2006, the most recent available. The
pro-forma adjustments are required to present the historical information as if
the acquisition had occurred at an earlier date.
The pro-forma adjustments included in the pro-forma consolidated financial
are described below;
The issuance of $1,307,338 in convertible debt to acquire NRT and TSI.. The
recognition of $2,275,674 in intangible assets related to customer contracts and
the receipt of $275,000 of the sellers common stock.
The recognition of interest expense on the convertible debt. The Company has
assumed no conversion of the debt as the fixed conversion price is in excess of
the Company's current stock price.
The amortization of the intangible asset over a four year period, its
estimated useful life.
The pro-forma financial information should be read in conjunction with the
historical financial statements of the Company and NRT and TSI.
Cyber Digital (CE) (USOTC:CYBD)
過去 株価チャート
から 8 2024 まで 9 2024
Cyber Digital (CE) (USOTC:CYBD)
過去 株価チャート
から 9 2023 まで 9 2024