<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
/X/ Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended June 30, 1998.
/ / Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from to
Commission file number: 33-83526
SECURFONE AMERICA, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 34-1833574
- ------------------------------------- -------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
5850 OBERLIN DRIVE, SUITE 220 SAN DIEGO, CALIFORNIA 92121
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(Address of Principal Executive Offices)
619-677-5580
------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Check whether 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 report(s), and (2) has been
subject to such filing requirements for the past 90 days.
Yes No X
----- -----
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
COMMON STOCK, $0.001 PAR VALUE PER SHARE: 6,091,881 (AS OF FEBRUARY 1, 1999)
- --------------------------------------------------------------------------------
Transition Small Business Disclosure Format (check one):
Yes No X
----- -----
<PAGE>
SECURFONE AMERICA, INC.
Quarterly Report on Form 10-QSB
For the Quarter Ended June 30, 1998
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SECURFONE AMERICA, INC.
QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
<S> <C>
PART I -- FINANCIAL INFORMATION................................................2
Item 1. Financial Statements.............................................3
Item 2. Management's Discussion and Analysis or Plan of Operation.......16
PART II -- OTHER INFORMATION..................................................26
Item 1. Legal Proceedings...............................................26
Item 2. Changes in Securities and Use of Proceeds.......................26
Item 3. Defaults Upon Senior Securities.................................26
Item 4. Submission of Matters to a Vote of Security Holders.............26
Item 5. Other Information...............................................26
Item 6. Exhibits and Reports on Form 8-K................................26
</TABLE>
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Page 1
<PAGE>
SECURFONE AMERICA, INC.
Quarterly Report on Form 10-QSB
For the Quarter Ended June 30, 1998
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
<S> <C>
Consolidated Balance Sheets...........................................3
Consolidated Statements of Operations.................................4
Consolidated Statements of Stockholders' Equity.......................5
Consolidated Statements of Cash Flows.................................6
Notes to Financial Statements......................................7-15
</TABLE>
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Page 2
<PAGE>
SECURFONE AMERICA, INC.
Quarterly Report on Form 10-QSB
For the Quarter Ended June 30, 1998
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CONSOLIDATED BALANCE SHEETS FOR
THE THREE MONTHS AND SIX MONTHS ENDED
JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS
1998 1997
----------- -----------
CURRENT ASSETS:
<S> <C> <C>
Cash & cash equivalents $ 36,123 $ 63,429
Note receivable --- 150,000
Accounts receivable, net 63,427 ---
Marketable securities 770,000 ---
Inventory --- 41,282
Prepaid expenses 105,100 615
----------- -----------
Total current assets 974,650 255,326
PROPERTY AND EQUIPMENT, net of
accumulated depreciation 215,267 271,280
OTHER ASSETS:
Intangible assets, net of
accumulated amortization 230,201 283,690
Deposits 1,225 40,274
----------- -----------
Total other assets 231,426 323,964
----------- -----------
Total assets $ 1,421,343 $ 850,570
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
1998 1997
----------- -----------
CURRENT LIABILITIES:
Accounts payable & accrued liabilities $ 359,351 $ 183,099
Accrued payroll 46,664 16,458
Note payable 50,000 ---
Current portion of long term liabilities 61,463 35,881
----------- -----------
Total current liabilities 517,478 235,438
----------- -----------
LONG-TERM LIABILITIES:
Advances payable 842,000 ---
Notes payable, net of current portion 4,181 ---
Obligation under capital leases, net of current portion 70,248 112,486
----------- -----------
Total long term liabilities 916,429 112,486
----------- -----------
Total liabilities 1,433,907 347,924
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock - SecurFone America, Inc. 5,880 41,200
$.001 par value, authorized 100,000,000
shares, outstanding 6,000,216 shares at
June 30, 1998 and 4,000,000 shares
at June 30, 1997
Additional paid in capital 4,330,145 1,054,600
Additional paid in capital-stock options 2,869,525 ---
Deficit accumulated during the development stage (5,157,131) (593,154)
Retained earnings (deficit) (2,060,983) ---
----------- -----------
Total stockholders' equity (12,564) 502,646
----------- -----------
Total liabilities and stockholders' equity $ 1,421,343 $ 850,570
----------- -----------
----------- -----------
</TABLE>
See accompanying notes
Page 3
<PAGE>
SECURFONE AMERICA, INC.
Quarterly Report on Form 10-QSB
For the Quarter Ended June 30, 1998
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CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED
JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------------------------- -------------------------------
three months six months three months six months
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
REVENUES $ 117,368 $ 275,472 $ 3,023 $ 5,684
COST OF GOODS SOLD 130,691 228,756 24,784 25,234
------------ ----------- ------------ -----------
Gross profit (13,323) 46,716 (21,761) (19,550)
OPERATING EXPENSES:
Selling, general and administrative 585,765 1,250,881 278,770 512,111
Stock-based compensation 1,620,000
------------ ----------- ------------ -----------
585,765 2,870,881 278,770 512,111
Income (loss) from operations (599,088) (2,824,165) (300,531) (531,661)
------------ ----------- ------------ -----------
OTHER INCOME (EXPENSE):
Royalty revenue --- 100,000 400,000 400,000
Interest expense (77,363) (105,169) (27,054) (27,054)
Loss on abandonment - SFNY (48,980)
------------ ----------- ------------ -----------
Total other income (expense) (77,363) (5,169) 372,946 323,966
------------ ----------- ------------ -----------
Provision for income tax (1,649) (1,649) ---
------------ ----------- ------------ -----------
Net Income (loss) (678,100) (2,830,983) 72,415 (207,695)
------------ ----------- ------------ -----------
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized gains on securities 490,000 770,000 ---
------------ ----------- ------------ -----------
Comprehensive Income (Loss) $ (188,100) $(2,060,983) $ 72,415 $ (207,695)
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Net (loss) per share - basic $ (0.11) $ (0.49) $ 0.02 $ (0.04)
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Net (loss) per share - fully diluted $ (0.11) $ (0.49) $ 0.02 $ (0.04)
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
</TABLE>
See accompanying notes
Page 4
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SECURFONE AMERICA, INC.
Quarterly Report on Form 10-QSB
For the Quarter Ended June 30, 1998
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS AND SIX MONTHS ENDED
JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
Additional Deficit
paid in accumulated
Additional capital- during the Retained
Common paid in stock development Earnings
Stock capital options stage (Deficit) Total
----------- ----------- ----------- ------------ ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Initial issuance of common
Stock, May 20, 1996 $ 3 $ 975,797 $ --- $ --- $ --- $ 975,800
Stock split 1,333.33 to 1 39,970 (39,970) --- --- --- ---
Sale of stock 1,200 118,800 --- --- --- 120,000
Acquisition (36,173) 36,173 --- --- --- ---
Stock options granted --- --- 1,227,250 --- --- 1,227,250
Contingent shares issued 620 3,099,380 --- --- --- 3,100,000
Stock options exercised 225 --- 22,275 --- --- 22,500
Stock options granted --- --- 1,620,000 --- --- 1,620,000
Stock issued 35 139,965 --- --- --- 140,000
Net loss --- --- --- (5,157,131) (2,060,983) (7,218,114)
----------- ----------- ----------- ------------ ----------- -----------
Balance June 30, 1998 $ 5,880 $ 4,330,145 $ 2,869,525 $(5,157,131) $(2,060,983) $ (12,564)
----------- ----------- ----------- ------------ ----------- -----------
----------- ----------- ----------- ------------ ----------- -----------
</TABLE>
See accompanying notes
Page 5
<PAGE>
SECURFONE AMERICA, INC.
Quarterly Report on Form 10-QSB
For the Quarter Ended June 30, 1998
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CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS AND SIX MONTHS ENDED
JUNE 30, 1998 AND 1997
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
1998 1997
----------------------------- -----------------------------
three months six months three months six months
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (678,100) $(2,830,980) $ 72,415 $ (207,695)
------------ ------------ ------------ ------------
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 29,623 59,246 2,780 38,589
Stock options granted and contingent shares issued 1,620,000
Decrease (increase) in accounts receivable (2,101) (28,323) ---
Decrease (increase) in notes receivable --- 89,353 --- (150,000)
Decrease (increase) in royalities receivable 100,000 (750,000)
Decrease (increase) in inventory --- 22,153 8,718 (41,282)
Decrease (increase) in prepaid expenses (104,800) (105,100) 36,385 (615)
Decrease (increase) in intangibles and other assets --- (132,225) (736,651)
(Decrease) increase in accounts payable
payroll payable and accrued expenses 158,571 248,144 (6,243) 199,556
(Decrease) increase in deferred royalty revenue (100,000) 750,000
------------ ------------ ------------ ------------
NET CASH USED BY
OPERATING ACTIVITIES (596,807) (925,507) (18,170) (898,098)
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (6,701) (12,457) (35,567) (282,641)
------------ ------------ ------------ ------------
NET CASH PROVIDED (USED) IN
INVESTING ACTIVITIES (6,701) (12,457) (35,567) (282,641)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contribution to capital 140,000 162,500 --- 1,095,800
Proceeds from advances payable 500,000 827,000 ---
Repayments on notes payable (3,880) (7,699) ---
Proceeds from capital lease 159,650
Repayments under capital lease (6,155) (15,221) (11,282) (11,282)
------------ ------------ ------------ ------------
NET CASH PROVIDED IN
FINANCING ACTIVITIES 629,965 966,580 (11,282) 1,244,168
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 26,457 28,616 (65,019) 63,429
BEGINNING BALANCE - CASH AND
CASH EQUIVALENTS 9,666 7,507 128,448 ---
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
CASH AT JUNE 30 $ 36,123 $ 36,123 $ 63,429 $ 63,429
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 29,545 $ 49,851 $ 28,563 $ 28,563
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Cash paid during the period for income taxes $ 1,649 $ 2,499 $ 900 $ 900
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See accompanying notes
Page 6
<PAGE>
SECURFONE AMERICA, INC.
Quarterly Report on Form 10-QSB
For the Quarter Ended June 30, 1998
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NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND SIX MONTHS ENDED
JUNE 30, 1998 AND 1997
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of SecurFone America, Inc. and its wholly owned subsidiary,
SecurFone, Inc. (collectively referred to as "SecurFone" or the
"Company"). Intercompany transactions and balances have been
eliminated in the consolidated financial statements.
NATURE OF OPERATIONS
SecurFone is principally engaged in the sale of prepaid cellular phone
services. The Company provides these services in some markets and,
in other markets, licenses the Company's resources to unrelated
parties.
The Company offers three main products:
- Buy-The-Minute-TM- a software modified handset for which the
Company provides underlying national airtime, activation,
and administrative services for end users.
- SFA Local Network Solution - the Company's flagship product
that telephonically connects directly to the underlying
wireless service provider to accomplish call routing and
completion.
- Carrier Network Services - the wholesale prepaid wireless
platform service that the Company sells directly to wireless
carriers that do not wish to create their own platform
On August 1, 1997, SecurFone, Inc. was acquired by Material
Technology, Inc. (Formerly Tensiodyne Scientific Corporation) and
became a publicly traded corporation.
CASH AND CASH EQUIVALENTS
For the purpose of the statement of cash flows, the Company considers
all highly liquid investments with an original maturity of three
months or less to be cash equivalents. The Company maintains its
cash accounts in two commercial banks. Accounts are guaranteed by
the Federal Deposit Insurance Company (FDIC) up to $100,000.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to credit
risk include temporary cash investments and trade receivables.
Concentration of credit risk with respect to trade receivables is
limited due to the Company's large number of customers and wide
range of locations served. The Company occasionally maintains
deposits in excess of federally insured limits. Management believes
that the risk is limited by maintaining all deposits in high
quality financial institutions.
PROPERTY AND EQUIPMENT
The cost of property and equipment is depreciated over the estimated
useful lives of the related assets. Depreciation is calculated
using the accelerated depreciation method for both financial
reporting and income tax purposes. For the quarters ended June 30,
1998 and 1997 depreciation expense of $14,077 and $2,780 was
charged to operations, respectively. For the six months ended June
30, 1998 and 1997 depreciation expense of $28,154 and $11,302 was
charged to operations, respectively.
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Page 7
<PAGE>
SECURFONE AMERICA, INC.
Quarterly Report on Form 10-QSB
For the Quarter Ended June 30, 1998
- --------------------------------------------------------------------------------
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
FINANCIAL INSTRUMENTS
As collateral for performance and advances on long-term contracts, the
Company has stand-by letters of credit that it can issue for up to
$1,000,000. Through an agreement with investors, the Company may
obtain letters of credit which are secured by their personal assets
through their personal banks. In connection with the annual renewal
of these credit lines investors were granted 35,000 shares of
common stock on April 1, 1998. As of June 30, 1998, there was an
amount of $212,500 available to these investors for stand-by
letters of credit. For the quarters ended June 30, 1998 and 1997,
interest expense of $57,500 and $22,500 was charged to operations
respectively. For the six months ended June 30, 1998 and 1997,
interest expense of $80,855 and $22,500 was charged to operations,
respectively.
REVENUE AND EXPENSE RECOGNITION
The Company recognizes revenue from sales of cellular airtime, net of
an allowance for uncollectible amounts, when substantially all
significant services to be provided by the Company have been
performed. Expenses are recognized in the period in which they are
incurred. An allowance equal to 5% of sales has been provided for
uncollectible accounts based on management's evaluation of the
accounts and their history.
INTANGIBLE ASSETS
Intangible assets are comprised of various costs incurred by the
Company as part of start-up phase of operations. The Company began
amortizing these costs over a five year period as of January 1,
1997, using the straight-line method. For the quarters ended June
30, 1998 and 1997, $15,546 and $0 in amortization expense of
organizational costs has been charged to operations, respectively.
For the six months ended June 30, 1998 and 1997, $31,092 and $0 in
amortization expense of organizational costs has been charged to
operations, respectively
USE OF ESTIMATES
In preparing the Company's financial statements, management is required
to make estimates and assumptions that effect 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. These estimates are based on management's knowledge and
experience. Accordingly, actual results could differ from those
estimates.
Note 2. NOTE RECEIVABLE
The June 30, 1997 note receivable consists of a note due from
Montipilier Holdings, Inc., with interest accrued at 7% annually.
This note is secured by publicly traded securities held by an
affiliated corporation owned by a principal shareholder of
Montipilier Holdings, Inc. Montipilier Holdings, Inc. is the
principal shareholder in the Company.
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Page 8
<PAGE>
SECURFONE AMERICA, INC.
Quarterly Report on Form 10-QSB
For the Quarter Ended June 30, 1998
- --------------------------------------------------------------------------------
Note 3. MARKETABLE SECURITIES AVAILABLE FOR SALE
Cost and fair value of marketable securities available for sale at
March 31, 1998 and June 30, 1998 is as follows:
<TABLE>
<CAPTION>
Cost Unrealized Gains Fair Value
---- ---------------- ----------
<S> <C> <C> <C>
March 31, 1998 - Equities $0 $ 280,000 $280,000
June 30, 1998 - Equities $0 $ 770,000 $770,000
</TABLE>
The Company has adopted FASB Statement No. 130, Reporting Comprehensive
Income. Statement No. 130 requires the reporting of comprehensive
income in addition to net income from operations. Comprehensive
income is a more inclusive financial reporting method that includes
disclosure of certain financial information that historically has
not been recognized in the calculation of net income.
At June 30, 1998 the Company held securities which have unrealized
gains of $770,000. These securities were pledged as collateral
for a $50,000 note payable. As described in Note 10, there is no
tax expense on realization of this gain.
Note 4. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 1998 and 1997 is comprised of the
following:
<TABLE>
<CAPTION>
June 1998 June 1997
---------- ----------
<S> <C> <C>
Office Furniture and Equipment $ 35,043 $ 11,015
Computer Software 88,802 88,328
Computer Hardware 190,691 183,229
---------- ----------
314,536 282,642
Accumulated Depreciation (99,269) (11,362)
---------- ----------
$ 215,267 $ 271,280
---------- ----------
---------- ----------
</TABLE>
Note 5. LONG TERM DEBT
As of June 30 notes payable, other obligations and long term debt
consisted of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Advances payable to unrelated parties and potential investors who have
committed the funds on a long term basis. Negotiations with
various parties have not characterized the debt and equity nature
of the funds or finalized interest rates, maturity dates,
repayment terms or other features for the advances. In August,
terms were agreed to on a substantial amount of the advances. See
Note 13 for additional information. Accordingly, the company has
recorded an interest expense for the quarter ended June 30, 1998
of $16,569. $827,000 0
Note payable with a vendor under an agreement dated October, 1997 is a
two year, unsecured note with an annual interest rate of 6% and
monthly payments of $1,407 including interest. The balance at
June 30, 1998 requires principal payments of $16,114 within
twelve months and the balance payable in the period. $ 20,295 0
</TABLE>
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Page 9
<PAGE>
SECURFONE AMERICA, INC.
Quarterly Report on Form 10-QSB
For the Quarter Ended June 30, 1998
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Note 5. LONG TERM DEBT (continued)
CAPITAL LEASE
In March, 1997, the Company entered into a sale-leaseback arrangement
under which computer equipment capitalized at $159,649 is being
accounted for as a capital lease. Under the agreement, the Company
sold certain equipment and leased it back for a period of 48
months, at which time the Company will repurchase the equipment
from the lessor.
<TABLE>
<S> <C> <C>
115,597 0
----------- ---
Total $ 1,012,892 0
Less: Current Portion, notes and other maturities 61,463 0
----------- ---
Total long term liabilities $ 951,429 $ 0
----------- ---
----------- ---
</TABLE>
Minimum future lease payments under non-cancelable capital leases for
the next five years are as follows:
<TABLE>
<S> <C>
1998 $ 22,259
1999 40,895
2000 44,621
2001 7,822
--------
Total minimum future lease payments $115,597
--------
--------
</TABLE>
Note 6. COMMON STOCK
At December 31, 1996, 30,000 shares of SecurFone America, Inc.'s stock
were authorized and 3,000 shares were issued and outstanding.
On March 5, 1997, an additional 4,700,000 shares were authorized by
the Board of Directors.
On March 6, 1997, the shareholders of SecurFone America, Inc. approved
a stock split of 1,333,333 to 1 shares, increasing the 3,000 shares
issued and outstanding to 4,000,000 shares with a par value of $.01
per share. The amount of $39,970 was transferred from the
paid-in-capital account to common stock account to record the
split.
Prior to the reorganization between SecurFone America, Inc. and
Material Technology, Inc., Material Technology, Inc. had as of July
31, 1997 100,000,000 shares authorized and 5,000,000 outstanding
with a reverse split of 1 for 10 resulting in 500,216 shares issued
and outstanding. Also, Material Technology issued an additional
4,500,000 shares on July 31, 1997 for a total of 5,000,216 shares
issued and outstanding. On August 1, 1997, SecurFone America, Inc.
completed a reorganization with Material Technology, Inc. whereby
4,000,000 share issued and outstanding of SecurFone America, Inc.
were exchanged for 4,500,000 share issued of Material Technology,
Inc. As a result of the reorganization, there were 5,000,216 share
issued and outstanding and 1,000,000 shares authorized. The account
of $36,173 was transferred from the common stock account to the
additional paid-in-capital account to reflect the par value change
from $.01 to $.001 per share.
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Page 10
<PAGE>
SECURFONE AMERICA, INC.
Quarterly Report on Form 10-QSB
For the Quarter Ended June 30, 1998
- --------------------------------------------------------------------------------
Note 6. COMMON STOCK (continued)
On November 13, 1997 the Company registered with the Securities and
Exchange Commission on Form S-8 (the "S-8 filing") 1,000,000 shares
under the 1997 Stock Option Plan to grant incentive stock options
and non-qualified stock options to officers and key employees. At
the same time a similar registration for 250,000 shares under the
1997 Director Non-qualified Stock Option Plan was made. At various
dates the Company granted stock options under the two stock option
plans totaling 830,900 shares consisting of 300,000 shares at an
option price of $1.00 per share, 130,900 shares at an option price
of $2.50 per share and 400,000 shares at an option price of $0.10
per share. These options are exercisable during 1997 and 1998.
These shares are recorded as $1,227,250 Selling, General &
Administrative (SG&A) expense and additional paid in capital stock
options at the grant date in accordance with Statement of Financial
Accounting Standards NO. 123 (SFAS 123) "Accounting for Stock-Based
Compensation."
On December 3, 1997, the Company ( SecurFone America, Inc. formerly
Material Technology, Inc.) issued 620,000 conditional shares of
common stock with a par value of $.001 per share registered with
the S-8 filing. These shares were issued pursuant various
employment, retainer, consulting and fee agreements. As of December
31, 1997 all conditions of these shares have been met and
$3,100,000 was recorded as SG&A expense, and common stock and
additional paid in capital accounts at the issue date.
On January 6, 1998 the Company granted stock options under the 1997
Stock Option Plan of 400,000 shares at an option price of $.10 per
share. These options are exercisable immediately and are recorded
as $1,620,000 Selling, General & Administrative (SG&A) expense and
additional paid in capital - stock options at the grant date in
accordance with Statement of Financial Accounting Standards NO. 123
(SFAS 123) "Accounting for Stock-Based Compensation."
On March 19, 1998 an additional 345,000 shares issued were the result
of the following transactions: 225,000 shares of stock issued
pursuant to warrants exercised by the individuals providing credit
accommodations in connection with letters of credit issued by the
Company; 120,000 shares were the result of two stock subscriptions
in private placements.
On May 12, 1998 35,000 shares were issued in connection with credit
accommodations provided to the Company by investors as discussed in
Note 1.
As of June 30, 1998, a total of 100,000,000 shares were authorized and
6,000,216 shares were issued and outstanding.
Note 7. LOSS ON SECURFONE NEW YORK
In August, 1996, the Company entered into a licensing agreement with
SecurFone New York, Inc. (SFNY). As part of the agreement, the
Company forwarded monies to SFNY to cover various start up costs.
Shortly, SFNY fell into default under the terms of the licensing
agreement and ceased operations. The monies paid by the Company to
SFNY were written off as a one-time charge to income of $48,980.
- --------------------------------------------------------------------------------
Page 11
<PAGE>
SECURFONE AMERICA, INC.
Quarterly Report on Form 10-QSB
For the Quarter Ended June 30, 1998
- --------------------------------------------------------------------------------
Note 8. RELATED PARTIES
A Director of the Company is also a partner in the law firm which
represents the Company in its legal matters.
Note 9. INCOME TAXES
Income taxes are provided based on earnings reported for financial
statement purposes pursuant to the provisions of Statement of
Financial Accounting Standards NO. 109 (FASB 109). The provision
for income taxes differs from the amounts currently payable because
of timing differences in the recognition of certain income and
expense items for financial and tax reporting purposes.
FASB 109 uses the asset and liability method to account for income
taxes which requires the recognition of deferred tax liabilities
and assets for the expected future tax consequences of temporary
differences between tax basis and financial reporting basis of
assets and liabilities.
At June 30, 1998 and 1997 the Company has net operating loss
carryforwards for federal income and state income tax purposes.
These carryforwards may provide future tax benefits. The federal
net operating loss will begin to expire in 2011, if not utilized to
offset taxable income. Various state net operating loss
carryforwards will begin to expire earlier. Future changes in
ownership, as defined by Section 382 of the Internal Revenue Code,
could limit the amount of net operating loss carryforwards used in
any one year.
An allowance has been provided for by the Company which reduced the
tax benefits accrued by the Company for its net operating losses to
zero. It cannot be determined when, or if, the tax benefits derived
from these losses will materialize.
Note 10. COMMITMENTS AND CONTINGENCIES
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplates
continuation of the Company as a going concern. However, the
Company has sustained losses totaling $7,218,114 since its
inception, of which $5,947,250 represented expenses associated with
stock-based compensation plans as noted at Note 6.
The continuing losses resulting from operations, and not necessarily
those costs associated with stock-based compensation plans, are an
indication that the Company may not be able to continue to operate
without additional cash infusion. The Company has been and is
currently seeking private and public equity and bridge loans in
order to finance operations. The Company has retained business
advisory firms to assist the Company in meeting its financing
needs.
In November 1996, the Company entered into an agreement with
Associated Barter Services, Inc. ("ABS") under which ABS agreed to
arrange for advertising services for the Company. The Company
agreed to issue ABS shares of the Company's common stock in
exchange for these services. A dispute has arisen between the
Company and ABS regarding ABS's performance under the agreement.
The Company is presently negotiating an amendment to the agreement
to settle the dispute. However, the Company may be unable to arrive
at a mutually acceptable resolution to the dispute and there can be
no assurances that litigation will not result from the dispute.
- --------------------------------------------------------------------------------
Page 12
<PAGE>
SECURFONE AMERICA, INC.
Quarterly Report on Form 10-QSB
For the Quarter Ended June 30, 1998
- --------------------------------------------------------------------------------
Note 10. COMMITMENTS AND CONTINGENCIES (continued)
In November, 1997 the Company entered into an annual employment
agreement with it's Chief Executive Officer. The employment
agreement automatically renews annually. The agreement reduced the
base salary by $5,833 per month until the earlier of May 1, 1998 or
a time that the Board determines capital and revenue to be
sufficient for payment. The salary reduction continued and had not
been paid as of June 30, 1998. As a result, a total of $46,664 of
unpaid salary has been accrued and recorded as of June 30, 1998.
The employment agreement was subsequently terminated and the unpaid
salary settled. See Note 12, Subsequent Events.
Note 11. QUARTERLY INFORMATION
Following is computational information for earnings per share
information calculated under Statement of Financial Accounting
Standards No. 130, Earnings Per Share (EPS) which is effective for
periods beginning after December 15, 1997.
<TABLE>
<CAPTION>
Quarter Ended June 30, 1998 Quarter Ended June 30, 1997
-------------------------------------- --------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income (loss) available
to common
stockholders
$ (678,100) 5,982,716 $ (.11) $ 72,415 4,000,000 $ .02
EFFECT OF DILUTIVE SECURITIES
Stock Options 0* 0
-------- --------
DILUTED EPS
Income available to
common stockholders and
assumed conversions
$ (678,100) 5,982,716 $ (.11) $ 72,415 4,000,000 $ .02
</TABLE>
* SFAS 128 requires the use of weighted averages for stock
outstanding during the quarter. Although stock options issued under
company plans exercise prices were below the average market price
of the common shares, they were not computed in calculating diluted
earnings per share because SFAS 128 does not include stock
dilutions that would reduce per share losses. Outstanding stock
options would have increased outstanding shares by 683,278 if
computed.
At June 30, 1998 830,900 stock options were issued, 500,000 were
vested and none had been exercised.
- --------------------------------------------------------------------------------
Page 13
<PAGE>
SECURFONE AMERICA, INC.
Quarterly Report on Form 10-QSB
For the Quarter Ended June 30, 1998
- --------------------------------------------------------------------------------
Note 12. SUBSEQUENT EVENTS
On June 16, 1998 the Company executed a Letter of Intent with Young
Management Group for securing new capital, and agreeing to the
proposed acquisition of SCIES, Inc. ("SCIES"), a privately-held,
development stage provider of Internet telephony software, systems
and services that is headquartered in Reston, Virginia. SCIES is a
provider of both software and gateway hardware for Internet
Telephone transmission. Negotiations for the purchase of SCIES have
centered on SCIES' ability to support SecurFone America, Inc.'s
entry into new related voice-over-IP markets (i.e. Internet
Telephony), as well as reduce the Company's networking costs and
providing the company with a platform to ensure lower costs for
terminating international calls. It is anticipated that the
proposed SCIES transaction would be made entirely with unregistered
common stock of the company. Structure of the final funding
provided by Young Management Group was contingent upon completion
of a definitive business agreement between the Company and Young
Management Group.
On August 1, 1998, Young Management Group declined to meet it's
funding obligation payable at that date and the funding agreement
was terminated. Total funds provided to the company by Young
Management Group during May through July 1998 were $115,000 and
were recorded as loans to the Company. The planned SCIES
acquisition has not yet been completed. SCIES is now co-located
with the Company and is operating as a strategic partner of the
company.
William P. Stueber, II, Chief Executive Officer and a Director,
announced plans to leave the Company and pursue other interests
effective November 1, 1998. The Company executed a settlement
agreement with Mr. Stueber on February 8, 1999 to resolve all
outstanding Company obligations related to his employment with
the Company in exchange for a payment of $50,000 payable not
later than April 1, 1999.
On September 11, 1998, the Company's Chief Operating Officer and a
Director, Derek Davis, resigned to pursue other interests. Mr.
Davis agreed to be available to Company executives for a period of
two months, without compensation, in order to ensure a smooth
transition of tasks and responsibilities to the new management
team.
Paul B. Silverman executed an employment agreement assuming the role of
Chief Executive Officer as of November 1, 1998. Mr. Silverman was
also granted options to acquire 100,000 shares of the Company's
stock upon execution of the employment agreement, and qualified
incentive stock options to acquire up to 300,000 additional shares
of the Company's stock based on achievement of company goals
established by the Board of Directors. Mr. Silverman was
subsequently elected Director of the Company on December 11, 1999.
Mr. Silverman was granted options to acquire 50,000 shares of the
Company's stock consistent with the terms of the Company's 1997
Director's Option Plan.
Additional cash advances totaling $517,000 have been obtained from
unrelated parties between July 1, 1998 and October 1, 1998.
On August 21, 1998, $1,000,000 of advances payable were exchanged for
a $1,000,000 convertible debenture. It has a 12% interest rate
which is payable quarterly. The principal is payable on the earlier
of; the company's receipt of at least $8 million proceeds from a
public offering of company securities or August 21, 2001.
Nondetachable warrants for 500,000 shares exercisable at $2.72 per
share were issued in connection with the convertible debenture. The
warrants expire August 21, 2003.
- --------------------------------------------------------------------------------
Page 14
<PAGE>
SECURFONE AMERICA, INC.
Quarterly Report on Form 10-QSB
For the Quarter Ended June 30, 1998
- --------------------------------------------------------------------------------
Note 12. SUBSEQUENT EVENTS (continued)
On August 21, 1998 $100,000 of advances payable were exchanged for a
$100,000 note payable due November 1, 1998 with 10% interest. The
note is secured by 50,000 shares of common stock. The company has
agreed to a $20,000 origination fee in connection with the loan
which is payable at maturity.
On November 17, 1998, the Company issued 41,665 shares of the
Company's unregistered common stock and cash payment of $2,500 to
Strategica Group for investment banking services and bridge
funding.
On October 19, 1998, SecurFone returned marketable securities to
Material Technologies, Inc. ("Matech II"), consisting of 560,000
shares of Matech II common stock, which was pledged as collateral
on $50,000 note payable to Matech II in exchange for the
cancellation of the note.
- --------------------------------------------------------------------------------
Page 15
<PAGE>
SECURFONE AMERICA, INC.
Quarterly Report on Form 10-QSB
For the Quarter Ended June 30, 1998
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following describes certain factors which produced changes in the
results of operations of SecurFone America, Inc. (the "Company") during the
first half and second quarter of 1998 and as compared with comparable periods in
1997 as indicated in the Company's Consolidated Financial Statements. The
following should be read in conjunction with the Consolidated Financial
Statements and related notes. Historical results of operations are not
necessarily indicative of results for any future period. All material
intercompany transactions have been eliminated in the results presented in this
Quarterly Report.
Certain matters discussed in this Quarterly Report constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act") and involve risks and
uncertainties. These forward-looking statements relate to, among other things,
expectations of the business environment in which the Company operates,
projections of future performance, perceived opportunities in the market and
statements regarding the Company's mission and vision. The Company's actual
results, performance or achievements may differ significantly from the results,
performance, or achievements expressed or implied in these forward-looking
statements. See "-- Forward-Looking Statements."
OVERVIEW
The Company develops and markets prepaid wireless products and services in
various markets throughout the United States. The Company has been in its
development stage since its inception in May 1996. The Company has substantially
completed development of all major aspects of its prepaid wireless network
systems and now plans to implement the marketing and sales programs necessary to
create a sustainable revenue base. The Company also plans to develop the
necessary back office and administrative support systems to support the
business. Additional funding will be required to support these new activities.
The Company has initiated its commercial product launch on a limited basis, with
broad-scale marketing and distribution efforts starting in the first quarter of
1998.
The products and services that the Company developed during its start-up
phase were initially introduced to a limited number of U.S. cities to fully test
the network, administrative, engineering and marketing infrastructure prior to
full-scale roll-out. The Company invested significant capital and effort to
develop its network, software, routing and carrier interface technology, for the
hiring and development of an experienced management team, and the initial
introduction of services to the roll-out markets. The Company may, from time to
time, make increasing expenditures to expand its available network capacity as
demand increases. The ability of the Company to meet its business growth
objectives will depend on securing substantial new funding for advertising and
promotion activities, as well as funding for securing new distribution channels.
To effectively manage the Company's growth and maintain quality controls over
its services and network, the Company must also expand its internal management,
technical and accounting systems, all of which will require substantial
investment.
RECENT EVENTS
MANAGEMENT CHANGES
Willliam P. Stueber, II, Chief Executive Officer and a Director, left the
Company to pursue other interests effective November 1, 1998. The Company has
negotiated a settlement with Mr. Stueber to resolve all outstanding Company
obligations related to his prior employment by the Company.
On September 11, 1998, the Company's Chief Operating Officer and a
Director, Derek Davis, resigned to pursue other interests. Mr. Davis agreed to
be available to company executives for a period of two months, without
compensation, in order to ensure a smooth transition of tasks and
responsibilities to his replacement.
Paul B. Silverman executed an employment agreement assuming the role of
Chief Executive Officer effective November 1, 1998. Mr. Silverman was also
granted options to acquire 100,000 shares of the Company's stock upon
execution of the employment agreement. The agreement also
- --------------------------------------------------------------------------------
Page 16
<PAGE>
SECURFONE AMERICA, INC.
Quarterly Report on Form 10-QSB
For the Quarter Ended June 30, 1998
- --------------------------------------------------------------------------------
provides for the issuance of qualified incentive options to acquire up to an
additional 300,000 shares of the Company's stock based on achievement of
company goals established by the Board of Directors. Mr. Silverman was
subsequently elected a Director of the Company on December 11, 1998. Mr.
Silverman was granted options to acquire 50,000 shares of the Company's stock
consistent with the terms of the Company's 1997 Director's
Option Plan.
NEW INTERNATIONAL BUSINESS DEVELOPMENTS
On August 20, 1998, the Company announced a strategic alliance with
Microwave Designs International, Inc., a wireless system engineering firm
providing wireless engineering services to telephone companies, competitive
local exchange carriers and operators worldwide. The Company has appointed a
local representative in Brazil and is now discussing several wireless and
prepaid project opportunities in Brazil, including developing a prepaid
cellular services systems to serve selected rural areas within Brazil. To
further develop its international business, the Company is discussing plans
to join an international consortium in Brazil with several partners to pursue
national wireless and telecommunications system projects. The Company is
seeking to leverage its core capabilities in the areas of designing and
provisioning prepaid cellular systems, and capitalize on the capabilities of
the technical and financial resources provided by the other consortium
partners. The Company will require additional funding to both secure and
successfully complete these projects.
NEW FUNDING
On June 16, 1998, the Company executed a Letter of Intent with Young
Management Group ("YMG") for securing new capital, and agreeing to the planned
acquisition of SCIES, Inc. ("SCIES"), a privately-held, development stage
provider of Internet telephony software, systems and services that is
headquarted in Reston, Virginia. Structure of the final funding provided by
YMG was contingent upon completion of a definitive business
agreement between the Company and YMG.
On August 1, 1998, YMG declined to meet its funding obligation payable
at that date and the funding agreement was terminated. Total funds provided
to the Company by YMG during May through July 1998 were $115,000, and were
recorded as loans to the company. The planned acquisition of SCIES, Inc. has
not yet been completed. SCIES is now co-located with the Company and is
operating as a strategic partner of the Company. See "Other Information."
Recognizing that new funding is essential to meet the Company's core
business objectives as well as expand into new business areas, the Company has
pursued several options.
On November 17, 1998, the Company entered into a relationship with the
Strategica Group for investment banking services and bridge funding. For
services rendered, Strategica Group was issued 41,665 shares of the Company's
unregistered common stock and received a cash payment of $2,500. Due to delays
encountered in securing new funding, the Company, on January 11, 1999,
terminated its business relationship with Strategica and elected to pursue other
new funding alternatives. To support the Company's new planned initiatives in
wireless system engineering and Internet telephony, the Company pursued the sale
of selected assets as described below.
On February 4, 1999, the Company executed a Purchase Agreement with All
Points Telecom, Inc. (APT), a privately-held telecommunications firm, whereby
APT would acquire a controlling interest in the Company through the purchase of
4.5 million shares of the Company's common stock from Montpilier Holdings, Inc.
("Montpilier"). Montpilier is the principal stockholder of the Company and is
owned indirectly by Michael M. Grand, a Director of the Company. Under terms of
the Purchase Agreement, APT would also loan up to $1.8 million at time of
closing to the Company. The proceeds of this loan would be used to repay
existing debt and provide additional working capital to meet the Company's
growth needs. Paul B. Silverman will continue to serve as Chief Executive
Officer of the Company upon completion of the transaction. The proposed
transaction is scheduled to close in the first quarter of 1999, and is
contingent upon due diligence now in progress. There can be no assurances that
the proposed APT transaction will be completed as expected, or at all.
- --------------------------------------------------------------------------------
Page 17
<PAGE>
SECURFONE AMERICA, INC.
Quarterly Report on Form 10-QSB
For the Quarter Ended June 30, 1998
- --------------------------------------------------------------------------------
SALE OF SELECTED ASSETS AND LINES OF BUSINESS
On January 30, 1999, the Company executed a previously announced agreement
with Teledata World Services, Inc. ("Teledata") (OTC/BB:TWOS), whereby certain
prepaid cellular assets would be sold to Teledata for cash and Teledata common
stock. Under the terms of the agreement, Teledata would acquire all outstanding
shares of SecurFone, Inc., a wholly owned operating subsidiary of the Company,
for $498,000 in cash and 600,000 shares of unregistered Teledata common stock.
SecurFone, Inc. assets include certain cellular service resale agreements, the
Company's Miami customer service center, rights to the Buy-The-Minute-TM-
("BTM") product and selected distribution channels. Under terms of the
agreement, the Company will continue to offer prepaid cellular services and may
establish resale and joint service arrangements to serve selected markets. The
Company is also negotiating a Management Services and Support (MSS) contract
with Teledata whereby the Company would provide management and operational
support services to Teledata for a minimum period of three months. During the
period until closing, the Company is supporting the provision of selected
prepaid products and services by Teledata. To cover the cost of these
services in the interim period prior to closing the transaction, the total
funds provided to the Company by Teledata through February 1999 were
$248,000, which were recorded as loans to the Company.
The proposed sale is consistent with the Company's planned strategy of
building on core strengths in planning, designing and operating prepaid cellular
services to pursue wireless system engineering and integrated voice over IP
service (i.e., Internet telephony) opportunities in the United States and
overseas. The Company plans to continue to offer prepaid wireless services,
focusing on higher margin opportunities, primarily through resale. Subject to
securing appropriate regulatory approvals, the proposed transaction is expected
to be completed in the second quarter 1999. There can be no assurances that the
proposed transaction with Teledata will be completed as expected, or at all.
MATERIAL TECHNOLOGIES STOCK TRANSFER
On August 1, 1997, SecurFone, Inc. was acquired by Material Technology,
Inc. ("Matech I") (formerly Tensiodyne Scientific Corporation) and became a
publicly-traded corporation. In connection with the transaction, the Company
retained 560,000 shares of Material Technologies, Inc. ("Matech II") Class A
Common Stock.
In July, 1997, Sherman Baker and certain Matech I shareholders associated
with Mr. Baker ("Baker Group") disputed the distribution of Matech II shares
issued to Robert M. Bernstein, the Chief Executive Officer and major shareholder
of Matech I. As a result of Mr. Baker's claims and demand, SecurFone delayed
finalizing the July 31, 1997 transaction until all disputes between Matech I and
its shareholders was resolved.
On October 22, 1997, the Baker Group filed a claim against Mr. Bernstein
for breach of contract and for inducing the group to enter into an exchange
agreement in connection with the SecurFone transaction. As a result of the Baker
Group's claims against Mr. Bernstein and in order to close the SecurFone
transaction, Mr. Bernstein placed 150,000 of his personally-held SecurFone
shares in escrow subject to a resolution of the Baker Group's claims. SecurFone
also withheld payment of $50,000 and executed a $50,000 promissory note (the
"Note") with a demand for payment contingent on, among other items, the release
of all claims from the Baker group toward SecurFone. The 560,000 shares of
Matech II stock held by SecurFone was pledged as collateral on the Note.
On July 31, 1998, the Barker Group entered into a settlement agreement with
Bernstein and Matech II and on August 18, 1998, the Baker Group filed a Release
of Claims against SecurFone. Pursuant the original transaction, Matech II was
entitled to the balance of $50,000 owed by SecurFone, and demanded payment, on
October 5, 1998. The SecurFone Board of Directors reviewed the situation on
October 9, 1998, and determined that given the illiquidity of the Matech II
stock, and the current financial condition of the Company, it was in the
Company's best interests to allow Matech II to acquire the pledged stock in
cancellation of the Note.
On October 9, 1998, Matech II served notice to SecurFone of their default
on the Note. On October 19, 1998, SecurFone returned to Matech II the 560,000
shares of its Common stock which was pledged as collateral on the Note and the
Note was cancelled.
- --------------------------------------------------------------------------------
Page 18
<PAGE>
SECURFONE AMERICA, INC.
Quarterly Report on Form 10-QSB
For the Quarter Ended June 30, 1998
- --------------------------------------------------------------------------------
PRODUCT LINES
The Company offers three main products:
- - BUY-THE-MINUTE-TM- ("BTM") -- a software modified handset for which the
Company provides underlying national airtime, activation, and
administrative services for end users. Uniden Corp. manufactures the
handset and U.S./Intelicom Inc. provides the handset software. This product
is offered for distribution by Brightpoint, Inc., the nation's leading
wholesaler of wireless handsets, and gives the Company immediate national
exposure that would otherwise require an extended period of time to
develop. The Company expects to significantly reduce barriers to market
entry by achieving a market presence without the need for fixed land line
telephony because the debiting software resides directly in the handset.
This market launch solution, although rapid, must be converted to the
Company's network solution when activation volumes become sufficient to
justify the expenditure. This transition is made necessary due to the
limited consumer service applications afforded by the proprietary,
application-specific, modified handset.
- - SFA NETWORK SOLUTION ("SFN") -- the Company's flagship product that
telephonically connects directly to the underlying wireless service
provider to accomplish call routing and completion. The advantages of this
method of prepaid service provisioning are numerous, including:
- Any handset in the market, digital or analog, can be used by consumers
to access the Company's service platform.
- The Company originates and terminates each call along its own network
configuration which generates significant incremental cost savings and
increased revenue from inherent service components such as long
distance termination, voice mail and local call termination.
- The Company can provide other telephony services, such as local and
long distance prepaid service, informational services and enhanced
calling options within the same platform.
- - CARRIER NETWORK SERVICES ("CNS") -- the wholesale prepaid wireless platform
service that the Company sells directly to wireless carriers that do not
wish to create their own platform. In many cases, it becomes a
cost-justifiable decision for a medium to small domestic wireless carrier
to out source value-added and hardware/software defined ancillary product
offerings to an outside vendor. CNS is a robust, competitive and scalable
prepaid service platform that enables any carrier to bring a prepaid
product to market in a significantly shorter period of time than an
in-house solution, enabling the carrier to focus on marketing and sales
efforts.
RESULTS OF OPERATIONS:
SECOND QUARTER OF 1998 COMPARED TO SECOND QUARTER OF 1997
REVENUES
The Company only began full-scale operations in the first quarter of
1998; accordingly, a detailed comparison of revenues and expenses between the
second quarter of 1998 and the second quarter of 1997 is not meaningful.
Prepaid cellular revenues for the second quarter of 1998 increased to
$117,368 from $3,023 in the second quarter of 1997. The increase was a result
of the Company marketing and selling its switch-based prepaid cellular
product in the Atlanta, Boston, Baltimore, Cleveland, Chicago, Detroit,
Houston, Miami, New Jersey, New York, Orlando, Philadelphia, San Diego, San
Francisco, and Tampa markets. The Company expects that SFN and CNS, assuming
adequate funds are available for advertising and promotion, will grow at a
strong rate on a long-term basis. The Company is seeking new funds to promote
sales and to ensure a strong market launch of the BTM product.
- --------------------------------------------------------------------------------
Page 19
<PAGE>
SECURFONE AMERICA, INC.
Quarterly Report on Form 10-QSB
For the Quarter Ended June 30, 1998
- --------------------------------------------------------------------------------
COST OF GOODS SOLD
Total cost of goods sold for the second quarter of 1998 increased to
$130,691 from $24,784 in the second quarter of 1997 primarily due to the Company
introducing the sale of its SFN switch-based product in the various markets
discussed above and due to an increase in fixed telephony charges associated
with market expansion.
GROSS PROFIT/MARGIN
Gross loss for the second quarter of 1998 decreased to $13,323 compared
with a loss of $21,761 in the second quarter of 1997. The gross profit margin
for the second quarter of 1998 was negative because of the increase in the fixed
portion of the cost of goods sold caused by continued market expansion. The
Company opens certain markets and immediately incurs activation and access fees
for lines ordered in those markets. As a result, the Company is subject to cost
of goods sold charges before any sales have been completed in specific markets.
OPERATING EXPENSES
Selling, general and administrative expenses increased to $570,765 in the
second quarter of 1998 from $278,770 in the second quarter of 1997. The increase
in selling, general and administrative expenses was primarily due to the hiring
and development of an experienced management team and wages and associated taxes
increased in the second quarter of 1998 to $192,665 from $71,155 in the second
quarter of 1997. In addition, the continued introduction of services to the
roll-out markets to develop the Company's network, software, routing and carrier
interface technology increased network expenses in the second quarter of 1998 to
$23,261 from $0 in the second quarter of 1997. Rent paid increased in the second
quarter of 1998 to $21,716 from $12,299 in the second quarter of 1997 primarily
due to the Company's expansion of its headquarters in San Diego and its customer
service operations in Miami and associated equipment rentals. Legal and
professional fees increased to $68,967 in the second quarter of 1998 from
$48,485 in the second quarter of 1997 due to the Company's increased need for
assistance in technological developments, accounting regulations and Public
Utilities Commission, Federal Communications Commission and Securities and
Exchange Commission requirements. In addition, the Company recorded amortization
and depreciation expenses of $29,623 in the second quarter of 1998 versus $2,780
in the second quarter of 1997.
Loss from operations in the second quarter of 1998 increased to $584,088
from $300,531 in the second quarter of 1997 due to increased costs associated
with the launch of the Company's products and related expenses. Net loss in the
second quarter of 1998 increased to $663,100 from net income of $72,415 in the
second quarter of 1997. The net loss in the second quarter of 1998 was reduced
by a $490,000 unrealized gain on marketable securities that the Company holds
which resulted in a comprehensive loss of $173,100 or $0.11 per share in the
second quarter of 1998.
ROYALTY REVENUE
The Company licensed, in a limited number of instances, certain
distribution rights in various markets for a license fee. Royalty revenue from
the sale of license rights was $0 in the second quarter of 1998 compared to
$400,000 in the second quarter of 1997. The Company does not anticipate any
additional 1998 revenues to be derived from the sale of licenses. Due to the
potential impact of exclusive distribution rights on the Company's future
marketing options, the Company does not anticipate, at this time, offering
similar licenses.
OTHER EXPENSES
Interest expense increased to $77,363 in the second quarter of 1998 from
$27,054 in the second quarter of 1997. The increase was primarily due to 35,000
shares of the Company's stock that was issued to investors who renewed letters
of credit to April 1999 on behalf of the Company which are posted with the
Company's underlying telephony service providers for the purpose of provisioning
service to initial roll-out markets. Additional interest expense has been
incurred as a result of $702,000 that was loaned to the Company by private
investors as of June 30, 1998.
- --------------------------------------------------------------------------------
Page 20
<PAGE>
SECURFONE AMERICA, INC.
Quarterly Report on Form 10-QSB
For the Quarter Ended June 30, 1998
- --------------------------------------------------------------------------------
FIRST HALF OF 1998 COMPARED TO FIRST HALF OF 1997
REVENUES
Prepaid cellular revenues for the first half of 1998 increased to $275,472
from $5,684 in the first half of 1997. The increase was as a result of the
Company marketing and selling its switch-based prepaid cellular product in the
Atlanta, Boston, Baltimore, Cleveland, Chicago, Detroit, Houston, Miami, New
Jersey, New York, Orlando, Philadelphia, San Diego, San Francisco, and Tampa
markets.
COST OF GOODS SOLD
Total cost of goods sold for the first half of 1998 increased to $228,756
from $25,234 in the first half of 1997 primarily due to the Company introducing
the sale of its SFN switch-based product in the various markets discussed above
and due to an increase in fixed telephony charges associated with market
expansion.
GROSS PROFIT/MARGIN
Gross profit for the first half of 1998 increased to $46,716 compared with
a loss of $19,550 in the first half of 1997. The gross profit margin for the
first half of 1998 was 17% as compared with a negative 343.9% in the first half
of 1997. The increase in profit margin was due to the increased utilization of
the fixed portion of the cost of goods sold caused by continued market
expansion. The Company opens certain markets and immediately incurs activation
and access fees for lines ordered in those markets. As a result, the Company is
subject to cost of goods sold charges before any sales have been completed in
specific markets. Once significant market expansion is completed, however, the
fixed portion of cost of goods sold should decrease as a percent of total cost
of goods sold which, the Company believes, should positively impact the overall
gross profit.
OPERATING EXPENSES
Selling, general and administrative expenses increased to $1,235,878 in the
first half of 1998 from $512,111 in the first half of 1997. The increase in
selling, general and administrative expenses was primarily due to the hiring and
development of an experienced management team and wages and associated taxes
increased in the first half of 1998 to $393,258 from $71,155 in the first half
of 1997. In addition, the continued introduction of services to the roll-out
markets to develop the Company's network, software, routing and carrier
interface technology increased network expenses in the first half of 1998 to
$23,261 from $0 in the first half of 1997. Rent paid increased in the first half
of 1998 to $47,151 from $15,702 in the first half of 1997 primarily due to the
Company's expansion of its headquarters in San Diego and its customer service
operations in Miami and associated equipment rentals. Legal and professional
fees increased to $181,143 in the first half of 1998 from $57,523 in the first
half of 1997 due to the Company's increased need for assistance in technological
developments, accounting regulations and Public Utilities Commission, Federal
Communications Commission and Securities and Exchange Commission requirements.
In addition, the Company recorded amortization and depreciation expenses of
$59,246 in the first half of 1998 versus $11,362 in the first half of 1997.
Loss from operations in the first half of 1998 increased to $2,809,162 from
$531,661 in the first half of 1997 due to increased costs associated with the
launch of the Company's products and related expenses. Net loss in the first
half of 1998 increased to $ 2,815,980 from a net loss of $207,695 in the first
half of 1997. A large portion of the net loss in the first half of 1998 was due
to an accounting cost entry of $1,620,000 associated with the issuance of stock
options to the Company's President William Stueber. The net loss for the first
half of 1998 was, however, reduced by a $770,000 unrealized gain on marketable
securities that the Company holds which resulted in a comprehensive loss of
$2,045,980 or $0.48 per share as compared to $207,695 or $0.04 per share for the
first half of 1997.
- --------------------------------------------------------------------------------
Page 21
<PAGE>
SECURFONE AMERICA, INC.
Quarterly Report on Form 10-QSB
For the Quarter Ended June 30, 1998
- --------------------------------------------------------------------------------
ROYALTY REVENUE
The Company licensed, in a limited number of instances, certain
distribution rights in various markets for a license fee. Royalty revenue from
the sale of license rights was $100,000 in the first half of 1998 compared to
$400,000 in the first half of 1997. The Company does not anticipate any
additional 1998 revenues to be derived from the sale of licenses.
OTHER EXPENSES
Interest expense increased to $105,169 in the first half of 1998 from
$27,054 in the first half of 1997. The increase was primarily due to 35,000
shares of the Company's stock that was issued to investors who renewed letters
of credit to April 1999. The issuance of the shares resulted in an additional
accounting cost entry of $35,000 that was recorded as an interest expense for
the second quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred significant operating and net losses as a result
of the development and operation of its service platform and supporting
networks. The Company expects that such losses will continue to increase as the
Company focuses on the development, construction and expansion of its service
platform and underlying networks and expands its customer base. Cash provided by
operations will not be sufficient to fund the expansion of the product offerings
and resultant subscriber base. The Company is continually reviewing various
sources of additional financing to fund its growth. As of June 30, 1998, the
Company had received advances in the amount of $842,000 from private investors.
The Company is required by underlying wireless carriers to post irrevocable
letters of credit to secure the purchase of airtime. As the Company's activation
and sales volume increase, it is likely that these underlying carriers will seek
additional security in the form of increased letter of credit guarantees. Prompt
payment history, as well as overall financial condition will also effect each
carrier's decision to stabilize, increase or eliminate these financial
guarantees. The Company has an agreement with two investors that may obtain
letters of credit of up to $1.0 million that are secured by their personal
assets (the "LC Agreement"). These investors have renewed the LC Agreement
through April 1, 1999. As compensation for their initial agreement to provide
letters of credit, the Company issued warrants to these investors to purchase a
total of 225,000 shares of Common Stock (the "LC Warrants"). In connection with
the renewal of the LC Agreement, the Company issued a total of 35,000 additional
shares of Common Stock to these investors. An amount of $35,000 was recorded as
interest expense in the second quarter of 1998 for the issuance of the shares.
An additional $35,000 interest expense will be recorded in each of the next
three quarterly periods to fully reflect the cost of the issuance of the 35,000
shares.
At June 30, 1998, the Company had cash and cash equivalents of $36,123. In
addition, the Company had accounts receivable totaling $63,427 from the sale of
the Company's switch-based debit cellular product. Net cash used by operating
activities was $925,507 in the first half of 1998 compared to $898,098 in the
first half of 1997. Net cash used in investing activities in the first half of
1998 was $12,457 used to purchase equipment as compared with $282,641 in the
first half of 1997. Net cash provided by financing activities in the first half
of 1997 totaled $966,580 which consisted primarily of $827,000 in advances
forwarded to the Company from private investors as compared with $1,244,168 in
the first half of 1997 which consisted primarily of capital contributions of
$1,095,800.
In order to continue at its current rate of network development and
expansion, the Company will require additional, non-revenue related financing of
approximately $1.25 million for 1999 to fund operating losses and to purchase
additional computer hardware and software which will allow the Company to
increase its call capacity and efficiency. The Company will also require an
additional letter of credit facility of $2.0 million to secure the necessary air
time from underlying carriers in order to support the proposed market roll-out
and expansion. The Company is continuing negotiations to secure this additional
funding from all possible sources. Possible plans call for raising of funds
through the sale of private and/or public equity and continued debt financing.
If the Company
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Page 22
<PAGE>
SECURFONE AMERICA, INC.
Quarterly Report on Form 10-QSB
For the Quarter Ended June 30, 1998
- --------------------------------------------------------------------------------
fails to obtain the above short-term financing within 90 days it will not be
able to continue operations. Long-term liquidity will depend on the Company's
ability to obtain long-term financing and attain profitable operations.
To meet the Company's funding needs, the Company retained American Express
Tax and Business Services to provide investment banking services for the
Company. American Express is continuing to assist the Company in exploring
funding options with various funding sources.
SEASONALITY
Sales of the Company's products and services are generally not seasonal,
with the exception of December, which typically provides a modest increase in
volume due to holiday purchases. Local wireless carrier credit policies,
penetration rates and promotional efforts primarily dictate sales levels.
TAXES AND ADOPTION OF NEW ACCOUNTING STANDARDS
Income taxes are provided for based on earnings reported for financial
statement purposes pursuant to the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 109. The provision for income taxes differs
from the amounts currently payable because of timing differences in the
recognition of certain income and expense items for financial and tax reporting
purposes. SFAS 109 uses the asset and liability method to account for income
taxes which requires the recognition of deferred tax liabilities and assets for
the expected future tax consequences of temporary differences between tax basis
and financial reporting basis of assets and liabilities. An allowance has been
provided for by the Company which reduced the tax benefits accrued by the
Company for its net operating losses to zero, as it cannot be determined when,
or if, the tax benefits derived from these operating losses will materialize.
In February 1997 the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share." This statement establishes a different method of
computing net income per share than was required under the provisions of
Accounting Principles Board Opinion No. 15. Under SFAS 128, the Company is
required to present both basic net income per share and diluted net income per
share. The Company adopted SFAS 128 in the first quarter of 1998 and all
historical net income per share data presented is restated to conform to the
provisions of SFAS 128.
YEAR 2000
The Company utilizes two different computer systems. The network telephony
system used in call routing and rating consists of three components, presently
the Bull Mini Computer, Apex interactive voice response ("IVR") unit which is
Intel based, and accounting and debit software. According to the vendor, the
Bull and Apex IVR are presently Year 2000 compliant. The Company recently
upgraded the accounting and debit software to INFORMIX, which is Year 2000
compliant, in late 1998. The Company's administrative computer network utilizes
accounting, database, and computational software that are all Year 2000
compliant according to management's recent discussions with its vendors. As a
result, management does not anticipate any material adverse effect to the
operations of the Company with respect to the Year 2000 problem.
While the Year 2000 considerations are not expected to materially impact
the Company's internal operations, they may have an effect on some of the
Company's customers and suppliers, and thus indirectly affect the Company.
Generally, the Company requires its key vendors and suppliers to certify they
are Year 2000 compliant. With respect to other vendors and suppliers with which
the Company's systems interface and exchange data, the Company expects to
initiate communication on an ongoing basis to discuss their Year 2000
compliance. The Company has not determined the exact costs and expenses it
expects to incur relating to preparation of its systems for the Year 2000. Based
on current assessments and compliance plans in process, the Company does not
expect that the Year 2000 issue, including the cost of making its critical
systems and applications compliant, will have a material effect on its business
operations, or its financial position or results of operations. However, if
appropriate modifications are required by the Company's key suppliers and
vendors, and if those modifications are not made on a timely basis, the
Company's actual costs or timing for Year 2000 compliance may differ materially
- --------------------------------------------------------------------------------
Page 23
<PAGE>
SECURFONE AMERICA, INC.
Quarterly Report on Form 10-QSB
For the Quarter Ended June 30, 1998
- --------------------------------------------------------------------------------
from current estimates. There can be no assurance that the systems of other
parties upon which the Company relies will be converted on a timely basis. It is
not possible to quantify the aggregate cost to the Company with respect to
customers and suppliers with Year 2000 problems, although the Company does not
anticipate it will have a material adverse impact on its business.
FORWARD-LOOKING STATEMENTS
Statements that are not historical facts, including statements about the
Company's confidence in its prospects and strategies and its expectations about
expansion into new markets, growth in existing markets, and the Company's
ability to attract new sources of financing, are forward-looking statements that
involve risks and uncertainties. These risks and uncertainties include, but are
not limited to:
- - NEW BUSINESS VENTURE. The Company has limited prior operating history. The
likelihood of the success of the Company must be considered in light of the
expenses, complications and delays frequently encountered in connection
with the establishment and expansion of new businesses, and the competitive
environment in which the Company operates. Therefore, there can be no
assurances that future revenues from sales of the Company's product will
occur or be significant or that the Company will be able to sell its
products at a profit. Future revenues and profits, if any, will depend on
various factors, including, but not limited to, the successful
commercialization of the Company's products and successfully implementing
its planned marketing strategies.
- - INSUFFICIENT CAPITAL TO CONTINUE OPERATIONS. As the Company continues to
implement its business plan and market roll-out schedule, present sources
of financing will not be adequate to support the Company's increased cash
needs. In addition, present and planned sources for financial guarantees to
provide the Company's underlying wireless and land line service providers
with increased face value amounts of irrevocable letters of credit for the
purpose of securing wholesale wireless and land line air time may not be
adequate. If the Company fails to obtain necessary short-term financing, it
will not be able to continue operations. Long-term liquidity will depend on
the Company's ability to obtain long-term financing and attain profitable
operations.
- - FAILURE OF PLANNED TRANSACTIONS. The Company is presently involved in
several proposed transactions, including the sale of a significant portion
of the Company's assets to Teledata, the proposed acquisition of SCIES, and
a loan from All Points Telecomm. See "Management's Discussion and Analysis
or Plan of Operation - Recent Events." There can be no assurances that
these transactions will be completed as planned, or at all. The failure of
any of these transactions could materially and negatively impact the
Company and its business.
- - POSSIBLE DELISTING. Because of recent changes in the Nasdaq listing rules,
the Company's common stock could be delisted from trading on the Nasdaq
Over-the-Counter Bulletin Board Service, unless the Company makes required
filings with the Securities and Exchange Commission. See "Other
Information." If the Company's stock were to be delisted, there would be no
public market for the stock and stockholders would be unable to liquidate
their investment. Although the Company intends to make the required filings
with the Securities and Exchange Commission and retain its stock listing on
the Nasdaq OTC:BB, there can be no assurances that it will be able to do
so.
- - DEPENDENCE ON NEW PRODUCT INTRODUCTION AND COMMERCIALIZATION. The concept
of and the technology to manufacture, operate and market prepaid cellular
services have only been recently developed. Although the Company believes
that there is a large market for its product, there can be no assurance
that the Company will be successful in the introduction of its new product.
Broad commercialization of debit cellular services may require the Company
to overcome significant technological, manufacturing and marketing hurdles
which may not be currently foreseen. Since the Company's product is new,
there is little direct operating history on which to base assumptions as to
practicality, market acceptability, sales volume and profitability.
- - COMPETITION. The prepaid cellular industry has become increasingly
competitive due to the entry of large, well financed wireless carriers into
the prepaid market. Other potential competitors include companies with
substantially greater financial and marketing resources than those of the
Company. Although the Company
- --------------------------------------------------------------------------------
Page 24
<PAGE>
SECURFONE AMERICA, INC.
Quarterly Report on Form 10-QSB
For the Quarter Ended June 30, 1998
- --------------------------------------------------------------------------------
believes that its products are unique, no assurance can be given that
competitors possessing greater financial resources than the Company will
not be able to develop a product which is more appealing or offer similar
products at lower prices than those of the Company. The Company may not be
able to operate successfully in this competitive environment.
- - DEPENDENCE ON UNDERLYING CELLULAR AND LONG DISTANCE CARRIERS. The Company
is currently dependent on a limited number of domestic wireless and long
distance carriers to provide access for its services. Although the Company
believes that it currently has sufficient access to transmission facilities
and long distance networks on favorable terms, and believes that its
relationships with carriers is satisfactory, an increase in the rates
charged by carriers would have a material adverse effect on the Company's
operating margins. Failure to obtain continuing access to such facilities
and networks on favorable terms, would also have a material adverse effect
on the Company, including the possibility that the Company may need to
significantly curtail or cease its operations or to develop its own
capabilities at a cost in excess of the Company's ability to fund such
undertakings.
- - REGULATORY ENVIRONMENT, UNFORESEEN COSTS AND REGULATION. Currently, both
land line and wireless telephony are undergoing rapid and drastic
regulatory changes. The Company's products have components that are
regulated by both state and federal regulatory agencies. There can be no
assurances that one or more services currently offered by the Company will
not be negatively impacted by newly-created or interpreted regulation.
These and other risks described in this Quarterly Report must be considered by
any investor or potential investor in the Company.
- --------------------------------------------------------------------------------
Page 25
<PAGE>
SECURFONE AMERICA, INC.
Quarterly Report on Form 10-QSB
For the Quarter Ended June 30, 1998
- --------------------------------------------------------------------------------
PART II -- OTHER INFORMATIOn
ITEM 1. LEGAL PROCEEDINGS.
From time to time, the Company is involved in legal matters which are
incidental to its operations. In the opinion of management, the ultimate
resolution of these matters has not had a material adverse effect on the
Company's financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In April 1998, the LC Agreement was renewed and extended through April 1,
1999. In connection with the renewal, the Company issued 35,000 shares of Common
Stock to the investors providing the letters of credit. The issuance of these
shares was intended to be exempt from registration under the Securities Act by
virtue of Sections 3(b) and 4(2) of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
No defaults upon senior securities occurred during the second quarter of
1998. In the fourth quarter of 1998, the Company defaulted in the payment of a
$50,000 note payable to Matech I. The Note was subsequently satisfied and
cancelled. See "Management's Discussion and Analysis or Plan of Operation --
Recent Events -- Material Technologies Stock Transfer."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders
during the second quarter of 1998.
ITEM 5. OTHER INFORMATION.
On June 16, 1998, the Company executed a Letter of Intent with Young
Management Group for securing new capital, and agreeing to the planned
acquisition of SCIES, a privately-held, development stage provider of Internet
telephony software, systems and services that is headquarted in Reston,
Virginia. The structure of the final funding was contingent upon completion of a
definitive business agreement between the Company and Young Management Group. On
August 1, 1998, Young Management Group declined to meet its funding obligation
payable at that date and the funding agreement was terminated. The planned
acquisition of SCIES has not yet been completed due to lack of funding. SCIES is
now co-located with the Company and is operating as a strategic partner of the
Company. See "Management's Discussion and Analysis or Plan of Operation - New
Funding."
The Company believes that the acquisition of SCIES may allow it to pursue
new related voice-over-IP opportunities (i.e., Internet telephony), and lower
existing networking costs as well as costs for terminating international calls.
The proposed acquisition calls for the Company to issue shares of its
unregistered Common Stock to purchase SCIES. If the acquisition is consummated,
SCIES will operate as a wholly-owned subsidiary of the Company. The acquisition
is subject to final due diligence, contract preparation, regulatory approval and
new funding consistent with the Letter of Intent. There can be no assurance that
the acquisition of SCIES will be consummated on the proposed terms, or at all.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) There are no exhibits being filed with this Quarterly Report.
(b) The Company did not file any reports on Form 8-K during the second
quarter of 1998.
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Page 26
<PAGE>
SECURFONE AMERICA, INC.
Quarterly Report on Form 10-QSB
For the Quarter Ended June 30, 1998
- --------------------------------------------------------------------------------
SIGNATURES
In accordance with the requirements of the Exchange Act, the Company caused
this Quarterly Report to be signed on its behalf by the undersigned, thereunto
duly authorized.
SecurFone America, Inc.
Date: March 15, 1999 /s/ Paul B. Silverman
----------------------------------------------
By Paul B. Silverman, Chief Executive Officer
- --------------------------------------------------------------------------------
Page 27
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