SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,1999
Commission File No. 0-25474
SIMS COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 65-0287558
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18001 Cowan, Suites C & D, Irvine CA 92614
(address of principal executive offices) (Zip Code)
(949) 261-6665
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) or the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes_X___ No____
As of May 13, 1999, the Company had 14,994,110 shares of Common Stock issued and
outstanding.
Page 1 of 16 Pages
<PAGE>
PART I. FINANCIAL INFORMATION
Part 1. Financial Information
Item 1. Index to Financial Statements
SIMS COMMUNICATIONS, INC.
CONSOLIDATED FINANCIAL STATEMENTS Page
Consolidated Balance Sheets at
March 31,1999 and June 30, 1998 3-4
Consolidated Statements of Operations for the Three and
Nine Months Ended March 31, 1999 and 1998 5
Consolidated Statement of Cash Flows for the
Nine Months Ended March 31, 1999 and 1998 6
Consolidated Statement of Stockholders' Equity
at March 31, 1999 7
Notes to Consolidated Financial Statements. 8-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 14-15
Other Information 16
<PAGE>
SIMS COMMUNICATIONS, INC, AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, June 30,
1999 1998
ASSETS
CURRENT ASSETS
Cash and cash equivalents (Note 3) $397,216 $263,878
Accounts receivables, less allowance for
doubtful accounts of $27,584 210,450 128,984
Inventories 430,693 452,473
Prepaid expenses and other current assets 175,764 92,667
Notes receivable, current portion 150,000 150,000
------------ -----------
Total Current Assets 1,364,123 1,088,002
PROPERTY AND EQUIPMENT
Property & Equipment net of accumulated
depreciation of $1,528,735 at March 31, 1999
and $940,807 at June 30, 1998 2,525,065 2,589,447
OTHER ASSETS
Notes receivables, less allowance of $400,902 415,360 445,360
Licensing rights, net of accumulated amortization
of $23,100 (Note 2) 900,958 --
Patents, net of accumulated amortization of
$170,990 at March 31, 1999 and $115,624 at
June 30, 1998 345,755 401,121
Royalty advances (Note 2) 418,589 --
Goodwill, net of accumulated amortization of
$87,666 at March 31, 1999 and $0 at June 30, 1998 867,703 952,069
Other 117,191 126,752
Deferred offering costs (Note 8) 77,730 --
------------ -----------
Total Other Assets 3,143,286 1,925,302
------------- ------------
Total Assets $7,032,474 $5,602,751
=========== ============
See notes to consolidated financial statements
<PAGE>
SIMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, June 30,
1999 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $1,363,646 $ 1,142,828
Bank line of credit (Note 3) 250,000 250,000
Current portion of capitalized lease
obligations (Note 5) 159,894 16,732
Current portion of long term debt (Note 4) 569,119 547,794
Franchisee deposits -- 827,661
Dividends payable 32,525 --
-------------- ----------
Total Current Liabilities 2,375,184 2,785,015
LONG TERM LIABILITIES
Long term debt (Note 4) 4,500 500,853
Capitalized lease obligations (Note 5) 621,601 86,674
--------------- ----------
Total Long Term Liabilities 626,101 587,527
--------------- ----------
Total Liabilities
3,001,285 3,372,542
Commitments and contingencies
-- --
STOCKHOLDERS' EQUITY (Note 8)
Preferred stock, Series A, B; $.001 par value,
150,000 shares authorized, 50,000(A),
100,000 (B), 125,250 shares issued and
outstanding (liquidation preference of $605,000) 125 125
Preferred stock Series C, 6% Cumulative, $.001 par
value, 2,060 shares authorized, 1,745 shares
issued and outstanding at March 31, 1999 2 --
Common stock $.0001 par value 40,000,000
shares authorized:
Shares issued and outstanding - 13,851,560
and 7,959,033 at March 31, 1999 and June 30,
1998, respectively 1,385 796
Additional paid in capital 29,011,876 22,646,232
Accumulated deficit (Note 6) (24,982,199) (20,416,944)
-------------- -----------
Total Stockholders' Equity 4,031,189 2,230,209
-------------- -------------
Total Liabilities and Stockholders' Equity $7,032,474 $5,602,751
========= ========
See notes to consolidated financial statements
<PAGE>
SIMS COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended March 31, 1999 and 1998
(Unaudited)
Three Months Ended Nine Months Ended
March 31 March 31
1999 1998 1999 1998
----- ---- ---- ----
Revenues
Telecommunications $ 41,995 $ 92,783 $113,920 $ 529,786
Financial Processing 86,727 - 230,461 -
Automated Movie Rentals and Sales 168,580 125,099 629,739 125,099
Medical Transaction Processing 215,266 - 310,465 -
-------------------------------------------
Total Revenues 512,568 217,882 1,284,585 654,885
Cost of Sales 188,882 134,108 520,678 394,913
--------------------------------------------------
Gross Profit 323,686 83,774 763,907 259,972
Operating Expenses
General & Administrative 808,225 638,166 2,671,281 1,551,371
Depreciation and Amortization 271,669 99,812 749,844 227,732
Selling & Marketing 201,696 185,914 855,159 695,701
Equity Based Compensation/
Services 473,50 239,743 838,412 1,007,874
Litigation Settlement - 424,300 - 424,300
Provision for Contract Termination - - - 933,000
-------------------------------------------
Total Expenses 1,755,090 1,587,935 5,114,696 4,839,978
Operating Loss (1,431,404) (1,504,161)(4,350,789)(4,580,006)
Other Expense - Interest, net (60,460) (22,672) (181,941) (104,289)
---------------------------------------------
Loss from continuing operations
before income taxes (1,491,864) (1,526,833)(4,532,730)(4,684,295)
Income Tax Benefit - - - -
----------------------------------------------
Net Loss from Continuing
Operations (1,491,864) (1,526,833) (4,532,730)(4,684,295)
Loss from Discontinued Operations - (54,752) - (107,139)
--------------------------------------------
Net Loss $(1,491,864 $(1,581,585 $(4,532,730 $(4,791,434)
======== ======== ======== ========
Basic and Diluted loss per share from
Continuing operations $(.13) $(.27) $(.46) $(1.67)
Basic and diluted earnings from
Discontinued operations -- (.01) -- (.04)
---------------------------------------------
Basic and Diluted net loss per
share $(.13) $(.28) $(.46) $(1.71)
Weighted Average Common Shares
Outstanding 11,624,838 5,599,129 9,894,92 2,808,899
See notes to consolidated financial statements
<PAGE>
SIMS COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDING MARCH 31, 1999 AND 1998
(Unaudited)
March 31,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(4,532,730 $ (4,791,434)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 749,844 227,732
Imputed value of options granted for
services and interest 222,736 --
Provision for contract termination -- 764,000
Expenses of stock issued -- (180,505)
Stock issued for services/compensation 849,785 1,007,874
Stock issued for litigation settlement -- 309,300
Changes in assets and liabilities:
Inventories 21,780 (382,380)
Accounts and other receivables (63,574) 160,809
Prepaid expenses and other current
assets (83,097) 14,772
Advances to acquisition -- (132,458)
Accounts payable and accrued expenses 260,735 (396,622)
Dividends payable 32,525 --
Franchisee and customer deposits (10,042) (126,135)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (2,552,038) (3,525,047)
CASH FLOWS FROM INVESTING ACTIVITIES
Repayments of notes receivable -- 481
Acquisition costs paid (465,454) --
Capital expenditures (484,046) (48,396)
Change in other assets and royalty advances (409,028) 27,955
-------------- ------------
NET CASH (USED IN) FROM INVESTING ACTIVITIES (1,358,528) (19,960)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 450,000 1,460,000
Payments on debt (313,691) (88,714)
Repayment of officers loans -- (65,809)
Payments on obligations under capital leases (66,876) (4,734)
Net proceeds from issuance of common stock 1,801,686 869,001
Net proceeds from issuance of series "C"
preferred stock 1,446,845 --
Proceeds from capital leases 725,940 --
Reduction in investments -- 1,360,000
------------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,043,90 3,529,744
------------- -----------
NET INCREASE (DECREASE) IN CASH 133,338 (15,263)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 263,878 295,900
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 397,216 $ 280,637
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
INFORMATION
Cash paid during the 9 months for interest $ 128,370 $ 51,634
Cash paid during the 9 months for income taxes 0 0
See notes to consolidated financial statements
<PAGE>
SIMS COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PREFERRED STOCK
SERIES "A" AND "B" SERIES "C" COMMON STOCK ADDITIONAL
NUMBER NUMBER OF NUMBER OF PAID IN ACCUMULATED
OF SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
Balance - June 30, 1998 125,250 $125 -- -- 7,959,033 $796 $22,646,232 ($20,416,944) 2,230,209
Net loss - 9 months ended
March 31, 1999 (4,532,730)(4,532,730)
Issuance of common stock for cash 2,619,774 262 1,801,424 1,801,686
ranging from $.44 to $1.00 per
share, net of $253,325 expenses
Issuance of preferred stock at 1,745 $2 134,769 13 1,446,830 1,446,845
$1,000 per share, net of $253,154
expenses; issuance of common stock
in connection with offering
Issuance of common Stock for
services and Equipment 1,018,000 102 854,908 855,010
Issuance of common stock for accounts 140,700 14 110,876 110,890
payable
Imputed value of stock option grants
in exchange for consulting and other
services 222,736 222,736
Issuance of common stock for conversion
of notes payable, franchise deposits and
accrued interest 1,879,284 188 1,466,976 1,467,164
Issuance of common stock and warrants 100,000 10 461,894 461,904
in connection with MedCard acquisition
Dividend on Series "C" (32,525) (32,525)
Preferred stock
Balance - March 31, 1999 125,250 $125 1,745 $ 2 13,851,560 $1,385 $29,011,876 ($24,982,199) $4,031,189
======== ==== ===== === ========= ===== =========== ============ ========
</TABLE>
<PAGE>
SIMS COMMUNICATIONS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Organization and Significant Accounting Policies
Organization
Sims Communications Inc. and Subsidiaries (the Company) was incorporated in the
State of Delaware on August 15, 1991. The Company was formed as a communications
equipment company and had expanded its focus to include telecommunication 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, payments
and cash-backs, activating prepaid phone cards, obtaining prepaid cellular
service, securing check guaranties and authorizations and tracking customer
affinity programs. Additionally, the Company rents videocassettes and cellular
phones through automated dispensing units. Most recently, the Company has
entered the business of electronic processing of medical claims and on-line
insurance eligibility verification.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine-month period ended March 31, 1999
are not necessarily indicative of the results that may be expected for the year
ended June 30, 1999. For further information refer to the financial statements
and footnotes included in the Company's annual report on Form 10-KSB.
Principles of Consolidation
The consolidated financial statements includes the accounts of Sims
Communications Inc. and its wholly owned subsidiaries Sims Franchise Group,
Inc., Sims Communications International, Inc. and Link 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 Services, Corp., Movie Bar
Company USA and Vector Vision Inc. The financial statements also include the
operations of the Company's MedCard division from the date of the acquisition of
the exclusive licensing rights (see Note 2). All intercompany balances and
transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with a maturity
date of three months or less to be cash equivalents.
<PAGE>
Inventories
Inventories consists 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 (5-7 years), utilizing the straight-line method. Expenditures for
maintenance and repairs are charged to expense as incurred.
Loss Per Common Share
Loss per common share is based on the weighted average number of common shares
outstanding during the respective periods. Common shares issuable upon exercise
of the convertible preferred stock and, common stock options and equivalents are
excluded from the weighted average since their effect would be anti-dilutive.
Licensing Rights
Licensing rights capitalized in connection with the MedCard licensing agreement
are being amortized over the length of the agreement of fifteen years.
Goodwill
The excess of the cost of the net tangible and identifiable intangible assets of
acquired businesses is stated at cost and is being amortized over seven years.
Revenue Recognition
Revenues from the sale of equipment are recognized upon delivery and service and
technology processing revenue is recognized when transactions are completed.
Patents
Patent costs are those costs related to filing for patents and the value
allocated to patents based upon the business acquisition of Link Technologies
and subsidiaries. They are amortized on the straight-line basis over their
expected useful life of seven years.
Note 2 - Acquisition of MedCard Licensing Rights
In November, 1998, the Company purchased certain assets of MedCard Management
Systems, Inc. of Islandia, New York ("MedCard"), along with the exclusive
licensing rights to the MedCard name and the MedCard System software and network
for fifteen years. The term of the agreement may be extended after fifteen years
for ten successive one year periods. The MedCard System is a comprehensive
electronic processing system that consolidates insurance eligibility
verification and processes medical claims and approval of credit card/debit card
payments within 30 seconds. Consideration for the transaction included cash of
$450,000, 100,000 shares of restricted common stock, options to purchase 350,000
shares of common stock (imputed value of $333,904) and royalties on future
sales. The common stock issued in connection with the agreement was recorded at
market at the date of the transaction, $1.28 per share. At March 31, 1999,
licensing rights related to the agreement totaled $900,958 net of $23,100 of
accumulated amortization.
Note 3 - Bank Line of Credit
The Company maintains a secured revolving line of credit with a bank for up to
$250,000. The balance at March 31, 1999 was $250,000. The line of credit is
secured by a restricted certificate of deposit with a balance at March 31, 1999
of approximately $250,000. The line of credit bears interest at 5.77% per annum,
payable monthly and expires June 5, 1999.
Note 4 - Notes and Loans Payable
A detailed listing of outstanding debt at March 31, 1999 is as follows
8% Convertible notes payable, principal due at maturity dates ranging from Aug,
1997 through 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
$ 217,000
Note payable - individuals (non-interest bearing) payable in
monthly installments of $1,500 through June,
2000 39,000
Note payable - franchisee, bearing interest at 10%, principal and interest due
in full on October 31, 1999.
317,619
Total $ 573,619
Less: Current
Portion ( 569,119)
-------------
Long Term
Portion $ 4,500
===============
Note 5 - Capitalized Lease Obligations
The company leases various office and revenue-producing equipment accounted for
as capitalized leases. The leases bear interest at 16-19% and are payable in
monthly installments. At March 31, 1999, the Company owed $781,495 under the
terms of the leases of which $159,894 represents the current portion. The terms
for the leases vary from 48 to 60 months and the leases are collateralized by
the underlying equipment.
Note 6 - Continuing Operations
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and liquidation of
liabilities in the ordinary course of business. In prior years, the Company had
been in the development stage and did not begin earning significant revenues
until the middle of the fiscal year ended 1994. During the years ending June
1995, through June 1998 and continuing through the nine months ended March 31,
1999, the Company has continued to suffer recurring losses from operations. In
fiscal year ended June 30, 1995, the Company completed an initial public
offering for $5.2 million. In subsequent periods, the Company has successfully
completed the raising of additional capital to help fund its operations by
completing private placements. The consolidated financial statements do not
include any adjustments that might be necessary if the Company is unable to
continue as a going concern. See the Company's Form 10-KSB for the year ended
June 30, 1998.
Note 7 - Provision for Contract Termination and Bad Debt and Litigation
Settlement (1998)
During the year ended June 1997 the Company received 1,807,800 shares of Cancall
Cellular Communications, Inc. Class A preferred stock with a recorded value of
$1,310,000 from the sales of licensing rights and equipment. During the quarter
ended December 31, 1997, this agreement was mutually terminated as management of
both companies did not desire to go forward together in cellular telephone
rentals. Accordingly, the equipment was returned to the company, the Preferred
Stock was returned to Cancall and a loss provision for $ 764,000 was provided,
which represented the full profit on the agreement which had been previously
recorded.
The company sold 30 ACDC units to a master licensee in1996. A majority of these
units were installed at Los Angeles Airport terminals with the remaining units
anticipated to be installed in the San Francisco bay area. The airport terminals
were briefly functional but Airport management and licensee management requested
a secession of operations until contract provisions could be renegotiated. The
company has not received payment for the units and a loss provision of $169,000
was recorded for uncollected receivables. The receivable was personally
guaranteed by the owner/president of the master licensee and Management believes
that the units will be returned.
In February, 1998, the Company negotiated a litigation settlement agreement with
a former Instafone International Master Licensee resulting in a special charge
of $424,300. The terms of the settlement provided for cash payments of $115,000
over 21 months and the issuance of 300,000 shares of Company stock.
Note 8 - Stockholders Equity
For the nine months ended March 31, 1999, the following equity transactions
occurred:
The Company sold 1,700 shares of its 6% Series C Preferred Stock to a group of
institutional investors for $1,700,000 net of $253,154 in offering costs. The
shares are convertible into common stock at an adjustable conversion rate. For
each preferred share, the Company will issue warrants on certain dates. The
warrants entitle the holder to purchase common stock at prices ranging from
$1.27 to $1.50 per share. While the Company has the right to redeem the
preferred shares at any time; the redemption price varies from 110% to 125% of
face value depending on the redemption date. In connection with the preferred
stock sales, the Company issued 45 shares of preferred, 14,769 shares of common
and 37,500 warrants to purchase common at prices ranging from $1.27 to $1.50 per
share to the placement agent. In addition, the Company issued 120,000 shares of
common stock to the investment banking group and 200,000 warrants to purchase
common stock at prices of $2.50 to $5.00 per share. The dividend attributable to
the preferred stock was $32,525 at March 31, 1999.
The Company sold 2,619,774 shares of common stock at prices ranging from $.44 to
$1 per share in private placements raising $1,801,686 net of $253,325 in
offering costs.
The Company issued 981,500 shares of its common stock for $836,260 of services
and equipment received.
The Company issued 140,700 shares of its common stock for $110,890 for services
previously rendered.
The Company issued 1,879,284 shares of its common stock in order to convert
$1,467,164 worth of long-term debt, notes payable, franchisee deposits and
accrued interest into stockholders' equity.
The Company issued 36,500 shares of its common stock valued at $18,750 to its
employees under the Company's Stock Bonus Plan.
The Company issued 100,000 shares of its common stock valued at $128,000 in
connection with the acquisition of certain assets of MedCard including the
exclusive licensing rights to the MedCard name and the MedCard System software
and network. Additionally, the Company issued options to purchase 350,000 shares
of the common stock at $1.34 per share. The options expire in November, 2001 and
have an imputed value of $333,904 which was allocated as part of the purchase
price of the licensing rights acquired (Note 2).
The Company issued options to purchase 150,000 shares of its common stock at
$.59 per share to a company retained as its investment banker in connection with
any future offerings. The imputed value of the options, $77,730, has been
recognized as deferred offering costs at March 31, 1999.
The Company issued options to purchase 50,000 shares of its common stock at
$1.50 per share in connection with a loan advanced to the Company by an
individual. The imputed value of the options, $40,101, has been charged to
interest expense in the nine-month period.
The Company issued options to purchase 120,000 shares of its common stock at
rates ranging from $1.50 to $2.50 per share. These options expire September,
2001. $104,905 of expense has been recognized based on imputed values ranging
from $.87 to $1.50 per option.
The Company accounts for stock based compensation in accordance with Financial
Accounting Standards Board Statement No. 123, "Accounting for Stock Based
Compensation," 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 non-employees.
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 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 nine months ended March 31, 1999, employees of the Company
were issued options to purchase 190,000 shares of the common stock at a range
from $2 to $2.50 per share expiring Oct. 2001 (unrecognized imputed charge of
$167,660 or $0.02 per share).
Note 9- 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 sale and processing of
cellular telephone rentals, prepaid cellular phone cards and other related
services. The financial processing segment has developed, in conjunction with
the Company's intelligent "Debit Link" system, a monetary transaction processing
platform that eliminated the need for ATM's used primarily in major fast food
chains and convenience stores. The automated movie rentals segment rents
videocassettes through automated dispensing units in hotels, primarily Florida
and California. The medical transaction processing segment has developed, in
conjunction with the Company's intelligent "Debit Link" systems, communications
and transaction processing platforms which allow pharmacies to access on-line
credit card and medical reimbursement approval and automated product ordering
and payment. The segment also includes revenues from the electronic processing
of medical claims and on-line insurance eligibility verification (MedCard).
Operating results and other financial data are presented for the four reportable
segments of the Company for the nine months ended March 31, 1999 and 1998. Net
revenue includes sales to external customers within the segment. Cost of goods
sold includes costs associated with net revenue within the segments. Segment
profit (loss) does not include general and administrative expenses, other income
(expense) items or income taxes. Identifiable assets for each operations'
segment consist of cash, receivables, inventory, prepaid items, net machinery
and equipment, goodwill, licensing rights and other assets. Corporate assets are
patents.
Net- Cost of Depreciation Segment
Profit Identifiable
9 months ending Revenues Sales & Amort.
(Loss) Assets Assets
March 31, 1999:
Tele-Communications- $ 113,920 $ 87,137$ 362,453 $ (335,670) $ 2,119,295
Financial Processing- 230,461 179,204 75,924 (24,667) 955,587
Movie Rentals- 629,739 163,079 168,190 298,470 1,198,624
Medical
Processing- 310,465 91,258 87,912 131,295 2,413,213
Corporate & Other- -- -- 55,365 (55,365) 345,755
---------------------------------------------------------
Consolidated $ 1,284,585 $ 520,678 $ 749,844 $ 14,063 $ 7,032,474
Tele-Communications-$529,786 $357,383 $167,539 $ 4,864 $4,549,497
Financial Processing- -- -- -- -- --
Automated
Movie Rental-
125,099 37,530 23,878 63,691 204,363
Medical
Transaction
Processing- -- -- -- -- --
Corporate & Other- -- -- 36,315 (36,315) 438,626
---------------------------------------------------------
Consolidated $654,885 $394,913 $227,732 $ 32,240 $5,192,486
Note 10 - Subsequent Event
Subsequent to March 31, 1999 the Company's MedCard division entered into an
agreement with the Suffolk Bureau of Medical Economics ("SBME") to manage its
collections business. SBME is a healthcare provider agency for collecting
overdue accounts receivable from patients. No additional investment using
Company resources is expected to be required for the addition of this new
business division; yet the agreement is expected to add an additional $75,000 in
estimated monthly revenues and result in positive cash flow.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operation-Nine Months Ending March 31, 1999
During the nine month period ended March 31, 1999, total revenues amounted to
$1,284,585 versus last year's revenue of $654,885. The company is completing a
state of transition with its expansion focused on Financial Processing, Medical
Transaction Processing and Automated Movie Rentals. These business segments
produced revenues of $230,461, $310,465 and $629,736, respectively for the nine
months ended March 31, 1999 or 91% of total revenues. Comparable operations for
the nine months ended March 31, 1998 consisted only of two month's worth of
Automated Movie Rental revenue. There continues to be a gradual decline in the
emphasis on telecommunications operations as calling card and long distance
revenues were significantly less than revenues from the same period last year.
Gross profit for the nine months ended March 31, 1999 totaled $763,907 with a
margin of 60% due to the introduction of the new business segments with higher
gross margins. The Company has experienced an escalating revenue stream of
residual processing income from its ATM/Scrip division, reflective of
terminals/machines in place for longer periods resulting in wider acceptance and
use. Currently, the financial processing operation has more than 800 units
placed in the field. The comparable margin on revenues for the nine-month period
ended March 31, 1998 was $259,972 or 40% and was composed of Tele-Communications
and Automated Movie Rentals.
The Medical transaction processing segment has more than 275 field units between
the One Medical Service ("OMS") and MedCard Management Systems ("MedCard")
divisions. OMS' strategic alliance partner, Bergen Brunswig Corp., revised their
launch strategy in the past quarter in order to accommodate introduction of the
OMS system to more than 2,000 pharmacies during 1999, up from the previous plan
of 500. Implementation of the new OMS product has been delayed and will occur in
June, 1999, when approximately 150 Southern California pharmacies will be
activated on the upgraded system. The national sales launch for the OMS system
will take place in July, 1999. The MedCard division is completing the "ramp-up"
stage of its operations and it continues to receive a very positive market
response. The MedCard product is now represented by 16 independent sales
organizations, several large hospitals and other healthcare organizations. The
MedCard system was recently upgraded and a PC version will be available in the
summer of 1999. Gross profits from the MedCard division contributed as expected
for the past quarter and are expected to increase in subsequent quarters.
Selling, marketing and general and administrative expenses are higher for the
nine months ended March 31, 1999 compared to the same period last year as a
result of several factors. In the past nine months, the Company incurred
significant start-up costs related to its new line of business focus and the
expansion of its business segments. Expenses related to prior operations and
agreements in place, which are being lessened, compounded an increase in general
and administrative expenditures. This was partially offset by the savings
realized in the current nine months by the downsizing of facilities and the
reduction in personnel. Stock and option-based compensation for services and
expenses totaled $838,412 for the nine months ended March 31, 1999 compared to
$1,007,864 for the same period last year. In the quarter ended March 31, 1999,
the Company used stock to pay for outside consultants retained for the
production and development of the Company's website, internet healthcare web
portal and e-commerce business applications.
The Company terminated its cellular activation business in the prior fiscal
year. This segment incurred a net $107,139 loss for the nine-month period and
was deconsolidated and reclassified as "discontinued."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Sources of Capital
During the nine months ended March 31, 1999, the Company's operating cash
requirement was $2,552,038 attributable to a net loss of $4,532,730 mitigated by
non-cash charges for depreciation and amortization ($749,844) and stock and
option based compensation/services ($838,412). The net remaining shortfall was
primarily funded by the net sale of common and preferred stock for $1,801,686
and $1,446,845, respectively, and the proceeds from capitalized leases on
ATM/Scrip machines (transaction processing division) of $725,940. Partially
offsetting this funding were capital expenditures of $484,948 (primarily for
ATM/Scrip units placed in the field) and debt repayments of $313,691.
During the nine months ended March 31, 1999, the Company converted $1,467,164
worth of long-term debt, notes payable, franchisee deposits and accrued interest
into common stock of the Company, thereby significantly increasing stockholders'
equity and improving its debt to equity ratio.
Royalty advances were $418,589 for the nine-month period ended March 31, 1999.
Advances are required under the terms of the Company's exclusive licensing
agreement with MedCard (See Note 2).
During the nine months ended March 31, 1998, the Company's cash requirement was
primarily funded by the sale of common stock for $869,000 and $1,460,000 in
proceeds from debt which was subsequently converted to common stock. Cash was
conserved with stock based compensation for services totaling $1,007,874, as
well as $309,300 in common stock used to partially settle $424,300 of
litigation. Higher inventories reflected the build-up of new products and the
expansion of the newly acquired Movie Vision operations. The $132,458 worth of
advances to acquisition reflected funds advanced to One Medical Service prior to
formal acquisition and consolidation.
Year 2000 Issue
The Year 2000 issue does not materially affect the Company's computer systems,
software or other business systems. The Company has conducted a review to
identify areas that could be affected and has developed an implementation plan
to ensure compliance. The Company believes that with modifications to existing
software the issue will not pose significant operational concerns nor have a
material impact on financial position or results of operations. The costs of
modifications is not expected to be material and will be expensed as incurred.
The Company has requested that its major independent suppliers and support
providers confirm that they will be Year 2000 compliant.
Item 2. Changes in securities and use of proceeds
For the nine months ended March 31, 1999, the following equity transactions
occurred:
The Company sold 1,700 shares of its 6% Series C Preferred Stock to a group of
institutional investors for $1,700,000 net of $253,154 in offering costs. The
shares are convertible into common stock at an adjustable conversion rate. For
each preferred share, the Company will issue warrants on certain dates. The
warrants entitle the holder to purchase common stock at prices ranging from
$1.27 to $1.50 per share. While the Company has the right to redeem the
preferred shares at any time; the redemption price varies from 110% to 125% of
face value depending on the redemption date. In connection with the preferred
stock sales, the Company issued 45 shares of preferred, 14,769 shares of common
and 37,500 warrants to purchase common at prices ranging from $1.27 to $1.50 per
share to the placement agent. In addition, the Company issued 120,000 shares of
common stock to the investment banking group and 200,000 warrants to purchase
common stock at prices of $2.50 to $5.00 per share. The dividend attributable to
the preferred stock was $32,525 at March 31, 1999.
The Company sold 2,619,774 shares of common stock at prices ranging from $.44 to
$1 per share in private placements raising $1,801,686 net of $253,325 in
offering costs.
The Company issued 981,500 shares of its common stock for $836,260 of services
and equipment received.
The Company issued 140,700 shares of its common stock for $110,890 for services
previously rendered.
The Company issued 1,879,284 shares of its common stock in order to convert
$1,467,164 worth of long-term debt, notes payable, franchisee deposits and
accrued interest into stockholders' equity.
The Company issued 36,500 shares of its common stock valued at $18,750 to its
employees under the Company's Stock Bonus Plan.
The Company issued 100,000 shares of its common stock valued at $128,000 in
connection with the acquisition of certain assets of MedCard including the
exclusive licensing rights to the MedCard name and the MedCard System software
and network. Additionally, the Company issued options to purchase 350,000 shares
of the common stock at $1.34 per share. The options expire in November, 2001 and
have an imputed value of $333,904 which was allocated as part of the purchase
price of the licensing rights acquired (Note 2).
The Company issued options to purchase 150,000 shares of its common stock at
$.59 per share to a company retained as its investment banker in connection with
any future offerings. The imputed value of the options, $77,730, has been
recognized as deferred offering costs at March 31, 1999.
The Company issued options to purchase 50,000 shares of its common stock at
$1.50 per share in connection with a loan advanced to the Company by an
individual. The imputed value of the options, $40,101, has been charged to
interest expense in the nine-month period.
The Company issued options to purchase 120,000 shares of its common stock at
rates ranging from $1.50 to $2.50 per share. These options expire September,
2001. $104,905 of expense has been recognized based on imputed values ranging
from $.87 to $1.50 per option.
The Company accounts for stock based compensation in accordance with Financial
Accounting Standards Board Statement No. 123, "Accounting for Stock Based
Compensation," 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 non-employees.
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 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 nine months ended March 31, 1999, employees of the Company
were issued options to purchase 190,000 shares of the common stock at a range
from $2 to $2.50 per share expiring Oct. 2001 (unrecognized imputed charge of
$167,660 or $0.02 per share).
Item 6. Exhibits and reports on Form 8-K
The Company filed 8-K reports on December 10, 1998 and January 20, 1999. These
reports concerned the issuance of shares of the Company's capital stock.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIMS COMMUNICATIONS, INC.
By:_ /s/ Mark Bennett________
Mark Bennett
President
__/s/ Ian Hart____________
Ian Hart
Chief Financial Officer
Date: May 13, 1999
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