SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended June 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-25474
SIMS COMMUNICATIONS, INC.
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(Name of Small Business Issuer in its charter)
Delaware 65-0287558
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(State of incorporation) (IRS Employer
Identification No.)
18001 Cowan, Suites C&D
Irvine, California 92614
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(Address of Principal Executive Office) Zip Code
Registrant's telephone number, including Area Code: (949) 261-6665 Securities
registered pursuant to Section 12(b) of the Act: None Securities registered
pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the Registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days.
X
YES NO
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The Company's revenues for the most recent fiscal year were $2,240,876.
The aggregate market value of the voting stock held by non-affiliates of the
Company, (17,172,937 shares) based upon the average bid and asked prices of the
Company's Common Stock on September 30, 1999 was approximately $1,288,000.
As of September 30, 1999 the Company had 17,635,639 issued and outstanding
shares of common stock.
<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS
SIMS Communications, Inc. (the "Company") was incorporated in Delaware in
August 1991 to rent cellular telephones through a stand-alone dispensing station
known as an Automated Communications Distribution Center ("ACDC"). 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. At September 30, 1999, the Company was not operating any
ACDC units and the Company's only remaining franchisee had four ACDC units in
operation.
The Company changed its name to MedCom USA, Incorporated in October, 1999.
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.
In December 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 ("PCD's") 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 PCD's are full sized stand-alone vending machines and are operated
by the Company. Long distance time for the prepaid calling cards is purchased by
the Company from various venders. Link also markets a proprietary scrip terminal
which dispenses a receipt to the customer which can be used to pay for
merchandise and/or services.
In June 1999 the Company sold 520 of Link's scrip terminals to the employee who
was responsible for overseeing this aspect of the business. Although the Company
did not receive any material cash payment in connection with this sale, the
purchaser of the assets agreed to assume $70,000 in accounts payable and
approximately $600,000 in capitalized lease obligations associated with the
acquisition of the scrip terminals. The assets sold had a net book value of
approximately $635,000. The Company recognized as income previously recorded
deferred gross profit related to the scrip terminals totaling $212,805, as well
as an immaterial gain related to the sale of the assets and the release from the
related obligations. Excluded from the sale of Link's assets were 117 scrip
terminals (45 of which are in operation) and all of the PCD's. The purchaser
also agreed to hire all of the employees involved with this business line and to
assume the lease obligation for the related office space. The script terminals
were sold because this line of business was not profitable and, in the opinion
of the Company's management, was not likely to become profitable in the
foreseeable future.
The Company is continuing to use the scrip terminals and PCDs excluded from the
sale, although this is not a major focus of the Company. The script terminals
and PCD's are managed by personnel involved in other aspects of the Company's
business.
<PAGE>
In May 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. One Medical provides a financial processing and communications network
for the Home Medical Equipment (HME) industry. In addition to processing
information and verifying insurance medical cards, this network connects HME
buyers with a network of HME vendors. This proprietary network has been
designated for the medical and managed healthcare market, but at the present
time is being marketed to the retail pharmacy industry. As of September 30,
1999, 80 pharmacies, 13 HME service centers, 8 HME vendors and one catalogue
vendor were members of the One Medical network.
In July 1999 the Company licensed its rights to the One Medical Service
Network to an unrelated third party for $1,377,000, of which $300,000 was paid
by September 30, 1999, $267,000 of which is to be paid by January 5, 2000 and
the remainder of which ($810,000) will be paid in accordance with the terms an
unsecured promissory note which bears interest at 7% per year. The principal due
on the note is to be reduced by license royalties due the Company, up to a
maximum of $6,000 per month, and prepaid phone card credits of $3,000 per month.
On July 30, 2002 the licensee is to make a one-time payment to the Company equal
to 25% of the then outstanding principal on the note. All unpaid principal and
interest is due on July 30, 2006. The licensee can convert the amounts paid for
royalties and the license fee into an 81% interest in One Medical Services and
can acquire the remaining 19% for the greater of $132,000 or its fair market
value. The Licensee also agreed to acquire the inventory as they needed it and
pay $200,000 of accounts payable related to the inventory. The Licensee hired
the full time employees involved with this operation. The Company retained as
employees those persons who devoted less than full time to the One Medical
Services Network. These people primarily provide technical support,
installations, repairs, maintenance of the underlying software and billing
support. The Company charges the Licensee for these services on a time and
materials basis. The Licensee also assumed other overhead associated with the
One Medical operation. The Company uses the prepaid phone card credits in the
sale of its prepaid calling cards.
The Company licensed the rights to the One Medical service because this
line of business was not profitable. The license also provides the Company with
monthly income.
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.
As of September 30, 1999 substantially all of the Company's revenues were
generated by the JustMed.com and the Movie Vision divisions.
<PAGE>
JustMed.com
The JustMed.com division involves three components:
o The MedCard health insurance verification and billing system
o The JustMed.com website
o The Med Store
MedCard System
In November 1998 the Company acquired, from an unrelated entity, Dream
Technologies, LLC (Dream), an exclusive worldwide license to software programs
and related technology known as the MedCard System. In consideration for this
acquisition, Dream received $450,000 in cash, 100,000 shares of the Company's
restricted stock and a three-year warrant to purchase 350,000 shares of the
Company's common stock at $1.28 per share.
The Company is required to pay a royalty to Dream equal to twenty-five
percent of the first $1,000,000 of net monthly revenue and ten percent of net
monthly revenue in excess of $1,000,000. The term net revenues means the gross
revenues received from the use of the MedCard software program less (a) terminal
lease costs of up to $50 per month,: (b) commissions payable to agents which
place terminals with end users; and (c) network costs which include (i) claim
fees payable to data vendors, (ii) charges for verification of insurance
coverage and (iii) similar telecommunications charges related to obtaining
claims processing and/or benefits verification information.
The original Medcard license was for a period of fifteen years and was
exclusive for the entire term provided at least fifteen thousand systems were
sold to end users by May 31, 2001. The Company, as of March 31, 2000, had sold
approximately 850 systems.
In May 2000 the license agreement with Dream was amended such that the
Company acquired all rights to the MedCard system including all software
programs, intellectual property, trade names and existing contracts. The
amendment effectively terminated the original License Agreement, except that the
royalty provisions of the original license agreement will remain in effect until
November 2013. In consideration for this amendment, Dream received 100,000
shares of the Company's restricted common stock and a warrant to purchase
400,000 shares of the Company's common stock at $3.57 per share at any time
prior to May 11, 2003. For financial reporting purposes the warrant had a cost
of $449,446 based upon an imputed value of $1.12 per share, using the Black
Scholes option pricing method with the following assumptions: Expected life - 2
years, 48% volatility, risk free interest rate of 6.5% and 0% dividend rate. The
Company believes the acquisition of the rights to the technology and the other
aspects, along with the simultaneous termination of the License Agreement will
ensure its exclusive and perpetual use of the MedCard System.
<PAGE>
The License agreement also required the Company to retain as consultants
two owners of Dream Technologies until May 31, 2001 at a fee of $2,000 per
person per week. in June 2000 the Company hired these individuals as employees
under two year employment contracts with essentially the same terms.
The MedCard System is an electronic processing system which consolidates
insurance eligibility verification and processes medical claims and approvals of
credit card and debit card payments in under 30 seconds through a small terminal
or personal computer. Using the MedCard system, patients are relieved from the
problems associated with eligibility confirmation and billings, healthcare
providers' reimbursements are accelerated and account receivables are reduced.
The time it takes to collect payments from insurance providers decreases from
months to days.
The Company also markets a complete billing service using the MedCard
System to hospitals and large practice groups. The Company receives a percentage
of the amounts collected under these arrangements, as opposed to a fee for each
item processed. As of March 31, 2000, the Company was providing this service to
one hospital and one medical practice group.
The Medcard System also allows a patient's primary care physician to
request approval from the patient's insurance carrier or managed care plan for a
referral to a secondary physician or specialist. The secondary physician or
specialist can use the MedCard system to verify that the referral has been
approved by the patient's insurance carrier, thereby eliminating numerous
telephone calls that are normally required with referrals. The MedCard system's
referral capabilities reduces paperwork and administrative costs, increases
productivity and provides greater patient information for the specialist, as
well as a written record of the referral authorization.
The MedCard system can record and track encounters between patients and
health care providers for performance evaluation and maintenance of hospital
records. After examining a patient a physician is able to enter the patient's
name, procedure code and diagnostic code at a nearby terminal. This information
is then downloaded daily to MedCom's computer network, processed and transmitted
back to the hospital in both summary and detail reports sorted by day, week,
date and name of physician.
The MedCard System currently operates through either a Point of Sale
Terminal or a personal computer. The Point of Sale Terminals are purchased from
Hypercom USA, Inc. (Hypercom) under a non-cancelable agreement that expires in
February 2001. If the contract with Hypercom is not renewed, the Company could
purchase its terminals from another supplier although this may result in a
disruption of the Company's sales process for a short period of time while its
software is reconfigured to meet the specifications of the new supplier.
However, the Company believes that it is unlikely that the Company will stop
purchasing terminals from Hypercom upon the expiration of the current agreement.
If this occurs, the Company anticipates that it will have adequate notification
to make the necessary software modifications in a timely manner so as to not
disrupt operations. An on-line version is under development.
<PAGE>
Revenues from the MedCard system are generated through the sale of
terminals, for verifying insurance eligibility and for processing insurance
claims. Potential revenue sources include fees for credit card transactions
processed through the terminal, fees for collection of receivables if the
Company provides billing services, reimbursement by insurance carriers for
submission of claims electronically, fees for using the system's referral
program and processing encounter data.
The MedCard System is marketed through Company sales personnel, as well as
independent sales representatives and financial institutions such as EFS
National Bank, a subsidiary of Concord EFS, Inc., Physicians Management Group,
and Healthtech Systems. Company sales personnel generally receive a commission
for sales of the terminals. The Company receives a fixed amount per terminal if
the sale is not made by Company sales personnel. The Company also receives a fee
for each transaction processed through the MedCard System.
For the year ended June 30, 1999, the majority of MedCard Systems revenue
was developed by Company sales personnel, with the remaining revenues
distributed among several independent sales representatives, none of whom,
individually, resulted in a material amount of MedCard System sales. For the
nine months ending March 31, 2000, 95% of terminal sales were completed by
Company sales personnel, including the sale of 500 terminals to Executive
Healthcare Services and 68 terminals to Physician Management Group, both of
which are Independent Sales Organizations. The remaining MedCard System revenues
were developed by several other independent sales representatives, none of
which, individually, resulted in a material amount of sales.
As of June 30, 2000 the MedCard system was able to retrieve on-line
eligibility and authorization information from approximately 125 medical
insurance companies and electronically process and submit billings for its
healthcare providers to over 1,650 companies. These insurance providers include
CIGNA, Prudential, Oxford Health Plan, United Health Plans, Blue Cross,
Medicaid, Aetna, Blue Cross/Blue Shield and Metrahealth.
Website
The JustMed.com website is an Internet web site which began functioning on
July 1, 1999. The website advertises healthcare products and services which are
available to the general public and provides medical information to the general
public. Persons in need of healthcare products and services can access the
website and order products or transfer to the more detailed websites maintained
by the companies which provide the products and services. The Company expects to
generate revenues from this website by charging providers of healthcare products
and services fees for advertising on the website. The Company will also receive
fees when a person transfers from the Company's website to the websites
maintained by a provider of healthcare products or services. The Company expects
that advertisers on its website will include distributors of healthcare
equipment and products, hospitals, physician practice groups, and clinics. The
Company is not currently marketing its web site.
<PAGE>
The Company obtains the medical and other information for its website
primarily from three independent suppliers, Healthology, InfoSpace.com and
iSyndicate. These suppliers operate under agreements with terms ranging from one
to two years. In the event that any or all of these providers decide not to
renew their contract with the Company, the Company believes that it could locate
alternate website content providers with no interruption to the Company's
business operations.
Med Store
The Med Store is a feature of Sims' website which allows consumers to use
their computers to purchase a variety of healthcare products and services
supplied by unrelated manufacturers and healthcare service providers. Items
available for purchase include canes, crutches, walkers, bath chairs, blood
pressure units, cold therapies, exercise equipment and hot and cold packs. The
Med Store became operational on July 1, 1999. The Company is not currently
directly marketing the Med Store aside from its website.
Accredited Homecare Pharmacy and Accredited Medical Services are
responsible for filling orders for products or services purchased from the Med
Store. The providing of these fulfillment services can be terminated at the
discretion of either party. If the fulfillment companies decide to no longer
service the Company, management believes that another supplier could handle the
fulfillment process, with no disruption to the Company's operations.
Movie Vision
In January 1998 the Company issued 550,000 shares of its common stock to
the shareholders of Moviebar Company USA and Vectorvision, Incorporated in
consideration for the acquisition of businesses known collectively 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 110 hotels and time
share facilities in the United States. Machines are located in approximately
twenty states with the largest concentration in Florida and California. Movie
Vision services are marketed through Company personnel.
The customer can either rent a single video or purchase a video card that
entitles the customer to view an unlimited number of videos during the rental
period (three to seven days).
DCB Actuaries & Consultants
In April 2000, the Company acquired 100% of the stock of DCB Actuaries &
Consultants SRO (DCB), a Czech Republic based company and certain technology and
intellectual property from DSM, LLC (DSM), a Florida limited liability company.
DCB developed and currently operates a health insurance decision support system
with advanced data structures. The purchase price of DCB was approximately
$2,500,000 and was comprised of the following:
<PAGE>
Series D preferred stock $ 494,000
Purchase price - cash 1,403,848
Direct costs of acquisition - cash (estimated) 135,763
Direct costs of acquisition - 12,880 shares
of common stock 52,037
Excess of liabilities
over assets of DCB 412,480
Total acquisition value $2,498,128
==========
The purchase price of the technology and intellectual property acquired from DSM
was approximately $3,305,000 and was comprised of the following:
Series D preferred stock $2,356,000
Purchase price - cash 746,153
Direct costs of acquisition - cash (estimated) 104,488
Direct costs of acquisition - 24,249 shares
of common stock 97,963
Total acquisition value $3,304,604
==========
Each of the 2,850 shares of Series D preferred stock issued in connection with
the acquisition of DCB and the DSM technology are convertible into 202.4 shares
of the Company's common stock at any time at the holder's option, for a total of
576,923 shares of common stock. The Company can convert the Series D Preferred
shares into shares of Medcom's common stock, in the manner described above, at
any time after April 15, 2001 so long as the bid price of Medcom's common stock
exceeds $4.94 and the shares of common stock issuable upon the conversion of the
Series D Preferred shares are either covered by an effective registration
statement or are eligible for sale pursuant to Rule 144 of the Securities and
Exchange Commission.
DCB is a member of an international network of actuarial consulting firms,
Woodrow Milliman, an international network of actuarial and consulting firms
represented in 34 countries, employing over 3,000 people worldwide. DCB was
formed in 1991 and currently employs approximately 65 professionals in the Czech
Republic, primarily highly qualified software engineers, actuaries and
consultants.
DCB developed and operates a Health Information Gateway, which is a state of the
art, web-based infrastructure, featuring advanced data mining capabilities,
designed to meet the information needs of the worldwide health care industry in
a real time basis. The Health Information Gateway can be a valuable tool for
healthcare entities of almost any size, from the small physician group to the
large hospital chain or insurance company and plan.
There are four main components, each targeting a different group of users. They
include:
<PAGE>
o Risk Management - Actuarial analysis and PMPM predictions (per member per
month predicted cost) are provided. These features are ideal for the
insurance company or managed care plan, as well as for a hospital
concerned with controlling its costs. This segment is of particular
interest to those involved with the financial implications of operating a
healthcare facility or insurance concern.
o Clinical Services - Electronic patient record system, critical care
pathways and electronic medical documents are available. On-line documents
include x-rays, diagnostic results, lab reports, EKGs and physician notes.
The electronic medical documents feature allows a healthcare provider to
review these patient critical documents on-line, possibly from home or the
office. More than one physician in multiple locations can also review the
records simultaneously. This has significant implications regarding the
ability to provide quick and effective consultations. This aspect can be
used by healthcare providers of any size, while improving the care given to
the patient. The critical care pathways can indicate a standard treatment
regimen based upon the patient's particular background and symptoms, as
compared to the actual course of action being followed. The Clinical
Services segment is geared towards the physicians and improving the overall
standard of care and the ability to enhance the ease by which it is given.
o Administrative and Management Functions - The Health Information Gateway
can assist with quality assurance and management, as well as claims
analysis. Market and sales scrutiny can also be accomplished. This aspect
covers not only certain of the financial concerns, but also enables the
healthcare provider (from the small physician practice to the large
hospital organization or insurance company) to review its performance,
against its own goals or the results of other similarly sized or located
organizations. It provides a barometer of their overall performance. The
reporting features can be tailored to meet the information needs of the
user, whether they are a small independent practitioner or a large
healthcare chain.
o Patient Services - The patients will also benefit from the Health
Information Gateway. They will be able to monitor personal health
profiles, in addition to their own medical treatment histories. Early
warning and reminder alerts will also be available on line.
The Company intends to market DCB's Health Information Gateway to hospitals,
insurance companies, consultants and governmental agencies in the United States
and abroad. Both Company personnel and outside consultants will market DCB's
products. The Company will offer the Health Information Gateway in two formats,
a direct license of the technology to the end user, as well as providing the
service under an Application Service Provider (ASP) relationship. By offering
both alternatives, the Company believes it will be able to capture a larger
market share, since it will be able to accommodate the needs of different sized
organizations with varying budgetary constraints. The ASP center is currently
under construction in a newly leased facility in Florida.
<PAGE>
DCB's has other products related to healthcare, pensions and medical insurance.
One such product is its "VFlex" product. VFlex stands for Virtual Flexible
Benefits. Using VFlex, employees will have the ability to administer their own
benefits over a company's intranet from anywhere in the world. The Company
anticipates marketing this program to large companies with multi-national
operations.
Competition
There are many companies that compete with the Company at some level.
Competing health insurance processing systems include Envoy, Medical Manager,
Medic, Spot Check and Mediphis. Leading consumer healthcare websites include AOL
Health Channel, Thrive Online, drkoop.com, Mayo Clinic Health Oasis,
InteliHealth, Mediconsult.com, and OnHealth. The Company also faces competition
from a variety of sources with respect to its Movie Vision operations, including
premium cable companies such as HBO and Showtime, video on demand companies
including On Command Video and Lodgenet Entertainment as well as smaller
vendors, such as VTV and Suite View that provide the same service as the
Company. The Company anticipates that DCB will compete with Eclipsys,
Healtheon/Web MD, Medisoft and McKesson/HBOC in terms of providing high end
technical solutions to the healthcare industry, although Company management
believes that none of these competitors provide as comprehensive a system as is
provided by DCB. Many of these competitors are far better capitalized than the
Company and control significant market share in their respective industry
segments.
Employees and Offices
As of September 30, 1999, the Company employed 18 persons on a full-time
basis. Nine 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's executive offices are located at 18001 Cowan, Suite C&D,
Irvine, California 92614 and consist of 4,900 square feet of space which are
leased at an annual rent of $70,000. This lease on the space expires in August
2003. The Company leases a 7,000 square foot production and office facility in
Orlando, Florida at an annual rent of $50,000. The lease on this facility
expires in December 2005. The Company's telephone number is (949) 261-6665.
ITEM 2. DESCRIPTION OF PROPERTIES
See Item 1 of this report.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
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On December 21, 1998 Albert Levenberg filed a complaint against the
Company in the Fifteenth Judicial Circuit Court, Palm Beach County, Florida. The
complaint seeks $250,000, plus interest and legal costs, related to loans made
by Mr. Levenberg to the Company in 1994. The Company believes the claim is
without merit as the loans had either been repaid or converted into franchises
for sale of ACDC units.
On May 11, 1999 Arthur Fried, a former employee, filed a complaint against
the Company in the Orange County, California Superior Court seeking actual
damages of $269,000, and an unspecified amount of general and punitive damages.
The former employee claims that the Company breached a written employment
agreement and made certain misrepresentations to the former employee. The
Company believes these claims are without merit and has filed a counterclaim
against the former employee.
Other than the foregoing there are no material legal proceedings to which
the Company is a party or to which its properties are subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
-------------------------------------------------------------
Not Applicable
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of September 30, 1999, there were approximately 350 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 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 High Low
9/30/97 $2.31 $1.25
12/31/97 $5.00 $1.50
3/31/98 $2.87 $1.09
6/30/98 $2.75 $1.56
9/30/98 $2.88 $1.38
12/31/98 $2.44 $.56
<PAGE>
3/31/99 $2.25 $.44
6/30/99 $1.69 $.88
Holders of Common Stock are entitled to receive such dividends as may be
declared by the Board of Directors 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 its 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.
Issuance of Common Stock
During the two years ended June 30, 1999 the Company issued:
846,827 shares pursuant to the exemption provided by Regulation S,
28,200 shares upon the conversion of the Company's series A and Series B
preferred stock,
2,679,271 shares in settlement of notes payable,
1,041,500 shares pursuant to the Company's stock bonus plans,
792,350 shares in connection with the acquisition of the Company's Movie Bar,
One Medical and MedCard Divisions,
318,512 shares in payment of outstanding liabilities,
300,000 shares in connection with the termination of certain franchises which
were previously sold by the Company (as well as related litigation),
2,716,968 shares for services rendered, and
5,883,379 shares for cash in private offerings.
The shares issued upon the conversion of the Series A and B preferred
stock and in settlement of the notes payable were issued in reliance upon the
exemption provided by Section 3(a)(9) of the Securities Act of 1933.
<PAGE>
The shares issued pursuant to the Stock Bonus Plan were registered by
means of a registration statement on Form S-8.
The remaining shares issued or sold during the two years ended June 30,
1000 were issued or sold in reliance upon the exemption provided by Section 4(2)
of the Act. The persons who acquired these shares were either accredited or
sophisticated investors. The shares of common stock were acquired for investment
purposes only and without a view to distribution. The persons who acquired these
shares were fully informed and advised about matters concerning the Company,
including the Company's business, financial affairs and other matters. The
persons acquired these shares for their own accounts. The certificates
representing the shares of commons tock bear legends stating that the shares may
not be offered, cols or transferred other than pursuant to an effective
registration statement under the Securities Act of 1933, or pursuant to an
applicable exemption from registration. The shares are "restricted" securities
as defined in Rule 144 of the Securities and Exchange Commission.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following selected financial data should be read in conjunction with
the more detailed financial statements, related notes and other financial
information included herein.
Statement of Operations Data:
----------------------------
Years Ended June 30,
1999 1998
---- ----
Revenues $2,212,376 $980,951
Cost of Services (634,518) (523,479)
Operating and other
Expenses (8,724,843) (7,503,483)
Loss from Discontinued Operations -- (63,737)
---------------- ---------------
Net Loss $(7,146,985) $(7,109,748)
============ ============
Balance Sheet Data:
------------------
June 30,
1999 1998
---- ----
Current Assets $1,168,055 $787,998
Total Assets 6,374,862 5,602,751
Current Liabilities 2,142,550 2,785,015
Total Liabilities 2,268,256 3,372,542
Working Capital (Deficit) (974,495) (1,997,017)
Shareholders' Equity 4,106,606 2,230,209
No Common Stock dividends have been declared by the Company since its inception.
<PAGE>
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, 2000.
Percent of Gross Revenues
-------------------------
Year Ending
Years Ending June 30, June 30, 2000
---------------------
1998 1999 (Projected) (1)
---- ---- ---------------
Rental of cellular telephones directly from
Company and from ACDC Units. 11% -- --
Sale of ACDC units and related equipment. -- -- 4%
Fees paid by cellular telephone companies
for activation of cellular telephones. 17% -- --
Sale of prepaid calling cards. 14% 4% 1%
Sale of long distance telephone service. 4% -- --
Revenues from Link International. 15% 28% --
Revenues from Movie Vision 38% 40% 15%
Revenues from One Medical Service 1% 7% 10%
Revenues from JustMed.com -- 19% 70%
Miscellaneous Income -- 2% --
(l) There can be no assurance that these percentages will not change
significantly based upon events that may not be within the Company's
control. Projected revenues for the year ending June 30, 2000 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.
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. At September 30, 1999, the Company was not
operating any ACDC units and the Company's only remaining franchisee had four
ACDC units in operation.
<PAGE>
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 phone 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.
In December 1996 the Company acquired all the issued and outstanding
shares of Link International, Inc. (see Item 1 of this report). In June 1999 the
Company sold 520 of Link's scrip terminals to the employee who was responsible
for overseeing this aspect of the Company's business. Although the Company did
not receive any material cash payment in connection with this sale, the
purchaser of the assets agreed to assume $70,000 in accounts payable and
approximately $600,000 in capitalized lease obligations associated with the
scrip terminals. The assets sold had a net book value of approximately $635,000.
The Company recognized as income previously recorded deferred gross profit
related to the scrip terminals totaling $212,805, as well as an immaterial gain
from the sale of the assets and the release from the related obligations.
In January 1998 the Company acquired its Movie Vision division from
Moviebar Company USA and Vectorvision, Incorporated. Movie Vision rents
videocassettes, primarily containing motion pictures, through automated
dispensing units in hotels and time share facilities.
In May 1998 the Company acquired One Medical Services, Inc. (see Item 1 of
this report). In July 1999 the Company licensed its rights to the One Medical
Service Network to an unrelated third party (Licensee) for $1,377,000, of which
$300,000 was paid by September 30, 1999, $267,000 of which is to be paid by
January 5, 2000 and the remainder of which (810,000) will be paid in accordance
with the terms an unsecured promissory note which bears interest at 7% per year.
The principal due on the note is to be reduced by license royalties and other
credits up to a maximum of $9,000 per month. The Licensee also agreed to
purchase approximately $200,000 of the Company's inventory on an as needed basis
and to pay the related accounts payable. Such inventory is being released to the
Licensee as requested at which time the Licensee pays the related accounts
payable. The Licensee hired the full time employees involved with this
operation. The Company retained as employees those persons who devoted less than
full time to the One Medical Services Network. These employees primarily provide
technical support, installations, repairs, maintenance or the underlying
software and billing support. The Company charges the Licensee for these
services on a time and materials basis. The Licensee also assumed other overhead
associated with the One Medical operation. This transaction will improve the
Company's cash flow by eliminating overhead, recovering amounts for services
provided and providing for future licensing and royalty fee income.
In November 1998 the Company acquired the world wide license to software
programs and related technology known as the MedCard system. The MedCard system
is an electronic processing system which consolidates insurance eligibility
verification and processes medical claims and approvals of credit card and debit
card payments in under 30 seconds through a single, small terminal or a personal
computer. The MedCard system is a major component of the Company's JustMed.com
division.
<PAGE>
Revenues from the MedCard System are generated from the sale of terminals,
for verifying insurance eligibility and for processing insurance claims.
Potential revenue sources include fees for credit card transactions processed
through the terminal, fees for collection of receivables if the Company provides
billing services, reimbursement by insurance carriers for submitting claims
electronically, fees for using the system's referral program and fees for
processing encounter data. The Company anticipates that the MedCard System will
begin generating significant revenues during the year ending June 30, 2001.
Year Ended June 30, 1999
During the year ended June 30, 1999, the Company's revenue increased as a
result of the Company's expansion into financial processing (Link debit and
scrip terminals), medical transaction processing (One Medical and MedCard
operations) and automated motion picture rentals (Movie Vision division). These
business segments produced revenues of $625,801, $583,777 and $860,126,
respectively for the year ended June 30, 1999. Comparable revenues from these
segments for the year ended June 30, 1998 were substantially less since the full
scale distribution of the Link debit and scrip terminals did not begin until
April 1998, and the One Medical and MedCard operations did not commence
operations until May 1998 and November 1998, respectively. During the summer of
1999 the Company began directing its efforts toward its JustMed.com division. As
a result of this change in focus, and as discussed above, the Company sold a
major portion of its script terminals in June 1999 and the Company licensed its
rights to the One Medical Service Network in July 1999. In connection with the
sale of the financial processing division, the Company recognized $210,000 of
deferred gross profit.
Selling, Marketing and General and Administration expenses (including
depreciation) increased to nearly $8,400,000 during the year ended June 30, 1999
compared to $5,900,000 in the prior year primarily due to the following:
1) The financial processing segment, One Medical and Movie Vision were
operating during all twelve months of fiscal 1999, compared to shorter
periods in the prior year.
2) The Company acquired its MedCard operation in November 1998. As a
result, only operations for the twelve month period ending June 30, 1999
were affected by the expenses of this division.
3) Depreciation and amortization expense was $1,099,871 in the year ended
June 30, 1999 compared to $474,372 in the prior period. A substantial
portion of this increase was the result of depreciating assets related
to the Company's ACDC operations for a full year compared to the prior
year.
4) As a result of the sale of a portion of its financial processing
division, the Company incurred approximately $140,000 of commission
expense in the quarter ended June 30, 1999.
5) The Company incurred one-time expenses related to the closing of offices
in New Jersey and Modesto, California offices and in the termination of
offices leases Florida.
6) The Company expensed approximately $200,000 in additional reserves
against note receivables deemed uncollectible at June 30, 1999. See Note
5 to the Company's June 30, 1999 Financial Statements.
<PAGE>
During the year ended June 30, 1999 equity-based compensation increased to
$2,540,338, which was 50% greater than the prior period. The Company issued
shares of its common stock to pay for the services provided by employees and
outside consultants retained for a number of projects, including the development
of the Company's website, internet healthcare web portal and e-commerce business
applications.
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
expenses 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 ended June 30, 1998:
1) An expense of $1,687,422 as the result of issuing shares of stock,
options and warrants for services rendered.
2) 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.
3) 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 determined that Cancall would not be able to comply
with the terms of the Licensing Agreement. Accordingly, 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
<PAGE>
expense of ($764,000) was recorded which represented the profit previously
recorded by the Company on the sale of the ACDC units and the receipt of the
licensing fee. This provision was based on the fair market value of the ACDC
units that collateralized the note receivable.
4) 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 did not receive payment for the units, which were subsequently returned
to the Company, and a reserve of $374,980 (the profit recognized for the units
sold) was recorded for uncollected receivables, which reduced the net
collectable amount of the note to equal the fair market value of the underlying
collateral.
5) The Company recorded a valuation reserve ($200,000) for the Company's
investment in Smartphone, a corporation which sold prepaid cellular telephones.
The Company's investment represented a 10% interest in Smartphone. The Company
wrote off its investment in Smartphone since Smartphone ceased operations and
did not have any net worth.
6) During the year ended June 30, 1998, the Company's ACDC machine
operations changed from a primarily franchise oriented operation to a primarily
company-owned operation. As such, the Company converted the existing ACDC
inventory that was formerly held for sale to fixed assets and began depreciating
these units over their remaining estimated useful lives. This resulted in an
increase in depreciation expense during the year ended June 30, 1998.
7) An increase in the ACDC depreciation and patent amortization rates due
to the classification of ACDC machines from inventory to fixed assets the
related depreciation and a full year of patent amortization.
Liquidity and Sources of Capital
During the year ending June 30, 1999 the Company's operations used
approximately $3,400,000 of cash. In order to fund its operating losses, the
Company sold shares of its common stock and preferred stock in private
placements. Approximately $1,400,000 was raised from the sale of preferred stock
and approximately $2,600,000 was raised from the sale of 3,636,879 shares of
common stock. The 3,636,879 shares of common stock were sold at discounts
ranging from 11% to 60% of the then prevailing market price of the Company's
common stock since the shares were restricted securities, as that term is
defined in Rule 144 of the Securities and Exchange Commission. None of these
shares were issued to employees of the Company. During fiscal year 1999, the
Company also issued (i) 2,607,950 shares of common stock in exchange for
services and equipment valued at $2,340,423, (ii) 2,260,675 shares of common
stock in settlement of outstanding liabilities totaling $1,796,201, and (iii)
262,969 shares of common stock for other matters. The total shares issued during
the year was 8,768,473.
During the year ended June 30, 1999 the Company granted options and
warrants for the purchase of 6,771,164 shares of common stock to officers,
employees consultants and other third parties. The exercise prices of the
<PAGE>
warrants issued to consultants relating to 994,360 shares of common stock were
below the then prevailing market price of the Company's common stock on the date
the warrants were granted since the shares issuable upon the exercise of the
warrants were restricted securities as that term is defined in Rule 144 of the
Securities and Exchange Commission.
Between July 1, 1999 and June 30, 2000, the Company raised approximately
$6,100,000, net of expenses of approximately $659,000, from the sale of
6,562,645 shares of common stock at prices ranging from $.45 to $4.00 per share.
A total of 3,090,000 of these shares were issued at prices below market since
the shares were restricted securities. None of these shares were issued to the
Company's employees. The Company also issued approximately 1,860,000 shares of
common stock and received approximately $2,190,000 in cash as a result of the
exercise of options and warrants at prices ranging between $.44 and $5.00 per
share.
Proceeds of $567,000 from the licensing of the One Medical Services
Network were also used to fund 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
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 repay outstanding debt and fund receivables and inventory balances.
The Company's auditors stated in their report on the Company's financial
statements for the year ended June 30, 1999 that due to the Company's recurring
losses form operations there is substantial doubt as to the Company's ability to
continue in business. The existence of such an explanatory paragraph in the
auditor's opinion can make it more difficult for the Company to raise or borrow
additional funds.
Although the Company has reduced its cash requirements for normal
operations through the sale of the Link assets and the license of the One
Medical Services Network, it will still need cash to fund operating losses
during the year ending June 30, 2000. As of June 30, 2000 the Company had
approximately $1,900,000 in cash. The Company projects that it may need to
obtain an additional $1,000,000 to fund its operations before its cash inflows
equal its cash outflows, depending upon whether the Company is able to finance
some of its equipment acquisitions. The Company is currently attempting to
obtain such equipment financing. The Company may also seek additional funding to
be able to capitalize upon the existing opportunity for both the MedCard System
and DCB's health Information Gateway. Obtaining this additional funding will
allow the Company to fully implement its business plan and to capitalize on the
market potential in a faster manner. The Company may also be able to obtain
additional funding, if necessary, by selling additional shares of its common
stock. There can be no assurance, however, that the Company will be successful
in obtaining additional funding. If the Company is unsuccessful in obtaining
additional funding for its operations, the Company will, if necessary, either
sell certain assets or divisions, reduce its operations or otherwise reorganize
its operations so that its operating expenses would be less than its revenues.
<PAGE>
During June 2000, the Company's shareholders approved an amendment to the
Company's Articles of Incorporation increasing the authorized capitalization of
the Company to 80,000,000 shares of common stock.
As of June 30, 1999 the Company had borrowed $250,000 under a bank line of
credit, which was secured by a certificate of deposit. In July 1999, the Company
redeemed the certificate of deposit and used the proceeds to pay amounts due
under the line credit. The line of credit was then terminated.
As of June 30, 1999, the Company had defaulted on the payment of
convertible notes in the principal amount of $94,000. Subsequent to June 30,
1999, notes in the principal amount of $69,000 were converted into shares of
common stock. A note with a balance of $25,000 remains unpaid as the Company is
unable to locate the lender. With respect to the remaining notes payable as of
June 30, 1999, $11,214 was paid, $343,905 was converted into 393,035 shares of
common stock and the maturity on the balance ($70,000) was extended to November
1, 2000. This note was converted into 100,000 shares of the Company's common
stock in June 2000.
The Company's long-term debt consists entirely of obligations under
capital leases. As of June 30, 2000 and 1999, the Company is in compliance with
the covenants and provisions of these leases.
In January 2000 the holders of the Company's Series C preferred shares
converted the preferred shares into 3,490,000 shares of the Company's common
stock. In payment of accrued dividends and other costs the Company made cash
payments of $160,567 and issued 60,000 shares of its common stock plus warrants
to the holders of the Series C preferred shares. The warrants allow the holders
to purchase 132,000 shares of the Company's common stock at a price of $0.75 per
share at any time prior to December 22, 2002. For assisting in arranging the
conversion of the preferred shares, the Company issued 175,000 shares of common
stock to a financial consultant.
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 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 are 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. The Company has
<PAGE>
requested that its major independent suppliers and support providers confirm
that they will be Year 2000 compliant.
ITEM 7. FINANCIAL STATEMENTS
See the financial statements attached to this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS, COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The Company's officers and directors are as follows:
Name Age Position
Mark Bennett 40 President and a Director
Michael Malet 51 Executive Vice President and a Director
Alan Ruben 43 Chief Accounting and Financial Officer
David Robinson 36 Vice President and Chief Technology Officer
Vladimir Havlena 44 Managing Director - DCB Actuaries and Consultants,
s.r.o.
Jeffrey Yablon 39 Vice President of Sales
David Breslow 55 Director
Julio Curra 40 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 and other
key employees.
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.
<PAGE>
Michael Malet has been the Company's 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.
Alan Ruben joined the Company as Chief Accounting and Financial Officer in
October 1999. Prior to joining the Company, he was the Chief Financial Officer
for Direct Container Line, Inc., an international shipping company. Previously
Mr. Ruben was the Vice-President and Chief Financial Officer for Relsys
International, Inc., a medical software development company. Mr. Ruben is a
certified public accountant, licensed in the state of California. He began his
career with Coopers & Lybrand and was in public accounting for eighteen years.
David Robinson joined the Company as Vice President and Chief Technology
Officer in April 2000. Prior to joining the Company, Mr. Robinson was the
President of DCB Actuaries & Consultant, s.r.o., since 1991. In 1986, he founded
DSM.net, a systems network integration company, and has served as its President
since inception. In 1998, Mr. Robinson was appointed to the Board of Directors
of Woodrow Milliman, a worldwide actuarial and consulting firm
Vladimir Havlena became the Managing Director of the Company's wholly owned
subsidiary, DCB Actuaries & Consultants, s.r.o. in April 2000. Mr. Havlena was a
founder and had worked as the Managing Director of DCB Actuaries and Consultants
since 1991. Between 1987 and 1990 Mr. Havlena received several post-graduate
degrees at the University of Brno, Czech Republic. Mr. Havlena graduated in 1981
from the Czech Technical University with a degree in engineering.
Jeffrey Yablon joined the Company as its Vice President of Sales. Mr.
Yablon was the Vice President of Sales for Olsten Health Service in New York.
Previously, Mr. Yablon was employed by Abbott Laboratories for six years, in
various capacities, including Director of Managed Care, Director of Marketing
and Director of Alternate Site National Accounts. He is a Certified Healthcare
Executive (CHE) of the American College of Health Care Executives and a member
of the American Association of Health Plans. Mr. Yablon was a member of the
Executive Board of the Metropolitan Healthcare Administrators Association. In
addition to a bachelor's degree, he holds an MBA degree from Fairleigh Dickinson
University.
David Breslow has been a director of the Company since March 1999. Since
1996 Mr. Breslow has been the Executive Director of United Pharmacists Network,
Inc., a corporation involved in purchasing, management and other services to
pharmacies. Between 1976 and 1995 Mr. Breslow owned and managed various
pharmacies in the Los Angeles, California metropolitan area.
Julio Curra has been a director of the Company since March 1999. Since 1996
Mr. Curra has been the president of All-Line Communications, Inc., a corporation
<PAGE>
involved in telecommunication sales. Between 1987 and 1996 Mr. Curra was the
president of Julio Curra & Associates, a firm also involved in telecommunication
sales.
Robert Stevens is the Company's Director of Development and Information
Technology. He has been with the Company or its subsidiaries since 1994. Prior
to joining the Company, Mr. Stevens was the Vice President of Development for
three different companies. He was involved with a ten-year development effort on
EZ-Fax, the first network fax server developed in 1984. He also spent seventeen
years at IBM, primarily in their complex systems group.
Julie Signorille became the Director of Operations for the Company's
MedCard Division in June 2000. Ms. Signorille was the Vice- President of
Operations for Citibank, serving as the Director of Banking Operations of
Citibank's Internet Bank. Ms. Signorille has over fifteen years of management
experience, primarily in operations. Prior to her tenure with Citibank, she
managed the day to day operations of a 36 branch-banking network with assets in
excess of 6 billion dollars.
Ron Pizzolo became the president of the Company's MedCard division in June
2000. Previously, he had been providing services to the Company on a consulting
basis under the terms of the original License Agreement for the MedCard System.
Mr. Pizzolo developed and managed many of the features of the MedCard system as
it founder and president. Prior to his involvement with MedCard, he spent over
twenty years with a major national insurance company supervising the settlement
of personal injury claims.
Tony Pizzolo became Executive Vice President of the Company's MedCard
division in June 2000. Previously, he had been providing services to the Company
on a consulting basis under the terms of the original License Agreement for the
MedCard System. Prior to joining MedCard in 1997, Mr. Pizzolo was an executive
in a variety of service related businesses in the New York area.
All of the Company's officers devote substantially all of their time on the
Company's business. Mr. Breslow and Mr. Curra, as directors, devote only a
minimal amount of time to the Company.
Mr. Breslow and Mr. Curra 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. Mark Bennett, Michael Malet, Chet Howard and George Pursglove remained
directors of the Company. In September 1998 Cornelia Eldridge was appointed a
director of the Company. In February 1999 Mr. Howard, Mr. Pursglove and Ms.
Eldridge resigned as directors of the Company. In March 1999 David Breslow and
Julio Curra were appointed directors of the Company. In October 1999, Alan Ruben
was appointed Chief Accounting and Financial Officer after Ian Hart's employment
<PAGE>
contract as chief financial officer expired. In January 2000, Mr. Marvin Berger
resigned as the Company's Vice President of Sales & Marketing. In April 2000,
Mr. David Robinson and Mr. Vladimir Havlena joined the Company as its
Vice-President and Chief Technology Officer and Managing Director of DCB
Actuaries and Consultants, s.r.o., respectively. Mr. Jeffrey Yablon and Ms.
Julie Signorille joined the Company in June 2000 as the Vice President of Sales
and Director of Operations for the MedCard division, respectively. Mr. Ronald
Pizzolo and Mr. Anthony Pizzolo also joined the Company as the President and
Executive Vice President of the Company's MedCard division in June 2000.
ITEM 10. 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 years ended June 30, 1998 and 1999.
Other Annual Restricted Options
Name and Fiscal Salary Bonus Compensation Stock Awards Granted
Principal Position Year (1) (2) (3) (4) (5)
------------------ ------ ------ ----- ------------- ----------- -------
Mark Bennett, 1999 $128,482 $8,400 -- 1,015,000
President and Chief 1998 $111,350 -- $8,400 $67,500 560,500
Executive Officer
Michael Malet, 1999 $112,462 $8,400 -- 925,000
Vice President 1998 $100,923 -- $8,400 $58,500 457,000
(1) The dollar value of base salary (cash and non-cash) received.
(2) The dollar value of bonus (cash and non-cash) received.
(3) Any other annual compensation not properly categorized as salary or bonus,
including perquisites and other personal benefits, securities or property.
Amounts in the table represent automobile allowances.
(4) Amounts reflect the value of 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,
1999.
Name Shares Value
---- ------ -----
Mark Bennett 224,900 $218,153
Michael Malet 117,400 $113,878
<PAGE>
(5) The shares of Common Stock to be received upon the exercise of all stock
options granted during the fiscal years shown in the table.
Employment Contracts
In March 1999 the Company entered into employment agreements with Mark
Bennett and Michael Malet. Each employment agreement provides for the following:
1. Term of three years.
2. Annual salary of $137,500 in the case of Mr. Bennett and $120,000 in the
case of Mr. Malet.
3. Automobile allowance of $700 per month.
4. Four weeks of paid vacations and the right to participate in any
group medical, group life insurance or any other employee benefit
plan that the Company may, from time to time, maintain.
5. Reimbursement for any medical, dental or optical expenses not covered by
any Company group healthcare plan.
6. Disability benefits equal to the employee's salary payable to the employee
for the remaining term of the employment agreement.
7. Premium payments for a $1,000,000 term life insurance policy with the
beneficiary to be designated by the employee.
In the event that there is a change in the control of the Company and the
employee is terminated without cause or the employee resigns for cause then the
Company is required to pay the Company a lump-sum amount equal to the employee's
annual salary multiplied by 2.99. The term "resignation for cause" means there
is a material change in the employee's authority, duties or activities. For
purposes of the employment agreement a change in the control of the Company
means: (1) the acquisition by any person of more than 15% of the Company's
common stock; (2) the acquisition by any person more than 50% of the voting
capital stock of any subsidiary of the Company; (3) the merger of the Company
with another entity if after such merger the shareholders of the Company do not
own at least 85% of voting capital stock of the surviving corporation; (4) the
approval by the shareholders of the Company of a plan to liquidate or dissolve
the Company; (5) the sale of substantially all of the assets of the Company; or
(6) a change in a majority of the Company's directors which has not been
approved by at least two-thirds of the incumbent directors.
If following a change in control the employee is terminated without cause,
all options granted to the employee pursuant to any of the Company's incentive
or non-qualified stock option plans will be fully vested.
<PAGE>
Options Granted During Fiscal Year Ending June 30, l999
The following tables set forth information concerning the options granted,
during the fiscal year ended June 30, 1999, to the persons named below, and the
fiscal year-end value of all unexercised options (regardless of when granted)
held by these persons. The options listed below were not granted pursuant to the
Company's incentive or non-qualified stock option plans.
% of Total Options Exercise
Options Granted to Employees Price Per Expiration
Name Granted (#) in Fiscal Year Share Date
------ ----------- -------------------- --------- ---------
Mark Bennett 1,015,000 33% $0.82 4/16/04
Michael Malet 925,000 30% $0.82 4/16/04
Option Exercises in Last Fiscal Year and Fiscal Year-End Values
Number of Value of Unexer-
Securities Underlying cised In-the-
Unexercised Options Money Options
at June 30, 1999 at June 30, 1999
Shares -------------------- ---------------
Acquired Value Exercisable/ Exercisable/
Name on Exercise (1) Realized (2) Unexercisable (3) Unexer-
cisable (4)
------------- --------------- ------------ ----------------- ---------------
Mark Bennett -- -- 1,575,500/-- $152,250/--
Michael Malet -- -- 1,382,000/-- $138,750/--
(1) The number of shares received upon exercise of options during the fiscal
year ended June 30, 1999.
(2) With respect to options exercised during the Company's fiscal year ended
June 30, 1999, the dollar value of the difference between the option
exercise price and the market value of the option shares purchased on the
date of the exercise of the options.
(3) The total number of unexercised options held as of June 30, 1999, separated
between those options that were exercisable and those options that were not
exercisable.
(4) For all unexercised options held as of June 30, 1999, the excess of the
market value of the stock underlying those options (as of June 30, 1999) and
the exercise price of the option
Long Term Incentive Plans - Awards in Last Fiscal Year
None.
<PAGE>
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.
Except as disclosed elsewhere in this report no director of the Company
received any form of compensation from the Company during the year ended June
30, 1999.
Stock Option and Bonus Plans
The Company has an Incentive Stock Option Plan, Non-Qualified Stock Option
Plans and 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. Only officers, and 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.
<PAGE>
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 Board of Directors 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).
In June 2000, the Company's shareholders ratified the Company's year 2000
Incentive Stock Option Plan, which provides that up to 1,000,000 shares of
common stock may be issued upon the exercise of options granted pursuant to the
year 2000 Incentive Stock Option Plan. No options have been granted under this
plan as of June 30, 2000.
Non-Qualified Stock Option Plans.
--------------------------------
The Non-Qualified Stock Option Plans authorize the issuance of options to
purchase up to 3,000,000 shares of the Company's Common Stock less the number of
shares already optioned under both this Plan and the Incentive Stock Option
Plan. The Company's employees, directors, officers, consultants and advisors are
eligible to be granted options pursuant to the Plan, provided however that bona
fide services must be rendered by such consultants or advisors and such services
must not be in connection with the offer or sale of securities in a
capital-raising transaction. The option exercise price is determined by the
Board of Directors but cannot be less than the market price of the Company's
Common Stock on the date the option is granted.
Options granted pursuant to the Plan not previously exercised terminate
upon the first to occur of the following dates:
(a) The expiration of one year after the date on which an option
holder's employment by the Company is terminated (whether
termination is by the Company, disability or death); or
(b) The expiration of the option which occurs five (5) years from the
date the option was granted.
In the event of an option holder's death while in the employ of the
Company, his legatees or distributees may exercise the option as to any of the
shares not previously exercised prior to the option's expiration.
<PAGE>
In June 2000, the Company's shareholders ratified the Company's year 2000
Non-Qualified Stock Option Plan, which provides that up to 2,000,000 shares of
common stock may be issued upon the exercise of options granted pursuant to the
year 2000 Non-Qualified Stock Option Plan. No options have been granted under
this plan as of June 30, 2000.
Stock Bonus Plans.
-----------------
Up to 2,400,000 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 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.
In June 2000, the Company's shareholders ratified the Company's year 2000
Stock Bonus Plan, which provides that up to 500,000 shares of common stock may
be issued as bonuses pursuant to the year 2000 Stock Bonus Plan. No Shares have
been issued under this plan as of June 30, 2000.
Other Options
During the year ended June 30, 1999 the Company granted Mark Bennett and
Michael Malet options to purchase 1,015,000 and 925,000 shares respectively, of
the Company's common stock. The options may be exercised at any time prior to
April 16, 2004 at an exercise price of $0.82 per share. These options were not
granted pursuant to the Company's Incentive or Non-Qualified stock option plans.
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
<PAGE>
a non-employee ceases to perform services for the Company), any shares or
options not fully vested will be forfeited and cancelled. In the discretion of
the Board of Directors payment for the shares of Common Stock underlying options
may be paid through the delivery of shares of the Company's Common Stock having
an aggregate fair market value equal to the option price, provided such shares
have been owned by the option holder for at least one year prior to such
exercise. A combination of cash and shares of Common Stock may also be permitted
at the discretion of the Board of Directors.
Options are generally non-transferable except upon death of the option
holder. Shares issued pursuant to the Stock Bonus Plan will generally not be
transferable until the person receiving the shares satisfies the vesting
requirements imposed by the Board of Directors when the shares were issued.
The Board of Directors of the Company may at any time, and from time to
time, amend, terminate, or suspend one or more of the Plans in any manner it
deems appropriate, provided that such amendment, termination or suspension
cannot adversely affect rights or obligations with respect to shares or options
previously granted. The Board of Directors may not, without shareholder
approval: make any amendment which would materially modify the eligibility
requirements for the Plans; increase or decrease the total number of shares of
Common Stock which may be issued pursuant to the Plans except in the case of a
reclassification of the Company's capital stock or a consolidation or merger of
the Company; reduce the minimum option price per share; extend the period for
granting options; or materially increase in any other way the benefits accruing
to employees who are eligible to participate in the Plans.
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, 1999,
concerning the stock options and stock bonuses granted by the Company pursuant
to its Plans. Each option represents the right to purchase one share of the
Company's Common Stock.
Total Shares Shares Reserved Shares Remaining
Reserved for Outstanding Issued As Options/Shares
Name of Plan Under Plan Options Stock Bonus Under Plan
------------ ---------- -------------- ----------- ------------
1998 Incentive Stock
Option Plan 1,500,000 688,000 N/A 812,000
1996 Non-Qualified Stock
Option Plan 1,500,000 607,500 N/A 892,500
1998 Non-Qualified Stock
Option Plan 1,500,000 -- N/A 1,500,000
1996 and 1998 Stock Bonus
Plans 1,500,000 N/A 1,497,625 2,375
<PAGE>
1999 Stock Bonus Plan 900,000 N/A 46,571 853,429
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 1999 2000
---- ---- ---- ---- ---- ----
Mark Bennett 18,750
Michael Malet 5,000 16,250
Other employees and
consultants as a group461,250 111,875 174,000 710,500 46,571
------- ------- ------- ------- ------
461,250 116,875 209,000 710,500 46,571
======= ======= ======= ======= ======
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
-------------------------------------------------------------------------
The following table sets forth, as of September 30, 1999, 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.
Percent of
Name and Address Shares Owned (1) Class (2)
---------------- ----------------- -------------
Mark Bennett 224,900 1%
18001 Cowan, Suite C&D
Irvine, CA 92614
Michael Malet 117,400 *
18001 Cowan, Suite C&D
Irvine, CA 92614
Marvin Berger 65,000 *
18001 Cowan, Suite C&D
Irvine, CA 92614
David Breslow 10,000 *
701 N. Brand, #380
Glendale, CA 91203
<PAGE>
Julio Curra -- --
1767 Veterans Memorial Hwy. #6
Islandia, NY 11722 _______ ____
Officers and Directors as a Group
(5 persons) 417,300 3%
======= =====
Less than 1%
(1) Excludes shares issuable prior to December 31, 1999 upon the exercise of
options or warrants granted to the following persons.
Name Options exercisable prior to December 31, 1999
---- ----------------------------------------------
Mark Bennett 1,575,500
Michael Malet 1,382,000
Marvin Berger 25,000
David Breslow 10,000
Julio Curra --
(2) Excludes any shares issuable upon the exercise of any warrants or options or
upon the conversion of any promissory notes or other convertible securities.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Effective January 30, 1998 the Company issued 550,000 shares of its common
stock to the shareholders of Moviebar Company USA and Vectorvision, Incorporated
in consideration for the acquisition of businesses collectively 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 110 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 Company USA 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 and director 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.
During the year ended June 30, 1998, the Company acquired One Medical
Services, Inc. David Breslow, a director of the Company, is the Executive
Director of an entity that owned forty percent (40%) of the acquired company.
One Medical Services was valued at $1,067,398. This transaction was completed
before Mr. Breslow became a member of the Company's Board of Directors.
<PAGE>
See "Stock Option and Bonus Plans" in Item 10 of this report for
information concerning stock options and stock bonuses granted to the Company's
present officers and directors.
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
Number Exhibit Page Number
3.1 Certificate of Incorporation (1)
------------------------
3.1.1 Amendment to Certificate of Incorporation (3)
------------------------
3.2 Bylaws of the Company (1)
------------------------
4.1 Incentive Stock Option Plan
------------------------
4.2 Non-Qualified Stock Option Plans ------------------------
4.3 Stock Bonus Plans
-----------------------
10.5 July 1999 Licensing Agreement relating
to One Medical System _____________
23 Consents of Accountants Previously Filed
27 Financial Data Schedule Previously Filed
(1) Incorporated by reference, and as same exhibit number, from Registration
Statement on Form SB-2 (Commission File Number 33-70546-A).
(2) Incorporated by reference, and as same exhibit number, from Amendment No. 1
to Registration Statement on Form SB-2 (Commission File Number 33-70546-A).
(3) Incorporated by reference, and as same exhibit number, from Amendment No. 5
to Registration Statement on Form SB-2 (Commission File Number 33-70546-A).
<PAGE>
FINANCIAL STATEMENTS
<PAGE>
SIMS COMMUNICATIONS, INC. AND SUBSIDIARIES
Table of Contents
Page
Independent Auditors' Report.........................................F - 1
Financial Statements
Consolidated Balance Sheet........................................F - 2
Consolidated Statements of Operations.............................F - 3
Consolidated Statements of Stockholders' Equity...................F - 4
Consolidated Statements of Cash Flows.............................F - 5
Notes to Consolidated Financial Statements...........................F - 6
<PAGE>
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, 1999 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended June 30, 1999 and 1998. 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, 1999 and the results of their operations
and cash flows for the years ended June 30, 1999 and 1998 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
August 19, 1999
Denver, Colorado
<PAGE>
SIMS COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
June 30, 1999
Assets
Current assets
Cash and cash equivalents $ 189,772
Restricted cash (Note 7)
250,000
Accounts receivables, less allowance for doubtful 250,913
accounts of $31,811
Inventories 227,033
Prepaid expenses 100,337
Notes receivable, current portion (Note 5) 150,000
----------
Total current assets 1,168,055
Property and equipment, net (Note 4) 2,296,643
----------
Other assets
Notes receivable less allowance of $575,062 (Note 5) 241,200
Licensing rights, net of accumulated amortization of 885,558
$38,500
Patents, net of accumulated amortization of $189,446 327,299
Royalty advances (Note 3) 515,907
Goodwill, net of accumulated amortization of $136,070 819,299
(Note 3)
Other 120,901
----------
Total other assets 2,910,164
----------
Total assets $6,374,862
==========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 649,154
Accrued expenses 622,820
Bank line of credit (Note 7) 250,000
Notes payable (Note 8) 519,119
Current obligations under capital leases (Note 8) 43,432
Dividends payable 58,025
----------
Total current liabilities 2,142,550
Long-term liabilities
Obligations under capital lease (Note 8) 125,706
----------
Total liabilities 2,268,256
----------
Commitments and contingencies (Notes 2 and 14)
Stockholders' equity (Notes 10, 11 and 12) Preferred stock,
Series A, B and C, $.001 par value,
152,600 shares authorized - 50,000 (A), 100,000 (B),
2,060 (C) 10,995 shares issued and outstanding at June 11
30, 1999 (liquidation preference of $1,930,000)
Common stock $.0001 par value 40,000,000 shares
authorized, 16,727,506 issued and outstanding 1,673
Additional paid in capital 32,093,851
Accumulated deficit (27,988,929)
-----------
Total stockholders' equity 4,106,606
----------
Total liabilities and stockholders' equity $6,374,862
==========
See notes to consolidated financial statements.
<PAGE>
Consolidated Statements of Operations
Year Ended June 30,
------------------------------
1999 1998
---- ----
Revenue (Note 13)
Telecommunications $142,672 $446,524
Financial processing 625,801 147,533
Automated movie rentals 860,126 371,416
Medical transaction processing 583,777 15,478
----------- -----------
Total revenue 2,212,376 980,951
----------- -----------
Cost of services (exclusive of
depreciation and amortization shown
separately below) (Note 13)
Telecommunications 86,252 245,468
Financial processing 236,517 128,133
Automated movie rentals 180,549 145,040
Medical transaction processing 131,200 4,838
------- -----
Total cost of services 634,518 523,479
------- -------
Gross profit 1,577,858 457,472
---------- -----------
Operating expenses
General and administrative (Note 11) 6,101,305 4,405,486
Depreciation and amortization 1,099,871 474,372
Selling and marketing 1,164,761 1,058,252
Loss on termination of licensing - 764,000
and equipment agreement (Note 6)
Research and development - 32,760
Litigation settlement (Note 14) - 444,300
---------- ---------
Total expenses 8,365,937 7,179,170
---------- ---------
Operating loss (6,788,079) (6,721,698)
---------- -----------
Other income (expense)
Interest expense (337,153) (158,263)
Interest income 28,772 28,424
Loss on write down of investment (Note 6) - (200,000)
Other 7,500 5,526
--------- -----------
(300,881) (324,313)
--------- -----------
Loss from continuing operations before
income taxes (7,088,960) (7,046,011)
Income tax benefit (Note 9) - -
----------- ----------
Net loss from continuing operations (7,088,960) (7,046,011)
Net loss from discontinued operations (Note 16) - (63,737)
----------- -----------
Net loss (7,088,960) (7,109,748)
Preferred stock dividend 58,025 -
----------- ----------
Net loss applicable to common shareholders $(7,146,985) $(7,109,748)
=========== ===========
Basic and diluted loss per common share from $(0.67) $(1.78)
continuing operations =========== ===========
Basic and diluted loss per common share from $ - $(.01)
=========== ===========
discontinued operations
Basic and diluted net loss per common share $(0.67) $(1.79)
=========== ===========
Weighted average common shares outstanding
(Notes 11 and 12) 10,602,609 3,961,389
=========== ===========
See notes to consolidated financial statements.
<PAGE>
SIMS COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years Ended June 30, 1999 and 1998
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Preferred Stock
-------------------------------------------
Series A and B Series C Common Stock
Additional
Number of Number of Number of Paid-in Accumulated
Shares Amount Shares Amount Shares Amount Capital Deficit Total
Balance June 30,
1997 125,250 $125 -- $ -- 2,120,499 $ 212 15,134,683 $(13,307,196) $1,827,824
Issuance of common
stock in connection
with acquisitions
(Notes 3 and 12) -- -- -- -- 692,350 69 1,327,691 -- 1,327,760
Issuance of common
stock for cash
(ranging from $.80 to
$1.00) net offering
costs of $633,421
(Note 12) -- -- -- -- 2,246,500 225 1,475,855 -- 1,476,080
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) -- -- -- -- 846,827 85 936,959 -- 937,044
Issuance of common
stock in exchange
for services (Note 12) -- -- -- -- 1,015,749 102 1,696,134 -- 1,696,236
Unearned compensation
expense (Note 12) -- -- -- -- -- -- (136,475) -- (136,475)
Issuance of common
stock upon conversion
of notes payable
and interest (Note 12) -- -- -- -- 506,791 50 707,039 -- 707,089
Issuance of common
stock upon conversion
of former officer
notes payable and
accrued salaries
(Note 12) -- -- -- -- 230,317 23 419,174 -- 419,197
<PAGE>
Issuance of common
stock in connection
with litigation
settlement (Notes 12
and 16) -- -- -- -- 300,000 30 309,270 -- 309,300
Imputed value of
stock option grants
in exchange for
consulting and
other services
(Note 12) -- -- -- -- -- -- 775,902 -- 775,902
Net loss for the
year ended June 30,
1998 -- -- -- -- -- -- -- (7,109,748) (7,109,748)
-------- ------- ----- ----- ---- ---- ------ ----------- ----------
Balance -
June 30, 1998 125,250 125 -- -- 7,959,033 796 22,646,232 (20,416,944) 2,230,209
Issuance of
common stock
for cash ranging
from $.44 to
$1.00 per share,
net of $307,925
of offering costs -- -- -- -- 3,636,879 364 2,552,748 -- 2,553,112
Issuance of
preferred stock
at $1,000 per share,
net of $253,154 and
issuance of common
stock for offering
costs -- -- 1,745 2 134,769 13 1,871,830 (425,000) 1,446,845
Issuance of
common stock for
services and equipment -- -- -- -- 2,607,950 261 2,340,162 -- 2,340,423
Issuance of common
stock for accounts
payable -- -- -- -- 150,700 15 123,415 -- 123,430
Imputed value of
stock option grants
in exchange for
consulting and other
services -- -- -- -- -- -- 424,671 -- 424,671
Issuance of common
stock for conversion
of notes payable,
franchise deposits
and accrued interest -- -- -- -- 2,109,975 211 1,672,786 -- 1,672,997
Issuance of common
stock and warrants
in connection with
MedCard acquisition -- -- -- -- 100,000 10 461,894 -- 461,904
Conversion of
Preferred Stock (116,000) (116) -- -- 28,200 3 113 -- --
Dividend on Series
C Preferred Stock -- -- -- -- -- -- -- (58,025) (58,025)
Net loss for the year
ended June 30, 1999 -- -- -- -- -- -- -- (7,088,960) (7,088,960)
-----------------------------------------------------------------------------------------------------------
Balance -
June 30, 1999 9,250 $ 9 1,745 $ 2 16,727,506 $ 1,673 $32,093,851 $(27,988,929) $4,106,606
========== ======== ======= ========== =========== ======= ========== ============ =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
SIMS COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year Ended June 30,
-----------------------------
1999 1998
----------- ----------
Cash flows from operating activities
Net loss $(7,088,960) $(7,109,748)
----------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation 854,779 400,552
Amortization 245,092 73,820
Imputed value of options granted for services 424,671 127,661
and interest
Impairment of investment -- 200,000
Termination of licensing and equipment -- 764,000
agreement
Provision for uncollectible notes receivable 178,387 400,902
Officer salaries converted to equity -- 419,197
Stock issued for services, interest, and in
connection with litigation settlement 2,425,072 1,869,061
Changes in assets and liabilities
Accounts and other receivables (126,156) 167,832
Inventories (53,564) 51,574
Prepaid expenses (7,670) 113,193
Royalty advances (515,907) --
Accounts payable 229,526 (147,349)
Accrued expenses 40,425 (103,339)
Franchise deposits and customer deposits -- (11,493)
---------- ----------
3,694,655 4,325,611
Net cash used in operating activities (3,394,305) (2,784,137)
---------- ----------
Cash flows from investing activities
(Advances) repayments on notes receivable, net -- (54,372)
Acquisition costs paid, net of cash acquired (462,154) (424,095)
Capital expenditures (57,398) (34,122)
Change in other assets 5,851 62,664
---------- ----------
Net cash used in investing activities (513,701) (449,925)
---------- ----------
Cash flows from financing activities
Proceeds from issuance of long-term debt 537,892 805,459
(Payments on) proceeds from officer advances -- (65,809)
Payments under capital lease obligation (127,216) (10,200)
Proceeds from issuance of common and preferred 3,999,957 2,820,781
stock, net
Payments on long-term debt (326,733) (348,191)
---------- ----------
Net cash provided by financing activities 4,083,900 3,202,040
---------- ----------
Net increase (decrease) in cash 175,894 (32,022)
Cash and cash equivalents at beginning of year 263,878 295,900
---------- ----------
Cash and cash equivalents at end of year $ 439,772 $ 263,878
========== ==========
Supplemental disclosure of cash flows information
Cash paid during the year for interest was
$164,167 (1999) and $169,345 (1998).
Non-cash investing and financing activities (Note 15)
See Notes to Consolidated Financial Statements
<PAGE>
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 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
through its automated dispensing units. Most recently, the Company has evolved
such that while the primary business is still telecommunications; the Company's
telecommunications expertise and technology have been applied to the healthcare
industry in general and electronic processing of medical claims, on-line
insurance eligibility verification and e-commerce, specifically. And, as a means
to establish and gain recognition for SIMS' new identity, the Company included
in its proxy, a ballot to change the name of SIMS Communications, Inc. to MEDCOM
USA, Incorporated. Upon acceptance of the proposed name change, MedCom USA's
ticker symbol on The Nasdaq Stock Market will be "EMED."
Principles of Consolidation
The consolidated financial statements include the accounts of SIMS
COMMUNICATIONS, Inc. and its wholly owned subsidiaries SIMS Franchise Group
Inc., SIMS Communications International, Inc., Link International Technologies,
Inc., New View Technologies, Inc. and JustMed.com, 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
dates of acquisition. The financial statements also include the operations of
the Company's MedCard division from the date of the acquisition of the licensing
rights (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.
<PAGE>
Note 1 - Organization and Significant Accounting Policies (cont'd)
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with a maturity of
three months or less to be cash equivalents.
Inventories
Inventories consist primarily of movie video cassettes, terminals that are held
for sale and other associated miscellaneous parts and are recorded at the lower
of cost or market determined by the first-in, first-out method.
Property and Equipment
Property and equipment is stated at cost. Equipment under capital leases is
valued at the lower of fair market value or net present value of the minimum
lease payments at inception of the lease. Depreciation is provided utilizing the
straight-line method over the estimated useful lives for owned assets, ranging
from 5 to 7 years, and the related lease term for leasehold improvements and
equipment under capital leases. Expenditures for maintenance and repairs are
charged to expense as incurred.
Net loss Per Common Share
Basic earnings per share is calculated by dividing net income attributable to
common shareholders by the weighted average number of common shares outstanding.
Dilutive earnings per common share is computed similarly, but also gives effect
to the impact convertible securities, such as convertible debt, stock options
and warrants, if dilutive, would have on net income and average common shares
outstanding if converted at the beginning of the year. The Company has incurred
losses in each of the periods covered in these financial statements, thereby
making the inclusion of convertible securities and stock options in the 1999 and
1998 dilutive earnings per share computations antidilutive. Accordingly,
convertible securities and stock options have been excluded from the calculation
of dilutive earnings per share. Basic and dilutive earnings per share are the
same for each period presented.
Antidilutive securities excluded from dilutive earnings per share.
Security Price Shares Expiration Date
Stock options and warrants $0.44 - $13.00 9,988,429 7/1999-12/2006
Convertible Preferred Stock $1.28 - $ 1.50 1,249,271 10/2001
<PAGE>
Note 1 - Organization and Significant Accounting Policies (cont'd)
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 intelligent vending equipment are recognized upon
delivery of the equipment. Revenue related to the providing of technical and
other support related to the One Medical Services Program is recognized as the
services are rendered. Revenue from the sale of MedCard units is recognized upon
shipment of the unit. Revenue from the billing services using the MedCard System
is recorded at the time the billing service is rendered at the expected net
realizable value of the Company's share of the moneys to be collected. Revenue
is recognized upon the sale of phone cards at the time of the sale. Revenue on
the rental of cellular phones through ACDC machines is recognized at the time
the rental is completed. Processing fees related to medical transactions and
financial processing are recognized as revenue at the time the transaction is
completed. Deferred gross profit on equipment, which has been sold and leased
back, is recognized over the term of the resulting lease. Automated movie rental
revenues are recognized at the time of rental and based upon usage of prepaid
movie cards (where applicable).
Patents
Patent costs are those costs related to filing for patents and the value
allocated to patents based upon the acquisition of Link Technologies and its
subsidiaries. They are amortized on the straight-line basis over their expected
economic life of seven years.
Fair Value of Financial Instruments
The carrying amounts of financial instruments including cash and cash
equivalents, receivables, accounts payable, and accrued expenses approximates
fair value at June 30, 1999 because of the relatively short maturity of these
instruments.
The carrying amounts of debt issued approximates fair value because interest
rates on these instruments approximate market interest rates and all are
classified as current maturities.
<PAGE>
Note 1 - Organization and Significant Accounting Policies (cont'd)
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 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, assets are adjusted to their fair
values.
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, which consists of
the equipment which gave rise to the original note, when available.
<PAGE>
Note 2 - Continued Operations
Reclassifications
Certain accounts in the June 30, 1998 financial statements have been
reclassified to conform to the June 30, 1999 presentation.
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,
1999, the Company continued to suffer recurring losses from operations in excess
of $7,000,000, resulting in an accumulated deficit of approximately $27,500,000.
Subsequent to June 30, 1999, the Company has raised approximately $400,000 in
private placement offerings and is continuing to look for additional equity
capital. Additionally, the Company has entered into an Exclusive License
Agreement with an outside party for its One Medical Services, Inc. subsidiary
whereby it will receive $567,000 over the next six months and an 8% 7-year note
payable in the amount of $810,000 (see Note 17). There can be no assurances
however that the Company will be successful in obtaining additional equity
financing, if needed, or if available on terms satisfactory to the Company, or
be able to generate significant profits from the operations described above. If
the Company is unsuccessful in obtaining additional funding for its operations,
it would if necessary either sell certain assets or divisions, reduce its
operations or otherwise reorganize its operations to the extent necessary so
that its operating expenses would be less than its revenues.
Although the Company's common stock is currently listed on the NASDAQ
Small Cap Market ("NASDAQ"), there is no assurance that the Company's stock will
continue to be listed. 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. If delisted from
NASDAQ, the Company's stock would trade in the unorganized interdealer
over-the-counter market through the OTC Bulletin Board which provides
significantly less liquidity than NASDAQ. Securities which are not traded on
NASDAQ may be more difficult to sell and may be subject to more price volatility
than NASDAQ listed securities. The consolidated financial statements do not
include any adjustments that might be necessary if the Company is unable to
continue as a going concern.
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 10 and 11). The acquired
companies rent motion picture video cassettes through automated dispensing units
<PAGE>
Note 3 - Acquisitions (cont'd)
that are located in hotels throughout the United States. The acquisitions were
accounted for under the purchase method of accounting.
Moviebar Company USA, Inc. and Vector Vision, Inc. (cont'd)
-----------------------------------------------------------
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 warrants to purchase 187,500 shares of
the Company's common stock at $ 2.00 per share (Notes 10 and 11). 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.
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:
<PAGE>
Note 3 - Acquisitions (cont'd)
One Medical Services, Inc. (cont'd)
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.
Subsequent to June 30, 1999, the Company has licensed the One Medical Services
technology to an outside party (see Note 17).
MedCard Management Systems, Inc.
In November, 1998, the Company purchased certain assets of MedCard Management
Systems, Inc. of Islandia, New York ("MedCard"), along with the 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 valued at $1.28 per share, which approximated
market, and warrants to purchase 350,000 shares of common stock with an imputed
value of $333,904. At June 30, 1999, licensing rights related to the agreement
totaled $885,558 net of $38,500 of accumulated amortization.
<PAGE>
Note 3 - Acquisitions (cont'd)
MedCard Management Systems, Inc. (cont'd)
In connection with the acquisition of the licensing rights, the Company entered
into a royalty agreement requiring future royalty payments based on sales (Note
14). The Company has provided additional funding related to these operations
that are recorded as royalty advances. As of June 30, 1999, royalty advances
totaled $515,907.
Note 4 - Property and Equipment
Property and equipment consist of the following:
June 30,
1999
Property and equipment
Vehicles $ 20,608
Furniture and fixtures 137,209
Machinery and equipment 4,144,429
Software 100,450
Less accumulated depreciation and amortization (2,106,053)
----------
$2,296,643
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 originally 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. The Company has received interest on the notes
through June 30, 1999 and believes that both principal and interest are
collectible at June 30, 1999.
As of June 30, 1997, the Company had sold equipment to a customer for a total
sales price of $664,000. 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, 1999. Accordingly, the Company has recorded an allowance of
$452,800 which reduces the net balance to $211,200, which approximates the value
of the underlying collateral.
<PAGE>
Note 5 - Notes Receivable (cont'd)
The Company has an unsecured note receivable for $30,000, which was collected in
October 1999.
The Company has a note receivable from an entity owned entirely by former
officers of the Company, with a balance of $122,262. This amount has been fully
reserved against because collection is considered to be unlikely and the Company
does not have any collateral for this note.
Note 6 - Investments
During the year ended June 30, 1998, the Company terminated a licensing and
equipment agreement with a Canadian Company that had originally been entered
into in the year ended June 30, 1997 in exchange for preferred stock. The
equipment was returned to the Company, the preferred stock was returned to the
Canadian Company and a loss provision for $764,000 was provided for during the
year ended June 30, 1998.
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, 1999 was $250,000. The line-of-credit is
secured by a restricted certificate of deposit with a balance at June 30, 1999
of approximately $250,000. The line-of-credit bears interest at 5.77% payable
monthly. The line-of-credit expired June 5, 1999 and on July 13, 1999, the
Company voluntarily redeemed the certificate of deposit and applied the proceeds
toward repayment of the credit line principal and accrued interest in full.
Note 8 - Notes Payable and Capital Leases
June 30, 1999
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. Currently in default. 94,000
Note payable - individual, non-interest bearing -
payable in monthly installments of $1,500 through 37,500
June 2000.
Note payable - franchisee, bearing interest at 10%,
principal and interest due October 31, 1999; debt
includes conversion to common stock feature at $.875
per share. 317,619
<PAGE>
Note 8 - Notes Payable and Capital Leases (cont'd)
Convertible Bridge Financing Note - corporation,
bearing interest at 4%, principal and interest
due July 28, 1999. Debt includes conversion to common
stock feature at $.70 per share. 70,000
----------
Total current maturities $ 519,119
==========
Capital Leases
The Company leases various office and other equipment which are 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, 1999.
Year Ending June 30,
2000 $68,843
2001 67,818
2002 67,818
2003 15,797
2004 3,814
-----
Total 224,090
Less interest (54,952)
-------
169,138
Less current portion (43,432)
-------
$125,706
The assets recorded under capital leases are as follows:
Furniture, fixtures and equipment $162,630
Less accumulated depreciation (13,379)
-------
$149,251
Depreciation expense for equipment under capital lease was $70,418 and $14,679
for the years ended June 30, 1999 and 1998, 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
<PAGE>
Note 9 - Income Taxes (cont'd)
to reverse. The measurement of deferred tax assets is reduced, if necessary, by
the amount of any tax benefits that, based on available evidence, are not
expected to be realized.
The principal temporary differences that will result in deferred tax assets and
liabilities are certain expenses and losses accrued for financial reporting
purposes not deductible for tax purposes until paid, depreciation for tax
purposes in excess of depreciation for financial reporting purposes and the
deferral of franchise costs and franchise sales revenues for financial reporting
purposes which are recognized for tax purposes in the period paid. The effect of
the differences outlined above and the benefit of the Company's net operating
loss carryforward generated a long-term deferred tax asset that totals
approximately $8,800,000 and has been reduced 100% by a valuation allowance
because of a lack of profitable operating history. Accordingly, there is no net
deferred tax asset reflected in the accompanying consolidated financial
statements. The Company will continue to assess the valuation allowance and to
the extent it is determined that it is more likely than not that the tax
benefits will be realized, the tax benefit of the remaining net deferred assets
will be recognized at that time.
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,
-------------------------
1999 1998
----------- ----------
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,
1999
Total long-term deferred tax asset $8,800,000
Valuation allowance
(8,800,000)
$ --
==========
At June 30, 1999, the Company has approximately $26,000,000 of net operating
loss carryforwards for income tax reporting purposes which expire in 2007
through 2014. During 1995, 1998 and 1999, there were transactions involving
changes in ownership which restrict the utilization of net operating loss
carryforwards in the future.
<PAGE>
Note 10 - Stock Option and Bonus Plans
The Company's Incentive Stock Option Plans, Non-Qualified Stock Option Plans and
Stock Bonus Plans are collectively referred to as the "Plans". The following
sets forth certain information as of June 30, 1999 concerning the stock options
and stock bonuses granted by the Company pursuant to the Plans. Each option
represents the right to purchase one share of the Company's Common Stock.
Shares
Total Reserved for Shares Remaining
Shares Outstanding Issued Shares/
Reserved Options as Stock Options
Under Plans Bonus Under Plans
1998 Incentive Stock Option Plan 1,500,000 688,000 N/A 812,000
1996 Non-Qualified Stock 1,500,000 607,500 N/A 892,500
Option Plan
1998 Non-Qualified Stock 1,500,000 -- N/A 1,500,000
Option Plan
1996 and 1998 Stock Bonus 1,500,000 N/A 1,497,625 2,375
Plans
1999 Stock Bonus Plan 500,000 N/A -- 500,000
Incentive Stock Option Plan.
---------------------------
The 1998 Incentive Stock Option Plan authorizes the issuance of options to
purchase up to 1,500,000 shares of the Company's Common Stock. 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.
Non-Qualified Stock Option Plans
The Non-Qualified Stock Option Plans collectively authorize the issuance of
options to purchase up to 3,000,000 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
Board of Directors .
<PAGE>
Note 10 - Stock Option and Bonus Plans (cont'd)
Non-Qualified Stock Option Plans (cont'd)
The following is a summary of options granted:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Non-Qualified Options and Weighted
Incentive Stock Warrants Weighted Average
Stock Options and Issued Not Average Weighted Currently Exercise Price
Options and Warrants Related to a Exercise Average Rair Exercisable - Currently
Warrants Plan Price Value Exercisable
Outstanding June 30, 1997 683,500 10,000 250,765 $ 4.96 944,265 $ 4.96
--------- ---------
Options and warrants (161,000) - - (4.00)
expired or cancelled
Options transferred
between Plans (522,500) 522,500 - 4.86
Options and warrants
granted - 75,000 2,362,000 1.73 1.17
--------- --------- ----------- ---------- ---------
Outstanding June 30, 1998 - 607,500 2,612,765 2.56 3,220,265 2.56
--------- -----
Options and warrants - - -
expired or forfeited (3,000)
Options and warrants
granted 691,000 - 6,080,164 1.04 .69
---------- --------- ---------- ---------- ---------
Outstanding June 30, 1999 688,000 607,500 8,692,929 $ 1.53 8,840,429 $ 1.61
=========== =========== ========== ========== ========= ==========
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
June 30, 1999
Options and Warrants Outstanding Options and Warrants Exercisable
Weighted
Weighted Average Weighted
Number Average Remaining Number Average
Outstanding Exercise Contractual Exercisable Exercise
Range of Exercisable Price Price Life Price
$.44 - $3.00 9,064,614 $ 1.15 3.50 7,916,614 $ 1.18
$4.00 - $8.00 872,565 4.91 3.96 872,565 4.91
$10.00 - $13.00 51,250 11.76 .22 51,250 11.76
------------- ------------- ------------- ------------- -------------
9,988,429 $ 1.53 3.52 8,840,429 $ 1.61
============= ============ ============= ============= =============
</TABLE>
<PAGE>
Note 10 - Stock Option and Bonus Plans (cont'd)
Non-Qualified Stock Option Plans (cont'd)
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, 1999 and 1998, employees of the Company
were issued options to purchase a total of 3,281,000 and 1,806,500 shares of the
Company's common stock, respectively, at rates ranging from $.81 to $13 per
share expiring from September 1999 to December 2006.
Had compensation cost for the Company's issuances of stock options during the
years ended June 30, 1999 and 1998 been determined based on the fair value at
the date of grant consistent with the provisions of FAS 123, the Company's 1999
and 1998 net loss and loss per share would have been increased to the pro forma
amounts indicated below:
June 30,
-----------------------------
1999 1998
----------- ------------
Net loss - as reported $(7,088,960) $(7,109,748)
Net loss - pro forma $(9,469,523) $(9,227,346)
Net loss per share - as reported $ (.67) $ (1.79)
Net loss per share - pro forma $ (.89) $ (2.33)
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, 1999; dividends yield
of 0.0%; expected average annual volatility of 133.86%; average annual risk-free
interest rate of 6.0%; and expected terms averaging 3 years.
Stock Bonus Plans
Up to 2,000,000 shares of Common Stock may be granted under the Stock Bonus
Plan. Such shares may consist, in whole or in part, of authorized but unissued
shares, or treasury shares. Under the Stock Bonus 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
<PAGE>
Note 10 - Stock Option and Bonus Plans (cont'd)
connection with the offer or sale of securities in a capital-raising
transaction. As of June 30, 1999, 1,497,625 shares of the Company's common stock
have been issued under the Stock Bonus Plans.
Note 11 - Stockholders' Equity
Common Stock
The Company is authorized to issue 40,000,000 shares of $.0001 par value Common
Stock.
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 established the 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 are not cumulative.
Additionally, each share of Series A Preferred Stock is convertible into .20
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, 1999,
the Company has 9,250 shares of Series A Preferred Stock issued and outstanding.
In March 1996, the Company established the 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 are not
cumulative. 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, 1999, all Series B
Preferred shares had been converted and there were no shares outstanding.
In November, 1998, the Company's board of directors amended the original
certificate of designation for its Series C Preferred Stock ("Series C") and
authorized the issuance of up to 2,060 shares. Each share of the Series C
Preferred Stock is entitled to a dividend at the rate of $.06 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 accumulate 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,
<PAGE>
Note 11 - Stockholders' Equity (cont'd)
Preferred Stock (cont'd)
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. From November, 1998 to January, 1999, 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 Company
recognized $425,000 as the value of the guaranteed embedded beneficial
conversion feature related to the Series C Preferred Stock. 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 Series C preferred
stock was $58,025 at June 30, 1999.
For the years ended June 30, 1999 and 1998, the Company did not declare any
dividends.
Equity Transactions
During the year ended June 30, 1999, the following equity transactions occurred:
The Company sold 3,636,879 shares of common stock at prices ranging from $.44 to
$1 per share in private placements raising $2,553,112 net of $307,925 in
offering costs.
The Company issued 2,607,950 shares of its common stock for $2,340,423 of
services and equipment received, which included 466,150 shares of its common
stock valued at $431,445 that were issued to its employees under the Company's
Stock Bonus Plan.
The Company issued 150,700 shares of its common stock for $123,430 for services
previously rendered.
The Company issued 2,109,975 shares of its common stock in order to convert
$1,672,997 worth of long-term debt, notes payable, franchisee deposits and
accrued interest into stockholders' equity.
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
<PAGE>
Note 11 - Stockholders' Equity (cont'd)
Equity Transactions (cont'd)
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. As no such offering took place, the imputed value of the
options, $77,730, has been charged to stock based compensation at June 30, 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 during the year ended June 30, 1999.
The Company issued options to purchase 420,000 shares of its common stock at
rates ranging from $.82 to $2.50 per share. These options expire September,
2001. $306,840 of expense has been recognized based on imputed values ranging
from $.61 to $1.50 per option.
The total value of the above-mentioned stock and warrants that is included in
general and administrative expenses in the accompanying consolidated statement
of operations was $2,540,338 during the year ended June 30, 1999.
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 a combined $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
<PAGE>
Note 11 - Stockholders' Equity (cont'd)
Equity Transactions (cont'd)
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.
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 have 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).
The total value of the above-mentioned stock and warrants that is included in
general and administrative expenses in the accompanying consolidated statement
of operations was $1,687,422 during the year ended June 30, 1998.
Note 12 - Stock Splits
In February 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 13 - 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
<PAGE>
Note 13 - Business Segments (cont'd)
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. This segment also includes the MedCard
System, a comprehensive electronic processing system that consolidates insurance
eligibility verification and process medical claims and approval of credit
card/debit card payments within 30 seconds. 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.
Operating results and other financial data are presented for the four reportable
segments of the Company for the years ended June 30, 1999 and 1998. Net revenue
includes sales to external customers within that segment. There are no
significant transfers between segments. Cost of services 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, selling and marketing, other operating 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, licensing rights and goodwill. Corporate
assets are principally patents.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Medical
Tele- Financial Automated Transaction Corporate
Communications Processing Movie Rental Processing and Other Consolidated
June 30, 1998:
Net revenues $ 446,524 $ 147,533 $ 371,416 $ 15,478 $ - $ 980,951
Cost of services $ 245,468 $ 128,133 $ 145,040 $ 4,838 $ - $ 523,479
Depreciation and
amortization $ 245,700 $ -- $ 94,058 $ - $ 134,614 $ 474,372
Selling, General $7,029,111 $7,029,111
& Administrative
(Income (Loss) $ (44,644) $ 19,400 $ 132,318 $ 10,640 $(7,163,725) $(7,046,011)
from continuing
operations
before income
taxes
Identifiable $2,224,685 $ 467,962 $1,450,122 $1,058,714 $ 401,268 $ 5,602,751
assets
</TABLE>
<PAGE>
Note 13 - Business Segments (cont'd)
June 30, 1999:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Net revenues $ 142,672 $ 625,801 $ 860,126 $ 583,777 $ - $2,212,376
Cost of services $ 86,252 $ 236,517 $ 180,549 $ 131,200 $ - $ 634,518
Depreciation and
amortization $ 504,686 $ 117,768 $ 265,802 $ 136,458 $ 75,157 $ 1,099,871
Selling, General
& Administrative $7,566,947 $ 7,566,947
Income (Loss) $ (448,266) $ 271,516 $ 413,775 $ 316,119 $(7,642,104) $(7,088,960)
from continuing
operations
before income
taxes
Identifiable $1,812,851 $ 573,362 $1,197,108 $2,464,242 $327,279 $ 6,374,862
assets
</TABLE>
Product or Service Type Year Ended June 30, 1999 Year Ended June 30, 1998
----------------------- ------------------------ ------------------------
Rental of cellular $ 0 $ 103,774
telephones
Activation fees for
cellular telephones 0 158,309
Sale of prepaid calling 89,635 144,457
cards
Sale of long distance
telephone service 0 39,984
Financial processing 625,801 147,533
revenue
Movie rentals 860,126 371,416
One medical revenues 156,712 15,478
MedCard system 427,065 0
Other 53,037 0
-------- ------------
Total $ 2,212,376 $ 980,951
============ ============
Note 14 - Commitments and Contingencies
Operating Leases
The Company leases administrative offices and warehouse locations under
noncancelable operating leases in California and Florida. 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,
1999 and 1998 was $279,550 and $113,275, respectively.
<PAGE>
Note 14 - Commitments and Contingencies (cont'd)
Future minimum lease commitments at June 30, 1999 are as follows:
Year Ending June 30,
2000 $ 287,000
2001 238,000
2002 236,000
2003 192,000
2004 119,000
Thereafter 105,000
----------
$1,177,000
Employment Agreements
The Company has entered into three-year employment agreements with its two most
senior officers. The agreements entitle the officers to an annual salary of
$137,500 and $120,000, respectively. 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. As part of an Exclusive Licensing Agreement with an outside party
dated July 20, 1999, the Company and the executive terminated this employment
agreement (Note 17).
Additionally, the Company has entered into three year employment agreements with
another officer and two other employees. These agreements amount to a total of
$187,000 in annual base compensation. In connection with these agreements,
43,274 shares of the Company's common stock and options to purchase up to 34,000
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. One of the agreements entitle the
individual to additional compensation of $92.50 for
<PAGE>
Note 14 - Commitments and Contingencies (cont'd)
Employment Agreements (cont'd)
each POS transaction automation terminal placed in service or sold. Effective
June 10, 1999, the Company and this employee terminated the employment
agreement.
Royalty Agreement
In connection with the acquisition of the licensing rights of MedCard (Note 3),
the Company entered into a royalty agreement with the licensor. The Company will
pay the licensor 25% of monthly revenues, less direct costs, generated by the
licensed software. Royalties on net revenues in excess of $1,000,000 per month
shall be paid at 10% instead of 25%. The agreement requires the Company to
advance $550,000 of royalty fees payable to the licensor and then retain as a
credit 40% of the future monthly royalty payments until the advance is offset in
full.
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 16). As of June 30, 1999, no monies
had been remitted for profit participation for the current year.
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, 1999, the Company issued 2,123,300
shares of common stock and options to acquire 360,000 shares of common stock at
rates ranging from $.82 to $2.00 per share in exchange for consulting services
valued at $2,134,296. As of June 30, 1999, 75,000 shares remained payable
pursuant to the terms of two of the consulting agreements. No other outstanding
obligations existed as of June 30, 1999 pursuant to the terms of the remaining
consulting agreements. 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.
<PAGE>
Note 14 - Commitments and Contingencies (cont'd)
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 moneys 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. As of June 30, 1999, the
Company owed $8,000 to the former employee under the settlement agreement; this
amount is included in accrued expenses.
During February 1998, the Company reached a settlement with a former master
license holder (the "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, resulting in a special charge of $424,300. At June 30,
1998, $90,000 was due to license holder and included in accrued expenses. During
the fiscal year ended June 30, 1999, the Company made $15,000 in payments to the
license holder in accordance with the settlement agreement. On April 7, 1999,
the license holder converted the balance of the amount due ($75,000) into 70,755
shares of the Company's common stock (see Note 11).
Additionally, in the fiscal year ended June 30, 1998, a franchisee demanded that
the Company repurchase his franchises for approximately $1,000,000 or a suit for
breach of the franchise agreement would be filed. On February 19, 1999, the
Company negotiated a settlement with the franchisee whereby the Company issued
571,429 shares of common stock to satisfy $500,000 of the franchisee's deposit
liability (see Note 11). In addition, the Company issued a 10% Promissory Note
for $317,619 in favor of the franchisee due October 31, 1999 (see Note 8).
A suit has been filed against the Company by a former employee for damages
totaling $269,000. Management believes the claim is without merit and has filed
a counterclaim against the plaintiff.
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.
Note 15 - Statements of Cash Flows
During the year ended June 30, 1999:
The Company acquired $860,810 of fixed assets through capital leases,
satisfaction of notes receivable and for stock.
<PAGE>
Note 15 - Statements of Cash Flows (cont'd')
The Company accrued dividends payable of $58,025 on the Series C Preferred
Stock.
The Company incurred various noncash transactions in connection with the
acquisition of the MedCard licensing rights (Note 3).
The Company converted $500,000 of franchise deposits, $1,068,348 of convertible
notes and interest payable and $123,430 of accounts payable into 2,260,675
shares of common stock.
The Company converted $327,661 of franchise deposits into notes payable.
The Company converted 116,000 shares of Series A and B Preferred Stock into
21,950 shares of common stock.
The Company sold $635,237 of fixed assets by transferring the related capital
leases to the acquiring entity.
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.
Note 16 - 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 years ended June
30, 1999 and 1998, there was a loss on the disposal of the segment and the
discontinued operations resulted in a charge of $63,737.
<PAGE>
Note 17 - Subsequent Event
On July 20, 1999, the Company entered into an agreement with a corporation for
the exclusive licensing rights to market the One Medical Service system. The
Company received $200,000 upon execution of the document and will receive an
additional $367,000 over the following six months. The Company also received a
7-year 8% unsecured note receivable, in the amount of $810,000, as part of the
transaction. The note shall be paid off by monthly royalty payments to the
Company and other scheduled payment amounts over its term. The Licensee can
convert the moneys paid for royalty and licensing fees into an eighty-one
percent (81%) ownership in One Medical Service. It can also acquire the
remaining nineteen percent (19%) for the greater of $132,000 or the fair market
value of such interest. The Licensee agreed to acquire approximately $200,000 of
inventory on an as needed basis and pay the related accounts payable when they
purchase the inventory and assume other overhead associated with the One Medical
operation. The Licensee also hired the full time employees that were associated
with the One Medical operations.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(a) of the Exchange Act, the Registrant
has caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized on the 12th day of July 2000 .
SIMS COMMUNICATIONS, INC.
By /s/ Mark Bennett
------------------------
Mark Bennett, President
By /s/ Alan Ruben
------------------------
Alan Ruben , Principal Financial Officer and
Chief Accounting Officer
In accordance with the Exchange Act, this Report has been signed by the
following persons on behalf of the Registrant in the capacities and on the dates
indicated.
Signature Title Date
/s/ Mark Bennett
Mark Bennett Director July 14, 2000
/s/ Michael Malet
Michael Malet Director July 14, 2000
/s/ David Breslow
David Breslow Director July 14, 2000
/s/ Julio Curra
Julio Curra Director July 14, 2000
