<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 March 31, 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 report(s), and (2) has been
subject to such filing requirements for the past 90 days.
Yes____ No __X__
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
COMMON STOCK, $0.001 PAR VALUE PER SHARE: 6,000,216 (AS OF AUGUST 1, 1998)
Transition Small Business Disclosure Format (check one):
Yes ____ No __X__
<PAGE>
SECURFONE AMERICA, INC.
QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
<S> <C>
PART I -- FINANCIAL INFORMATION.......................................... 1
Item 1. Financial Statements...................................... 1
Item 2. Management's Discussion and Analysis or Plan of Operation. 17
PART II -- OTHER INFORMATION 25
Item 1. Legal Proceedings......................................... 25
Item 2. Changes in Securities and Use of Proceeds................. 25
Item 3. Defaults Upon Senior Securities........................... 25
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>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
<S> <C>
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Operations. . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Stockholders' Equity. . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . . . 5
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . 5-16
</TABLE>
1
<PAGE>
SECURFONE AMERICA, INC.
(FORMERLY MATERIAL TECHNOLOGY, INC.)
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash & cash equivalents $ 9,666 $ 128,448
Note receivable --- 150,000
Accounts receivable 61,326 ---
Royalties receivable --- 750,000
Marketable securities 280,000 ---
Inventory --- 50,000
Prepaid Expenses 300 37,000
---------- ----------
Total current assets 351,292 1,115,448
PROPERTY AND EQUIPMENT, - net of
accumulated depreciation 222,643 238,493
OTHER ASSETS:
Intangible assets, net of
accumulated amortization 245,747 526,423
Deposits 1,225 50,775
---------- ----------
Total other assets 246,972 577,198
---------- ----------
Total assets $ 820,907 $1,931,139
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
1998 1997
---------- ----------
CURRENT LIABILITIES:
Accounts payable & accrued liabilities $ 233,276 $ 189,342
Accrued payroll 29,165 16,458
Current portion of long term liabilities 54,180 47,449
---------- ----------
Total current liabilities 316,621 253,249
---------- ----------
LONG-TERM LIABILITIES:
Advances payable 327,000 ---
Notes payable-net of current portion 58,301 ---
Obligation under capital leases-net of current
portion 83,446 112,200
---------- ----------
Total long term liabilities 468,747 112,200
DEFERRED ROYALTY REVENUE --- 750,000
---------- ----------
Total deferred revenue and liabilities 785,368 1,115,449
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock - SecurFone America, Inc. 5,845 41,200
$.001 par value, authorized 100,000,000
shares, outstanding 5,965,216 shares at
March 31, 1998 and 5,000,000 shares
at March 31, 1997
Additional paid in capital 4,190,180 1,054,600
Additional paid in capital-stock options 2,869,525 ---
Deficit accumulated during the development stage (5,157,131) (280,110)
Retained earnings (deficit) (1,872,880) ---
---------- ----------
Total stockholders' equity 35,539 815,690
---------- ----------
Total liabilities and stockholders' equity $ 820,907 $1,931,139
---------- ----------
---------- ----------
</TABLE>
See accompanying notes
2
<PAGE>
SECURFONE AMERICA, INC.
(FORMERLY MATERIAL TECHNOLOGY, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND FOUR MONTHS ENDED
MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- --------
<S> <C> <C>
REVENUES $ 158,104 $ 2,661
COST OF GOODS SOLD 98,065 450
----------- --------
Gross profit 60,039 2,211
OPERATING EXPENSES:
Selling, general and administrative 665,113 233,341
Stock-based compensation 1,620,000 ---
----------- --------
Income (loss) from operations (2,225,074) (231,130)
----------- --------
OTHER INCOME (EXPENSE):
Royalty revenue 100,000 ---
Interest expense (27,806) ---
Loss on abandonment - SFNY --- (48,980)
----------- --------
Total other income (expense) 72,194 (48,980)
----------- --------
Provision for income tax --- ---
----------- --------
Net (loss) (2,152,880) (280,110)
----------- --------
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized Gains on Securities 280,000 ---
----------- --------
Comprehensive Income $(1,872,880) $(280,110)
----------- --------
----------- --------
Net (loss) per share - basic $ (0.32) $ (0.06)
----------- --------
----------- --------
Net (loss) per share - fully diluted $ (0.32) $ (0.06)
----------- --------
----------- --------
</TABLE>
See accompanying notes
3
<PAGE>
SECURFONE AMERICA, INC.
(FORMERLY MATERIAL TECHNOLOGY, INC.)
STATEMENT OF STOCKHOLDERS' EQUITY
MAY 20, 1996 THROUGH MARCH 31, 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
Net loss --- --- --- (5,157,131) (1,872,880) (7,030,011)
-------- ----------- --------- ------------ ----------- -----------
Balance March 31, 1998 $ 5,845 $4,190,180 $2,869,525 $(5,157,131) $(1,872,880) $ 35,539
-------- ----------- --------- ------------ ----------- -----------
-------- ----------- --------- ------------ ----------- -----------
</TABLE>
See accompanying notes
4
<PAGE>
SECURFONE AMERICA, INC.
(FORMERLY MATERIAL TECHNOLOGY, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE AND FOUR MONTHS ENDED MARCH 31,
<TABLE>
<CAPTION>
1998 1997
------------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,872,880) $ (280,110)
------------- -----------
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 29,623 35,809
Stock options granted and contingent
shares issued 1,620,000 ---
Decrease (increase) in accounts receivable (26,222) ---
Decrease (increase) in notes receivable 89,353 (150,000)
Decrease (increase) in royalties receivable 100,000 (750,000)
Decrease (increase) in inventory 22,153 (50,000)
Decrease (increase) in prepaid expenses (300) (37,000)
Decrease (increase) in intangibles and
other assets --- (604,426)
(Decrease) increase in accounts payable
payroll payable and accrued expenses 89,573 205,800
(Decrease) increase in deferred
royalty revenue (100,000) 750,000
------------- -----------
NET CASH USED BY
OPERATING ACTIVITIES (48,700) (879,927)
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Unrealized gain (loss) on marketable securities (280,000) ---
Purchase of property and equipment (5,756) (247,074)
------------- -----------
NET CASH PROVIDED (USED) IN
INVESTING ACTIVITIES (285,756) (247,074)
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contribution to capital 22,500 1,095,800
Proceeds from advances payable 327,000 ---
Repayments on notes payable (3,819) ---
Proceeds from capital lease --- 159,650
Repayments under capital lease (9,066) ---
------------- -----------
NET CASH PROVIDED IN
FINANCING ACTIVITIES 336,615 1,255,450
------------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 2,159 128,449
BEGINNING BALANCE - CASH AND
CASH EQUIVALENTS 7,507 ---
------------- -----------
CASH AT MARCH 31 $ 9,666 $ 128,449
------------- -----------
------------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 20,306 $ ---
------------- -----------
------------- -----------
Cash paid during the period for income taxes $ 850 $ ---
------------- -----------
------------- -----------
</TABLE>
See accompanying notes
5
<PAGE>
SECURFONE AMERICA, INC.
(FORMERLY MATERIAL TECHNOLOGY, INC.)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 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 the "Company"). Intercompany transactions
and balances have been eliminated in the consolidated financial
statements.
NATURE OF OPERATIONS
SecurFone America, Inc. 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.
6
<PAGE>
SECURFONE AMERICA, INC.
(FORMERLY MATERIAL TECHNOLOGY, INC.)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
- -------------------------------------------------------------------------------
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
INVENTORY
Inventories are valued on the first in, first out (FIFO) method, at cost.
Inventories consist of prepaid calling cards.
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 for both financial reporting and income tax
purposes. As of March 31, 1998 and 1997 depreciation expense of $14,077
and $8,582 was charged to operations, respectively.
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. The Company has an agreement with investors that may obtain
letters of credit which are secured by their personal assets through
their personal banks. As of March 31, 1998, there was an amount of
$218,750 available to these investors for stand-by letters of credit.
As of March 31, 1998 and 1997, interest expense of $23,355 and $ 0 was
charged to operations respectively.
7
<PAGE>
SECURFONE AMERICA, INC.
(FORMERLY MATERIAL TECHNOLOGY, INC.)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
- -------------------------------------------------------------------------------
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
REVENUE AND EXPENSE RECOGNITION
The Company recognizes revenue from sales of cellular airtime, net of an
allowance for uncollectable 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. No allowance
for uncollectable accounts has been provided because management has
evaluated the accounts and believes they are all collectable.
INTANGIBLE ASSETS
Intangible assets are comprised of various cost incurred by the Company as
part of start-up phase of operations. The Company began amortizing
these costs over a five-year period as of January 1, 1997, using the
straight-line method. As of March 31, 1998 and 1997, $15,546 and $0 in
amortization expense of organizational costs has been charged to
operations respectively.
USE OF ESTIMATES
In preparing the Company's financial statements, management is required to
make estimates and assumptions that effect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. These
estimates are based on management's knowledge and experience.
Accordingly, actual results could differ from those estimates.
Note 2. NOTE RECEIVABLE
The 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.
8
<PAGE>
SECURFONE AMERICA, INC.
(FORMERLY MATERIAL TECHNOLOGY, INC.)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
- -------------------------------------------------------------------------------
Note 3. ROYALTIES RECEIVABLE AND DEFERRED ROYALTY REVENUE
Royalties receivable and deferred royalty revenue at March 31, 1997
represents the portion of total revenue from initial license sales
attributable to services required by the Company that have not yet been
performed. Revenues are recognized on a pro-rata basis as services are
provided to the licensor.
Note 4. MARKETABLE SECURITIES AVAILABLE FOR SALE
Cost and fair value of marketable securities available for sale at March
31, 1998 is as follows:
<TABLE>
<CAPTION>
Cost Unrealized Gains Fair Value
<S> <C> <C> <C>
Equities $ 0 $ 280,000 $ 280,000
</TABLE>
During the quarter, the Company 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 March 31, 1998 the Company held securities which have unrealized gains
of $280,000. As described in Note 9, the tax expense of realizing
this gain would be $ 0.
Note 5. PROPERTY AND EQUIPMENT
Property and equipment at March 31, 1998 and 1997 is comprised of the
following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Office Furniture and Equipment $ 28,660 $ 5,663
Computer Software 88,802 81,763
Computer Hardware 190,373 159,649
307,835 247,075
Accumulated Depreciation (85,192) (8,582)
-------- --------
$222,643 $238,493
-------- --------
-------- --------
</TABLE>
9
<PAGE>
SECURFONE AMERICA, INC.
(FORMERLY MATERIAL TECHNOLOGY, INC.)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
- -------------------------------------------------------------------------------
Note 6. LONG TERM DEBT
As of March 31, 1998 notes payable, other obligations and long term debt
consisted of the following:
<TABLE>
<S> <C>
Advances payable to unrelated parties and potential
investors who have committed the funds on a long
term basis. Negotiations with the parties have not
characterized the debt and equity nature of the funds
or determined an interest rate, maturity date, repay-
ment terms or other features for the advances. $327,000
Note payable in connection with July 31, 1997 reorgan-
ization between SecurFone America, Inc. and Mate-
rial Technology, Inc. The payment has been withheld
until claims against a shareholder have been resolved.
The company is not a named defendant in the action
and the parties are in settlement discussions. The interest
rate or maturity date cannot be reasonably estimated. 50,000
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 March 31, 1998 requires
principal payments of $15,874 within twelve months and
the balance payable in the period. 24,175
CAPITAL LEASE
In March, 1997, the Company entered into a sale-leaseback
on computer equipment capitalized for $159,649 in an
arrangement which 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. 121,752
---------
Total $522,927
Less: Current Portion, notes and other maturities 54,180
---------
Total long term liabilities $468,747
---------
---------
</TABLE>
10
<PAGE>
SECURFONE AMERICA, INC.
(FORMERLY MATERIAL TECHNOLOGY, INC.)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
- -------------------------------------------------------------------------------
Note 6. LONG TERM DEBT (continued)
Minimum future lease payments under non-cancelable capital leases for the
next five years are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 28,414
1999 40,895
2000 44,621
2001 7,822
--------
Total minimum future lease payments $121,752
--------
--------
</TABLE>
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 1,333,333 to 1 shares, increasing the 3,000 shares issued
and outstanding to 4,000,000 shares with a par value of $.01 per share.
The amount of $39,970 was transferred from the paid-in-capital account
to common stock account to record the split.
Prior to the reorganization between SecurFone America, Inc. and Material
Technology, Inc., Material Technology, Inc. had as of July 31, 1997
100,000,000 shares authorized and 5,000,000 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 amount 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.
11
<PAGE>
SECURFONE AMERICA, INC.
(FORMERLY MATERIAL TECHNOLOGY, INC.)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
- -------------------------------------------------------------------------------
Note 7. COMMON STOCK (continued)
On November 13, 1997 the Company registered with the Securities and
Exchange Commission on Form S-8 (the "S-8 filing") 1,000,000 shares
under the 1997 Stock Option Plan to grant incentive stock options and
non-qualified stock options to officers and key employees. At the same
time a similar registration for 250,000 shares under the 1997 Director
Non-qualified Stock Option Plan was made. At various dates the Company
granted stock options under the two stock option plans totaling 830,900
shares consisting of 300,000 shares at an option price of $1.00 per
share, 130,900 shares at an option price of $2.50 per share and 400,000
shares at an option price of $0.10 per share. These options are
exercisable during 1997 and 1998. These shares are recorded as
$1,227,250 Selling, General & Administrative (SG&A) expense and
additional paid in capital - stock options at the grant date in
accordance with Statement of Financial Accounting Standards NO. 123
(SFAS 123) "Accounting for Stock-Based Compensation."
On December 3, 1997, the Company ( SecurFone America, Inc. formerly
Material Technology, Inc.) issued 620,000 conditional shares of common
stock with a par value of $.001 per share registered with the S-8
filing. These shares were issued pursuant to various employment,
retainer, consulting and fee agreements. As of December 31, 1997 all
conditions of these shares have been met and $3,100,000 was recorded as
SG&A expense, and common stock and additional paid in capital accounts
at the issue date.
On January 6, 1998 the Company granted stock options under the 1997 Stock
Option Plan of 400,000 shares at an option price of $.10 per share.
These options are exercisable immediately and are recorded as $1,620,000
Selling, General & Administrative (SG&A) expense and additional paid in
capital - stock options at the grant date in accordance with Statement
of Financial Accounting Standards NO. 123 (SFAS 123) "Accounting for
Stock-Based Compensation."
On March 19, 1998 an additional 345,000 shares issued were the result of
the following transactions: 225,000 shares of stock issued pursuant to
warrants exercised by the individuals providing credit accommodations in
connection with letters of credit issued by the Company; 120,000 shares
were the result of two stock subscriptions in private placements.
As of March 31, 1998, a total of 100,000,000 shares were authorized and
5,965,216 shares were issued and outstanding.
12
<PAGE>
SECURFONE AMERICA, INC.
(FORMERLY MATERIAL TECHNOLOGY, INC.)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
- -------------------------------------------------------------------------------
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. 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 (SFAS 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 March 31, 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, as
it cannot be determined when, or if, the tax benefits derived from these
losses will materialize.
Note 10. RELATED PARTIES
An officer of the Company is also a partner in the law firm which
represents the Company in its legal matters.
13
<PAGE>
SECURFONE AMERICA, INC.
(FORMERLY MATERIAL TECHNOLOGY, INC.)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
- -------------------------------------------------------------------------------
Note 11. COMMITMENTS AND CONTINGENCIES
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.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates
continuation of the Company as a going concern. However, the Company
has sustained losses totaling $7,030,011 since its inception, of which
$5,947,250 represented expenses associated with stock-based compensation
plans as noted earlier at Note 6.
The continuing losses resulting from operations, and not necessarily those
costs associated with stock-based compensation plans, are an indication
that the Company may not be able to continue to operate without
additional cash infusion. The Company has been and is currently seeking
private and public equity and bridge loans in order to finance
operations.
In November, 1997 the Company entered into an annual employment agreement
with it's President and Chief Executive Officer. The agreement has
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. As of March 31, 1998, a total of $29,165 of
deferred wages has accrued and was recorded as a selling, general and
administrative expense.
14
<PAGE>
SECURFONE AMERICA, INC.
(FORMERLY MATERIAL TECHNOLOGY, INC.)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
- -------------------------------------------------------------------------------
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 March 31, 1998 Quarter Ended March 31, 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 $(1,872,880) 5,677,716 $ (.32) $(280,110) 5,000,000 $ (.06)
EFFECT OF DILUTIVE SECURITIES
Stock Options 0 0
DILUTED EPS
Income available to
common stockholders and
assumed conversions
$(1,872,880) 5,677,716 $ (.32) $(280,110) 5,000,000 $ (.06)
</TABLE>
SFAS 128 requires the use of weighted averages for stock outstanding during
the quarter. Although stock options issued under Company plans exercise
prices were below the average market price of the common shares, they
were not computed in calculating diluted earnings per share because SFAS
128 does not include stock dilutions that would reduce per share losses.
Outstanding stock options would have increased outstanding shares by
667,118 if computed.
At March 31, 1998 630,900 stock options were issued, 500,000 were vested
and none had been exercised.
15
<PAGE>
SECURFONE AMERICA, INC.
(FORMERLY MATERIAL TECHNOLOGY, INC.)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
- -------------------------------------------------------------------------------
Note 13. SUBSEQUENT EVENTS
On June 12, 1998, the Company executed a term sheet for the acquisition of
SCIES, Inc., a privately-held provider of Internet telephony software,
systems and services that is headquartered in Reston, Virginia. The
Company believes that the acquisition of SCIES would allow it to lower
existing networking costs as well as costs for terminating international
calls. The acquisition would also provide opportunities for the Company
to pursue related Internet-telephony opportunities that are compatible
with the Company's existing lines of business and distribution channels.
The term sheet calls for the Company to issue shares of its unregistered
common stock to purchase SCIES. There can be no assurance that the
acquisition of SCIES will be consummated on the proposed terms, or at
all.
Additional cash advances totaling $700,000 have been obtained from
unrelated parties between April 1, 1998 and July 31, 1998. Negotiations
are underway to characterize the nature to the advances.
Additional 35,000 shares of stock were issued in May 1998 pursuant to
warrants exercised by the individuals providing credit accommodations in
connection with letters of credit issued by the Company.
16
<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 months ended March 31, 1998 and as compared with the four months ended
March 31, 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 may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act") and may 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 with the exception of several administrative enhancements that
require additional funding. The Company has initiated its commercial product
launch and broad-scale marketing and distribution efforts beginning in the first
quarter of 1998.
The products and services that the Company has developed during its
start-up phase have been 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 has 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 expects to make increasing expenditures to
expand its networks and coverage area footprint to broaden its service
offerings. Proper management of the Company's growth will require the
Company to maintain quality controls over its services and network as well as
a significant expansion of the Company's internal management, technical and
accounting systems, all of which will require substantial investment.
RECENT EVENTS
On June 12, 1998, the Company executed a term sheet for the acquisition of
SCIES, Inc. ("SCIES"), a privately held Internet telephony company. See "Other
Information."
17
<PAGE>
PRODUCTS 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.
18
<PAGE>
RESULTS OF OPERATIONS:
FIRST QUARTER OF 1998 COMPARED TO FIRST QUARTER OF 1997
REVENUES
The Company began full-scale operations in the first quarter of 1998;
accordingly, a detailed comparison of revenues and expenses, with the first
quarter of 1997, is not meaningful. Prepaid cellular revenues for the first
quarter of 1998 increased to $158,104 from $2,661 in the first quarter 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,
Chicago, Cleveland, Detroit, Houston, Miami, New Jersey, New York, Orlando,
Philadelphia, San Diego, San Francisco, and Tampa markets. The Company
expects that SFN and CNS will continue to grow at an accelerated rate on a
long-term basis while BTM will experience rapid growth for 18 to 24 months
before exhibiting lessened or no additional growth.
COST OF GOODS SOLD
Total cost of goods sold for the first quarter of 1998 increased to $98,065
from $450 in the first 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 first quarter of 1998 increased to $60,039 from $2,211
in the first quarter of 1997. The gross profit margin for the first quarter of
1998 of 37.9% is expected to decrease slightly for the remainder of 1998 as the
fixed portion of the cost of goods sold increases due to continuing market
expansion. The Company does not expect the variable portion of cost of goods
sold to increase for 1998 due to the fact that airtime rates are guaranteed
under the contracts with the underlying carriers. 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 should positively impact
the overall gross profit margin.
OPERATING EXPENSES
Selling, general and administrative expenses increased to $665,113 in the
first quarter of 1998 from $233,341 in the first quarter of 1997. The increase
in selling, general and administrative expenses was primarily due to the hiring
and development of an experienced management team and wages and associated taxes
increased in the first quarter of 1998 to $200,593 from a negligible amount in
the first quarter of 1997. In addition, the initial introduction of services to
the roll-out markets to develop the Company's network, software, routing and
carrier interface technology increased marketing and promotion and consulting
expenses in the first quarter of 1998 to $107,626 from $53,485 in the first
quarter of 1997. Rent paid increased in the first quarter of 1998 to $25,435
from $3,403 in the first quarter of 1997 primarily due to the Company's
expansion of its
19
<PAGE>
headquarters in San Diego and its customer service operations in Miami.
Legal and professional fees increased to $112,176 in the first quarter of
1998 from $9,038 in the first quarter of 1997 due to the Company's increased
need for assistance in technological developments, accounting regulations and
Public Utilities Commission, Federal Communications Commission and Securities
and Exchange Commission requirements. The Company has instituted internal
accounting procedures to reduce the need for external accounting assistance
and intends to further decrease professional expenses by hiring additional
qualified personnel to provide a portion of these services internally.
Operating expenses increased to $2,285,113 in the first quarter of 1998
from $233,341 in the first quarter of 1997. In addition to the increase in
selling, general and administrative expenses discussed above, the increase in
operating expenses was due to the issuance on January 6, 1998 of options to
purchase 400,000 shares of the Company's common stock, $0.001 par value per
share (the "Common Stock"), at a price of $0.10 per share to the Company's
President, William P. Stueber, II. According to generally accepted accounting
principles, the shares were recorded as a stock based compensation expense of
$1,620,000 with a corresponding entry to the paid-in-capital stock options
account.
The net loss in the first quarter of 1998 increased to $2,152,880 from
$$280,110 in the first quarter of 1997 due to the accounting cost entry of
$1,620,000 associated with the issuance of stock options to the Company's
President and the increased costs associated with the launch of the Company's
products and related expenses.
ROYALTY REVENUE
The Company has 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 increased to $100,000 in the first quarter of 1998
from $0 in the first quarter of 1997. At this time, the Company does not
anticipate any additional 1998 revenues to be derived from the sale of licenses.
Due to the potential impact of exclusive distribution rights on the Company's
future marketing options, the Company does not anticipate, at this time,
offering similar licenses.
OTHER EXPENSES
Interest expense increased to $27,806 in the first quarter of 1998 from $0
in the first quarter of 1997 due to the Company's purchase of computer hardware
under a capital lease agreement and the payment of interest to investors who
have obtained letters of credit on behalf of the Company which are posted with
the Company's underlying telephony service providers for the purpose of
provisioning service to initial roll-out markets.
NETWORK INFRASTRUCTURE AND COSTS
To provide services, the Company purchases many requisite underlying
component network telephony services from various vendors. Some of these
vendors operate in a highly competitive and minimally regulated environment,
others either exist as monopolies, part of an oligopoly or otherwise in an
environment of little competition in a service segment that is heavily
regulated. 1997
20
<PAGE>
brought severe and wide sweeping change to much of the telephony industry.
As a consequence, the Company has been afforded the opportunity to
competitively seek bids for many of its requisite underlying service
components. In 1997 the Company began, and will continue to implement in
1998, an initiative to significantly lower costs to provide service and
ensure a purchasing environment of multiple, redundant vendors for each
category of purchase service. The overall result of this initiative should
be to increase the gross profit margins of each of the Company's product
offerings. Additionally, because many of the Company's products reside in a
common software and/or hardware environment, the Company expects to achieve
incremental economies of scale as it expands its markets.
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 reviewing various sources of additional financing to fund its
growth. As of March 31, 1998, the Company had received advances in the
amount of $327,000 from private investors. As of June 30, 1998, the Company
had received an additional $500,000 in advances 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. See "Changes in Securities and Use of
Proceeds."
At March 31, 1998, the Company had cash and cash equivalents of $9,666. In
addition, the Company had accounts receivable totaling $61,326 from the sale of
the Company's switch-based debit cellular product. The Company also has
marketable equity securities valued at $280,000 as of March 31, 1998. Net cash
used by operating activities was $48,700 in the first quarter of 1998 compared
to $879,756 in the first quarter of 1997. Net cash used in investing activities
was $285,756 consisting of $5,756 used to purchase equipment and a $280,000
unrealized gain on marketable securities. Net cash provided by financing
activities was $336,615 which included $22,500 paid to the Company in connection
with the exercise of the LC Warrants for $0.10 per share of Common Stock and
advances in the amount of $327,000 provided to the Company by unrelated
entities, less $12,885 used to reduce existing debt. See "Changes in Securities
and Use of Proceeds."
21
<PAGE>
In order to continue at its current rate of network development and
expansion, the Company will require additional, non-revenue related financing of
approximately $1.75 million for 1998 to fund operating losses and to purchase
additional computer hardware and software which will allow the Company to
increase its call capacity and efficiency. The Company will also require an
additional letter of credit facility of $2.0 million to secure the necessary air
time from underlying carriers in order to support the proposed market roll-out
and expansion. The Company is continuing negotiations to secure this additional
funding with a subsidiary of American Express Tax & Business Services. The plan
calls for raising of funds through the sale of private and/or public equity.
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 intends to
upgrade 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
22
<PAGE>
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.
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. Sale of the Company's prepaid
cellular services has only recently commenced. 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 and
planned sources of financing may 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.
- - DEPENDENCE ON NEW PRODUCT INTRODUCTION AND COMMERCIALIZATION. The concept
of and the technology to manufacture, operate and market prepaid cellular
services have only been recently developed. Although the Company believes
that there is a large market for its product, there can be no assurance
that the Company will be successful in the introduction of its new product.
Broad commercialization of debit cellular services may require the Company
to overcome significant technological, manufacturing and marketing hurdles
which may not be currently foreseen. Since the Company's product is new,
there is little direct operating history on which to base assumptions as to
practicality, market acceptability, sales volume and profitability.
- - COMPETITION. The prepaid cellular industry has become increasingly
competitive due to the entry of large, well financed wireless carriers into
the prepaid market. Other potential competitors include companies with
substantially greater financial and marketing resources than those of the
Company. Although the Company 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. There can be no assurances that the Company will be able to
operate successfully in this competitive environment.
23
<PAGE>
- - DEPENDENCE ON UNDERLYING CELLULAR AND LONG DISTANCE CARRIERS. The Company
is currently dependent on a limited amount 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 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.
24
<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. The Company is not
presently involved in any legal matters.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In March 1997, the Company issued a total of 120,000 shares of Common Stock
to two private investors for $120,000. The issuance of these shares was
intended to be exempt from registration under the Securities Act of 1933, as
amended (the "Securities Act"), by virtue of Sections 3(b) and 4(2) of the
Securities Act.
In March 1997, the Company entered into LC Agreement with two investors
under which they agreed to provide the Company with irrevocable letters of
credit to secure the purchase of air time by the Company from certain wireless
carriers. See "Management's Discussion and Analysis or Plan of Operation --
Liquidity and Capital Resources." As compensation for their agreement to
provide these letters of credit, on March 17, 1997 the Company issued the LC
Warrants to purchase a total of 225,000 shares of Common Stock. The LC Warrants
were immediately exercisable and were exercised by their holders in full in
February 1998 for the exercise price of $0.10 per share of Common Stock. The
holders of the shares issued under the LC Warrants have certain rights to
include their shares in any public registration of Common Stock undertaken by
the Company. The issuance of the LC Warrants and the underlying shares of
Common Stock was intended to be exempt from registration under the Securities
Act by virtue of Sections 3(b) and 4(2) of the Securities Act.
In April 1998, the LC Agreement was renewed and extended through April 1,
1999. In connection with the renewal, the Company issued 35,000 shares of
Common Stock to the investors providing the letters of credit. The issuance of
these shares was intended to be exempt from registration under the Securities
Act by virtue of Sections 3(b) and 4(2) of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable
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 first quarter of 1998.
25
<PAGE>
ITEM 5. OTHER INFORMATION.
On June 12, 1998, the Company executed a term sheet for the acquisition of
SCIES, a privately-held provider of Internet telephony software, systems and
services that is headquarted in Reston, Virginia. The Company believes that the
acquisition of SCIES would allow it to lower existing networking costs as well
as costs for terminating international calls. The acquisition would also
provide opportunities for the Company to pursue related Internet-telephony
opportunities that are compatible with the Company's existing lines of business
and distribution channels. The term sheet calls for the Company to issue shares
of its unregistered Common Stock to purchase SCIES. When the acquisition is
consummated, SCIES will operate as a wholly-owned subsidiary of the Company.
Paul B. Silverman, Chief Executive Officer of SCIES, was appointed Chief
Executive Officer of the Company effective June 16, 1998. William P. Stueber
II, will continue as Chairman of the Board and President of the Company. 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 first
quarter of 1998.
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: August 10, 1998 /s/ DEREK M. DAVIS
-------------------------------------------
By Derek M. Davis, Chief Operating Officer
27
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 9,666
<SECURITIES> 280,000
<RECEIVABLES> 61,326
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 351,292
<PP&E> 222,643
<DEPRECIATION> 29,623
<TOTAL-ASSETS> 820,907
<CURRENT-LIABILITIES> 316,621
<BONDS> 468,747
0
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<COMMON> 5,845
<OTHER-SE> 29,694
<TOTAL-LIABILITY-AND-EQUITY> 820,907
<SALES> 158,104
<TOTAL-REVENUES> 258,104
<CGS> 98,065
<TOTAL-COSTS> 2,410,984
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