SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB Quarterly Report Filed Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended Commission File Number February 28, 1997 0-21649 WEBSECURE, INC. (Exact Name of Small Business Issuer As Specified In Its Charter) Delaware 04-3296069 - ------------------------------- --------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 1711 Broadway, Saugus, Massachusetts 01906 ------------------------------------------ (Address of Principal Executive Offices) (617) 867-2300 ------------------------------------------------ (Issuer's Telephone Number, Including Area Code) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ As of April 18, 1997, the Company had outstanding 5,606,875 shares of Common Stock, $.01 par value per share. WEBSECURE, INC. INDEX Part I. Financial Information Page ---- Item 1. Financial Statements Balance Sheets as of February 28, 1997 (Unaudited) and August 31, 1996 (Audited)..... 3 Statements of Operations for the Three and Six Month Periods ended February 28, 1997 and 1996 (Unaudited) and cumulative from inception (July 19, 1995) to February 28, 1997.................................. 4 Statements of Cash Flows for the Three and Six Month Periods ended February 28, 1997 and 1996 (Unaudited) and cumulative from inception (July 19, 1995) to February 28, 1997.................................. 5-6 Notes to Financial Statements (Unaudited)................................ 7-8 Item 2. Plan of Operations ............................................... 9-11 Part II. Other Information ............................................... 12 Item 1. Legal Proceedings................................................ 12 Item 2. Changes in Securities............................................ 12 Item 3. Defaults Upon Senior Securities.................................. 12 Item 4. Submission of Matters to a Vote of Security-Holders ............. 12 Item 5. Other Information ............................................... 12 Item 6. Exhibits and Reports on Form 8-K................................. 12 Signatures................................................................ 13 WebSecure, Inc. (A Development Stage Company) Balance Sheets February 28, August 31, 1997 1996 ------------ ----------- (Unaudited) (Audited) ASSETS Current: Cash and cash equivalents $ 4,855,964 $ 12,832 Restricted cash 740,574 -- Accounts receivable, net 10,144 21,797 Inventories 972 5,971 Due from related parties 30,549 59,776 Prepaid expenses and other 52,114 6,600 Legal retainers and deposit 137,000 -- ------------ ----------- Total current $ 5,827,317 106,976 Property and equipment, net 1,221,307 1,173,397 Deferred registration costs -- 424,060 Other assets 68,100 41,515 ------------ ----------- $ 7,116,724 $ 1,745,948 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable and accrued expenses $ 423,574 $ 679,435 Reserve for software license settlement 791,750 -- Due to related parties -- 125,635 Note payable to related party -- 672,000 Current portion of capital lease obligations 183,432 71,763 ------------ ----------- Total current liabilities 1,398,756 1,548,833 Capital lease obligation, less current maturities 850,790 300,430 ------------ ----------- Total liabilities 2,249,546 1,849,263 ------------ ----------- Stockholders' equity (deficit): Preferred stock, $.01 par value; 1,000,000 shares authorized; no shares issued and outstanding -- -- Common stock, $.01 par value; 20,000,000 shares authorized; 5,605,750 and 2,105,000 shares issued and outstanding 56,058 21,050 Class B common stock, $.01 par value; 2,000,000 shares authorized; 0 and 625,000 shares issued and outstanding -- 6,250 Additional paid-in capital 14,283,642 7,827,025 Deficit accumulated during the development stage (9,472,522) (7,957,640) ------------ ----------- Total stockholders' equity (deficit) 4,867,178 (103,315) ------------ ----------- $ 7,116,724 $ 1,745,948 ============ =========== See accompanying notes to financial statements -3- WebSecure, Inc. (A Development Stage Company) Statements of Operations Cumulative from Inception Three Months Ended Six Months Ended (July 19, 1995) to February 28 February 29 February 28 February 29 February 28, 1997 1996 1997 1996 1997 ----------- ----------- ----------- ----------- ----------- Revenues $ 60,789 $ 24,783 $ 147,830 $ 31,746 $ 245,085 Cost of revenues 301,975 76,736 489,987 102,010 683,427 ----------- ----------- ----------- ----------- ----------- Gross margin (241,186) (51,953) (342,157) (70,264) (438,342) ----------- ----------- ----------- ----------- ----------- Operating expenses: General and administrative 483,669 268,975 784,765 381,631 1,961,136 Selling and marketing 128,383 61,750 324,157 68,047 624,783 Research and development 40,477 136,584 85,625 168,698 663,873 Charge for acquired research and development -- -- -- -- 5,760,000 ----------- ----------- ----------- ----------- ----------- Total operating expenses 652,529 467,309 1,194,547 618,376 9,009,792 Loss from operations (893,715) (519,262) (1,536,704) (688,640) (9,448,134) Interest income (expense), net 55,156 (16,872) 21,822 (16,872) (24,388) ----------- ----------- ----------- ----------- ----------- Loss before income taxes (838,559) (536,134) (1,514,882) (705,512) (9,472,522) Income taxes -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- Net loss $ (838,559) $ (536,134) $(1,514,882) $ (705,512) $(9,472,522) =========== =========== =========== =========== =========== Net loss per common and common equivalent shares (.15) (.10) (.27) (.13) (1.69) =========== =========== =========== =========== =========== Shares used in computing net loss per common and common equivalent shares 5,605,750 5,605,750 5,605,750 5,605,750 5,605,750 =========== =========== =========== =========== =========== See accompanying notes to financial statements -4- WebSecure, Inc. (A Development Stage Company) Statements of Cash Flows Cumulative from Inception Three Months Ended Six Months Ended (July 19, 1995) to February 28 February 29 February 28 February 29 February 28, 1997 1996 1997 1996 1997 ----------- ----------- ----------- ----------- ----------- Cash flows from operating activities: Net loss $ (838,559) $ (536,131) $(1,514,882) $ (705,509) $(9,472,522) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Charge for acquired research and development -- -- -- -- 5,760,000 Issuance of common stock for professional services -- -- -- -- 79,800 Depreciation and amortization 108,543 40,203 208,843 58,280 406,309 Changes in operating assets and liabilities Accounts receivable & other 45,534 (55,436) 11,653 (57,155) (10,144) Inventories 8,134 9,956 4,999 (6,758) (972) Prepaid expenses and other (160,720) 79,614 (182,514) 88,253 (189,114) Accounts payable and accrued expenses 79,982 (6,919) 535,889 784,066 1,215,324 ----------- ----------- ----------- ----------- ----------- Net cash provided (used) by operating activities (757,086) (468,713) (936,012) (161,177) (2,211,319) ----------- ----------- ----------- ----------- ----------- Cash flows from investing activities: Acquisition of property and equipment (50,125) (32,034) (255,505) (679,605) (1,626,368) Notes Receivable -- (250,000) -- (250,000) -- Deferred registration costs 641,260 (54,057) 424,060 (133,981) -- Increase (decrease) in other assets 13,042 7,944 (27,833) 3,108 (69,348) ----------- ----------- ----------- ----------- ----------- Net cash provided (used) in investing activities 604,177 (328,147) 140,722 (1,060,478) (1,695,716) ----------- ----------- ----------- ----------- ----------- Cash flows from financing activities: Borrowings under capital leases -- 416,084 735,431 416,084 1,124,487 Principal payments on capital lease (46,709) (16,109) (73,402) (16,109) (90,265) (Increase) decrease in due from related parties 1,890 (820,628) 29,227 (1,089,082) (30,549) Subscriptions receivable -- (595,000) -- (595,000) -- Decrease in due to related parties -- -- (125,635) (17,343) -- -5- WebSecure, Inc. (A Development Stage Company) Statements of Cash Flows (continued) Cumulative from Inception Three Months Ended Six Months Ended (July 19, 1995) to February 28 February 29 February 28 February 29 February 28, 1997 1996 1997 1996 1997 ----------- ----------- ----------- ----------- ----------- Cash flows from financing activities (continued): Proceeds from issuance of common stock 6,485,375 1,760,225 6,485,375 2,014,535 8,499,900 Proceeds from notes payable to related party -- -- 27,083 133,928 1,522,083 Payments of notes payable to related party (699,083) (175,000) (699,083) (175,000) (1,522,083) ----------- ----------- ----------- ----------- ----------- Net cash provided by financing activities 5,741,473 569,572 6,378,996 672,013 9,503,573 ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in cash and Cash equivalents 5,588,564 (227,288) 5,583,706 (227,288) 5,596,538 Cash and cash equivalents, beginning of period 7,974 227,288 12,832 227,288 -- ----------- ----------- ----------- ----------- ----------- Cash and cash equivalents, end of period $ 5,596,538 $ -- $ 5,596,538 $ -- 5,596,538 =========== =========== =========== =========== =========== Supplemental cash flow information: Cash paid for interest $ 51,973 $ 16,872 $ 57,970 $ 16,872 $ 98,706 See accompanying notes to financial statements -6- WEBSECURE, INC. Notes to Financial Statements 1. General WebSecure, Inc. (the "Registrant") is in the development stage, and as such, success of future operations is subject to a number of risks similar to those of other companies in the same stage of development. Principal among these risks are the Company's limited operating history, history of operating losses, early stage of market development, competition from substitute products, larger more established competitors and rapid technological change. The accompanying unaudited condensed financial statements have been prepared in accordance with the instructions for Form 10-QSB and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and changes in cash flows in conformity with generally accepted accounting principles. The unaudited condensed financial statements should be read in conjunction with the financial statements and related notes included in the Registrant's Form SB-2 Registration Statement as filed with the Securities and Exchange Commission (the "SEC") on December 4, 1996. In the opinion of management, the unaudited condensed financial statements contain all adjustments necessary for a fair presentation of the Registrant's financial condition and results of operations for the interim periods presented and all such adjustments are of a normal and recurring nature. The results of operations for the six months ended February 28, 1997 are not necessarily indicative of the results which may be expected for the entire fiscal year. Computation of Net Loss per Common and Common Equivalent Shares The net loss per common and common equivalent shares are computed by dividing the net loss by the weighted average number of shares outstanding during each period presented, as adjusted for the effects of application of SEC Staff Accounting Bulletin No. 83 ("SAB No. 83"). Pursuant to SAB No. 83, all common stock and common stock equivalents issued within twelve months prior to the initial filing of the registration statement relating to the Company's initial public offering (the "IPO") at a price less than the IPO price have been treated as outstanding for all reported periods. The number of shares used in the computation also includes the conversion of outstanding Class B Common Stock into four shares of Common Stock, which occurred on the date of filing of the Registrant's Form SB-2 Registration Statement with the SEC. Initial Public Offering On December 10, 1996 the Company consummated a public offering of 1,000,000 shares of common stock at a price of $8.00 per share and redeemable warrants to purchase 1,000,000 shares of common stock at $9.60 per share, at a price of $.20 per warrant. The gross proceeds from the public offering of $8,200,000 was reduced by the underwriting discount and non-accountable expense allowance totaling $1,066,000 and legal, printing, accounting and other registration costs of $648,625. -7- 2. Reversal of Revenue from Manadarin Trading Co. Ltd. As a result of an investigation, conducted over the last two months, at the Company's request, by the Boston law firm of Hill & Barlow, the Company has restated its revenues for the first quarter ended November 30, 1996. During the first quarter, the Company previously reported sales of approximately $887,000; approximately $792,000 of said sales were for licensing software that the Company believed it had purchased in exchange for stock, from Manadarin Trading Company, Ltd., an Irish corporation. Based upon the Hill & Barlow investigation, the Company has determined that it never received any software from Manadarin, and even though it received approximately $792,000 from two purported sublicensees of the software, WebSecure never delivered any software to them. The Company has booked the money received from the sublicensees as cash, instead of revenue, and simultaneously recorded the approximately $792,000 as a liability on its books. WebSecure is considering what further action to take and intends to report its findings to proper authorities and will cooperate fully with any further investigation. -8- Item 2. PLAN OF OPERATIONS Overview The Registrant, a development stage Company, offers Internet access and support services for secure communications and commercial transactions over the Internet. The Company provides general Internet services, such as connectivity and communications services. The financial results for the period from inception (July 19, 1995) to February 28, 1997 primarily relate to the Company's initial organization and establishment of infrastructure. The Company has had limited revenues since inception and working capital of $4,428,560. The results for the quarter ended February 28, 1997 are not necessarily indicative of the results of the Company's operations that may be expected for the fiscal year ending August 31, 1997. The Company completed its IPO on December 10, 1996. The Company sold 1,000,000 shares of common stock and 1,150,000 redeemable warrants, and received net proceeds of approximately $6,485,000. The Company's plan of operations for the next twelve months will principally involve the sale of connectivity and the provision of Internet access services. The Company intends to use a portion of the IPO proceeds to hire additional personnel, including marketing, sales and customer service personnel, as well as to continue to upgrade its Internet access infrastructure and services. Results of Operations Revenues. The Company had revenues of $147,830 during the six month period ended February 28, 1997 compared to $31,746 during the six months ended February 29, 1996, an increase of $116,084 primarily related to increased connectivity, communications services and web site development. The Company anticipates it will derive revenues primarily from connectivity charges, hosting services, web site development and intranet networking. Cost of revenues. The Company's costs of revenues have exceeded revenues since inception. Negative gross margin of ($438,342) primarily relates to the Company's early stages of development. As sales revenues increase, the costs of revenues is expected to decline as a percentage of revenue. General and Administrative. The Company had general and administrative expenses of $784,765 during the six month period ended February 28, 1997 compared to $381,631 during the six months ended February 29, 1996, an increase of $403,134. This increase consists primarily of legal, compensation expense due to increased personnel, rent and insurance expenses. From inception through February 28, 1997, approximately $1,601,000 of the general and administrative expenses were paid to Employee Resource, Inc. ("ERI"), an employee leasing Company owned by the Company's former President and Chief Executive Officer. ERI leases to the Company all of its employees, including the officers of the Company. Selling and Marketing. The Company had selling and marketing expenses of $324,157 during the six month -9- period ended February 28, 1997 compared to $68,047 during the six months ended February 29, 1996, an increase of $256,110 This increase consisted of primarily of salaries and advertising costs.. Research and Development. The Company's research and development efforts are focused on development of the Company's co-hosting capabilities. The Company is also developing intranet models for intraorganization communications that can be used by multi-site organizations as well as a communications infrastructure to allow for daily information transfer to the Company for periodic back-up of customer files for disaster control purposes. The Company had research and development expenses of $85,625 during the six month period ended February 28, 1997 compared to $168,698 during the six months ended February 29, 1996, a decrease of $83,073. The decrease in research and development expenses is due primarily to the fact that the majority of the initial infrastructure development has been accomplished. Net Interest Income (Expense). Net interest income was $55,156 for the three month period ended February 28, 1997 compared to interest expense of $16,872 for the three months ended February 29, 1996. Net interest income was $21,822 for the six month period ended February 28, 1997 compared to interest expense of $16,872 for the six month period ended February 29, 1996 an increase of $38,694. The increase in interest income was due to investments of cash and cash equivalent investments raised in the Company's IPO. In addition, the interest expense decrease is related to the payoff of Notes Oayable to related parties in January 1997. Income Taxes. Since inception, the Company has generated tax benefits related to its operating loss carry-forwards and amortization of research and development costs. The deferred asset related to such benefits was fully reserved as of February 28, 1997 due to the significant doubt about the realization of the deferred tax asset. Accordingly, there has been no income tax expense or benefit reflected on the accompanying statements of operations since inception. Liquidity and Capital Resources Since its inception, the Company has financed its activities primarily by the IPO which closed on December 10, 1996 and raised approximately $6,485,000, as well as by notes payable from a stockholder, and the sale of its Common Stock to private investors. As a result of the IPO, working capital at February 28, 1997 was $4,428,560. The Company has three capital lease agreements which are secured by fixed assets. The outstanding balance as of February 28, 1997 for one of these agreements was approximately $337,000 and matures in December 2000. In September 1996, the Company entered into two additional capital lease agreements under which it may borrow up to an aggregate of $1,000,000 of which approximately $697,000 was outstanding at February 28, 1997. These obligations mature in October 2001. On December 10, 1996, the Company deposited, as collateral, a portion of the proceeds from the IPO equal to the amount outstanding under the September 1996 agreements. For the three months ended February 28, 1997, cash of approximately $757,000 was used by operating activities compared to cash used by operating activities of approximately $469,000 for the three months ended February 29, 1996. The Company used cash of approximately $936,000 during the six month period ended February 28, 1997 compared to approximately $162,000 during the six months ended February 29, 1996, an increase of $774,000, due primarily to the Company's net loss of approximately $1,515,000, compared to $706,000 for the six months ended February 29, 1996. During -10- the period from inception to February 28, 1997, the Company recorded a non-cash charge of $5,760,000 against earnings for acquired research and development, which was a substantial component of the Company's overall net loss for the period of approximately $9,473,000. The Company provided cash from the IPO on December 10, the Company consummated a public offering of 1,000,000 shares of common stock at a price of $8.00 per share and redeemable warrants to purchase 1,000,000 shares of common stock at $9.60 per share, at a price of $.20 per warrant. The gross proceeds from the public offering of $8,200,000 was reduced by the underwriting discount and non-accountable expense allowance totaling $1,066,000 and legal, printing, accounting and other registration costs of $648,625. During the quarter ending February 1997 the Company repaid $699,000 of notes payable to related parties. The Company raised approximately $2,014,500 from the sale of Common Stock to third party investors. The Company has borrowed approximately $1,522,000 from related parties since inception, all of which has been repaid as of January 17, 1996. Management believes that the net proceeds from the IPO will be sufficient to meet the Company's anticipated cash needs and finance its plans for expansion for at least the next twelve months. Thereafter, the Company anticipates that it may require additional financing to meet its current plans for expansion. No assurance can be given of the Company's ability to obtain such financing on favorable terms, if at all. If the Company is unable to obtain additional financing, its ability to meet its current plans for expansion could be materially adversely affected. Impact of Inflation Inflation has not had a material adverse effect on the Company's business. New Accounting Standards Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," issued by the Financial Accounting Standards Board ("FASB"), is effective for financial statements for fiscal years beginning after December 15, 1995. The new standard establishes new guidelines regarding when impairment losses on long-lived assets, which include plant and equipment and certain identifiable intangible assets and goodwill, should be recognized and how impairment losses should be measured. The Company does not expect the adoption of this standard to have a material effect on its financial position or results of operations. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." The Company has determined that it will continue to account for stock-based compensation for employees under Accounting Principles Board Opinion No. 25 and elect the disclosure-only alternative under SFAS No. 123. The Company will be required to disclose the pro forma net income or loss and per share amounts in the notes to the financial statements using the fair-value-based method beginning in the year ending August 31, 1997, with comparable disclosures for the year ended August 31, 1996. The Company has not determined the impact of these pro forma adjustments. -11- PART II - Other Information Item 1. Legal Proceedings. 1. The Registrant has been named as a defendant in three almost identical proceedings brought in the United States District Court for the District of Massachusetts (Nager v. WebSecure, Inc. et al); (Krause and Krause v. WebSecure, Inc., et al); and (Miller, Weberman and Fisher v. WebSecure, Inc. et al). The actions were commenced on March 26, 1997 and April 16, 1997. Also named as defendants were certain current and former officers and directors of the Registrant, Coburn & Meredith, Inc. and Shamrock Partners, Ltd., the underwriters of the Registrant's initial public offering (the "IPO"), and Centennial Technologies, Inc. ("Centennial"). The complaints allege that the registration statement filed by the Registrant in connection with the IPO contains certain false and misleading statements concerning the Registrant and its operations. The complaints seek compensatory damages, attorney's fees, and other damages. 2. The Registrant has responded to an inquiry by the Massachusetts Securities Division (the "Division"), which inquiry was commenced on March 19, 1997. The Division is seeking additional information surrounding the relationship between the Registrant and Centennial. Also named as subjects of the inquiry are Coburn & Meredith, Inc. and Shamrock Partners, Ltd. 3. The Registrant's President and Chairman of the Board, Carroll M. Lowenstein, was indicted for failure to file state income tax returns. Item 2. Changes in Securities. None. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 27 Financial Data Schedule. (b) Reports on Form 8-K. The Registrant filed a report on Form 8-K on February 24, 1997 under Item 5 ("Other Events"). No financial statements were filed with that report. -12- SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WEBSECURE, INC. Date: April 21, 1997 By: /s/ Carroll M. Lowenstein ---------------------------- Carroll M. Lowenstein President Date: April 21, 1997 By: /s/ Carole A. Ouellette ---------------------------- Carole A. Ouellette Chief Financial Officer