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 December 31,1998
SIMS COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 65-0287558
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 February 19, 1999 the Company had 12,095,497 shares of Common Stock issued
and outstanding.
Page 1 of 15 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
December 31,1998 and June 30, 1998 3-4
Consolidated Statements of Operations for the Three and
Six Months Ended December 31, 1998 and 1997 5
Consolidated Statement of Cash Flows for the
Six Months Ended December 31, 1998 and 1997 6
Consolidated Statement of Stockholders' Equity
at December 31, 1998 7
Notes to Consolidated Financial Statements. 8-15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 16-17
Other Information 18
<PAGE>
SIMS COMMUNICATIONS INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December June
31, 30,
1998 1998
ASSETS (Unaudited) (Audited)
CURRENT ASSETS
Cash and cash equivalents (Note 3) $404,245 $263,878
Accounts receivables, less allowance for
doubtful accounts of $27,584 216,873 128,984
Inventories 559,902 452,473
Prepaid expenses and other current 190,077 92,667
assets
Notes receivable, current portion 150,000 150,000
------------ -----------
Total Current Assets 1,521,097 1,088,002
PROPERTY AND EQUIPMENT
Property & Equipment net of accumulated
depreciation of $1,325,039 at December
31, 1998 and $940,807 at June 30, 1998 2,644,785 2,589,447
OTHER ASSETS
Notes receivables, less allowance of $400,902 415,360 445,360
Licensing rights, net of accumulated
amortization of $7,700 (Note 2) 916,358 --
Patents, net of accumulated amortization of
$152,535 and $115,624 364,210 401,121
Royalty advances (Note 2) 382,043 --
Goodwill, net of accumulated amortization of 901,821 952,069
$50,248 and $0
Other 116,776 126,752
Deferred offering costs 77,730 --
------------ -----------
Total Other Assets 3,174,298 1,925,302
------------- ------------
Total Assets $7,340,180 $5,602,751
======== =======
<PAGE>
SIMS COMMUNICATIONS INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
1998 1998
(Unaudited) (Audited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $1,606,059 $ 1,142,828
Bank line of credit (Note 3) 250,000 250,000
Current portion of capitalized lease 119,263 16,732
obligations (Note 5)
Current portion of long term debt (Note 4) 922,381 547,794
Franchise deposits 817,619 827,661
-------------- ------------
Total Current Liabilities 3,715,322 2,785,015
LONG TERM LIABILITIES
Long term debt (Note 4) 201,467 500,853
Capitalized lease obligations (Note 5) 575,716 86,674
--------------------------
Total Long Term Liabilities 777,183 587,527
--------------------------
Total Liabilities 4,492,505 3,372,542
Commitments and contingencies
-- --
STOCKHOLDERS' EQUITY (Note 8)
Preferred stock, Series A, B; $.001 par value, 150,000 125 125
shares authorized, 50,000
(A), 100,000 (B), 125,250 shares issued and outstanding
(liquidation preference of $605,000)
Preferred stock, Series C, 6% Cumulative, $.001 par 2 --
value, 2,060 shares authorized, 1,545 shares issued
and outstanding at December 31, 1998
Common stock $.0001 par value 40,000,000 shares 991 796
authorized:
Shares issued and outstanding - 9,906,233
and 7,959,033 at December 31, 1998
and June 30, 1998, respectively
Additional paid in capital 26,312,092 22,646,232
Accumulated deficit (Note 6) ( 23,465,535) (20,416,944)
-------------- --------------
Total Stockholders Equity 2,847,675 2,230,209
-------------- --------------
Total Liabilities and Stockholders' Equity $7,340,180 $5,602,751
========= ========
See notes to consolidated financial statements
<PAGE>
SIMS COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended December 31, 1998 and 1997
(Unaudited)
Three Months Ended Six Months Ended
Dec. 31 Dec. 31,
1998 1997 1998 1997
Revenues
Telecommunications $31,779 $189,679 $71,925 $437,003
Financial Processing 86,233 - 143,734 -
Automated Movie Rentals and
Sales 220,395 - 461,159 -
Medical Transaction
Processing 56,154 - 95,199 -
------------------------- -----------------------
Total Revenues 394,561 189,679 772,017 437,003
Cost of Sales 185,288 91,451 331,796 260,805
------------------------- -------------------------
Gross Profit 209,273 98,228 440,221 176,198
Operating Expenses
General & Administrative 946,480 413,022 1,863,056 913,170
Depreciation and
Amortization 256,288 66,031 478,175 127,920
Selling & Marketing 288,188 354,879 653,463 509,823
Equity Based
Compensation/Services 71,150 85,230 364,912 768,131
Provision for Contract
Termination - 933,000 - 933,000
------------------------- -------------------------
Total Expenses 1,562,106 1,852,162 3,359,606 3,252,044
Operating Loss (1,352,833) (1,753,934)(2,919,385)(3,075,846)
Other Expense - Interest,
net (80,295) (56,325) (121,481) (81,617)
-------- ------- --------- --------
Loss from continuing
operations
before income taxes (1,433,128) (1,810,259) (3,040,866)(3,157,463)
Income Tax Benefit - - - -
------------------------- ---------------------
Net Loss from Continuing
Operations $(1,433,128) $(1,810,259) $(3,040,866) $(3,157,463)
Loss from Discontinued Operations - (56,226) - (52,387)
------------------------- -------------------------
Net Loss $(1,433,128) $(1,866,485) $(3,209,850) $(3,040,866)
======== ======== ======== ========
Basic and Diluted loss per share from
Continuing operations $(.15) $(.73) $(.32) $(1.37)
Basic and diluted earnings from
Discontinued operations -- (.02) -- (.02)
Basic and Diluted net
loss per share $(.15) $(.75) $(.32) $(1.39)
Weighted Average Common
Shares Outstanding 9,720,650 2,492,354 9,535,471 2,306,208
--------- --------- --------- ---------
See notes to consolidated financial statements
<PAGE>
SIMS COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDING DECEMBER 31, 1998 AND 1997
(Unaudited)
December
31,
CASH FLOWS FROM OPERATING ACTIVITIES 1998 1997
Net loss $(3,040,866)$(3,209,850)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 478,175 127,920
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 376,275 615,463
Changes in assets and liabilities:
Inventories (107,429) (401,290)
Accounts and other receivables (69,997) 68,428
Prepaid Expenses and Other Current Assets (97,410) 31,405
Accounts Payable and Accrued Expenses 431,163 (251,327)
Franchise and customer deposits (10,042) (126,135)
-----------------------
NET CASH USED IN OPERATING ACTIVITIES (1,817,395)(2,561,891)
CASH FLOWS FROM INVESTING ACTIVITIES
Repayments of notes receivable -- 481
Acquisition costs paid (465,454) --
Capital expenditures (400,070) --
Change in other assets and royalty advances (372,067) 8,395
---------- ---------
NET CASH (USED IN) FROM INVESTING ACTIVITIES (1,237,591) 8,876
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 450,000 1,460,000
Payments on debt (307,691) (69,623)
Repayment of officers loans -- (65,809)
Payments on obligations under capital leases (27,485) (7,021)
Net proceeds from issuance of common stock 1,214,625 --
Net proceeds from issuance of series "C"
preferred stock 1,246,846 --
Proceeds from capital leases 619,058 --
Reduction in investments -- 1,310,000
---------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,195,353 2,627,547
---------- ----------
NET INCREASE IN CASH 140,367 74,532
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 263,878 295,900
-----------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 404,245 $ 370,432
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid during the 6 months for interest $ 70,953 $ 23,166
Cash paid during the 6 months for income taxes 0 0
See notes to consolidated financial statements
<PAGE>
SIMS COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
DECEMBER 31, 1998 (UNAUDITED)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
PREFERRED STOCK COMMON STOCK
SERIES "A" AND "B" SERIES "C" ADDITIONAL
NUMBER NUMBER NUMBER PAID IN
OF OF OF
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
Balance - June 30, 1998 125,250 $125 -- -- 7,959,033 $796 $22,646,232
Net loss - 6 months ended
December 31, 1998
Issuance of common stock for cash 1,425,000 142 1,214,483
at $1.00 per share, net of
$210,375 expenses
Issuance of preferred stock at 1,545 2 120,000 12 1,246,832
$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 188,000 19 381,481
Issuance of common stock
for
Accounts 59,200 7 50,471
payable
Imputed value of stock
option grants
in exchange for consulting
and other
Services 222,736
Issuance of common stock
for conversion of notes
payable
and
accrued interest
55,000 5 87,963
Issuance of common stock and 100,000 10 461,894
warrants in connection with
MedCard acquisition
Dividend on Series "C"
Preferred
-------------------------------------------------------------------------
Balance - December 31, 1998 125,250 $125 1,545 2 9,906,233 $991 $26,312,092
======== ====== ===== === ========= ===== ===========
</TABLE>
SIMS COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
DECEMBER 31, 1998 (UNAUDITED)
ADDITIONAL
PAID IN ACCUMULATED
CAPITAL DEFICIT TOTAL
Balance - June 30, 1998 $22,646,232 ($20,416,944) $ 2,230,209
Net loss - 6 months ended
December 31, (3,040,866) (3,040,866)
1998
Issuance of common stock for cash 1,214,483 1,214,625
at $1.00 per share, net of
$210,375 expenses
Issuance of preferred stock at 1,246,832 1,246,846
$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 381,481 381,500
Issuance of common stock
for
Accounts 50,471 50,478
payable
Imputed value of stock
option grants
in exchange for consulting
and other
Services 222,736 222,736
Issuance of common stock 87,963 87,968
for conversion of notes
payable
and
accrued interest
Issuance of common stock and 461,894 461,904
warrants in connection with
MedCard acquisition
Dividend on Series "C" (7,725) ( 7,725)
Preferred
------
Balance - ($23,465,535) $2,847,675
=========== =============
December 31, 1998
<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 and 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.
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 six-month period ended December 31,
1998 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 Filing Statement 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. All intercompany balances and transactions
have been eliminated in consolidation. The financial statements include the
operations of the MedCard division from the date of acquisition (see Note 2).
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.
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 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
<PAGE>
Note 1 - Organization and Significant Accounting Policies (Continued)
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 acquisition are
being amortized over the length of the contract or fifteen (15) 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 a straight-line basis based on their
expected useful life over a seven-year period.
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 modification to existing
software the issue will not pose significant operational concerns nor have a
material impact on financial position or results of operations. Cost of
modifications is not expected to be material and will be expensed as incurred.
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 acquisition was recorded
at market at the date of the transaction, $1.28 per share.
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 December 31, 1998 was $250,000. The line of credit is
secured by a restricted certificate of deposit with a balance at December 31,
1998 of approximately $250,000. The line of credit bears interest at 5.77% per
annum, payable monthly and expires June 5, 1999.
<PAGE>
Note 4 - Notes and Loans Payable
A detailed listing of debt at December 31, 1998 is as follows:
Promissory note, individuals; interest payable
at 10% monthly, commencing Sept. 15, 1995.
Principal balance is due in full September,
1999. As additional consideration, the Company
agrees to pay the note holders 15.5% of all profits
received through the Company's investment with
Commonwealth Group International
(see Note 10) $ 310,348
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
223,000
Note payable - principal (non-interest bearing) payable in
monthly installments of $1,500 through June,2000 40,500
Note payable - corporation, bearing interest
at 12%, monthly principal and
interest payments of $2,500, due August 2001.
Debt includes common stock conversion feature
that provides for conversion at any time while
the note is still outstanding at a conversion price
based on the previous five-day average.
Collateralized by substantially all of the
company's assets (see Note 10) 200,000
Notes payable - corporation, bearing interest at
12%, interest and principal are
due at June 30, 1999; the holder has the option
to convert the note into common
stock of the Company at $.59 per share (see Note 10 )
250,000
Note payable - individual, 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
note date until maturity. 100,000
-------
Total $ 1,123,848
Less: Current Portion ( 922,381)
------------
Long Term Portion $ 201,467
Note 5 - Capitalized Lease Obligations
The company leases various revenue-producing equipment accounted for as
capitalized leases. The leases bear interest at 16-18% and are payable in
monthly installments. At December 31, 1998, the Company owed $694,979 of which
$119,263 represents the current portion. The terms for the leases vary from 48
to 60 months and the leases are collateralized by the underlying equipment.
<PAGE>
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 fiscal year ended 1994. During the years ending June 1995,
through June 1998 and continuing through the six months ended December 31, 1998,
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. 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
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 12/31/97, 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.
Note 8 - Stockholders Equity
For the six months ended December 31, 1998, the following equity transactions
occurred:
The Company sold 1,500 shares of its 6% Series C Preferred Stock to a group of
institutional investors for $1,500,000 net of $253,154 in offering costs. The
shares are convertible into common stock at an adjustable conversion rate. For
each preferred stockholder, the Company will issue warrants on certain dates.
The warrants will entitle the holder to purchase shares of the Company's common
stock at ranges from $1.27 to $1.50 per share. While the Company has the right
to redeem the Series C Preferred shares at any time; the redemption price varies
from 110% to 125% of face value depending on the date the shares are actually
redeemed. In connection with the preferred stock sale, the Company issued 45
shares of preferred stock and 37,500 warrants to purchase common stock 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
along with 200,000 warrants to purchase the Company's common stock at prices of
$2.50 to $5.00 per share. The dividend attributable to the preferred stock was
$7,725 at December 31, 1998.
The Company sold 1,425,000 shares of common stock at $1 per share in a private
placement raising $1,214,625 net of $210,375 in offering costs.
The Company issued 205,000 shares of its common stock for $405,789 of services
and equipment received.
The Company issued 42,200 shares of its common stock for $26,163 for services
previously rendered.
The Company issued 36,500 shares of its common stock valued at $18,750 to its
employees under the Company's Stock Bonus Plan.
<PAGE>
Note 8 - Stockholders Equity (Continued)
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
$.62 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 December 31, 1998.
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 current quarter.
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," ("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
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 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 six months ended December 31, 1998, employees of the Company
were issued options to purchase 190,000 shares of the Company's stock at prices
ranging 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
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 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.
Operating results and other financial data are presented for the four reportable
segments of the Company for the six months ended December 31, 1998 and 1997. Net
revenue includes sales to external customers within the segment. Cost of goods
sold includes costs associated with net revenue within the segments. Segment
income (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.
<PAGE>
Note 9- Business Segments (Continued)
<TABLE>
<S> <C> <C> <C> <C> <C>
Net- Cost of Depreciation Segment Profit Identifiable
6 months ending Revenues Sales & Amort. (Loss) Assets
December 31, 1998:
Tele-Communications- $ 71,925 $ 71,008 $ 232,856 $(231,939) $ 2,337,133
Financial Processing- 143,734 121,007 42,467 (19,740) 953,942
Automated
Movie Rental- 461,159 116,032 112,230 232,897 1,328,502
Medical
Transaction
Processing- 95,199 23,749 53,712 17,738 2,356,393
Corporate & Other- -- -- 36,910 (36,910) 364,210
-------------------------------------------------------------------
Consolidated $ 772,017 $ 331,796 $ 478,175 $ (37,954) $ 7,340,180
Net- Cost of Depreciation Segment Profit Identifiable
6 months ending Revenues Sales & Amort. (Loss) Assets
December 31, 1997:
Tele-Communications- $437,003 $260,805 $103,710 $ 72,488 $3,701,447
Financial Processing- -- -- -- -- --
Automated
Movie Rental- -- -- -- -- --
Medical
Transaction
Processing- -- -- -- -- --
Corporate & Other- -- -- 24,210 (24,210) 450,731
- --------------------------------------
Consolidated $437,003 $260,805 $127,920 $ 48,278 $4,152,178
</TABLE>
Note 10 - Subsequent Events
Subsequent to December 31, 1998 the Company sold 200 additional shares of its
Series "C" Preferred Stock for $200,000 and issued shares of its common stock
for cash and in payment of certain liabilities.
The following "as adjusted" balance sheet of the Company as of December 31, 1998
reflects these transactions:
(unaudited) (unaudited)
As reported ProForma December 31, 1998
December 31,1998 Adjustments (as adjusted)
ASSETS
Cash $404,245 $ 487,109 (1,2) $891,354
Accounts receivable 216,873 216,873
Inventories 559,902 559,902
Prepaid expenses
And other 190,077 190,077
Notes receivables,net 565,360 565,360
Licensing rights, net 916,358 916,358
Patents, net 364,210 364,210
Goodwill, net 901,821 901,821
Other assets 498,819 498,819
Deferred offering
Costs 77,730 77,730
Property and Equipment 2,644,785 2,644,785
Total Assets $ 7,340,180 $ 487,109 $7,827,289
LIABILITIES
Accounts payable and
Accrued expenses $ 1,606,059 (67,750) (3,4) $ 1,538,309
Bank line of credit 250,000 250,000
Current portion of 119,263 119,263
Franchise deposits 817,619 (500,000) (5) 317,619
Capitalized leases
Current portion
Of long-term debt 922,381 (578,869) (3) 343,512
Long term debt 201,467 (192,467) (3) 9,000
Capitalized leases, 575,716 575,716
------- -------
Long-term
Total Liabilities $4,492,505 $ 3,153,419
<PAGE>
Note 10 - Subsequent Event (Continued)
(unaudited) (unaudited)
As reported ProForma December 31, 1998
December 31,1998 Adjustments (as adjusted)
STOCKHOLDERS'
EQUITY
Preferred stock, A,B 125 125
Preferred stock, C 2 1 (2) 3
Common stock 991 219 (1,3,4,5) 1,210
Additional Paid-In Capital 26,312,092 1,825,975 (1-5) 28,138,067
Accumulated Deficit (23,465,535) (23,465,535)
Total Stockholders'
Equity $2,847,675 $4,673,870
Total Liabilities and
Stockholders Equity $7,340,180 $7,827,289
(1)Reflects the sale of 550,016 shares of common stock for $330,010, less
related offering expenses.
(2)Reflects the sale of 200 shares of Series "C" Preferred stock at $1,000
per share (no offering expenses).
(3)Reflects issuance of 1,006,319 share of common stock upon conversions of
notes payable plus accrued interest.
(4) Reflects issuance of 61,500 shares of common stock in payment of
accounts payable.
(5) Reflects issuance of 571,428 shares of common stock upon conversion of
franchise deposits.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operation-Six Months Ending December 31, 1998
During the six month period ended December 31, 1998, total revenues amounted to
$772,017 versus last year's revenue of $437,003. The company is in a state of
transition with its expansion focused on Financial Processing, Medical
Transaction Processing and Automated Movie Rentals. These business segments
produced revenues of $143,734, $461,159 and $95,199, respectively for the six
months ended December 31, 1998 or 90% of total revenues. There were no
comparable operations for the six months ended December 31, 1997. Conversely,
there has been 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 six months ended December 31, 1998 totaled $440,221 with a
margin of 57% due to the introduction of the new business segments with higher
gross margins. The Company has seen 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. The
comparable margin on revenues for the six-month period ended December 31, 1997
was $176,198 or 40% (attributable only to the telecommunications segment).
Currently, the financial processing operation has more than 800 units placed in
the field and has established both east and west coast marketing operations to
rapidly expand the related customer base.
The Medical transaction processing segment has more than 200 field units between
the One Medical Service and MedCard divisions. The One Medical Service strategic
alliance agreement with Bergen Brunswig Corp., although delayed in its embryonic
stage, will go to "market" in early fiscal 3rd quarter. The Company's MedCard
division should complete "ramp-up" of its operations in late fiscal 3rd quarter
and has received very positive market response in its infancy.
Selling, marketing and general and administrative expenses are higher for the
six months ended December 31, 1998 compared to the same period last year as a
result of several factors. In the past six 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 six months by the downsizing of facilities and the
reduction in personnel. Stock and option-based compensation for services and
expense totaled $364,912 for the six months ended December 31, 1998 compared to
$768,131 for the same period last year reflecting a conservation of these
resources by management.
The Company discontinued its cellular activation business in the prior fiscal
year resulting in a $52,387 loss for the six-month period being deconsolidated
and reclassified as "discontinued."
Liquidity and Sources of Capital
During the six months ended December 31, 1998, the Company's operating cash
requirement was $1,817,395, attributable to a net loss of $3,040,866 mitigated
by non-cash charges for depreciation and amortization ($478,175) and stock and
option based services ($599,011). The net remaining shortfall was primarily
funded by the net sale of common and preferred stock for $1,216,625 and
$1,246,846, respectively, and the proceeds from capitalized leases on ATM/Scrip
machines (transaction processing division) of $619,058. Partially offsetting
this funding were capital expenditures of $400,070 (primarily for ATM/Scrip
units placed in the field) and debt repayments of $307,691.
Royalty advances were $382,043 for the six-month period in accordance with the
terms of the Company's exclusive licensing agreement with MedCard Management
Systems (See Note 2).
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Sources of Capital (Continued)
After December 31, 1998, the Company completed a private placement for the sale
of both common and preferred stock yielding net cash to the Company of $487,000.
The Company also converted $840,000 of long-term debt and accounts payable into
common stock of the Company (see Note 10).
During the six months ended December 31, 1997, the Company's cash requirement
(net loss adjusted for non-cash provisions) was primarily funded by $1,460,000
in proceeds from debt which was subsequently converted to common stock. Stock
based compensation and services valued at $768,131 were used to conserve cash.
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 modification to existing
software the issue will not pose significant operational concerns nor have a
material impact on financial position or results of operations. Cost of
modifications is not expected to be material and will be expensed as incurred.
The Company has inquired that major independent suppliers and support providers
will also be Year 2000 compliant.
<PAGE>
Item 2. Changes in securities and use of proceeds
In July,1998, the Company sold 1,425,000 share of its common stock at $1.00 per
share to a group of private investors. Net proceeds to the Company from the sale
of these shares were $1,214,625 net of $210,375 in offering related expenses.
In November and December,1998, the Company sold 1,500 shares of its Series "C"
Preferred Stock at $1,000 per share to a group of private investors. Net
proceeds to the Company from the sale of these shares were $1,246,846 net of
$253,154 in offering related expenses.
Item 6. Exhibits and reports on Form 8-K
The Company filed 8-K reports on December 10, 1998 and January 20, 1999.
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/ Michael Malet
Michael Malet
Vice President
/s/ Ian Hart
Ian Hart
Chief Financial Officer
Date: February 19, 1999
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