<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 September 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
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(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 reports), 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 MARCH 1, 1999)
- --------------------------------------------------------------------------------
Transition Small Business Disclosure Format (check one):
Yes No X
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<PAGE>
SECURFONE AMERICA, INC.
QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
<S> <C>
PART I -- FINANCIAL INFORMATION................................................2
Item 1. Financial Statements................................................2
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>
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>
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS
1998 1997
----------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash & cash equivalents $ 3,093 $ 4,099
Royalties receivable -- 300,000
Accounting receivable, net 41,372 9,903
Marketable securities 490,000 --
Inventory -- 20,641
Prepaid expenses 70,000 615
----------- ----------
Total current assets 604,465 335,258
PROPERTY AND EQUIPMENT, -net of
accumulated depreciation 200,772 257,099
OTHER ASSETS:
Investments -- --
Note receivable including accrued interest -- 87,453
Intangible assets, net of
accumulated amortization 214,655 283,119
Deposits 1,225 1,225
----------- ----------
Total other assets 215,880 371,797
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Total assets $ 1,021,117 $ 964,154
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----------- ----------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
1998 1997
----------- ----------
<S> <C> <C>
CURRENT LIABILITIES:
Bank overdraft $ 19,033 $ --
Accounts payable & accrued liabilities 415,489 199,007
Accrued payroll 64,163 3,674
Notes payable 315,000 --
Current portion of long term liabilities 59,236 47,449
----------- ----------
Total current liabilities 872,921 250,130
----------- ----------
LONG-TERM LIABILITIES:
Advances payable 140,000 --
Notes payable--net of current portion 911,000 50,000
Obligation under capital leases--net of current 66,473 92,260
portion
----------- ----------
Total long term liabilities 1,117,473 142,260
----------- ----------
Total liabilities 1,990,394 392,390
----------- ----------
DEFERRED ROYALTY REVENUE -- 300,000
STOCKHOLDERS' EQUITY:
Common stock--SecurFone America, Inc. $.001 par 5,930 41,200
value, authorized 100,000,000 shares,
outstanding 6,050,216 shares on September 30,
1998 and 5,000,000 shares at September 30,
1997
Additional paid in capital 4,330,145 1,054,600
Additional paid in capital--stock options 2,874,475 --
Deficit accumulated during the development stage (5,157,131) (824,036)
Retained earnings (deficit) (3,022,696) --
----------- ----------
Total stockholders' equity (969,277) 271,764
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</TABLE>
See accompanying notes.
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<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------------------- -------------------------
three months nine months three months nine months
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
REVENUES $ 52,878 $ 328,350 $ 33,698 $ 39,382
COST OF GOODS SOLD 151,522 380,278 26,128 51,362
------------ ----------- ------------ -----------
Gross profit (98,644) (51,928) 7,570 (11,980)
OPERATING EXPENSES:
Selling, general and administrative 492,261 1,743,300 652,899 1,284,805
Stock-based compensation -- 1,620,000 -- --
------------ ----------- ------------ -----------
492,261 3,363,300 652,899 1,284,805
Income (loss) from operations (590,905) (3,415,228) (645,329) (1,296,785)
------------ ----------- ------------ -----------
OTHER INCOME (EXPENSE):
Royalty revenue -- 100,000 550,000 950,000
Interest income -- -- 7,218 7,218
Interest expense (88,832) (194,001) (22,975) (50,029)
Loss on abandonment -- SFNY -- -- -- (48,980)
------------ ----------- ------------ -----------
Total other income (expense) (88,832) (94,001) 534,243 858,209
------------ ----------- ------------ -----------
Provision for income tax (1,818) (3,467) -- --
------------ ----------- ------------ -----------
Net income (loss) (681,555) (3,512,696) (111,086) (438,576)
------------ ----------- ------------ -----------
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized Gains on Securities (280,000) 490,000 -- --
------------ ----------- ------------ -----------
Comprehensive Income (Loss) $ (961,555) $(3,022,696) $ (111,086) $(438,576)
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Net (loss) per share -- basic $ (0.11) $ (0.60) $ (0.02) $ (0.09)
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Net (loss) per share -- fully diluted $ (0.11) $ (0.60) $ (0.02) $ (0.09)
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
</TABLE>
See accompanying notes.
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<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
MAY 20, 1996 THROUGH SEPTEMBER 30, 1998
<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
Stock options exercised 50 -- 4,950 -- -- 5,000
Net loss -- -- -- (5,157,131) (3,022,696) (8,179,827)
----------- ----------- ----------- ------------ ----------- ----------
Balance September 30, 1998 $ 5,930 $4,330,145 $2,874,475 $(5,157,131) $(3,022,696) $ (969,277)
----------- ----------- ----------- ------------ ----------- ----------
----------- ----------- ----------- ------------ ----------- ----------
</TABLE>
See accompanying notes.
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<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------------------- -------------------------
three months nine months three months nine months
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (681,555) ($3,512,696) $ (111,086) $(438,570)
------------ ----------- ------------ -----------
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 29,623 88,869 26,411 64,940
Stock options granted and contingent shares issued -- 1,620,000 -- --
Decrease (increase) in accounts receivable 22,055 (6,268) (9,903) (9,903)
Decrease (increase) in notes receivable -- 89,353 68,380 118,380
Decrease (increase) in royalties receivable 100,000 50,000 (50,000)
Decrease (increase) in inventory -- 22,153 (20,641) (20,641)
Decrease (increase) in prepaid expenses 35,100 (70,000) -- (615)
Decrease (increase) in intangibles and other assets -- -- (39,049) (76,822)
(Decrease) increase in accounts payable,
payroll payable and accrued expenses 73,922 306,784 (3,124) 149,313
(Decrease) increase in deferred royalty revenue -- (100,000) (50,000) 50,000
------------ ----------- ------------ -----------
NET CASH USED BY
OPERATING ACTIVITIES (520,855) (1,461,805) (89,012) (213,924)
------------ ----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment -- (12,014) (11,660) (146,305)
------------ ----------- ------------ -----------
NET CASH PROVIDED (USED) IN
INVESTING ACTIVITIES -- (12,014) (11,660) (146,305)
------------ ----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contribution to capital 5,000 167,500 -- 120,000
Proceeds from advances payable -- 140,000 -- --
Proceeds from notes payable 474,000 1,176,000 -- --
Repayments on notes payable (3,942) (11,641) 50,000 50,000
Proceeds from capital lease -- -- -- 159,649
Repayment under capital lease (6,266) (21,487) (8,658) (19,940)
------------ ----------- ------------ -----------
NET CASH PROVIDED IN
FINANCING ACTIVITIES 468,792 1,450,372 41,342 309,709
------------ ----------- ------------ -----------
NET INCREASE(DECREASE) IN CASH
AND CASH EQUIVALENTS (52,063) (23,447) (59,330) (50,520)
BEGINNING BALANCE--CASH AND
CASH EQUIVALENTS 36,123 7,507 63,429 54,619
------------ ----------- ------------ -----------
CASH AT SEPTEMBER 30 $ (15,940) $ (15,940) $ 4,099 $ 4,099
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 21,718 $ 71,569 $ 22,975 $ 50,030
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Cash paid during the period for income taxes $ 1,018 $ 3,517 $ 900 $ 900
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
Amortization of prepaid loan fees paid by stock issued $ 35,000 $ 70,000 $ -- $ --
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Increase (decrease) in fair value of marketable
securities $ (280,000) $ 490,000 $ -- $ --
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Conversion of advances payable to notes payable $ 702,000 $ -- $ -- $ --
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Sale of common stock for note $ -- $ -- $ 5,000 $ 5,000
------------ ----------- ------------ -----------
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</TABLE>
See accompanying notes.
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<PAGE>
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 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 September
30, 1998 and 1997 depreciation expense of $14,077 and $571 was
charged to operations, respectively. For the nine months ended
September 30, 1998 and 1997 depreciation expense of $42,231 and
$37,142 was charged to operations, respectively.
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<PAGE>
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 September
30, 1998, there was an amount of $133,900 available to these
investors for stand-by letters of credit. For the quarters ended
September 30, 1998 and 1997, interest expense of $57,500 and
$19,771 was charged to operations respectively. For the nine
months ended September 30, 1998 and 1997, interest expense of
$137,500 and $42,271 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 the 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 September 30, 1998 and 1997, $15,546 and $571 in
amortization expense of organizational costs has been charged to
operations, respectively. For the nine months ended September 30,
1998 and 1997, $46,638 and $37,142 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
Montpilier 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
Montpilier Holdings, Inc. Montpilier Holdings, Inc. is the
principal shareholder in the Company, and is owned indirectly by
Michael M. Grand, a Director of the Company.
-- Page 8 --
<PAGE>
Note 3. MARKETABLE SECURITIES AVAILABLE FOR SALE
Cost and fair value of marketable securities available for sale at
September 30, 1998 is as follows:
<TABLE>
<CAPTION>
Cost Unrealized Gains Fair Value
---- ---------------- ----------
<S> <C> <C> <C>
September 30, 1998 - Equities $ 0 $ 490,000 $ 490,000
</TABLE>
The securities are held in connection with the July 31, 1997
reorganization and legal claims asserted against a Company
shareholder. The Company also withheld $50,000 as security (see
Note 5). The legal claims were subsequently resolved (see Note
13).
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 September 30, 1998 the Company held securities which have
unrealized gains of $490,000. These securities were pledged as
collateral for a $50,000 note payable to a shareholder of the
Company. See Note 5. As described in Note 10, there is
no tax expense on realization of this gain.
Note 4. PROPERTY AND EQUIPMENT
Property and equipment at September 30, 1998 and 1997 is comprised
of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Office Furniture and Equipment $ 35,043 $ 11,015
Computer Software 88,702 88,802
Computer Hardware 190,373 188,814
----------- ----------
314,118 294,302
Accumulated Depreciation (113,346) (37,203)
----------- ----------
$ 200,772 $ 257,099
----------- ----------
----------- ----------
</TABLE>
Note 5. SHORT TERM DEBT
As of September 30 notes payable, other obligations and long term
debt consisted of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Notes payable (formerly treated as an advances payable) to
unrelated parties for advances of $35,000 and $130,000 are due
February 18, 1999 and January 30, 1999, respectively with 10%
interest. The notes are unsecured. $ 165,000 0
Note payable (formerly treated as an advances payable) to an
unrelated party is due November 21, 1998 with 10% interest. Under
terms of the note, a $20,000 origination fee is due November 1,
1998. The note is secured with security interest in 50,000 shares
of the Company's common stock. $ 100,000 0
</TABLE>
-- Page 9 --
<PAGE>
<TABLE>
<S> <C> <C>
Note payable to a shareholder in connection with the July 31, 1997
reorganization and legal claims asserted against a Company
shareholder. $ 50,000 0
----------
The demand note has no stated interest rate and is due on 10 days
demand after settlement of legal claims made upon the
shareholder. As discussed in Note 13, the claims were released
August 18, 1998 and the note was satisfied on October 9, 1998 $ 315,000 0
</TABLE>
Note 6. LONG TERM DEBT
As of September 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. $ 140,000 0
Convertible debenture issued August 21, 1998 for advances made to the
Company. The debenture has a 12% interest rate 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. $ 911,000 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
September 30, 1998 requires payment within twelve months $ 16,356 0
Note payable to a shareholder in connection with the July 31, 1997
reorganization and legal claims asserted against a Company
shareholder (See Note 5). $ 20,295 50,0000
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. 109,353 139,709
------- -------
Total $ 1,176,709 189,909
Less: Current Portion, notes and other maturities 59,236 47,449
------ ------
Total long term liabilities $ 1,117,473 $ 142,460
---------- --------
---------- --------
</TABLE>
Minimum future lease payments under non-cancelable capital leases
through 2001 are as follows:
<TABLE>
<S> <C>
1998 $ 12,765
1999 40,599
2000 44,298
2001 11,691
--------
Total minimum future lease payments $109,353
--------
--------
</TABLE>
-- Page 10 --
<PAGE>
Note 7. 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 1,333.33 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 shares issued and outstanding
of SecurFone America, Inc. were exchanged for 4,500,000 shares
issued of Material Technology, Inc. As a result of the
reorganization, there were 5,000,216 shares issued and
outstanding and 100,000,000 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.
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
-- Page 11 --
<PAGE>
Note 7. COMMON STOCK (continued)
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.
On August 6, 1998, 50,000 shares were issued on the exercise of
vested stock options.
As of September 30, 1998, a total of 100,000,000 shares were
authorized and 6,050,216 shares were issued and outstanding.
Note 8. 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.
Note 9. RELATED PARTIES
A Director of the Company is also a partner in the law firm which
represents the Company in its legal matters.
Note 10. 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 September 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.
-- Page 12 --
<PAGE>
Note 11. 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 $8,179,827
since its inception, of which $5,947,250 represented expenses
associated with stock-based compensation plans as noted at Note 7.
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.
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
$64,143 of unpaid salary has been accrued and recorded as of
September 30, 1998.
The employment agreement was subsequently terminated and the unpaid
salary settled. See Note 13, Subsequent Events.
Note 12. 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 Sept. 30, 1998 Quarter Ended Sept. 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 $(681,555) 5,998,549 $ (.11) $(111,086) 5,000,000 $(.02)
EFFECT OF DILUTIVE SECURITIES
- -----------------------------
Stock Options 0* 0
</TABLE>
-- Page 13 --
<PAGE>
Note 12. QUARTERLY INFORMATION (continued)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
DILUTED EPS
- -----------
Income available to
common stockholders and
assumed conversions $(681,555) 5,998,549 $ (.11) $ (111,086) 5,000,000 $(.02)
</TABLE>
* SFAS 128 requires the use of weighted averages for stock
outstanding during the quarter. Although the exercise prices for
stock options issued under Company plans 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 536,535 if computed.
At September 30, 1998, 780,900 stock options were issued, 600,000
were vested and 50,000 had been exercised.
Note 13. 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's entry into
new related voice-over-IP markets (i.e. Internet Telephony), as
well as reduce the Company's networking costs and provide 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.
A shareholder who was subject to legal claims arising from the July
31, 1997 reorganization was released from those claims and made
demand for payment of a $50,000 promissory note from the Company
on October 5, 1998. The marketable securities were held by the
Company as collateral on the note. On October 19, 1998 the
marketable securities were exchanged with the shareholder in full
satisfaction of the note.
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.
-- Page 14 --
<PAGE>
Note 13. SUBSEQUENT EVENTS (continued)
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 appointed a 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 $479,500 have been obtained from
unrelated parties between October 1, 1998 and February 3, 1999.
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 January 30, 1999 the Company executed an agreement with Teledata
World Services, Inc. ("Teledata"), a publicly traded company,
whereby certain prepaid cellular assets would be sold to Teledata
for cash and Teledata common stock. Under the agreement Teledata
would acquire all outstanding shares of SecurFone, Inc., a wholly
owned operating subsidiary of the Company for $498,000 and
600,000 shares of unregistered Teledata common stock. Subject to
securing regulatory approvals, the proposed transaction is
expected to be completed in the second quarter of 1999. Teledata
has advanced $248,000 to the Company as of February 3, 1999 which
is included in the cash advances referred to above.
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 purchase of 4,550,000 shares from
Montpilier Holdings, Inc., the principal stockholder of the
Company. Under the agreement, APT would also loan up to $1.8
million at closing which would be used to repay existing debt and
provide working capital. The transaction is scheduled to close
in the first quarter of 1999 and is contingent upon due diligence
now in progress.
-- Page 15 --
<PAGE>
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 three and
nine months ended September 30, 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 1999.
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
William 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
obligations related to his prior employment by the Company.
On September 11, 1998, the Company's Chief Operating Officer and a
Director, Derek M. 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.
-- Page 16 --
<PAGE>
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 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
under 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 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 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 the 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>
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 costs for 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, and 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 (the "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 were 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 were pledged as
collateral on the Note.
On July 31, 1998, the Baker Group entered into a settlement agreement
with Mr. Bernstein and Matech II and on August 18, 1998, the Baker Group
filed a Release of Claims against SecurFone. Pursuant to 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
obligations 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 its default
on the Note. On October 19, 1998, SecurFone returned to Matech II the
560,000 shares of its Common stock which were pledged as collateral on the
Note and the Note was cancelled.
-- Page 18 --
<PAGE>
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:
THIRD QUARTER OF 1998 COMPARED TO THIRD 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
third quarter of 1998 and the third quarter of 1997 is not meaningful.
Prepaid cellular revenues for the third quarter of 1998 increased to $52,878
from $33,698 in the third 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. Prepaid cellular revenues for the third quarter of 1998
decreased to $52,878 from $117,424 in the second quarter of 1998 due to
increased competition for SFN, and the Company's inability to adequately fund
major national marketing programs. Assuming adequate funds are available for
advertising and promotion, the Company expects that SFN and CNS will grow at
a strong rate on a long-term basis. The Company is seeking new funds to
promote sales and market strong market launch of the BTM product.
-- Page 19 --
<PAGE>
COST OF GOODS SOLD
Total cost of goods sold for the third quarter of 1998 increased to
$151,522 from $26,128 in the third 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 profit for the third quarter of 1998 decreased to a loss of
$98,644 compared with a profit of $7,570 in the third quarter of 1997. The
gross profit margin for the third 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 decreased to $492,261 in
the third quarter of 1998 from $652,899 in the third quarter of 1997.
Marketing-related expenses, including advertising, printing and tradeshows,
decreased in the third quarter of 1998 to $8,552 from $111,165 in the third
quarter of 1997. Miscellaneous expenses decreased in the third quarter of
1998 to $547 from $78,787 in the third quarter of 1997. Due to the hiring of
an experienced management team, wages and associated taxes increased in the
third quarter of 1998 to $192,809 from $127,621 in the third 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 third quarter of 1998 to $8,364
from $0 in the third quarter of 1997. Consulting, legal and professional fees
increased to $153,297 in the third quarter of 1998 from $125,360 in the third
quarter of 1997 due to the Company's increased need for assistance in
technological developments, new product development, 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 third
quarter of 1998 versus $26,411 in the third quarter of 1997.
Loss from operations in the third quarter of 1998 decreased to $590,905
from $645,329 in the third quarter of 1997 due to decreased costs associated
with selling, general and administrative expenses. Net loss in the third
quarter of 1998 increased to $681,555 from net loss of $111,086 in the third
quarter of 1997. The net loss in the third quarter of 1998 was increased by
a $280,000 unrealized loss on marketable securities that the Company holds
which resulted in a comprehensive loss of $961,555 or $0.11 per share in the
third quarter of 1998.
ROYALTY REVENUE
The Company previously 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 third quarter of 1998
compared to $550,000 in the third 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 in the future.
OTHER EXPENSES
Interest expense increased to $88,832 in the third quarter of 1998 from
$22,975 in the third quarter of 1997. The increase was primarily due to
35,000 shares of the Company's stock that was issued as compensation to
investors who renewed and extended letters of credit to April 1999 on behalf
of the Company. The issuance of the shares resulted in an additional
accounting cost entry of $35,000 in the third quarter of 1998. The letters of
credit 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 $1,176,000 that
was loaned to the Company by private investors as of September 30, 1998.
-- Page 20 --
<PAGE>
FIRST NINE MONTHS OF 1998 COMPARED TO THE FIRST NINE MONTHS OF 1997
REVENUES
Prepaid cellular revenues for the first nine months of 1998 increased to
$328,350 from $39,382 in the first nine months 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 nine months of 1998 increased to
$380,278 from $51,362 in the first nine months 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 first nine months of 1998 was $51,928 compared with a
loss of $11,980 in the first nine months of 1997. The gross profit margin
for the first nine months of 1998 was a negative 15.8% as compared with a
negative 30.4% in the first nine months 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 $1,743,300 in
the first nine months of 1998 from $1,284,805 in the first nine months of
1997. The increase in selling, general and administrative expenses was
primarily due to the hiring and development of an experienced management
team. The wages and associated taxes increased in the first nine months of
1998 to $602,132 from $203,889 in the first nine months 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 nine months of 1998 to $31,624 from
$0 in the first nine months of 1997. Marketing-related expenses, including
advertising, printing and tradeshows, decreased in the first nine months of
1998 to $75,724 from $160,833 in the first nine months of 1997.Consulting,
legal and professional fees increased to $360,876 in the first nine months of
1998 from $223,282 in the first nine months of 1997 due to the Company's
increased need for assistance in technological developments, new product
development, 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 $88,869 in the first nine months of 1998 versus $64,940 in the
first nine months of 1997.
Loss from operations in the first nine months of 1998 increased to
$3,415,228 from $1,296,785 in the first nine months of 1997 due to increased
costs associated with the launch of the Company's products and related
expenses. Net loss in the first nine months of 1998 increased to $ 3,512,696
from a net loss of $438,576 in the first nine months of 1997. A large
portion of the net loss in the first nine months 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 nine months of 1998 was, however, reduced by a $490,000 unrealized gain
on marketable securities that the Company holds which resulted in a
comprehensive loss of $3,022,696 or $0.60 per share as compared to $438,576
or $0.09 per share for the first nine months of 1997.
-- Page 21 --
<PAGE>
ROYALTY REVENUE
The Company previously 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 nine months
of 1998 compared to $950,000 in the first nine months 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 $194,001 in the first nine months of 1998
from $50,029 in the first nine months of 1997. The increase was primarily
due to 35,000 shares of the Company's stock that was issued as compensation
to investors who renewed and extended letters of credit to April 1999 on
behalf of the Company. The issuance of the shares resulted in an additional
accounting cost entry totaling $70,000 in the second and third quarters of
1998. The letters of credit 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 $1,176,000 that was loaned to the Company by private investors as
of September 30, 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 September 30, 1998, the Company had received advances
in the amount of $1,316,000 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 third quarter of 1998 for the issuance of the shares.
An additional $35,000 interest expense will be recorded in each of the next
two quarterly periods to fully reflect the cost of the issuance of the 35,000
shares.
At September 30, 1998, the Company had cash and cash equivalents of
$3,093. In addition, the Company had accounts receivable totaling $41,372
from the sale of the Company's switch-based debit cellular product. Net cash
used by operating activities was $1,461,805 in the first three quarters of
1998 compared to $213,924 in the first three quarters of 1997. Net cash used
in investing activities in the first three quarters of 1998 was $12,014 used
to purchase equipment as compared with $146,305 in the first three quarters
of 1997. Net cash provided by financing activities in the first three
quarters of 1998 totaled $1,450,372 which consisted primarily of $1,176,000
in proceeds from notes payable forwarded to the Company from private
investors as compared with $309,709 in the first three quarters of 1997 which
consisted primarily of capital contributions of $120,000.
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
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<PAGE>
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. See "-Recent Events - New Funding." Possible plans call for
raising of funds through the sale of private and/or public equity and
continued debt financing. If the Company 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.
-- Page 23 --
<PAGE>
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 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 Bulletin Board, 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
-- Page 24 --
<PAGE>
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 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>
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.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
No defaults upon senior securities occurred during the third 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 third quarter of 1998.
ITEM 5. OTHER INFORMATION.
On June 16, 1998, the Company executed a Letter of Intent with YMG 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 YMG. On August 1, 1998, YMG 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 - Recent Events - 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 third
quarter of 1998.
-- Page 26 --
<PAGE>
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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