SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-25474
For the quarter ended March 31,1998
SIMS COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 65-0287558
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17821 Skypark Circle Suite G, Irvine CA 92514 (address of
principal executive offices) (Zip Code)
(714) 724-9094
(Registrant's telephone number, including area code)
3333 South Congress Ave., Suite 401 Delray Beach Fl. 33445
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) or the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No____
As of May 15, 1998 the Company had 5,842,292 shares of Common Stock issued and
outstanding.
Page 1 of 16 Pages
<PAGE>
PART I. FINANCIAL INFORMATION
Part 1. Financial Information
Item 1. Index to Financial Statements
SIMS COMMUNICATIONS, INC.
CONSOLIDATED FINANCIAL STATEMENTS Page
Consolidated Balance Sheets at 3
March 31, 1998 and June 30, 1997
Consolidated Statements of Operations
for the Three and Nine Months Ended 5
March 31, 1998 and 1997.
Consolidated Statement of Cash Flows
for the Nine Months Ended March 31, 1998 6
and 1997.
Consolidated Statement of Stockholders'
Equity for the Nine Months Ended March 7
31, 1998.
Notes to Consolidated Financial Statements. 8
Item 2. Management's Discussion and Analysis of 14
Financial Condition and Results of Operations.
Part 11. Other Information 16
2
<PAGE>
SIMS COMMUNICATIONS INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March June
31, 1998 30, 1997
(Unaudited) (Audited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ($250,000 restricted) $280,637 $
295,900
Accounts receivables, less allowance for doubtful 133,896 205,888
accounts of $27,584
Inventories (Note 5) 1,497,979 1,083,199
Prepaid expenses 15,587 205,860
Advances 132,458 ----------
Notes receivable, current portion 221,667 215,442
----------- ------------
Total Current Assets 2,282,224 2,006,289
----------- ------------
PROPERTY AND EQUIPMENT
Property & Equipment 2,324,641 1,161,081
Less Accumulated Depreciation 595,760 424,002
----------- ------------
Net property and 1,728,881 737,079
equipment
OTHER ASSETS
Notes receivables (Less $169,000 allowance Mar. 98 - 551,223 726,448
Note 5)
Patents, net of accumulated amortization 438,626 474,941
Investments (Notes 4,5 and 11) 150,000 1,510,000
Other 41,532 89,416
-----------
------------
Total Other Assets 1,181,381 2,800,805
----------------------
TOTAL ASSETS $ $
5,192,486 5,544,173
=========== ============
</TABLE>
3
<PAGE>
SIMS COMMUNICATIONS INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
(Unaudited) (Audited)
<S> <C> <C>
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $1,059,600 $ 1,295,105
Bank line of credit 250,000 250,000
Current obligations under capital lease (Note 8) 8,377 8,377
Current maturity of long term debt (Note 2) 816,688 1,066,985
Franchise deposits and deferred revenue 818,019 944,154
Officer advances payable -- 65,809
--------- ---------
Total Current Liabilities 2,952,684 3,630,430
LONG TERM LIABILITIES
Long term debt (Note 2) 34,500 48,000
Obligations under capital leases (Note 8) 33,185 37,919
--------- ---------
Total Long Term Liabilities 67,685 85,919
--------- ---------
Total Liabilities 3,020,369 3,716,349
--------- ---------
Commitments and contingencies - -
--------- ---------
STOCKHOLDERS' EQUITY (Notes 6 and 7)
Preferred stock, Series A, $.001 par value, 50,000 25 25
shares authorized, 25,250
shares issued and outstanding (liquidation preference of
$505,000)
Preferred stock, Series B, $.001 par value, 100,000 100 100
shares authorized, 100,000
shares issued and outstanding (liquidation preference of
$100,000)
Common stock $.0001 par value 40,000,000 shares 597 212
authorized: 5,699,944
shares issued and outstanding March 1998 and 2,120,499
June 1997
Additional Paid In Capital 20,270,025 15,134,683
Accumulated Deficit (18,098,630)(13,307,196)
--------- ---------
Total Stockholders' Equity 2,172,117 1,827,824
--------- ---------
Total Liabilities and Stockholders' Equity $5,192,486 $5,544,173
======== ========
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
SIMS COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended March 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues
Equipment & Other $29,052 $ 36,067 $106,255 $ 496,689
Rental 8,458 187,175 207,349 755,875
Calling Card & Long Distance 55,273 65,349 216,182 225,060
License Fee Income 0 500,000 0 500,000
Movie Rentals 125,099 125,099
---------- -------- -------- ---------
Total Revenues 217,882 788,591 654,885 1,977,624
Cost of Sales 134,108 160,290 394,913 960,265
---------- -------- -------- ---------
Gross 83,774 628,301 259,972 1,017,359
Profit
Operating Expenses
General & Administrative 605,441 394,739 1,518,611 1,008,120
Depreciation and 99,812 62,008 227,732 170,000
Amortization
Interest-net 22,672 4,690 104,289 29,613
Selling & Marketing 185,914 140,626 695,701 395,661
Stock Based Compensation/Services 239,743 0 1,007,874 381,393
Research & Development 32,760 1,294 32,760 28,362
Provisions for Bad Debt & Contract 0 0 933,000 0
Termination
Litigation Settlement 424,300 0 424,300 0
(Note 10)
---------- -------- -------- ---------
Total Expenses 1,610,642 603,357 4,944,267 2,013,149
Income/(Loss) Before Income Taxes ($1,526,868) $24,944 ($4,684,295) ($995,790)
---------- -------- -------- ---------
Income Tax Expense - - - -
---------- -------- -------- ---------
Net Income/(Loss) from ($1,526,868) $24,944 ($4,684,295) ($995,790)
Continuing
Operations
Discontinued Operations (54,717) 697 (107,139) 44,145
(Note 11)
---------- -------- -------- ---------
Net Loss ($1,581,585) $25,641 ($4,791,434) ($951,645)
========== ======== ========== ========
Net Income/(Loss) Per Common ($0.28) $0.01 ($1.71) ($0.75)
Share Basic & Diluted (Note 1 )
======== ======== ======== ========
Weighted Average Common
Shares Outstanding 5,599,129 1,927,553 2,808,899 1,274,310
</TABLE>
5
<PAGE>
SIMS COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDING MARCH 31, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
March 31,
CASH FLOWS FROM OPERATING ACTIVITIES 1998 1997
<S> <C> <C>
Net (loss) ($4,791,434) ($951,645)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation & Amortization 227,732 170,000
Equity Based Compensation 1,007,874 381,393
/Services
Expenses of Stock issued (180,505)
Provision for Contract 764,000
Termination
Stock issued for 309,300
litigation settlement
Changes in assets and
liabilities
Inventories (382,380) 197,930
Accounts and other receivables 160,809 (547,519)
Prepaid Expenses and other 14,772 (625)
Current Assets
Accounts payable and accrued expenses (396,622) (234,318)
Franchise and customer deposit & (126,135) (37,083)
Deferred Revenues
Advances to acquisition (132,458)
-------- ---------
NET CASH FROM (USED IN) OPERATING ACTIVITIES (3,525,047) (1,021,867)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (59,311) (44,120)
Net cash received from acquisition (Note 5) 10,915 2,737
Net cash used for acquisition 0 (48,660)
Notes receivable 481 (413,404)
Change in other assets 27,955 (11,171)
-------- ---------
NET CASH (USED IN) INVESTING ACTIVITIES (19,960) (514,618)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt 1,460,000 422,500
Payments on debts (88,714) (264,020)
Loans from (repayments to) (65,809) 60,569
officers
Proceeds from issuance of common stock 869,001 1,274,381
Reduction in investments 1,360,000 0
Payments of obligation under capital lease (4,734) (6,018)
-------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,529,744 1,487,412
-------- ---------
NET INCREASE (DECREASE) IN CASH (15,263) (49,073)
CASH AT BEGINNING OF PERIOD 295,900 322,542
-------- ---------
CASH AT END OF PERIOD 280,637 273,469
======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid during the 9 months for interest $51,634 $49,670
Cash paid during the 9 months for income taxes $ 0 $ 0
</TABLE>
See notes to consolidated financial statements
6
<PAGE>
SIMS COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE NINE MONTHS ENDING MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON
STOCK
ADDITIONAL
SERIES A SERIES B
NUMBER NUMBER OF NUMBER OF PAID IN ACCUMULATED
OF SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - June 30, 1997 25,250 $25 10,000 $100 8,481,995 $848 $15,134,047 ($13,307,196) $1,827,824
Adjustment of stock on reverse stock (6,361,496) (636) 636
split of 1 for 4 (Note 6 )
Net loss -9 months ended (4,791,434) (4,791,434)
March 31, 1998
Common stock issued for the conversion of 75,000 7 (7) 0
incentive stock options net of shares returned to
Company as payment
Issuance of Common Stock to officers and 167,817 17 369,180 369,197
directors for accrued salaries and loans at $2.20
per share
Conversion of Notes Payable to officers 62,500 6 49,994 50,000
at a value of $.80
Issuance of Common Stock and options for 550,000 55 1,126,659 1,126,714
investment (Note 9 )
Issuance of Common Stock for cash 999,478 100 868,901 869,001
Issuance of Common Stock for Conversion of Notes 876,827 88 933,006 933,094
Payable to Foreign Individuals Under Reg S (net
of $166,095 expenses)
Issuance of Common Stock for Services 320,250 32 832,339 832,371
Issuance of Common Stock For Conversion of Notes 452,574 50 646,000 646,050
(net of $ 7,550 Expenses)
Issuance of Common Stock in partial 75,000 8 309,270 309,300
settlement of litigation
-------------------------------------------------------------------------------------------------
Balance -March 31, 1998 25,250 $25 10,000 $100 5,699,944 $597 $20,270,025 ($18,098,630) $2,172,117
</TABLE>
See notes to consolidated financial statements
7
<PAGE>
SIMS COMMUNICATIONS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Organization and Significant Accounting Policies
Organization
Sims Communications, Inc. provides low cost, turnkey point-of-sale (POS)
transaction automation solutions to retailers. These solutions include a
comprehensive network of transaction processing applications using its patented,
intelligent DebitLink POS terminal with custom software. Functions include
processing credit card and ATM charges and payments, cash-backs, activating
prepaid phone cards, obtaining prepaid cellular phone service, securing check
guarantees and authorizations and tracking customer affinity programs.
Sims Communications Inc. and Subsidiaries (the Company) was incorporated in the
State of Delaware on August 15, 1991. The Company was initially formed as a
communication equipment company and had expanded its focus to include
telecommunication and cellular and prepaid telephone activities
Besides POS automation processing, new products include: automated or manual
prepaid phone card dispensing machines, and script terminals. The Company is
also in the automated Movie rental business at hotels.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine-month period ended March 31, 1998
are not necessarily indicative of the results that may be expected for the year
ended June 30, 1998. For further information, refer to the consolidated
financial statements and footnotes included in the Company's annual report on
Form 10-KSB for the year ending June 30, 1997.
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., Sims Communications International, Inc. and
Link Technologies Inc. (and its wholly owned subsidiaries New View Technologies,
Inc., Link Dispensing Systems and Southeast Phone Card, Inc.). The Movie Vision
operations (reflecting the net assets of Movie Bar and Vector Vision) that were
acquired in January 1998, are being operated as a division of New View
Technologies. All intercompany balances and transactions have been eliminated in
consolidation. The 10% minority investment in Smartphone is accounted for under
the cost method.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with a maturity
date of three months or less to be cash equivalents.
-8-
<PAGE>
Inventories
Inventories consists primarily of automated cellular distribution centers
(ACDC's), cellular phones, other communication equipment and Link Technologies'
debit and calling card vending machines and equipment and point of sales (POS)
materials. This is recorded at the lower of cost or market determined by the
first in, first out method.
Property and Equipment
Property and equipment are recorded and depreciated over their estimated useful
lives (5-7 years), utilizing the straight-line method. Expenditures for
maintenance and repairs are charged to expense as incurred.
Organization Costs
Organization costs have been capitalized and are being amortized using the
straight-line method over a five-year period.
Net Gain / (Loss) Per Common Share
The Company adopted Statement of Financial Accounting Standard No. 128 (FAS 128)
Earnings Per Share. All prior period loss per common share data has been
restated to conform to the provision of this statement where appropriate. Basic
loss per common share is computed using the weighted average number of shares
outstanding. Diluted loss per common shares is computed using the weighted
average of number of shares outstanding adjusted for the incremental shares
attributed to outstanding options to purchase common stock, only if their effect
is dilutive. Options and warrants to purchase common shares of common stock
issued in 1997 and 1998 were not included in the computation of diluted loss per
share because their effort would be antidulutive.
Deferred Location Costs
Deferred location costs relate to expenses associated with the buyback of
certain franchises. These costs are amortized over five years.
Revenue Recognition
Rental revenue is recognized upon the completion of the customer phone rental.
Revenues from the sale of the Automated Cellular Distribution Center (ACDC) and
other equipment are recognized upon title passing. Income from movie rentals is
recorded upon the rental of the movie.
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.
Patents
The patents acquired by the Link acquisition are amortized based on the expected
useful life over a ten-year period.
-9-
<PAGE>
Note 2- Notes and Loans Payable
During the quarter ended March 31, 1998, the Company converted $ 165,118 of
8%-10% convertible debt maturing January through May 1998 (and accrued interest)
into 165,699 shares of common stock. Also, $50,000 of notes due former officers
were converted to common stock.
A detail listing of debt follows:
March 31,1998
Promissory note payable at 10% interest payable
monthly, commencing Sept. 15, 1995. Balance of
principal is payable in full on April 30, 1998.
As additional consideration, the Company agreed
to pay the note holder 15.5% of all profits
received through the Company's agreements with
Commonwealth Group International. $310,348
Note payable - principal and 11% interest payable
in monthly installments of $541 through June 14, 1998.
Collateralized by equipment. 1,928
Notes payable to former officers, $ 3,003 payable
monthly (inclusive of 10% interest) payable through
June 1999 47,412
8%-10% Convertible notes payable, principal due at
maturity dates ranging from January through April 1998.
Debt includes conversion to common stock feature
with conversion rates of $ 1.60 per share. Additionally
each note holder was issued options to purchase shares
of the Company stock 408,500
Note payable - $5,000 principal plus interest (prime +1%)
payable monthly through October 1998 35,000
Note payable - principal (non interest bearing) payable in
monthly installments of $1,500 through June 2000. 48,000
-------
851,188
Less: Current Maturities (816,688)
-------
Total Long Term $ 34,500
=======
Note 3 - Continuing Operations and Subsequent Financing
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 state and did not begin earning significant revenues
until the middle of fiscal year ended 1994. During the period from the year
ending June 1995 and continuing through the nine months ended March 31, 1998,
the Company continued to suffer recurring losses from operations.
During the fiscal year ended June 30, 1995, the Company completed an initial
public offering for $5.2 million. For the first 9 month of fiscal 1998,
management sold in private offerings, or had liabilities of $2.4 million
converted into, 2.1 million shares of common stock. However, cash flows from
operations may not be sufficient to meet future obligations of the company. Note
4-Investment in Non Consolidated Subsidiary In September 1996, the Company
acquired a 10% minority investment in Smartphone, Inc. (a corporation that sells
a debit cellular telephone) from former management at their original cost. The
Company issued 400,000 shares of common stock for its interest in Smartphone.
This investment is recorded under the cost method. A $50,000 realization reserve
was established in recognition of the discontinued operation.
-10-
<PAGE>
Note 5- Provisions for Bad Debt and Contract Termination
During the year ended June 1997 the Company received 1,807,800 shares of Cancall
Cellular Communications, Inc. Class A preferred stock with a recorded value of
$1,310,000 from the sales of licensing rights and equipment. During the last
quarter, this agreement was mutually terminated as management of both companies
did not desire to go forward together in cellular telephone rentals.
Accordingly, the equipment was returned to the company, the Preferred Stock was
returned to Cancall and a loss provision for $ 764,000 was provided, which
represented the full profit on the agreement previously recorded.
The Company sold 30 ACDC units to a master licensee from June through September
1996. A majority of these units were installed at Los Angeles Airport terminals
with the remaining units anticipated to be installed in the San Francisco bay
area. The airport terminals were briefly functional but Airport management and
licensee management requested a secession of operations until contract
provisions could be renegotiated. The Company has not received payment for the
units and a loss provision of $169,000 (the profit on the units sold) was
recorded for uncollected receivables. The receivable was personally guaranteed
by the owner/president of the master licensee company, and Management believes
that the sold units will be returned to the company, and ultimately, the company
will participate in the airport cellular rental operations.
Note 6-Stockholders Equity and Stock Split
Effective February 16, 1998, the company's shareholders approved a 1 for 4
reverse stock split. Accordingly, all weighted average share, per share and
option information throughout the consolidated financial statements has been
restated to reflect this split.
For the nine months ended March 1998 the Company issued 320,250 shares and
associated stock options to officers, directors and consultants for services
valued at $832,371.
The Company issued 75,000 shares of common stock to two officers for the
conversion of incentive stock options valued at $ 4.00 per share, net of options
for common stock returned to the Company, then valued at $6.00 per share. The
Company sold in October and November 1997, $1,100,000 of convertible notes to
four foreign investors. The notes bear interest at 8% per year and were due and
payable in November 1999. These notes have been converted into 876,827 shares of
the Company's common stock in December and January. . Notes (and accrued
interest) sold for $ 646,050 (between February and October 1997) were converted
to 452,574 shares of common stock.
In December 1997 $369,000 owed to former officers and directors of the Company
were converted to 167,817 shares of common stock at $ 2.20 per share. In January
1998 $50,000 owed to two former officers and directors were converted into
62,500 shares of common stock.
During the quarter ended March 1998, the Company sold 999,478 shares of common
stock for $869,000, or an average price of $ .87 per share.
-11-
<PAGE>
The settlement of litigation with a former Instafone master license holder
required the issuance of 75,000 shares, valued at $ 309,300
The Movie Vision investment and business were acquired via the issuance of
550,000 shares of common stock at a value of $ 1.1 million.
Note 7-Stock Options
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No 123 "Accounting for Stock-based Compensation" (SFAS No.
123). Accordingly, no compensation cost has been recognized for stock options
and warrants granted. Consistent with the disclosure-only provisions of SFAS No.
123, the Company must provide pro forma net earnings and pro forma earnings per
share disclosures for employee stock option grants made in 1995 and future years
as if the fair value based method defined in SFAS No. 123 had been applied.
The Company uses one of the most widely used option pricing models, the
Black-Scholes model (the Model), for purposes of valuing in stock option grants.
The Model was developed for use in estimating the fair value of traded options
which have no vesting restrictions and are fully transferable. In addition, it
requires the input of highly subjective assumptions including the expected stock
price volatility, expected dividend yields, the risk free interest rate and the
expected life. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the value determined by the Model is not necessarily
indicative of the ultimate value of the granted options.
In February 1998, the Company issued 412,500 options to employees, directors and
consultants (in connection with services), which allow holders to purchase
common stock at prices ranging from $3.00 to $8.00 per share. These options vest
over a two-year period and expire in five years. Compensation expense of $
94,302 will be recognized over the two-year vesting period for the consultants
options.
Note 8 - Capital Leases
The Company leases various office equipment which is accounted for as capital
leases. The current liability for the leases is $8,377 and the long-term portion
is $30,898 payable through the year 2002.
Note 9- Acquisition of investment
Effective January 1998, the Company issued 550,000 shares (split adjusted) of
its common stock to the shareholders of Movie Bar, Inc. and Vector Vision Inc.
in consideration for the acquisition of a business known as "Movie Vision".
Movie Vision rents videocassettes, primarily containing motion pictures, through
automated dispensing units in hotels. Movie Vision currently has videocassette
dispensing machines in approximately 120 hotels in the United States. For
financial statement purposes, the purchase acquisition of Movie Vision was
valued at $1.1 million based on a $2.00 market price of the Company's stock.
The summarized net assets acquired from Movie Vision are as follows:
Cash $ 10,914
Other current assets 121,217
Equipment and machinery 1,128,699
Current Liabilities (161,116)
---------
Net Assets Acquired 1,099,714
Acquisition expenses ($27,000)
-12-
<PAGE>
Note 10- Litigation Settlement
In February 1998 the Company settled litigation with a former Instafone Master
Licensee resulting in a special charge of $424,300. The terms of the settlement
provide for payments of cash and common stock to the former Master Licensee over
a twenty-one month period.
Note 11- Discontinued Operations
The Company decided in 1998 to discontinue the cellular activation (Cellex) and
cellular prepaid business. The activation business was discontinued due to the
loss, via acquisition, of its major contracted American Automobile Association
customer base. The loss for the fiscal 1998 third quarter and nine months to
date for Cellex was $4,717 and $57,139 respectively, as compared to income for
comparable prior years periods of $ 696, and $44,145, respectively.
Additionally, a loss provision of $50,000 was provided for realization in the
investment in Smartphone, a non-consolidated subsidiary which sells prepaid
cellular telephones. The income statement has been restated to segregate the
discontinued from ongoing operations.
Note 12 -Subsequent Transactions
The company has a definitive agreement for the acquisition of Westside Home
Medical Equipment Inc., which operates 1 One Medical Service, for 142,350 shares
of common stock. 1 One Medical has developed, in conjunction with the company's
intelligent "Debit Link" system and Bergen Brunswig (NYSE:BBC), a communications
and transaction platform which allows pharmacies to participate in the fast
growing home medical supply industry. This new Point of Sale process, currently
targeted to retail pharmacies and doctors offices, will enable the facility to
get on-line credit card and medical reimbursement approval, and automated
product ordering and payment. The product has been test marketed to
approximately 50 pharmacies within the Southern California with outstanding
results. Using Sims patented Debit Link technology, new applications to other
markets are also being pursued
-13-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operation-Three and Nine Months Ending March 31, 1998
During the three month and nine month periods ended March 31,1998, total
revenues decreased versus the comparable periods of last year. Revenue of $
217,882 for the current March 1998 quarter was below the prior comparable
quarter of $ 788,591. The nine months' revenue results of $ 654,885 was below
last years activity of $ 1,977,624.
Calling card and long distance revenue of $ 55,273 and $216,182 for the current
quarter and nine months, respectively, were only slightly below prior years'
results. This is attributable to new phone card dispensing units partially
offsetting the revenue lost by the discontinuance of the association with AAA
Florida, Mississippi and Louisiana customers. Cellular telephone rental revenue
of $8,458 for the 1998 quarter versus $ 187,175 for the comparable quarter of
1997 and $ 207,349 for the nine months of fiscal 1998 (compared to $ 755,875 for
the prior nine months) significantly decreased. This is due to the termination
of on site renting of cellular telephones at Alamo Rent A Car locations until
more profitable venues can be established. Establishment of such venues is
anticipated via the integration of telephone and calling card dispensing units
into Movie Vision rental locations.
Revenue of $ 125,099 from the January 31, 1998 acquisition of movie Vision was
recognized during their seasonally slow period. Expansion of the Automated Movie
Rental "Video Card" program allowing for unlimited movie rentals at a pre
charged fixed fee, is progressing successfully.
A one time $500,000 License fee was recognized in March 1997 pursuant to an
agreement with Cancall Cellular Communications, which was terminated in December
1997. A loss provision for the recession of this agreement was subsequently
recorded.
The March 1997 nine month activity for equipment sales included ACDC unit and
telephone sales for installation in various California airports.
Cost of sales for the three and nine months ending March 31, 1998 were lower due
to decreases in the Company's total rental operations and reduced level of
equipment sales. Profit margins were high on the calling card and long distance
business since revenues are largely commission based. This quarter's cost of
sales also includes new movies purchased for the Movie Vision activity, which
will keep the products current.
Selling, marketing and general and administrative expenses are higher for the
three and nine months reflective of support for the Link and Movie Vision
acquisitions, startup of a new production facility and changes in management.
This was partially offset by savings realized in the current quarter from
employee and concurrent facility downsizing. Charges for stock based
compensation and services for employees and consultants increased for the three
and nine months, to again conserve cash, as the company's businesses evolves and
expands.
Expenditures for research and development increased as new "Smart Card"
improvements to company products are being pursued.
The Company settled litigation with a former Instafone franchisee resulting in a
special charge of $424,300 inclusive of $ 115,000 cash payments over 21 months
and the issuance of shares of common stock.
-14-
<PAGE>
Largely due to the loss of the AAA Florida customer base through acquisition in
December 1997, the Company decided to discontinue its cellular activation
(Cellex subsidiary) and prepaid calling card business. The current quarters and
year to date losses of $ 54,717 and $ 107,139 respectively, for this activity
were reclassified as discontinued operations.
Comparable net results for the prior year's periods were profits of $697and
$44,145.
The new management team, which came to the Company with the "Link" acquisition,
has hired a new Vice President of Finance and an Executive Vice President of
Sales and Marketing. This is under a plan to guide the Company forward in its
new ventures but also to integrate its past cellular telephone activities to
current customers.
Liquidity and Sources of Capital
During the nine month period ended March 31, 1998, the Company's cash
requirement was primarily funded by the sale of common stock for $869,000 and
$1,460,000 in proceeds from debt, which has largely been converted to common
stock. Cash was also conserved with stock based compensation for services
charged at $1,007,874, as well as $309,300 in common stock used to partially
settle $424,300 of litigation. Higher inventories reflect the buildup of new
products and the expansion of the newly acquired Movie Vision operations. The
$132,458 advances to acquisition reflect funds advanced to I One Medical prior
to formal acquisition and consolidation.
The Movie Vision business, at a net asset value of $ 1,099,7147, consisting of
operations and assets from Movie Bar and Vector Vision was acquired January 31,
1998, for the issuance of 550,000 shares
The $ 1,021,867 operating cash shortfall for the comparable prior year nine
months was funded by proceeds from common stock. The increase in accounts
receivable reflects ACDC unit and equipment sales.
Link Technologies Inc. was acquired at Dec. 31, 1996 for the issuance of 168,539
shares of common stock.
-15-
<PAGE>
Part II
Item 2. Changes in Securities and Use of Proceeds.
1. In February 1998 the Company's shareholders approved a one-for-four
reverse stock split of the Company's common stock.
2. During the quarter ended March 31, 1998 the Company issued shares of
common stock which were not registered under the Securities Act of 1933. The
following is a description of the transactions relating to the issuance of these
shares. The share amounts have been adjusted to reflect the one-for-four reverse
stock split described above.
A. Effective January 30, 1998 the Company issued 550,000 shares of
its common stock to the four shareholders of Moviebar, Incorporated and
Vectorvision, Incorporated in consideration for the acquisition of a business
known as "Movie Vision." Movie Vision rents video cassettes, primarily
containing motion picture, through automated dispensing units in hotels. Movie
Vision currently has video cassette dispensing machines in approximately 140
hotels in the United States. For financial statement purposes, the acquisition
of Movie Vision was valued at $1,100,000.
B. During the quarter ended March 31, 1998 the Company:
(1) sold 999,478 shares of its common stock to twenty-three investors for
$869,000 in cash;
(2) issued 202,500 shares of its common stock to five of the Company's
officers and directors in consideration for services rendered;
(3) issued 212,500 shares of its common stock to six financial consultants
for consulting services provided to the Company;
(4) issued 75,000 shares of its common stock to one unrelated person in
settlement of a lawsuit filed against the Company;
(5) issued 62,500 shares of common stock to two former officers and
directors in payment of loans of $50,000.
C. Between February and October 1997 the Company sold convertible
notes in the principal amount of $1,017,500 to various private investors. The
notes bear interest at 8% per annum and are due and payable between August 1997
and May 1998. During the quarter ended March 31, 1998 notes in the principal
amount of $509,000 (plus accrued interest of $14,890) were converted into
327,431 shares of the Company's common stock.
The sales of the Company's Common Stock described above were exempt
transactions under Section 4(2) of the Securities Act of 1933 as transactions by
an issuer not involving a public offering. All of the shares of Common Stock
were issued for investment purposes only and without a view to distribution. All
of the persons who acquired the foregoing securities were fully informed and
advised about matters concerning the Company, including its business, financial
affairs and other matters. The purchasers of the Company's Common Stock acquired
the securities for their own accounts. The certificates evidencing the
securities bear legends stating that they may not be offered, sold or
transferred other than pursuant to an effective registration statement under the
Securities Act of 1933, or pursuant to an applicable exemption from
registration. All such shares are "restricted" shares as defined in Rule 144 of
the Securities and Exchange Commission.
-16-
<PAGE>
The issuance of common stock as a result of the conversion of the
Company's convertible notes were exempt under Section 3(a)(9) of the Securities
Act of 1933. All shares of common stock issued upon the conversion of the notes
were issued for investment purposes only and without a view to distribution. All
of the persons who acquired the shares of common stock were fully informed and
advised about matters concerning the Company, including its business, financial
affairs and other matters. The former convertible note holders acquired the
common stock for their own accounts. The certificates evidencing the securities
bear legends stating that they may not be offered, sold or transferred other
than pursuant to an effective registration statement under the Securities Act of
1933, or pursuant to an applicable exemption from registration. All such shares
are "restricted" shares as defined in Rule 144 of the Securities and Exchange
Commission.
In connection with certain sales referenced in B. (1) above, the Company
paid a commission of $20,800 to a sales agent. Except as noted above, no
underwriters were involved with the other sales or issuances of the Company's
common stock and no commissions or other forms of remuneration were paid to any
person in connection with such sales.
3. During the quarter ending March 31, 1998 the Company issued options to
the persons in the amounts and upon the terms set forth below.
Shares Exercise Option
Name Subject to Price Expiration
Option Date
Mark Bennett* 18,750 $3.00 2/2/03
37,500 $4.00 2/2/03
25,000 $6.00 2/2/03
12,500 $8.00 2/2/03
Michael Malet* 16,250 $3.00 2/2/03
32,500 $4.00 2/2/03
22,500 $6.00 2/2/03
10,000 $8.00 2/2/03
David Markowski* 18,750 $4.00 2/2/03
12,500 $6.00 2/2/03
6,250 $8.00 2/2/03
Chet Howard* 5,000 $3.00 2/2/03
12,500 $4.00 2/2/03
5,000 $6.00 2/2/03
-17-
<PAGE>
George Pursglove* 5,000 $3.00 2/2/03
12,500 $4.00 2/2/03
5,000 $6.00 2/2/03
2,500 $8.00 2/2/03
Various Consultants 12,500 $3.00 2/2/03
18,750 $4.00 2/2/03
12,500 $6.00 2/2/03
6,250 $8.00 2/2/03
25,000 $5.00 2/2/03
12,500 $4.00 2/2/03
25,000 $2.00 2/2/03
* Officer and/or director of Company
-18-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) No exhibits are filed with this report
(b) During the quarter ended March 31, 1998 the Company filed a report on
Form 8-K, dated January 30, 1998, that disclosed the acquisition of a
business known as "Movie Vision" and sale of shares of the Company's
common stock.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIMS COMMUNICATIONS, INC.
By: /s/ Mark Bennett
Mark Bennett
President
/s/ Bruce S. Schames
Bruce S. Schames
Chief Financial Officer
Date: May 15, 1998
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