-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QLfQDze73yeYKI4HDmB88HHyh/dqWpXxAnsqFWvYs3b9sKxqDuQ/bLM3FyFnO/fr V5JtwctOjjcRL/jM60CkAQ== 0001047469-99-014905.txt : 19990416 0001047469-99-014905.hdr.sgml : 19990416 ACCESSION NUMBER: 0001047469-99-014905 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19990415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SECURFONE AMERICA INC CENTRAL INDEX KEY: 0000929425 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INSTRUMENTS FOR MEASUREMENT, DISPLAY, AND CONTROL [3823] IRS NUMBER: 954622822 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 033-83526 FILM NUMBER: 99594055 BUSINESS ADDRESS: STREET 1: 11835 WEST OLYMPIC BLVD STREET 2: EAST TOWER STE 705 CITY: LOS ANGELES STATE: CA ZIP: 90064 BUSINESS PHONE: 3102085589 MAIL ADDRESS: STREET 1: 11835 WEST OLYMPIC BLVD STREET 2: EAST TOWER STE 705 CITY: LOS ANGELES STATE: CA ZIP: 90064 FORMER COMPANY: FORMER CONFORMED NAME: MATERIAL TECHNOLOGY INC DATE OF NAME CHANGE: 19970326 FORMER COMPANY: FORMER CONFORMED NAME: MATERIAL TECHNOLOGIES INC DATE OF NAME CHANGE: 19970313 10QSB 1 10QSB 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 - -------------------------------------------------------------------------------- (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 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 ----- ----- SECURFONE AMERICA, INC. QUARTERLY REPORT ON FORM 10-QSB FOR THE QUARTER ENDED SEPTEMBER 30, 1998 TABLE OF CONTENTS
ITEM PAGE - ---- ---- 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
-- Page 1 -- PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. 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
-- Page 2 -- CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1998 AND 1997
ASSETS 1998 1997 ----------- ---------- 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 ----------- ---------- Total assets $ 1,021,117 $ 964,154 ----------- ---------- ----------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997 ----------- ---------- 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 ----------- ----------
See accompanying notes. -- Page 3 -- CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
1998 1997 ------------------------- ------------------------- three months nine months three months nine months ------------ ----------- ------------ ----------- 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) ------------ ----------- ------------ ----------- ------------ ----------- ------------ -----------
See accompanying notes. -- Page 4 -- CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY MAY 20, 1996 THROUGH SEPTEMBER 30, 1998
Additional Deficit paid in accumulated Additional capital- during the Retained Common paid in stock development Earnings Stock capital options stage (Deficit) Total ----------- ----------- ----------- ------------ ----------- ---------- 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) ----------- ----------- ----------- ------------ ----------- ---------- ----------- ----------- ----------- ------------ ----------- ----------
See accompanying notes. -- Page 5 -- CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
1998 1997 ------------------------- ------------------------- three months nine months three months nine months ------------ ----------- ------------ ----------- 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 ------------ ----------- ------------ ----------- ------------ ----------- ------------ -----------
See accompanying notes. -- Page 6 -- 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. -- Page 7 -- 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 -- Note 3. MARKETABLE SECURITIES AVAILABLE FOR SALE Cost and fair value of marketable securities available for sale at September 30, 1998 is as follows:
Cost Unrealized Gains Fair Value ---- ---------------- ---------- September 30, 1998 - Equities $ 0 $ 490,000 $ 490,000
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:
1998 1997 ---- ---- 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 ----------- ---------- ----------- ----------
Note 5. SHORT TERM DEBT As of September 30 notes payable, other obligations and long term debt consisted of the following:
1998 1997 ---- ---- 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
-- Page 9 -- 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
Note 6. LONG TERM DEBT As of September 30 notes payable, other obligations and long term debt consisted of the following:
1998 1997 ---- ---- 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 ---------- -------- ---------- --------
Minimum future lease payments under non-cancelable capital leases through 2001 are as follows: 1998 $ 12,765 1999 40,599 2000 44,298 2001 11,691 -------- Total minimum future lease payments $109,353 -------- --------
-- Page 10 -- 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 -- 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 -- 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.
Quarter Ended Sept. 30, 1998 Quarter Ended Sept. 30, 1997 ------------------------------------- -------------------------------------- Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- --------- ----------- ------------- --------- 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
-- Page 13 -- Note 12. QUARTERLY INFORMATION (continued) DILUTED EPS - ----------- Income available to common stockholders and assumed conversions $(681,555) 5,998,549 $ (.11) $ (111,086) 5,000,000 $(.02)
* 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 -- 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 -- 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 -- 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 -- 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 -- 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 -- 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 -- 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 -- 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 -- Page 22 -- 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 -- 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 -- 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 -- 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 -- 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 -- EX-27 2 EX-27
5 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 3,093 490,000 41,372 0 0 604,465 314,118 113,346 1,021,117 872,921 1,051,000 0 0 5,930 (975,207) 1,021,117 328,350 328,350 380,278 380,278 3,363,300 0 194,001 (3,509,229) (3,467) (3,512,696) 0 0 0 (3,022,696) (0.60) (0.60)
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