-----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, KemBREu13hTNntXgla7jwGpXrC5ONpgZ1J7Pp8SSnvkqulnelWcOlPGEWdBYxh0F FCLl9Iu+cMyLlvfHflFTcw== 0001047469-98-030106.txt : 19980812 0001047469-98-030106.hdr.sgml : 19980812 ACCESSION NUMBER: 0001047469-98-030106 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980810 SROS: NONE 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: 98680969 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 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__ SECURFONE AMERICA, INC. QUARTERLY REPORT ON FORM 10-QSB FOR THE QUARTER ENDED MARCH 31, 1998 TABLE OF CONTENTS
ITEM PAGE - ---- ---- 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
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS.
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
1 SECURFONE AMERICA, INC. (FORMERLY MATERIAL TECHNOLOGY, INC.) CONSOLIDATED BALANCE SHEETS MARCH 31, 1998 AND 1997 ASSETS
1998 1997 ---------- ---------- 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 ---------- ---------- ---------- ----------
See accompanying notes 2 SECURFONE AMERICA, INC. (FORMERLY MATERIAL TECHNOLOGY, INC.) CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND FOUR MONTHS ENDED MARCH 31, 1998 AND 1997
1998 1997 ----------- -------- 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) ----------- -------- ----------- --------
See accompanying notes 3 SECURFONE AMERICA, INC. (FORMERLY MATERIAL TECHNOLOGY, INC.) STATEMENT OF STOCKHOLDERS' EQUITY MAY 20, 1996 THROUGH MARCH 31, 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 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 -------- ----------- --------- ------------ ----------- ----------- -------- ----------- --------- ------------ ----------- -----------
See accompanying notes 4 SECURFONE AMERICA, INC. (FORMERLY MATERIAL TECHNOLOGY, INC.) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE AND FOUR MONTHS ENDED MARCH 31,
1998 1997 ------------- ----------- 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 $ --- ------------- ----------- ------------- -----------
See accompanying notes 5 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 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 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 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:
Cost Unrealized Gains Fair Value Equities $ 0 $ 280,000 $ 280,000
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:
1998 1997 -------- -------- 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 -------- -------- -------- --------
9 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: 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 --------- ---------
10 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:
1998 $ 28,414 1999 40,895 2000 44,621 2001 7,822 -------- Total minimum future lease payments $121,752 -------- --------
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 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 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 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 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.
Quarter Ended March 31, 1998 Quarter Ended March 31, 1997 ------------------------------------ -------------------------------------- Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ------------ ------------- --------- ----------- ------------- ---------- 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)
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 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 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 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 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 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 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 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 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 - - 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 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 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 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 EX-27 2 EXHIBIT 27
5 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 9,666 280,000 61,326 0 0 351,292 222,643 29,623 820,907 316,621 468,747 0 0 5,845 29,694 820,907 158,104 258,104 98,065 2,410,984 0 0 27,806 (2,152,880) 0 (2,152,880) 0 0 0 (2,152,880) (.32) (.32)
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