SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT
OF 1934
Commission File No. 0-25474
SIMS COMMUNICATIONS, INC.
(Name of Small Business Issuer in its
charter)
Delaware 65-0287588
(State of incorporation) (IRS Employer
Identification No.)
3333 S. Congress Avenue, Suite 401
Delray Beach, Florida
33445
(Address of Principal Executive Office) Zip
Code
Registrant's telephone number, including Area Code: (407)
265-3601 Securities registered pursuant to Section 12(b)
of the Act: None Securities registered pursuant to
Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of Class)
Check whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the past 12 months (or for such shorter
period that the Registrant was required to file such reports)
and (2) has been subject to such filing requirements for the
past 90 days.X YES
NO
Check if disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no
disclosure will be contained, to the best of the Registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or
any amendment to this Form 10-KSB. [ ]
The issuer's revenues for the most recent fiscal year were
$2,607,879.
The aggregate market value of the voting stock held by non
affiliates of the registrant (2,174,264 shares), based upon the
average bid and asked prices of the Registrant's Common Stock
on October 31, 1996, was approximately $2,430,000.
As of October 31, 1996, the Registrant had 4,964,908 shares of
common stock issued and outstanding.
Documents Incorporated by Reference: None
Transitional Small Business Disclosure Format: Yes No X
PAGE 1 OF ___ PAGES
EXHIBIT INDEX BEGINS ON PAGE
FORM 10-KSB
YEAR ENDED JUNE 30, 1996
Table of Contents
Page
ITEM 1. DESCRIPTION OF BUSINESS ............................ 3
ITEM 2. DESCRIPTION OF PROPERTY ............................12
ITEM 3. LEGAL PROCEEDINGS ..................................12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS ...................................12
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS ........................12
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION ..................................13
ITEM 7. FINANCIAL STATEMENTS ...............................16
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE ................16
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTORS AND
CONTROL PERSONS, COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT ................................16
ITEM 10. EXECUTIVE COMPENSATION .............................17
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT .....................................24
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .....25
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K ...................26
ITEM 1. DESCRIPTION OF BUSINESS
Company History
SIMS Communications, Inc. (the "Company") was formed
in 1991 to design and market a computerized system which
provides unattended rental of cellular telephones through a
stand-alone dispensing station. The Company's system, known as
an Automated Communications Distribution Center ("ACDC"), was
designed to serve the needs of traveling sales people,
convention and seminar participants, and anyone else who is
temporarily away from normal communications facilities and
needs to maintain contact with an office or home while
traveling.
Prior to 1996 the Company operated ACDC units for its
own account and also sold franchises which provided third
parties the right to operate ACDC units at various franchised
locations.
The Company's first ACDC units became operational in
September l993. In August l995, the Company had 50 ACDC units
in operation and the Company's franchisees (13 in total) had 28
ACDC's in operation. These ACDC units were located in 30
states and in Puerto Rico.
Since installing its first ACDC unit, the Company
found that certain locations generate more rentals than others.
Accordingly, the Company and the Company's franchisees moved a
number of ACDC units from their original locations to locations
which are capable of generating greater revenues. At the
present time, ACDC units located at car rental agencies provide
the highest
revenues.
During 1995 the Company discontinued the sale of new
franchises. The Company's decision in this regard was based in
part on the Company's desire to retain more ACDC units for its
own use and to decrease the expenses associated with selling
franchises and servicing franchisees.
The Company has introduced four additional programs in
an effort to diversify and broaden the Company's product and
service mix: (i) cellular telephone activations, (ii) sale of
prepaid calling cards, (iii) sale of long distance telephone
service and (iv) rental of cellular telephones using overnight
courier service.
In June 1995 the shareholders of the Company approved a
2
for 1 forward split of the Company's Common Stock. In February
1996 the shareholders of the Company approved a 1 for 10 reverse
split of the Company's Common Stock. Accordingly, all historical
share data in this Annual Report have been adjusted to reflect
these stock splits.
The Company's executive offices are located at 3333 S.
Congress Avenue, Suite 401, Delray Beach, Florida 33445. The
Company's telephone number is (561) 265-3601.
Revenues From the ACDC System
An ACDC station is capable of dispensing from 1 to 12
cellular phones on a user-friendly, completely automated basis.
The system uses electronic funds transfer and accepts American
Express, Visa, Mastercard, Discover and Diner's Club credit
cards for payment in advance by the customer. The system is
entirely free-standing and requires no on-site support
personnel.
To rent a cellular telephone from an ACDC, a customer
simply places a credit or bank card in the machine's credit card
reader. The ACDC then provides the customer with easy to
follow, on-screen instructions regarding the procedure for
renting a cellular telephone. The ACDC validates the customer's
credit card and charges the customer a deposit for the equipment
rented. Once the customer's credit card is accepted, the
cellular telephone is dispensed and the customer can make and
receive telephone calls with the cellular telephone.
The equipment rented by a customer is contained in a
carrying case and includes a cellular telephone with an active
telephone number, two batteries, a battery recharger, and a DC
power connector which allows the cellular telephone to be
operated with electric current provided by an automobile
cigarette lighter.
When the customer has completed use of the cellular
telephone, he returns to the ACDC from which the equipment was
rented, places the same credit card into the ACDC card reader
and deposits the full carrying case into an open receptacle in
the ACDC. The ACDC then checks all equipment returned by the
customer to determine that all equipment has been returned and
is in proper working condition. If the cellular telephone,
battery or other item is missing or damaged,the ACDC charges the
customer for the missing or damaged item. If all equipment is
returned and in proper working order, the deposit initially
charged to the customer is released. The transaction is then
closed and the ACDC immediately delivers to the customer a
detailed print-out of charges and calls made by the customer.
The customer is billed for the use of the cellular telephone
through the customer's credit card company. All transaction
information is communicated by the ACDC to the Company's central
office. Through a telephone connected to the ACDC, the Company
can poll the ACDC station at any time to monitor sales and
system performance and undertake
remote software
maintenance.
Each cellular telephone in the ACDC has a pre-assigned
telephone number which can only be activated by the ACDC. The
Company has programmed each cellular telephone dispensed from
an ACDC in such a manner that the telephone will cease to
operate after a certain number of calls have been made or
received. To continue using the cellular telephone after this
call limit, the customer must return the cellular telephone to
the ACDC unit to have the telephone reactivated. A cellular
telephone which has passed the specified call limit or which
has been stolen from an ACDC will not operate but will display
a Company telephone number and message that the telephone is
the Company's property and is to be returned to the Company.
In addition to short-term rentals, customers may, all on the
basis of credit card transactions, subscribe to longer term
service at the ACDC location.
Each ACDC station requires only a single dedicated
business voicefrequency telephone line and a normal 110 volt
commercial power outlet. The ACDC unit requires just over two
square feet of floor space within facilities owned by third
parties. To compensate the third party for the space required,
the telephone line and the power outlet, a monthly percentage
of the gross revenue from the ACDC is typically paid to the
third party providing the space for the ACDC. Each ACDC unit
normally requires twelve local cellular telephone accounts
("lines"). The Company is of the opinion that local cellular
telephone line availability with major carriers is plentiful
and will not be a limiting factor in the foreseeable future.
At September 30, 1996, the Company had 28 ACDC units
in operation and the Company's franchisees (6 in total) had 7
ACDC's in operation. These ACDC units were located in 10
states and Puerto Rico. Most of these ACDC units (27) were
located at car rental agencies.
The Company has modified its method of renting
cellular telephones at certain Alamo Car Rental locations. Due
to the demand for cellular telephone rentals at some locations,
a Company employee staffs a counter adjacent to the Alamo
Rental Car counter. Rather than dispensing cellular telephones
through a Company ACDC unit, Company employees at the counters
handle all cellular telephone rentals for persons wanting to
rent cellular telephones at select locations. The Company
first introduced this program at the Orlando, Miami and Ft.
Lauderdale airports. Rentals from the Alamo Rental Car
locations at these locations accounted for approximately 14% of
the Company's gross revenues during the three months ending
March 31, 1996. Subsequent to March 31, 1996 the Company
expanded this program to include the Alamo Rental Car counters
at the following airports: Los Angeles (LAX), San Francisco,
Tampa, Chicago (O'Hare) and Atlanta (Hartsfield). Standard ACDC
units are available at these locations for customers wanting to
rent a cellular telephone during off-peak hours.
As an alternative to selling additional franchises the
Company plans to enter into joint venture or master licensing
arrangements with third parties. It is expected that these
arrangements will normally involve the single sale of 10 or
more ACDC units for (i) a large location (such as an airport),
(ii) part or all of a foreign country, or (iii) a specific
region in the United States. As of September 30, 1996 the
Company has sold thirty ACDC units to third parties under a
master licensing arrangement.
Overnight Cellular Telephone Rentals
In January 1996 the Company initiated its overnight
cellular telephone rental program which provides for the
delivery of cellular telephones anywhere in the United States
through Federal Express overnight service. Customers include
Florida, Louisiana and Mississippi AAA members, employees of
Nike Corpor ation and ESPN, and Alamo Rent-a-Car customers.
The Company also supplies cellular telephones for special
events such as Superbowl XXIX and XXX. A person wanting to
rent a cellular telephone through this service calls the
Company's toll free telephone number to arrange for the short-
term rental of a cellular telephone. The Company ships the
cellular telephone via Federal Express to the address
designated by the customer, together with a Federal Express box
addressed to the Company. When the customer no longer needs
the cellular telephone, the customer returns the telephone to
the Company by means of Federal Express. This program generated
approximately $51,000 in revenue during the year ending June
30, 1996. The Company believes that revenues from this program
will increase as more potential customers become aware of this
service.
Cellular Telephone Activation
In January 1996 the Company began offering its
cellular telephone activation program to members of the
Florida, Louisiana and Mississippi AAA Clubs. This program
allows a AAA member to receive a free cellular telephone if the
member agrees to a one year service contract with a cellular
telephone carrier. The Company is paid a commission for each
service contract signed by a AAA member. During the year
ending June 30, 1996 the Company activated over 2,600 cellular
phones. This program generated about 40% of the Company's
fourth quarter revenue and operated at a gross profit of
$150,000 for the fourth quarter. The AAA Clubs in Florida,
Louisiana and Mississippi Clubs have approximately 1.2 million
members. The Company anticipates broadening this service to
other AAA clubs.
Long Distance Telephone Services
Since January 1996 the Company has offered members of
AAA Clubs in Florida, Louisiana and Mississippi pre-paid long
distance calling cards and long distance telephone service.
Beginning in January 1996 the pre-paid long distance calling
card program was introduced to Alamo Rent-a-Car customers.
Calling cards are sold to rental car customers over the counter
and through an automated calling card dispensing machine. The
Company receives a commission for each pre-paid calling card
sold.
With respect to long distance telephone service, the
Company acts as an agent for a long distance telephone company.
For each AAA member who switches their long distance service to
this telephone company, the Company receives a commission based
upon the member's long distance usage.
If the Company can raise additional capital of
approximately $1,500,000, the Company plans to become a
reseller of telephone long distance service in all markets in
which the Company currently operates. As a reseller of long
distance telephone services, the Company will be able to earn
additional revenue from prepurchasing airtime and blocks of
cellular numbers.
Retail Kiosks
The cellular telephone industry is currently
undergoing significant changes in marketing techniques.
Traditional distribution methods are proving too costly. The
high cost of acquiring new customers coupled by increased
competition from new Personal Communication Services Carriers
("PCS") are forcing many wireless carriers to explore new
methods of distribution.
In response to this need, the Company is developing an
automated retail kiosk which dispenses activated cellular
telephones or PCS devices. The Company's kiosk is designed to
replace manned kiosks and act as a satellite office for
cellular telephone carriers, PCS carriers, cellular resellers
and cellular telephone retailers. The kiosk is equipped with
live video conferencing capabilities enabling a service
representative to assist a customer with the credit approval
process, answer any questions the customer may have and close
the sale. The Company plans to test market its kiosk in
October 1996.
Debit Cellular Telephones
The cellular industry has experienced problems in the
collection of debts (bad debt) and the fraudulent use of
cellular telephones. In response to these problems cellular
telephone carriers have imposed higher credit standards to open
accounts for cellular service. These higher requirements
result in a 30%40% decline in applications for cellular
service.
The Company plans on implementing a debit cellular
telephone that will enable the Company to offer high risk and
declined applicants with a prepaid cellular service. The users
are required to prepay for future usage when establishing an
account. To purchase additional minutes the user simply calls
an 800 service number, provides credit card information to a
customer service representative, and upon approval receives a
special code to restock the cellular telephone with additional
cellular airtime.
The Company has had preliminary discussions with its
major cellular accounts and one car rental company concerning
the introduction of cellular debit telephones. The Company is
also exploring additional applications for the debit
telephones, such as retail distribution of debit telephones and
offering debit telephones to companies which provide cellular
telephones to their employees as a means of controlling costs.
Research and Development
During the years ending June 30, 1994, 1995 and l996,
the Company spent approximately $173,000, $89,000 and $134,000,
respectively, on research and development. Research and
development expenditures pertained to the design, development
and testing of enhancements to the ACDC units and the software
used to operate the units.
Third Party Suppliers
Cellular telephone equipment is presently procured by
the Company on a purchase order basis from Panasonic, Inc. and
Muratech Corp. Equivalent equipment is generally available in
the open market from a number of other suppliers. The Company
does not have any agreements with respect to cellular telephone
equipment with any supplier and does not currently foresee the
need to seek any supply agreement.
Prior to April 1995 the Company contracted with Keyosk
Corporation ("Keyosk") of Lakeland, Florida in April, 1992, for
the manufacture, assembly and testing of the ACDC units. In
April 1995 the Company acquired all of Keyosk's assets and
technology relating to the ACDC units. The Company now uses
subcontractors to manufacture the ACDC units for the Company.
The software used by the Company to provide a customer
with an itemized billing for calls made with the cellular
telephone
has been licensed to the Company by Telemac Cellular
Corporation ("Telemac"). The Company has a world-wide,
exclusive license (expiring in September, 2003) to use the
Telemac software for automated rentals of cellular telephones.
As consideration for this license, the Company pays Telemac, on
a monthly basis, 7% of the gross pre-tax revenues derived from
the operation of the ACDC units owned by the Company or the
Company's franchisees. The agreement requires the Company to
take certain precautions to prevent the unauthorized disclosure
of the licensed software to persons other than the Company's
employees, agents and franchisees. Telemac may terminate the
license in the event the Company transfers the software subject
to the license to any third party without the consent of
Telemac, fails to take adequate measures to protect the
unauthorized disclosure or use of the software, fails to make
any payment required by the agreement, becomes insolvent or
otherwise discontinues its business. Telemac provides a 90 day
limited warranty that the medium of the software is free from
defects in workmanship and materials.
At the present time, the Company does not have any
alternative sources for the software provided by Telemac
Cellular.
The Company has agreements with various cellular
telephone companies concerning the use of the particular
cellular telephone company's network by the Company's rental
customers. For each cellular telephone in service, the Company
is usually charged a monthly fee (regardless of whether the
cellular telephone is rented) plus air time charges for each
minute the cellular telephone is used to place or receive
calls. The Company earns a profit to the extent amounts
received from customers for the rental and use of the Company's
cellular telephones exceed the amounts paid by the Company to
the cellular telephone company for monthly access fees and
airtime charges.
Franchise Operations
At September 30, l996 the Company had six franchisees
which were collectively operating seven ACDC units.
As a franchisor the Company is subject to a number of
state laws, as well as foreign laws, that regulate substantive
aspects of the franchisor/ franchisee relationship, including,
but not limited to, those concerning termination and non-
renewal. The state laws and regulations concerning termination
and nonrenewal of franchisees are not expected to have material
impact on the Company's operations. The Company believes that
it is in substantial compliance with applicable laws and
regulations governing its operations.
Each Company franchisee is given the right and
authority to use the Company's trademark and service mark for
the operation of an ACDC location. A franchisee is required to
operate, advertise and promote its location under the ACDC
trademark and "INSTA FONE" service mark.
A franchisee is obligated to purchase all ACDC units
directly from the Company. The lease for the space occupied by
the ACDC unit is entered into between the owner of such space
and the Company and typically provides the owner of the space
with a monthly rental equal to 10% of the gross revenues
generated by the ACDC placed in the space. The Company then
sublets the space to the franchisee for the term of the
franchise agreement. Other than the physical location of the
ACDC machine, the franchisee does not receive an exclusive
territory.
Each franchisee currently pays the Company 17.5% of
the franchisee's gross revenues derived from the operation of
the franchisee's ACDC units. No minimum royalties are required
to be paid. Of this amount, 8% is a franchise royalty, 7% is
designated as licensing fees for the software used in the
operation of the ACDC and 2.5% is a credit card processing fee.
Pursuant to the terms of the franchise agreement the Company
has the right to charge a franchisee an additional 2% of the
franchisee's gross revenues, which amount would be used by the
Company for advertising, public relations and promotional
campaigns.
From the fees received from the franchisee, the
Company pays Telemac 7% of the franchisee's gross revenues in
accordance with the terms of the software licensing agreement
between the Company and Telemac. The 2.5% credit card
processing fee collected from the franchisee is paid by the
Company to the firm that processes the credit card transations
generated by cellular telephone rentals from the franchisee's
ACDC unit. With respect to the 2% advertising fee, the Company
has agreed to spend approximately 80% of this amount on local,
regional and national advertising. Although the Company has
primary responsibility to the owner of the space leased for the
ACDC unit and for the software licensing fees to Telemac, the
Company has not experienced any difficulty in collecting these
amounts from its franchisees.
The franchise is for a term of 10 years which may be
renewed, under certain conditions, for subsequent periods of 5
years each. The Company may terminate the franchise agreement
due to the insolvency of the franchisee, the transfer of the
franchise without the Company's consent, criminal misconduct on
the part of the franchisee relating to the operation of the
franchisee or the failure of the franchisee to comply with the
provisions of the franchise agreement.
The franchisee is required to operate the ACDC unit 24
hours a day each day of the year. All franchises are required
to be operated in accordance with the Company's standards and
guidelines which are set forth in the Company's operations
manual covering day-to-day operations, maintenance of the ACDC
unit, preparation of financial records and other matters. The
Company requires franchisees to submit annual financial
statements and may conduct its own audits of the franchisee's
books and records. The Company provides an initial training
program and continuing assistance to the franchisee during the
term of the franchise agreement. Periodic inspections are
conducted to assure compliance with Company standards.
The Company performs recordkeeping, bookkeeping and
payment functions for the franchisee, for which the Company
collects a fee. The Company collects all revenues from the
franchisee's ACDC unit and, after deducting all amounts due the
Company, Telemac Cellular, and third parties providing the
space for the ACDC units, remits the balance to the franchisee.
The Company provides franchisees with technical and service
support by telephone on a 24-hour basis, 7 days a week.
Equipment and franchise deposits received from
Instafone of California, one of the Company's franchisees and
held by the Company as of June 30, 1996 represented $724,000
(78%) of the total amounts recorded by the Company as a
liability for franchise and customer deposits on such dates.
Proprietary Rights; Patents, Trademark and Service Mark
The United States Patent and Trademark Office has
approved the Company's patent for the design of the cabinet
which houses the Company's ACDC. The Company has two other
patent applications
pending, one for a patent concerning the operation of the ACDC
and one for the design of the cellular telephone kit which is
dispensed by the ACDC. There is no assurance that the pending
patent applications will be granted. Since the Company's
design patent covers only the external design of the ACDC
cabinet, certain other aspects of the ACDC system could be
duplicated by competitors.
The Company has registered the "ACDC" trademark and
the "INSTA FONE" service mark with the United States Patent and
Trademark Office. The Company regards its trade and service
marks as having substantial value and as being important
factors in the marketing of its systems, although the marks are
not as important as the ACDC concept and the product itself.
The Company is not aware of any infringing uses or claim to its
trademark or service mark. In any event, there can be no
assurance that the Company will have the financial resources to
enforce or defend its patent, trademark and service mark in the
event these are challenged.
Sales and Marketing
At present the Company is concentrating its efforts
with airports and car rental agencies, locations which studies
indicate have a high customer traffic count. If the Company is
successful in placing an ACDC at a third party facility, the
Company normally attempts to obtain a three to five year lease
on the location in the Company's name, with a provision in the
lease that the third party providing the space for the ACDC may
not provide space, during the term of the lease, to any other
person renting cellular telephones on an automated basis.
The Company's marketing staff provides advertising and
marketing support for the ACDC field sites through point of
purchase displays, signs and promotions. Currently, ten
Company employees work with airport and car rental agents to
promote the rental of the Company's cellular telephones and to
advertise the Company's rental program at hotels, convention
centers and other facilities.
Competition
The Company competes with numerous other companies
engaged in the rental of cellular telephones. The Company's
competitors include regional cellular telephone companies as
well as numerous other companies. The cellular telephone
rental business is relatively easy to enter, since a company
only needs cellular telephones and an agreement with a cellular
telephone company to provide airtime to customers renting the
cellular telephones.
The Company is not presently aware of any competitor
engaged in the automated, unattended daily rental of cellular
telephones. The Company believes that its patent and pending
patent applications together with other proprietary aspects of
its system and the significant costs associated with
development of a comparable system provide obstacles to
potential competitors in terms of automated cellular telephone
rentals. However larger, more established entities with
greater financial and personnel resources than those of the
Company may nevertheless enter into direct competition with the
Company, although the Company expects it would have a one to
two year lead time. There can be no assurance that the Company
will be able to successfully compete in the cellular telephone
rental business.
The Company is of the opinion that its most
significant competitive advantage is the 24 hour availability
and the quick and easy rental/return process offered by the
ACDC units.
In comparison to others engaged in short term rentals
of cellular telephones, the Company's daily rental charges
($4.95 to $6.95 per day) are in the lower to middle price
range. The Company's charges for airtime usage ($1.60 per
minute for local calls) are average in relation to the
Company's competitors.
During the past several years, the number of persons
who either own or lease cellular telephones on a long-term
basis has increased significantly and, in some markets, there
has been a general decline in the cost of using cellular
telephones. For persons owning or leasing a cellular telephone
on a long-term basis, the cost of operating a cellular
telephone includes the cost of the cellular telephone,
batteries, charging units and other accessories (in the case of
direct ownership), monthly lease payments (in the case of
leased equipment), fixed monthly charges, airtime charges for
calls made or received within the area serviced by the person's
cellular carrier, and higher "roaming" charges for calls made
or received outside the area serviced by the person's cellular
carrier. Although the cost of operating a cellular telephone
will vary depending upon various factors, certain persons who
own or lease cellular telephones on a long-term basis may find
that the cost of using their cellular telephone, when
traveling, is less expensive than renting a cellular telephone
from the Company, and may therefore elect to use their own
cellular telephone instead of renting a cellular telephone from
the Company.
Employees and Offices
As of September 30, 1996, the Company employed 34
persons on a fulltime basis. Thirteen employees serve in
management or administrative capacities, and the remainder are
hourly workers in the Company's operations. None of the
Company's employees are covered by a collective bargaining
agreement. The Company has never experienced an organized work
stoppage, strike or labor dispute. Management considers the
Company's relations with its employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company occupies office, shipping and repair
facilities consisting of approximately 8,000 square feet in
Delray Beach, Florida. These facilities are leased at an
annual rental of $80,724 pursuant to a lease which expires on
February 28, 1998.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any pending legal
proceedings. The Company's California franchisee has demanded
that the Company purchase this franchise, as well as the
franchisee's ACDC units, for approximately $1,000,000. The
Company is currently negotiating the terms of this acquisition
with the franchisee. If the Company and the franchisee cannot
reach an agreement as to the acquisition of the franchise, the
franchisee has indicated that it intends to file suit against
the Company for breach of the franchise agreement. As of June
30, 1996 the Company had a liability of $724,000 for franchise
and equipment deposits paid by this franchisee to the Company.
In 1996 InstaCall Beheer B.V. and Robert Herbold (the
"Plaintiffs") filed a lawsuit against the Company alleging that
the Company breached its agreement to provide cellular
telephones for use by the Plaintiffs in Europe, and as a
result, the Plaintiffs suffered damages of approximately
$3,800,000. The Company has denied the allegations of the
Plaintiffs.
Other than the foregoing, there are no legal
proceedings to which the Company is a party or to which its
properties are subject, other than routine litigation incident
to the Company's business which is covered by insurance or
which would not have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the Company's past fiscal year, the Company did
not submit any matter to a vote of its shareholders.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
As of September 30, 1996, there were approximately
1,000 beneficial owners of the Company's Common Stock, Series A
Warrants and Series B Warrants. The Company's Common Stock and
Warrants are traded on the National Association of Securities
Dealers Automatic Quotation ("NASDAQ") System. Set forth below
are the range of high and low bid quotations for the periods
indicated as reported by NASDAQ. The market quotations reflect
interdealer prices, without retail mark-up, mark-down or
commissions and may not necessarily represent actual
transactions. The Company's Common Stock and Warrants began
trading in February 1995. The market quotations have been
adjusted to reflect a two for one forward stock split, which
was effective in June 1995 and a 1 for 10 reverse stock split
which was effective in March 1996.
Series A Series
B
Quarter Common Stock Warrants
Warrants
Ending High Low High Low High
Low
3/31/95 $45.00 $20.00 $1.62 $0.70
$1.03 $0.44
6/30/95 $31.90 $23.80 $2.46 $2.00
$2.25 $1.18
9/30/95 $23.75 $5.00 $4.06 $1.87 $3.43
$1.25
12/31/95 $7.81 $1.87 $3.75 $0.31 $2.50
$0.31
3/31/96 $4.68 $0.93 $0.93 $0.03 $0.93
$0.03
6/30/96 $1.78 $1.00 $0.09 $0.03 $0.06
$0.01
Holders of Common Stock are entitled to receive such
dividends as may be declared by the Board of Directors out of
funds legally available therefor and, in the event of
liquidation, to share pro rata in any distribution of the
Company's assets after payment of liabilities. The Board of
Directors is not obligated to declare a dividend. The Company
has not paid any dividends and the Company does not have any
current plans to pay any dividends.
The provisions in the Company's Articles of
Incorporation relating to the Company's Preferred Stock would
allow the Company's directors to issue Preferred Stock with
rights to multiple votes per share and dividends rights which
would have priority over any dividends paid with respect to the
Company's Common Stock. The issuance of Preferred Stock with
such rights may make more difficult the removal of management
even if such removal would be considered beneficial to
shareholders generally, and will have the effect of limiting
shareholder participation in certain transactions such as
mergers or tender offers if such transactions are not favored
by incumbent management.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS
The following selected financial data should be read
in conjunction with the more detailed financial statements,
related notes and other financial information included herein.
Statement of Operations Data:
Years Ended June 30,
1996 1995 1994
1993
Revenue $2,607,879 $696,909 $ 1,986,630 $
75,322
Cost of Sales 1,686,188 607,509 (1,337,066)
(16,789)
Operating Expenses 4,645,197 2,540,512 (3,066,942)
(1,778,337)
Net (Loss) (3,723,506) $(2,451,112) $(2,417,378)
$(1,719,804)
Net (Loss) per Share $(1.56) $(0.14) $(.47)
$(.26)
Weighted Average Number
of Shares Outstanding 2,384,055 1,716,580 1,035,698
643,630
Balance Sheet Data:
June 30,
1996 1995
1994
Current Assets $1,983,252 $2,657,070 $
1,413,383
Total Assets $3,312,372 $3,616,793 $
1,726,762
Current Liabilities $2,343,308 $1,438,645 $
3,962,109
Total Liabilities $2,404,534 $1,608,819 $
3,977,261
Working Capital (Deficit) $( 360,056)
$1,218,425
$(2,548,726)
Shareholders Equity
(Deficiency) $ 907,838 $2,007,974
$(2,250,499)
Shareholders' Equity
(Pro Forma Basis) $1,307,838 (1)
(1) During October 1996 the Company sold 800,000 shares of
common stock in a private offering at a price of $0.50 per
share. As a result of the sale of these shares, the
Company's
stockholders' equity increased by approximately $400,000.
No common stock dividends have ever been declared by the
Company since its inception.
Results of Operations
The following table shows the percentage of the
Company's gross revenues by category for the periods indicated.
% of Gross
Revenue for
Year Ending
June 30, 1996
1994 1995
1996
A.1 Income from Company owned and
operated ACDC units. 4% 17%
30%
A.2 Rental of cellular telephone
directly from Company. - 12%
3%
B. Initial franchise fees. 8%
7%
- --
C. Royalties from franchisees. 3%
14%
1%
D. Sale of ACDC units, retail
kiosks and related equipment. 79%
48%
29%
E. Fees paid by cellular
telephone companies for
activation of cellular
telephones 4% 1%
32%
F. Sale of prepaid calling
cards. - --
- --
G. Sale of long distance
telephone service. - --
- --
H. Miscellaneous Income 2% 1%
5%
Income from categories A and C were minimal for the year ending June 30,
1994, since most of the Company's and the franchisees' ACDC units became
operational in November and December 1993. During fiscal 1997 (as well
as future years thereafter), the Company expects that the percentage of
its gross revenues by category will be as follows: A.1 26%; A.2 2%; B
0%; C .3%; D 23%; E 42%; F 1%; G 2%; and H 1%. There can be no
assurance that
such percentages will not change significantly based upon events which
may not be within the Company's control.
Year Ending June 30, 1996
Revenues increased from the comparable period in 1995 year due to
the introduction of four new programs in an effort to diversify and broaden
the Company's product and service mix. These programs were (i) cellular
telephone activations, (ii) sale of pre-paid calling cards, (iii) sale of
long distance telephone service and (iv) rental of cellular telephones using
overnight courier service.
The activation program of cellular telephones for members of the
Florida, Louisiana, and Mississippi AAA clubs began in January 1996. The
program allows a AAA member to receive a free cellular telephone if the
member agrees to a one year cellular telephone service contract. The
Company receives a commission for each activation. During the year ending
June 30, 1996, the Company activated over 2,600 cellular telephones and
anticipates broadening this service to other AAA clubs.
Franchise royalties declined as franchises were reacquired by the
Company. Income from equipment sales to franchisees declined as the Company
reserved prime ACDC locations for its own use.
Cost of sales for fiscal l996 largely reflects the expansion of the
Company's rental operations, the newly instituted cellular telephone
activation program and costs of technology development and sales. Due to
significant demand at certain Alamo Car Rental locations, Company personnel
rent cellular telephones directly to customers. This contrasts with the
comparable period in 1995 when cost of sales consisted primarily of expenses
associated with the sale of ACDC units and a more limited telephone rental
program.
The higher selling and general and administrative expenses for the
year are due to the Company's new programs and additional personnel needed
for these programs.
Fiscal 1996 operating expenses includes a charge of $1,765,000
which pertains to the issuance of common stock for past services.
Interest expense declined as funds provided by the Company's public
offering in February 1995 were used to repay outstanding debt.
Year Ending June 30, l995
During fiscal l995, revenues from equipment sales to franchisees
and franchise fees declined as the Company reserved more new ACDC locations
for its own use and eventually discontinued the sale of new franchises.
Royalties from franchisees increased over the prior period as the Company's
first ACDC unit did not become operational until September 1993.
Year Ending June 30, 1994
During the year ending June 30, 1994, the Company's general and
administrative expenses increased by $891,100, or 70% from the previous
year, as the Company commenced full operations. Salaries, commissions,
consulting fees and general overhead expenses all increased from the prior
year. The Company's net interest expense increased from the prior period as
a result of additional borrowings. Stock based compensation (approximately
$180,000 during fiscal 1994) is a non-cash charge resulting from the
issuance of Common Stock as additional consideration to certain persons who
loaned funds to the Company.
Liquidity and Capital Resources
During the year ending June 30, 1996 the Company's operating
activities used approximately $1,860,000 in cash. The Company does not have
any available lines of credit, bank financing or other external sources of
liquidity. Due to operating losses, the Company's operations are not a
source of liquidity. In order to obtain capital, the Company plans to sell
additional shares of its Common Stock. There can be no assurance, however,
that the Company will be successful in obtaining additional funding. The
Company does not have any material capital commitments during the year
ending June 30, 1997 except for funding its operating expenses.
ITEM 7. FINANCIAL STATEMENTS
See the financial statements attached to this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Officers and Directors
Name Age Position
Melvin Leiner 50 President, Chief Executive Officer,
and a Director
Donald M. Marks 56 Vice President, and a Director
James J. Caprio 33 Chief Financial Officer, Vice
President and a Director
Darren M. Marks 29 Vice President of Marketing and
Sales, and a Director
Bruce S. Schames 49 Controller
Donald M. Marks and Darren M. Marks are not related.
Each director holds office for a period of one (1) year and
will serve until his successor is duly elected by the stockholders.
Executive officers serve at the pleasure of the Board of Directors.
The members of the Board of Directors are not compensated in such
capacity; however, the Board of Directors may, by resolution, pay
Director's fees and reimburse Directors for expenses related to the
Company's business.
The following sets forth certain information concerning the
past and present principal occupations of the Company's officers and
directors.
Melvin Leiner has been the Company's President and Chief
Executive Officer since November 1994. Between November 1994 and
August 1991 Mr. Leiner was the Company's Chief Operating Officer and
Executive Vice President. Mr. Leiner has been a director of the
Company since August 1991.
Donald M. Marks has been an officer and director of the
Company since l99l.
James J. Caprio has been the Company's Chief Financial
Officer, Vice President, Secretary and a director since August, 1991.
Darren M. Marks joined the Company in August, 1991 as its Vice
President and a director.
Bruce S. Schames has been the Company's Controller since
December, 1993. From 1991 to 1993 Mr. Schames was self-employed as a
Certified Public Accountant. Between 1983 and 1991, Mr. Schames was
employed as Manager of Financial Reporting for the Dole Fresh Fruit
Company.
Donald Marks, Melvin Leiner, James Caprio and Darren Marks
may be deemed "Parents" and "Founders" of the Company as such terms
are defined under the federal securities laws.
During the year ending June 30, 1996 Melvin Leiner, James Caprio,
Darren Marks and Donald Marks, each officers and directors of the
Company, failed to file reports requied by Section 16 of the
Securities and Exchange Act of 1934 for the months of May and June
1996 disclosing the purchase and sale of shares of the Company's
common stock. The purchases and sales made by such persons during
these months were as follows: Melvin Leiner: acquisition of
423,714 shares and sale of 26,185 shares; Donald Marks:
acquisition of 434,378 shares and sale of 22,037 shares; James
Caprio: acquisition of 434,492 shares and sale of 22,037 shares;
and Darren Marks: acquisition of 408,568 shares and sale of 32,685
shares.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth in summary form the compensation
received by or accrued for (i) the persons who held the position
of Chief Executive Officer during the three years ending June 30,
1996 and (ii) each other executive officer of the Company who
received salary and bonus in excess of $75,000 during the past
three years.
Annual Compensation Long Term Compensation
Re-
All
Other stric-
Other
Annual ted LTIP Com-
Name and Compen- Stock Options Pay
pensa-
Principal Fiscal Salary Bonus sation Awards Granted outs
tion
Position Year (1) (2) (3) (4) (5) (6)
(7)
Melvin Leiner, 1996 $21,038 -- -- 250,000 -- -- -
- -
President and 1995 $92,063 -- $8,400 - 40,000 -- -
- -
Chief Executive1994 $89,919 -- $8,400 -- -- -- -
- -
Officer (since
November 1994)
Donald M. Marks,1996 $21,038 -- -- 250,000 -- -- -
- -
Vice President 1995 $77,189 -- $8,400 -- 40,000 -- -
- -
since April l9931994 $85,858 -- $8,400 -- -- -- -
- -
Darren M. Marks,1996 $21,038 -- -- 250,000 -- -- -
- -
Vice President 1995 $86,594 -- $8,400 -- 40,000 -- -
- -
1994 $87,900 -- $8,400 -- -- -- -
- -
James Caprio, 1996 $21,038 -- -- 250,000 -- -- -
- -
Chief Financial 1995 $95,419 -- $8,400 -- 40,000 -- -
- -
Officer 1994 $92,515 -- $8,400 -- -- -- -
- -
(1) The dollar value of base salary (cash and non-cash) received.
(2) The dollar value of bonus (cash and non-cash) received.
(3) Any other annual compensation not properly categorized as
salary or bonus, including perquisites and other personal
benefits, securities or property. Amount in the table represents
automobile allowances.
(4) During the period covered by the foregoing table, the shares of
restricted stock issued as compensation for services. The table
below shows the number of shares of the Company's Common Stock
owned by the officers listed above, and the value of such shares
as of June 30, 1996.
Name Shares Value
Melvin Leiner 554,913 $624,000
Donald M. Marks 569,725
$641,000 Darren M. Marks 532,167
$599,000 James Caprio 569,839
$641,000
(5) The shares of Common Stock to be received upon the
exercise of all stock options granted during the period
covered by the table.
(6) "LTIP" is an abbreviation for "Long-Term Incentive
Plan". An LTIP is any plan that is intended to serve as
an incentive for performance to occur over a period
longer than one fiscal year. Amounts reported in this
column represent payments received during the applicable
fiscal year by the named officer pursuant to an LTIP.
(7) All other compensation received that the Company could
not properly report in any other column of the Table
including annual Company contributions or other
allocations to vested and unvested defined contribution
plans, and the dollar value of any insurance premiums paid
by, or on behalf of, the Company with respect to term life
insurance for the benefit of the named executive officer,
and the full dollar value of the remainder of the premiums
paid by, or on behalf of, the Company.
Employment Contracts
In October, 1994, the Company entered into
employment agreements with Melvin Leiner, Donald M. Marks,
James J.
Caprio and Darren M. Marks. Each employment agreement
provides for the following:
1. Term of three years.
2. Salary of $105,000 during the first year of
the employment term,increasing to $120,000 during
the second year and $150,000 during the third
year.
3. Incentive bonus computed according to the
following formula:
Cumulative Company Revenues Bonus Payable
From Operations to Employee
$3,000,000 to $5,000,000 $22,500
$5,000,000 to $7,500,000 $45,000
$7,500,000 to $10,000,000 $67,500
Over $10,000,000 $90,000
4. Automobile allowance of $700 per month.
5. Four weeks of paid vacations and the right to participate
in any group medical, group life insurance or any other
employee benefit plan that the Company may, from time to
time, maintain.
6.Disability benefits equal to 50% of the employee's base
salary, determined at the time of disability, and payable
to the employee for the remaining term of the employment
agreement.
The four officers listed in the above above agreed to
amend their respective employment agreements such that the
collective salaries paid to these four officers (effective
September 30, 1996) will not exceed $360,000.
Except for the employment agreements described above, the
Company does not have any written employment contracts with respect
to any of its executive officers, and does not have any
compensatory plan or arrangement that results or will result from
the resignation, retirement, or any other termination of any
executive officer's employment with the Company or from a changein-
control of the Company or a change in an executive officer's
responsibilities following a change-in-control.
Long Term Incentive Plans Awards in Last Fiscal Year
None.
Employee Pension, Profit Sharing or Other Retirement Plans
Except as provided in the Company's employment agreements
with its executive officers, the Company does not have a defined
benefit, pension plan, profit sharing or other retirement plan,
although the Company may adopt one or more of such plans in the
future.
Compensation of Directors
Standard Arrangements. At present the Company does not
pay its directors for attending meetings of the Board of Directors,
although the Company expects to adopt a director compensation
policy in the future. The Company has no standard arrangement
pursuant to which directors of the Company are compensated for any
services provided as a director or for committee participation or
special
assignments.
Other Arrangements. During the year ended June 30, 1996,
and except as disclosed elsewhere in this report, no director of
the Company received any form of compensation from the Company.
Compensation Committee Interlocks and Insider Participation
The Company does not have a compensation committee.
During the year ended June 30, 1996, all of the Company's present
officers participated in deliberations of the Company's Board of
Directors concerning executive officer compensation.
During the year ended June 30, 1996, no director of the
Company was also an executive officer of another entity, which had
an executive officer of the Company serving as a director of such
entity or as a member of the compensation committee of such entity.
Committees
The Company plans to establish an Audit Committee and a
Compensation Committee. The Audit Committee will (i) recommend to
the Board of Directors a firm of independent public accountants to
conduct the annual audit of the Company's financial statements,
(ii) review with such accounting firm the scope and result of
annual audits and the adequacy of the Company's internal controls,
and (iii) otherwise oversee the auditor's review of management
controls and the Company's financial performance. The Compensation
Committee will review the compensation of the Company's senior
management and recommend any changes in such compensation to the
Board of Directors, as well as administer the Company's Stock
Option Plans, Stock Bonus Plan, and other compensation programs.
The Company anticipates that directors who are not officers or
principal shareholders will constitute a majority of the members of
each Committee. Stock Option and Bonus Plans
The Company has an Incentive Stock Option Plan, a Non
Qualified Stock Option Plan and a Stock Bonus Plan. A summary
description of each Plan follows. In some cases these three Plans
are collectively referred to as the "Plans".
Incentive Stock Option Plan. The Incentive Stock Option
Plan authorizes the issuance of options to purchase up to 1,500,000
shares of the Company's Common Stock, less the number of shares
already optioned under both this Plan and the Non-Qualified Stock
Option Plan. The Incentive Stock Option Plan became effective on
April 15, 1993 and will remain in effect until April 15, 2001
unless terminated earlier by action of the Board. Only officers,
directors and key employees of the Company may be granted options
pursuant to the Incentive Stock Option Plan.
Options granted pursuant to the Plan not previously
exercised terminate upon the first to occur of the following dates:
(a) The expiration of thirty (30) days after the date on which
an option holder's employment by the Company is terminated
(whether such termination is by the Company or due to
disability or death); or
(b) The expiration of one year after the date on which an option
holder's employment by the Company is terminated, if such
termination is due to the Employee's disability or death.
In the event of an option holder's death while in the employ of the
Company, his legatees or distributees may exercise (prior to the option's
expiration) the option as to any of the shares not previously exercised. The
total fair market value of the shares of Common Stock (determined at the time
of the grant of the option) for which any employee may be granted options
which are first exercisable in any calendar year may not exceed $100,000.
Options may not be exercised until one year following the
date of grant. Options granted to an employee then owning more than
10% of the Common Stock of the Company may not be exercisable by its
terms after five years from the date of grant.
The purchase price per share of Common Stock purchasable
under an option is determined by the Committee but cannot be less than
the fair market value of the Common Stock on the date of the grant of
the option (or 110% of the fair market value in the case of a person
owning the Company's stock which represents more than 10% of the total
combined voting power of all classes of stock).
Non-Qualified Stock Option Plan. The NonQualified Stock
Option Plan authorizes the issuance of options to purchase up to
1,500,000 shares of the Company's Common Stock less the number of
shares already optioned under both this Plan and the Incentive Stock
Option Plan. The NonQualified Stock Option Plan became effective on
April 15, 1993 and will remain in effect until April 15, 2001 unless
terminated earlier by the Board of Directors. The Company's employees,
directors, officers, consultants and advisors are eligible to be
granted options pursuant to the Plan, provided however that bona fide
services must be rendered by such consultants or advisors and such
services must not be in connection with the offer or sale of securities
in a capitalraising transaction. The option exercise price is
determined by the Committee but cannot be less than the market price of
the Company's Common Stock on the date the option is granted.
Options granted pursuant to the Plan not previously exercised
terminate upon the first to occur of the following dates:
(a) The expiration of one year after the date on which an
option holder's employment by the Company is terminated
(whether termination is by the Company, disability or
death); or
(b) The expiration of the option which occurs five (5) years
from the date the option was granted.
In the event of an option holder's death while in the employ
of the Company, his legatees or distributees may exercise the option as
to any of the shares not previously exercised prior to the option's
expiration.
Stock Bonus Plan. Up to 3,000,000 shares of Common Stock may be
granted under the Stock Bonus Plan. Such shares may consist, in
whole or in part, of authorized but unissued shares, or treasury
shares. Under the Stock Bonus Plan, the Company's employees,
directors, officers, consultants and advisors are eligible to receive
a grant of the Company's shares; provided, however, that bona fide
services must be rendered by consultants or advisors and such
services must not be in connection with the offer or sale of
securities in a capital-raising transaction.
Other Information Regarding the Plans. The Plans are
administered by the Company's Board of Directors. The Board of
Directors has the authority to interpret the provisions of the Plans
and supervise the administration of the Plans. In addition, the
Board of Directors is empowered to select those persons to whom
shares or options are to be granted, to determine the number of
shares subject to each grant of a stock bonus or an option and to
determine when, and upon what conditions, shares or options granted
under the Plans will vest or otherwise be subject to forfeiture and
cancellation.
In the discretion of the Board of Directors, any option granted
pursuant to the Plans may include installment exercise terms such that
the option becomes fully exercisable in a series of cumulating
portions. The Board of Directors may also accelerate the date upon
which any option (or any part of any options) is first exercisable.
Any shares issued pursuant to the Stock Bonus Plan and any options
granted pursuant to the Incentive Stock Option Plan or the Non
Qualified Stock Option Plan will be forfeited if the "vesting"
schedule established by the Board of Directors at the time of the
grant is not met. For this purpose, vesting means the period during
which the employee must remain an employee of the Company or the
period of time a non-employee must provide services to the Company.
At the time an employee ceases working for the Company (or at the time
a non-employee ceases to perform services for the Company), any shares
or options not fully vested will be forfeited and cancelled. In the
discretion of the Board of Directors payment for the shares of Common
Stock underlying options may be paid through the delivery of shares of
the Company's Common Stock having an aggregate fair market value equal
to the option price, provided such shares have been owned by the
option holder for at least one year prior to such exercise. A
combination of cash and shares of Common Stock may also be permitted
at the discretion of the Board of Directors. Options are generally
non-transferable except upon death of the option holder. Shares
issued pursuant to the Stock Bonus Plan will generally not be
transferable until the person receiving the shares satisfies the
vesting requirements imposed by the Board of Directors when the shares
were issued. The Board of Directors of the Company
may at any time, and from time to time, amend, terminate, or suspend
one or more of the Plans in any manner it deems appropriate, provided
that such amendment, termination or suspension cannot adversely affect
rights or obligations with respect to shares or options previously
granted. The Board of Directors may not, without shareholder approval:
make any amendment which would materially modify the eligibility
requirements for the Plans; increase or decrease the total number of
shares of Common Stock which may be issued pursuant to the Plans
except in the case of a reclassification of the Company's capital
stock or a consolidation or merger of the Company; reduce the minimum
option price per share; extend the period for granting options; or
materially increase in any other way the benefits accruing to
employees who are eligible to participate in the Plans.
Any options granted under the Incentive Stock Option Plan or
the Non-Qualified Stock Option Plan must be granted before April 15,
2001. Any shares granted pursuant to the Stock Bonus Plan must be
issued prior to April 15, 2001. The Plans are not qualified under
Section 401(a) of the Internal Revenue Code, nor are they subject to
any provisions of the Employee Retirement Income Security Act of 1974.
Summary. The following sets forth
certain information as of October 31, 1996, concerning the stock
options and stock bonuses granted by the Company. Each option
represents the right to purchase one share of the
Company's Common Stock.
Total Shares
Remaining
Shares Reserved for Shares Options/
Reserved Outstanding Issued As Shares
Name of Plan Under Plan Options
Stock Bonus Under Plan
Incentive Stock Option
Plan 1,500,000 90,000
N/A 1,410,000 Non-Qualified Stock Option Plan
1,500,000 -
N/A 1,500,000
Stock Bonus Plan 3,000,000 N/A
2,435,000 565,000
As of October 31, 1996, the Company has issued stock options and
granted stock bonuses to the following
officers and directors.
Incentive Stock Options
Shares
Expiration
Subject to
Exercise Date of Option Holder Option Price
Option
Melvin Leiner 20,000 $3.25 9/30/99
Donald M. Marks 20,000 $3.25 9/30/99
James T. Caprio 20,000
$3.25 9/30/99
Darren M. Marks 20,000
$3.25 9/30/99
Other Options (1)
Shares
Expiration
Subject to
Exercise Date of Option Holder
Option Price
Option
Melvin Leiner 20,000
$2.75 9/30/99
Donald M. Marks 20,000
$2.75 9/30/99
James T. Caprio 20,000
$2.75 9/30/99
Darren M. Marks 20,000
$2.75 9/30/99
(1) These options were not granted pursuant to any of the
Company's
stock option plans.
Stock Bonuses
Shares
Issued as Name Stock
Bonus
Melvin Leiner
450,000
Donald M. Marks 450,000
James J. Caprio 450,000
Darren M. Marks 450,000
Bruce S. Schames 75,000
As of October 31, 1996, the Company had not granted any options
pursuant to its Non-Qualified Stock Option Plan.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth certain information as of
September 30, 1996 regarding the number and percentage of outstanding
shares of the Company's Common Stock beneficially owned by (i) each
person owning more than 5% of the Company's Common Stock; (ii) each
officer and director; and (iii) all officers and directors as a group:
Amount and Nature of
Beneficial Ownership Percent of
Number of Shares (1) Class (1)
Melvin Leiner 697,579 14.0%
Donald M. Marks 707,625 14.2%
James J. Caprio 736,506 14.8%
Darren M. Marks 676,934 13.6%
Bruce S. Schames 72,000 1.4%
Officers and Directors as a
Group (5 persons) 2,890,644 58.0%
(1) Gives effect to issuance of shares of common stock upon conversion
of Series B Preferred Stock. See Item 12 of this report. Does
not include shares of Common Stock issuable upon exercise of any
outstanding warrants or options. Unless otherwise noted, the
Company believes that all persons named in the table have sole
investment power with respect to all Common Stock beneficially
owned by them. The address of each person in the
foregoing table is 3333 S. Congress Avenue, Suite 401, Delray
Beach, Florida 33445.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company had a consulting agreement with Compass Consulting,
Inc. pursuant to which Kenneth Zubay, a former officer and director of
the Company, rendered software and systems development, consulting,
training and installation services to the Company. The consulting
agreement expired on July 31, 1994. Through July 31, l994, the Company
delivered (or was obligated to deliver) equipment (at a cost to the
Company of approximately $66,000) to Compass Consulting as payment for
services provided to the Company. During fiscal 1995, equipment was
delivered to Compass Consulting pursuant to and in satisfaction of the
amounts owed pursuant to the consulting agreement. In June 1995, the
equipment previously delivered to Compass Consulting was repurchased
by the Company for $l6,000 and the agreement to issue l6,000 shares of
the Company's preferred stock, valued at $80,000, to Compass
Consulting.
In December 1995 the Company issued 43,778 shares of its Common
Stock to Melvin Leiner, Donald Marks, James Caprio and Darren Marks
(175,112 shares in total) as repayment of loans, each in the amount of
$90,500, made by such persons to the Company.
In March 1996 the Company issued 25,000 shares of its Series B
Preferred Stock to Melvin Leiner, Donald Marks, James Caprio and
Darren Marks (100,000 shares in total) as repayment of loans, each in
the amount of $25,000, made by such persons to the Company. Each
share of Series B Preferred Stock is convertible into one share of the
Company's common stock.
In June 1996 the Company issued shares of its Common Stock to the
following officers and directors in repayment of loans made by such
persons to the Company: Melvin Leiner: 103,686 shares in repayment of
loan of $51,843; Donald Marks: 114,350 shares in repayment of loan of
$57,175; James Caprio: 114,464 shares in repayment of loan of $57,232;
and Darren Marks: 87,440 shares in repayment of loan of $43,720.
Effective May 1, 1996, the Company's Board of Directors amended
the Company's Incentive Stock Option Plan, Non-Qualified Stock Option
Plan and Stock Bonus Plan such that each Plan authorized the issuance
of 1,500,000 shares of Common Stock pursuant to options or stock
bonuses granted pursuant to these Plans. In July 1996 the Company's
Board of Directors again amended the Company's Stock Bonus Plan such
that this Plan now authorizes the issuance of 3,000,000 shares of
Common Stock pursuant to stock bonuses granted pursuant to the Plan.
In May and August 1996 the Company, in accordance with the terms
of its Stock Bonus Plan, issued 2,435,000 shares of Common Stock to
certain Company officers, employees and consultants. The shares were
issued in consideration for past services rendered to the Company. The
following officers received shares of the Company's Common Stock in
these transactions:
Shares Issued as Stock Bonus
Name May 1996 August 1996
Mel Leiner 250,000 200,000
James J. Caprio 250,000 200,000
Darren Marks 250,000 200,000
Don Marks 250,000 200,000
Bruce Schames 75,000 --
In September 1996 the Company issued 150,000 shares of its
Common Stock to Melvin Leiner, Donald Marks, James Caprio and Darren
Marks (1,000,000 shares in total) as repayment of loans, each in the
amount of $75,000, made by such persons to the Company.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Exhibit No.
No. Description Page No.
3.1 Certificate of Incorporation, as amended (1)
3.1.1 Amendment to Articles of Incorporation (3)
3.2 Bylaws of the Company (1)
10.7 Software Licensing Agreement with (1)
Telemac Cellular Corporation
10.13 Form of Franchise Agreement (2)
10.14 Employment Agreements with Donald (3)
Marks, Melvin Leiner, James Caprio
and Darren Marks
28.1 Form of 1993 Incentive Stock Option Plan (1)
and 1993 Non-Statutory Stock Option Plan
28.2 Stock Bonus Plan (2)
(1) Incorporated by reference, and as same exhibit number, from
Registration Statement on Form SB-2 (Commission File Number 3370546-
A).
(2) Incorporated by reference, and as same exhibit number, from
Amendment No. 1 to Registration Statement on Form SB-2
(Commission File Number 33-70546-A).
(3) Incorporated by reference, and as same exhibit number, from
Amendment No. 5 to Registration Statement on Form SB-2
(Commission File Number 33-70546-A).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its be half by the undersigned, thereunto duly
authorized.
SIMS COMMUNICATIONS, INC.
By /s/ Melvin Leiner
Melvin Leiner, President and
Chief Executive Officer
By /s/ James J. Caprio
James J. Caprio, Principal Financial
Officer
By /s/ Bruce Schames
Bruce Schames, Principal Accounting
Officer
Date: November 4, 1996
In accordance with the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Signature Title Date
/s/ Melvin Leiner Director November 4, 1996
Melvin Leiner
/s/ Donald M. Marks Director November 4, 1996
Donald M. Marks
/s/ Darren Marks Director November 4, 1996
Darren Marks
/s/ James J. Caprio Director November 4, 1996
James J. Caprio
SIMS COMMUNICATIONS, INC. AND SUBSIDIARIES
Table of Contents
Page
Independent Auditors' Report F - 1
Financial Statements
Consolidated Balance Sheet F - 2
Consolidated Statements of Operations F - 3
Consolidated Statement of Stockholders' Equity F - 4
Consolidated Statements of Cash Flows F - 5
Notes to Consolidated Financial Statements F - 6
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
SIMS Communications, Inc. and Subsidiaries
Delray Beach, Florida
We have audited the accompanying consolidated balance sheet of SIMS
Communications, Inc. and Subsidiaries as of June 30, 1996 and the
related consolidated statements of operations, stockholders' equity,
and cash flows for the years ended June 30, 1996 and 1995. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of SIMS Communications, Inc. and Subsidiaries as of June 30,
1996 and the results of their operations and cash flows for the years
ended June 30, 1996 and 1995 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in
Note 2 to the financial statements, the Company has suffered
recurring losses from operations which raise substantial doubt about
its ability to continue as a going concern. Management's plan in
regard to these matters is also described in Note 2. The financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
Ehrhardt Keefe Steiner & Hottman PC
September 27, 1996
Denver, Colorado
Consolidated Balance Sheet June 30, 1996
Assets
Current assets
Cash and cash equivalents ($250,000 Restricted) (Note 5) $322,542
Accounts receivables 150,950
Franchise and other receivables, less allowance for
doubtful accounts of $10,000 208,582
Inventories 1,059,637
Prepaid expenses (Note 4) 58,904
Notes receivable, current portion (Note 3) 182,637
Total current assets 1,983,252
Property and equipment, net of accumulated depreciation
of $321,245 1,071,85
Other assets
Notes receivable (Note 3) 201,363
Deferred location costs 38,100
Deposits 13,761
Organization costs, net of accumulated amortization
of $15,435 4,045
Total other assets 257,269
Total assets $3,312,372
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $462,498
Accrued expenses
341,733
Bank line of credit (Note 5)
250,000
Current obligations under capital lease
(Note 4) 6,148
Current maturities of long-term debt
(Note 6) 407,666
Franchise deposits and customer deposits (Note 12) 875,263
Total current liabilities 2,343,308
Long-term liabilities
Long-term debt (Note 6)
59,048
Obligations under capital lease (Note
4) 2,178
Total liabilities
2,404,53 4
Commitments and contingencies (Notes 4
and 14)
Stockholders' equity (Note 10)
Preferred stock, Series A, $.001 par
value, 300,000 shares authorized, no
shares issued and outstanding -
Preferred stock, Series B, $.001 par
value, 100,000 shares authorized, no
shares issued or outstanding -
Preferred stock subscribed 125,250 shares
365,000
Common stock $.0001 par value 40,000,000
shares authorized, 4,029,908 issued and
outstanding 403
Additional paid-in capital
11,060,7 35
Accumulated deficit
(10,518,
300)
Total stockholders' equity
907,838
Total liabilities and stockholders' $
equity 3,312,37
2
Consolidated Statements of Operations
Year Ended June
30,
1996 1995
Revenue
Rental $
$197,419
849,877
Activations -
846,524
Equipment and other 353,204
831,171
Franchise and royalty
146,286
80,307
Total revenue
696,909
2,607,879
Cost of sales
607,509
1,686,188
Gross profit
89,400
921,691
Operating expenses
General and administrative
1,604,451
1,518,950
Depreciation and amortization
74,747
206,581
Selling expenses 537,698
982,130
Stock based compensation
20,000
1,765,000
Research and development
89,398
134,470
Total expenses
2,326,294
4,607,131
Operating loss
(2,236,894)
(3,685,44
0)
Other income (expense)
Interest expense
(253,057)
(65,221)
Interest income
38,839
27,155
(214,218) (38,066)
Loss before income taxes
(2,451,112)
(3,723,50
6)
Income tax expense (Note 7)
- -
-
Net loss $
$(2,451,112)
(3,723,50
6)
Net loss per common share $
$
(1.56) (1.43)
Weighted average common shares
1,716,581
outstanding (Note 11) 2,384,055
Consolidated Statements of Stockholders' Equity
Years Ended June 30, 1996 and 1995
Subscribed
Preferred Stock Common Stock
Subscrib
Number
ed
of
Number Number
Shares
of of
Shares Amount Shares
Subscrib
ed
(Note
11)
Balance June 30, 1994 - $ -
96,591
4,334,51
2
Issuance of stock upon stock split
of 3 for 2 and 2 for 1 (Note 11) -
193,182
- 8,669,02
4
Issuance of common stock as a - -
54,330
valuation guarantee (Note 10) -
Issuance of common stock for cash
(ranging from $.27 to $.83 per - -
share) - 2,852,74
1
Stock issued as inducement to
noteholders ranging from ($.67 to - -
91,170 -
$1 per share) (Note 10)
Issuance of common stock upon
conversion of debt and interest - -
($.67 per share) (Note 10) - 274,660
Issuance of common stock in
conjunction with Initial Public
Offering ($1.75 per share) less - -
offering costs of $1,099,938 (Note - 3,622,50
10) 0
Issuance of subscribed common - - (344,103)
stock 344,103
Amortization of noteholder stock - - -
inducements -
Preferred stock - subscribed (Note 24,250 245,000 -
10) -
Net loss for the year - - -
-
Balance June 30, 1995 24,250 245,000 -
20,188,7
10
Adjustment of stock upon reserve
stock split of 1 for 10 (Note 11) - -
- (18,169,
780)
Issuance of common stock for cash
(ranging from $.75 to $1.88 per - -
share) - 50,928
Issuance of common stock upon
conversion of officer notes - -
payable ($2.07 per share) (Note - 175,110
10)
Issuance of common stock for
services ($1.00 per share) - -
(Note 10) - 1,365,00
0
Issuance of common stock upon
conversion of officer notes - -
payable ($.50 per share) (Note 10) - 419,940
Officer notes payable forgiven - - -
(Note 10) -
Accrued officer salaries forgiven - - -
(Note 10) -
Preferred stock - subscribed (Note 101,000 120,000 -
10) -
Dividends paid on preferred stock - - -
-
Net loss for the year - - -
-
Balance - June 30, 1996 125,250 $
365,000 -
4,029,90
8
Addition Stock
al Issued
Paid-in for Accumula
Future ted
Amount Capital Interest Deficit Total
$ 433 $ 2,168,916 $ $ $
(2,250,499)
(84,366) (4,335,4
82)
867
(867) - - -
- -
- - -
285 -
895,820 - 896,105
9
62,017 - - 62,026
28
182,623 - - 182,651
362
5,239,07 - - 5,239,43
5 7
34 (34)
- - -
- 84,366
- - 84,366
- -
- - 245,000
- -
- (2,451,1 (2,451,1
12) 12)
8,547,550 - (6,786,594)
2,007,974
2,018
1,816
(1,816) - - -
50,301
5 - - 50,306
361,982
18 - - 362,000
1,364,864
136 - - 1,365,00
0
209,928
42 - - 209,970
124,294 -
- - - 124,294
400,000 -
- - - 400,000
- -
- - - 120,000
-
(8,200) (8,200)
- -
- - (3,723,5 (3,723,5
06) 06)
$ $ 11,060,735 $ - $ $
403 (10,518, 907,838
300)
Consolidated Statements of Cash Flows
June 30,
1996 1995
Cash flows from operating activities
Net (loss) $ $(2,451,
(3,723,5 112)
06)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation 73,187
205,021
Amortization 3,912
1,560
Gross profit on sales of equipment to
officers in settlement of advances
payable (Note 8) (284,060 -
)
Stock issued for services -
1,765,00
0
Changes in assets and liabilities
Inventories (780,031
(80,724) )
Accounts and other receivables (3,153)
(304,171
)
Prepaid expenses 96,828
4,149
Accounts payable (445,703
350,330 )
Accrued expenses (204,018
303,383 )
Franchise deposits and customer (225,089
deposits (96,186) )
(1,484,0
1,864,30 67)
2
Net cash used in operating (3,935,1
activities (1,859,2 79)
04)
Cash flows from investing activities
Note receivable (150,000
(234,000 )
)
Capital expenditures (8,247)
(52,000)
Change in other assets 56,540
24,292
Net cash used in investing (101,707
activities (261,708 )
)
Cash flows from financing activities
Proceeds from issuance of long-term 715,000
debt 160,348
Proceeds (payments to) from officer (64,841)
advances 1,146,26
4
Payments under capital lease obligation (4,776)
(7,440)
Proceeds from issuance of common stock 6,197,56
50,306 8
Payments on long-term debt (1,940,0
(57,909) 00)
Dividends paid -
(8,200)
Net cash provided by financing 4,902,95
activities 1,283,36 1
9
Net (decrease) increase in cash 866,065
(837,543
)
Cash at beginning of year 294,020
1,160,08
5
Cash at end of year $ $1,160,0
322,542 85
Supplemental disclosure of cash flows information
Cash paid during the year for interest was $57,311 (1996) and
$315,674 (1995).
Non-cash investing and financing activities
During the fiscal year ended June 30, 1996 and 1995, the Company
transferred $517,017 and $569,100 of ACDC units, respectively,
from inventory to property, plant, and equipment as these units
represented company owned locations.
During the fiscal year ended June 30, 1996 and 1995, the Company
bought back franchisees upon the issuance of preferred stock
(Note 10).
During the fiscal year ended June 30, 1996 and 1995, the Company
converted accrued officer salaries, officer advances payable,
debt and accrued interest to common and preferred stock (Note
10).
During the fiscal year ended June 30, 1996, the Company bought
back franchisees by entering into debt obligations totaling
$147,000. $147,000 of inventory and other assets were received
by the Company.
During the fiscal year ended June 30, 1996, the Company had a 1
for 10 reverse stock split.
Note 1 - Organization and Significant Accounting Policies
Organization
SIMS COMMUNICATIONS Inc. and Subsidiaries (the Company) was
incorporated in the State of Delaware on August 15, 1991. The
Company was formed as a communication equipment company.
Principles of Consolidation
The consolidated financial statements includes the accounts of SIMS
COMMUNICATIONS, Inc. and its wholly owned subsidiaries SIMS Franchise
Group Inc., Cellex Communications Inc., and SIMS Communications
International, Inc. All significant intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Management believes that such estimates have been based on
reasonable assumptions and that such estimates are adequate, however,
actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with a
maturity of three months or less to be cash equivalents.
Inventories
Inventories consists primarily of automated cellular distribution
centers (ACDC's), cellular phones and other communications equipment
and are recorded at the lower of cost or market determined by the
first-in, first-out method.
Property and Equipment
Property and equipment are recorded at cost and depreciated over
their estimated useful lives (5 to 7 years), utilizing the straight
line method. Expenditures for maintenance and repairs are charged to
expense as incurred.
Note 1 - Organization and Significant Accounting Policies (continued)
Organization Costs
Organization costs have been capitalized and are being amortized
using the straight-line method over a five year period.
Net loss Per Common Share
Net loss per common share is based upon the weighted average number
of common shares outstanding during each of the respective periods
(Note 11). Common shares issuable upon the exercise of convertible
notes and common stock equivalents are excluded from the weighted
average number of shares since the effect is anti-dilutive.
Deferred Location Costs
Deferred location costs relate to costs associated with the buy back
of certain franchisees (Note 10). These costs are amortized over
five years.
Revenue Recognition
Rental revenue is recognized upon the completion of the customer
phone rental. Activation revenue is recognized upon the activation of
the customers cellular account with the appropriate carrier. Revenues
from the sale of the Automated Cellular Distribution Center (ACDC)
and other equipment are recognized upon delivery.
Royalty Fees
Royalties as allowed by the franchise agreement are accrued on a
percentage of gross sales, as defined, as reported by franchisees and
are included in accounts receivable.
Research and Development
Research and development costs consist primarily of costs related to
the conceptual formation, design, tooling and development of
prototypes and are expensed as incurred.
Concentration of Credit Risks
Financial instruments that potentially subject the Company to
concentration of credit risk consist primarily of temporary cash
investments. The Company places its cash investments with high
credit quality financial institutions and, by policy limits the
amount of credit exposure to any one institution. The Company does,
however, on occasion exceed the Federal Deposit Insurance Corporation
federally insured limits and at June 30, 1996 exceeded that amount by
approximately $209,000.
Note 1 - Organization and Significant Accounting Policies (continued)
Reclassifications
Certain accounts in the June 30, 1995 financial statements have been
reclassified to conform to the June 30, 1996 presentation.
Note 2 - Continued Operations
The accompanying financial statements have been prepared on a going
concern basis which contemplates the realization of assets and
liquidation of liabilities in the ordinary course of business. In
prior years, the Company had been in the development stage and did
not begin earning significant revenues until the middle of fiscal
year end 1994. During the year ended June 30, 1996, the Company
continued to suffer recurring losses from operations in excess of
$3,700,000, resulting in an accumulated deficit of approximately
$10,518,000. During the fiscal year ended June 30, 1995, the Company
did complete an initial public offering. However, cash flows from
operations may not be sufficient to meet the future obligations of
the Company. Management is in the process of effecting a private
placement of the Company's common stock (Note 15).
Note 3 - Note Receivable
The Company made advances to and entered into a joint venture
agreement with Commonwealth Group International, Inc. and Frederick
C. Sayle. The note receivable bears interest at a rate of 10% per
annum, with principal and interest payable by September 1, 1996.
Additionally, the Company is entitled to 16.7% of the gross revenues
from agreements with Commonwealth Group International, Inc. which
include cable television and cellular communications licenses owned
by CGI-UKRAINE Ltd and ASWEST, Commonwealth Group International, Inc.
joint venture partners.
The Company sold equipment to a customer for a total sales price of $
384,000. $ 150,000 of the sales price was payable at the time of the
sale or no later than six months from the date of the sale. The
remaining $ 234,000 is payable under the terms of a note receivable
which bears interest at 8.5%. Principal and interest is payable in
monthly installments of approximately $ 4,773 through August, 2001.
Note 4 - Commitments and Contingencies
Capital Leases
The Company leases various office equipment which is accounted for as
capitalized leases. The following is a schedule of future minimum
capital lease payments together with the net present value of the
minimum lease obligation as of June 30, 1996.
Year Ending June 30,
1997 $7,438
1998 2,526
Total 9,964
Less interest (1,638
)
$8,326
The assets recorded under capital leases are as follows:
Furniture and fixtures $57,74
0
Less accumulated amortization (28,15
2)
$29,58
8
Amortization expense for equipment under capital lease was $7,780 and
$8,248 for the years ended June 30, 1996 and 1995, respectively.
Operating Leases
The Company leases its facilities under a noncancelable operating
lease with a term of 5 years. The minimum annual rent will increase
each year by an amount based in the Consumer Price Index. The
Company is also responsible for paying its portion of the common area
maintenance, real estate taxes and insurance expenses. Additionally,
the Company also leases various office equipment under noncancelable
operating leases with terms up to 4 years. Rental expense for the
years ended June 30, 1996 and 1995 was $106,705 and $89,185,
respectively.
Future minimum lease commitments at June 30, 1996 are as follows:
Year Ending June 30,
1997 $93,762
1998 60,487
1999 2,227
Total minimum lease payments $156,47
required 6
Note 4 - Commitments and Contingencies (continued)
Employment Agreements
The Company has entered into three year employment agreements with
their four officers commencing November 1, 1994. Each officer is
entitled to a first year salary of $105,000, increasing to $120,000
in the second year and $150,000 during the third year. Each officer
is granted options to purchase 10,000 shares of the Company's common
stock pursuant to the Incentive Stock Option Plan and additional
options to purchase 10,000 shares not pursuant to any plans.
Additionally, each officer is entitled to receive an incentive bonus
computed based upon annual Company revenues from operations and is
entitled to other benefits, including an automobile allowance.
Effective October 1995, the officers salaries and bonuses pursuant to
the terms of the employment agreements have been waived
indefinitely.
Royalty Agreement
The Company has entered into an agreement with Telemac, Inc., the
developer of the software for real time billing. This agreement
provides for the Company to pay Telemac 7% of gross receipts based on
cellular telephone rentals.
Additionally, the Company has an agreement with an individual
requiring payments based upon the net profits of Cellex
Communications, Inc. (Cellex). 20% of Cellex's net profits are to be
remitted to this individual pursuant to the terms of the agreement.
As of June 30, 1996, Cellex has not posted a net profit to date,
however, advances on future payments have been made. These advances
amount to $ 8,200 and are included in prepaid assets.
Note 5 - Bank Line of Credit
The Company maintains a secured revolving line-of-credit with a bank
with a limit of $250,000. The balance at June 30, 1996 was $250,000.
The line-of-credit is secured by a restricted certificate of deposit
with a balance at June 30, 1996 of $252,988. The line-of-credit
bears interest at 5.65% payable monthly. The line-of-credit expires
June 7, 1997.
Note 6 - Notes Payable
June 30,
1996
Promissory note payable at 10% interest
payable monthly commencing September 15,
1995. Balance of principal is payable in
full by March 26, 1997. As additional
consideration, the Company agrees to pay
the note holder 7.5% of all profits
received through the Company's agreements $310,348
with Commonwealth Group International,
Inc. (Note 3).
9.0% Note payable - bank, principal and
interest payable in monthly installments
of $3,157 through January 1997. 21,484
Collateralized by equipment.
8.5% Note payable - individual, principal
and interest payable in monthly
installments of $5,500 through April 52,341
1997.
Non interest bearing note payable -
individual, principal payable in monthly 70,500
installments of $1,500 through June 2000.
11% Note payable - bank, principal and
interest payable in monthly installments
of $541 through June 14, 1998. 12,041
Collateralized by equipment.
466,714
Less current maturities (407,666
)
Total $ 59,048
Principal payment on notes payable subsequent to June 30, 1996 are as
follows:
Year Ending June 30,
1997 $407,66
6
1998 18,000
1999 16,500
2000 24,548
$466,71
4
Note 7 - Income Taxes
Deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax basis of assets
and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. The measurement of
deferred tax assets is reduced, if necessary, by the amount of any
tax benefits that, based on available evidence, are not expected to
be realized.
The principal temporary differences that will result in deferred tax
assets and liabilities are certain expenses and losses accrued for
financial reporting purposes not deductible for tax purposes until
paid, depreciation for tax purposes in excess of depreciation for
financial reporting purposes and the deferral of franchise costs and
franchise sales revenues for financial reporting purposes which are
recognized for tax purposes in the period paid. The effect of the
differences outlined above generated a long-term deferred tax asset
that is fully impaired because of a lack of profitable operating
history. The fully impaired asset, computed at a 34 percent tax rate
at June 30, 1996 was approximately $3,136,817. Accordingly, there is
no net deferred tax asset reflected in the accompanying consolidated
financial statements.
The components of the provision for income tax (benefit) expense for
the years ended June 30, 1996 and 1995 are as follows:
Years Ended
June
30,
1996 1995
Current $ $ -
-
Deferred -
-
$ $ -
-
The differences between the federal income tax rate and the effective
income tax rate as reflected in the accompanying statements of
operations are:
Year Ended
June
30,
1996 1995
Statutory federal income tax rate
(benefit) (34.0)% (34.0)%
Valuation allowance for net operating 34.0
loss 34.0
Effective tax rate (benefit) - % - %
Note 7 - Income Taxes (continued)
The deferred tax asset consists of the following:
June 30,
1996
Total long-term deferred tax asset $
3,576,22 2
Valuation allowance
(3,576,2
22)
$ -
At June 30, 1996, the Company has approximately $10,540,000 of net
operating loss carryforwards for income tax reporting purposes which
expire in 2007 through 2011. During 1995, there was a change in
ownership due to the initial public offering, which could restrict
the utilization of net operating loss carryforwards in the future.
Note 8 - Related Party
Sales
During the year ended June 30, 1996, the Company sold equipment and
other technology to Lonestar, Inc., an entity owned entirely by the
officers of the Company. The sales price was $350,000 and was used
to satisfy $350,000 of officer advances payable
Note 9 - Stock Option and Bonus Plans
The Company has an Incentive Stock Option Plan, a Non-Qualified Stock
Option Plan and a Stock Bonus Plan. A summary description of each
Plan follows.
Incentive Stock Option Plan
The Incentive Stock Option Plan authorizes the issuance of up to
1,500,000 shares of the Company's Common Stock to persons that
exercise options granted pursuant to the Plan. It became effective
on April 15, 1993 and will remain in effect until April 15, 2001
unless terminated earlier by action of the Board. Only officers,
directors and key employees of the Company may be granted options
pursuant to the Incentive Stock Option Plan.
Note 9 - Stock Option and Bonus Plans (continued)
Incentive Stock Option Plan (continued)
The total fair market value of the shares of Common Stock (determined
at the time of the grant of the option) for which any employee may be
granted options which are first exercisable in any calendar year may
not exceed $100,000.
Options may not be exercised until one year following the date of
grant. Options granted to an employee then owning more than 10% of
the Common Stock of the Company may not be exercisable by its terms
after five years from the date of grant.
The purchase price per share of Common Stock purchasable under an
option is determined by a committee but cannot be less than the fair
market value of the Common Stock on the date of the grant of the
option (or 110% of the fair market value in the case of a person
owning the Company's stock which represents more than 10% of the
total combined voting power of all classes of stock).
Non-Qualified Stock Option Plan
The Non-Qualified stock Option Plan authorizes the issuance of up to
1,500,000 shares of the Company's Common Stock to persons that
exercise options granted pursuant to the Plan. It became effective
April 15, 1993 and will remain in effect until April 15, 2001 unless
terminated earlier by the Board of Directors. The Company's
employees, directors, officers, consultants or advisors are eligible
to be granted options pursuant to this Plan, provided however that
bona fide services must be rendered by such consultants or advisors
and such services must not be in connection with the offer of sale of
securities in a capital-raising transaction. The option exercise
price is determined by a Committee but cannot be less than the market
price of the Company's Common Stock on the date the option is
granted.
The Company has the following stock options outstanding at June 30,
1996.
Options Exercise Expirati Currentl
on y
Outstand
ing Price Date Exercisa
ble
$ 90,000
90,000 5.50 1999
90,000
90,000 6.50 1999
180,000
180,000
Note 9 - Stock Option and Bonus Plans (continued)
Non-Qualified Stock Option Plan (continued)
Number Price
of Per
Shares Shares
Options outstanding June 30, 1995 180,00 $
0 5.50-
6.50
Granted - -
Options outstanding June 30, 1996 180,00 $
0 5.50-
6.50
Stock Bonus Plan
Up to 3,000,000 shares of Common Stock may be granted under the Stock
Bonus Plan. Such shares may consist, in whole or in part, of
authorized but unissued shares, or treasury shares. Under the Stock
Bonus Plan, the Company's employees, directors, officers, consultants
and advisors are eligible to receive a grant of the Company's shares;
provided, however, that bona fide services must be rendered by
consultants or advisors and such services must not be in connection
with the offer or sale of securities in a capital-raising
transaction.
Note 10 - Stockholders' Equity
During the fiscal year ended June 30, 1995, the Company had a
successful public offering for 1,811,250 units, with each unit
consisting of one share of common stock, one Series A Warrant and one
Series B Warrant. The Series A Warrants entitle the holder to
purchase one share of Common Stock at $70.00 per share for three
years. The Series B Warrants entitle the holder to purchase one
share of Common Stock for $90.00 for three years. Proceeds to the
Company amounted to $5,239,437, net of offering costs of $1,099,938.
In addition, in 1995 the Company converted $145,000 of debt and
$37,651 of accrued interest into 274,660 shares of common stock at
$.67 per share.
In 1995, the Company issued 91,170 shares of the Company's common
stock for $.67 to $1.00 per share for a total of $62,026 as
inducements to various individuals to provide loans to the Company.
As the underlying notes matured or were paid off prior to June 30,
1995, the $62,026 was recorded as interest expense.
In 1995, the Company determined that an additional 54,330 shares of
the Company's common stock would need to be to be issued to three
individuals pursuant to valuation guarantees relating to the initial
public offering.
Note 10 - Stockholders' Equity (continued)
In 1995, the Company agreed to issue 24,250 shares of Series A, $.001
par value convertible, 8% preferred stock in conjunction with the
repurchase of certain franchises valued at $245,000. At any time
after July 1, 1999, each share of the Series A preferred stock can be
converted into .8 shares of the Company's common stock.
In 1996, the Company agreed to issue an additional 1,000 shares of
the Series A preferred stock as payment for the repurchase of certain
franchises valued at $ 20,000.
In 1996, the Company converted $ 362,000 of officer advances payable
into 175,110 shares of the Company's common stock at $ 2.07 per
share.
In 1996, the Company issued 1,365,000 shares of the Company's common
stock at $1 per share for a total of $ 1,365,000 as compensation for
services from officers and other employees.
In 1996, the Company agreed to issue 100,000 shares of $.001 par
value Series B convertible preferred stock as repayment of certain
officer advances payable valued at $ 100,000. Each share of the
Series B preferred stock can be converted into one share of the
Company's common stock at the option of the holder.
In 1996, the Company issued 419,940 shares of its common stock in
repayment of loans of $209,970 from certain officers.
In 1996, certain officers of the Company forgave $124,294 of officer
advances payable and $400,000 of accrued salaries. For financial
statement purposes this amount has been treated as a contribution to
capital.
Note 11 - Stock Splits
The Company in October 1994 declared a 3 for 2 stock split, in June
1995 declared a 2 for 1 stock split, and in March 1996 declared a 1
for 10 reverse stock split. Accordingly, all weighted average share,
per share and option information throughout the consolidated
financial statements has been restated to reflect these splits.
Note 12 - Significant Customers
As of June 30, 1996, One individual accounted for $ 50,000 (62%) of
franchise and royalty revenue. One Corporation accounted for $
384,000 (46%) of equipment and other revenue. Another franchisee and
stockholder accounts for $ 724,264 (83%) of the franchise and
customer deposits.
Note 12 - Significant Customers (continued)
As of June 30, 1995, one franchisee accounted for $24,500 (54%) of
franchise revenue and $125,800 (46%) of equipment and other revenue.
Another franchisee and stockholder accounts for $727,750 (71%) of the
franchise and customer deposits.
Note 13 - Business Segments
The Company's principal operations are in the cellular technology
industry. In prior years, the Company also generated significant
revenues from the franchising of cellular related technology.
However, the Company changed their business focus, therefore,
franchising no longer generates significant revenues or losses. The
Company still is involved in minimal franchising activities, however,
franchising is no longer considered a significant segment and does
not require separate disclosures.
Note 14 - Litigation
A matter is pending in state court in Palm Beach County, Florida,
whereby the plaintiff seeks damages in excess of $3,800,000 for
breach of agreement. The Company has filed an Answer and Affirmative
Defenses denying the claims and intends to continue to vigorously
defend themselves against these claims. The financial statements do
not include any adjustments that might result from the outcome of
this uncertainty.
Additionally, a franchisee has demanded that the Company repurchase
his franchises for approximately $1,000,000 or a suit for breach of
the franchise agreement will be filed. The Company is currently
negotiating a settlement and has approximately $770,000 accrued
relating to this obligation.
Note 15 - Subsequent Events
Private Placement
In September 1996, the Company offered, in a private placement,
800,000 shares of Company stock at $.50 per share. The placement is
limited to accredited individual investors with a minimum investment
of $25,000.
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<NAME> SIMS COMMUNICATIONS, INC.
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