File # 333-60851
Rule 424(b)(3)
PROSPECTUS SIMS COMMUNICATIONS, INC.
Common Stock
This Prospectus relates to:
1. The sale of 3,782,301 shares of the Common Stock of Sims
Communications, Inc. (the "Company") by the owners of such shares. The shares
were sold by the Company in various private offerings for cash, services
rendered, and in settlement of claims against the Company.
2. The sale of up to 336,315 shares of the Company's common stock
issuable upon the exercise of options and warrants. The options and warrants
were issued by the Company to:
(i) certain investors in connection with the Company's private
offerings.
(ii) Sales Agent's in connection with certain private offerings of
the Company's securities,
(iii) financial consultants for services provided to the
Company, and
(iv) to other third parties in settlement of claims and
liabilities.
The owners of the Common Stock referred to above, and the holders of
the options and warrants, to the extent they exercise the options and warrants
and receive shares of the Company's Common Stock, are referred to in this
Prospectus as the "Selling Shareholders".
The Company will not receive any proceeds from the resale of the shares
by the Selling Shareholders. The Selling Shareholders may resell the shares they
acquire by means of this Prospectus from time to time in the public market. The
Selling Shareholders have advised the Company that they will offer the shares
through broker/dealers at market prices with customary commissions being paid by
the Selling Shareholders. The costs of registering the shares offered by the
Selling Shareholders are being paid by the Company. The Selling Shareholders
will pay all other costs of the sale of the shares offered by them. See
"Dilution and Comparative Share Data" and "Selling Shareholders".
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK AND
SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO LOSE THEIR ENTIRE
INVESTMENT. FOR A DESCRIPTION OF CERTAIN IMPORTANT FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS, SEE "RISK FACTORS" AND "DILUTION AND
COMPARATIVE SHARE DATA".
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
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ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
On November 23, 1998 the closing prices of the Company's Common Stock on the
NASDAQ Small-Cap Market was $1.25 See "Market Information".
The Date of this Prospectus is November 24, 1998.
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TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY .................................8
RISK FACTORS........................................10
DILUTION AND COMPARATIVE SHARE DATA ................14
MARKET FOR THE COMPANY'S COMMON STOCK ..............17
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS ........................................18
BUSINESS............................................24
MANAGEMENT..........................................31
PRINCIPAL SHAREHOLDERS .............................40
SELLING SHAREHOLDERS ...............................42
DESCRIPTION OF SECURITIES ..........................48
EXPERTS.............................................49
LITIGATION..........................................49
INDEMNIFICATION ....................................50
FINANCIAL STATEMENTS ...............................F-1
<PAGE>
PROSPECTUS SUMMARY
The following information is qualified in its entirety by the detailed
information appearing elsewhere in this Prospectus.
THE COMPANY
SIMS Communications, Inc. (the "Company") was incorporated in Delaware
on August 15, 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 1995, the Company had 50 ACDC units in operation and the Company's
franchisees (13 in total) had 28 ACDC's in operation. At September 30, l998, the
Company was not operating any ACDC units and the Company's only remaining
franchisee had four ACDC units in operation.
During 1996 the Company 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 pre-paid calling cards, (iii) sale
of long distance telephone service and (iv) rental of cellular telephones using
overnight courier service. With the exception of the sale of pre-paid calling
cards, these four programs were discontinued in December 1997.
Effective December 31, 1996 the Company acquired all the issued and
outstanding shares of Link International, Inc. ("Link"). Link manufactures
and distributes machines which dispense prepaid calling cards and terminals
which are used by merchants to perform a variety of transactions, including
accepting credit cards and bank debit cards in payment for sales of
merchandise and services. See "Business - Link International Technologies,
Inc."
Effective January 30, 1998 the Company issued 550,000 shares of its
common stock to the shareholders of Moviebar, Incorporated and Vectorvision,
Incorporated 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 140 hotels in the United
States.
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Effective May 30, 1998 the Company acquired One Medical Service Inc.
in consideration for 142,349 shares of common stock and 187,500 warrants. Each
warrant allows the holder to purchase one additional share of common stock at
any time prior to May 30, 2003 at a price of $2.00 per share. One Medical
service uses Link's Point-of-Sale transaction terminals to permit retail
pharmacies and their customers to purchase home medical equipment. Additional
services offered through the terminal include check guarantee and verification,
point of sale activation of prepaid phone card and cellular time, frequent buyer
programs and verification of Medi-Cal benefits in California.
All historical share data in this Prospectus has been adjusted to
reflect the following stock splits relating to the Company's common stock: June
1995: 2-for-1 forward split, February 1996: 1-for-10 reverse split, February
l998:1-for-4 reverse split.
Unless otherwise indicated, all references to the Company include
the operations of Link, Movie Vision and One-Medical
The Company's executive offices are located at 18001 Cowan, Suite C &
D, Irvine, CA 92614. The Company's telephone number is (714) 724-9094.
Common Stock
Outstanding: As of September 30, 1998, the Company had 9,417,957 shares
of Common Stock issued and outstanding. The number of
outstanding shares does not give effect to shares which
may be issued upon the exercise and/or conversion of
options, warrants or other convertible securities
previously issued by the Company. See "Dilution and
Comparative Share Data", "Selling Shareholders" and
"Description of Securities".
NASDAQ Symbol: Common Stock: SIMS
RISK FACTORS
The purchase of the Securities offered involves a high degree of
risk and immediate substantial dilution to investors. See "Risk Factors" and
"Dilution".
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SUMMARY FINANCIAL INFORMATION
The following sets forth certain financial data with respect to the
Company and is qualified in its entirety by reference to the more detailed
financial statements and notes thereto included elsewhere in this Prospectus.
Statement of Operations Data:
Years Ended June 30,
1998 1997
----- ----
Revenues $980,951 $2,923,532
Cost of Sales (523,479) (1,608,572)
Operating and other
Expenses (7,503,483) (4,657,587)
(Loss Income from
Discontinued Operations) (63,737) 553,731
--------------- -------------
Net (Loss) $(7,109,748) $(2,788,896)
============ ============
Balance Sheet Data:
June 30,
1998 1997
---- ----
Current Assets $1,088,022 $2,006,289
Total Assets 5,602,751 5,544,173
Current Liabilities 2,785,015 3,630,430
Total Liabilities 3,372,542 3,716,349
Working Capital (Deficit) (1,697,013) (1,624,141)
Shareholders' Equity 2,230,209 1,827,824
No Common Stock dividends have been declared by the Company since its inception.
RISK FACTORS
The securities offered hereby are speculative and involve a high degree
of risk and should be purchased only by persons who can afford to lose their
entire investment. Therefore, prospective investors should read this entire
Prospectus and carefully consider, among others, the following risk factors in
addition to the other information set forth in this Prospectus prior to making
an investment.
History of Losses. The Company has incurred losses since it was formed
in 1991. From the date of its formation through June 30, 1998, the Company
incurred net losses of approximately $(20,417,000). During the year ended June
30, l998 the Company had a loss of $(7,109,748). The Company expects to continue
<PAGE>
to incur losses until such time, if ever, as it generates substantial revenues
and earns net income. There can be no assurance that the Company will be able to
generate sufficient revenues and become profitable.
The Company is vulnerable to a variety of business risks generally
associated with small companies, any one of which could have a material adverse
effect on its business, financial condition and results of operations. Potential
investors should be aware of the difficulties encountered by small companies and
the other risk factors set forth in this section. The Company's future operating
results will depend on a number of factors, including the demand for its
products and services, government regulation, the Company's ability to compete
with much larger companies, its ability to successfully market its products and
services, retain qualified sales and other personnel, successfully manage growth
(including monitoring an expanded level of operations and controlling costs),
and the availability of additional financing,
The Company's operations have placed, and are expected to continue to
place, significant strain on the Company's management, staff, working capital,
and financial control systems. The failure to maintain or upgrade financial
control systems, to recruit additional staff or to respond effectively to
difficulties encountered during expansion could have a material adverse effect
on the Company's business, financial condition and results of operations. There
can be no assurance that the Company's systems and controls or staff will be
adequate. There can be no assurance that the Company will be able to earn a
profit from its operations.
Need for Capital. This offering is being made in behalf of certain
Selling Shareholders. The Company will not receive any proceeds from the sale of
the shares offered by the Selling Shareholders. The Company's continued
operations will depend upon the availability of additional funding. There can be
no assurance that the Company will be able to obtain additional funding, if
needed, or if available on terms satisfactory to the Company.
Competition There can be no assurance that the Company will be able to
compete with the numerous other companies which are engaged in the Company's
lines of business. Many of these competitors have greater financial and
marketing resources than those of the Company.
Agreements with Credit Card Companies. The Company's point-of-sale
terminals and video dispensing machines are capable of operating on an automatic
basis as the result of a nationwide credit card system. By means of telephone
lines and computers, this system links credit card companies, issuing banks and
credit card processing firms throughout the United States and allows products
and services to be purchased through credit cards. The Company presently has
agreements with credit card processors which authorize the use of various major
credit cards in the Company's machines. In order for the Company to continue to
have the services of these credit card processors available, the Company is
required to meet certain conditions as provided in the agreements between the
credit card processors and the Company. In the event the Company fails to meet
these conditions, the credit card processors may automatically refuse to accept
credit cards, in which case the Company's machines would be unable to process
transactions.
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Dependence on Personnel. The future success of the Company will be
highly dependent upon the personal efforts of its executive officers and the
loss of the services of any of the Company's executive officers could have a
material adverse effect on the Company. The Company believes that its future
success will also depend upon its ability to attract and retain qualified
marketing, operating and programming personnel. There can be no assurance that
the Company will be able to hire and retain such necessary personnel in the
future.
Market for Company's Securities; Volatility of Securities Prices.
Prices for the Company's Common Stock have been highly volatile and will be
influenced by a number of factors, including the depth and liquidity of the
market for the Company's Common Stock, the Company's financial results, investor
perceptions of the Company, and general economic and other conditions.
Additionally, in the last several years, the stock market has experienced a high
level of price and volume volatility and market prices of many companies,
particularly small and emerging growth companies, the common stock of which
trade in the over-the-counter market, have experienced wide price fluctuations
which have not necessarily been related to the operating performance of such
companies.
No Assurance of Continued NASDAQ Listing. Although the Company's Common
Stock and Warrants are currently listed on the NASDAQ Small-Cap Market, the
National Association of Securities Dealers, Inc. ("NASD") requires, for
continued inclusion on the NASDAQ Small-Cap Market, that the Company must
maintain $2,000,000 in tangible net worth and that the bid price of the
Company's Common Stock must be at least $1.00. The Company has been advised by
the NASD that as of June 30, 1998 the Company was not in compliance with the
listing standards for the NASDAQ Small-Cap Market. Although the Company believes
it can comply with these listing standards, if the Company's securities were
delisted from the NASDAQ Small-Cap Market, the Company's securities would trade
in the unorganized interdealer over-the-counter market through the OTC Bulletin
Board which provides significantly less liquidity than the NASDAQ Small-Cap
Market. Securities which are not traded on the NASDAQ Small-Cap Market may be
more difficult to sell and may be subject to more price volatility than NASDAQ
listed securities. There can be no assurance that the Company's securities will
remain listed on the NASDAQ Small-Cap Market.
If the Company's Common Stock was delisted from NASDAQ, trades in such
securities may then be subject to Rule 15g-9 under the Securities Exchange Act
of 1934, which rule imposes certain requirements on broker/dealers who sell
securities subject to the rule to persons other than established customers and
accredited investors. For transactions covered by the rule, brokers/dealers must
make a special suitability determination for purchasers of the securities and
receive the purchaser's written agreement to the transaction prior to sale. Rule
15g-9, if applicable to sales of the Company's securities, may affect the
ability of broker/dealers to sell the Company's securities and may also affect
the ability of investors in this offering to sell such securities in the
secondary market and otherwise affect the trading market in the Company's
securities.
The Securities and Exchange Commission has rules that regulate
broker/dealer practices in connection with transactions in "penny stocks". Penny
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stocks generally are equity securities with a price of less than $5.00 (other
than securities registered on certain national securities exchanges or quoted on
the NASDAQ system, provided that current price and volume information with
respect to transactions in that security is provided by the exchange or system).
The penny stock rules require a broker/dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document prepared by the Commission that provides information about
penny stocks and the nature and level of risks in the penny stock market. The
broker/dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker/dealer and its
salesperson in the transaction, and monthly account statements showing the
market value of each penny stock held in the customer's account. The bid and
offer quotations, and the broker/dealer and salesperson compensation
information, must be given to the customer orally or in writing prior to
effecting the transaction and must be given to the customer in writing before or
with the customer's confirmation. These disclosure requirements may have the
effect of reducing the level of trading activity in the secondary market for a
stock that becomes subject to the penny stock rules.
Transactions with Affiliates. The Company has in the past entered into
transactions and agreements with the Company's management and certain affiliated
parties and the Company may in the future enter into other transactions and
agreements incident to its business with certain of its affiliates. Although the
Company intends that the terms of any such future transactions and agreements
will be no less favorable than those which could be obtained from unaffiliated
third parties, no assurances can be given that this will be the case. See
"Management - Transactions with Former Management" and "Management -
Transactions With Present Management".
Options, Warrants and Convertible Securities. The Company has issued
options, warrants and other convertible securities ("Derivative Securities")
which allow the holders to acquire additional shares of the Company's Common
Stock. In some cases the Company has agreed that, at its expense, it will make
appropriate filings with the Securities and Exchange Commission so that the
securities underlying certain Derivative Securities will be available for public
sale. Such filings could result in substantial expense to the Company and could
hinder future financings by the Company.
For the terms of these Derivative Securities, the holders thereof will
have an opportunity to profit from any increase in the market price of the
Company's Common Stock without assuming the risks of ownership. Holders of such
Derivative Securities may exercise and/or convert them at a time when the
Company could obtain additional capital on terms more favorable than those
provided by the Derivative Securities. The exercise or conversion of the
Derivative Securities will dilute the voting interest of the owners of presently
outstanding shares of the Company's Common Stock and may adversely affect the
ability of the Company to obtain additional capital in the future. The sale of
the shares of Common Stock issuable upon the exercise or conversion of the
Derivative Securities could adversely affect the market price of the Company's
stock. See "Dilution and Comparative Share Data".
Shares Available for Resale. As of September 30, 1998, there were
9,417,957 shares of the Company's Common Stock issued and outstanding. Of this
<PAGE>
amount, approximately 4,200,000 shares (exclusive of the shares offered by this
Prospectus) are "restricted securities" as defined by Rule 144 of the Securities
Act of 1933, as amended (the "Act").
Rule 144 provides, in essence, that shareholders, after holding
restricted securities for a period of one year may, every three months, sell in
ordinary brokerage transactions an amount equal to the greater of l% of the
Company's then outstanding Common Stock or the average weekly trading volume, if
any, of the stock during the four calendar weeks preceding the sale.
Non-affiliates of the Company who hold restricted securities for a period of two
years may, under certain prescribed conditions, sell their securities without
regard to any of the requirements of the Rule.
Approximately 3,500,000 shares of restricted stock have satisfied the
one year holding period required by Rule 144. The remaining shares of restricted
stock will become available for resale pursuant to Rule 144 beginning in January
1999.
No prediction can be made as to the effect, if any, that the sale of
Common Stock (or the availability of such Common Stock for sale) by the holders
of the Company's restricted stock will have on the market price of the Company's
securities. Nevertheless, the possibility of a substantial number of shares of
Common Stock being offered for sale in the public market may adversely affect
prevailing market prices for the Common Stock and could impair investors'
ability to sell the Company's Common Stock or the Company's ability to raise
capital through the sale of its equity securities.
Lack of Dividends. There can be no assurance that the operations of the
Company will result in any revenues or will be profitable. At the present time,
the Company intends to use available funds to finance any possible growth of the
Company's business. Accordingly, while payment of dividends rests within the
discretion of the Board of Directors, no common stock dividends have been
declared or paid by the Company. The Company does not presently intend to pay
dividends and there can be no assurance that dividends will ever be paid.
Preferred Stock. The Company's Articles of Incorporation authorize the
Company's Board of Directors to issue up to 1,000,000 shares of Preferred Stock.
The provisions in the Company's Articles of Incorporation relating to the
Preferred Stock would allow the Company's directors to issue Preferred Stock
with 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 the removal of management difficult
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.
DILUTION AND COMPARATIVE SHARE DATA
As of September 30, 1998, the present shareholders of the Company owned
9,417,957 shares of the Company's Common Stock, which had a net tangible book
value of approximately $0.18 per share. Upon completion of this Offering, and
assuming all options and warrants are exercised, purchasers of the common stock
<PAGE>
offered by this Prospectus will own 4,118,616 shares or approximately 43% of the
Company's Common Stock and the present shareholders of the Company will own 57%
of the Company's Common Stock.
Shares presently outstanding (1) 9,417,957
Shares offered by this prospectus
See "Selling Shareholders" 4,118,616
Net tangible book value per share $0.18
Equity ownership by present shareholders
after this offering 57%
Equity ownership by investors in this Offering 43%
The purchasers of the securities offered by this Prospectus will suffer
an immediate dilution if the price paid for the securities offered is greater
than the net tangible book value of the Company's Common Stock.
"Net tangible book value" is the amount that results from subtracting
the total liabilities and intangible assets of the Company from its total
assets. "Dilution" is the difference between the offering price per share paid
by investors in this offering and the net tangible book value of the Company's
common stock.
(1) As of September 30, 1998 the Company had 9,417,957 shares of Common
Stock issued and outstanding. The following table reflects the shares of Common
Stock which may be issued by the Company as the result of the sale of additional
securities by the Company, the exercise of options and warrants issued, or to be
issued, by the Company and the conversion of convertible securities issued by
the Company.
Number of Note
Shares Reference
Shares Outstanding 9,417,957
Shares issuable upon exercise
of warrants issued to sales agents
and financial consultants 238,753 A
Shares issuable upon conversion of notes
and exercise of warrants sold in
private offering 256,937 B
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Shares issuable upon exercise of options
previously granted by Company 2,164,000 C
Shares issuable upon conversion of
Series A and Series B Preferred Stock 35,000 D
Additional shares issuable in connection
with the acquisition of One Medical
Services, Inc.: E
Warrant Shares 187,500
Incentive Shares 1,485,000
Share issuable upon conversion of loan 142,900 F
TOTAL
A. In connection with prior private offerings of the Company's common stock, the
Company paid Commissions to the sales agents for such offerings in the form of
cash and warrants. The Company has also entered into a number of agreements with
various financial consultants. Pursuant to the terms of these agreements, the
Company has issued to the financial consultants shares of common stock, plus
warrants to purchase additional shares of common stock. The warrants referred to
above are exercisable at prices ranging between $2.00 and $7.00 per share and
expire between 2001 and 2003.
B. Between February and December l997 the Company sold $1,017,500 of convertible
notes (the "Notes"), together with warrants for the purchase of 97,562 shares of
the Company's common stock. The Notes bear interest at 8% per annum and are
presently due and payable. As of July 31, 1998 Notes in the principal amount of
$762,500 (plus accrued interest) have been converted into 534,285 shares of the
Company's common stock. The remaining Notes are collectively convertible into
159,375 shares of the Company's Common Stock at a conversion price of $1.60 per
share. The Warrants are exercisable at any time prior to May 31, 2000 at prices
ranging between $5.00 and $10.00 per share.
C. See "Management - Stock Option and Bonus Plans".
D. See "Description of Securities".
E. Effective May 30, 1998 the Company acquired One Medical Services, Inc. in
consideration for 142,349 shares of common stock and 187,500 warrants
exercisable at $2.00 per share at any time prior to May 30, 2003. The Company
has also agreed to issue to the former owners of One Medical up to 1,485,000
additional shares of common stock depending on the future operating of One
Medical. The number of shares to be issued will be determined by dividing the
quarterly net income of One Medical (for each fiscal quarterly beginning June
30, 1998 and ending June 30, 2001, by the average closing price of the Company's
common stock for the five day trading period prior to the end of each quarter.
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F. The Company has borrowed $250,000 from an non-affiliated third party.
At the option of the third party the loan is convertible into shares of
the Company's common stock. The number of shares to be issued upon the
conversion of the loan is determined by dividing the principal and
accrued interest to be converted by the average market price of the
Company's common stock during the five day period prior to conversion.
The shares in the table assume the principal amount of the loan is
converted when the market price of the Company's common stock is $1.75
per share.
The shares referred to in Notes A, and B, above are being offered for
public sale by means of this propectus. See "Selling Shareholders". The shares
issuable upon the exercise of options, and which are referred to in Note C, have
been registered for public sale by means of a registration statement on Form S-8
which has been filed with the Securities and Exchange Commission
MARKET FOR THE COMPANY'S COMMON STOCK
As of September 30, 1998, there were approximately 600 beneficial
owners of the Company's Common Stock. The Company's Common Stock is 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 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, a one-for ten
reverse stock split which was effective in March 1996, and a one-for-four
reverse stock split which was effective in February 1998.
Quarter
Ending Common Stock
High Low
9/30/95 $95.00 $20.00
12/31/95 $31.24 $ 7.48
3/31/96 $18.72 $ 3.72
6/30/96 $ 7.12 $ 4.00
9/30/96 $ 5.36 $ 2.00
12/3l/96 $ 4.48 $ 2.64
3/31/97 $ 7.76 $ 3.44
6/30/97 $11.24 $4.12
9/30/97 $2.31 $1.25
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12/31/97 $5.00 $1.50
3/31/98 $2.87 $1.09
6/30/98 $2.75 $1.56
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 on it's
Common Stock and the Company does not have any current plans to pay any Common
Stock 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.
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,
1998 1997
----- ----
Revenues $980,951 $2,923,532
Cost of Sales (523,479) (1,608,572)
Operating and other
Expenses (7,503,483) (4,657,587)
(Loss) Income from
Discontinued Operations (63,737) 553,731
--------------- -------------
Net (Loss) $(7,109,748) $(2,788,896)
============ ============
Balance Sheet Data:
June 30,
1998 1997
---- ----
Current Assets $1,088,022 $2,006,289
Total Assets 5,602,751 5,544,173
Current Liabilities 2,785,015 3,630,430
Total Liabilities 3,372,542 3,716,349
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Working Capital (Deficit) (1,697,013) (1,624,141)
Shareholders' Equity 2,230,209 1,827,824
No Common Stock dividends have 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, as well as the anticipated
revenue percentage from each category for the year ending June 30, 1999.
Percent of Gross Revenues
Year Ending
Years Ending June 30, June 30, 1999
1997 1998 (Projected) (1)
---- ---- ------------------
Rental of cellular
telephones directly
from Company and
from ACDC Units. 19% 13% --
Sale of ACDC units,
and related
equipment. 25% -- --
Fees paid by cellular
telephone companies for
activation of cellular
telephones 38% 37% --
Sale of prepaid calling cards. 5% 13% 4%
Sale of long distance
telephone service. 1% 3% --
Revenues from Link
International 12% 9% 50%
Revenues from Moviebar -- 23% 14%
Revenues from One Medical
Service -- 1% 32%
Miscellaneous Income -- 1% --
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(l) There can be no assurance that these percentages will not change
significantly based upon events which may not be within the Company's control.
Projected revenues for the year ending June 30, l999 constitute a
forward-looking statement which is subject to risks and uncertainties which
could cause actual results to differ materially from those projected. Factors
that could cause or contribute to such differences include lack of adequate
funding, loss of major customers and inability to meet sales projections. The
Company undertakes no obligation to publicly release any revision to these
forward-looking statements which may be made to reflect events or circumstances
after the date of this report or to reflect the occurrence of unanticipated
events.
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 1995, the Company had 50 ACDC units in
operation and the Company's franchisees (13 in total) had 28 ACDC's in
operation. At September 30, 1998, the Company was not operating any ACDC units
and the Company's only remaining franchisee had four ACDC units in operation.
In 1996 the Company introduced four programs in an effort to diversify
and broaden the Company's product and service mix: (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. With the exception of the sale of pre-paid calling cards, these
programs were discontinued in December 1997.
Effective December 31, 1996, the Company acquired Link International
Technologies, Inc. in consideration for the issuance of 168,539 shares of the
Company's Common Stock.
Effective January 30, 1998 the Company issued 550,000 shares of its
common stock to the shareholders of Moviebar, Incorporated and Vectorvision,
Incorporated 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 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.
Effective May 30, 1998 the Company acquired One Medical Services, Inc.
in consideration for 142,350 shares of common stock and 187,500 warrants
exercisable at $2.00 per share at any time prior to May 30, 2003. The Company
has also agreed to issue to the former owners of One Medical up to 1,485,000
additional shares of common stock depending on the future operating results of
One Medical. The number of shares to be issued will be determined by dividing
the quarterly net income of One Medical (for each fiscal quarter beginning June
30, 1998 and ending June 30, 2001), by the average closing price of the
Company's common stock for the five day trading period prior to the end of each
quarter. Using terminals developed by Link pharmacy customers can communicate
with medical vendors and suppliers and directly order home medical equipment.
<PAGE>
Year Ending June 30, 1998
During the year ending June 30, 1998 the Company's revenues declined as a
result of the suspension of the Company's ACDC program and the termination of
the following programs which were first introduced in 1996: (i) cellular
telephone activations, (ii) sale of long distance telephone service and (iii)
rental of cellular telephones using overnight courier service.
During fiscal 1998 the Company concentrated on its three new divisions:
Link, Movievision and One Medical Service. During the year ended June 30, 1998
revenues from the Link and Movie Vision divisions were $148,000 and $371,000
respectively. Revenues from the One Medical Service division, which was acquired
effective May 30, 1998, were not significant during fiscal 1998.
General and Administrative expenses as well as Selling and Marketing
expanses increased due to the acquisition of Link, Movie Vision, and One Medical
Service, the lease of the Company's production facility in Tampa and changes in
the management of the Company.
The following factors also contributed to the Company's loss during the
year ending June 30, 1998:
A. An expense of $1,687,422 as the result of issuing shares of stock,
options and warrants for services rendered.
B. In February 1998, the Company settled a lawsuit filed by a former
Master Licensee of ACDC units resulting in a special charge of $424,300. The
terms of the settlement require the Company to pay $115,000 over 21 months and
issue 300,000 shares of common stock to the former master licensee.
C. In March 1997, the Company entered into a License Agreement with
Cancall Cellular Communications, Inc. ("Cancall") whereby the Company provided
Cancall with a license to operate and/or distribute the Company's ACDC units,
prepaid calling card machines and point-of-sale terminals. The Licensing
Agreement also required Cancall to purchase a certain number of ACDC units and
point-of-sale terminals from the Company. Between March and September 1997, the
Company sold 30 ACDC units to Cancall for $705,000. In payment of the $500,000
licensing fee and the 30 ACDC units, Cancall issued 1,807,800 shares of it's
Class B Preferred Stock to the Company. As of September 30,1997 the Company had
valued the Cancall Preferred Stock at $1,310,000. Subsequent to September 30,
1997 the Company and Cancall ( i ) agreed to rescind the licensing agreement and
the sale of the ACDC units (ii) the equipment previously sold to Cancall were
returned to the Company and (iii) an expense of ($764,000) was recorded.
D. Between June through September 1996 the Company sold 30 ACDC units to a
master licensee in California resulting in gross revenues of $664,000. The
Company has not received payment for the units and a reserve of $374,980 (the
profit for the units sold) was recorded for uncollected receivables.
<PAGE>
E. The Company recorded a valuation reserve ($200,000) for the Company's
investment in Smartphone, a non consolidated subsidiary which sold prepaid
cellular telephones.
F. An increase in the ACDC depreciation and patent amortization rates due
to technological changes in the industry.
Year Ending June 30, l997
Revenues during the year ending June 30, 1997 increased from the
comparable period in 1996 due to the expansion of four programs which were
introduced in 1996 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. With the
exception of the sale of pre-paid calling cards, these programs were
discontinued in December 1997.
Revenues also increased as the result of a one-time licensing fee
($500,000) received pursuant to a License Agreement between the Company and
Cancall Cellular Communications, Inc. (Cancall). The License Agreement provided
Cancall with the right to operate and/or distribute the Company's ACDC units, as
well as Link's prepaid calling card machines and POS terminals (collectively the
"Products"). In consideration for the rights granted pursuant to the Licensing
Agreement, Cancall agreed to pay the Company $500,000 in shares of Cancall's
Class B Preferred stock. The Licensing Agreement also required Cancall to
purchase a certain number of ACDC units and POS terminals from the Company.
During the year ending June 30, 1997 the Company sold thirty ACDC units to
Cancall for $705,000. In payment of the $500,000 licensing fee and the thirty
ACDC units, Cancall issued 1,807,800 shares of it's Class B Preferred Stock to
the Company. Subsequent to June 30, 1997 the Company and Cancall (i) agreed to
rescind the licensing agreement and the sale of the ACDC units (ii) the
equipment previously sold to Cancall were returned to the Company and (iii) an
expense of ($764,000) was recorded.
The activation program of cellular telephones for members of the
Florida, Louisiana, and Mississippi AAA clubs began in January 1996. This
program allowed a AAA member to receive a free cellular telephone if the member
agreed to a one year cellular telephone service contract. The Company received a
commission for each activation. The Company discontinued this program in fiscal
1988.
Revenues from the rental of cellular telephones through ACDC units
decreased during the year ending June 30,1997 as the Company closed certain ACDC
locations that were not profitable.
As an alternative to selling ACDC units to franchisees the Company
entered into various master licensing arrangements with third parties. These
arrangements 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 June 30, 1997 the Company
had sold 30 ACDC units to third parties under master licensing arrangements,
<PAGE>
resulting in gross revenues of approximately $664,000, and had sold 10 ACDC
units to a corporation affiliated with certain former officers and directors of
the Company for $150,000. Although all of these sales occurred prior to December
31, 1996, as a result of credit terms extended by the Company approximately
$793,000 was still owed to the Company as of June 30, 1997 for these equipment
sales. The Company has not received payment for the units and subsequent to June
30, 1997 a reserve of $374,980 (the profit for the units sold) was recorded for
uncollected receivables.
Effective December 31, 1997 the Company acquired all the issued and
outstanding shares of Link International, Inc. ("Link"). Link manufactures and
distributes machines which dispense prepaid calling cards and terminals which
are used by merchants to perform a variety of transactions, including accepting
credit cards and bank debit cards in payment for sales of merchandise and
services. The terminals manufactured by Link are sometimes referred to as "POS
terminals". As a result of this acquisition, Link's revenue and expenses have
been consolidated with those of the Company for the six months ending June 30,
1997. During this six month period, Link's revenues from sales of equipment,
prepaid calling cards and technical service were approximately $60,000, which
amount excludes revenues attributable to the Licensing Agreement between the
Company and Cancall. During the six month period ending June 30, 1997 Link's
cost of sales accounted for 0.4% of the Company's consolidated cost of sales and
Link's other expenses accounted for approximately 1% of the Company's
consolidated operating expenses.
The increase in Cost of Sales during the year period ending June 30,
1997 reflects the acquisition of Link, the expansion of the Company's cellular
telephone rental, cellular telephone activation, prepaid calling cards and long
distance telephone programs.
Liquidity and Sources of Capital
During the year ending June 30, 1998 the Company's operations used
approximately $2,800,000 of cash.
In order to fund its operating losses, the Company sold shares of its
common stock in private placements and borrowed funds from private lenders. In
July 1998, the Company issued 1,402,500 shares of its common stock at $1.00 per
share, raising $1,172,125 net of $230,375 in offering related expenses.
The Company's scrip terminals are sold to a leasing Company which leases
the terminals back to the Company. The leased scrip terminals are placed with a
merchant free of charge. The Company receives a fee for each transaction
processed by the scrip terminal. The Company uses a portion of these fees to pay
the monthly charges for the leased terminals. The funds received from the sale
of the terminals to the leasing company are a source of cash to the Company.
Other than the foregoing, and any cash generated by the Company's operations,
the Company does not have any available credit, bank financing or other external
sources of liquidity. Due to historical operating losses, the Company's
operations have not been a source of liquidity. In order to obtain capital, the
<PAGE>
Company may need to sell additional shares of its common stock or borrow funds
from private lenders. During the next twelve months the Company will need
capital to fund its operations, repay outstanding debt and fund receivables and
inventory balances.
Although there can be no assurance in this regard, the Company expects
that during fiscal 1999 cash generated by operations and the sale of the
Company's point-of-sale and scrip terminals will satisfy the Company's cash
requirements. During the twelve months ending June 30, 1999 the Company's
anticipated capital requirements are $700,000 for inventory, and $150,000 for
equipment and fixed assests.
The Company may suffer future losses, in which case the Company will
need to obtain additional sources of capital in order to continue operations.
There can be no assurance, however, that the Company will be successful in
obtaining additional funding.
Year 2000 Issue
The "Year 2000" issue affects the Company's installed computer systems,
network elements, software applications and other business systems that have
time-sensitive programs that may not properly reflect or recognize the Year
2000. Because many computers and computer applications define dates by the last
two digits of the year, "00" may not be properly identified as the Year 2000.
This error could result in miscalculations or system failures. The Company is
conducting a review of its computer systems to identify those areas that could
be affected by the "Year 2000" issue and is developing an implementation plan to
ensure compliance. The Company presently believes that the Year 2000 problem
will not pose significant operational concerns nor have a material impact on the
financial position or results of operation in any given year. The total cost of
modifications and conversions is not expected to be material and will be
expensed as incurred. However, failures of computer systems maintained by third
parties could have a material impact on the Company's ability to conduct
business.
BUSINESS
SIMS Communications, Inc. (the "Company") was incorporated in Delaware
on August 15, 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. An ACDC unit is capable of dispensing from 1 to
12 cellular phones on an 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.
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.
<PAGE>
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. At September 30, 1998, the
Company was not operating any ACDC units and the Company's only remaining
franchisee had four ACDC units in operation.
In 1996 the Company introduced four programs in an effort to diversify
and broaden the Company's product and service mix: (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. With the exception of the sale of pre-paid calling cards, these four
programs were discontinued in December 1997.
Effective December 31, 1996 the Company acquired all the issued and
outstanding shares of Link International, Inc. ("Link"). Link manufactures and
distributes machines which dispense prepaid calling cards and terminals which
are used by merchants to perform a variety of transactions, including accepting
credit cards and bank debit cards in payment for sales of merchandise and
services. Unless otherwise indicted, all references to the Company's business
and operations included the business and operations of Link.
Effective January 30, 1998 the Company issued 550,000 shares of its
common stock to the shareholders of Moviebar, Incorporated and Vectorvision,
Incorporated 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 video cassette dispensing machines in approximately 140 hotels in the United
States.
Effective May 30, 1998 the Company acquired One Medical Service Inc.
The One Medical Service technology is used in the pharmaceutical market and
allows the pharmacy and its customers to communicate with medical vendors and
suppliers and directly order home medical equipment through a proprietary
point-of-sale terminal.
All historical share data in this report have been adjusted to
reflect the following stock splits relating to the Company's common stock:
June 1995: 2-for-1 forward split, February 1996: 1-for-10 reverse split,
February 1998: 1-for-4 reverse split.
The Company's executive offices are located at 18001 Cowan, Suite C&D,
Irvine, California 92614. The Company's telephone number is (949) 724-9094.
Link International Technologies, Inc.
Effective December 31, 1996, the Company acquired Link International
Technologies, Inc. ("Link") in consideration for the issuance of 168,539 shares
of the Company's Common Stock. For financial statement purposes the acquisition
was accounted for under the purchase method and the assets acquired from Link
(net of liabilities) were valued by the Company at approximately $600,000.
<PAGE>
Link has developed a series of state-of-the art pre-paid long distance
telephone card dispensing machines which allow for payment with bank debit
cards, credit cards or cash.
Link has developed and patented certain technologies which provide
unique features for its phone card vending machines. The first and most
important feature is that LINK's machine is the only vending machine in the
market which can individually activate prepaid phone cards (or other "value
stored" cards, including chip-embedded "smart" cards) at the point of sale. All
prepaid phone cards stored in LINK's machines are "dead" (i.e. "inactive") until
each one is individually activated once cash is received or a customer's credit
or debit card has been accepted by the machine and successfully processed. This
patented device, using a proprietary bar code technology, eliminates the risk of
fraud or theft as well as the need for large capital investment which is
required by other machines that dispense only pre-activated (or "live") cards.
The machines can be operated either by direct telephone line or wireless
technology, at the option of the customer. Second, although LINK's machines
accept cash and credit cards, Link's machines are the only vending devices that
requires the customer to use personal identification number when purchasing
prepaid phones cards with a bank debit card. This particular feature serves to
eliminate the expense (ie. "charge backs") to the merchant for mistakenly
accepting fraudulent or stolen credit cards.
Link has designed two versions of its prepaid telephone card machine.
Its first product (introduced in 1995) is a full sized stand-alone vending
machine which is used in locations where size is not important and where the
machine's lighted billboard signage is desired for advertising. Typical
locations include check cashing locations, office product stores, motels,
airports, universities, and other high traffic locations. This machine, with six
vending slots and a thermal graphic printer, offers other sales opportunities to
the merchant such as recharging cellular phone time, dispensing promotional
coupons, dispensing prepaid gas cards for service station chains, and selling
and dispensing tickets for concerts, sporting events, lotteries, ski lifts, and
the like. Although capable of dispensing a variety of products, Link has decided
to concentrate heavily on the market for prepaid telephone cards and plans to
install this machine at large regional accounts and chains.
All major hardware is subcontracted and virtually snaps into place
allowing this miniature dispensing machine to be moved and installed in under 30
minutes by one individual. The location for the machine needs only electrical
power and a telephone line. The machine requires very little maintenance and can
be connected to an on-line computer in order to monitor sales, cash on hand and
inventory requirements.
Link's phone card machines can also be used to dispense other items
such as:
- pre-paid gasoline cards
- smart chip cards
- coupons
- stamps
- sporting, theatrical and other event tickets
<PAGE>
Link has also developed a counter top point-of-sale transaction
terminal, ("known as the "Debitlink" terminal), primarily for use in the sale of
goods and services. This terminal, which accepts bank debit cards as well as
major credit cards, includes the capability of pre-paid long distance phone card
activation, customer frequency programs, check guarantee and pre-paid cellular
time activation. The Debitlink terminal uses the same technology and host
reporting as Link's phone card dispensing machines. The Company markets its
Debitlink to smaller stores, most of which do not have point-of-sale debit card
capability and to retail pharmacies. The Company began marketing Link's
Debitlink terminals in August 1997.
The Company receives revenues from sales of its Debitlink terminal and
for all transactions processed by the terminal. As of September 15, 1998
approximately 70 Debitlink terminals were in operation and 50 terminals were
awaiting installation.
Link also markets its proprietary scrip terminals which provide the
same benefits as cash dispensing ATM machines without the prohibitive costs to
the merchant. A customer using a bank debit card inserts the card into the
terminal and selects a dollar denomination ($5, $10, $20, etc.). The scrip
terminal dispenses a receipt to the customer which can be used to pay for
merchandise and/or services. The customer receives cash for any difference
between the dollar denomination of the scrip and the amount of the purchase.
Once the transaction is processed, funds are electronically transferred to the
merchant's bank account from the customer's bank account within 48 hours.
Scrip terminals appeal to fast food restaurants, convenience stores,
bars, pharmacies, arcades and other outlets where cash is needed for products or
services. While occupying little store space, scrip terminals increase sales by
giving customers purchasing power, thereby, generating impulse buying and larger
purchases. Similarly, consumers find scrip terminals beneficial due the their
convenience and the fact that they provide a safe alternative to isolated ATM's.
The Company receives a transaction fee (charged to the customer rather than the
retailer) for each transaction processed by the scrip terminal.
As of September 15, 1998 approximately 540 scrip terminals were in
operation.
Movie Vision
Effective January 30, 1998 the Company issued 550,000 shares of its
common stock to the 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
pictures, through automated dispensing units in hotels. Movie Vision currently
has video cassette dispensing machines in approximately 140 hotels in the United
States.
One-Medical
Effective May 30, 1998 the Company acquired One Medical Services, Inc.
in consideration for 142,350 shares of common stock and 187,500 warrants
<PAGE>
exercisable at $2.00 per share at any time prior to May 30, 2003. The Company
has also agreed to issue to the former owners of One Medical up to 1,485,000
additional shares of common stock depending on the future operating results of
One Medical. The number of shares to be issued will be determined by dividing
the quarterly net income of One Medical (for each fiscal quarter beginning June
30, 1998 and ending June 30, 2001), by the average closing price of the
Company's common stock for the five day trading period prior to the end of each
quarter.
One Medical provides a financial processing and communications network
for the Home Medical Equipment (HME) industry. Since the Company's DebitLink
terminal has the ability to process information and verify insurance medical
cards, this network can connect HME buyers with a network of HME vendors. This
proprietary network has been designated for the medical and managed healthcare
market, but the Company's primary focus at the present time is the retail
pharmacy industry.
The retail pharmacy industry has been one of the casualties of the
growing influence of managed healthcare. As efforts to control healthcare
spending increase, pharmacies have come under increasing pressure to lower
prices. As a result, the era of the locally owned and operated drugstores has
virtually ended as shrinking margins have forced a rapid consolidation in the
industry. Giant pharmacy chains now dominate the industry, taking advantage of
economics of scale in advertising, purchasing, and distribution. Thus, the
retail pharmaceutical industry is forced to look for other revenue streams and
efficiencies. The current home healthcare market is estimated to be $20 billion
annually and is expected to mushroom to $60 billion within the next several
years, representing up to 100 million potential customers. The driving forces
behind this growth is the aging population, managed care pressures for earlier
hospital discharges, advance home medical equipment technologies, government
cost-cutting imperatives, and a more active elderly population.
The One Medical network allows any pharmacy to be more competitive in
the HME marketplace by being able to offer over 23,000 products through an
automated catalogue process and a direct connection to local providers of
oxygen, appliance repair, nursing care, and other such services. Pharmacies in
the network are able to provide their customers with medical supplies and
equipment along with product information without sending the customer to another
location and thus losing control of the customer. As a result, the network
provides pharmacies with the opportunity to capture a greater percentage of the
managed healthcare market, generate additional revenues, and simultaneously
provide greater service and convenience to their customers.
The Company provides each pharmacy in the network with a compact,
modular, self contained kiosk that allows a customer to view, inspect, obtain
information and purchase a variety of HME equipment while at the local pharmacy.
The kiosk measures approximately 24" by 15" by 17" and contains an HME catalogue
of over 23,000 HME products, a directory of products and services offered by the
HME vendors, a telephone handset and a key pad. This "one stop" shopping service
is helpful for older, less healthy, and less mobile customers.
The One Medical network is comprised of the following components:
<PAGE>
Pharmacies. In order to join the network a pharmacy is required
to pay a monthly membership fee of $25. The pharmacy is also required to
purchase one of the Company's DebitLink terminals which, together with
installation, costs approximately $1,150. For each pharmacy within the network
the Company installs (free of charge to the pharmacy) the One Medical kiosk. To
insure quality control and customer satisfaction a pharmacy is required to
contact each pharmacy customer that purchased products or services through the
network. The pharmacy asks the customer certain questions concerning the quality
of the products and/or services purchased through the network. For administering
this quality control program, the pharmacy receives a fee for service from the
HME service center, the HME vendor, or the catalogue vendor which provided
products, equipment or services to the customer. Using the Company's DebitLink
terminal, the pharmacy also earns fees for activating pre-paid telephone cards
and through a computer link to the California Medi-Cal data base, the pharmacy
can instantly verify MEDI-CAL eligibility for California residents. The Company
charges the pharmacy a monthly fee for the MEDI-CAL verification service.
HME Service Center. The HME Service Center provides customers with
items such as wheelchairs, crutches, hospital beds, bathroom safety equipment,
respiratory therapy equipment, and medical supplies. Delivery to the customer is
made by van or truck. The typical HME Service Center supports 10 to 15
pharmacies and is located within ten miles of each pharmacy. In order to join
the network the HME Service Center is required to pay an initial membership fee
of $1,500 and a monthly fee of $150.
HME Vendors The HME vendors provide customers with items such as
oxygen concentrators, portable oxygen tanks, urological, ostomy, and skin care
products, home health supplies, wound care treatment, vascular support products,
breast pumps, diagnostic testing kits, orthopedic equipment, prosthesis, IV
equipment, and services such as home nursing care, product repair services
construction of ramps or lifts and conversions of automobiles or vans. Delivery
of equipment and supplies is made by van or truck. The typical HME vendor
supports 10 to 15 pharmacies and is located within ten miles of each pharmacy.
In order to join the network the HME vendor is required to pay an initial
membership fee of $500 and a monthly fee of $125. The Company also charges
vendors a per-minute fee for all calls made by pharmacy customers using the
network.
Catalogue Vendor The catalogue vendor allows the customer to purchase
over 23,000 home medical products such as walkers, canes, pillows, grab bars,
lotions, and dressings. Delivery is made by U.P.S. or, at the option of the
customer, overnight courier service. The Company also charges the catalogue
vendor a per-minute fee for all calls made by pharmacy customers using the
network.
1 One Medical Service. The Company's One Medical Service division
supplies the kiosk and the DebitLink terminal to the pharmacy, manages the
network and administers the transfer of funds between the members of the
network. At the present time, a major home medical equipment supplier pays for
the kiosk.
<PAGE>
A customer needing home medical equipment or services is directed to
the pharmacy's kiosk. The customer picks up the kiosk's telephone handset and,
using the keypad, selects a number which corresponds with the product or service
needed by the customer. After making the selection, the customer is connected to
a representative at the nearest HME service center or HME vendor, or with a
representative at the catalogue vendor. The customer then obtains any needed
information relating to the product or service from the representative and if
desired, orders the product or service. Billing for the product or service is
handled directly between the vendor and the customer. Pharmacy customers can
also access the One Medical network at home by dialing a toll-free number
provided by the pharmacy.
The Company's One Medical Service division receives revenue from a
variety of sources including initial membership fees, monthly membership dues,
prepaid phone-card sales, charges for calls made to HME service centers and
vendors by pharmacy customers, Medi-Cal verification fees, advertising rebates,
and fees for all transactions processed by the pharmacy's Debitlink terminal.
As of September 15, 1998, 100 pharmacies, three HME service centers,
fifteen HME vendors and one catalogue vendor were members of the One Medical
network.
Research and Development
During the years ending June 30, l997, and 1998, the Company spent
approximately $35,000, and $33,000 respectively, on research and development.
Research and development expenditures pertained to the design, development and
testing of enhancements to Link's DebitLink transaction terminals as well as
other on-line transaction terminals as well as other on-line transaction
terminals.
Franchise Operations
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.
As of April 15, 1998 only one Company franchisee was operating ACDC
units. Instafone of California, one of the Company's former franchisees, had
previously paid the Company $1,000,000 for deposits of ACDC units and
franchises. Instafone of California is no longer in the business of renting
cellular telephones and has advised the Company that it wants a refund of the
deposits paid to the Company. The Company is attempting to negotiate a
settlement with Instafone of California concerning this matter. The amounts
received by the Company for equipment and franchise deposits as of June 30, 1997
represented 90% of the total amounts recorded by the Company as a liability for
franchise and customer deposits on such date. See "Litigation".
<PAGE>
Competition
The Company competes with numerous other companies which are engaged in
the Company's lines of business. Many of these competitors have greater
financial and marketing resources than those of the Company.
Employees and Offices
As of September 15, 1998, the Company employed 38 persons on a
full-time basis. Fifteen 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.
The Company leases a 7,000 square foot production and office facility
in Tampa, Florida at an annual rent of $35,000. The lease on this facility
expires in June 2002. The Company's executive offices are located in Irvine,
California and consist of 4,900 square feet of space which are leased at an
annual rent of $67,000. This lease on the space expires in August 2003. The
Company's offices in Boca Raton, Florida consist of 1,400 square feet of space
and are leased for $15,000 per year pursuant to a lease which expires in
December 2001.
MANAGEMENT
The Company's present officers and directors are as follows:
Name Age Position
- ---- --- --------
Mark Bennett 39 President and a Director
Michael Malet 50 Executive Vice President and a
Director
Ian Hart 34 Chief Financial and Accounting
Officer
Marvin Berger 54 Executive Vice President of
Sales and Marketing
Chet Howard 54 Director
George Pursglove 46 Director
Cornelia Eldridge 57 Director
Each director holds office until his successor is duly elected by the
stockholders. Executive officers serve at the pleasure of the Board of
Directors.
The following sets forth certain information concerning the past and
present principal occupations of the Company's officers and directors.
<PAGE>
Mark Bennett has been the Company's President since November 1997 and
has been a Director of the Company since September 1997. Mr. Bennett has been
the President, Chief Executive Officer and a Director of Link International
Technologies, Inc., a subsidiary of the Company, since January 1996. Since April
1995 Mr. Bennett has also been the President of New View Technologies, a wholly
owned subsidiary of Link. From 1985 to 1987 Mr. Bennett was the General Manager
for MovieBar, a video vending company servicing the hotel and hospitality
industry, with installations in over 35,000 hotel rooms worldwide. In 1987 Mr.
Bennett became Vice President of International Operations and General Manager of
MovieBar and was subsequently named as President of MovieBar Company USA. In
December 1995 Mr. Bennett resigned his position with MovieBar to co-found Link.
Michael Malet has been the Company's Executive Vice President since
November 1997 and has been a director of the Company since September 1997. Mr.
Malet has been the President of New View Technologies, Inc., a wholly owned
subsidiary of Link International Technologies, Inc., since July 1995. From 1986
to 1987 Mr. Malet was the President of Vending Control Systems, a manufacturer
of video vending machines. Mr. Malet was a Sales Manager (1987-1990) and later
President (1991-1995) of Keyosk Corporation, a Company involved on the
development and sale of intelligent on-line vending machines, including the
Company's ACDC Units.
Ian Hart has been the Companys Chief Financial Officer since October 1998.
Between April 1998 and October 1998 Mr. Hart was the Chief Financial Officer for
Data Systems West. Between December 1997 and September 1998 Mr. Hart was the
Chief Financial Officer for D2 Electrical Contracting. From August 1995 to
December 1997 Mr. Hart was employed by Merrill Lynch as a financial consultant.
From March 1992 to August 1995 Mr. Hart was Vice President of Secondary
Marketing for Fallbrook Mortgage Corporation
Marvin S. Berger joined the Company as Vice President of Sales and
Marketing in April 1998. Prior to his joining the Company Mr. Berger was
Vice President of Sales and Special Accounts with SmarTalk
Telecommunications, Inc. a company at which his involvement began during the
founding stages. Mr. Berger has held marketing and management positions at
IBM, Data General Corporation and Visage Corporation.
Chet Howard has been a director of the Company since September 1997.
Since 1992 Mr. Howard has been a principal of Consolidated Business Group, a
company providing financial consulting services for development stage business.
From 1988 to 1992 Mr. Howard was Executive Vice President and Chief Financial
Officer of HQ Office Supplies, Inc.
George Pursglove has been a Director of the Company since September
1997. Since November 1995 Mr. Pursglove has been a principal of Consolidated
Business Group, a company providing financial consulting services to development
stage businesses. Between March 1993 and November 1995 Mr. Pursglove was a
Senior Divisional Merchandise Manager, and later Director of Merchandising for
<PAGE>
Office Depot. Between April 1992 and March 1993 Mr. Pursglove was Divisional
Merchandise Manager for the Price Company, a retailer of home improvement goods.
Cornelia Eldridge has been a Director of the Company since September
1998. Since 1981 Ms. Eldridge has been the President of Eldridge Associates,
Inc., a management consulting firm.
All of the Company's officers devote substantially all of their time
on the Company's business. Mr., Howard, Mr. Pursglove and Ms. Eldridge, as
directors, devote only a minimal amount of time to the Company.
Michael Malet and Chet Howard are members of the Company's audit
committee.
Change in Management
In November 1997 Melvin Leiner, Darren Marks, James Caprio and Donald
Marks resigned as officers and directors of the Company. David Barnhill also
resigned as a director in November 1997. In November 1997 Mark Bennett was
appointed President and Michael Malet was appointed Executive Vice President of
the Company. Bruce Schames continued as an officer of the Company. Mark Bennett,
Michael Malet, Chet Howard and George Pursglove remained directors of the
Company. In October 1998 David Markowski and Bruce Schames resigned as officers
of the Company. In October 1998 Ian Hart was appointed an officer of the
Company.
Executive Compensation
The following table sets forth in summary form the compensation
received by (i) the Chief Executive Officer of the Company and (ii) by each
other executive officer of the Company who received in excess of $100,000 during
the fiscal year ended June 30, 1998.
Other Re-
Annual stricted
Compen- Stock Options
Name and Fiscal Salary Bonus sation Awards Granted
Principal Position Year (1) (2) (3) (4)
(5)
Mark Bennett 1998 $111,350 -- $8,400 93,750 560,500
President and
Chief Executive
Officer
Michael Malet 1998 $100,923 -- $8,400 81,250 457,000
Executive Vice President
(1) The dollar value of base salary (cash and non-cash) received.
<PAGE>
(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. Amounts in the table represents automobile allowances.
(4) During the year ending June 30, 1998, the shares of the Company's common
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, 1998.
Name Shares Value
---- ------ -----
Mark Bennett 224,900 $393,575
Michael Malet 157,802 $276,154
(5) The shares of Common Stock to be received upon the exercise of all
stock options granted during the. year ending June 30, 1998.
Options Granted
The following tables set forth information concerning the options
granted during the fiscal year ended June 30, 1998, to the Company's officers
and directors, and the fiscal year-end value of all unexercised options
(regardless of when granted) held by these persons. As of October 15, 1998 none
of the options listed in table below have been exercised.
Number of
% of Total Securities Value of
Options Underlying Unexercised
Granted to Exercise Unexercised In-the-Money
Options Employees in Price Per Expiration Options at Options at
Name Granted(1) Fiscal Year Share Date FY End (#) FY End ($)
- ------ ----------- ----------- --------- ---------- ---------- -----------
Mark Bennett 560,500 38.5% $1.50 5/29/03 560,500 $140,000
Michael Malet 457,000 31.4% $1.50 5/29/03 457,000 $114,250
David Markowski 439,000 30.2% $1.50 5/29/03 439,000 $109,750
Chet Howard 25,000 1.7% $1.50 5/29/03 25,000 $6,250
George Pusglove 37,500 2.6% $1.50 5/29/03 37,500 $9,375
<PAGE>
(1) Represents shares issuable upon exercise of options. All options were
exercisable at June 30, 1998.
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 ending June 30, 1998 the Company
issued shares of common stock to the following directors in consideration of
services rendered to the Company:
Shares
Name Issued(1)
Chet Howard 25,000
George Pursglove 37,500
(1) Certain of these shares were issued pursuant to the Company's Stock Bonus
Plan. See "Stock Bonuses" below.
See the table titled "Options Granted" above for information concerning
stock options granted to the Company's officers and directors.
Except as disclosed elsewhere in this prospectust no director of the
Company received any form of compensation from the Company during the year ended
June 30, 1998.
<PAGE>
Stock Option and Bonus Plans
The Company has an Incentive Stock Option Plan, two Non-Qualified Stock
Option Plans and two Stock Bonus Plans. 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 will remain in effect until 2008
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.
In order to qualify for incentive stock option treatment under the
Internal Revenue Code, the following requirements must be complied with:
1. Options granted pursuant to the Plan must be exercised no later
than:
(a) The expiration of thirty (30) days after the date on which an
option holder's employment by the Company is terminated.
(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.
2. 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.
3. 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.
4. 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.
5. 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).
<PAGE>
Non-Qualified Stock Option Plans.
The Non-Qualified Stock Option Plans authorize the issuance of options
to purchase up to 3,00,000 shares of the Company's Common Stock. The Company's
employees, directors, officers, consultants and advisors are eligible to be
granted options pursuant to the Plans, 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 capital-raising
transaction. The option exercise price and expiration date are determined by the
Committee.
Stock Bonus Plans.
Up to 1,500,000 shares of Common Stock may be granted under the Stock
Bonus Plans. Such shares may consist, in whole or in part, of authorized but
unissued shares, or treasury shares. Under the Stock Bonus Plans, 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.
<PAGE>
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 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 September 30, 1998,
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 -- N/A --
Non-Qualified Stock Option
Plan 3,000,000 2,164,000 N/A 836,000
Stock Bonus Plan 1,500,000 N/A 749,625 750,375
Stock Bonuses
The Company, in accordance with the terms of its Stock Bonus Plans, has
issued shares of Common Stock to certain Company officers, employees and
consultants. The following persons (including former officers and directors)
received shares of the Company's common stock as stock bonuses:
Shares Issued as Stock Bonus
Name 1996 1997 1998
---- ---- ---- ----
Melvin Leiner * 62,500 12,500
Darren Marks * 62,500 12,500
James J. Caprio * 62,500
Donald Marks * 62,500
Bruce Schames * 18,750
<PAGE>
Mark Bennett 18,750
Michael Malet 5,000 16,250
David Markowski * 6,250
Chet Howard 6,250
George Pursglove 12,500
Other employees and
consultants as a group 192,500 86,875 111,250
------- ------ -------
461,250 116,875 171,500
======= ======= =======
* Former Officer and Director
Transactions with Former Management.
Melvin Leiner, Donald Marks, James Caprio and Darren Marks were officers and
directors of the Company between August 1991 and November 1997. See "Change
in Management" above.
In December 1995 the Company issued 10,945 shares of its Common Stock
to Melvin Leiner, Donald Marks, James Caprio and Darren Marks (43,778 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 6,250 shares of its Series B Preferred
Stock to Melvin Leiner, Donald Marks, James Caprio and Darren Marks (25,000
shares in total) as repayment of loans, each in the amount of $25,000, made by
such persons to the Company.
In June 1996 the Company issued 62,500 shares of its Common Stock to
Melvin Leiner, Donald Marks, James Caprio and Darren Marks (250,000 shares in
total) as repayment of loans, each in the amount of $125,000, made by such
persons to the Company.
In June 1996 the Company issued shares of its Common Stock to the
following former officers and directors in repayment of loans made by such
persons to the Company: Melvin Leiner: 25,922 shares in repayment of loan
of $51,843; Donald Marks: 28,588 shares in repayment of loan of $57,175;
James Caprio: 28,616 shares in repayment of loan of $57,232; and Darren
Marks: 21,860 shares in repayment of loan of $43,720.
In September 1996, the Company acquired a 10% interest in Smartphone,
Inc. (a corporation that sells a debit cellular telephone) from Melvin Leiner,
Donald Marks, James Caprio and Darren Marks in consideration for 100,000 shares
of the Company's common stock. The Company's investment in Smartphone was
recorded at $200,000, which was the original cost of the former officers' and
directors' investment in Smartphone.
During the year ended June 30, 1996, the Company sold five ACDC units
and related technology to Lonestar, Inc., a corporation owned by Melvin Leiner,
Darren Marks, James Caprio and Donald Marks for $350,000. The sales price for
these units was paid by offsetting advances of $350,000 which had previously
<PAGE>
been made to the Company by such officers. In December l996 the Company sold ten
additional ACDC units to Lonestar for $l50,000. Lonestar made an initial payment
of $15,000 for these ACDC units and has a balance of $123,859 owing to the
Company.
Transactions with Present Management
Effective January 30, 1998 the Company issued 550,000 shares of its common
stock to the 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
pictures, 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. Mark Bennett, the President and a director of the Company,
was shareholder of both Moviebar, Incorporated and Vectorvision, Incorporated
and received 55,000 shares of the Company's common stock in connection with this
transaction.
During the fiscal 1998 the Company issued 18,750 shares of its common
stock to David Markowski, a former officer of the Company in consideration for
services provided to the Company. The Company also issued Mr. Markowski 6,250
shares of common stock pursuant to the Company's stock bonus plan.
See "Stock Option and Bonus Plans" above for information concerning
stock options and stock bonuses granted to the Company's present officers and
directors.
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of September 30, 1998, information
with respect to the only persons owning beneficially 5% or more of the
outstanding Common Stock and the number and percentage of outstanding shares
owned by each director and officer and by the officers and directors as a group.
Unless otherwise indicated, each owner has sole voting and investment powers
over his shares of Common Stock.
Number of Percent of
Name and Address Shares (1) Class
(2)
Mark Bennett
18001 Cowan, Suite C&D
Irvine, CA 92614 224,900 3%
Michael Malet 157,802 2%
18001 Cowan, Suite C&D
Irvine, CA 92614
<PAGE>
Ian Hart -- --
18001 Cowan, Suite C&D
Irvine, CA 92614
Marvin Berger
18001 Cowan, Suite C&D
Irvine, CA 92614 80,000 1%
Chet Howard
1805 Apricot Glen Drive
Austin, TX 78746 25,000 *
George Pursglove
9380 N.W. 39 Court
Coral Springs, FL 33065 27,500 *
Cornelia Eldridge
4514 Elkhorn Road
Sun Valley, Idaho 83353 -- --
Officers and Directors as a
Group (7 persons) 516,202 7.1%
* Less than 1%
(2) Excludes shares issuable prior to December 31, 1998 upon the exercise of
options or warrants granted to the following persons:
Name Options exercisable prior to December 31, 1998
- ---- ----------------------------------------------
Mark Bennett 560,500
Michael Malet 457,000
Ian Hart --
Chet Howard 50,000
George Pursglove 50,000
(2) Includes shares referenced in footnote (1) above but excludes any other
shares issuable upon the exercise of any warrants or options or upon the
conversion of any promissory notes or other convertible securities. See
"Dilution and Comparative share data."
<PAGE>
SELLING SHAREHOLDERS
This Prospectus relates to:
1. The sale of 3,782,301 shares of the Common Stock of Sims
Communications, Inc. (the "Company") by the owners of such shares. The shares
were sold by the Company in various private offerings for cash, services
rendered, and in settlement of claims against the Company.
2. The sale of up to 336,315 shares of the Company's common stock
issuable upon the exercise of options and warrants. The options and warrants
were issued by the Company to:
(i) certain investors in connection with the Company's private
offerings.
(ii) Sales Agent's in connection with certain private offerings of
the Company's securities,
(iii) financial consultants for services provided to the
Company, and
(iv) to other third parties in settlement of claims and
liabilities.
The owners of the Common Stock referred to above, and the holders of
the options and warrants, to the extent they exercise the options and warrants
and receive shares of the Company's Common Stock, are referred to as the
"Selling Shareholders".
<PAGE>
The names of the Selling Shareholders are:
Name Shares Shares to be Sold Share Ownership
Shares Issuable This Offering After Offering(1)
Presently Owned Upon
Exercise
of
Options
or
Warrants
Maxwell K. Scheuerer 37,500 37,500
Maxwell B. Scheuerer 5,000 5,000 --
James Gilloon 12,500 12,500 --
Carl Schafer 47,500 37,500 10,000
Michael Pickens 125,000 125,000 --
Robert Herdina 1,250 1,250 --
Ann Lou Last 25,000 25,000 --
Fred Matulka 8,750 8,750 --
Anthony A. Cappola 5,000 5,000 --
Madeline A Esposito 5,000 5,000 --
William M.Goatley
Revocable Trust 88,648 35,000 53,648
Scott Lyng 15,000 5,000 10,000
Michael & Associates 110,000 110,000 --
Cary A. Paulis 10,000 10,000 --
James E. and Helen M. 6,000 6,000 --
Picou
Matthew Sakurda 18,750 10,000 8,750
Carl Shaifer 10,000 10,000 --
Kenneth Stilger 20,000 20,000 --
Franklin Stone 10,000 10,000 --
Alberta Tabony 55,000 5,000 50,000
Frank H. Harvey 43,750 40,000 3,750
Neils Lauersen 150,000 150,000 --
Nabih Akkawi 15,000 15,000 --
Warren Becker 10,000 10,000 --
Nancy and Richard Bixby 10,000 10,000 --
Lewis F. Bruce 10,000 10,000 --
Adrienne and Sal Coppola 17,500 17,500 --
Rodney J. Darling 30,000 30,000 --
Maher Fasheh 10,000 10,000 --
Rodney Fingleson 10,000 10,000 --
Ray C. Felshman Sr., IRA 50,000 50,000 --
Account
Ken Hiniker 25,000 25,000 --
<PAGE>
Errol Kaplan 45,000 45,000 --
Leslie Kasar 10,000 10,000 --
Steven D. Kremer, M --
Sterling I.G.A. 30,000 30,000
Mark J. Levy 10,000 10,000 --
Thomas M. Pisula 150,000 150,000 --
Mark A. Raifman 35,500 30,000 5,500
Larry C. Roark 100,000 100,000 --
Gregory Rubel 2,000 2,000 --
Glen L. Rufenach 20,000 20,000 --
Paul Sciarrino 10,000 10,000 --
Steven W. Seaworth 10,000 10,000 --
Scott Sibella 5,000 5,000 --
James Sink 225,000 25,000 125,000 125,000
Kenneth Stilger 25,000 25,000 --
Marc R. VanNess 25,000 25,000 --
Charles M. Wheet 15,000 15,000 --
Richard Clinton 20,000 20,000 --
Yoram Cohen 18,000 18,000
Dennis Cohen 5,000 5,000 --
Karolin Dadasahhakimi 75,000 75,000 --
Financial Processing --
Institutions, Inc. 50,000 50,000
Ian Garrun 5,000 5,000 --
Barry Halperin 125,000 125,000 --
Valerie Koff 5,000 5,000 --
Sanford I. Litchman --
Revocable Living Trust 50,000 50,000
Robert H. Mandelbaum 2,500 2,500 --
Randy and Luz Marks 50,000 50,000 --
Martin Marks 100,000 100,000 --
Arnold L. Rosen 464,000 464,000 --
Terence P. Scheckler 5,000 5,000 --
William Solfisburg 451,034 50,000 401,034
W.R. Smith Profit Trust 50,000 50,000 --
Allen Yasmeh 57,000 57,000 --
Jeffrey Zwiebel 235,000 235,000 --
David Schevel 3,000 3,000 --
Mervin Herson 3,000 3,000 --
Edward Haggerty 6,250 6,250
Harold E. Hamburg Trust 35,000 10,000 25,000
William Brennen 10,000 10,000
Pamela Buckley 10,000 10,000
F.J. Burroughs 14,000 14,000
Joyce Marshall 5,000 5,000
<PAGE>
William McBeath 50,000 50,000
Charles Merlis 20,000 20,000
Marvin Oishi 10,000 10,000
Johnny Smith 10,000 10,000
Thomas Snelgowski 20,000 20,000
Catherine Mead 1,000 1,000
John Cassara 15,000 10,000 25,000
Richard Glasgow 20,000 20,000 40,000
Albert Milstein 35,112 13,551 21,561
Melvin Liener 15,625 15,625
Darren Marks 15,625 15,625
Jim Caprio 15,625 15,625
Don Marks 15,625 15,625
Moviebar Co. 260,750 50,000 210,750
Jack Levit 275,000 50,000 225,000
Fernando DeMarquet 10,000 10,000 --
Yetta Levit 17,000 17,000
Howard Lefkowitz 1,125 1,125 --
Gerald Mendelovitz 375 375 --
Marcus G. Bebee 3,125 3,125 --
Peter E. Robbins 3,125 3,125 --
Herman and --
Marlena Goldblatt 1562.50 1562.50
Gabriel Herman 2,250 1562.50 1562.50 2,250
Jeff Kontir 1562.50 1562.50 --
Thomas
Oelschliger 8,594 1562.50 1562.50 8,594
Max Strauss 9,344 1562.50 1562.50 9,344
David Welch 3,125 3,125 --
Keith Cooper 18,125 1,875 1,875 18,125
Bernard Etra 750 750 --
Allen Franco 750 750 --
George Frost 1,875 1,875 --
Peter Joseph 36,250 3,750 3,750 36,250
Richard Kandel 817 1,875 1,875 817
Kandal & Son, Inc.P.S.P.
817 1,875 1,875 817
Werteim & Co.Retirement --
Plan,FBO RonaldLeibman
1,875 1,875
Wayne Katz 750 750 --
Ronald Liebmann 63,125 63,125 --
David McCooey 3,750 3,750 --
Albert Milstein 1,875 1,875 --
<PAGE>
Robert Rosenberg 17,043 1,875 1,875 17,043
Leonard Schoen 3,750 3,750 --
James Simanton,Revocable 7,500 7,500 --
Trust
Thomas, Thomas,Armstrong & 3,000 3,000 --
Niesen Retirement
Plan, FBO Charles
E. Thomas Jr
SRK Associates 1,875 1,875 --
Dennis Wallach 1,125 1,125 --
Dr. Lennart C. 2,025 2,025 --
Belok
Dr. Lennart C. 1,275 1,275 --
Belok MD PC
Sidney, Bors 1,875 1,875 --
Jean Cheng 3,250 3,250 --
--
Leon Ladd 50,000 50,000 --
Investor
RelationsInternational 12,500 12,500 25,000 --
Michael Carey 4,510 450
450 4,510
Baritex, Inc. 50,000 50,000 --
Small Business 50,000 50,000 --
Brokers, Inc.
Luge Financial 50,000 50,000 --
Corporation
E.B. Lyon IRA 37,500 37,500
SRG & Associates 12,500 12,500
Instacall -
Robert Herbol 300,000 100,000 200,000
Texas CapitalSecurities, Inc. 25,000 12,500 37,500
Harbor Financial, Inc. 29,250 (2) 29,250 (2)
Thomas Renna 18,000 8,250 (3) 26,250 (3)
1st Discount Brokerage, Inc. 25,000 25,000
SMP Financial Consultants 50,000 50,000
RJJ Capital Consultants 20,000 20,000
Wimbledon Investments 65,000 65,000
Continental Capital
& Equity Corporation 120,000 120,000
<PAGE>
(1) Amount represents less than 10% of the Company's common stock, except for
William Solfisburg, who will own 4.2% of the Company's common stock after this
offering.
(2) Texas Capital Securities, Inc. assigned 29,250 of its Warrants to this
person.
(3) Texas Capital Securities, Inc. assigned 8,250 of its Warrants to this
person.
Manner of Sale. The shares of Common Stock owned, or which may be
acquired, by the Selling Shareholders may be offered and sold by means of this
Prospectus from time to time as market conditions permit in the over-the-counter
market, or otherwise, at prices and terms then prevailing or at prices related
to the then-current market price, or in negotiated transactions. These shares
may be sold by one or more of the following methods, without limitation: (a) a
block trade in which a broker or dealer so engaged will attempt to sell the
shares as agent but may position and resell a portion of the block as principal
to facilitate the transaction; (b) purchases by a broker or dealer as principal
and resale by such broker or dealer for its account pursuant to this Prospectus;
(c) ordinary brokerage transactions and transactions in which the broker
solicits purchasers; and (d) face-to-face transactions between sellers and
purchasers without a broker/dealer. In effecting sales, brokers or dealers
engaged by the Selling Shareholders may arrange for other brokers or dealers to
participate. Such brokers or dealers may receive commissions or discounts from
Selling Shareholders in amounts to be negotiated.
The Selling Shareholders and any broker/dealers who act in connection
with the sale of the Shares hereunder may be deemed to be "underwriters" within
the meaning of ss.2(11) of the Securities Acts of 1933, and any commissions
received by them and profit on any resale of the Shares as principal might be
deemed to be underwriting discounts and commissions under the Securities Act.
The Company has agreed to indemnify the Selling Shareholders and any securities
broker/dealers who may be deemed to be underwriters against certain liabilities,
including liabilities under the Securities Act as underwriters or otherwise.
The Company has advised the Selling Shareholders that they and any
securities broker/dealers or others who may be deemed to be statutory
underwriters will be subject to the Prospectus delivery requirements under the
Securities Act of 1933. The Company has also advised each Selling Shareholder
that in the event of a "distribution" of the shares owned by the Selling
Shareholder, such Selling Shareholder, any "affiliated purchasers", and any
broker/dealer or other person who participates in such distribution may be
subject to Rule 102 under the Securities Exchange Act of 1934 ("1934 Act") until
their participation in that distribution is completed. A "distribution" is
defined in Rule 102 as an offering of securities "that is distinguished from
ordinary trading transactions by the magnitude of the offering and the presence
of special selling efforts and selling methods". The Company has also advised
the Selling Shareholders that Rule 101 under the 1934 Act prohibits any
"stabilizing bid" or "stabilizing purchase" for the purpose of pegging, fixing
or stabilizing the price of the Common Stock in connection with this offering.
<PAGE>
Rule 102 makes it unlawful for any person who is participating in a
distribution to bid for or purchase stock of the same class as is the subject of
the distribution. If Rule 102 applies to the offer and sale of any of the
Shares, then participating broker/dealers will be obligated to cease
market-making activities nine business days prior to their participation in the
offer and sale of such Shares and may not recommence market-making activities
until their participation in the distribution has been completed. If Rule 102
applies to one or more of the principal market-makers in the Company's Common
Stock, the market price of such stock could be adversely affected.
DESCRIPTION OF SECURITIES
Common Stock
The Company is authorized to issue 40,000,000 shares of Common Stock,
(the "Common Stock"). Holders of Common Stock are each entitled to cast one vote
for each share held of record on all matters presented to shareholders.
Cumulative voting is not allowed; hence, the holders of a majority of the
outstanding Common Stock can elect all directors.
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 is not obligated to
declare a dividend. It is not anticipated that dividends will be paid in the
foreseeable future.
Holders of Common Stock do not have preemptive rights to subscribe to
additional shares if issued by the Company. There are no conversion, redemption,
sinking fund or similar provisions regarding the Common Stock. All of the
outstanding shares of Common Stock are fully paid and nonassessable and all of
the shares of Common Stock offered as a component of the Units will be, upon
issuance, fully paid and non-assessable.
Preferred Stock
The Company is authorized to issue up to 300,000 shares of Preferred
Stock. The Company's Articles of Incorporation provide that the Board of
Directors has the authority to divide the Preferred Stock into series and,
within the limitations provided by Delaware statute, to fix by resolution the
voting power, designations, preferences, and relative participation, special
rights, and the qualifications, limitations or restrictions of the shares of any
series so established. As the Board of Directors has authority to establish the
terms of, and to issue, the Preferred Stock without shareholder approval, the
Preferred Stock could be issued to defend against any attempted takeover of the
Company.
In April 1995, the Company's directors established the Company's Series
A Preferred Stock and authorized the issuance of up to 50,000 shares of Series A
Preferred Stock as part of this series. Each share of Series A Preferred Stock
is entitled to a dividend at the rate of $1.60 per share when, as and if
<PAGE>
declared by the Board of Directors out of funds legally available for the
payment of dividends. Dividends not declared by the Board of Directors do not
cumulate. Upon any liquidation or dissolution of the Company, each outstanding
share of Series A Preferred Stock is entitled to distribution of $20 per share
prior to any distribution to the holders of the Company's Common Stock. Each
share of Series A Preferred Stock is entitled to one vote per share and at any
time after July 1, 1999 is convertible into 0.2 of a share of the Company's
Common Stock. Subsequent to the establishment of the Series A Preferred Stock,
the Company issued 25,250 shares of Series A Preferred Stock to eight persons in
consideration for the termination of their franchises with the Company.
In March 1996, the Company's directors established the Company's Series
B Preferred Stock and authorized the issuance of up to 100,000 shares of Series
B Preferred Stock as part of this series. Each share of Series B Preferred Stock
is entitled to a dividend at the rate of $0.15 per share when, as and if
declared by the Board of Directors out of funds legally available for the
payment of dividends. Dividends not declared by the Board of Directors do not
cumulate. Upon any liquidation or dissolution of the Company, each outstanding
share of Series B Preferred Stock is entitled to distribution of $1.00 per share
prior to any distribution to the holders of the Company's Common Stock. Each
share of Series B Preferred Stock is entitled to one vote per share and is
convertible into 0.25 of a share of the Company's Common Stock. 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.
Transfer Agent
Corporate Stock Transfer, Inc., of Denver, Colorado, is the transfer
agent for the Company's Common Stock.
EXPERTS
The consolidated balance sheet of the Company as of June 30, l998 and
the Statements of Operations, Shareholders' Equity and Cash Flows for the two
years then ended have been included herein in reliance on the report of Ehrhardt
Keefe Steiner & Hottman P.C., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
LITIGATION
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, 1998 the Company had a liability of $724,000
for franchise and equipment deposits paid by this franchisee to the Company.
<PAGE>
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.
INDEMNIFICATION
The Delaware General Corporation Law authorize indemnification of a
director, officer, employee or agent of the Company against expenses incurred by
him in connection with any action, suit, or proceeding to which he is named a
party by reason of his having acted or served in such capacity, except for
liabilities arising from his own misconduct or negligence in performance of his
duty. In addition, even a director, officer, employee, or agent of the Company
who was found liable for misconduct or negligence in the performance of his duty
may obtain such indemnification if, in view of all the circumstances in the
case, a court of competent jurisdiction determines such person is fairly and
reasonably entitled to indemnification. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers, or persons controlling the Company pursuant to the
foregoing provisions, the Company has been informed that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is therefore unenforceable.
<PAGE>
Table of Contents
Page
Independent Auditors' Report.............................................F - 1
Financial Statements
Consolidated Balance Sheet............................................F - 2
Consolidated Statements of Operations.................................F - 3
Consolidated Statements of Stockholders' Equity.......................F - 4
Consolidated Statements of Cash Flows.................................F - 5
Notes to Consolidated Financial Statements...............................F - 6
<PAGE>
F - 1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
SIMS Communications, Inc. and Subsidiaries
Irvine, California
We have audited the accompanying consolidated balance sheet of SIMS
Communications, Inc. and Subsidiaries as of June 30, 1998 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended June 30, 1998 and 1997. 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, 1998 and the results of their operations
and cash flows for the years ended June 30, 1998 and 1997 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 15, 1998
Denver, Colorado
<PAGE>
SIMS COMMUNICATIONS, INC. AND SUBSIDIARIES
See notes to consolidated financial statements.
Consolidated Balance Sheet
June 30, 1998
Assets
Current assets
Cash and cash equivalents (Note 7) $ 263,878
Accounts receivables, less allowance for doubtful
accounts of $27,584 128,984
Inventories 452,473
Prepaid expenses 92,667
Notes receivable, current portion (Notes 5 and 10) 150,000
----------
Total current assets 1,088,002
Property and equipment (Note 4) 2,589,447
----------
Other assets
Notes receivable less allowance of $400,902 445,360
(Notes 5 and 10)
Patents, net of accumulated amortization of 401,121
$115,624
Goodwill (Note 3) 952,069
Other 126,752
----------
Total other assets 1,925,302
----------
Total assets $5,602,751
==========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 543,058
Accrued expenses 599,770
Bank line of credit (Note 7) 250,000
Franchise deposits 827,661
Current maturities of long-term debt (Note 8) 547,794
Current obligations under capital lease (Note 8) 16,732
---------
Total current liabilities 2,785,015
Long-term liabilities
Long-term debt (Note 8) 500,853
Obligations under capital lease (Note 8) 86,674
----------
Total long-term liabilities 587,527
----------
Total liabilities 3,372,542
----------
Commitments and contingencies (Notes 5 and 16)
Stockholders' equity (Notes 11, 12 and 13) Preferred stock, Series A, B and C,
$.001 par
value, 300,000 shares authorized - 50,000 (A),
100,000 (B), 500 (C) and 149,500 (Undesignated),
125,250 shares issued and outstanding 125
(liquidation preference of $605,000)
Common stock $.0001 par value 40,000,000 shares
authorized, 7,959,033 issued and outstanding 796
Additional paid in capital 22,646,232
Accumulated deficit (20,416,944)
-----------
Total stockholders' equity 2,230,209
----------
Total liabilities and stockholders' equity $5,602,751
=========
<PAGE>
Consolidated Statements of Operations
Year Ended June 30,
1998 1997
Revenue (Note 15)
Telecommunications $ 446,524 $ 2,923,532
Financial processing 147,533 -
Automated Movie Rentals 371,416 -
Medical transaction processing 15,478 -
-------- ----------
Total revenue 980,951 2,923,532
-------- ----------
Cost of goods sold 523,479 1,608,572
-------- ----------
Gross profit 457,472 1,314,960
-------- ----------
Operating expenses
General and administrative 2,718,064 1,774,162
Depreciation and amortization 474,372 247,990
Selling expenses 1,058,252 1,128,395
Equity based compensation 1,687,422 1,431,741
Loss on termination of licensing and equipment
agreement (Note 6) 764,000 -
Research and development 32,760 34,686
Litigation settlement (Note 16) 444,300 -
-------- ----------
Total expenses 7,179,170 4,616,974
-------- ----------
Operating loss (6,721,698) (3,302,014)
Other income (expense)
Interest expense (158,263) (71,537)
Interest income 28,424 30,924
Loss on write down of investment (Note 6) (200,000) -
Other 5,526 -
--------- ----------
(324,313) (40,613)
--------- ----------
Loss from continuing operations before income taxes 7,046,011) (3,342,627)
Income tax benefit (Note 9) - -
--------- ----------
Net loss from continuing operations (7,046,011) (3,342,627)
--------- ----------
Net (loss) income from discontinued operations $ (63,737) $ 553,731
(Note 18) ========= ==========
Net loss (7,109,748) $(2,788,896)
========== ===========
Basic and diluted loss per share from continuing $ (1.78) $ (2.00)
operations =========== ============
Basic and diluted (loss) earnings per share from
discontinued operations (Note 18) $ (.01) $ .33
======== ============
Basic and diluted net loss per share $ (1.79) $ (1.67)
============= ============
Weighted average common shares outstanding
(Notes 12 and 13) 3,961,389 1,666,823
=========== ============
<PAGE>
SIMS COMMUNICATIONS, INC. AND SUBSIDIARIES
See notes to consolidated financial statements.
F - 5
Consolidated Statements of Stockholders' Equity
Years Ended June 30, 1998 and 1997
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Subscribed Preferred Stock Preferred Stock Preferred Stock
Subscribed Series A Series B
Additional
Number of Number of Number of
Shares Amount Shares Amount Shares Amount
Balance - June 30, 1996 125,250 $ 365,000 - $ - - $ -
Issuance of common stock issued
for investments (Notes 6 - - - - - -
Issuance of common stock fo
services (Note 12) - - - - - -
Issuance of common stock for cash
(ranging from $2.00 to
$2.80 per share), net of $198,160
in offering costs (Note - - - - - -
12)
Issuance of common stock upon
conversion of notes payable
(ranging from $2.00 to $2.80 per
share) (Note 12) - - - - - -
Imputed value of stock options
granted for consulting - - - - - -
Subscribed preferred stock issued (125,250) (365,000) 25,250 25 100,000 100
Net loss - - - - - -
Balance June 30, 1997 - - 25,250 25 100,000 100
Issuance of common stock in
connection with acquisitions - - - - - -
(Notes 3 and 12)
Issuance of common stock for cash
(ranging from $.80 to
$1.00) net offering costs of
$633,421 (Note 12) - - - - - -
Issuance of common stock for
conversion of notes payable
to investors in connection with
a Regulation S offering, - - - - - -
net of expenses of $162,956
(Note 12)
Issuance of common stock in
exchange for services (Note 12) - - - - - -
Unearned compensation expense
(Note 12) - - - - - -
Issuance of common stock upon
conversion of notes payable - - - - - -
and interest (Note 12)
Issuance of common stock upon
conversion of former officer
notes payable and accrued
salaries (Note 12) - - - - - -
Issuance of common stock in
connection with litigation - - - - - -
settlement (Notes 12 and 16)
Imputed value of stock option
grants in exchange for
consulting and other services
(Note 12) - - - - - -
Net loss - - - - - -
------- -------- -------- -------- ------- ------
Balance - June 30, 1998 - $ - 25,250 $ 25 100,000 $ 100
======= ========== ======= ========== ======== =======
</TABLE>
<PAGE>
Consolidated Statements of Stockholders' Equity
Years Ended June 30, 1998 and 1997
<TABLE>
<S> <C> <C> <C> <C> <C>
Number of Paid-in Accumulated
Shares Amount Capital Deficit Total
Balance - June 30, 1996 1,007,477 $ 101 $11,061,037 $(10,518,300) $907,838
Issuance of common stock issued for 268,539 27 799,973 - 800,000
investments (Notes 6 and 12)
Issuance of common stock for services (Note 223,125 22 927,956 - 927,978
12)
Issuance of common stock for cash (ranging
from $2.00 to $2.80 573,143 57 1,176,583 - 1,176,640
per share), net of $198,160 in offering
costs (Note 12)
Issuance of common stock upon conversion of
notes payable 48,215 5 124,995 - 125,000
(ranging from $2.00 to $2.80 per share)
(Note 12)
Imputed value of stock options granted for - - 679,264 - 679,264
consulting services and
interest (Note 12)
Subscribed preferred stock issued - - 364,875 - -
Net loss - - - (2,788,896) (2,788,896)
-------- ---- --------- ----------- -----------
Balance June 30, 1997 2,120,499 212 15,134,683 (13,307,196 1,827,824
Issuance of common stock in connection with 692,350 69 1,327,691 - 1,327,760
acquisitions (Notes 3
and 12)
Issuance of common stock for cash (ranging
from $.80 to $1.00) 2,246,500 225 1,475,855 - 1,476,080
net offering costs of $633,421 (Note 12)
Issuance of common stock for conversion of
notes payable to 846,827 85 936,959 - 937,044
investors in connection with a Regulation S
offering, net of
expenses of $162,956 (Note 12)
Issuance of common stock in exchange for 1,015,749 102 1,696,134 - 1,696,236
services (Note 12)
Unearned compensation expense (Note 12) - - (136,475) - (136,475)
Issuance of common stock upon conversion of 506,791 50 707,039 - 707,089
notes payable and
interest (Note 12)
Issuance of common stock upon conversion of
former officer notes 230,317 23 419,174 - 419,197
payable and accrued salaries (Note 12)
Issuance of common stock in connection with 300,000 30 309,270 - 309,300
litigation settlement
(Notes 12 and 16)
Imputed value of stock option grants in
exchange for consulting - - 775,902 - 775,902
and other services (Note 12)
Net loss - - - (7,109,748) 7,109,748)
--------- ---- ----------- ----------- ---------
Balance - June 30, 1998 7,959,033 $ 796 $22,646,232 $(20,416,944) $2,230,209
========= ===== =========== ============ ===========
</TABLE>
<PAGE>
Consolidated Statements of Cash Flows
Year Ended June 30,
1998 1997
Cash flows from operating activities
Net loss $(7,109,748) $(2,788,896)
Adjustments to reconcile net loss to net cash ----------- ----------
used in operating activities
Depreciation 400,552 206,186
Amortization 73,820 41,804
Imputed value of options granted for services 127,661 503,763
and interest
Sales settled by receipt of notes receivable - (430,000)
Impairment of investment 200,000 -
Termination of licensing and equipment agreement 764,000 -
Provision for uncollectible notes receivable 400,902 -
Officer salaries converted to equity 419,197 -
Sales settled by receipt of investments - (1,310,000)
Stock issued for services and in connection
with litigation settlement 1,869,061 927,978
Changes in assets and liabilities
Accounts and other receivables 167,832 116,737
Inventories 51,574 662,655
Prepaid expenses 113,193 28,545
Accounts payable (147,349) 104,909
Accrued expenses (103,339) (5,002)
Franchise deposits and customer deposits (11,493) 88,391
---------- ----------
4,325,611 935,966
---------- ----------
Net cash used in operating activities (2,784,137) (1,852,930)
---------- ----------
Cash flows from investing activities
(Advances) repayments on notes receivable, net (54,372) 7,110
Acquisition costs paid, net of cash acquired (424,095) -
Capital expenditures (34,122) (13,522)
Change in other assets 62,664 (24,855)
------- --------
Net cash used in investing activities (449,925) (31,267)
--------- --------
Cash flows from financing activities
Proceeds from issuance of long-term debt 805,459 797,500
(Payments on) proceeds from officer advances (65,809) 50,209
Payments under capital lease obligation (10,200) (7,565)
Proceeds from issuance of common stock, net 2,820,781 1,176,640
Payments on long-term debt (348,191) (159,229)
--------- ---------
Net cash provided by financing activities 3,202,040 1,857,555
--------- ---------
Net decrease in cash (32,022) (26,642)
Cash and cash equivalents at beginning of year 295,900 322,542
------- --------
Cash and cash equivalents at end of year $ 263,878 $ 295,900
======== =======
Supplemental disclosure of cash flows information
Cash paid during the year for interest was $169,345 (1998)
and $70,710 (1997).
Non-cash investing and financing activities (Note 17)
<PAGE>
SIMS COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
F - 31
Note 1 - Organization and Significant Accounting Policies
Organization
Sims Communications, Inc. and Subsidiaries 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 telecommunications and
cellular and prepaid telephone activities. Currently, the Company provides low
cost, turnkey point-of-sale (POS) transaction automation solutions to retailers
and pharmacies. These solutions include a comprehensive network of transaction
processing applications using its patented, intelligent DebitLink POS terminal
with custom software. Functions include processing on-line credit card and
medical reimbursement approvals, processing automated home medical equipment
product orders and payments, 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. Additionally, the Company rents videocassettes and
cellular phones through automated dispensing units.
Principles of Consolidation
The consolidated financial statements include the accounts of SIMS
COMMUNICATIONS, Inc. and its wholly owned subsidiaries SIMS Franchise Group
Inc., Cellex Communications Inc. (Note 18), SIMS Communications International,
Inc., Link International Technologies, Inc. and its wholly owned subsidiaries
New View Technologies, Inc., Link Dispensing Systems, Inc., and Southeast Phone
Card, Inc.; additionally, the consolidated financial statements include the
accounts of One Medical Service, Inc., Moviebar Company USA, Inc., and Vector
Vision, Inc. since their respective date of acquisition (Note 3). 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.
<PAGE>
Note 1 - Organization and Significant Accounting Policies (continued)
Inventories
Inventories consist primarily of automated video dispensing units, video
cassette players, movie video cassettes, debitlink data transmission units and
other associated miscellaneous parts and 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.
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. Common shares issuable
upon the exercise of convertible notes and common stock options and warrants are
excluded from the weighted average number of shares since their effect is
anti-dilutive.
Advertising
Advertising costs are expensed as incurred.
Goodwill
The excess of the cost of the net tangible and identifiable intangible assets of
acquired businesses is stated at cost and will be amortized over seven years.
Patents
Patent costs are those costs related to filing for patents and the cost
allocated to the patents based upon business acquisitions. These costs are
amortized on a straight-line basis over the estimated useful live of seven
years.
<PAGE>
Note 1 - Organization and Significant Accounting Policies (continued)
Fair Value of Financial Instruments
The carrying amounts of financial instruments including cash and cash
equivalents, receivables, accounts payable, and accrued expenses approximated
fair value as of June 30, 1998 because of the relatively short maturity of these
instruments.
The carrying amounts of debt issued approximate fair value because interest
rates on these instruments approximate market interest rates and a significant
portion are classified as current maturities.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Impairment of Long-Lived Assets
The Company follows the Statement of Financial Accounting Standards (SFAS No.
121) "Accounting for the Impairment of Long-Lived Assets." Under the provisions
of this statement, the Company has evaluated its long-lived assets for financial
impairment and will continue to evaluate them as events or changes in
circumstances indicate that the carrying amount of such assets may not be fully
recoverable.
The Company evaluates the recoverability of long-lived assets not held for sale
by measuring the carrying amount of the assets against the estimated
undiscounted cash flows associated with them. At the time such evaluations
indicate that the future undiscounted cash flows of certain long-lived assets
are not sufficient to recover the carrying value of such assets, the assets are
adjusted to their fair values.
Revenue Recognition
Telecommunications revenue is recognized upon the sale and delivery of equipment
upon activation of a customers cellular account, upon the completion of a
customer phone rental and upon delivery of prepaid calling cards. Automated
movie rental revenues are recognized at the time of rental and upon delivery of
prepaid calling cards. Financial and medical transaction processing revenues are
recognized at the time of transaction.
<PAGE>
Note 1 - Organization and Significant Accounting Policies (continued)
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 and receivables. 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 grants credit to hotels that the Company has placed
automated movie rental units in. The Company periodically performs credit
analysis and monitors the financial condition of its clients in order to
minimize credit risk. Additionally, the Company attempts to limit its note
receivable credit risk by maintaining sufficient collateral.
Reclassifications
Certain accounts in the June 30, 1997 financial statements have been
reclassified to conform to the June 30, 1998 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. During the year ended June 30,
1998, the Company continued to suffer recurring losses from operations in excess
of $7,100,000, resulting in an accumulated deficit of approximately $20,400,000.
However, in July 1998, the Company raised approximately $1,170,000 in a private
placement offering and is continuing to look for additional equity capital.
Additionally, the Company is in the process of negotiating the sale or placement
of a significant number of the point-of-sale transaction automation processing
units with retailers and pharmacies located throughout California, Florida and
New York. As of September 15, 1998, the Company has placed or sold approximately
600 of these units. The Company also plans to place a significant number of
rental cellular telephone dispensing units into hotels where the Company
currently has the automated videocassette dispensing units. There can be no
assurances that the Company will be successful in obtaining additional equity
financing or be able to generate significant profits from the operations
described above. The consolidated financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern.
<PAGE>
Note 3 - Acquisitions
Moviebar Company USA, Inc. and Vector Vision, Inc.
In January 1998, the Company purchased the net assets of Moviebar Company USA,
Inc. and all of the outstanding stock of Vector Vision, Inc., valued at
$1,126,714 in exchange for 550,000 shares of the Company's common stock.
Additionally, the Company issued options to purchase 25,000 shares of the
Company's common stock at $ 2.20 per share (Notes 11 and 12). The acquired
Companies rent motion picture video cassettes through automated dispensing units
that are located in hotels throughout the United States. The acquisition was
accounted for under the purchase method of accounting.
The aggregate purchase price has been allocated to the net assets purchased
based on the fair market values at the date of acquisition, as follows:
Cash $ 6,518
Accounts receivable 90,928
Inventory 24,500
Property and equipment 1,127,768
Accounts payable (123,000)
$1,126,714
The common stock issued in connection with the acquisition was recorded at the
market value of the stock at the date of the acquisition of $2.00 per share.
No pro forma statements of operations are presented as the effect would not be
material to the Company's operations.
One Medical Services, Inc.
In June 1998, the Company purchased all of the outstanding stock of One Medical
Services, Inc., ("One Medical") valued at $1,067,398 in exchange for 142,350
shares of the Company's common stock and additional consideration detailed
below. Additionally, the Company issued options to purchase 187,000 shares of
the Company's common stock at $ 2.00 per share (Notes 11 and 12). The Company
has also agreed to issue to the former owners of One Medical up to 1,485,000
additional shares of common stock depending on the future operating results of
One Medical. One Medical, has developed, in conjunction with the Company, a
communications and transaction platform which allows pharmacies, insurance
companies, medical providers and suppliers to process transactions through a
Debit Link terminal for such items as ordering, medical reimbursement approval
and payment. The acquisition was accounted for under the purchase method of
accounting.
<PAGE>
Note 3 - Acquisitions (continued)
One Medical Services, Inc. (continued)
The aggregate purchase price has been allocated to the net assets purchased
based on the fair market values at the date of acquisition, as follows:
Cash $ 13,047
Fixed Assets 2,282
Contract Values 100,000
Goodwill 952,069
$1,067,398
Acquisition costs $ 443,660
Promissory note assumed 182,108
Fair value of common stock and options issued 441,630
$1,067,398
The common stock issued in connection was recorded at the market value of the
stock at the date of the acquisition of $1.60 per share.
No pro forma statements of operations are presented as the effect would not be
material to the Company's operations.
Note 4 - Property and Equipment
Property and equipment consist of the following:
June 30,
1998
Property and equipment
Vehicles $ 20,608
Furniture and fixtures 107,209
Machinery and equipment 3,350,437
Software 52,000
Less accumulated depreciation (940,807)
$2,589,447
<PAGE>
Note 5 - Notes Receivable
The Company made advances to and entered into a joint venture agreement with
Commonwealth Group International, Inc. and Frederick C. Sayle. The $150,000 note
receivable bears interest at a rate of 10% per annum, with principal and
interest payable by February 1, 1998. 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.
As of June 30, 1997, the Company had sold equipment to a customer for a total
sales price of $664,000. During the year ended June 30, 1997, a company was
contracted to provide services necessary to get the units operational, but
failed to perform. As such, all amounts due related to the sales have been
extended. The total amount of $664,000 is payable under the terms of a note
receivable which bears interest at 8.5%. Principal and interest is payable
commencing by December 31, 1997 in equal monthly installments of approximately
$14,000 through November 30, 2002. No payments have been received as of June 30,
1998. Accordingly, the Company has impaired the outstanding balance to $289,020,
which represents the value of the underlying assets, by recording a reserve of
$374,980.
Note 6 - Investments
Smartphone
During the year ended June 30, 1997, the Company acquired a 10% minority
interest in Smartphone, Inc. (a company that sells prepaid cellular air time)
from certain former officers and former directors of the Company at their
original cost basis of $200,000. This was effected by the issuance of 100,000
shares of common stock which were valued at $2.00 a share. As of June 30, 1998,
in accordance with the company's policy of accounting for impairment of
long-lived assets, the entire $200,000 has been impaired.
Cancall
During the year ended June 30, 1997, the Company sold 30 rental cellular
telephone dispensing units and 100 telephone debit card dispensers for $810,000
as well as entering into a licensing agreement for $500,000 with Cancall
Cellular Communications, Inc., (Cancall) for a total price of $1,310,000. The
licensing agreement entitles Cancall the right to market, distribute and operate
the Company's products and trademarks on an exclusive basis within the
territories of Canada and Europe and on a non-exclusive basis within the
territories of the United States and Asia. The exclusive license within the
European territory is subject to certain minimum purchase commitments the must
be met by Cancall over a two year period. In consideration for the above
transaction, the Company received 1,807,800 shares of Cancall's Class A $ 1.00
par value preferred stock. The preferred stock can be converted into 3,013,000
shares of Cancall's common stock at a rate of $.60(Canadian) per share after a
one year mandatory holding period. The transaction was valued at the cost of the
underlying goods sold.
<PAGE>
Note 6 - Investments (continued)
Cancall (continued)
During the year ended June 30, 1998, the Company terminated the licensing and
equipment agreement and the equipment was returned to the Company, the preferred
stock was returned to Cancall and a loss provision for $764,000 was provided.
Note 7 - Bank Line of Credit
The Company maintains a secured revolving line of credit with a bank for up to
$250,000. The balance at June 30, 1998 was approximately $250,000. The
line-of-credit is secured by a restricted certificate of deposit with a balance
at June 30, 1998 of approximately $250,000. The line-of-credit bears interest at
5.77% payable monthly. The line-of-credit expires June 5, 1999.
Note 8 - Notes Payable and Capital Leases
June 30,
1998
Promissory note payable at 10% interest payable monthly
commencing September 15, 1995. Balance of principal is
payable in full by September, 1999. As additional
consideration, the Company agrees to pay the note
holder 13.0% of all profits received through the
Company's agreements with Commonwealth
Group International, Inc. (Note 5). $ 310,348
8.0% convertible notes payable - individuals, interest
payable quarterly, principal due at maturity dates
ranging from August 1997 to May 1998. Debt includes
conversion to common stock feature with conversion rates
ranging from $1.25 to $2.50 per share. Additionally,
each note holder was issued options to purchase
shares of the Company's stock (Note 12 325,000
)
Note payable - corporation, bearing interest at bank prime
plus 1% (9.5% at June 30, 1998), principal
payments of $5,000 plus interest due monthly 20,000
through September 1998.
<PAGE>
Note 8 - Notes Payable and Capital Leases (continued)
June 30,
1998
Non interest bearing note payable - individual,
principal payable in monthly
installments of $1,500
through June 2000. 45,000
Note payable - bank, bearing interest at 11%,
principal and interest payable in monthly
installments of $541 through June 14, 1998. 1,191
Collateralized by equipment.
Note payable - corporation, bearing interest at 12%,
monthly principal and interest payments of $2,500,
due August 2001. Debt includes conversion to
common stock feature that provides for conversion at any
time while the note is outstanding at a conversion price
based on the previous five day average. Collateralized
by substantially all the company's assets. 182,108
Note payable - individuals, bearing interest at 10%,
principal and interest due in full on September 20,
1998. Debt includes conversion agreement that provides
for conversion into the Company's common stock at $1.00
per share from September 13, 1998 until maturity. 100,000
Note payable - individual, principal and interest due in
full July 1998, 10% of principal balance
borrowed interest charge. 65,000
1,048,647
Less current maturities (547,794)
Total $ 500,853
Principal payment on notes payable subsequent to June 30, 1998
are as follows:
Year Ending June 30,
1999 $ 547,794
2000 335,359
2001 10,718
2002 154,776
$1,048,647
<PAGE>
Note 8 - Notes Payable and Capital Leases (continued)
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, 1998.
Year Ending June 30,
1999 $ 33,295
2000 33,295
2001 33,295
2002 32,197
2003 19,250
-------
Total 151,332
Less interest (47,926)
--------
103,406
Less current portion (16,732)
--------
$ 86,674
========
The assets recorded under capital leases are as follows:
Furniture, fixtures and equipment $105,531
Less accumulated amortization (24,900)
---------
$ 80,631
=========
Amortization expense for equipment under capital lease was $14,679 and $2,271
for the years ended June 30, 1998 and 1997, respectively.
Note 9 - 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.
<PAGE>
Note 9 - Income Taxes (continued)
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, 1998 was
approximately $6,500,000. Accordingly, there is no net deferred tax asset
reflected in the accompanying consolidated financial statements.
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,
1998 1997
Statutory federal income tax rate (benefit) (34.0)% (34.0)%
Valuation allowance for net operating loss 34.0 34.0
Effective tax rate (benefit) - % - %
======= =======
The deferred tax asset consists of the following:
June 30,
1998
Total long-term deferred tax asset $6,500,000
Valuation allowance (6,500,000)
$ -
===========
At June 30, 1998, the Company has approximately $19,000,000 of net operating
loss carryforwards for income tax reporting purposes which expire in 2007
through 2013. During 1995 and 1998, there were transactions involving changes in
ownership which could restrict the utilization of net operating loss
carryforwards in the future.
<PAGE>
Note 10 - Related Party
Sales
As of June 30, 1997, the Company sold equipment and other technology to
Lonestar, Inc., an entity owned entirely by former officers of the Company. The
sales price was $500,000 and was used to satisfy $365,000 of former officer
advances payable and created a $135,000 note receivable. The note receivable
bears interest at 8.25% and is payable in equal monthly installments of
principal and interest of approximately $2,750 commencing April 1997 through
March 2002. As of June 30, 1998, the outstanding balance was $96,340 net of an
allowance of $30,000.
During the fiscal year ended June 30, 1997, former officers sold telephone debit
card dispensers to the Company for a sales price of $30,600 which was recorded
as officer advances payable.
During the fiscal year ended June 30, 1997, the Company purchased a 10% interest
in Smartphone, Inc. from former officers of the Company (Note 16).
Officer Advances Payable
During the years ended June 30, 1998 and 1997, former officers advanced amounts
to the Company to help fund operations and meet obligations. At June 30, 1998
and 1997, $0 and $65,809, respectively, was outstanding and due on demand to
certain former officers and former directors of the Company. During the year
ended June 30, 1998, the Company converted to common stock amounts outstanding
to these former officers related to advances and accrued salaries. A total of
$419,197 was converted to 230,317 shares of common stock.
Note 11 - 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 1,250,000
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.
<PAGE>
Note 11 - Stock Option and Bonus Plans (continued)
Incentive Stock Option Plan (continued)
In order for the stock options to qualify for Incentive Stock Option treatment:
1. 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.
2. Options may not be exercised until one year following the date of grant.
Options granted to an employee 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.
3. 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 3,000,000
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.
<PAGE>
Note 11 - Stock Option and Bonus Plans (continued)
Non-Qualified Stock Option Plan (continued)
The following is a summary of options and warrants granted:
Non-Qualified Options Exercise
Incentive Stock Issued Not Price
Stock Options Related to Per
Options a Plan Share
Outstanding June 30, 1996 45,000 - - $22.00-$26.00
Options expired - - - -
Options exercised - - - -
Options granted 692,250 10,000 202,313 4.00-13.00
Outstanding June 30, 1997 737,250 10,000 202,313 4.00-26.00
Options expired 225,000 - - 8.00
Options exercised - - - -
Options granted 1,556,500 250,000 676,500 .80-8.00
Outstanding June 30, 1998 2,068,750 260,000 878,813 $ .80-26.00
The Company has the following stock options outstanding as of June 30, 1998:
Currently
Options Exercise Exercisable
Outstanding Price xpiration Date Options
22,500 22.00 September 1999 22,500
22,500 26.00 September 1999 22,500
275,000 4.00 December 2006 275,000
161,000 4.00 December 2001 161,000
22,500 13.00 September 1999 22,500
8,750 5.00 December 2006 8,750
5,000 5.00 September 1999 5,000
5,000 8.00 September 1999 5,000
22,500 11.00 September 1999 22,500
40,000 2.00 December 2001 40,000
25,000 5.00 December 2001 25,000
25,000 5.00 August 2001 25,000
12,500 7.00 December 2001 12,500
18,750 4.00 May 2000 18,750
9,375 10.00 May 2000 9,375
10,938 5.00 May 2000 10,938
<PAGE>
Note 11 - Stock Option and Bonus Plans (continued)
Non-Qualified Stock Option Plan (continued)
The Company has the following stock options outstanding as of June 30, 1998:
Currently
Options Exercise Exercisable
Outstanding Price Expiration Date Options
38,250 8.00 May 2000-July 2002 38,250
1,556,500 1.50 May 2003 1,556,500
372,500 2.00 January-June 2002 372,500
250,000 5.00 July 2002 250,000
16,500 8.00 May 2000 16,500
187,500 1.32 January 2002 187,500
50,000 1.00 February 2003 50,000
25,000 .80 December 2000 25,000
25,000 5.00 January 2003 25,000
------- ----- --------
3,207,563 $ 2.91 3,207,563
========= ==== =========
The Company accounts for stock based compensation in accordance with Financial
Accounting Standards Board Statement No. 123, "Accounting for Stock Based
Compensation," ("FAS 123") which encourages, but does not require, companies to
recognize compensation expense for grants of stock, stock options and other
equity instruments to employees. FAS 123 requires the recognition of expense for
such grants, described above, to acquire goods and services from all
nonemployees. Additionally, although expense recognition is not mandatory for
issuances to employees, FAS 123 requires companies that choose not to adopt the
new fair value accounting rules to disclose pro forma net income and earnings
per share information using the new method.
The Company has adopted the disclosure-only provisions of FAS 123. Accordingly,
no compensation cost has been recognized for the issuances of stock options to
employees. For the years ended June 30, 1998 and 1997, employees of the Company
were issued options to purchase a total of 1,806,500 and 724,750 shares of the
Company's common stock, respectively, at rates ranging from $1.50 to $13 per
share expiring from September 1999 to December 2006.
<PAGE>
Note 11 - Stock Option and Bonus Plans (continued)
Non-Qualified Stock Option Plan (continued)
Had compensation cost for the Company's issuances of stock options during the
years ended June 30, 1998 and 1997 been determined based on the fair value at
the date of grant consistent with the provisions of FAS 123, the Company's 1998
and 1997 net loss and loss per share would have been increased to the pro forma
amounts indicated below:
June 30,
1998 1997
Net loss - as reported $(7,109,748) $(2,788,896)
Net loss - pro forma $(9,227,346) $(6,429,498)
Net loss per share - as reported $ (1.79) $ (1.67)
Net loss per share - pro forma $ (2.33) $ (3.86)
The Company utilizes the Black-Scholes options-pricing model to calculate the
fair value of each individual issuance of options or warrants with the following
assumptions used for grants during the year ended June 30, 1998; dividends yield
of 0.0%; expected average annual volatility of 133.86%; average annual risk-free
interest rate of 5.5%; and expected terms averaging 2 years.
Stock Bonus Plan
Up to 1,500,000 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. As of
June 30, 1998, 749,625 shares of the Company's common stock have been issued
under the Stock Bonus Plan.
Note 12 - Stockholders' Equity
Common Stock
The Company is authorized to issue 40,000,000 shares of $.0001 par value Common
Stock.
<PAGE>
Note 12 - Stockholders' Equity (continued)
Preferred Stock
The Company is authorized to issue up to 300,000 shares of $.001 par value
Preferred Stock. The Board of Directors has the authority to divide the
Preferred Stock into series and, within the certain limitations, to set the
relevant terms of such series created.
In April 1995, the Company's former directors established the Company's Series A
Preferred Stock and authorized the issuance of up to 50,000 shares. Each share
of series A Preferred Stock is entitled to a dividend at the rate of $1.60 per
share when, as and if declared by the Board of Directors. Dividends not declared
do not cumulate. Additionally, each share of Series A Preferred Stock is
convertible into .80 shares of the Company's Common Stock at any time after July
1, 1999. Upon any liquidation or dissolution of the Company, each outstanding
share of Series A Preferred Stock is entitled to distribution of $20 per share
prior to any distribution to the holders of the Company's common stock. As of
June 30, 1998, the Company has 25,250 shares of Series A Preferred Stock issued
and outstanding.
In March 1996, the Company's former directors established the Company's Series B
Preferred Stock and authorized the issuance of up to 100,000 shares. Each share
of series B Preferred Stock is entitled to a dividend at the rate of $.15 per
share when, as and if declared by the Board of Directors. Dividends not declared
do not cumulate. Additionally, each share of Series B Preferred Stock is
convertible into one share of the Company's Common Stock. Upon any liquidation
or dissolution of the Company, each outstanding share of Series B Preferred
Stock is entitled to distribution of $1.00 per share prior to any distribution
to the holders of the Company's common stock. As of June 30, 1998, the Company
has 100,000 shares of Series B Preferred Stock issued and outstanding.
In December 1997, the Company's former directors established the Company's
Series C 8% Cumulative Convertible Preferred Stock ("Series C Preferred Stock")
and authorized the issuance of up to 500 shares. Each share of the Series C
Preferred Stock is entitled to a dividend at the rate of $.08 per share and has
a stated value of $ 1,000 per share. Dividends on all shares of the Series C
Preferred Stock shall begin to accrue and cumulate from the date of issuance.
Additionally, each share of Series C Preferred Stock is convertible into shares
of the Company's Common Stock at an adjustable conversion rate. Upon any
liquidation or dissolution of the Company, each outstanding share of Series C
Preferred Stock is entitled to distribution of the stated amount per share prior
to any distribution to the holders of the Company's common stock. As of June 30,
1998, there were no shares of Series C Preferred Stock issued and outstanding.
For the years ended June 30, 1998 and 1997, the Company did not declare any
dividends payable.
<PAGE>
Note 12 - Stockholders' Equity (continued)
Warrants
In conjunction with the Company's February, 1995 Public Offering, the Company
issued 1,811,250 Series A Warrants and 1,811,250 Series B Warrants. Every block
of five Series A warrants entitles the holder to purchase one share of the
Company's Common Stock at a price of $ 35.00 per share until February 10, 1998.
Every block of five Series B warrants entitles the holder to purchase one share
of the Company's Common Stock for $ 45.00 per share until February 10, 1998.
Under specific conditions, the Company may redeem both the Series A and Series B
Warrants. During the year ended June 30, 1998, these warrants expired.
Equity Transactions
During the year ended June 30, 1998, the following equity transactions occurred:
The Company acquired all of the outstanding stock of Vector Vision, Inc. and the
net assets of MovieBar Company USA, Inc. valued at $1,100,000 in exchange for
550,000 shares of the Company's common stock (Note 3). Additionally, the Company
issued options to purchase 25,000 shares of the Company's common stock at $2.20.
These options expire January 2003. These options have an imputed value of
$26,714 that was allocated to the value of the assets as part of the purchase
price.
The Company acquired all of the outstanding stock of One Medical Service Inc.
valued at $227,760 in exchange for 142,350 shares of the Company's common stock
(Note 3). Additionally, the Company issued options to purchase 187,500 shares of
the Company's common stock at $2.00. These options expire May 2003. These
options have an imputed value of $213,870 that was allocated as part of the
purchase price to goodwill.
The Company issued 2,246,500 shares of the Company's common stock at rates
ranging from $ .80 per share to $ 1.00 per share in private placements raising
$1,476,080 net of $254,546 in offering related expenses and $407,657 of imputed
option value. Additionally, the Company issued options to purchase 354,000
shares of the Company's common stock at rates ranging from $.80 to $2.00. These
options expire May 2000 and January 2002. These options have an imputed value of
$407,657 that was included in offering expenses.
The Company sold $1,100,000 of convertible notes to investors in connection with
a Regulation S offering raising $937,044 net of $162,956 in related expenses.
These notes were converted to 846,827 shares of the Company's common stock.
<PAGE>
Note 12 - Stockholders' Equity (continued)
Equity Transactions (continued)
During the year ended June 30, 1998, the following equity transactions occurred
(continued):
The Company issued 1,015,749 shares of the Company's common stock for $1,696,236
of professional services and consulting received. 265,000 shares of the stock
issued has a two year vesting period. As such, $136,475 of unearned compensation
expense has been recorded and will be amortized to expense over a one-year
period. Additionally, the Company issued options to purchase 110,000 shares of
the Company's common stock at rates ranging from $1.00 to $5.00. These options
expire January 2003. $127,661 of expense has been recognized based on imputed
values ranging from $.84 to $1.33 per option.
The Company converted $707,089 of convertible debt and accrued interest payable
to 506,791 shares of the Company's stock at rates ranging from $.40 to $1.60 per
share.
The Company issued 230,317 shares of its common stock in repayment of former
officer notes and accrued salaries of $419,197.
The Company issued 300,000 shares of its common stock valued at $309,300 in
connection with the litigation settlement with a former Instafone master license
holder (Note 16).
During the year ended June 30, 1997, the following equity transactions occurred:
The Company acquired a 10% minority interest in Smartphone valued at $200,000
for 100,000 shares of the Company's common stock (Note 5).
The Company acquired Link Technologies, Inc. and Subsidiaries for 168,539 shares
of the Company's common stock with a value of $600,000 (Note 17).
The Company issued 223,150 shares of the Company's common stock for $927,978 of
professional services received.
The Company issued 200,000 shares and 348,143 shares at $2.00 per share and
$2.80 per share in private placements, respectively, raising $1,176,640 net of
$198,160 in offering costs. The Company also issued 25,000 shares to the
underwriter in connection with these offerings.
The Company converted $125,000 of convertible debt to 48,215 shares of the
Company's stock at rates ranging from $2.00 to $2.80 per share.
The Company issued options to purchase 62,500 shares of the Company's Common
Stock at rates ranging from $5.00 to $7.00 per share in exchange for
professional consulting services. $325,578 of expense has been recognized at
imputed values ranging from $1.23 to $1.38 per option. These options expire from
August 2001 to December 2001.
<PAGE>
Note 12 - Stockholders' Equity (continued)
Equity Transactions (continued)
During the year ended June 30, 1997, the following equity transactions occurred
(continued):
The Company issued options to purchase 77,313 shares of the Company's common
stock at rates ranging from $4.00 to $10.00 per share in connection with the 8%
convertible notes payable. These options have an imputed value of $353,686 based
on rates ranging from $1.01 to $1.29. The amount was recorded as deferred loan
costs and is being amortized over the life of the loans. As of June 30, 1998,
$353,686 has been expensed. These options expire from May 2000 to July 2002.
Note 13 - Stock Splits
In March 1998, the Company declared 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 these split.
Note 14 - Significant Customers
As of June 30, 1998, a franchise and stockholder accounts for $724,264 (89%) of
the franchise and customer deposits liability.
As of June 30, 1997, one corporation accounted for approximately $500,000 (100%)
of licensing revenue. One Corporation accounted for $985,000 (79%) of equipment
and other revenue. Another franchisee and stockholder accounts for $724,264
(85%) of the franchise and customer deposits.
<PAGE>
Note 15 - Business Segments
The Company has four reportable segments: telecommunications, financial
processing, automated movie rentals and medical transaction processing. The
telecommunications segment is responsible for the sales and processing of
cellular telephone activations and rentals, prepaid cellular phone cards and
other telecommunications related services. The financial processing segment has
developed, in conjunction with the Company's intelligent "Debit Link" system, a
monetary transaction processing platform that eliminates the need for ATM's used
primarily in major fast food chains. The automated movie rentals segment rents
videocassettes through automated dispensing units in hotels, primarily located
in the states of Florida and California. The medical transaction processing
segment has developed, in conjunction with the Company's intelligent "Debit
Link" system, a communications and transaction processing platform which allows
pharmacies to access on-line credit card and medical reimbursement approval and
automated product ordering and payment. The accounting policies of the segments
are the same as those described in the summary of significant accounting
policies. The Company's reportable segments are strategic business units that
offer different products and services. They are managed separately because each
business requires different technology and marketing strategies.
Operating results and other financial data are presented for the four reportable
segments of the Company for the years ended June 30, 1998 and 1997. Net revenue
includes sales to external customers within that segment. There are no
significant transfers between segments. Cost of goods sold includes costs
associated with net revenue within the segments. Depreciation and amortization
includes expenses related to depreciation and amortization directly allocated to
the segment. Segment income (loss) does not include general and administrative
expenses, other income (expense) items or income taxes. Identifiable assets are
those assets used in segment operations, which consist primarily of cash,
receivables, inventory, prepaid expenses, machinery, equipment and goodwill.
Corporate assets are principally patents and other assets.
Tele- Automated Medical Corporate
Communi- Financial Movie Transaction And Consoli-
cation Processing Rental Processing Other dated
June 30,1998:
Net revenues $446,524 $ 147,533 $ 371,416 $ 15,478 $ - $ 980,951
Cost of $245,468 $ 128,133 $ 145,040 $ 4,838 $ - $ 523,479
goods sold
Depreciation
and $245,700 $ - $ 94,058 $ - $ 34,614 $ 474,372
amortization
Segment
profit $(44,644) $ 19,400 $ 132,318 $ 10,640 $(134,614) $ 16,900)
(loss)
Identi-
fiable $ 2,224,685 $467,962 $1,450,122 $1,058,714 $401,268 $5,602,751
assets
<PAGE>
Note 15 - Business Segments (continued)
Tele- Automated Medical Corporate
Communi- Financial Movie Transaction And Consoli-
cation Processing Rental Processing Other dated
Medical
June 30, 1997:
Net revenues $ 2,923,532 $ - $ - $ - $ - $2,923,532
Cost of good $ 1,608,572 $ - $ - $ - $ - $1,608,572
sold
Depreciation
and $ 190,612 $ - $ - $ - $ 57,378 $ 247,990
amortization
Segment profit $1,124,348 $ - $ - $ - $ (57,378) $1,066,970
(loss)
Identifiable $ 5,069,232 $ $ $ $ 474,941 $5,544,173
assets
Note 16 - Commitments and Contingencies
Operating Leases
The Company leases administrative offices and warehouse locations under
noncancelable operating leases in California, Florida and New Jersey. The
minimum annual rent generally increases each year by an amount based in the
Consumer Price Index. The Company is also generally 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 5 years. Rental expense for the
years ended June 30, 1998 and 1997 was $113,275 and $101,039, respectively.
Future minimum lease commitments at June 30, 1998 are as follows:
Year Ending June 30,
1999 $ 287,000
2000 238,000
2001 236,000
2002 192,000
2003 119,000
Thereafter 105,000
$1,177,000
<PAGE>
Note 16 - Commitments and Contingencies (continued)
Employment Agreements
The Company has entered into two year employment agreements with its two most
senior officers. The agreements entitle the officers to an annual salary of $
144,000 and $ 120,000, respectively and options to purchase 560,500 and 457,000
shares of the Company's common stock, respectively. The options have stated
exercise prices of $1.50 per share and are exercisable until May 2003. As
additional compensation, each officer is entitled to receive an incentive bonus
computed based upon annual Company revenues from operations and is entitled to
other benefits, including such items as an automobile allowance, health and life
insurance, vacation and sick pay benefits.
The Company has also entered into a three year employment agreement with an
officer of a subsidiary of the Company commencing on June 1, 1998. The officer
is entitled to a salary of $96,000 per year. As additional compensation, the
officer is entitled to receive incentive bonus stock options computed based upon
annual performance criteria and is entitled to other benefits, including such
items as an automobile allowance, health and life insurance, vacation and sick
pay benefits.
Additionally, the Company has entered into three year employment agreements with
another officer and three key employees. These agreements amount to a total of
$259,000 in base compensation. In connection with these agreements, 43,274
shares of the Company's common stock and options to purchase up to 44,000 shares
of the Company's common stock at rates ranging from $1.00 to $2.00 were issued.
These agreements are automatically renewable for a period of two years after the
third anniversary date. As additional compensation, each individual is entitled
to receive an incentive bonus computed based upon annual performance criteria as
determined in the applicable agreements and is entitled to certain other
benefits, including such items as an automobile allowance, health and life
insurance, vacation and sick pay benefits. Two of the agreements entitle the
individual to additional compensation of $ 92.50 for each POS transaction
automation terminal placed in service or sold.
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, 1998, Cellex has remitted $22,818 in profit
participation payments to this individual. Effective December 1997, the Company
discontinued the operations of Cellex (Note 18).
<PAGE>
Note 16 - Commitments and Contingencies (continued)
Consulting Agreements
The Company has entered into various consulting agreements with outside
consultants. These agreements entitle the consultant to issuances of common
stock and options as well as cash compensation in exchange for consulting
services relating to such things as raising additional debt and equity capital,
sales development, investor and public relations and general strategic business
consulting. For the year ended June 30, 1998, the Company has issued 483,551
shares of common stock and options to acquire 100,000 shares of common stock at
rates ranging from 1.00 to 5.00 per share in exchange for consulting services
valued at $ 1,029,412. As of June 30, 1998, $ 20,000 remained payable pursuant
to the terms of one of the consulting agreements. No other outstanding
obligations existed as of June 30, 1998 pursuant to the terms of the remaining
consulting agreements.
Litigation
During the year ended June 30, 1998, an action was brought against subsidiary,
Vector Vision, Inc. The litigation alleged the former employee was owed
approximately $80,000 in un-reimbursed expenses and monies advanced to the
company. The Company settled the matter for approximately $50,000. As security
for the settlement, the Company gave the individual a collateral assignment of
revenue generated from a location using the Company's automated movie rental
system as well as related equipment and agreed to have a judgment of $80,000
entered against them should they default in payment. The Company has the $50,000
liability accrued in accounts payable at June 30, 1998.
During February 1998, the Company reached a settlement with a former master
license holder for Holland, Belgium and Germany. The Company issued 300,000
shares of common stock valued at $309,300 and agreed to pay $135,000 in cash. As
of June 30, 1998, the remaining cash payment due of $90,000 is recorded in
accrued expenses.
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 attempting to negotiate a
settlement and has approximately $724,000 accrued relating to this obligation.
The Company is also involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations, or liquidity.
<PAGE>
Note 17 - Statements of Cash Flows
During the fiscal year ended June 30, 1998:
The Company acquired $44,096 of fixed assets through capital leases.
The Company converted $707,089 of convertible notes and interest payable to
506,791 shares of common stock. The Company converted $419,197 of officer notes
payable and salaries to 230,317 shares of common stock.
The Company incurred various noncash transactions related to their business
acquisitions (Note 3).
The Company transferred $603,652 of ACDC units and equipment from inventory to
fixed assets in anticipation of placing these units at Company owned sites.
The Company terminated a licensing and equipment agreement which resulted in the
return of $441,000 of ACDC units and equipment into fixed assets and the
reversal of $105,000 of deferred revenue.
During the fiscal year ended June 30, 1997:
The Company bought back franchisees by entering into debt obligations totaling
$135,000 and $147,000, respectively, equal amounts of inventory and other assets
were received by the Company.
The Company issued 100,000 shares of common stock for a 10% interest in
Smartphone which was valued at $200,000. The Company converted an account
receivable to a note receivable in the amount of $150,000.
The Company acquired Link Technologies, Inc., and Subsidiaries for 168,539
shares of common stock, with a value of $600,000.
The Company acquired fixed assets of $45,535 through a capital lease.
The Company converted $125,000 of convertible notes payable to 48,215 shares of
common stock.
The Company purchased $30,600 of prepaid calling card dispensing machines from
officers of the Company and was recorded as a notes payable to officers.
<PAGE>
Note 17 - Statements of Cash Flows (continued)
During the fiscal year ended June 30, 1997 (continued):
The Company issued stock options to individuals as an inducement to provide
financing pursuant to the 8% convertible notes payable. The options had an
imputed value of $353,686. As of June 30, 1997, $178,185 has been amortized to
expense with the remaining $175,501 recorded as deferred loan costs and included
in prepaids and other current assets (Note 12).
Note 18 - Discontinued Operations
Effective December 1997, the Company decided to discontinue the operations of
Cellex communications Inc., which provided cellular activation and prepaid
cellular time services. The Company expects no additional revenues or expenses
and has no material remaining assets or liabilities. For the year ended June 30,
1997, there was no loss on the disposal of the segment and the discontinued
operations resulted in a loss of $63,737. The prior year statement of operations
has been reclassified to present the operating results of Cellex Communications,
Inc. as a discontinued operation with income from discontinued operations of
$553,731 for the year ended June 30, 1997.
Note 19 - Subsequent Event
In July 1998, the Company issued 1,402,500 shares of its common stock at $1.00
per share raising $1,172,125 net of $230,375 in offering related expenses.
