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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 23, 1996
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934
SYSTEMS COMMUNICATIONS, INC.
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(Exact name of Registant as specified in its charter)
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<CAPTION>
<S> <C>
FLORIDA 65-0036344
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
2575 ULMERTON ROAD, SUITE 300, CLEARWATER, FLORIDA 34622
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(Address of principal executive offices) (ZIP Code)
</TABLE>
Registrant's telephone number, including area code 813-571-1185
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Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
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Securities to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
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(Title of class)
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(Title of class)
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SYSTEMS COMMUNICATIONS, INC.
ITEM 1. BUSINESS.
Systems Communications, Inc. ("SCI"), a Florida corporation organized in
1987, is a holding company which is principally engaged, through subsidiaries,
in the businesses of healthcare management and telecommunication services.
The Company's principal strategic objective is to assist large
self-insurers to improve the management and administration of their healthcare
benefit plans by reducing costs and improving care through the use of
sophisticated software systems that access substantial healthcare data bases.
Similarly, the Company's telecommunications unit provides assistance to
municipalities, institutions and commercial users of telephone and utility
services by conducting cost control audits designed to reduce and prevent
errors in telephone and utility billings and operates as a switchless reseller
of long distance services and as a reseller of Operator Service Provider and
Pay-Per-View products, principally to the hospitality industry.
SCI underwent several corporate name changes from inception until 1991
and, at various times, was a merchandiser of optical products and a developer
of residential homes. SCI was inactive in 1992 and 1991. SCI commenced its
telecommunications operations in August, 1994 when it acquired Ameristar
Telecommunications, Inc. ("ATI"), an Illinois corporation. It increased its
commitment to this business line with the acquisition of Telcom Network, Inc.
("Telcom" or "TNI"), a Delaware corporation, in July 1995. SCI commenced its
health care management services business when it acquired National Solutions
Corporation ("NSC"), a Pennsylvania corporation, in October, 1995. This
business was recently augmented with the acquisition of Health Management
Technologies ("HMT"), a California corporation in March 1996.
SCI and these subsidiaries are hereinafter collectively referred to as the
"Company."
FINANCIAL INFORMATION
The Company's operations are classified into two industry segments:
healthcare cost management and containment products and services ("Healthcare")
and telecommunications products and services ("Telecommunications").
Fiscal 1995. Net revenues, operating loss and identifiable assets
attributable to the Healthcare segment for 1995 (the first partial year in
which this segment has been engaged in business) were, respectively, $91,106;
$(363,857); and $15,575,741. Net revenues, operating loss and identifiable
assets attributable to the Telecommunications segment for 1995 were,
respectively, $2,893,778; $(3,690,064); and $2,709,226. See Note 15 to the
Notes To Consolidated Financial Statements for additional segment information.
Current liabilities at December 31, 1995 were $5,417,864 (of which $1,579,395
represented related party indebtedness) and current assets were $4,156,868.
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First Quarter 1996. Net revenues, operating loss and identifiable assets
attributable to the Healthcare segment for the first quarter of 1996 ending
March 31 were, respectively, $369,612; $(642,063); and $19,223,089. Net
revenues, operating loss and identifiable assets attributable to the
Telecommunications segment for the first quarter of 1996 ending March 31 were,
respectively, $657,943; $(379,350); and $2,524,798. Current liabilities at
March 31, 1996 were $5,963,772 (of which $1,402,581 represented related party
indebtedness) and current assets were $3,859,201.
The Company has been involved in an active acquisition program for the
past two years and management has devoted considerable time and effort in
implementing this program. Management believes it has largely been successful
in acquiring healthcare businesses which are believed to have significant
potential. In particular, it is encouraged by the prospects for its NSC
business in light of the exclusive rights to its sophisticated, healthcare
software technology and benefit plan data bases. As of December 31, 1995, the
telecommunications business was part of the Company for less than sixteen
months and the healthcare business less than three months. During this short
and expansionary operating history, large operating losses have been incurred
which management is striving to reverse.
The future success of the Company is dependent upon numerous factors, the
most significant of which are: (i) successful completion of its healthcare
management decision software development efforts and the commercialization and
marketing of that technology to others; (ii) the ability of the Company to
generate profitable operations from its pay-per-view and telecommunications
related businesses; and (iii) the ability of the Company to raise additional
equity or debt capital until such time as it achieves profitable operations.
(See "Management's Discussion and Analysis of Financial Condition and Results
of Operations.")
In connection with certain of its business acquisitions, the Company is
obligated, over the next two years, to provide or arrange working capital and
equipment financing transactions to provide funds totaling approximately $2.7
million for the use of acquired companies. While the Company believes it will
be able to arrange such financing in one or more debt or equity financing
transactions or from cash provided by operations, there is no assurance that it
will be able to do so, in which case the Company could be subject to claims
involving its performance under the related acquisition agreements.
Additionally, as discussed in Note 14 to the Consolidated Financial Statements,
included elsewhere herein, the Company has been notified by the Michigan
Department of Commerce and Securities Bureau that it has offered and sold
securities in the State of Michigan without an exemption from registration
under the Michigan Uniform Securities Act. As part of the proposed consent
order from the State of Michigan, the Company will be required to offer a right
of rescission to Michigan purchasers of its securities. If appropriate, the
Company may offer a right of rescission to purchasers of its securities in
other states where the requirements of applicable exemptions may not have been
met. It is uncertain whether or not such rescission offers will be made or, if
made, whether or not sufficient funds will be available to complete such
rescission offers. Enforcement sanctions relative to the sale of unregistered,
non-exempt securities may also include fines and restrictions on the Company's
ability to sell securities in those states.
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HEALTHCARE MANAGEMENT SERVICES
SCI's healthcare management services division consists of NSC and HMT.
The principal business of NSC is (i) to enhance, for commercial use,
healthcare management decision software technology acquired from the U.S.
Government pursuant to the Federal Technology Transfer Act of 1986, as amended,
and (ii) sell the benefits from the use of that technology to large,
self-insured companies and other healthcare plan administrators. NSC's software
technology is designed to identify unnecessary and manage healthcare benefit
costs. NSC anticipates using its computer software and data bases to assist
these companies and administrators to improve the management and administration
of their healthcare benefit plans in connection with their efforts to control
and manage healthcare costs. To date, the Company's revenues have been derived
primarily from retroactive analysis of claims paid, utilizing the computer
software capabilities of its subcontractor, Health Management Systems, Inc.
("HMS") with respect to which the Company has received a percentage of the
recovered savings. NSC contemplates that its software capabilities will
ultimately allow it to minimize the use of subcontractors, such as HMS.
HMT develops and markets PC software products and services for managing
cases of Workers' Compensation and other work absences in order to facilitate
return to work and monitoring general employee health. The software products
and systems provide not only data collection and processing but represent
work-in-progress tools applied to information management and decision support.
Costs are controlled by reducing case severity and frequency, using the
software as a tool to coordinate and manage cases, document and monitor care
delivery, produce mandated reports, monitor medical service utilization and
costs, communicate with providers and other case participants and to analyze
case income. The goal is to achieve a significant reduction in both the human
and financial toll of work place accidents.
Licenses and Agreements. On June 2, 1994, NSC entered into a joint
research and development agreement with the U.S. Department of the Army to
develop and commercialize a statistical data base and related software to be
used by the uniformed services to reduce the costs associated with their
healthcare benefits--the Civilian Health and Medical Program for the Uniformed
Services ("CHAMPUS"). Under the agreement, NSC has an irrevocable, perpetual
license to use the data base and software in the area of health and medical
plan benefits for self-insured companies and U.S. and foreign governmental
entities. NSC's rights are exclusive for three years with an option to renew
such exclusivity for an additional three years.
The software system was developed by the Army, Navy and Air Force (the
"Tri-Services") at a cost of over twenty million dollars, and has reduced the
costs related to providing healthcare for retirees and dependents of men and
women serving in the uniformed services. The CHAMPUS data base covers over 18
million individuals. This technology has been enhanced and incorporated into
NSC's technology base. The analytical measurements, profiling and other
decision-making tools have been incorporated into NSC's software and data
bases, increasing the comprehensive analysis and decision-making capabilities
of NSC's current technology.
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On March 9, 1995, HMT entered into a software development, marketing and
maintenance agreement with Medicode, Inc. which is engaged in the business of
developing, licensing, and publishing data and computer software relating to
the medical services industry.
Services and Products. Utilizing its commercially enhanced software, NSC
has the ability to analyze companies' medical claims by (i) comparing these
claims against its CHAMPUS data base of medical claims, and (ii) identifying
which claims were paid or billed inappropriately. NSC provides support and
assistance to pursue recovery from the responsible parties, and has the ability
to process the data on an ongoing basis within three weeks after claim
adjudication. On a prospective basis, by using the NSC data base of
enrollment, coordination of benefits, and claims information prior to the time
of payment, companies have the opportunity to intervene and avoid making
erroneous payments. From its analysis of a company's claims payments, NSC is
able to generate reports which evaluate the company's entire system for
delivering healthcare benefits to the plans' beneficiaries.
NSC has developed a master data base containing the healthcare program
activities of its clients. By monitoring and updating companies' claims, NSC
is continuously expanding the range of information concerning healthcare
benefit plans in its master data base.
HMT's RETURN software program documents, monitors and analyzes clinic
visits, work status, case costs, and medical utilization in workers'
compensation cases.
Market. The market for NSC's services include large corporations that
self-insure, such as those in the automobile industry, that have relied on
third-party administrators to manage their healthcare benefits program. Most
large corporations' healthcare claims usually go directly to third-party
administrators where they are validated and paid by the third-party
administrators with the corporations' funds. Given the volume of claims, it is
difficult for the companies' own qualified healthcare specialists to monitor
unnecessary healthcare benefits costs.
The Company has also targeted healthcare programs administered by state
and municipal governments and certain foreign governments. Although no
contracts have as yet been entered into, the Company has had exploratory
discussions with two foreign governments and believes that these and other
governments have cost-control needs for their healthcare programs at least
comparable to those of the large corporations which self-insure.
The market for HMT's services include large corporations that self-insure,
managed care organizations, hospital organizations, and occupational health
programs.
Customers. NSC entered into a service agreement with Chrysler Corporation
in 1993 which accounted for a majority of NSC's 1995 revenues. Since that
time, NSC has entered into service agreements with Ford Motor Company, GTE
Service Corporation, and Philadelphia American Life Insurance Company. As
compensation for its services, NSC receives a percentage of the savings which
it obtains for its customers.
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NSC pays a portion of the percentage savings it receives from customers
to certain subcontractors in return for data processing and analysis services.
HMT has over 300 clients which include insurance companies, governmental
agencies, third-party administrators, self-administered self-insureds,
consulting firms and businesses. Among these are Levi Strauss & Co., the Coca
Cola Company, Nabisco, Inc., Blue Cross of California, and Rush-Presbyterian
St. Luke's Hospital in Chicago, IL. The program assists employers in
maximizing the benefit of using a well-defined information system to reduce
overall claim costs and understand the nature of healthcare costs in the
organization.
Competition. Third-party administrators such as Cigna and Blue Cross Blue
Shield currently are the competition for NSC's approach to control healthcare
costs of large self-insurers. These third-party administrators have
substantially greater financial resources than the Company but management
believes none of these competitors has the advanced software technology and
data base capabilities of NSC.
HMT's competitors include companies that produce clinical knowledge
software and data base products enabling healthcare providers to manage the
financial risk associated with the delivery of healthcare services.
Employees. As of May 1, 1996, NSC had 9 employees and HMT had 18
employees.
TELECOMMUNICATIONS SERVICES
The major companies in SCI's Telecommunications Services division include
Telcom Network, Inc. ("Telcom") and Ameristar Telecommunications, Inc. ("ATI").
Telcom provides assistance to municipalities, institutions and commercial
users of telephone and utility services by conducting cost control audits
designed to reduce and prevent errors in telephone and utility billings.
Utilizing experienced utility bill auditors, the audit team analyzes local
utility and phone billings and applies for refunds if applicable. The audit
team is familiar with the methods used by utility and telecommunication
companies to arrive at the rates and charges a business pays. The team
utilizes this information to verify that payments are correct and to identify
charges that will reduce future costs. Because most state laws now mandate a
full refund on documented claims plus 12% interest, the size of the client
refund can be substantial.
Telcom's audit services are provided on a contingency basis with respect
to retroactive analysis savings. If billing errors are found, the audit firm
will negotiate with the utility or telephone company to obtain a refund or
credit for the client. The Company typically receives, after subcontractor
costs, an amount approximating one-quarter of the recovery rate. The recovery
rate generally amounts to 3% of total auditable billings. In addition, the
Company's utility and telephone billing audit contracts typically provide that
TNI will receive 50% of the forward savings (identified at the time of the
audit) for a period of two years. In 1995, Telcom was awarded contracts to
perform audits on $185 million of utility billings. In the first half of 1996,
Telcom has
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been awarded contracts for $130 million of utility billings, including
identified forward savings for two years. It's major customers are the City of
Tampa, Florida, The University of Florida and Florida State University, AAA
Corporate Headquarters, located in Lake Mary, Florida, St. Johns County,
Florida and Goodings Supermarkets.
Telcom has also operated as a switchless reseller of long distance
services. While Telcom has the ability to continue this business, its revenues
and operations have been severely and adversely affected by a dispute with a
major supplier of telecommunications products and services to Telcom. (See
"Legal Proceedings" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations".)
ATI sells Operator Service Provider ("OSP") and Pay-Per-View ("PPV")
programs to small and medium sized hotels and motels, currently in 20 states in
the U.S. PPV is a product in high demand for small to mid-sized hotel and
motel properties but approximately 90% of the hotels and motels in this
category do not provide this amenity because of the capital cost involved. To
address this need, ATI provides the PPV equipment and installation cost free to
hotel/motel operators in return for five to ten year contracts designating ATI
as the telecommunications provider for the hotel/motel room phones and the
hotel/motel pay phones. ATI receives approximately 90% of the PPV revenue and
40% of the phone billings of the customers during the contract term.
Licenses and Agreements. ATI has negotiated contract agreements with
Inter-Exchange Carriers ("IXC's") and Operator Service Provider ("OSP")
companies. These ATI provider agreements, negotiated on behalf of ATI's
network of customers and agents, allow special pricing and value-added services
otherwise unavailable to the individual company or concern. This focus allows
ATI to provide telecommunication benefits to small and medium sized hotels,
eliminating competitive advantages previously extended only to large
corporations. Over 15 IXC and OSP companies are under contract with ATI.
Management believes these OSP and PPV products are exportable to small and
medium hotels in certain foreign countries and has over 3,000 rooms under
contract in Mexico.
Market. As of June 30, 1996, ATI had approximately 4,900 rooms under
contract and in service for its bundled OSP/PPV product. These contracts for
PPV and OSP services eliminate the customer retention problems associated with
many telecommunications packages. ATI has targeted major Mexican resorts as a
potential for its OSP/PPV products.
Competition. The principal competition for the business of hotel and
motel properties in the United States in the OSP/PPV area are large, satellite
oriented companies such as Spectradine Corp. that principally market to the
larger hotel chains. ATI perceives its niche to be the small to mid-size hotel
properties which have less than 200 rooms. ATI believes it has a competitive
advantage over the larger satellite-serviced hotels because these hotels
provide movies only at a specific time whereas ATI's product consists of a bank
of first release VCR movies that are directly accessible at any time by
telephone.
Employees. As of May 1, 1996, Telcom had 16 employees and ATI had 5
employees.
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ITEM 2. FINANCIAL INFORMATION.
SELECTED FINANCIAL DATA
Set forth below is selected financial data for the last three fiscal years
and the first quarter of 1996. In 1992 and 1991, the Company had no operations
or assets and was dormant.
<TABLE>
<CAPTION>
First Year Ended December 31,
Quarter --------------------------------------------
1996 1995 1994 1993
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<S> <C> <C> <C> <C>
Net Revenues ............... $ 1,027,555 $ 2,984,884 $807,669 $996,118
Income (loss) from
operations ............... (1,596,717) (5,980,730) (126,581) 336,707
Net income (loss) .......... (1,043,377) (5,808,025) (129,002) 338,909
Earnings (loss) per share .. (.14) (1.81) (.10) .41
Current Assets ............. 3,859,201 4,156,868 442,069 492,216
Current Liabilities ........ 5,963,772(1) 5,417,864(1) 652,107 13,335
Total Assets ............... 24,154,480 21,545,654 780,222 578,549
Long-Term Liabilities(2) ... 1,664,024 1,326,022 77,750 553,750
</TABLE>
(1) Includes $1,402,581 in 1996 and $1,579,395 in 1995 of related party
indebtedness.
(2) Includes long-term portion of notes and debentures payable; obligations
under capital leases; and deferred compensation.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
The following table sets forth certain information derived from the
Consolidated Financial Statements of the Company for each of the three years in
the period ended December 31, 1995, and for the three months ended March 31,
1996 and 1995. The following discussion should be read in conjunction with the
Consolidated Financial Statements and notes thereto, appearing elsewhere
herein.
<TABLE>
<CAPTION>
Three Months Ended
Year ended December 31, March 31,
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1995 1994 1993 1996 1995
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<S> <C> <C> <C> <C> <C>
Net revenues:
Healthcare ............. $ 91,106 $ -- $ -- $ 369,612 $ --
Telecommunications ..... 2,893,778 807,669 996,188 657,943 160,544
--------- ------- ------- --------- -------
2,984,884 807,669 996,188 1,027,555 160,554
Cost of healthcare
revenues ............... 45,553 -- -- 122,351 --
Cost of telecommunication
revenues ............... 2,014,460 134,607 1,221 466,962 29,294
Selling and administrative
expenses ............... 3,687,495 727,269 644,513 1,735,590 207,905
Goodwill write-down ...... 2,758,779 -- -- -- --
Depreciation and
amortization ........... 459,327 72,374 13,747 299,369 20,862
Income (loss) from
operations ............. (5,980,730) (126,581) 336,707 (1,596,717) (97,517)
</TABLE>
Operations of Businesses Acquired
In 1995, the Company acquired various businesses, the most significant of
which were Telcom, acquired July 1995, and NSC, acquired October 1995; and, in
March 1996, the Company acquired HMT. The Company's consolidated operating
results for the year ended December 31, 1995 and the three months ended March
31, 1996 include the results of operations of businesses acquired from their
respective dates of acquisition, as follows:
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<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31,1995 March 31, 1996
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<S> <C> <C>
Net revenues:
Healthcare ..................... $ 91,106 $ 369,612
Telecommunications ............. 2,373,491 536,458
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2,464,597 906,070
Cost of healthcare revenues ........ 45,553 122,351
Cost of telecommunication revenues 1,838,082 458,888
Selling and administrative expenses 978,310 1,028,114
Goodwill write-down ................ 2,758,779 --
Depreciation and amortization ...... 330,352 266,541
Loss from operations ............... 3,486,478 969,824
</TABLE>
The net revenues and loss from operations of Telcom for the period from
the date of acquisition (July 7, 1995) to December 31, 1995 were $2,373,475 and
$3,102,472, (including the goodwill write-down of $2,758,779), respectively,
and $536,458 and $320,629, respectively, for the three months ended March 31,
1996. Telcom's operating results for the period subsequent to the date of
acquisition were adversely affected by (i) the failure of GE Capital
Communications Services Corporation ("GECCS") and News Enterprise Wholesale
Services Limited Partnership ("News") to, among other things, provision
customer accounts for telecommunications products offered by GECCS/News and
sold by Telcom pursuant to a contractual agreement among Telcom, GECCS and
News, (ii) the cancellation of Telcom customers by GECCS and News, (iii) the
failure of GECCS/News to properly bill and collect revenues due to Telcom and
(iv) a diminution of Telcom's marketing and distribution organization as a
result of such failures and other actions taken by GECCS and News. See "Legal
Proceedings" and Note 14 to the Consolidated Financial Statements, included
elsewhere herein. The diminution in Telcom's marketing and distribution
organization that occurred as a result of such failures and other actions taken
by GECCS and News, together with limitations on the ability of the Company to
provide additional working capital to Telcom, continues to adversely affect
Telcom's operations.
The net revenues and loss from operations of NSC for the period from the
date of acquisition (October 27, 1995) to December 31, 1995 were $91,106 and
$367,386, respectively, and $245,702 and $599,851, respectively, for the three
months ended March 31, 1996. Negatively impacting NSC's operating results
during these periods were lower than expected revenues from retroactive
healthcare claims analysis and recovery services, the cost of software
development activities and costs related to sales and marketing of NSC's
healthcare decision management products.
The net revenues and loss from operations of HMT for the period from the
date of acquisition (March 12, 1996) to March 31, 1996 were $123,910 and
$42,212, respectively. The loss from operations principally reflects costs
related to the enhancement of existing products and development of new
products.
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NET REVENUES
The increase in net revenues from 1994 to 1995 and in the first quarter of
1996 versus 1995 includes the net revenues of businesses acquired ($2,464,597
for the year ended December 31, 1995 and $906,070 for the three months ended
March 31, 1996) and a reduction in pay telephone revenues due to management's
decision to target the OSP and PPV hospitality market. The decrease in 1994 net
revenues as compared to 1993 also reflects the decision by the Company to
reduce its commitment to the pay phone industry.
COST OF HEALTHCARE REVENUES
The changes in the cost of healthcare revenues from period to period are
the result of acquisitons of businesses. See "Operations of Businesses
Acquired".
COST OF TELECOMMUNICATION REVENUES
The relationship of the cost of telecommunications revenues to net
telecommunications revenues changed dramatically in 1995 as compared to 1994.
This change was principally due to the acquisition of Telcom and the inclusion
of the cost of long distance services provided to Telcom's customers in the
cost of telecommunications revenues. In 1995, the Company also made a
provision of $145,776 to reduce the value of obsolete PPV equipment to net
realizable value. Prior to 1995, the cost of telecommunication revenues
principally reflected the cost of PPV installation, only. Similarly, the
increase in the cost of telecommunications revenues in the first quarter of
1996 versus 1995 is principally the result of businesses acquired.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses increased by $2,960,226 in 1995 over
1994. Of this amount, $978,310 was due to businesses acquired during the year.
The remaining increase principally reflects higher corporate expenses for
personnel, office space and information systems for expanded operations and
legal, professional and consulting costs incurred in connection with the
Company's acquisition activities and includes $793,373 from the issuance of
stock and common stock purchase warrants for services rendered and in
consideration for extension of related party indebtedness. Similarly, the
increase in the first quarter of 1996 versus 1995 is due to businesses acquired
and higher corporate expenses.
GOODWILL WRITE-DOWN
At December 31, 1995, the Company recognized a charge to income of
$2,758,779 to write off, with no associated income tax benefit, all of the
goodwill related to its acquisition of TNI. This write-off reflects the
Company's belief that the business of TNI has been severely damaged as a result
of actions taken by GECCS and News which actions included, among other things,
(i) the failure of GECCS/News to provision customer accounts for
telecommunications products and services offered by GECCS/News and sold by TNI
pursuant to a contractual agreement among TNI, GECCS and News, (ii) the
cancellation of TNI customers by
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GECCS/News and (iii) the failure of GECCS/News to properly bill and collect
revenues due to TNI. As further discussed in Note 14 to the Consolidated
Financial Statements, included elsewhere herein, the Company is the claimant in
a binding arbitration proceeding against GECCS/News seeking damages of
approximately $5 million arising from such actions. The accompanying
consolidated financial statements do not give effect to amounts, if any, that
may be realized by the Company from such proceedings. Amounts realized, if any,
will be recognized in income when determinable.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased in 1995 over 1994 and in the first
quarter of 1996 versus 1995 principally due to the amortization of intangibles
and goodwill arising from business acquisitions. The increase from 1993 to
1994 principally reflects a higher investment in furniture and equipment.
INTEREST EXPENSE
Interest expense was $84,110, $2,421 and $-0- in 1995, 1994 and 1993,
respectively, and $45,477 in the first quarter of 1996. The increases from
period-to-period in interest expense are principally due to higher levels of
borrowings outstanding.
INCOME TAXES
For information concerning the deferred income tax benefit recorded in
1995, as well as information regarding deferred income tax assets and
liabilities as of December 31, 1995 and the Company's effective tax rate, see
Note 10 to the Consolidated Financial Statements. In the first quarter of 1996,
the Company recorded a deferred income tax benefit of $594,432, attributable
primarily to the operating loss for the quarter.
LIQUIDITY AND CAPITAL RESOURCES
The principal factors having a negative impact on the Company's liquidity
during fiscal 1995 were cash used in operations of approximately $1.8 million
(see the Consolidated Statements of Cash Flows), acquisitions of businesses
which required approximately $1.4 million in cash and other investing
activities of approximately $250,000. The positive impacts on liquidity during
the fiscal year were the proceeds of approximately $4.1 million from the
issuance of common stock and borrowings, principally from related parties, net
of repayments, of approximately $210,000.
The principal factors having a negative impact on the Company's liquidity
in the first quarter of 1996 were cash used in operations of approximately $1.4
million (see the Consolidated Statements of Cash Flows) capital expenditures of
$480,110, and debt repayments, net of borrowings, of $180,845. The positive
impact on liquidity during the first quarter of 1996 were the proceeds of
approximately $1.3 million from the issuance of common stock.
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The Company anticipates that it will continue to consume cash in its
business operations until such time as (i) its healthcare management
subsidiaries achieve profitable operations, (ii) it is able to arrange
equipment financing to support the capital requirements of its OSP and PPV
business and (iii) it resolves its arbitration claim against GECCS and News.
The Company believes that its healthcare management subsidiaries will
report profitable operations no later than in the fourth quarter of 1996, based
on known and pending business opportunities but there is no assurance that such
business opportunities will materialize or that the Company's healthcare
businesses will in fact become profitable. Also, the Company believes that it
will be able to arrange sufficient equipment financing commitments (estimated
at approximately $1.5 million for the foreseeable future) for its OSP and PPV
business but, there is no assurance that the Company will in fact be able to do
so. And, the Company believes that it will achieve a favorable outcome in its
arbitration proceeding against GECCS and News but, there is no assurance that
it will achieve a favorable outcome or, if achieved, that sufficient funds will
be available to reinvest in Telcom's business or defray the costs incurred to
date.
In connection with certain of its business acquisitions, the Company is
obligated, over the next two years, to provide or arrange working capital and
equipment financing transactions totaling approximately $2.7 million. While
the Company believes that it will be able to arrange such financing in one or
more debt or equity financing transactions or from cash provided by operations,
there is no assurance that the Company will in fact be able to do so, in which
case the Company could be subject to claims involving its performance under the
related acquisition agreements. Additionally, as discussed in Note 14 to the
Consolidated Financial Statements, included elsewhere herein, the Company has
been notified by the Michigan Department of Commerce and Securities Bureau that
it has offered and sold securities in the State of Michigan without an
exemption from registration under the Michigan Uniform Securities Act. As part
of the proposed consent order from the State of Michigan, the Company will be
required to offer a right of rescission to Michigan purchasers of its
securities. If appropriate, the Company may offer a right of rescission to
purchasers of its securities in other states where the requirements of
applicable exemptions may not have been met. It is uncertain whether or not
such rescission offers will be made or, if made, whether or not sufficient
funds will be available to complete such rescission offers. Enforcement
sanctions relative to the sale of unregistered, non-exempt securities may also
include fines and restrictions on the Company's ability to sell securities in
those states.
Based on the foregoing factors, the Company anticipates meeting its
short-term liquidity requirements, in the absence of cash flows from operations
or from settlement of the GECCS/News arbitration, by issuing debt or equity
securities in private placements in those jurisdictions where applicable
exemptions are met or in the public market subsequent to the filing of a
registration statement with the Securities and Exchange Commission. While the
Company believes that sufficient amounts of equity or debt financing will be
available, as needed, there is no assurance that such funds will be available
and, if available, on terms acceptable to the Company.
13
<PAGE> 14
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the FASB issued Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," which requires impairment losses to be recognized
when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. Statement No. 121 also addresses the accounting for long-lived assets
expected to be disposed of. The Company adopted Statement No. 121 for the year
ending December 31, 1995. The adoption of Statement No. 121 did not have a
material financial statement impact.
IMPACT OF INFLATION
The impact of inflation on the costs of the Company and its business
units, and the ability to pass on cost increases to its customers over time is
dependent upon market conditions. The Company is not aware of any inflationary
pressures that have had any significant impact on the Company's operations over
the past three years and, the Company does not anticipate that inflationary
factors will have a significant impact on future operations.
14
<PAGE> 15
Item 3. Properties.
Neither SCI nor its subsidiaries own any properties. All office space is
leased and the Company believes the leased facilities are adequate for its
current needs and that additional suitable space will be available as required.
The following table sets forth information with respect to the office
space leased by SCI and its subsidiaries.
<TABLE>
<CAPTION>
Square Annual Lease
Entity Location Footage Rental Expiration Date
- ------- -------- ------- ------ ---------------
<S> <C> <C> <C> <C>
SCI 2575 Ulmerton Road
Clearwater, FL 3,959 $52,952 09-14-98
ATI 1151 Old McHenry Road
Buffalo Grove, IL 1,888 19,500 05-01-97
Telcom 25 S. Magnolia
Orlando, FL 1,200 21,168 09-30-96
408 Nutmeg Street
San Diego, CA 6,600 47,520 03-31-00
NSC 602 Sarasota Quay
Sarasota, FL 3,316 52,860 10-13-99
4241 Piedras
San Antonio, TX 4,429 47,832 11-30-00
HMT 1150 Moraga Way
Moraga, CA 9,239 67,814 12-10-97
</TABLE>
15
<PAGE> 16
Item 4. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of June 30, 1996, (i) by each
shareholder known by the Company to be a beneficial owner of more than five
percent of the Company's common Stock, (ii) by each of the Company's directors,
(iii) by each of the named executive officers, and (iv) by all directors and
executive officers of the Company as a group. Except as indicated in the
footnote to this table, the Company believes that the persons named in the
table have sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by them.
Name Amount and Nature Percent of
Of Beneficial Owner Of Beneficial Interest Class
- ------------------- ---------------------- ----------
John A. Paolicelli(2) 628,052 7.4
James L. Tolley(2) 628,052 7.4
John D. Looney(2) 613,334 7.2
Stephen E. Williams 500,000 5.9
Edwin B. Salmon, Jr. 350,000 4.1(1)
All Directors and Executive Officers
as a Group (7 persons) 1,050,000 12.4
- ------------------------
1 Mr. Salmon also holds proxies granting him the right to vote 1,815,235
shares of Common Stock representing 21.4% of the voting shares of Common Stock
issued and outstanding.
2 Messrs. Paolicelli, Tolley and Looney, all officers of NSC, each has the
right to receive 3019 shares of the Company's Common Stock in consideration of
finder services rendered in connection with the acquisition of HMT.
16
<PAGE> 17
The following table sets forth information regarding beneficial ownership
of the Company's non-voting Class A convertible preferred stock and non-voting
Class B convertible preferred stock as of June 30, 1996 (i) by each of the
Company's directors, (i) by each of the Company's named executive officers, and
(iii) by all directors and executive officers of the Company as a group.
Amount and Nature
Name of Beneficial Ownership Percent
- ---- ----------------------- -------
Class A Class B
------- -------
Stephen E. Williams 1,363,000 Class A 28.4 None
Edwin B. Salmon, Jr. 1,075,000 Class A 22.4 None
Robert L. Alexander 500,000 Class A 10.4 None
Russell H. Armstrong 750,000 Class A 15.6 1.5
70,000 Class B
Mark Woodward 750,000 Class A 15.6 1.5
70,000 Class B
David Olivet 1,455,000 Class B None 32.0
All Directors & 4,438,000 Class A 92.5 35.1
Executive 1,595,000 Class B
Officers as a Group (7
Persons)
17
<PAGE> 18
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
The names, ages and terms of office of directors and executive officers of
the Company are set forth in the following table:
<TABLE>
<CAPTION>
Name Age All Positions With Company and Subsidiaries Since
- -------------------- --- -------------------------------------------- --------
<S> <C> <C> <C>
Robert L. Alexander 52 Director and Chief Operating Officer of SCI 1995
Russell H. Armstrong 34 Director and CEO/Sales & Marketing of ATI 1994
Edwin B. Salmon, Jr. 58 Director and Executive Vice President of SCI 1991
Stephen E. Williams 55 Director, President and Chief Executive
Officer of SCI 1995
Mark Woodward 36 Director and CEO/Operations of ATI 1994
David Olivet 59 Director and President of TNI 1996
Robert A. Thompson 43 Chief Financial Officer of SCI
</TABLE>
Each director is elected by holders of a majority of the Common Stock to
serve for a term of one year ending on the next following annual meeting of
stockholders and until his successor is elected and qualified. Officers serve
at the will of the board. Directors are not compensated for their services
apart from their executive salaries, but may be reimbursed for travel expenses
related to Company business. Messrs. Armstrong and Woodward in connection with
the ATI acquisition have been elected as directors pursuant to the terms of the
agreements for acquisition of their stock in ATI.
Robert L. Alexander is currently the Chief Operating Officer of SCI and is
also President and founder of ComStar Network Services, Inc., a
telecommunications products, services, marketing and sales corporation, and a
wholly owned subsidiary of the Company.
Russell H. Armstrong is the CEO/Sales & Marketing of ATI. He is a
co-founder of ATI in 1991 and served as Co-CEO Marketing since that time and
until the acquisition of ATI by SCI in 1994.
Edwin B. Salmon, Jr. has been associated with the Company since its
formation. He is currently Chairman of the Company's Board of Directors and was
Chief Financial Officer of the Company from June 1994 to February 1996, when he
became an Executive Vice President of the Company. In 1991, Mr. Salmon became
President and a controlling stockholder of Associated Healthcare Industries,
Inc. ("Associated"), a publicly owned shell corporation, which changed its name
to Contour Medical, Inc. in connection with acquisition of a disposable medical
products manufacturing business. In 1993, Mr. Salmon left Associated to
resume his efforts in the Company's acquisition of operating businesses.
18
<PAGE> 19
Robert A. Thompson became Chief Financial Officer of the Company in
February 1996. During the period from February 1991 to the date of his
appointment as CFO of SCI, Mr. Thompson served as Vice President and Treasurer
of Anchor Glass Container Corporation, a manufacturer of glass containers.
Stephen E. Williams is Chief Executive Officer of the Company. From 1991
to 1994, Mr. Williams was Chief Operations Officer, majority stockholder and
co-founder of Televoice, Inc., an Illinois company which developed software
applications integrating relational data base technology with telephone
technology. From 1990 to 1991, Mr. Williams was Chief Executive Officer of
McArdle Enterprises, a real estate company located in St. Charles, Illinois.
Mark Woodward is co-founder and CEO of Operations for ATI. Mr. Woodward
has been president and CEO of operations of ATI since 1991.
David Olivet is currently President of Telcom Network, Inc., a
wholly-owned subsidiary of the Company. From 1961 to 1992, Mr. Olivet was
Director of Product Management for large scale computer systems worldwide for
NCR Corporation.
19
<PAGE> 20
Item 6. Executive Compensation.
The following table sets forth information regarding compensation paid for
all services rendered to the Company in all capacities during the last three
completed fiscal years by the Company's Chief Executive Officer and the two
executive officers of the Company.
<TABLE>
<CAPTION>
Annual Compensation
----------------------
Name & principal
- ---------------- Long-Term
positions Year Salary Bonus Other Compensation
- --------- ---- ------ ----- ----- ------------
<S> <C> <C> <C> <C> <C>
Robert L. Alexander
(1) 1995 $ 52,000 None None None
1994 None None None None
1993 None None None None
Edwin B. Salmon, Jr.
(1)(3) 1995 $ 99,630 None $9,000 None
1994 None None None None
1993 None None None None
Stephen E. Williams
(1)(2)(3) 1995 $155,000 None $7,500 None
1994 None None None None
1993 None None None None
</TABLE>
______________
(1) The salaries of Messrs. Salmon and Williams have been increased to
$180,000 for 1996 and Mr. Alexander to $150,000 effective June 1, 1996.
Each of the executive officers has entered into 5-year employment
contracts. See Note 13 of the Notes to Consolidated Financial Statements.
(2) The Company issued 500,000 shares of Common Stock valued at $15,000 and
1,375,000 shares of its Class A preferred stock valued at $20,625 to Mr.
Williams in connection with the performance of certain conditions set
forth in a 1994 letter agreement. See Note 13 to the Consolidated
Financial Statements.
(3) Each of Messrs. Salmon and Williams have options to purchase 500,000
shares of the Company's Common Stock at an exercise price of $6.00 per
share. Such options were issued in June 1996.
Item 7. Certain Relationships and Related Transactions.
The acquisition of ATI and the employment agreements entered into with
Messrs. Armstrong and Woodward were negotiated at arms-length prior to the date
on which Messrs. Armstrong and Woodward became directors of the Company. In
connection with the ATI acquisition, $250,000 aggregate principal amount of
notes payable were issued to Messrs. Armstrong and Woodward and, pursuant to
their terms, were originally due within 90 days of the date of the acquisition.
These notes were extended from time to time and are now due upon completion of
a public offering of the Company's common stock. In consideration for these
extensions, the Company, pursuant to an agreement executed on July 14, 1995,
authorized the issuance to each of Messrs. Armstrong and Woodward 70,000 shares
of Class B preferred stock and warrants for the purchase of 83,334 shares of
the Company's Common Stock exercisable at $1.50 per share.
20
<PAGE> 21
The acquisition of NSC was negotiated at arms-length prior to the date on
which Messrs. Tolley, Looney and Paolicelli became employees of the Company.
Employment agreements with these persons were entered into between them and NSC
prior to the acquisition and assumed, with certain modifications, by SCI.
Pursuant to the employment agreements, which expire June 30, 1997, each of
Messrs. Tolley, Looney and Paolicelli are to receive an annual compensation of
$180,000 in the initial base year , commencing July 1, 1995, which is to be
increased by 20% of the base year compensation effective July 31, 1996.
Certain of the directors who are former shareholders of acquired
businesses received notes from the Company that were negotiated at arms-length
at the time of the acquisition and prior to their election as directors. See
Note 7 of the Notes to Consolidated Financial Statements.
The Company entered into employment agreements with Messrs. Salmon,
Alexander and Williams. These agreements provide, among other things, for the
payment of compensation over 5 years from the date of employment, regardless of
whether or not these executive officers remain in the employ of the Company.
The present value of future obligations under these agreements was $1,609,775
at December 31, 1995. See Note 13 to the Consolidated Financial Statements.
In May 1994, the Company entered into a letter agreement with Mr.
Williams, its current Chief Executive Officer. Pursuant to that agreement, the
Company, in 1995, issued 500,000 shares of its Common Stock, valued at $15,000,
and 1,375,000 shares of its Class A Preferred Stock, valued at $20,625 in
connection with the satisfaction of conditions relating to equity and debt
funding arrangements on behalf of the Company.
In June 1995, the Company issued 1,075,000 shares of its Class A Preferred
Stock to Mr. Salmon in consideration for the acquisition of all the outstanding
shares of LCI.
In June 1995, the Company issued 200,000 shares of its common stock and
500,000 shares of its Class A preferred stock to Mr. Alexander in consideration
for the acquisition of Comstar.
Item 8. Legal Proceedings.
One of the Company's subsidiaries is claimant in a binding arbitration
proceeding against GE Capital Communications Services ("GECCS") and New
Enterprise Wholesale Services, Ltd. (News") seeking damages of approximately $5
million arising out of a breach of contract for the purchase and resale of
telecommunications services. GECCS and News have asserted a counter claim of
approximately $461,000 for costs allegedly owed to GECCS and News. While the
Company believes it will prevail in this case, it is not possible to predict
its outcome or the amount of recovery, if any. The arbitration proceeding
commenced on April 22, 1996 and was completed on April 25, 1996. The parties
are to file briefs in June and July and a decision is anticipated in August
1996.
21
<PAGE> 22
The Company was notified in May 1996 by the Michigan Department of
Commerce and Securities Bureau that it has offered and sold its securities in
the State of Michigan without an exemption from registration under the Michigan
Uniform Securities Act. As part of the proposed consent order from the State of
Michigan, the State of Michigan will require the Company to offer Michigan
purchasers of the Company's securities the right to rescind their purchase
transactions. The rescission offer currently encompasses approximately 500,000
shares of the Company's outstanding shares of common stock sold at prices
ranging from $1.50 to $3.50 per share. In addition, the Company has issued
approximately 500,000 common stock purchase warrants to certain of the Michigan
purchasers. Such warrants are exercisable at prices ranging from $1.50 to $3.50
per share.
It is not possible to determine the number of Michigan shareholders who
may exercise their rights pursuant to a rescission offer, or the number of
shares of common stock purchase transactions that may be rescinded or the
amount, if any, that the Company would be required to pay pursuant to a
rescission offer. If all of the Michigan purchasers exercised their rights
pursuant to a rescission offer, the Company would be required to pay such
purchasers approximately $1,000,000 in the aggregate to reimburse them for the
purchase price of their common stock investment in the Company. In that event,
it is uncertain whether sufficient funds will be available to complete a
rescission offer. The rescission offer will also require the payment to those
shareholders accepting the rescission offer interest from the date of
their investment to the date of rescission at the statutory rate in Michigan.
If appropriate, the Company may offer a right of rescission to purchasers
of its securities in other states where the requirements of applicable
exceptions may not have been met. It is uncertain whether or not such
rescission offers will be made or, if made, whether or not sufficient funds
will be available to complete such rescission offers. Enforcement sanctions
relative to the sale of unregistered, non-exempt securities may also include
fines and restrictions on the Company's ability to sell securities in those
states.
In May 1996, the Company informed the principals of Coast Communications,
Inc. ("CCI") that the Company was canceling the acquisition of CCI and
terminating all of the related acquisition documents. The principals filed suit
to enforce promissory notes ($300,000) which were issued by the Company. The
notes and associated documentation call for a return of CCI shares in the event
of non-payment.
The Company and its subsidiaries are also parties in various
administrative actions and other legal proceedings arising in the ordinary
course of business, none of which are expected to materially affect the
financial position, results of operations or cash flows of the Company.
22
<PAGE> 23
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS.
The Company's common stock is quoted under the stock symbol "SCMI" on the
NASDAQ Bulletin Board and the over-the-counter market. The following table
sets forth the approximate high and low bid quotations for the Company's Common
Stock for each quarter during the last two years. These bid quotations are
inter-dealer prices without retail markup, mark-down or commission, and may not
represent actual transactions.
Quarter ended High bid Low bid
------------- -------- -------
March 31, 1994 $ .06 $ .06
June 30, 1994 $ .06 $ .06
September 30, 1994 $ .06 $ .06
December 31, 1994 $ 2.265 $ .06
March 31, 1995 $ 4.25 $ 2.00
June 30, 1995 $ 3.875 $ .75
September 30, 1995 $ 8.50 $2.625
December 31, 1995 $ 15.50 $ 3.25
March 31, 1996 $ 17.75 $9.375
June 30, 1996 $ 12.375 $8.50
The high and low bid quotations price for the Common Stock on June 28,
1996 were $8.50. At the date of this Registration Statement, there is no
market for the Preferred Stock and a market is not expected to develop.
The Company has not paid any dividends on its Common Stock during the last
two fiscal years ended December 31, 1995 and from that date to the date of this
Registration Statement. The payment by the Company of dividends on the Common
Stock, if any, in the future rests within the discretion of its Board of
Directors and will depend, among other things, upon the Company's earnings, its
capital requirements and its financial condition, as well as other relevant
factors.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
During the period from January 1, 1993 to March 31, 1996, the Registrant
issued 4,800,000 shares of Class A Preferred Stock, 4,690,000 shares of Class B
Preferred Stock and 7,460,705 shares of Common Stock. These shares were issued
to the former owners of businesses acquired by the Registrant in consideration
for the businesses acquired, to accredited
23
<PAGE> 24
and unaccredited investors in consideration for cash, to persons in
consideration of services rendered and to persons on conversion or extension of
indebtedness.
During the period from January 1, 1993 to March 31, 1996, the Registrant
issued 3,275,000 shares of Class A Preferred Stock, 2,649,602 shares of Common
Stock and 4,550,000 shares of Class B Preferred Stock in connection with the
acquisition of businesses. During that same period, the Registrant issued
1,973,668 shares of Common Stock for an aggregate cash consideration of
$5,555,455 from 292 accredited and 32 unaccredited investors, 2,823,090 shares
of Common Stock and 1,525,000 shares of Class A Preferred Stock in
consideration for services rendered and, in the case of the Registrant's Chief
Executive Officer for services to be rendered over the term of his employment
agreement, 140,000 shares of Class B Preferred Stock in consideration for
extension of related party indebtedness and 14,345 shares of Common Stock on
conversion of convertible debt.
The Company claims reliance on the exemption from registration under the
Securities Act of 1933 provided by section 4(2) thereof.
Item 11. DESCRIPTION OF SECURITIES.
The authorized capital stock of the Company consists of fifteen million
shares of Preferred Stock and 50,000,000 shares of Common Stock, $.001 par
value per share. The Board of Directors designated five million shares of
Class A Convertible Preferred Stock and the balance of ten million shares is
Class B Convertible Preferred Stock.
PREFERRED STOCK
The Class A Convertible Preferred Stock has a stated value and liquidation
preference of One Dollar ($1.00) per share and is not entitled either to vote
on any matters submitted to a vote of stockholders or to any preference in the
payment of dividends over the Common Stock. The Class A Convertible Preferred
Stock is (i) convertible, at the election of the holder, prior to filing with
the U.S. Securities and Exchange Commission of a registration statement for the
first public offering of Common Stock made by the Company after the date of
issuance and (ii) is converted automatically upon such filing and, in either
case, each share of Class A Convertible Preferred Stock is convertible into
one-half share of Common Stock.
The Class B Convertible Preferred Stock has a stated value and liquidation
preference of One Dollar ($1.00) per share and is not entitled either to vote
on any matters submitted to a vote of stockholders or to any preference in the
payment of dividends over the Common Stock. The Class B Convertible Preferred
Stock is (i) convertible, at the election of the holder, prior to filing with
the U.S. Securities and Exchange Commission of a registration statement for the
first public offering of Common Stock made by the Company after the date of
issuance and (ii) is converted automatically upon such filing and, in either
case, each share of Class B Convertible Preferred Stock is convertible into
such number of shares of Common Stock (including fractions of shares) as is
determined by dividing the par value and stated value of the Preferred Stock by
the
24
<PAGE> 25
average of the closing bid prices of the Common Stock in the over-the-counter
market on the ten days ending on the closing date of the transaction in which
the shares of Class B Convertible Preferred Stock are issued. The 4,550,000
shares of Class B Convertible Preferred Stock issued in the acquisition of the
Company's Telcom subsidiary are convertible into 1,654,546 shares of Common
Stock.
Common Stock
As of June 30, 1996, 8,490,338 shares of Common Stock are issued and
outstanding. The shares of the Common Stock (i) have equal and ratable rights
with all shares of issued and outstanding Common Stock to payment of dividends
from funds legally available therefor, when, as and if declared by the Board of
Directors of the Company; (ii) are entitled to share ratably in all of the
assets of the Company available for distribution to holders of Common Stock
upon liquidation, dissolution or winding up of the affairs of the Company;
(iii) do not have preemptive, subscription or conversion rights; (iv) have no
redemption or sinking fund provisions applicable thereto; and (v) have one vote
for election of each director noncumulative and on other matters submitted to a
vote of stockholders. The issued and outstanding shares of Common Stock are
fully paid and non-assessable.
Transfer Agent
American Securities Transfer and Trust Inc., 1825 Lawrence Street, Suite
444, Denver, Colorado 80201; P.O. Box 15696, Denver, Colorado 80201-1596 serves
an the Company's transfer agent.
Item 12. Indemnification of Directors and Officers.
The Section 607.0850 of the Florida Business Corporation Act and Article
VII of the Company's Bylaws provide for indemnification of directors and
officers for liabilities incurred as a result of serving in those capacities.
Insofar as indemnification for liabilities arising under the federal securities
laws may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, the Company has been advised that
in the opinion of Commission such indemnification is against public policy as
expressed in such laws and is, therefore, unenforceable. In the event a claim
for indemnification against such liabilities (other than the payment of
expenses incurred in the successful defense, suit or proceeding) is asserted by
any such director, officer or controlling person, the Company will, unless in
the opinion of counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in such laws and
will be governed by the final adjudication of such issue.
25
<PAGE> 26
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page
----
Systems Communications, Inc.
<S> <C>
Independent Auditors' Report on the Consolidated Financial Statements
for the year ended December 31, 1995 ................................ 27
Independent Auditors' Report on the Consolidated Financial Statements
for the years ended December 31, 1994 and 1993 ...................... 28
Consolidated Balance Sheets
as of December 31, 1995 and 1994 and March 31, 1996 (unaudited)...... 29
Consolidated Statements of Operations
for each of the three years in the period ended December 31, 1995 and
three months ended March 31, 1996 and 1995 (unaudited)............... 31
Consolidated Statements of Stockholders' Equity
for each of the three years ended in the period December 31, 1995 and
three months ended March 31, 1996 (unaudited)......................... 32
Consolidated Statements of Cash Flows
for each of the three years ended in the period December 31, 1995
and three months ended March 31, 1996 and 1995 (unaudited)........... 34
Notes to Consolidated Financial Statements ............................. 35
Pro Forma Consolidated Statements of Operations
for the year ended December 31, 1995 and
three months ended March 31, 1996 (unaudited)........................ 52
NATIONAL SOLUTIONS CORPORATION
Independent Auditors' Report ............................................. 56
Balance Sheets as of December 31, 1994 and 1993 .......................... 57
Statements of Operations for the year ended December 31, 1994 and for the
period May 19, 1993 (inception) to December 31, 1993 .................. 58
Statements of Changes in Shareholders' Equity (Deficit) for the year ended
December 31, 1994 and for the period May 19, 1993 (inception)
to December 31, 1993 .................................................. 59
Statements of Cash Flows for the year ended December 31, 1994 and for the
period May 19, 1993 (inception) to December 31, 1993 .................. 60
Notes to Financial Statements ............................................ 61
TELCOM NETWORK, INC.
Independent Auditors' Report ............................................ 66
Balance Sheet as of December 31, 1994 ................................... 67
Income Statement for the year ended December 31, 1994 ................... 68
Statement of Stockholders' Equity for the year ended December 31, 1994 .. 69
Statement of Cash Flows for the year ended December 31, 1994 ............ 70
Notes to Financial Statements ........................................... 71
</TABLE>
26
<PAGE> 27
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Systems Communications, Inc.
We have audited the accompanying consolidated balance sheet of Systems
Communications, Inc. and Subsidiaries as of December 31, 1995, and the related
consolidated statement of operations, stockholders' equity, and cash flows for
the year then ended. 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 audit.
We conducted our audit 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 misstatement. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Systems
Communications, Inc. and Subsidiaries at December 31, 1995, and the
consolidated results of their operations and their cash flows for the year
ended in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that Systems Communications, Inc. and Subsidiaries will continue as a going
concern. As more fully described in Note 3, the Company has incurred operating
losses for 1995 and 1994 and has a working capital deficiency. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
June 19, 1996
27
<PAGE> 28
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Systems Communications, Inc.
Clearwater, Florida
We have audited the accompanying consolidated balance sheet of Systems
Communications, Inc. and Subsidiaries as of December 31, 1994, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the years ended December 31, 1994 and 1993. 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
misstatement. 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 Systems
Communications, Inc. and Subsidiaries as of December 31, 1994, and the results
of their operations and their cash flows for the years ended December 31, 1994
and 1993, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to
the consolidated financial statements, the Company incurred a loss from
operations for the year ended December 31, 1994 and had a net working capital
deficiency and an accumulated deficit at December 31, 1994. Additionally, the
Company is dependent upon successfully obtaining financing sufficient to pay its
obligations related to its acquisition of Ameristar Telecommunications, Inc. and
Coast Communications, Inc. These factors, among other things, raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 3. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Lovelace, Roby & Company, P.A.
Orlando, Florida
March 29, 1995
28
<PAGE> 29
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------ MARCH 31,
1995 1994 1996
---------- ---------- -----------
(UNAUDITED)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents ................................. $ 964,714 $ 81,522 $ 210,977
Accounts receivable, less allowance for
doubtful accounts of $510,000 in 1995, $-0- in 1994 and
$545,000 in 1996 ....................................... 1,322,469 61,518 1,699,198
Notes receivable from officers and employees .............. 52,000 -- 102,000
Equipment inventories ..................................... 228,344 294,029 155,133
Deferred expenses ......................................... 481,897 -- 417,203
Deferred income taxes ..................................... 608,277 -- 608,277
Other current assets ...................................... 499,167 5,000 666,413
------------- --------- -----------
Total current assets.......................... 4,156,868 442,069 3,859,201
------------- --------- -----------
Furniture and equipment ...................................... 693,046 355,765 1,900,443
Less accumulated depreciation.............................. (220,524) (88,669) (413,064)
------------- --------- -----------
Net furniture and equipment............................. 472,522 267,096 1,487,379
Deferred compensation ........................................ 1,190,374 -- 1,099,517
Intangible assets, net of accumulated amortization of
$253,333 in 1995, $-0- in 1994 and $408,333 in 1996 12,296,667 -- 12,141,667
Excess of cost over fair value of net assets acquired, net of
accumulated amortization of $38,638 in 1995,
$-0- in 1994 and $91,596 in 1996.......................... 3,125,675 -- 5,152,361
Other noncurrent assets ..................................... 303,548 71,057 414,355
------------- --------- -----------
$ 21,545,654 $ 780,222 $24,154,480
============= ========= ===========
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements 29
<PAGE> 30
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, 1996
1995 1994 -------------
LIABILITIES AND STOCKHOLDERS' EQUITY ----------- ----------- (UNAUDITED)
<S> <C> <C> <C>
Current liabilities:
Borrowings under line of credit......................................... $ 45,151 $ 47,251 $ 132,651
Current portion of related party notes and debentures .................. 1,579,395 567,450 1,402,581
10.75% demand note payable, secured by certain
accounts receivable ................................................. 100,000 -- 100,000
Current portion of obligations under capital leases..................... 29,328 2,250 169,752
Accounts payable........................................................ 1,260,990 24,278 1,340,457
Accrued expenses........................................................ 187,334 10,878 273,748
Accrued compensation and employee benefits.............................. 1,358,947 -- 1,424,572
Deferred revenue........................................................ 856,719 -- 1,120,011
---------- --------- -----------
Total current liabilities.................................. 5,417,864 652,107 5,963,772
---------- --------- -----------
Long-term portion of related party notes and debentures ................... 46,005 60,300 42,319
Long-term portion of obligations under capital leases ..................... 129,190 17,450 541,179
Deferred compensation ..................................................... 1,150,827 -- 1,080,526
Deferred income taxes ..................................................... 3,271,649 -- 2,677,217
Stockholders' equity:
Class A convertible preferred stock, stated value and liquidation
preference - $1.00 per share; authorized 5,000,000 shares,
issued and outstanding 4,800,000 shares in 1995, 1,700,000
shares in 1994 and 4,800,000 shares in 1996........................ 178,125 -- 178,125
Class B convertible preferred stock, stated value and
liquidation preference - $1.00 per share; authorized
10,000,000 shares, issued and outstanding 4,690,000
shares in 1996 and 1995 ........................................... 2,728,345 -- 2,728,345
Common stock - $.001 par value; authorized 50,000,000
shares, issued and outstanding 7,668,214 shares in 1995,
2,797,485 shares in 1994 and 8,286,470 shares in 1996.............. 7,668 2,798 8,287
Common stock to be issued.............................................. 2,000,000 -- 2,000,000
Additional paid in capital............................................. 12,663,291 286,852 16,025,397
Accumulated deficit.................................................... (6,047,310) (239,285) (7,090,687)
---------- --------- -----------
Total stockholders' equity................................... 11,530,119 50,365 13,849,467
---------- --------- -----------
$21,545,654 $780,222 $24,154,480
---------- --------- -----------
</TABLE>
See Notes to Consolidated Financial Statements 30
<PAGE> 31
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
Years Emded December 31, March 31,
------------------------ ------------------
1995 1994 1993 1996 1995
--------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues:
Healthcare ..................... $ 91,106 $ -- $ -- $ 369,612 $ --
Telecommunications ............. 2,893,778 807,669 996,118 657,943 160,544
----------- --------- -------- ------------ ----------
2,984,884 807,669 996,188 1,027,555 160,544
----------- --------- -------- ------------ ----------
Costs and expenses:
Cost of healthcare revenues .... 45,553 -- -- 122,351 --
Cost of telecommunication
revenues .................... 2,014,460 134,607 1,221 466,962 29,294
Selling and administrative
expenses .................... 3,687,495 727,269 644,513 1,735,590 207,905
Goodwill write-down ............ 2,758,779 -- -- -- --
Depreciation and amortization .. 459,327 72,374 13,747 299,369 20,862
----------- --------- -------- ------------ ----------
8,965,614 934,250 659,481 2,624,272 258,061
----------- --------- -------- ------------ ----------
Income (loss) from operations...... (5,980,730) (126,581) 336,707 (1,596,717) (97,517)
Interest income.................... 4,404 -- 2,202 4,330 413
Interest expense................... (84,110) (2,421) -- (45,477) (1,529)
Other income (expense), net ....... (4,288) -- -- 55 --
----------- --------- -------- ------------ ----------
Income (loss) before
income taxes ................ (6,064,724) (129,002) 338,909 (1,637,809) (98,633)
Income tax benefit ................ (256,699) -- -- (594,432) --
----------- --------- -------- ------------ ----------
Net income (loss) .............. $(5,808,025) $(129,002) $338,909 $ (1,043,377) $ (98,633)
----------- --------- -------- ------------ ----------
Earnings (loss) per share ......... $ (1.81) $ (.10) $ .41 $ (.14) $ (.04)
----------- --------- -------- ------------ ----------
Weighted average number of
common shares outstanding ...... 3,201,991 1,306,493 825,765 7,576,417 2,797,485
----------- --------- -------- ------------ ----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements 31
<PAGE> 32
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS A CLASS B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
--------------- --------------- ------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------------- ------------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993 ........... 1,500,000 $ -- -- $ -- 825,765 $ 826
Incorporation of Coast
Communications, Inc. ............. 200,000 -- -- -- --
Stockholder contributions, net ....... -- -- -- --
Net income ........................... -- -- -- -- -- --
--------- ------- ---------- ---------- --------- -------
Balance at December 31, 1993 ......... 1,700,000 -- -- -- 825,765 826
Issuance of common stock
as compensation .................. -- -- -- -- 1,770,000 1,770
Issuance of common stock for cash .... -- -- -- -- 201,720 202
Stockholders distributions, net ...... -- -- -- -- --
Net loss ............................. -- -- -- -- -- --
--------- ------- ---------- ---------- --------- -------
Balance at December 31, 1994 ......... 1,700,000 -- -- -- 2,797,485 2,798
Issuance of common stock
for cash ......................... -- -- -- -- 1,477,874 1,478
Issuance of stock as compensation .... 1,525,000 20,625 -- -- 1,053,090 1,053
Issurance of stock and warrants in
consideration for extension of
related party indebtedness ....... -- -- 140,000 236,600 -- --
Issuance of stock and warrants in
connection with acquisitions
of businesses .................... 1,575,000 157,500 4,550,000 2,491,745 2,339,765 2,339
Net loss ............................. -- -- -- -- -- --
--------- ------- ---------- ---------- --------- -------
Balance at December 31, 1995 ......... 4,800,000 178,125 4,690,000 2,728,345 7,668,214 7,668
Issuance of common stock for cash .... -- -- -- -- 294,074 295
Issuance of common stock in connec-
tion with business acquisitions .. -- -- -- -- 309,837 310
Issuance of stock for debt ........... -- -- -- -- 14,345 14
Net loss ............................. -- -- -- -- -- --
--------- ------- ---------- ---------- --------- -------
Balance at March 31, 1996
(unaudited) .................. 4,800,000 $178,125 4,690,000 $2,728,345 8,286,470 $ 8,287
--------- ------- ---------- ---------- --------- -------
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements 32
<PAGE> 33
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
<TABLE>
<CAPTION>
Common Additional
Stock to Paod-In Accumulated
be issued Capital Deficit Total
--------- ------- ------- -----
<S> <C> <C> <C> <C>
Balance at January 1, 1993 ........... $ -- $ 61,370 $ (210,562) $ (148,366)
Incorporation of Coast
Communications, Inc. ............. -- (61,370) (238,630) (300,000)
Stockholder contributions, net ....... -- 120,921 -- 120,921
Net income ........................... -- -- 338,909 338,909
----------- ----------- ----------- ----------
Balance at December 31, 1993 ......... -- 120,921 (110,283) 11,464
Issuance of common stock
as compensation .................. -- 69,030 -- 70,800
Issuance of common stock for cash .... -- 103,158 -- 103,360
Stockholders distributions, net ...... -- (6,257) -- (6,257)
Net loss ............................. -- -- (129,002) (129,002)
----------- ----------- ----------- -----------
Balance at December 31, 1994 ......... -- 286,852 (239,285) 50,365
Issuance of common stock
for cash ......................... -- 4,109,409 -- 4,110,887
Issuance of stock as compensation .... -- 430,095 -- 451,773
Issurance of stock and warrants in
consideration for extension of
related party indebtedness........ -- 105,000 -- 341,600
Issuance of stock and warrants in
connection with acquisitions
of businesses .................... 2,000,000 7,731,935 -- 12,383,519
Net loss ............................. -- -- (5,808,025) (5,808,025)
----------- ----------- ----------- -----------
Balance at December 31, 1995 ......... 2,000,000 12,663,291 (6,047,310) 11,530,119
Issuance of common stock for cash .... -- 1,340,913 -- 1,341,208
Issuance of common stock in connec-
tion with business acquisitions .. -- 1,999,690 -- 2,000,000
Issuance of stock for debt ........... -- 21,503 -- 21,517
Net loss ............................. -- -- (1,043,377) (1,043,377)
---------- ----------- ---------- ------------
Balance at March 31, 1996
(unaudited) ...................... $2,000,000 $16,025,397 $(7,090,687) $ 13,849,467
---------- ----------- ----------- ------------
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements 33
<PAGE> 34
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
Years Emded December 31, March 31,
------------------------ ---------
1995 1994 1993 1996 1995
------- ------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................ $(5,808,025) $(129,002) $338,909 $(1,043,377) $(98,633)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operations:
Depreciation and amortization ............ 459,327 72,374 13,747 299,369 20,862
Amortization of deferred
compensation, net .................... 61,819 -- -- 20,556 --
Provision for bad debts .................. 181,753 -- -- 39,765 --
Provision for inventory
obsolescence ......................... 145,776 -- -- -- --
Stock and warrants issued for compensation 757,748 -- -- -- --
Deferred income taxes .................... (256,699) -- -- (594,432) --
Goodwill write-down ...................... 2,758,779 -- -- -- --
Deferred revenue ......................... 5,937 -- -- 35,847 --
Increase (decrease) in cash from
changes in operating assets
and liabilities:
Accounts receivable .............. 317,161 13,908 (7,405) (176,030) (7,2287)
Equipment inventories............. (80,091) 39,690 (333,719) 73,211 (9,589)
Deferred expenses ................ (56,505) -- -- 81,494 --
Other current assets ............. (42,702) (5,000) -- (167,246) --
Accounts payable ................. (430,448) 12,247 4,974 (43,764) (6,889)
Accrued expenses ................. 84,297 9,574 (4,190) 72,026 --
Accrued compensation.............. 140,651 -- -- 65,625 --
----------- --------- -------- ----------- --------
Net cash (used in) provided by operating
activities ....................................... (1,761,222) 13,791 12,316 (1,336,956) (121,536)
----------- --------- -------- ----------- --------
Cash flows from investing activities:
Acquisition of businesses, net of
cash acquired ................................ (1,428,312) -- -- (47,034) --
Expenditures for furniture and equipment (131,744) (245,514) (91,002) (480,110) (138,076)
Loan to officer ................................. (52,000) -- -- (50,000) --
Acquisition of other assets ..................... (64,852) -- -- -- --
----------- --------- -------- ----------- --------
Net cash used in investing activities (1,676,908) (245,514) (91,002) (577,144) (138,076)
----------- --------- -------- ----------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 4,110,887 103,360 -- 1,341,208 --
Proceeds from notes payable ...................... 475,349 180,195 -- 29,500 94,844
Payments of notes payable and capital leases (262,814) (1,000) -- (208,262) (18,316)
Payment on borrowings under line of credit (2,100) -- -- (2,083) --
Stockholder contributions, net ................... -- -- 120,921 -- 113,398
Stockholder distributions, net ................... -- (52,381) -- -- --
----------- --------- -------- ----------- --------
Net cash provided by financing
activities ................................... 4,321,322 230,174 120,921 1,160,363 189,926
----------- --------- -------- ----------- --------
Net increase (decrease) in cash .................. 883,192 (1,549) 42,235 (753,737) (69,686)
Cash and cash equivalents at beginning
of the period ................................ 81,522 83,071 40,836 964,714 81,522
----------- --------- -------- ----------- --------
Cash and cash equivalents at end
of the period .................................... $ 964,714 $ 81,522 $ 83,071 $ 210,977 $ 11,836
----------- --------- -------- ----------- --------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements 34
<PAGE> 35
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - FORMATION OF THE COMPANY AND DESCRIPTION OF BUSINESS
Systems Communications, Inc. (the "Company") was organized as Florida One
Capital Corporation in 1987 and in 1988 made an initial public offering of its
common stock as a blank check company for the purpose of acquiring other
companies. During 1990 and 1991, the Company acquired and divested companies
engaged in the eye glass distribution and residential building industries and
for a brief period of time, operating under the name of Highland Healthcare
Corporation, was under the control of another publicly-owned blank check
company formed for the purpose of acquiring health care related businesses.
During the period from the fall of 1991 to the date of the first acquisitions
described below, the Company had no operations or assets and was dormant.
In 1994, the Company changed its name from Highland Healthcare Corporation
to Systems Communications, Inc. and, effective August 29, 1994, acquired all of
the outstanding stock of (i) Ameristar Telecommunications, Inc. ("ATI"), a
reseller of long-distance and pay-per-view services and products, principally
to the hospitality industry, and (ii) Coast Communications, Inc. ("CCI"),
whose principal business is the installation and servicing of pay-per-view
equipment. The acquisitions of ATI and CCI were accounted for as a reverse
merger and reorganization of the Company in a manner similar to a pooling of
interests.
Effective June 1, 1995, the Company completed the acquisition of all of
the outstanding stock of LCI Communications, Inc. ("LCI"), a reseller of
telecommunication services, from a person designated as a "promoter/
shareholder" of the Company. The net assets acquired were recorded at the
promoter/shareholder's historical cost basis.
Effective June 12, 1995, the Company acquired all of the outstanding stock
of Comstar Network Services, Inc. ("Comstar"), a reseller of long-distance
telephone services.
Effective July 7, 1995, the Company acquired all of the outstanding stock
of Telcom Network, Inc. ("TNI"), a reseller of telecommunications services and
products, principally to residential and small business customers. TNI also
audits utility and telecommunications payments and provides cost recovery
services to its customers (large and small businesses and governmental
entities) for a percentage of recovered savings.
Effective October 27, 1995, the Company acquired all of the outstanding
stock of National Solutions, Inc. ("NSC"). The principal business of NSC is to
(i) enhance, for commercial use, healthcare management decision software
technology acquired from the U.S. Government pursuant to the Federal Technology
Transfer Act of 1986, as amended, and (ii) sell the benefits from the use of
such technology to large, self-insured companies and other healthcare plan
administrators. To date, the Company's revenues have been derived primarily
from retroactive analysis of claims paid, with respect to which the Company has
received a percentage of the recovered savings.
35
<PAGE> 36
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The acquisitions of TNI, NSC and Comstar were accounted for by the
purchase method (See Note 4).
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
EQUIPMENT INVENTORIES
Equipment (pay-per-view) inventories, net of an allowance for
obsolescence, are stated at the lower of cost or market. Cost is determined by
the specific identification method.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Depreciation is provided using
the straight-line method over periods that approximate the assets' useful
lives.
Capitalized lease assets are recorded at the lower of present value of
minimum future lease payments at inception of the lease or the fair value of
the asset and are amortized straight-line over the shorter of the lease term or
estimated useful life of the asset.
INTANGIBLE ASSETS
Intangible assets consist of the cost of acquired healthcare management
decision software technology and the cost of acquired customer lists. The cost
of acquired healthcare management decision software technology ($12,400,000) is
being amortized over the estimated useful life of such technology (20 years).
The cost of acquired customer lists ($150,000) is being amortized over the
estimated useful lives of the customer relationships acquired (approximately
six months).
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
Excess of cost over the fair value of net assets acquired (goodwill) is
being amortized over periods ranging from 10 to 20 years.
36
<PAGE> 37
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company assesses the recoverability of intangible assets, including
goodwill, if facts and circumstances suggest that the carrying amount of such
intangible assets may have been impaired. If such an assessment indicates that
the carrying value of intangible assets may not be recoverable (as determined
by the undiscounted cash flows over the remaining amortization period), the
carrying value of intangible assets is reduced.
REVENUE RECOGNITION
The Company generally recognizes revenue in the period in which the
service is provided. Revenues related to audit or retroactive claims review
services, which are based on a percentage of the savings, are recognized at the
time of third party approval of the reimbursable amounts. At December 31, 1995,
one of the Company's customers had advanced the Company $856,719 of funds in
excess of those approved for reimbursement at that date. This amount has been
reflected as deferred revenue in the accompanying consolidated balance sheets.
INCOME TAXES
The Company has applied the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," which requires an
asset and liability approach in accounting for income taxes for all years
presented.
INCOME (LOSS) PER SHARE
Income (loss) per share is computed by dividing net income (loss) by the
average number of common and dilutive common equivalent shares outstanding
during each period. In 1995 and 1994, shares issuable upon conversion of the
Company's convertible preferred stock and from exercise of outstanding stock
purchase warrants were not included in the calculation of earnings (loss) per
share because their inclusion would have been anti-dilutive.
STATEMENT OF CASH FLOWS
The operating, investing and financing activities included in the 1995
consolidated statement of cash flows are presented net of the assets and
liabilities acquired in connection with business combinations.
LONG LIVED ASSETS
In March 1995, the FASB issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company adopted Statement No.
121 for the year ending December 31, 1995. The adoption of Statement No. 121
did not have a material financial statement impact.
37
<PAGE> 38
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
USE OF ESTIMATES
The process of preparing financial statements requires the use of
estimates and assumptions regarding certain types of assets, liabilities,
revenues and expenses. Such estimates primarily relate to unsettled
transactions and events as of the date of the financial statements.
Accordingly, upon settlement, actual results may differ from estimated amounts.
RECLASSIFICATIONS
Certain amounts in the 1994 and 1993 consolidated financial statements
have been reclassified to conform to the 1995 presentation.
INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The unaudited consolidated balance sheets at March 31, 1996 and the
unaudited consolidated statements of operations, stockholders' equity and cash
flows for the three months ended March 31, 1996 and 1995 have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
of normal and recurring accruals considered necessary for a fair presentation,
have been included. Results of operations for the three months ended March 31,
1996 are not necessarily indicative of the results for the full fiscal year.
NOTE 3 - GOING CONCERN
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. The Company incurred losses of
$5,808,025 and $129,002 in 1995 and 1994, respectively, and used approximately
$1,761,000 of cash in operations in 1995. The Company has a net working capital
deficiency of $1,260,996 at December 31, 1995, including $1,579,395 of related
party notes and debentures. Additionally, as discussed in Note 14, the Company
is obligated to provide or arrange for $2,700,000 of working capital and
equipment financing for acquired companies (none of which financing has
currently been arranged) and may be required to offer purchasers of the
Company's common stock in certain jurisdictions the right to rescind their
stock purchase transactions. The amount, if any, of cash required to effect
such stock purchase rescission offers is not currently determinable. It is
uncertain whether or not the Company can generate adequate cash flows from
operations, financings and sales of equity securities to meet its obligations
as they become due.
The Company's principal sources of funds have been from the sale of common
stock and borrowings from stockholders. The principal uses of funds have been
for acquisitions and costs associated with the (i) enhancement, for commercial
use and sale, of healthcare management decision software technology, acquired
from the U.S. government pursuant to the Federal Technology Transfer Act of
1986, (ii) development of the Company's pay-per-view and
38
<PAGE> 39
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
telecommunications businesses and (iii) a binding arbitration proceeding where
the Company is claimant (see Note 14). The future success of the Company is
primarily dependent upon the achievement of the following objectives: (i)
successful completion of its healthcare management decision software
development efforts and the commercialization and marketing of that technology
to others, (ii) the ability of the Company to generate profitable operations
from its pay-per-view and telecommunications related businesses and (iii) the
ability of the Company to raise additional equity or debt capital until such
time as it achieves profitable operations. There is no assurance that the
Company will successfully achieve any or all of these objectives.
NOTE 4 - ACQUISITIONS
On August 29, 1994, the Company acquired, in two separate transactions,
all of the outstanding stock of ATI and CCI in exchange for an aggregate of
1,700,000 shares of the Company's Class A convertible preferred stock and an
aggregate of $550,000 principal amount of notes payable. Each share of
preferred stock issued in connection with these acquisitions is convertible
into one-half share of the Company's common stock at the election of the holder
at any time prior to a public offering of the Company's common stock and are
automatically converted at the time of such public offering. The $550,000 of
acquisition notes payable bear interest at the rate of 6% per annum and were
originally due within 90 days of the date of such acquisitions. Such notes have
been extended from time to time and are now due upon completion of a public
offering of the Company's common stock. These transactions were accounted for
as a reverse merger and reorganization of the Company in a manner similar to a
pooling of interests. Accordingly, the accompanying consolidated financial
statements include the results of operations of these companies for all periods
presented.
In June 1995, the Company completed the acquisition of all of the
outstanding stock of LCI from a person designated as a promoter/shareholder of
the Company in exchange for 1,075,000 shares of the Company's Class A preferred
stock. The net assets acquired were recorded at the promoter/shareholder's
historical cost.
In June 1995, the Company acquired all of the outstanding stock of Comstar
in exchange for 200,000 shares of the Company's common stock, valued at
$126,000, and 500,000 shares of its Class A convertible preferred stock, valued
at $157,500. Each share of preferred stock issued in connection with this
acquisition is convertible into one-half share of the Company's common stock at
the election of the holder at any time prior to a public offering of the
Company's common stock and are automatically converted at the time of such
public offering.
In July 1995, the Company acquired all of the outstanding stock of TNI in
exchange for 4,550,000 shares of the Company's Class B convertible preferred
stock, valued at $2,492,000, $450,000 of 10% convertible debentures and $50,000
in cash. Holders of the convertible debentures are also entitled to receive an
aggregate of 225,000 stock purchase warrants, valued and recorded at $141,750,
exercisible at any time prior to a public offering of the Company's common
stock for an exercise price of $1.50 per share. Each share of preferred stock
issued in
39
<PAGE> 40
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
connection with this acquisition is convertible into .36 shares of the
Company's common stock at the election of the holder at any time prior to a
public offering of the Company's common stock and are automatically converted
at the time of such public offering. The 10% convertible debentures, plus
accrued interest, are due at the time of a public offering of the Company's
common stock and are convertible, at the election of the holder, into the
Company's common stock at the public offering price in such public offering.
In October 1995, the Company acquired all of the outstanding stock of NSC
in exchange for 2,000,000 shares of the Company's common stock valued at
$6,916,000, cash of $1,000,000 and $250,000 in notes payable. The purchase
price also included shares of the Company's common stock, valued at $2,000,000,
to be issued to the former shareholders of NSC no later than November 30, 1996.
The number of additional shares to be issued is to be determined at the date of
issuance based upon a formula. The formula is $5,000,000 minus outstanding
advances made to NSC by the Company ($520,000 at December 31, 1995) divided by
the quoted market value of the Company's common stock ($16.25 per share at
December 31, 1995). The $250,000 in notes payable are non-interest bearing and
are due in equal monthly installments of $20,000.
The acquisitions of Comstar, LCI, TNI, and NSC have been accounted for
using the purchase method of accounting. The results of operations of these
acquired businesses have been included in the consolidated financial statements
since their respective dates of acquisition.
The following unaudited pro forma summary presents the results of
operations, with pro forma adjustments (primarily intangible amortization) as
if the acquisitions had occurred at the beginning of the indicated periods. The
pro forma information is provided for information purposes only. It is based on
historical information and does not necessarily reflect the actual results that
would have occurred nor is it necessarily indicative of future results of
operations of the combined companies.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1994
----------- -----------
<S> <C> <C>
Net revenues ...................... $ 6,610,000 $ 2,395,000
=========== ===========
Net loss .......................... $(6,386,600) $(4,358,000)
=========== ===========
Net loss per share................. $ (1.19) $ (1.24)
=========== ===========
</TABLE>
NOTE 5 - GOODWILL WRITE-DOWN
At December 31, 1995, the Company recognized a charge to income of
$2,758,779 to write off, with no associated income tax benefit, all of the
goodwill related to its acquisition of TNI. This write-off reflects the
Company's belief that the business of TNI has been severely damaged as a result
of actions taken by GE Capital Communications Service ("GECCS") and News
Enterprise Wholesale Services, Ltd. ("News"), which actions included, among
other things, (i) the failure of GECCS/News to provision customer accounts for
telecommunications products and services offered by GECCS/News and sold by TNI
pursuant to a contractual
40
<PAGE> 41
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
agreement among TNI, GECCS and News, (ii) the cancellation of TNI customers by
GECCS/News and (iii) the failure of GECCS/News to properly bill and collect
revenues due to TNI.
As further discussed in Note 14, the Company is the claimant in a binding
arbitration proceeding against GECCS/News seeking damages of approximately $5
million arising from such actions. The accompanying consolidated financial
statements do not give effect to amounts, if any, that may be realized by the
Company from such proceedings. Amounts realized, if any, will be recognized in
income when determinable.
41
<PAGE> 42
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - FURNITURE AND EQUIPMENT
Furniture and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1995 1994
--------- --------
<S> <C> <C>
Furniture and equipment ............. $ 558,461 $347,885
Equipment held under capital lease .. 120,188 7,880
Leasehold improvements .............. 14,397 --
--------- --------
693,046 355,765
Less: accumulated depreciation ...... (220,524) (88,669)
--------- --------
Net furniture and equipment ....... $ 472,522 $267,096
========= ========
</TABLE>
Depreciation expense was $122,471, $72,374 and $13,747 in 1995, 1994 and
1993, respectively.
NOTE 7 - RELATED PARTY NOTES AND DEBENTURES
Related party notes and debentures consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1995 1994
-------- --------
<S> <C> <C>
10% Convertible debentures payable to
former shareholders of TNI ................... $ 450,000 $ --
6% Acquisition notes payable to former
shareholders of ATI, secured by the
stock of ATI ................................. 250,000 250,000
6% Acquisition notes payable to former
shareholders of CCI, secured by the
stock of CCI ................................. 300,000 300,000
Notes payable to former shareholders of
NSC in equal monthly installments of
$20,000, non-interest bearing ................ 210,000 --
8% - 10% Notes payable to stockholders due
on various dates through October 1996 ........ 290,400 --
5% Note to former shareholder of CCI,
payable in equal monthly installments of
$1,415, secured by certain equipment ......... 75,000 75,000
10.50% Demand note payable to an officer,
secured by certain accounts receivable ....... 50,000 --
Other .......................................... -- 2,750
------------ --------
1,625,400 627,750
Less: current portion .......................... (1,579,395) (567,450)
------------ --------
$ 46,005 $ 60,300
============ ========
</TABLE>
42
<PAGE> 43
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's 10% convertible debentures and 6% acquisition notes are
payable at the time of a public offering of the Company's common stock. The 10%
convertible debentures are convertible, at the election of the holder, into
shares of the Company's common stock at the public offering price in a public
offering. These debentures and notes are classified as current liabilities in
the accompanying consolidated financial statements in contemplation of a public
offering of the Company's common stock.
The 6% acquisition notes payable to the former shareholders of TNI were
originally due within 90 days of the date of acquisition of TNI. These notes
were extended from time to time and are now due at the time of a public
offering of the Company's common stock. In consideration of those extensions,
the Company issued 140,000 shares of its Class B preferred stock and 166,668
stock purchase warrants exercisable at $1.50 per share.
The notes payable and debentures associated with the acquisitions of
subsidiaries are collateralized by the stock of the respective subsidiaries.
Future maturities of related party notes and debentures as of December 31,
1995 are as follows:
<TABLE>
<S> <C>
1996 ............................ $1,579,395
1997 ............................ 15,024
1998 ............................ 15,794
1999 ............................ 15,187
2000 ............................ --
----------
$1,625,400
==========
</TABLE>
NOTE 8 - BORROWINGS UNDER LINE OF CREDIT
ATI has a line of credit with a bank in the amount of $100,000. Borrowings
outstanding under the line of credit are due on demand, bear interest at the
prime rate, plus 1% (9.50%), and are collateralized by substantially all of the
assets of ATI. At December 31, 1995 and March 31, 1996, borrowings outstanding
under the line of credit were $45,151 and the unused portion was $54,849.
NOTE 9 - FINANCIAL INSTRUMENTS DISCLOSURE
Statement of Financial Accounting Standards No. 107 - Disclosures about
Fair Value of Financial Instruments requires disclosure of the estimated fair
value of financial instruments. It is not practicable to estimate the fair
value of the Company's debt instruments because most of the debt instruments
are unique due to their terms being negotiated as a part of the acquisition of
companies and comparable instruments do not exist. The carrying amount of the
Company's other financial instruments, cash and cash equivalents and accounts
receivable, are a reasonable estimate of their fair value.
43
<PAGE> 44
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Most of the Company's accounts receivable are for long-distance telephone
services provided by TNI. Approximately 50% of TNI's customers are located in
the State of Florida.
NOTE 10 - INCOME TAXES
The income tax benefit recorded in 1995 consists of deferred income taxes.
No provisions for taxes currently payable were made in 1995, 1994 or 1993 due
to operating losses in each of those years for income tax purposes.
Income tax expense (benefit) differs from the amounts computed by applying
the U.S. federal income tax rate of 34 percent to income (loss) before income
taxes as a result of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994 1993
----------- ---------- ---------
<S> <C> <C> <C>
Amount computed at statutory rate ......... $(2,062,006) $ (43,861) $ 115,229
Increase (reduction) in taxes
resulting from:
State income taxes ................... (242,589) (5,160) --
Nondeductible goodwill amortization .. 14,682 -- --
Goodwill write-down .................. 1,048,336 -- --
Change in valuation allowance ........ 980,777 49,021
Earnings of nontaxable
entities acquired .................. (115,229)
Other ................................ 4,101 -- --
----------- ---------- ---------
$ (256,699) $ -- $ --
=========== ========== =========
</TABLE>
At December 31, 1994, the Company recorded a valuation allowance of
$49,021 which was equal to the net deferred tax assets of the Company as of
that date. In the first ten months of 1995, the Company recorded additional net
deferred tax assets of approximately $930,000 (attributable primarily to net
operating losses) with an addition to the valuation allowance in the same
amount. As part of the acquisition of NSC, the Company recorded approximately
$3.8 million of deferred tax liabilities. Because the deferred tax liabilities
after the NSC acquisition exceeded the previously recorded net deferred tax
assets, the Company reversed the valuation allowance (approximately $980,000 as
of October 31, 1995) with a corresponding decrease in goodwill associated with
the NSC acquisition.
44
<PAGE> 45
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company has temporary differences between the amounts of assets and
liabilities for financial reporting purposes and the amounts of such assets and
liabilities as measured by enacted tax laws. The Company also has net operating
loss carryforwards available to reduce future taxable income. The significant
components of the Company's deferred tax assets and liabilities as of December
31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
---------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ........ $1,402,574 $ 49,021
Allowance for doubtful accounts ......... 193,728 --
Equipment inventory valuation reserves .. 55,395 --
Accrued compensation .................... 953,714 --
---------- ----------
Total deferred tax assets ................. 2,605,411 49,021
Less-valuation allowance .................. -- (49,021)
---------- ----------
Net deferred tax assets ................... 2,605,411 --
---------- ----------
Deferred tax liabilities:
Intangible assets ....................... 4,672,733 --
Deferred compensation ................... 596,050 --
---------- ----------
Total deferred tax liabilities ............ 5,268,783 --
---------- ----------
Net deferred tax liabilities .............. $2,663,372 $ --
========== ==========
</TABLE>
At December 31, 1995, the consolidated group of companies had unused net
operating loss carryforwards of approximately $3.5 million, expiring on various
dates through 2010. Of this amount approximately $2.3 million is not restricted
as to use. The balance of the carryforwards amounting to approximately $1.2
million is restricted to offsetting future taxable income, if any, of the
respective companies which generated the carryforwards and may be further
limited as to utilization in any one year by existing tax laws.
Prior to their acquisition in August 1994, ATI and CCI were taxed under
Subchapter S of the Internal Revenue Code and consequently, were not subject to
Federal income tax.
NOTE 11 - STOCKHOLDERS' EQUITY
CLASS A PREFERRED STOCK
The Company's Class A preferred stock is non-voting, has a stated value
and liquidation preference of $1.00 per share, is convertible into one-half
share of the Company's common stock at the election of the holder at any time
prior to a public offering of the Company's common stock and automatically
converts into common stock at the time of such public offering.
45
<PAGE> 46
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CLASS B PREFERRED STOCK
The Company's Class B preferred stock is non-voting, has a stated value
and liquidation preference of $1.00 per share, is convertible into shares of the
Company's common stock (with such number of shares to be determined as of the
date of issuance, based on the stated value divided by the 10-day average
closing bid price of the Company's common stock) at the election of the holder
at any time prior to a public offering of the Company's common stock and
automatically converts into common stock at the time of such public offering.
STOCK PURCHASE WARRANTS
The Company has issued common stock purchase warrants in conjunction with
the sale and issuance of common stock, preferred stock and convertible
debentures. The exercise prices of warrants issued (and to be issued in
connection with the acquisition of TNI (See Note 4) were determined at
arms-length in connection with the issuance of the Company's other securities.
Such warrants are generally exercisible at any time within two years from the
date of issuance and entitle the holder to receive one share of common stock
for each warrant held. Warrants outstanding as of December 31, 1995 are
summarized as follows:
<TABLE>
<CAPTION>
Exercise
Price
Shares per Share
--------- -----------
<S> <C> <C>
Outstanding at December 31, 1994 ........... --- ---
Issued during the year ..................... 1,680,936 $1.50-$8.00
---------
Outstanding at December 31, 1995 ........... 1,680,936
=========
</TABLE>
NOTE 12 - Leases
The Company leases certain equipment under capital leases expiring on
various dates through 2000. The amortization of assets under capital leases is
included in depreciation expense. Minimum future lease payments for assets
under capital leases as of December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996 ............................................ $ 52,092
1997 ............................................ 51,552
1998 ............................................ 48,820
1999 ............................................ 48,275
2000 ............................................ 16,985
--------
Total minimum lease payments .................... 217,724
Less: future amount representing interest ....... (59,206)
--------
Present value of future minimum lease payments .. 158,518
Less: current portion ........................... (29,328)
--------
$129,190
========
</TABLE>
46
<PAGE> 47
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company also leases office space and equipment under operating leases
expiring on various dates through 2000. Total minimum future rental payments
under non-cancelable operating leases having remaining terms in excess of one
year as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 .................................. $ 282,371
1997 .................................. 261,728
1998 .................................. 223,137
1999 .................................. 162,609
2000 .................................. 71,556
----------
Total minimum future rental payments .. $1,001,401
==========
</TABLE>
Rental expense under all operating leases was $94,961, $22,000 and $11,000
in 1995, 1994, and 1993, respectively.
NOTE 13 - EMPLOYMENT AGREEMENTS
The Company has employment agreements with certain key employees which
provide for, among other things, the payment of compensation over 5 years from
the date of employment regardless of whether or not the employee remains in the
employ of the Company. The present value of future obligations under such
agreements was $1,609,775 at December 31, 1995. The Company has also recorded a
similar amount of deferred compensation related to these agreements. The
deferred compensation has been reported on the basis that the related
employee(s) continue to provide meaningful service to the Company. In the event
the employee(s) cease to provide such service, deferred compensation would be
reduced accordingly. Following is a summary of amounts included in the
accompanying consolidated balance sheets for such agreements as of December 31,
1995:
<TABLE>
<CAPTION>
<S> <C>
Deferred compensation assets included in:
Other current assets ............................. $ 406,675
Deferred compensation (non-current) .............. 1,168,405
----------
$1,575,080
==========
</TABLE>
<TABLE>
<S> <C>
Deferred compensation liabilities included in:
Accrued compensation and employee benefits........ $ 458,948
Deferred compensation (non-current) .............. 1,150,827
----------
$1,609,775
==========
</TABLE>
In May 1994, the Company entered into a letter agreement to employ its
current Chief Executive Officer. In connection with that letter agreement, the
Company reserved 500,000 shares of its common stock, valued at $15,000, and
1,375,000 shares of its Class A preferred stock, valued at $20,625, to be
issued as additional compensation upon satisfaction of certain conditions as
set forth in the letter agreement. Such conditions were met during 1995 and the
47
<PAGE> 48
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
shares of common stock and Class A preferred stock previously reserved for
issuance were issued. The Company recorded deferred compensation of $35,625 in
1995, which is being amortized over the life of the related employment
agreement, for the value of the stock issued.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
In connection with certain of its business acquisitions, the Company is
obligated, over the next two years, to provide or arrange for working capital
and equipment financing transactions to provide funds totaling approximately
$2.7 million for the use of acquired companies. While the Company believes it
will be able to arrange such financing in one or more debt or equity financing
transactions or from cash provided by operations, there is no assurance that it
will be able to do so, in which case the Company could be subject to claims
involving its performance under the related acquisition agreements.
One of the Company's subsidiaries is the claimant in a binding arbitration
proceeding against GE Capital Communications Services ("GECCS") and New
Enterprise Wholesale Services, Ltd. ("News") seeking damages of approximately
$5 million arising out of a breach of contract for the purchase and resale of
telecommunications services. GECCS and News have asserted a counter claim of
approximately $461,000 for costs allegedly owed to GECCS and News. While the
Company believes it will prevail in this case, it is not possible to predict
its outcome or the amount of recovery, if any. The arbitration proceeding
commenced on April 22, 1996 and was completed on April 25, 1996. The parties
are to file briefs in June and July 1996 and a decision is anticipated in
August 1996.
The Company was notified in May 1996 by the Michigan Department of
Commerce and Securities Bureau that it has offered and sold its securities in
the State of Michigan without an exemption from registration under the Michigan
Uniform Securities Act. As part of the proposed consent order from the State of
Michigan, the State of Michigan will require the Company to offer Michigan
purchasers of the Company's securities the right to rescind their purchase
transactions. The rescission offer currently encompasses approximately 500,000
shares of the Company's outstanding shares of common stock sold at prices
ranging from $1.50 to $3.50 per share. In addition, the Company has issued
approximately 500,000 common stock purchase warrants to certain of the Michigan
purchasers. Such warrants are exercisable at prices ranging from $1.50 to $3.50
per share.
It is not possible to determine the number of Michigan shareholders who
may exercise their rights pursuant to a rescission offer, or the number of
shares of common stock purchase transactions that may be rescinded or the
amount, if any, that the Company would be required to pay pursuant to a
rescission offer. If all of the Michigan purchasers exercised their rights
pursuant to a rescission offer, the Company would be required to pay such
purchasers approximately $1,000,000 in the aggregate to reimburse them for the
purchase price of their common stock investment in the Company. In that event,
it is uncertain whether or not sufficient funds will be available to complete a
rescission offer. The rescission offer will also require the
48
<PAGE> 49
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
payment of interest from the date of the shareholders' investment to the date
of rescission at the statutory rate in Michigan for those shareholders who
accept the rescission offer.
If appropriate, the Company may offer a right of rescission to purchasers
of its securities in other states where the requirements of applicable
exemptions may not have been met. It is uncertain whether or not such
rescissions offers will be made or, if made, whether or not sufficient funds
will be available to complete such rescission offers. Enforcement sanctions
relative to the sale of unregistered, non-exempt securities may also include
fines and restrictions on the Company's ability to sell securities in those
states.
The Company and its subsidiaries are also parties in various actions and
legal proceedings arising in the ordinary course of business, none of which are
expected to materially affect the financial position, results of operations or
cash flows of the Company.
NOTE 15 - SEGMENT INFORMATION
The Company's operations are classified into two industry segments:
healthcare cost management and containment products and services
("Healthcare"); and telecommunications products and services, including
pay-per-view related services ("Telecommunications"). Following is a summary
of segmented information:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------- ---------
1995 1994 1993 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net revenues from unaffiliated customers:
Healthcare....................................... $ 91,106 $ -- $ -- $ 369,612 $ --
Telecommunications............................... 2,893,778 807,669 996,188 657,943 160,544
----------- ---------- ---------- ----------- --------
$ 2,984,884 $ 807,669 $ 996,188 $ 1,027,555 $160,544
----------- ---------- ---------- ----------- --------
Income (loss) from operations:
Healthcare....................................... $ (363,857) $ -- $ -- $ (642,063) $ --
Telecommunications............................... (3,690,064) 59,554 336,707 (379,350) 8,454
Corporate expenses............................... (1,922,104) (78,233) -- (584,028) (78,730)
Eliminations..................................... (4,705) (107,902) -- 8,724 (27,241)
----------- ---------- ---------- ----------- --------
(5,980,730) (126,581) 336,707 (1,596,717) (97,517)
Interest income.................................... 4,404 -- 2,202 4,330 413
Interest expense................................... (84,110) (2,421) -- (45,477) (1,529)
Other income (expense)............................. (4,288) -- -- 55 --
----------- ---------- ---------- ----------- --------
Income (loss) before income taxes.................. $(6,064,724) $ (129,002) $ 338,909 $(1,637,809) $(98,633)
----------- ---------- ---------- ----------- --------
Depreciation and amortization expense:
Healthcare......................................... $ 104,669 $ -- $ -- $ 232,235 $ --
Telecommunications................................. 371,005 103,482 13,747 68,213 18,756
Corporate.......................................... 18,548 -- -- 7,645 3,540
Eliminations....................................... (34,895) (31,108) -- (8,724) (1,434)
----------- ---------- ---------- ----------- --------
$ 459,327 $ 72,374 $ 13,747 $ 299,369 $20,862
----------- ---------- ---------- ----------- --------
Capital Expenditures:
Healthcare......................................... $ 41,999 $ -- $ -- $ 1,038,332 $ --
Telecommunications................................. 227,436 408,938 91,002 143,685 166,751
Corporate.......................................... 86,779 -- -- 25,380 --
Eliminations....................................... (18,933) (155,544) -- -- (28,675)
----------- ---------- ---------- ----------- --------
$ 337,281 $ 253,394 $ 91,002 $ 1,207,397 $138,076
----------- ---------- ---------- ----------- --------
</TABLE>
49
<PAGE> 50
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------ ---------
1995 1994 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Identifiable Assets:
Healthcare .......................................... $15,575,741 $ -- $19,223,089 $ --
Telecommunications .................................. 2,709,226 812,299 2,524,798 1,059,915
Corporate ........................................... 3,373,297 75,825 2,510,476 69,179
Eliminations ....................................... (112,610) (107,902) (103,883) (264,468)
----------- --------- ----------- ---------
$21,545,654 $ 780,222 $21,154,480 $ 864,626
=========== ========= =========== ==========
The Company has no intersegment revenues.
</TABLE>
For each of the three years in the period ended December 31, 1995, the
Company had no customers that accounted for more than 10% of the Company's net
revenues.
NOTE 16 STATEMENTS OF CASH FLOWS SUPPLEMENTAL INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------- ---------
1995 1994 1993 1996 1995
------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Non-cash transactions:
Equipment capital leases ........ $ 112,308 $7,880 $ -- $570,675 $ --
========== ====== ====== ======== =======
Common stock issued for
compensation ................. $ 451,773 $ -- $ -- $ -- $ --
========== ====== ====== ======== =======
Stock and warrants issued in
consideration for extension of
related party indebtedness ... $ 341,600 $ -- $ -- $ -- $ --
========== ====== ====== ======== =======
Employment agreements ........... $1,609,775 $ -- $ -- $ -- $ --
========== ====== ====== ======== =======
Notes payable issued in
connection with
business acquisitions ........ $700,000 $ -- $ -- $ -- $ --
========== ====== ====== ======== =======
Cash paid during the period for:
Interest ........................ $ 23,055 $2,421 $ -- $ 22,337 $ 1,529
========== ====== ====== ======== =======
Income taxes .................... $ -- $ -- $ -- $ -- $ --
========== ====== ====== ======== =======
</TABLE>
NOTE 17 EVENTS SUBSEQUENT TO DECEMBER 31, 1995
In March 1996, the Company acquired all of the outstanding stock of Health
Management Technologies, Inc. ("HMT"), whose principal business is the
development, sale and maintenance of medical management computer software, for
309,837 shares of its common stock valued at $2,000,000. The Company has
tentatively allocated all of the HMT excess purchase price ($2,080,000) to
goodwill pending final analysis by the Company.
50
<PAGE> 51
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following unaudited pro forma summary operating results for the three
months ended March 31, 1996, includes the results of operations of companies
acquired in 1995 for all three months and the operating results of HMT (with
pro forma adjustments for goodwill amortization) as if HMT was acquired as of
January 1, 1996. The pro forma operating results for the three months ended
March 31, 1995 reflects the operating results of companies acquired in 1995
and, HMT acquired in 1996, with pro forma adjustments (primarily goodwill and
intangible amortization) as if the acquisitions were consummated on January 1,
1995. The pro forma summary is provided for information purposes only. It is
based on historical information and does not necessarily reflect the actual
results that would have occurred nor is it necessarily indicative of future
operating results of the combined companies.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
MARCH 31,
-------------------------------
1996 1995
--------- ---------
<S> <C> <C>
Net revenues ....................................................... $ 1,230,627 $ 1,887,662
------------- ------------
Net loss ........................................................... $ (1,075,511) $ (507,288)
------------- ------------
Net loss per share ................................................. $ (.14) $ (.10)
------------- ------------
</TABLE>
In May 1996, the Company gave notice to the principals of CCI of its
intent to abandon its investment in CCI. Pursuant to the terms of the
acquisition and related pledge agreements, the effect of such abandonment is
that the former shareholders of CCI will receive the shares of stock in CCI
acquired in 1994 by the Company in return for the shares of preferred stock
issued by the Company to the former shareholders of CCI in connection with the
acquisition (see Note 4). Also, in May 1996 the former shareholders of CCI
filed suit against the Company for payment of the $300,000 notes payable issued
as part of the acquisition agreement and the issuance of an additional 200,000
shares of Class A preferred stock they allege are due. The operations and the
assets and liabilities of CCI are included in the accompanying consolidated
financial statements for all periods presented. For the year ended December 31,
1995, CCI reported approximately $158,000 in revenues and a net loss of
approximately $247,000. At December 31, 1995, CCI had net assets of
approximately $245,000. The Company plans to vigorously defend the claims
brought against it by the former CCI shareholders and does not believe the
outcome will have a material adverse affect on the Company's financial
position, operations or cash flow.
NOTE 18 - Valuation and Qualifying Accounts
Valuation and qualifying accounts (which are deducted from the assets to
which they apply) consist of an allowance for doubtful accounts ($510,000 at
December 31, 1995) and a reserve for obsolete equipment inventories, the
provision for which was made in 1995, of $145,776.
Following is a summary of the allowance for doubtful accounts:
Balance, December 31, 1994 $ --
Additions:
Acquisition of businesses 328,247
Provision for bad debts charged
to operations 181,753
Deductions --
--------
Balance, December 31, 1995 $510,000
========
51
<PAGE> 52
SYSTEMS COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
AND THREE MONTHS ENDED MARCH 31, 1996
The accompanying unaudited pro forma condensed consolidated statement of
operations for the year ended December 31, 1995 has been prepared to reflect
the acquisitions of NSC, acquired effective October 27, 1995, Telcom, acquired
effective July 7, 1995, and HMT, acquired effective March 12, 1996, as if the
acquisitions occurred as of January 1, 1995. The accompanying unaudited pro
forma condensed consolidated statement of operations for the three months ended
March 31, 1996 includes the historical effects of NSC and Telcom for all three
months and HMT for one month and have been prepared as if HMT was acquired on
January 1, 1996. The unaudited pro forma financial information does not include
the historical effects of the acquisitions by the Company of LCI and Comstar as
their operations are diminimous.
The pro forma consolidated statements of operations are based on the
historical operating results of the acquired businesses and give effect to the
purchase method of accounting for deferred income tax assets and liabilities,
intangible assets acquired and goodwill arising from the acquisitions.
The pro forma information is not indicative of the actual results of
operations that would have been achieved had such acquisitions been consummated
as of the beginning of the respective periods. The pro forma information should
be read in conjunction with the historical financial statements included
elsewhere herein.
52
<PAGE> 53
SYSTEMS COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------------------------------
PRO FORMA PRO FORMA
CONSOLIDATED(1) NSC(2) TNI(2) HMT(3) ADJUSTMENTS TOTALS
--------------- ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
Healthcare ................. $ 91,106 $ 979,122 $ -- $ 1,314,646 $ -- $ 2,384,874
Telecommunications ......... 2,893,778 -- 2,645,626 -- -- 5,539,404
------------ ----------- ----------- ----------- ------------ -----------
2,984,884 979,122 2,645,626 1,314,646 -- $ 7,924,278
------------ ----------- ----------- ----------- ------------ -----------
Costs and expenses:
Cost of healthcare
revenues ............... 45,553 489,561 -- 184,999 -- 720,113
Cost of telecommunication
revenues ............... 2,014,460 -- 2,274,860 -- -- 4,289,320
Selling and administrative
expenses ............... 3,687,495 1,616,059 555,743 1,095,825 -- 6,955,122
Goodwill write-down ........ 2,758,779 -- -- -- 71,772(6) 2,830,551
Depreciation and ........... 459,327 3,176 5,009 44,006 516,667(4)
amortization ........... 242,518(5)
74,432(6) 1,345,135
------------ ----------- ----------- ----------- ------------ -----------
8,965,614 2,108,796 2,835,612 1,324,830 905,389 16,140,241
------------ ----------- ----------- ----------- ------------ -----------
Loss from operations ......... (5,980,730) (1,129,674) (189,986) (10,184) (905,389) (8,215,963)
Interest income .............. 4,404 -- 1,113 -- -- 5,517
Interest expense ............. (84,110) (11,957) -- (9,590) -- (105,657)
Other expense, net ........... (4,288) -- -- -- -- (4,288)
------------ ----------- ----------- ----------- ------------ -----------
Loss before income taxes .... (6,064,724) (1,141,631) (188,873) (19,774) (905,389) (8,320,391)
Income tax benefit ........... (256,699) -- -- -- (1,560,408)(6) (1,817,107)
------------ ----------- ----------- ----------- ------------ -----------
Net loss ..................... $ (5,808,025) $(1,141,631) $ (188,873) $ (19,774) $ 655,019 $(6,503,284)
============ =========== =========== =========== ============ ===========
Loss per share ............... $ (1.81) $ (1.15)
============ ===========
Weighted average number
of common shares
outstanding ................. 3,201,991 5,675,930(7)
============ ===========
</TABLE>
- --------------------------------------------------------------------------------
See Accompanying Notes 53
<PAGE> 54
SYSTEMS COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
HISTORICAL
------------------------------ PRO FORMA PRO FORMA
CONSOLIDATED(8) HMT(9) ADJUSTMENTS TOTALS
--------------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues:
Healthcare ............................ $ 369,612 $203,072 $ -- $ 572,684
Telecommunications .................... 657,943 -- -- 657,943
----------- -------- --------- -----------
$ 1,027,555 $203,072 -- $ 1,230,627
----------- -------- --------- -----------
Costs and expenses:
Cost of healthcare revenues ........... 122,351 -- -- 122,351
Cost of telecommunication revenues .... 466,962 -- -- 466,962
Selling and administrative expenses ... 1,735,590 213,991 -- 1,949,581
Depreciation and amortization ......... 299,369 11,293 17,330(5) 327,992
----------- -------- --------- -----------
2,624,272 225,284 17,330 2,866,886
----------- -------- --------- -----------
Loss from operations .................... (1,596,717) (22,212) (17,330) (1,636,259)
Interest income ......................... 4,330 -- -- 4,330
Interest expense ........................ (45,477) (1,666) -- (47,143)
Other income, net ....................... 55 -- -- 55
----------- -------- --------- -----------
Loss before income taxes ................ (1,637,809) (23,878) (17,330) (1,679,017)
Income tax benefit ...................... (594,432) -- (9,074)(10) (603,506)
----------- -------- --------- -----------
Net loss ................................ $(1,043,377) $(23,878) $ (8,256) $(1,075,511)
=========== ======== ========= ===========
Loss per share .......................... (.14) (.14)
=========== ===========
Weighted average number of common shares
outstanding ........................... 7,576,417 7,886,254(7)
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
See Accompanying Notes 54
<PAGE> 55
SYSTEMS COMMUNICATIONS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995 AND
THREE MONTHS ENDED MARCH 31, 1996
(1) Represents the consolidated results of operations of the Company for the
year ended December 31, 1995, which includes the operating results of
businesses acquired during 1995 from their respective dates of
acquisition.
(2) Represents the historical unaudited results of operations of businesses
acquired in 1995 for the period from January 1, 1995 to their respective
dates of acquisition, which results are not included in the historical
consolidated financial statements of the Company.
(3) Represents the historical unaudited results of operations of HMT for the
year ended December 31, 1995.
(4) To reflect the amortization of intangibles acquired in connection with
acquisitions consummated in 1995 for the period from January 1, 1995 to
the respective dates of acquisition.
(5) To reflect the amortization of goodwill related to acquisitions
consummated in 1995 for the period from January 1, 1995 to the respective
dates of acquisition and, for the three months ended March 31, 1996, the
amortization of goodwill related to the acquisition of HMT for the period
from January 1, 1996 to the date of acquisition.
(6) To reflect the effects from the recognition of deferred income tax assets
and liabilities of acquired businesses as of the beginning of the period.
(7) To reflect the adjusted number of common shares outstanding giving effect
to shares issued in connection with businesses acquired.
(8) Represents the unaudited consolidated results of operations of the
Company for the three months ended March 31, 1996, which includes the
results of operations of businesses acquired in fiscal 1995 and the
results of operations of HMT for the period from the date of acquisition
to March 31, 1996.
(9) Represents the historical unaudited results of operations of HMT for the
period from January 1, 1996 to February 28, 1996, which results are not
included in the historical consolidated financial statements of the
Company.
(10) To reflect the deferred income tax benefit applicable to HMT's loss for
the first quarter of 1996.
55
<PAGE> 56
KERKERING
BARBERIO & CO., P.A.
CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITORS' REPORT
The Shareholders
National Solutions Corporation
We have audited the balance sheets of National Solutions Corporation (a
development stage enterprise) as of December 31, 1994 and 1993, and the related
statements of operations, changes in shareholders' equity (deficit) and cash
flows for the year ended December 31, 1994 and the period May 19, 1993
(inception) through December 31, 1993. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit 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
misstatement. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of National Solutions Corporation
as of December 31, 1994 and 1993, and the results of its operations and its cash
flows for the year ended December 31, 1994 and the period ended December 31,
1993 in conformity with generally accepted accounting principles.
/s/ Kerkering Barberio & Co.
Sarasota, Florida
April 12, 1996
56
<PAGE> 57
NATIONAL SOLUTIONS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
Assets 1994 1993
---- ----
<S> <C> <C>
Current Assets
Cash $ 41,717 $ 27,075
Prepaid expenses 64,997 -
Advances to sub-contractor 624,895 -
---------- --------
Total current assets 731,609 27,075
Furniture and equipment, net 16,420 -
Deposits 34,775 -
---------- --------
Total Assets $ 782,804 $ 27,075
========== ========
Liabilities and Shareholders' Equity (Deficit)
Current Liabilities
Accounts payable $ 32,020 26,129
Accured payroll, related taxes and withholdings 42,436 -
Lease payable, current portion 2,204 -
Advances from customer 1,249,789 91,200
---------- --------
Total current liabilities 1,326,449 117,329
Lease payable - non-current portion 5,165 -
---------- --------
Total liabilities 1,331,614 117,329
---------- --------
Shareholders' Equity (Deficit)
Common stock, no par value, 50,000,000
shares authorized, 5,782,900 share issued
and outstanding 578 578
Deficit accumulated during the development stage $ (49,388) (90,832)
---------- --------
Total shareholders' equity (deficit) (548,810) (90,254)
---------- --------
Total Liabilities and Shareholders' Equity (Deficit) $ 782,804 $ 27,075
========== ========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
57
<PAGE> 58
NATIONAL SOLUTIONS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994 AND
PERIOD MAY 19, 1993 (INCEPTION) THROUGH DECEMBER 31, 1993
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Revenue $ 340,831 $ -
--------- --------
Expenses
Computer services 170,415 -
Professional services 235,623 79,866
Salaries, related taxes and benefits 283,456 -
Office 52,889 3,579
Travel 57,004 7,387
--------- --------
Total expenses 799,387 90,832
--------- --------
Loss before income taxes 458,556 90,832
Income taxes - -
--------- --------
Net loss $ 458,556 $ 90,832
========= ========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
58
<PAGE> 59
NATIONAL SOLUTIONS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
YEAR ENDED DECEMBER 31, 1994 AND
PERIOD MAY 19, 1993 (INCEPTION) THROUGH DECEMBER 31, 1993
<TABLE>
<CAPTION>
Deficit
Accumulated
During the
Common Development
Stock Stage Totals
------ ----------- ----------
<S> <C> <C> <C>
Balances - May 19, 1993 (Inception) $ - $ - $ -
Issuance of common stock 578 578
Net loss - (90,832) (90,832)
------ ---------- ----------
Balances - December 31, 1993 578 (90,832) (90,254)
Net loss - (458,556) (458,556)
------ ---------- ----------
Balances - December 31, 1994 $ 578 $ (549,388) $ (548,810)
====== ========== ==========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
59
<PAGE> 60
NATIONAL SOLUTIONS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1994 AND
PERIOD MAY 19, 1993 (INCEPTION) THROUGH DECEMBER 31, 1993
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Cash Flows From Operating Activities
Fees and advances received from customer $ 1,499,420 $ 91,200
Fees and advances paid to computer services
sub-contractor (795,310) -
Payments to vendors, suppliers and employees (679,597) (64,703)
----------- --------
Net cash provided by operating activities (24,513) 26,497
----------- --------
Cash Flows From Investing Activities
Purchase of furniture and equipment (9,871) -
----------- --------
Cash Flows From Financing Activities
Issuance of common stock - 578
Temporary working capital advance from shareholder 50,000 -
Repayment of temporary working capital advance (50,000) -
----------- --------
Net cash provided by financing activities - 578
----------- --------
Net increase in cash 14,642 27,075
Cash at beginning of period 27,075 -
----------- --------
Cash at end of period $ 41,717 $ 27,075
=========== ========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
60
<PAGE> 61
NATIONAL SOLUTIONS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
Note 1 - Summary of Significant Accounting Policies
Organization and Merger
National Solutions Corporation (Company) was incorporated in the Commonwealth of
Pennsylvania on May 19, 1993. The Company provides health care payment analysis
services to customers for the purpose of determining the appropriateness of such
payments. It also advises customers as to ways in which they can improve their
health care benefits administration.
Development Stage Enterprise
The Company is considered to be a development stage enterprise because it has
not yet commenced full operations, and its operations through December 31, 1994,
have generated an insignificant amount of revenue. As subsequently discussed, a
substantial portion of the Company's billings to its initial customer are
subject to the ability of a third party to recover certain amounts disbursed by
the third party on behalf of the initial customer. Therefore, such billings are
not included in the accompanying financial statements.
Financial Statements
The financial statements and notes are representations of the Company's
management who is responsible for their integrity and objectivity. The
accounting policies conform to generally accepted accounting principles and have
been consistently applied in the preparation of the financial statements.
Advance Billings and Deferrals
As the Company certifies to a customer instances of health care overpayments,
invoices are submitted to the customer indicating the Company's fee. Such
invoices are considered advance billings because the fee is not payable by the
customer until the customer's plan administrator concurs with the Company's
certification and recovers the previously expended amounts. From time to time a
customer may advance money to the Company based on the advance billings;
however, such advances are refundable to the customer should plan administrator
concurrence be withheld or recovery not be possible.
Since the Company's initial customer must negotiate with its plan administrator
regarding recovery of overpayments, all advance billings through December 31,
1994, are not included in the accompanying financial statements.
Presently, the Company utilizes the services of a sub-contractor to process
customer data files. From time to time the Company may advance money to this
sub-contractor. Such Company advances are based on advances received by the
Company from its customer.
Furniture and Equipment
Furniture and equipment, including asset rights under capital leases, are
recorded at cost, and depreciation is provided using the straight line method
over estimated useful lives, ranging from three to ten years.
61
<PAGE> 62
NATIONAL SOLUTIONS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1993
Note 1 - Summary of Significant Accounting Policies (Continued)
Income Taxes
The Company follows Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes." Under the asset and liability method of SFAS
109, 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
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS 109, 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.
Note 2 - Advance Billings and Advances
Through December 31, 1994, the Company has issued total billings of $2,272,316
to its initial customer. Of this amount, $340,831 has been recognized as
revenue in the accompany statement of operations. The balance of $1,931,485 is
considered an advance billing and is not reflected in the accompanying financial
statements. At December 31, 1994 and 1993 the Company's initial customer had
advanced $1,249,789 and $91,200, respectively, to the Company. Correspondingly,
the Company advanced $624,895 to the sub-contractor processing certain customer
computer files on behalf of the Company at December 31, 1994. No advances were
made to the sub-contractor at December 31, 1993.
Note 3 - Furniture and Equipment
Furniture and equipment consisted of the following at December 31, 1994:
<TABLE>
<S> <C>
Furniture and equipment $ 9,250
Telephone system under capital lease 7,990
--------
17,240
Less accumulated depreciation and amortization 820
--------
$ 16,420
========
</TABLE>
Amortization expense relating to the telephone system under capital lease was
$666 in 1994.
62
<PAGE> 63
NATIONAL SOLUTIONS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1993
Note 4 - Leases
The Company leases its telephone system under a capital lease. Minimum annual
rental payments for this lease and an operating lease for its offices at
December 31, 1994, are as follows:
<TABLE>
<CAPTION>
Capital Operating
Year Lease Lease Totals
---- ------- --------- ---------
<S> <C> <C> <C>
1995 $ 3,557 $ 32,149 $ 35,706
1996 3,557 49,685 53,242
1997 2,667 53,001 53,890
1998 56,317 56,317
1999 51,143 51,143
------- --------- ---------
9,781 $ 242,295 $ 250,298
========= =========
Less portion representing
interest 2,412
-------
Present value of net
minimum lease payments
under capital lease $ 7,369
=======
</TABLE>
Rent of $4,204 is included in office expense in the accompanying 1994 statement
of operations.
Note 5 - Income Taxes
At December 31, 1994 the Company has a net operating loss carryforward of
approximately $550,000 which expires during the years 2008 and 2009. The 1994
and 1993 tax benefits relating to losses incurred in each year (assuming a 34%
tax rate) amounted to approximately $156,000 and $30,000, respectively.
However, based on the Company's designation as a development stage enterprise,
there is no basis to conclude that such tax benefits will be realized.
Accordingly, a valuation allowance has been provided for all such tax benefits.
Note 6 - Related Party Transactions
Certain shareholders have provided various consulting services to the Company.
Payments for such services approximated $229,000 and $78,000 in 1994 and 1993,
respectively and are included in professional services in the accompanying
statements of operations. Commencing July 1, 1994 the same shareholders became
employees of the Company and have earned compensation of $225,000 through
December 31, 1994, which is included in wages, related taxes and benefits in the
accompanying statement of operations.
63
<PAGE> 64
NATIONAL SOLUTIONS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1993
Note 7 - Warrants to Purchase Common Stock
In connection with a consulting agreement dated August 5, 1994, the Company has
an agreement to issue warrants to purchase 200,000 shares of the Company's
common stock at $.25 per share. Such warrants would be exercisable at any time
through August 5, 1997.
Note 8 - Commitment
Under a Cooperative Research and Development Agreement (CRDA) between the
Company and the U.S. Department of the Army, the Company has obtained
substantially exclusive rights to software technology developed by the U.S.
Department of the Army. As part of the CRDA, which runs through 1997, the
Company has agreed to assist the U.S. Department of the Army in enhancing the
software technology by assigning appropriate Company personnel to assist the
U.S. Department of the Army in this process. In addition, the Company expects
to purchase computer time from the U.S. Department of the Army at a minimum cost
of approximately $25,000 per calendar quarter throughout the life of the CRDA.
At December 31, 1994, the Company has prepaid the initial minimum $25,000 fee.
Also, the Company must pay as a royalty to the U.S. Department of the Army 5% of
any gross revenues received by the Company from the licensing, assignment, sale,
lease, rental, sub-license or any other use of the aforementioned software
technology. As of December 31, 1994, the Company had not utilized such software
technology to generate any revenue.
Note 9 - Statements of Cash Flows Reconciliation
Reconciliation of net loss to net cash provided by operating activities:
<TABLE>
<CAPTION>
1994 1993
---------- ---------
<S> <C> <C>
Net loss $ (458,556) $ (90,832)
---------- ---------
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation 820 -
Increase in operating assets
Prepaid expenses (64,997) -
Deposits (34,775) -
Increase in operating liabilities
Accounts payable 5,891 26,129
Accrued payroll, etc. 42,436 -
Advances from customer 533,694 91,200
---------- ---------
Total adjustments 483,069 117,329
---------- ---------
Net cash provided by operating activities $ 24,513 $ 26,497
========== =========
</TABLE>
64
<PAGE> 65
NATIONAL SOLUTIONS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1993
Note 10 - Subsequent Event
On March 15, 1995, the Company borrowed $100,000 from an individual under a
demand note agreement secured by the collections from the Company's initial
customer. Under the agreement the Lender may demand and receive, in lieu of
cash, shares of stock issued by the Company at an agreed-upon value of $2.50 per
share for the principal and interest outstanding at the time such demand is
made.
On October 27, 1995 all of the issued and outstanding stock of the Company was
acquired by Systems Communications, Inc. (SCI) in exchange for cash and stock of
SCI.
65
<PAGE> 66
[LETTERHEAD, MANUEL JUNCO, JR.]
INDEPENDENT AUDITOR'S REPORT
July 14, 1995
To the Board of Directors
Telcom Network, Inc.
Orlando, Florida:
I have audited the accompanying balance sheet of Telcom Network, Inc. as of
December 31, 1994 and the related statements of income, stockholders' equity and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. My responsibility is to express an
opinion on these financial statements based on my audit.
I conducted the audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. 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.
I believe that my audit provides reasonable basis for my opinion.
In my opinion, the financial statements referred to above presents fairly, in
all material respects, the financial position of Telcom Network, Inc., as of
December 31, 1994, and the results of its operations and its cash flows for the
year ended in conformity with generally accepted accounting principles.
/s/ Manuel Junco, Jr.
- ---------------------------
Manuel Junco, Jr.
Certified Public Accountant
66
<PAGE> 67
TELCOM NETWORK, INC.
Balance Sheet
December 31, 1994
<TABLE>
<S> <C>
ASSETS
Current assets
Cash $ 110,058
Accounts receivable, net of allowance for
doubtful accounts of $81,975. 649,134
----------
Total current assets 759,192
Property and equipment, net of accumulated
depreciation of $528 (note 1,2) 7,088
Other assets 500
----------
Total assets $ 766,780
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 658,131
Due to officers 11,302
----------
Total current liabilities 669,433
Other liabilities
Deferred tax liability (note 3) 338
----------
Total liabilities 669,771
----------
Stockholders' equity
Common stock (No par value, 1,500 shares authorized,
and no shares outstanding) -
Redeemable, convertible preferred stock (note 6) 327,500
Retained deficit (230,491)
----------
Total stockholders' equity 97,009
----------
Total liabilities and stockholders' equity $ 766,780
==========
</TABLE>
Read accompanying notes.
67
<PAGE> 68
TELCOM NETWORK, INC.
Income Statement
Year ended December 31, 1994
<TABLE>
<S> <C>
SALES REVENUE:
Sales $ 1,246,298
-----------
Net sales revenue 1,246,298
-----------
Cost of sales 1,054,041
-----------
Gross profit 192,257
OPERATING EXPENSES:
Selling 40,595
General & administrative 381,473
Depreciation 528
-----------
Total operating expenses 422,596
-----------
Net loss from operations (230,339)
-----------
Other income(expense) 186
-----------
Net loss before income taxes (23,153)
Deferred income taxes (338)
-----------
Net loss $ (230,491)
===========
</TABLE>
Read accompanying notes.
68
<PAGE> 69
TELCOM NETWORK, INC.
Statement of Stockholders' Equity
Year ended December 31, 1994
<TABLE>
<CAPTION>
Common Preferred Retained
Stock Stock Deficit Total
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Balances at December 31, 1993 $ - $ - $ - $ -
Common Stock - - - -
Preferred Stock - 327,500 - 327,500
Net loss - - (230,491) (230,491)
--------- --------- ---------- ----------
Balances at December 31, 1994 $ - $ 327,500 $ (230,491) $ 97,009
========= ========= ========== ==========
</TABLE>
Read accompanying notes.
69
<PAGE> 70
TELCOM NETWORK, INC.
Statement of Cash Flows
Year ended December 31, 1994
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (230,491)
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income tax 338
Depreciation 528
(Increase) decrease in:
Accounts receivable, net (649,134)
Other assets (500)
Increase (decrease) in:
Due to officers 8,802
Accounts payable 658,131
----------
Net cash used by operating activities (212,326)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (5,116)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash from issuance of preferred stock 327,500
----------
Net cash provided by investing and financing activities 322,384
----------
Net increase in cash 100,058
Cash and cash equivalents at beginning of year -
----------
Cash and cash equivalents at end of year $ 110,058
==========
SUPPLEMENTAL DISCLOSURE:
Cash paid during the year for:
Interest $ 461
==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Purchase of computer from officer for $2,500 in exchange
for a loan payable to officer for $2,500.
</TABLE>
Read accompanying notes.
70
<PAGE> 71
TELCOM NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1994
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity
Telcom Network, Inc. (the Company) was incorporated on October 28, 1993. The
Company is a reseller of communications products and services, principally long
distance and provides audit services on telecommunication and utility billings.
Headquartered in Orlando, the Company has a branch office in San Diego with
dealers located in Philadelphia, Long Island, Montgomery, Buffalo, Detroit, Los
Angeles, Milwaukee, Tampa, Sarasota, Boston and San Diego.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instrument purchases with a maturity of three months or less to be
cash equivalents.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Expenditures for repairs and maintenance are charged to expense as incurred.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets.
Income Taxes
Deferred income taxes are provided for certain temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for tax purposes using enacted tax rates in effect for the year
in which the differences are expected to reverse.
Revenue Recognition
The Company recognizes revenue for the sale of products in the period the
products are installed. Revenue from providing communications services is
generally recognized in the period that the services are provided.
71
<PAGE> 72
TELCOM NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1994:
<TABLE>
<S> <C>
Equipment $7,616
Less accumulated depreciation 528
------
$7,088
======
</TABLE>
NOTE 3. INCOME TAXES
The provision for income taxes consists of deferred taxes of $338. Deferred tax
liability consists of $338 which is attributable to the property and equipment
book basis exceeding their tax basis by the cumulative amount of accelerated
depreciation deductions for tax purposes.
For the year ended December 31, 1994, the Company incurred a net operating loss
carryforward of approximately $148,000 which will expire in 2009. Under federal
tax law, certain changes in ownership of the Company may operate to restrict
future utilization of any net operating loss carryforwards. The extent and
timing of the restrictions are not currently determinable. No provision for
federal income taxes has been included in the accompanying financial statements
with respect to the net operating loss carryforward.
NOTE 4. LEASING ARRANGEMENT
The Company conducts its operations in Orlando under a 2-year operating lease
agreement which expires in September 1996.
The following is a schedule of future minimum rental payments required under the
above operating leases as of December 31, 1994:
<TABLE>
<CAPTION>
Year Ending
December 31 Amount
----------- -------
<S> <C>
1995 $19,996
1996 13,312
-------
$33,308
=======
</TABLE>
72
<PAGE> 73
TELCOM NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. SUBSEQUENT EVENT
On July 7, 1995, the Company completed the sale of the Company's stock to a
company (the purchaser) which invests and purchases various business which its
management believes has a potential for profit and growth for $50,000 and a
number of shares of the purchaser's class B restricted preferred stock which is
dependent upon future performance. In addition, the purchaser agreed to
provide working capital during 1995.
NOTE 6. REDEEMABLE, CONVERTIBLE PREFERRED STOCK
The Company has authorized 250,000 shares of redeemable, convertible preferred
stock with a par value of $2.00 per share. At December 31, 1994, 163,750
shares were outstanding with annual redemption requirements of 50% of the
Company's net income commencing July 1, 1995, until 100% of the redemption has
occurred.
Upon redemption, each unit holder will be issued a convertible debenture of the
purchaser with repayment scheduled quarterly over a period of 24 months, with
the first payment occurring 90 days from the purchasing company's acquisition
of the Company. The preferred stock holders will have the option of taking the
quarterly return of capital payments plus interest or leaving them in the
purchasing company with the principal and interest being converted to the
purchaser's common stock in its planned secondary offering, which is estimated
to be in the first quarter of 1996.
Should the preferred stockholder elect to cash out at the time of the secondary
offering, he will receive a purchase warrant for 2,500 shares of the purchasing
company's common stock at $1.50 per share for each share of the Company's
preferred stock. If the debenture is converted to common stock, in lieu of
cashing out, each preferred stockholder will receive in return for their
initial investment of $25,000, that value in the purchasing company's common
stock after the secondary offering. Additionally, each preferred stockholder
who converts to the purchasing company's common stock will receive for each
preferred stock certificate held 12,500 purchase warrants for the purchasing
company's common stock at $1.50 per share.
Additionally, preferred stockholders who convert to the purchasing company's
common stock will receive an additional option to purchase one-half percent of
two officers employment agreement-based incentive Class B redeemable convertible
stock distribution of the purchasing company for each preferred stock
certificate held of the Company at the conversion price of $2.75 per common
share.
73
<PAGE> 74
TELCOM NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. CONTINGENT CLAIMS AGAINST SUPPLIER
The Company is currently evaluating possible claims it has against a supplier
for breach of contract. The Company is contending the supplier breached their
contract by failing to provision accounts for as long as six months, failing to
bill on accounts that have been posted, failing to provide the Company with
monthly billing statements on accounts and various other issues. This matter
is in the preliminary stages and must be submitted to binding arbitration. The
company has not engaged legal counsel regarding this possible claim. Because
this matter is in the very preliminary stages, it is impossible to predict the
probable outcome of these claims.
74
<PAGE> 75
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE.
Management concluded that it should engage a Big Six accounting firm to
audit the Company's financial statements for the year ended December 31, 1995.
On January 9, 1996, senior management approved the engagement of Ernst & Young
LLP as the Company's independent auditors for the fiscal year ended December
31, 1995 to replace Lovelace, Roby & Company, P.A. and Lovelace, Roby & Company,
P.A. was dismissed as the Company's auditors. The decision to change
accountants was a senior management decision and was not recommended or
approved by the Board of Directors.
The reports of Lovelace, Roby & Company, P.A. on the Company's financial
statements for the past two fiscal years did not contain an adverse opinion or
a disclaimer of opinion and were not qualified or modified as to audit scope or
accounting principles. The reports of Lovelace, Roby & Company, P.A. included
an explanatory paragraph expressing substantial doubt about the Company's
ability to continue as a going concern.
In connection with the audits of the Company's financial statements for
each of the two fiscal years ended December 31, 1994, and in the subsequent
interim period, there were no disagreements with Lovelace, Roby & Company,
P.A. on any matters of accounting principles or practices, financial statement
disclosure, or auditing scope and procedures which, if not resolved to the
satisfaction of Lovelace, Roby & Company, P.A., would have caused Lovelace, Roby
& Company, P.A. to make reference to the matter in their report.
The Company has requested Lovelace, Roby & Company, P.A. to furnish it a
letter addressed to the Commission stating whether it agrees with the above
statements. A copy of that letter, dated July 20, 1996 is filed as Exhibit 16 to
this Form 10.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Index to Financial Statements Item 13
(b) Index to Exhibits
(3)(i) Articles of Incorporation, as amended
(ii) By-laws, as amended
p (4) Convertible Debentures
1. Convertible Debenture Note, dated December 5, 1995,
between the Company and Telcom United North, Inc.
2. Convertible Debenture Note, dated December 5, 1995,
between the Company and Donald T. McAllister, M.D
3. Convertible Debenture Note, dated December 5, 1995,
between the Company and David Fisk.
4. Convertible Debenture Note, dated December 5, 1995,
between the Company and Leonard F. D'Innocenzo
5. Convertible Debenture Note, dated December 5, 1995,
between the Company and Dean Charles Colantino
6. Convertible Debenture Note, dated December 5, 1995,
between the Company and Donald P. Dugan.
7. Convertible Debenture Note, dated December 5, 1995,
between the Company and Comgi Retirement Trust,
John R. Lang, M.D./Sharon B. Lang: Trustees
8. Convertible Debenture Note, dated December 5, 1995,
between the Company and John R. Lang, M.D./Sharon B.
Lang.
9. Convertible Debenture Note, dated December 5, 1995,
between the Company and Dale D. Higgins
10. Convertible Debenture Note dated December 5, 1995,
between the Company and R. Thomas Jannarone.
p (10) Material Contracts
1. Ameristar Stock Acquisition Agreement
2. HMT Stock Purchase Agreement (March 12, 1996)
3. NSC Agreement to Exchange Stock (August 24, 1995)
4. NSC Restated Agreement to Exchange Stock (October 13, 1995)
5. NSC Assignment and Amendment of Restated Agreement to
Exchange Stock (October 20, 1995)
75
<PAGE> 76
6. Telcom Restated Stock Purchase Agreement (June 16, 1995)
7. Employment Contracts
(a) Robert L. Alexander
(b) Russell H. Armstrong
(c) Edwin B. Salmon
(d) Stephen E. Williams
(e) Mark Woodward
(f) John D. Looney
(g) John A. Paolicelli
(h) James L. Tolley
(i) David J. Olivet
8. HMT Trademark Registration for "RETURN" Software Program
(December 8, 1992)
9. HMT - Medicode Value-Added Reseller Software Development,
Marketing, and Maintenance Agreement (March 9, 1995)
10. NSC Cooperative Research and Development Agreement Between
NSC and the U.S. Army (June 2, 1994).
11. Services and Marketing Agreement By and Among GE Capital
Communication Services Corporation and Telcom (March 31,
1995)
12. Joint Venture Agreement Between Universal Network
Services, Inc. and Telcom (February 13, 1995).
13. Comstar Acquisition Agreement
14. Coast Communications Acquisition Agreement
15. Teaming Agreement with Health Management Systems, Inc.
(16) Letter re change in certifying accountant
p (21) List of Subsidiaries of Registrant
(27.1) Financial Data Schedule (Year end December 31, 1995)
(27.2) Financial Data Schedule (Quarter ended March 31, 1996)
76
<PAGE> 77
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, SCI has caused this registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized.
SYSTEMS COMMUNICATIONS, INC. Date: July, 1996
By /s/ Edwin B. Salmon By /s/ Robert A. Thompson
------------------------------------- ---------------------------------
EDWIN B. SALMON, JR. ROBERT A. THOMPSON
Chairman of the Board of Directors Chief Financial Officer
By /s/ Stephen E. Williams By /s/ Robert L. Alexander
------------------------------------- ---------------------------------
STEPHEN E. WILLIAMS ROBERT L. ALEXANDER
Chief Executive Officer Chief Operating Officer
/s/ Robert L. Alexander /s/ Stephen E. Williams
- --------------------------------------- -----------------------------------
ROBERT L. ALEXANDER STEPHEN E. WILLIAMS
Director Director
/s/ Russell H. Armstrong /s/ Mark Woodward
- --------------------------------------- -----------------------------------
RUSSELL H. ARMSTRONG MARK WOODWARD
Director Director
/s/ David Olivet
- ---------------------------------------
DAVID OLIVET
Director
/s/ Edwin B. Salmon
- ---------------------------------------
EDWIN B. SALMON, JR.
Director
77
<PAGE> 78
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
(3)(i) Articles of Incorporation, as amended
(ii) By-Laws, as amended
p(4) Convertible Debentures
1. Convertible Debenture Note, dated December 5, 1995,
between the Company and Telcom United North, Inc.
2. Convertible Denbenture Note, dated December 5, 1995,
between the Company and Donald T. McAllister, M.D.
3. Convertible Debenture Note, dated December 5, 1995,
between the Company and David Fisk.
4. Convertible Debenture Note, dated December 5, 1995,
between the Company and Leonard F. D'Innocenzo
5. Convertible Debenture Note, dated December 5, 1995
between the Company and Dean Charles Colantino
6. Convertible Debenture Note, dated December 5, 1995,
between the Company and Donald P. Dugan.
7. Convertible Debenture Note, dated December 5, 1995,
between the Company and Comgi Retirement Trust,
John R. Lang, M.D./Sharon B. Lang: Trustees
8. Convertible Debenture Note, dated December 5, 1995,
between the Company and John R. Lang, M.D./ Sharon B. Lang.
9. Convertible Debenture Note, dated December 5, 1995,
between the Company and Dale D. Higgins
10. Convertible Debenture Note dated December 5, 1995,
between the Company and R. Thomas Jannarone.
p(10) Material Contracts
1. Ameristar Stock Acquisition Agreement
2. HMT Stock Purchase Agreement (March 12, 1996)
3. NSC Agreement to Exchange Stock (August 24, 1995)
4. NSC Restated Agreement to Exchange Stock (October 13, 1995)
5. NSC Assignment and Amendment of Restated Agreement to Exchange
Stock (October 20, 1995)
6. Telcom Restated Stock Purchase Agreement (June 16, 1995)
7. Employment Contracts
(a) Robert L. Alexander
(b) Russell H. Armstrong
(c) Edwin B. Salmon
(d) Stephen E. Williams
(e) Mark Woodard
(f) John D. Looney
(g) John A. Paolicelli
(h) James L. Tolley
(i) David J. Olivet
8. HMT Trademark Registration for "RETURN" Software Program
(December 8, 1995)
9. HMT - Medicode Value-Added Reseller Software Development,
Marketing, and Maintenance Agrement (March 9, 1995)
10. NSC Cooperative Research and Development Agreement Between NSC
and the U.S. Army (June 2, 1994).
11. Services and Marketing Agreement By and Among GE Capital
Communication Services Corporation and Telcom (March 31, 1995)
12. Joint Venture Agreement Between Universal Network
Services, Inc. and Telcom (February 13, 1995).
13. Comstar Acquisition Agreement
14. Coast Communications Acquisition Agreement
15. Teaming Agreement with Health Management Systems, Inc.
(16) Letter re change in certifying accountant
p(21) List of Subsidiaries of Registrant
(27.1) Financial Data Schedule (Year end December 31, 1995)
(27.2) Financial Data Schedule (Quarter ended March 31, 1996)
<PAGE> 1
EXHIBIT 3(i)
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
HIGHLAND HEALTHCARE CORPORATION
Pursuant to the provisions of sec. 607.1003(6), Fla. Stat., the Florida
Business Corporation Act, HIGHLAND HEALTHCARE CORPORATION does hereby amend its
Articles of Incorporation as follows:
1. This Amendment to the Articles of Incorporation was, upon
recommendation of the Board of Directors, made to the holders of Common Stock
entitled to vote thereon by action by written consent of all Directors without
a meeting on April 3, 1992, duly adopted by written consent of stockholders
without a meeting on April 3, 1992 by holders of a majority of the Common Stock
entitled to vote thereon, being not less than the number of votes required for
approval thereof.
2. Article III, B of the Articles of Incorporation, as amended, shall
be, and hereby is, amended by deleting it in its entirety and substituting
therefore, as follows:
B. The 5,000,000 preferred shares shall be divided into 3
classes designated "A," "B" and "C." Class "A" shall be composed of
250,000 shares, Class "B" shall be composed of 2,000,000 shares, and
Class "C" shall be composed of 2,750,000 shares. Each class have the
rights, privileges and preferences, as follows:
(1) Class "A"
(a)(i) For the first three (3) years after issuance, the
Preferred Shares shall carry a fixed dividend rate of One Dollar
($1.00) per share per annum. Accordingly, the holders of Preferred
Shares shall be entitled to receive, out of any funds of this
Corporation at the time legally available for the declaration of
dividends during such three (3) year period, a dividend of One Dollar
($1.00) per annum, per
Page 1 of 11
<PAGE> 2
share, and no more, payable in cash annually, or at such
intervals as the Board of Directors may from time to time determine,
when and as declared by the Board of Directors. Dividends on the
Preferred Shares shall accrue from the date of issuance of such
shares.
Dividends on all issued and outstanding Preferred Shares shall
accrue from day to day, whether or not earned or declared. Such
dividends shall be payable before any cash dividends shall be
declared or paid upon or set apart for the Common Shares, and shall
be cumulative, so that if in any year or years during such
three (3) year period dividends upon the outstanding Preferred Shares
of One Dollar ($1.00) per share, per annum shall not have been paid
thereon or declared and set apart therefor, the amount of the
deficiency shall be fully paid or declared and set apart for payment,
but without interest, before any distribution, whether by way of
dividend or otherwise, shall be declared or paid upon, or set apart
for, the Common Shares.
(a)(2) Following the three (3) year period after issuance, the
Preferred Shares shall not carry a fixed dividend rate of any amount
but shall be entitled to receive such dividend as the Board of
Directors shall determine in its discretion. Dividends declared but
not paid shall be cumulative and the amount of any deficiency shall be
fully paid or set apart for payment, but without interest, before any
cash distribution, whether by way of dividend or otherwise, shall be
declared or paid upon, or set apart for the Common Shares.
Page 2 of 11
<PAGE> 3
(a)(3) Undeclared and/or unpaid cash dividends on the Preferred
Shares shall not have preference over non-cash (stock) dividends
payable with respect to Common Shares. However, the Preferred Shares
shall participate with the Common Shares in all such non-cash (stock)
dividends as, if and when declared.
(b) Liquidation. In the event of a liquidation, dissolution or
winding up of this Corporation, whether voluntary or involuntary, the
holders of Preferred Shares shall be entitled to receive out of the
assets of this Corporation, whether such assets are capital or surplus
of any nature, the sum of Ten Dollar ($10.00) per share, and, in
addition to such amount, a further amount equal to the cash dividends
unpaid and accumulated thereon, as provided in B(1) of this Article,
to the date of such distribution, whether earned or declared or not,
and no more, before any payment shall be made or any assets
distributed to the holders of Common Shares.
If upon such liquidation, dissolution or winding up, whether
voluntary or involuntary, the assets thus distributed among the
holders of the Preferred Shares shall be insufficient to permit the
payment to such holders of the full preferential amounts, then the
entire assets of this Corporation to be distributed shall be
distributed ratably among the holders of the Preferred Stock.
In the event of any liquidation, dissolution or winding up of
this Corporation, whether voluntary or involuntary, subject to all of
the preferential rights of
Page 3 of 11
<PAGE> 4
the holders of Preferred Shares on distribution or otherwise, the
holders of Common Shares shall be entitled to receive, ratably,
all of the remaining assets of this Corporation.
A consolidation or merger of this Corporation, with or into any
other corporation or corporations, shall not be deemed to be a
liquidation, dissolution or winding up, within the meaning of this
clause.
(c) Redemption. Beginning one (1) year after issuance, this
Corporation, at the option of the Board of Directors, may redeem
the whole of, or from time to time may redeem any part of, the
Preferred Shares on any dividend date by paying in cash therefore Ten
Dollars ($10.00) per share and, in addition to such amount, an amount
in cash equal to all cash dividends on Preferred Shares unpaid and
accumulated, as provided in B(1) of this Article, whether earned or
declared or not, to and including the date fixed for redemption, such
sum being hereinafter sometimes referred to as the redemption price.
In case of the redemption of a part only of the outstanding Preferred
Shares, this Corporation shall designated by lot, in such manner as
the Board of Directors may determine, the shares to be redeemed, or
shall effect such redemption pro rata. Less than all of the Preferred
Shares at any time outstanding may not be redeemed until all cash
dividends accrued and in arrears upon all Preferred Shares outstanding
shall have been paid for all past dividend periods, and until full
cash dividends for the then current dividend period on all Preferred
Shares then outstanding,
Page 4 of 11
<PAGE> 5
other than the shares to be redeemed, shall have been paid or
declared and the full amount thereof set apart for payment. At least
30 days' previous notice by mail, postage prepaid, shall be given to
the holders of record of the Preferred Shares to be redeemed, such
notice to be addressed to each such shareholder at his post office
address as shown by the records of this Corporation. On or after the
date fixed for redemption and stated in such notice, each holder of
Preferred Shares called for redemption who shall not have converted
such shares to Common Shares shall surrender his certificate
evidencing such shares to this Corporation at the place designated in
such notice and shall thereupon be entitled to receive payment of this
redemption price. In cash less than all the shares represented by any
such surrendered certificate are redeemed, a new certificate shall be
issued representing the unredeemed shares. If such notice of
redemption shall have been duly given, and if on the date fixed for
redemption funds necessary for the redemption shall be available
therefor, then notwithstanding that the certificates evidencing any
Preferred Shares so called for redemption shall not have been
surrendered, the dividends with respect to the shares so called for
redemption shall cease to accrue after the date fixed for redemption
and all rights with respect to the shares so called for redemption
shall forthwith after such date cease and determine, except only the
right of the holders to receive the redemption price thereof without
interest upon surrender of their certificates therefor.
Page 5 of 11
<PAGE> 6
(d) Voting. The Preferred Shares shall not have voting
rights, and the holders of Preferred Shares as a class shall not be
entitled to vote, except in those specific instances, if any, where
voting rights are provided by statute.
(e) Conversion. The Preferred Shares shall, at the option of the
respective holders thereof, be convertible into fully paid and
nonassessable Common Shares of the Corporation, upon the following
terms and conditions, at any time and from time to time, except that
any of such Preferred Shares which have been called for redemption
shall be convertible up to and including, but not after, the close of
business on the tenth (10) day prior to the redemption date.
(i) In order to exercise the conversion privilege, the holder of
any Preferred Shares to be converted shall surrender the certificate
or certificates therefor to any transfer agent of the Corporation for
such Preferred Shares, duly endorsed in blank for transfer,
accompanied by written notice of election to convert such Preferred
Shares or a portion thereof executed on the form set forth on such
certificates or on such other form as may be provided from time to
time by the Corporation. As soon as practicable after the surrender
of such certificates, the Corporation shall cause to be issued and
delivered, at the office of such transfer agent, to or on the order of
the holder of the certificates thus surrendered, a certificate or
certificates for the number of full Common Shares issuable hereunder
upon the conversion of such Preferred Shares and cash or scrip, as
provided in
Page 6 of 11
<PAGE> 7
subparagraph (iv) below, in respect of any fraction of a Common
Share issuable upon such conversion. Such conversion shall be deemed
to have been effected on the date on which the certificates for such
Preferred Shares have been surrendered as provided above, and the
period in whose name any certificate or certificates for Common Shares
are issuable upon conversion shall be deemed to have become on such
date the holder of record of the shares represented thereby.
(ii) No adjustment or allowance shall be made for
dividends on Preferred Shares surrendered for conversion, whether
accrued, accumulated, or otherwise.
(iii) The Preferred Shares shall be convertible into Common
Shares at a conversion price of Five Dollars ($5.00) for each Common
Share taking such Preferred Share at Ten Dollars ($10.00) per share,
so that each such Preferred Share shall be convertible into two (2)
Common Shares. In case, prior to the redemption or conversion of any
Preferred Shares, the Corporation shall issue any of its Common Shares
as a share dividend or subdivide (split) the number of outstanding
Common Shares or contract (reverse split) the number of outstanding
Common Shares or recapitalize, reclassify or otherwise adjust the
number of outstanding Common Shares, the number of and the conversion
price per share of Common Shares obtainable upon conversion of a share
of the Preferred Shares shall be proportionately adjusted.
(iv) No fractional Common Shares shall be issued upon
conversion of any Preferred Shares, but in lieu of fractional shares,
Page 7 of 11
<PAGE> 8
the Corporation shall, at its option, either pay an amount in
cash equal to the current market value of such fractional interest,
computed on the basis of the last reported sale price of the Common
Shares prior to the date of conversion, or issue scrip of the
Corporation in respect thereof. Such scrip shall be non-
interest-bearing and non-voting, shall be exchangeable in combination
with other similar scrip for the number of full Common Shares
represented thereby, shall be issued in such denominations and in such
form, shall expire after such reasonable time, which shall not be less
than one year from the date of the issue, may contain such
provisions for the sale for the amount of the holder of such scrip of
the Common Shares for which such scrip is exchangeable, and shall be
subject to such other terms and provisions, if any, as the Board of
Directors may from time to time determine prior to the issuance
thereof.
(v) As long as any of the Preferred Shares remains
outstanding, the Corporation shall take all steps necessary to reserve
and keep available a number of its authorized but unissued Common
Shares sufficient for issuance upon conversion of all such outstanding
Preferred Shares, and for issuance in exchange for all outstanding
scrip certificates.
(vi) In case of the voluntary dissolution, liquidation or
winding up of the Corporation, all conversion rights of the holders of
the Preferred Shares shall terminate on a date fixed by the Board of
Directors, but not more than thirty (30) days prior to the record date
for determining the
Page 8 of 11
<PAGE> 9
holders of the Common Shares entitled to receive any distribution upon
such dissolution, liquidation or winding up. The Corporation shall
cause notice of the proposed action, and of the date of termination of
conversion rights, to be mailed to the holders of record of the
Preferred shares not later than thirty (30) days prior to the date of
such termination, and shall promptly give similar notice to each
transfer agent for such Preferred Shares and for the Common Shares.
Such notice shall also state the conversion price then in effect.
(vii) All certificates of the Preferred Shares surrendered
for conversion as provided herein shall be canceled and retired in the
manner provided in Section (i) hereof, and no further Preferred Shares
shall be issued in lieu thereof.
(viii) The exercise of the conversion privilege shall be
subject to such regulations, not inconsistent with the foregoing
provisions of this Section, as may from time to time be adopted by
the Board of Directors of the Corporation.
(ix) All Common Shares issued upon the conversion of the
Preferred Shares shall be validly issued and outstanding and fully
paid and nonassessable.
(2) Class "B"
The Preferred Stock shall be composed of 2 million shares
without par, liquidation or redemption value. The holders of the
Preferred Stock shall be entitled to vote on or approve all matters
submitted for vote by or approval of holders of
Page 9 of 11
<PAGE> 10
Buyer's capital stock on a basis of one vote for each share in
pari passu with Common Stock; provided, that the right to vote shall
expire and become void at and after 5:00 p.m. local time, exactly one
year from the "Closing Date"; and, provided further, that in the event
the right to vote shall have expired, as provided herein, the right to
vote shall be reinstated in the event the Common Stock is listed on
the Boston Stock Exchange or admitted to trading on the NASDAQ
National Market System.
The Preferred Stock shall be convertible, share for share, into
Common Stock at any time beginning upon listing of the Common Stock on
the Boston Stock Exchange or admission of the Common to trading on the
NASDAQ National Market System. Holders of Preferred Stock and of the
Common Stock issued upon conversion thereof, shall agree to hold such
stock, as the case may be, for two years from the Closing Date or one
year from listing on the Boston Stock Exchange or admission to trading
on the NASDAQ National Market System, whichever is later. The rights,
preferences and limitations of the Preferred Stock shall not be
changed, altered or modified without a favorable vote of or approval
by a majority of the shares of Common Stock, voting as a class.
(3) Class "C"
Class "C" shall have the rights, privileges and preferences
specified by the Board of Directors from time to time by amendment to
these Articles of Incorporation, as amended, pursuant to $607.0602,
Fla. Stat., and successors thereto, including division into subclasses
Page 10 of 11
<PAGE> 11
or designation of subsequent class
"D," et seq.
IN WITNESS WHEREOF, the undersigned, President of HIGHLAND HEALTHCARE
CORPORATION, has executed the within Articles of Amendment this 3rd day of
April, 1992 and caused said Articles to be filed in the office of the Secretary
of State for the State of Florida, effective upon the filing thereof.
HIGHLAND HEALTHCARE
(CORPORATE SEAL) HIGHLAND HEALTHCARE CORPORATION
CORPORATION
FLORIDA
ATTEST:
By: /s/ Edwin B. Salmon, Jr.
/s/ ----------------------------
- ------------------------- Edwin B. Salmon, Jr.
Secretary Executive Vice President
STATE OF FLORIDA
COUNTY OF HILLSBOROUGH
The foregoing instrument was acknowledged before me this 3rd day of
April, 1992, by Edwin B. Salmon, Jr., as President of HIGHLAND HEALTHCARE
CORPORATION, on behalf of the Corporation. He is personally known to me, and
who did take an oath.
/s/ Jackson L. Morris
-------------------------------
Jackson L. Morris
-------------------------------
Notary Public (print name)
Serial Number: cc 131424
-----------------
[NOTARY PUBLIC STAMP]
Page 11 of 11
<PAGE> 12
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
HIGHLAND HEALTHCARE CORPORATION
Pursuant to the provisions of sec. 607.1003, Fla. Stat., the Florida
Business Corporation Act, Highland Healthcare Corporation does hereby amend its
Articles of Incorporation as follows:
1. The name of the corporation is Highland Healthcare Corporation.
2. This Amendment to the Articles of Incorporation, as amended, was duly
approved and adopted on August 29, 1994, by a joint action by written consent of
all the directors of the Corporation and by holders of a majority of the common
stock, being the only class of stock outstanding and entitled to vote hereon,
pursuant to sec. sec. 607.0704 and 607.0726, Fla. Stat. The number of votes
cast by the shareholders was sufficient for approval.
3. The name of the corporation on and after the date of the filing
hereof with the Office of the Secretary of State of Florida shall be changed to
Systems Communications, Inc.
4. Article III, A of the Articles of Incorporation, as amended by
Articles of Amendment filed with the Florida Secretary of State on April 15,
1992, be, and it hereby is, amended by adding that the par value of the Common
Stock is $.001 per share.
5. Article III, B of the Articles of Incorporation, as amended by
Articles of Amendment filed with the Florida Secretary of State on April 15,
1992, be, and it hereby is, amended by deleting said article and section in its
entirety and substituting therefor and in place thereof, the following:
1,700,000 shares of the preferred stock shall be designated Class "A"
Convertible Preferred Stock, shall have a stated value and liquidation
preference of One Dollar ($1.00) per share shall have not be entitled
either to vote or to a preference in the payment of dividends over the
common stock and shall be (i) convertible, at the election of the holder,
prior to filing with the U.S. Securities and Exchange Commission for the
first public offering of common stock made by the corporation after the
date of the issuance of the shares of this Class "A" Convertible
Preferred Stock and (ii) shall be converted automatically upon such
filing, in both cases each share of Class "A" Convertible Preferred Stock
into one-half share of common stock; and the balance of 3,300,000 shares
of preferred stock may be divided into two or more classes or series and
may have such preferences, limitations and relative rights as shall be
determined by the Board of Directors; provided, that no shares of such
preferred stock shall be issued until the Corporation shall have filed
with the Department of State of the State of Florida articles of
amendment setting forth the designation of such class or series and the
preferences, limitations and rights thereof.
Page 1 of 2 Pages
<PAGE> 13
IN WITNESS WHEREOF, the undersigned, Edwin B. Salmon, Jr., Secretary of
Highland Healthcare Corporation has executed the within Articles of Amendment
this 29 day of August, 1994 and caused said Articles to be filed in the office
of the Secretary of State for the State of Florida, effective upon the filing
thereof.
Highland Healthcare Corporation
By: /s/ Edwin B. Salmon
-------------------------------
Edwin B. Salmon, Jr., Secretary
Page 2 of 2 Pages
<PAGE> 14
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION, AS AMENDED,
OF
SYSTEMS COMMUNICATIONS, INC.
Pursuant to the provisions of sec. 607.0602(4), Fla. Stat., the Florida
Business Corporation Act, Systems Communications, Inc. does hereby amend its
Articles of Incorporation as follows:
1. The name of the corporation is Systems Communications, Inc.
2. This Amendment to the Articles of Incorporation, as amended, as set
forth in Paragraph 3 hereof was duly approved and adopted on September 15, 1995,
by written consent of all the directors of the Corporation pursuant to
sec. 607.0821, Fla. Stat.
3. Article III, B of the Articles of Incorporation, as amended by
Articles of Amendment filed with the Florida Secretary of State on September 1,
1994, be, and it hereby is, amended by designating authorized and unissued
shares of Preferred Stock, as follows:
3,300,000 shares of the preferred stock shall be designated Class "A"
Convertible Preferred Stock, for a total of 5,000,000 shares of Class "A"
Convertible Preferred Stock authorized, shall have a stated value and
liquidation preference of One Dollar ($1.00) per share shall have not be
entitled either to vote or to a preference in the payment of dividends
over the common stock and shall be (i) convertible, at the election of
the holder, prior to filing with the U.S. Securities and Exchange
Commission for the first public offering of common stock made by the
corporation after the date of the issuance of the shares of this Class
"A" Convertible Preferred Stock and (ii) shall be converted automatically
upon such filing, in both cases each share of Class "A" Convertible
Preferred Stock into one-half share of common stock; provided, that the
Board of Directors reserves the right to change the designation of any
such shares of preferred stock before they are issued by dividing them
into two or more classes or series and with such preferences,
limitations and relative rights as determined by the Board of Directors.
4. This Amendment to the Articles of Incorporation, as amended, as set
forth in Paragraph 5 hereof was, upon the recommendation of the Board of
Directors by written consent pursuant to sec. 607.0821, Fla. Stat., dated 6-20,
1995, duly approved and adopted on 6-20, 1995, by an action by written consent
of the holders of a majority of the issued and outstanding common stock of the
Corporation pursuant to sec. 607.0704, Fla. Stat., being the only capital stock
of the Corporation entitled to vote thereon; the number of votes cast for
approval being sufficient for approval.
5. Article III, B of the Articles of Incorporation, as amended by
Articles of Amendment filed with the Florida Secretary of State on September 1,
1994, be, and it hereby is, amended, as follows:
Page 1 of 2 pages
<PAGE> 15
The total number of shares of preferred stock which the Corporation is
authorized to issue shall be Fifteen Million (15,000,000), Five Million
(5,000,000) of which have been designated Class "A" Convertible Preferred
Stock and Ten Million (10,000,000) shares of which are Class "B"
Convertible Preferred Stock, which shall have a stated value and
liquidation preference of One Dollar ($1.00) per share shall have not be
entitled either to vote or to a preference in the payment of dividends
over the common stock and each share shall be convertible, at the
election of the holder, prior to filing with the U.S. Securities and
Exchange Commission for the first public offering of Common Stock made
by the corporation after the date of issuance of the shares of this
Class "B" Convertible Preferred Stock and shall be converted
automatically upon such filing, in both cases, into such number of
shares (including fractions of shares of Common Stock) of Common Stock
as is determined by dividing the par value and stated value of the
Preferred Stock by the average of the closing bid prices of the Common
Stock in the over-the-counter market on the ten days ending on the
closing date of the transaction in which the shares of Class "B"
Convertible Preferred Stock are issued from time to time; provided, that
the Board of Directors reserves the right to change the designation of
any such shares of Class "B" Convertible Preferred Stock before they are
issued by dividing them into two or more classes or series and with such
preferences, limitations and relative rights as shall be determined by
the Board of Directors.
IN WITNESS WHEREOF, the undersigned, Edwin B. Salmon, Jr., Secretary of
Systems Communications, Inc. has executed the within Articles of Amendment this
13 day of July, 1995 and caused said Articles to be filed in the office of
Secretary of State for the State of Florida, effective upon the filing thereof.
Systems Communications, Inc.
By: /s/ Edwin B. Salmon, Jr.
-----------------------------------
Edwin B. Salmon, Jr., Secretary
Pages 2 of 2 pages
<PAGE> 1
EXHIBIT 3(ii)
BYLAWS
OF
FLORIDA ONE CAPITAL CORPORATION
ARTICLE I
Meeting of Stockholders
Section 1. Annual Meeting: The annual meeting of the stockholders
shall be held at the principal office of the corporation or at such other place,
within or without the State of Florida, as the Board of Directors shall
designate, on a date selected by the Board of Directors to occur within four
months of the close of the corporation's fiscal year. If the date so designated
for the annual meeting falls upon a legal holiday, then the meeting shall be
held on the next succeeding regular business day.
Section 2. Special Meeting: Special meetings of the stockholders may
be called by the President, the Board of Directors or the holders of not less
than one-tenth (1/10) of all of the shares entitled to vote at the meeting.
Special meetings requested by shareholders shall be called for a date not less
than ten (10) nor more than sixty (60) days after the request is made in
writing, executed by the holders of record reflecting the number of shares and
certificate numbers so held. The call for a special meeting shall be issued by
the President or Secretary and shall specify the business to be transacted at
any special meeting of stockholders.
Section 3. Notice: Written notice stating the place, day and
hour of the meeting and, in the case of a special meeting, the purpose or
purposes for which the meeting is called, shall be delivered not less than ten
(10) nor more than sixty (60) days before the meeting, either personally or by
first class.
[Article VI, Section Two, is amended to increase the number of authorized
Directors to 7.
Article IX is amended to change the Company's fiscal year from ending on
December 31st of each year to ending of May 31st of each year.
Adopted at Annual Stockholder's Meeting, July 6, 1989.]
<PAGE> 2
If, however, after the adjournment, the Board of Directors fixes a new record
date for the adjourned meeting, a notice of the adjourned meeting shall be given
as provided in this Section 3 to each shareholder of record on the new record
date entitled to vote at such meeting.
Section 4. Quorum: A majority of the shares entitled to vote,
represented in person or by valid proxy, shall constitute a quorum at the
meeting of stockholders. When a specified item of business is required by law
to be voted on by a class or a series of stock, a majority of the shares of
such class or series shall constitute a quorum for the transaction of such item
of business by that class or series. After a quorum has been established, the
subsequent withdrawal of shareholders, so as to reduce the number of shares
entitled to vote at the meeting below the number required for a quorum, shall
not effect the validity of any action taken at the meeting.
Section 5. Voting of Shares: Each outstanding share, regardless of
class or series, shall be entitled to one vote on each matter submitted to a
vote at any meeting of shareholders. A shareholder may vote either in person or
by proxy executed in writing by the shareholder in accordance with Section
607.101, Florida Statutes.
At each election of Directors, every shareholder entitled to vote at
such election shall have the right to vote, in person or by proxy, the number of
shares owned of record by him, for as many persons as there are directors to be
elected at that time and for whose election he has a right to vote.
Section 6. Closing of Transfer Books and Fixing of Date: For the
purpose of determining shareholders entitled to notice of or to vote at any
meeting of shareholders or any adjournment thereof, or entitled to receive
payment of any dividend, or in order to make a determination of shareholders for
any other purpose, the Board of Directors may provide that the stock transfer
books shall be closed for a stated period but not to exceed, in any case, sixty
(60) days. If the stock transfer books shall be closed for the purpose of
determining shareholders entitled to notice of or to vote at a meeting of
shareholders, such books shall be closed for at least ten (10) days immediately
preceding such meeting.
In lieu of closing the stock transfer books, the Board of Directors may
fix in advance a date as the record date for any determination of shareholders,
such date in any case to be not more than sixty (60) days and, in case of a
meeting of shareholders, not less than ten (10) days prior to the date on which
the particular action requiring such determination of shareholders is to be
taken.
- 2 -
<PAGE> 3
If the stock transfer books are not closed and no record date is fixed
for the determination of shareholders entitled to notice or to vote at a
meeting of shareholders, or shareholders entitled to receive payment of a
dividend, the date on which notice of the meeting is mailed or the date on which
the resolution of the Board of Directors declaring such dividend is adopted, as
the case may be, shall be the record date for such determination. When a
determination of shareholders entitled to vote at any meeting of shareholders
has been made as provided in this section, such determination shall apply to
any adjournment thereof, unless the Board of Directors fixes a new record date
for the adjourned meeting.
Section 7. Action by shareholders Without a Meeting: Any action
required by law, these Bylaws, or the Articles of this corporation to be taken
at any annual or special meeting of shareholders or any action which may be
taken at any annual or special meeting of such shareholders, may be taken
without a meeting, without prior notice and without a vote, if a consent in
writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would
be necessary to authorize or take such action at a meting at which all shares
entitled to vote thereon were present and voted. If any class of shares is
entitled to vote thereon as a class, such written consent shall be required of
the holders of a majority of the shares of each class of shares entitled to
vote as a class thereof.
Within ten (10) days after obtaining such authorization by written
consent, notice shall be given to those shareholders who have not consented in
writing. The notice shall fairly summarize the material features of the
authorized action and, if the action be a merger, consolation or sale or
exchange of assets for which dissenters rights are provided by law, the notice
shall contain a clear statement of the right of shareholders dissenting
therefrom to be paid the fair value of their shares upon compliance with further
provisions of this act regarding rights of dissenting shareholders.
Section 8. Order of Business: The order of business at all meetings
of the shareholders shall be as follows:
1. Roll call.
2. Proof of notice of meeting or waiver of notice.
3. Reading of minutes of preceding meeting.
4. Reports of officers.
5. Reports of committees.
6. Election of officers.
7. Unfinished business.
8. New business.
- 3 -
<PAGE> 4
ARTICLE II
Officers
Section 1. Officers: The officers of this corporation shall
consist of a President, Vice President, Secretary, Treasurer and such assistants
thereto as are deemed necessary from time to time. Any two (2) or more offices
may be held by the same person.
Section 2. Election: All officers of the corporation shall be
elected annually by the Board of Directors at their Annual Meeting and shall
hold office for the term of one (1) year or until their successors are duly
elected.
Section 3. Duties of Officers: The duties and powers of the officers
of the corporation shall be as follows:
A. President: The President shall preside at all meetings of the
stockholders. He shall present at each annual meeting of the stockholders a
report of the condition of the business of the corporation. He shall cause to
be called regular and special meetings of the stockholders in accordance with
these ByLaws. He shall be the Chief Executive Officer of the corporation and
shall have general supervision of its business; he shall see that all orders and
resolutions of the stockholders and contracts of the corporation are carried
into effect, subject, however, to the rights of the stockholders and/or
directors to delegate any specific powers (except such as may by statute be
exclusively conferred on the President) to any other officer of the corporation.
He shall appoint and remove, employ and discharge, and fix the compensation of
all servants, agents, employees and clerks of the corporation other than the
duly appointed officers, subject to the approval of the stockholders; he shall
see that the books, reports, statements and certificates required by the
statutes are properly kept, made and filed according to law. He shall enforce
these Bylaws and perform all the duties incident to the position and office,
and which are required by law.
B. Vice President: During the absence and/or inability of the
President to render and perform his duties or exercise his powers, as set forth
in these Bylaws or in the laws under which this corporation is organized, the
same shall be performed and exercised by the Vice President; and when so acting,
such Vice President shall have all the powers and be subject to all
responsibilities hereby given or imposed upon such President.
4
<PAGE> 5
C. Secretary: The Secretary shall keep the minutes of the
meetings of the stockholders in appropriate books; he shall give and serve all
notices of the corporation. He shall be custodian of the records and of the
seal, and affix the latter when required. He shall keep the stock transfer
books in the manner prescribed by law, so as to show at all times the amount of
capital stock, the manner and the time the same was paid in, the names of the
owners thereof, alphabetically arranged, their respective places of residence,
their post office addresses, the number of shares owned by each, the time at
which each person became such owners, and the amount paid thereon; and keep such
stock and transfer books open daily during business hours at the office of the
corporation, subject to the inspection of any stockholder of the corporation,
and to permit such stockholder to make extracts from said books to the extent
and as prescribed by law; he shall sign all certificates of stock. He shall
present to the stockholders at their stated meetings all communications
addressed to him officially by the President or any officer or shareholder of
the corporation. He shall attend to all correspondence and perform all the
duties incident to the office of Secretary.
D. Treasurer: The Treasurer shall have the care and custody of
and be responsible for all the funds and securities of the corporation, and
deposit all such funds and securities of the corporation, and deposit all such
funds in the name of the corporation in such bank or banks, trust company or
trust companies or safe deposit vaults as the stockholders may designate. He
shall exhibit at all reasonable times his books and accounts to any stockholder
of the corporation upon application at the office of the corporation during
business hours. He shall render a statement of the condition of the finances of
the corporation at each regular meeting of the stockholders and at such other
times as shall be required of him and full financial report at the annual
meeting of the stockholders. He shall keep at the office of the corporation,
correct books of account of all its business and transactions and such other
books of account as the stockholders may require. He shall do and perform all
duties appertaining to the office of Treasurer.
Either the President or Secretary shall sign, make and endorse, in the
name of the corporation, all checks, drafts, warrants and orders for the payment
of money, and pay out and dispose of same and receipt thereof, under the
direction of the stockholders.
Section 4. Bond: The Treasurer shall, if required by the
stockholders, give to the corporation such security for the faithful discharge
of his duties as the stockholders direct.
5
<PAGE> 6
Section 5. Vacancies, How Filled: All vacancies in any office shall
be filled by the Directors without undue delay, at its regular meeting, or at a
meeting especially called for that purppose.
Section 6. Compensation of Officers: The officers shall receive such
salary or compensation as may be determined by the stockholders.
Section 7. Removal of Officers: The Board of Directors may remove any
officer, by a majority vote of those present at a duly called regular or special
meeting, at any time, with or without couse.
ARTICLE III
Seal
Section 1. Seal: The seal of the corporation shall be as follows:
ARTICLE IV
Certificate of Stock
Section 1. Description of Stock Certificates: The certificates of
stock shall be numbered and registered in the order in which they are issued in
consecutive order therefrom, and in the margin thereof shall be entered the
name of the person owning the shares therein presented, with the number of
shares and the date thereof. Such certificates shall exhibit the holder's name
and number of shares. They shall be signed by the President and countersigned
by the Secretary and sealed with the seal of the corporation.
Section 2. Transfer of Stock: The stock of the corporation shall be
assigned and transferable on the books of the corporation only by the person in
whose name it appears on said books, or his legal representatives. In case of
transfer by attorney, the power of attorney duly executed and acknowledged
shall be deposited with the Secretary. In all cases of transfer, the former
certificate must be surrendered up and cancelled before a new certificate can
be issued. No transfer shall be made upon the books of the corporation, except
as herein expressly prescribed and provided.
6
<PAGE> 7
SECTION 3. LOST, STOLEN OR DESTROYED CERTIFICATES: The corporation
shall issue a new stock certificate in the place of any certificate previously
issued if the holder of record of the certificate (a) makes proof in affidavit
form that it has been lost, destroyed or wrongfully taken; (b) request the issue
of a new certificate before the corporation has been noticed that the
certificate has been acquired by a purchaser for value in good faith and without
notice of any adverse claim; (c) gives bond in such form as the corporation may
direct, to indemnify the corporation, the transfer agent, and the registrar
against any claim that may be made upon the alleged loss, destruction or theft
of the certificate; and (d) satisfies any other reasonable requirements imposed
by the corporation.
ARTICLE V
Dividends
The Board of Directors of this corporation may, from time to time,
declare and the corporation may pay dividends on its shares in cash, property or
its own shares, except when the corporation is insolvent or when the payment
thereof would render the corporation insolvent or when the declaration or
payment thereof would be contrary to any restrictions contained in the Articles
of laws of the State of Florida, subject to the following provisions:
A. Dividends in cash or property may be declared and paid, except as
otherwise provided by law, only out of the unreserved and unrestricted earned
surplus of the corporation or out of capital surplus, howsoever arising, but
each dividend paid out of capital surplus shall be identified as a distribution
of capital surplus and the amount per share paid from surplus shall be disclosed
to the shareholders receiving the same concurrently with the distribution.
B. Dividends may be declared and paid in the corporation's own treasury
shares.
C. Dividends may be declared and paid in the corporation's own
authorized but unissued shares out of any unreserved and unrestricted surplus of
the corporation except as prohibited by law.
D. No dividend payable in shares of any class shall be paid to the
holders of shares of any other class unless the Articles so provide or such
payment is authorized by the affirmative vote or the written consent of the
holders of at least a majority of the outstanding shares of the class in which
the payment is to be made.
7
<PAGE> 8
E. A split-up or division of the issued shares of any class into a
greater number of shares of the same class without increasing the stated capital
of the corporation shall not be construed to be a share dividend within the
meaning of this section.
SECTION 1. FUNCTION: All corporate powers shall be exercised by or
under the authority of, and the business and affairs of a corporation shall be
managed under the direction of the Board of Directors.
SECTION 2. QUALIFICATIONS: Directors need not be residents of this
state or shareholders of this corporation.
SECTION 3. COMPENSATION: The Board of Directors shall have authority to
fix the compensation of the directors.
SECTION 4. DUTIES OF DIRECTORS: A director shall perform his duties as
a director, including his duties as a member of any committee of the Board upon
which he may serve, in good faith, in a manner he reasonably believes to be in
the best interest of the corporation, and with such care as an ordinarily
prudent person in a like position would use under similar circumstances.
ARTICLE VI
DIRECTORS
In performing his duties, a director shall be entitled to rely on
information, opinions, reports or statements, including financial statements and
other financial data, in each case prepared or presented by:
A. One or more officers or employees of the corporation whom the
director reasonably believes to be reliable and competent in the matters
presented.
B. Counsel, public accountants or other persons as to matters which the
director reasonably believes to be within such person's professional or expert
competence; or
C. A committee of the Board upon which he does not serve, duly
designated in accordance with a provision of the Articles of Incorporation or
the Bylaws as to matters within its designated authority, which committee the
director reasonably believes to merit confidence.
A director shall not be considered to be acting in good faith if he has
knowledge concerning the matter in question that would cause such reliance
described above to be unwarranted.
8
<PAGE> 9
A person who performs his duties in compliance with this section shall
have no liability by reason of being or having been a director of the
corporation.
SECTION 1. PRESUMPTION OF ASSENT: A director of the corporation who is
present at a meeting of its Board of Directors at which action on any
corporation matter is taken shall be presumed to have assented to the action
taken unless he votes against such action or abstains from voting in respect
thereto because of an asserted conflict of interest.
SECTION 2. NUMBER: This corporation shall have no more than two
directors.
SECTION 3. ELECTION AND TERM: Each person named in the Articles as a
member of the initial Board of Directors shall hold office until the first
annual meeting of shareholders, and until his successor shall have been elected
and qualified or until his earlier resignation, removal from office or death.
At the first annual meeting of shareholders and at each annual meeting
thereafter the shareholders shall elect directors to hold office until the next
succeeding annual meeting. Each Director shall hold office for the term for
which he is elected and until his successor shall have been elected and
qualified or until his earlier resignation, removal from office or death.
SECTION 4. VACANCIES: Any vacancy occurring in the Board of Directors,
including any vacancy created by reason of an increase in the number of
directors, may be filled by the affirmative vote of a majority of the remaining
directors through less than a quorum of the Board of Directors. A director
elected to fill a vacancy shall hold office only until the next election of
directors by the shareholders.
SECTION 5. REMOVAL OF DIRECTORS: At a meeting of shareholders called
expressly for that purpose, any director or the entire Board of Directors may be
removed, with or without cause, by a vote of the holders of a majority of the
shares then entitled to vote at an election of directors.
SECTION 6. QUORUM AND VOTING: A majority of the number of directors
fixed by these Bylaws shall constitute a quorum for the transaction of business.
The act of the majority of the directors present at a meeting at which a quorum
is present shall be the act of the Board of Directors.
9
<PAGE> 10
SECTION 7. DIRECTOR CONFLICTS OF INTEREST: No contract or other
transaction between this corporation and one or more of its directors of any
other corporation, firm, association or entity in which one or more
of the directors are directors or officers or are financially interested, shall
be either void or voidable because of such relationship or interest or because
such director or a committee thereof which authorizes, approves or ratifies
such contract or transaction or because his or their votes are counted for such
purpose, if:
A. The fact of such relationship or interest is disclosed or known to
the Board of Directors or committee which authorizes, approves or ratifies the
contract or transaction by a vote or consent sufficient for the purpose without
counting the votes or consents of such interested directors; or
B. The fact of such relationship or interest is disclosed or known to
the shareholders entitled to vote and they authorize, approve or ratify such
contract or transaction by vote or written consent; or
C. The contract or transaction is fair and reasonable as to the
corporation at the time it is authorized by the Board, a committee or the
shareholders. Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or a committee
thereof which authorizes, approves or ratifies such contract or transaction.
SECTION 8. EXECUTIVE AND OTHER COMMITTEES: The Board of Directors, by
resolution, adopted by a majority of the full Board of Directors, may designate
from among its members an executive committee and one (1) or more other
committees each of which, to the extent provided in such resolution shall have
and may exercise all the authority of the Board of Directors, except that no
committee shall have the authority to:
A. Approve or recommend to shareholders actions or proposals required by
law to be approved by shareholders;
B. Designate candidates for the office of Director, for the purposes of
proxy solicitation or otherwise;
C. Fill vacancies on the Board of Directors or any committee thereof;
D. Amend the Bylaws;
E. Authorize or approve the reacquisition of shares unless pursuant to a
general formula or method specified by the Board of Directors; or
10
<PAGE> 11
F. Authorize or approve the issuance or the sale of, or any contract to
issue or sell, shares or designate the terms of a series of a class of shares,
except that the Board of Directors, having acted regarding general authorization
for the issuance or sale of shares, or any contract therefor, and, in the case
of a series, the designation thereof, may, pursuant to a general formula or
method specified by the Board of Directors, by resolution or by adoption of a
stock option or other plan, authorize a committee to fix the terms of any
contract for the sale of the shares and to fix the terms upon which such shares
may be issued or sold, including, without limitation, the price, the rate or
manner of payment of dividends, provisions for redemption, sinking fund,
conversion, voting or preferential rights, and provisions for other features of
a class of shares, or a series of a class of shares, with full power in such
committee to adopt any final resolution setting forth all terms thereof and to
authorize the statement of the terms of a series for filing with the Department
of State.
The Board of Directors, by resolution adopted in accordance with this
section, may designate one or more directors as alternate members of any such
committee, who may act in the place and stead of any absent member or members at
any meeting of such committee.
SECTION 9. PLACE OF MEETING: Regular and special meetings by the Board
of Directors may be held within or without the State of Florida.
SECTION 10. TIME, NOTICE AND CALL OF MEETINGS: Regular meetings of
the Board of Directors shall be held without notice immediately after
stockholders' meeting. Written notice of the time and place of special
meetings of the Board of Directors shall be given to each director by either
personal delivery, telegram or cablegram at least two (2) days before the
meeting or by notice mailed to the director at least five (5) days before the
meeting.
Notice of a meeting of the Board of Directors need not be given to any
director who signs a waiver of notice either before or after the meeting.
Attendance of a director at a meeting shall constitute a waiver of notice of
such meeting and waiver of any and all obligations to the place of the meeting,
the time of the meeting, or the manner in which it has been called or convened,
except when a director states, at the beginning of the meeting, any objection to
the transaction of business because the meeting is not lawfully called of
convened.
Neither the business to be transacted at, nor the purpose of any regular
or special meeting of the Board of Directors, need be specified in the notice or
waiver of notice of such meeting.
11
<PAGE> 12
A majority of the directors present, whether or not a quorum exists, may
adjourn any meeting of the Board of Directors to another time and place.
Notice of any such adjourned meeting shall be given to the directors who were
not present at the time of the adjournment and, unless the time and place of
the adjourned meeting are announced at the time of the adjournment, to the
other directors.
Meeting of the Board of Directors may be called by the Chairman of the
Board, by the President of the corporation or by any two directors.
Members of the Board of Directors may participate in a meeting of such
board by means of a conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear each other at
the same time. Participation by such means shall constitute presence in person
at a meeting.
Section 11. Action Without a Meeting: Any action required to be taken at
a meeting of the directors of a corporation, or any action which may be taken
at a meeting of the directors or a committee thereof, may be taken without a
meeting if a consent in writing, setting forth the action so to be taken,
signed by all of the directors, or all the members of the committee, as the
case may be, is filed in the minutes of the proceedings of the Board of the
committee. Such consent shall have the same effect as a unanimous vote.
ARTICLE VII
Indemnification
The corporation shall indemnify any officer or director who was or is a
party or is threatened to be made a party to any civil, criminal,
administrative or investigative (other than an action by, or in the right of,
the corporation), by reason of the fact that he is or was a director or officer
of the corporation against expenses, (including attorney's fees) judgments,
fines, and amounts paid in settlement actually and reasonably incurred by him
in connection with such action, suit or proceeding, including any appeal
thereof, if he acted in good faith and in a manner he reasonably believed to be
in, or not opposed to, the best interest of the corporation and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct as unlawful. Any indemnification hereunder unless pursuant to a
determination by a court of competent jurisdiction, shall be made by the
corporation only as authorized in the specific case upon the determination that
indemnification of the
12
<PAGE> 13
officer or director is proper in the circustances because he has met the
applicable standards of conduct set forth hereinabove and required by law.
Such determination shall be made by the Board of Directors by a majority vote
of a quorum consisting of directors who were not parties to such action, suit
or proceeding.
ARTICLE VIII
Amendments
These Bylaws may be repealed or amended, and new Bylaws may be adopted,
by either the Board of Directors or the shareholders, but the Board of
Directors may not amend or repeal any Bylaw adopted by the shareholders if the
shareholders specifically provide such Bylaw not be subject to amendment or
repealed by the directors.
ARTICLE IX
Fiscal Year
The Company's fiscal year shall begin on January 1 and end on December
31 each year.
13
<PAGE> 14
NOTICE OF ACTION BY
WRITTEN CONSENT OF STOCKHOLDERS OF
FLORIDA ONE CAPITAL CORPORATION
TO: Those holders of Common Stock of Florida One Capital
corporation who did not execute the written consents
of stockholders dated July 17, 1990.
On July 17, 1990, the record and beneficial owners of more than
a majority of outstanding shares of voting stock of Florida One Capital
Corporation, a Florida corporation, executed written consents pursuant to
chapters 607.1006 and 607.0704 of the Florida Business Corporation Act taking
the following action:
1. Amending Article 1 of the Corporation's Articles of
Incorporation to change the name of the Corporation from Florida One Capital
Corporation to Wholesale Optical Club International, Inc.
2. Electing the following individuals to the Board of
Directors of the Corporation, Wayne Loy, Marilyn DeMartini and Michael Dudak,
O.D.
The action by written consent of the stockholders became
effective July 17, 1990. A copy of the written consents will be furnished to
any stockholder upon request and without charge.
FLORIDA ONE CAPITAL CORPORATION
By the Order of the Board of Directors
/s/ James J. Lewis
-------------------------
James J. Lewis, Secretary
Dated: July 17, 1990
F14:
notice.act
<PAGE> 15
WHOLESALE OPTICAL CLUB INTERNATIONAL, INC.
MINUTES OF SPECIAL MEETING OF BOARD OF DIRECTORS
DECEMBER 9, 1990
A special meeting of the Board of Directors of Wholesale Optical Club
International, Inc., was convened in Sarasota, Florida, without formal notice
and each of the Directors, by execution of these Minutes, expressly waives
formal notice and the right to a formal meeting. After the conclusion of
discussion, the following resolutions were unanimously adopted by each of the
Directors:
BE IT RESOLVED, and it is hereby resolved, that new Officers and
Directors were duly elected for Wholesale Optical Club International, Inc.:
Chairman- James Jessup
President- Winfred D. Russell
Executive Vice President/Secretary-Wayne Loy
Treasurer Larry S. Brock
BE IT RESOLVED, and it is hereby resolved, that Richard Fox, Attorney
at Law, be instructed to prepare and file Form 8-K as required.
BE IT RESOLVED, and it is hereby resolved, that the Board authorized a
Press Release to be issued to reflect the merger and to provide public
relations information regarding the entities and the positive effects of the
transactions.
BE IT RESOLVED, and it is hereby resolved, that the Board amended the
Articles of Incorporation to provide the following:
Provide for the authorization of 5,000,000 shares of
Preferred Stock.
Provide for the issuance of up to 270,000 shares of
Preferred Stock to the Limited Partnerships of
Meadowbrooke and Pine Trace.
Provide for a name change of the corporation to be:
NU-VISION INTERNATIONAL, INC.
Provide that any action of the Board of Directors shall
hereafter require approval by a majority of the Members rather
than by an unanimous vote.
BE IT RESOLVED, and it is hereby resolved, that new Directors be
elected for the corporation as follows: James A. Howze and Marilyn Demartini.
These Directors would be in addition to the
1
<PAGE> 16
Minutes of 12.9
Page Two
Directors named above as officers which are James Jessup, Winfred D. Russell,
Wayne Loy and Larry S. Brock.
BE IT RESOLVED, and it is hereby resolved, that the Board elect new
Directors for Sterling Builders and Developers, Inc. as follows: Winfred D.
Russell, James Jessup and Larry S. Brock.
BE IT RESOLVED, and it is hereby resolved, that the Board accept the
resignation of James J. Lewis and Richard Dudak, as Directors.
BE IT FURTHER RESOLVED, and it is hereby resolved, that the individual
Board member signed an Indemnification Agreement for their actions as a Board
member. And further that the Corporation purchase Liability Insurance in
accordance with the executed Indemnification Agreement.
There being no further business to come before the meeting, it was duly
adjourned.
NU-VISION INTERNATIONAL, INC.
Dated: 12/9/90 /s/ James Jessup
-----------------------------
James Jessup
Dated: 12/9/90 /s/ Winfred Russell
-----------------------------
Winfred Russell
Dated: 12/9/90 /s/ Wayne Loy
-----------------------------
Wayne Loy
Dated: 12/9/90 /s/ Larry S. Brock
-----------------------------
Larry S. Brock
Dated: 12/9/90 /s/ James A. Howze
-----------------------------
James A. Howze
Dated: 12/9/90
-----------------------------
Marilyn Demartini
2
<PAGE> 17
MINUTES OF SPECIAL MEETING OF THE BOARD OF DIRECTORS
OF NU-VISION INTERNATIONAL, INC.
A special meting of the Board of Directors of Nu-Vision International, Inc. was
held on May 1, 1991, without formal notice of meeting. Each Director, by
execution of these Minutes, expressly waives the right to formal notice of said
meeting and agrees to the action as set forth hereinbelow:
1. It was resolved, that the name of the corporation be changed to be
the following:
HIGHLAND HEALTHCARE CORPORATION
2. That the Secretary be instructed to forward the appropriate
Amendment to the Secretary of State so that the new name be effective no
later than May 31, 1991, for the benefit of the proposed merger with ACL,
and to be formally in compliance with the abandment of Nu-Vision because
of the conflict with existing corporation.
3. It was resolved, that Edwin Salmon be authorized to continue to
negotiate with ACL, Inc. for the proposed merger, and to bind the
corporation to any agreement or contract that is proposed after review
by Jackson Morris, our Attorney.
There being no further business to come before the meeting it was duly
adjourned.
/s/ Larry S. Brock
--------------------------------
Larry S. Brock, Director
/s/ Edwin B. Salmon, Jr.
---------------------------------
Edwin B. Salmon, Jr., Director
<PAGE> 18
JOINT ACTION BY WRITTEN CONSENT
OF THE BOARD OF DIRECTORS AND THE STOCKHOLDERS
IN LIEU OF A SPECIAL MEETING OF
HIGHLAND HEALTHCARE CORPORATION
The undersigned, being all of the directors of and being holders of
record of and of proxies for not less than a majority of the issued and
outstanding capital stock of Highland Healthcare Corporation, a Florida
corporation, do hereby take and adopt, pursuant to sec. 607.0821 and sec.
607.0704, respectfully, Fla. Stat., the Florida Business Corporation Act, the
following actions in writing and without a meeting in lieu of a special meeting.
WHEREAS, Systems Communications Incorporated, a California corporation
(formerly NOUS Telecommunications Integrators, Inc.) has experienced adverse
publicity related to litigation between certain of its executive officers and
their previous employer;
RESOLVED, that the termination and cancellation of the agreement dated
June 1994 for the merger of NOUS into the Corporation, and the actions and
transactions undertaken in connection therewith, including the approval of
proposed Articles of Merger, be, and it hereby is approved, ratified and
confirmed; and
RESOLVED FURTHER, that the agreement of the acquisition of Ameristar
Telecommunications, Inc., previously approved by the Board of Directors, shall
not be affected by the termination and cancellation of the agreement for the
merger with NOUS.
WHEREAS, the Corporation has entered into an agreement dated August 12,
1994 for the acquisition of Coast Communications, Inc., a Nevada corporation,
("Coast"); it is:
RESOLVED, that the agreement dated August 12, 1994 for the acquisition
of Coast by the Corporation, and the transactions contemplated thereby and
necessary to accomplish such acquistion, be, and they hereby are approved,
ratified and confirmed.
WHEREAS, the Corporation desires to change its name and designate the
rights and preferences of its authorized shares of Preferred Stock, all as
previously set forth in the proposed Articles of Merger; it is:
RESOLVED, that the name of the Corporation shall be changed to Systems
Communications, Inc. by amendment to its Restated Articles of Incorporation; and
RESOLVED FURTHER, that the 1.7 million shares of the Corporation's
authorized but unissued Preferred Stock shall be, and hereby is designated by
amendment to its Restated Articles of Incorporation; and
RESOLVED FURTHER, that the Articles of Amendment to the Corporation's
Restated Articles of Incorporation attached hereto as Exhibit "A" be, and they
hereby are, approved, ratified and confirmed.
WHEREAS, the Board of Directors has been advised that it is desirable
for purposes of the public market to reduce the number of issued and outstanding
shares of Common Stock of the Corporation; it is:
Page 1 of 3 pages.
<PAGE> 19
RESOLVED, that the outstanding shares of Common Stock of the Corporation
shall be, and hereby are, reverse split in a ration of one share to each five
shares with the effect that each five shares outstanding shall be one share; and
RESOLVED FURTHER, that fractional shares resulting form the reverse split
shall be rounded to a whole share; and
RESOLVED FURTHER, that the par value per share not be effected by the
reverse split provided herein, but shall remain $.001 per share, and the excess
of the aggregate par value of issued and outstanding Common Stock resulting from
such reverse split shall be transferred to additional paid in capital or to
retained earnings <deficit> as may be appropriate in the opinion of the
Corporation's independent auditors; and
RESOLVED FURTHER, that number of shares of Common Stock into which the
Class "A" Convertible Preferred Stock is convertible shall not be affected by
the reverse split provided herein, such that each share of said preferred stock
shall remain convertible into one-half share of Common Stock; and
RESOLVED FURTHER, that the record date for purposes of the reverse split
provided herein shall be September 9, 1994.
WHEREAS, The Board of Directors desires to elect new management in
anticipation of the acquisitions of Ameristar and Coast; it is:
RESOLVED, that Kenneth Bruce Baker be, and he hereby is, elected as the
President of the Corporation to replace Edwin B. Salmon, Jr. and Mr. Salmon is
elected Secretary of the Corporation to replace Winfred D. Russell.
WHEREAS, the directors desires to fully authorize and empower the
officers of the Corporation to carry out the intents and purposes of the within
resolutions; it is:
RESOLVED, that in addition to and without limiting the authority and
direction set forth in each of the foregoing resolutions, the appropriate
officers of the Corporation be, and each of them hereby is, authorized to take,
or cause to be taken, such further action and to execute and deliver, or cause
to be executed and delivered, for and in the name and on behalf of the
Corporation, all such further and additional instruments and documents as such
proper officer may deem to be necessary or appropriate in order to effect the
proposes and intents of the foregoing resolutions and to be in the best
interests of the Corporation, (as conclusively evidenced by the taking of such
action or the execution and delivery of such instruments and documents, as the
case may be), and each and every action heretofore taken by the officers of the
Corporation in connection with the subject of the foregoing resolutions be, and
it hereby is, approved, ratified and confirmed in all respects as the act and
deed of the Corporation.
WHEREAS, the directors desire to provide an effective date for the
within actions which may be different from the date on which the last director
constituting all directors has executed this Action By Written Consent in
accordance with sec. 607.0821, Fla. Stat.; it is:
RESOLVED, that the effective date of the within Action and approval of
the Board of Directors shall be August 29, 1994 (not including the record date
for the reverse split); provided,
Page 2 of 3 pages.
<PAGE> 20
that if for any reason, by statute or by rule of law, the effective date of the
within actions shall be the date on which the last director constituting all
directors shall have signed this Action By Written Consent, then the approval of
the within Action shall be deemed to be and become a ratification of a prior act
or transaction.
RESOLVED FURTHER, that the receipt by telephone facsimile of a signature
of a director(s) to the within Action shall be accepted and effective for
purposes hereof as an original manual signature of such director(s); provided,
that such director(s) delivering his signature by telephone facsimile shall
promptly send a copy of the signature page to the within Action with his
original manual signature applied thereto, the failure of the Corporation to
receive same in no wise voiding the signature received by telephone facsimile,
and such director(s) may re-execute, at a later date, an original of the within
Actions under date of his telephone facsimile signature within need or
requirement to disclose that such re-execution was on any other date.
The foregoing constitutes a complete record of actions taken, adopted,
approved and ratified by the all of the directors and a majority of the
stockholders of the Corporation.
DATE: DIRECTORS AND STOCKHOLDERS:
August __, 1994 /s/ Edwin B. Salmon, Jr.
-----------------------------------
Edwin B. Salmon, Jr., as a director
and as proxy holder of 2,580,000
shares of common stock
August __, 1994 /s/ Winfred D. Russell
----------------------------------
Winfred D. Russell, as a director
Page 3 of 3 pages.
<PAGE> 1
<TABLE>
<S> <C>
LOVELACE, ROBY & COMPANY, P.A.
Certified Public Accountants & Management Consultants
- ----------------------------------------------------------------------------------------------------
Commerce Plaza, Suite 400 - 1201 South Orlando Avenue - Winter Park, Florida 32789-7192
(407) 740-5400 - FAX (407) 740-0012
</TABLE>
EXHIBIT 16
July 20, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
We have read Item 14 of the Form 10 of Systems Communications, Inc. and are in
agreement with the statements contained in the second and third paragraphs
therein. We have no basis to agree or disagree with other statements contained
therein.
/s/ Lovelace, Roby & Company, P.A.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SYSTEMS COMMUNICATIONS, INC. FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 964,714
<SECURITIES> 0
<RECEIVABLES> 1,832,469
<ALLOWANCES> (510,000)
<INVENTORY> 228,344
<CURRENT-ASSETS> 4,156,868
<PP&E> 693,046
<DEPRECIATION> (220,524)
<TOTAL-ASSETS> 21,545,654
<CURRENT-LIABILITIES> 5,417,864
<BONDS> 175,195
0
2,906,470
<COMMON> 7,668
<OTHER-SE> 8,615,981
<TOTAL-LIABILITY-AND-EQUITY> 21,545,654
<SALES> 0
<TOTAL-REVENUES> 2,984,884
<CGS> 0
<TOTAL-COSTS> (8,965,614)
<OTHER-EXPENSES> (4,288)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (79,706)
<INCOME-PRETAX> (6,064,724)
<INCOME-TAX> 256,699
<INCOME-CONTINUING> (5,808,025)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,808,025)
<EPS-PRIMARY> (1.81)
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SYSTEMS COMMUNICATIONS, INC. FOR THE THREE MONTHS
ENDED MARCH 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 210,977
<SECURITIES> 0
<RECEIVABLES> 2,244,198
<ALLOWANCES> (545,000)
<INVENTORY> 155,133
<CURRENT-ASSETS> 3,859,201
<PP&E> 1,900,443
<DEPRECIATION> (413,064)
<TOTAL-ASSETS> 24,154,480
<CURRENT-LIABILITIES> (5,963,772)
<BONDS> (583,498)
0
2,906,470
<COMMON> 8,287
<OTHER-SE> 10,934,710
<TOTAL-LIABILITY-AND-EQUITY> 24,154,480
<SALES> 0
<TOTAL-REVENUES> 1,027,555
<CGS> 0
<TOTAL-COSTS> 2,624,272
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41,147
<INCOME-PRETAX> (1,637,809)
<INCOME-TAX> 594,432
<INCOME-CONTINUING> (1,043,377)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,043,377)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> 0
</TABLE>
