AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 1996
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 POST EFFECTIVE AMENDMENT No. 1
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 Registrant as specified in its charter)
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<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)
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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)
<PAGE 2>
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 healthcare information 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 services and
Pay-Per-View television 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 from 1991 to August 1994. SCI commenced
it's telecommunications operations in August, 1994 when it acquired Ameristar
Telecommunications, Inc. ("ATI"), an Illinois corporation, and Coast
Communications, Inc. ("CCI"), an Arizona corporation. It increased it's
commitment to this business line with the acquisitions of LCI Communications,
Inc. ("LCI") and Comstar Network Services, Inc. ("Comstar"), both Florida
corporations, in June 1995 and Telecom Network, Inc. ("Telecom" or "TNI"),
a Delaware corporation, in July 1995. After the acquisition of Telecom,
the operations of Telecom, LCI and Comstar were combined. 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.
The amounts and types of consideration provided by the Company for each of
these acquisitions are described in Note 4 to the consolidated financial
statements included herein.
In May 1996, the Company gave notice to the former shareholders of CCI of
it's intent to rescind the purchase transaction. The rescission of the
Company's investment in CCI did not have a material affect on the
financial position or results of operations of the Company.
SCI and these subsidiaries are hereinafter collectively referred to as
the "Company."
<PAGE> 3
FINANCIAL INFORMATION
The Company's operations are classified into two industry segments:
healthcare cost management and cost 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.
First Half 1996. Net revenues, operating loss and identifiable assets
attributable to the Healthcare segment for the first half of 1996 ending
June 30 were, respectively, $709,863; $(1,649,732); and $18,561,826. Net
revenues, operating loss and identifiable assets attributable to the
Telecommunications segment for the first half of 1996 ending June 30 were,
respectively, $1,268,477; (670,052); and 2,173,860. Current liabilities
at June 30, 1996 were $6,755,998 (of which $1,619,750 represented related
party indebtedness) and current assets were $3,455,568.
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 management information software technology and benefit plan
data bases; and, for its HMT business in light of recent market acceptance
of its New PC based RETURN(R) for Managed Care software product. Mutual
of Omaha, New York Life, University of Michigan Hospital and John Hopkins
University have all signed contracts in the third quarter of 1996 for
HMT's new managed care software product. Chrysler and Ford have also
executed contract extensions for NSC's healthcare management products.
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.
At the time the Company acquired its various businesses, particularly NSC
and Telecom, it anticipated that such businesses would generate higher
revenues and operating income than those which have been achieved to date.
The principal reasons for the shortfall from original expectations are
higher than expected costs to fully complete the commercialization,
marketing and sale of NSC's healthcare management decision software
technology and delays in implementing NSC's strategic initiatives in
the areas of marketing, sales, operations and new product development,
principally due to constraints on the part of the Company to fund those
collective efforts. Similarly, the future development of new healthcare
management products and enhancements of existing products by HMT is
limited by constraints on the ability of the Company to fund those efforts
<PAGE> 4
FINANCIAL INFORMATION (CONTINUED)
With respect to the telecommunications segment, revenues and profits were
severely impacted by the failure of GE Capital Communications Services
Corporation ("GECCS") and News Enterprises Wholesale Services Limited
Partnership ("News", a wholly-owned subsidiary of GECCS) which, together,
supplied telecommunication products to Telecom for resale to residential
and business customers. The Company has spent over a year and has borne
the cost of a binding arbitration proceeding with GECCS and News as more
fully described herein. The actions of GECCS and News halted TNI's
marketing plans and the receipt of revenues due to TNI (pending resolution
of the arbitration). Constraints on the ability of the Company to fund
new business opportunities available to ATI, principally in Mexico, have
also contributed to the lower than expected performance of that business.
The Company has recently obtained a $250,000 financing commitment for
ATI's pay-per-view (PPV) equipment needs for the first phase of its
entrance into the Mexican hospitality market. ATI has executed contracts
with 10 resort properties for installation of its PPV product in Mexico.
The Company anticipates such properties to be in service in the fourth
quarter of 1996. While initial financing arrangements are in place,
additional financing will be required to fully implement the strategic
initiatives of ATI.
The Company currently believes that it will require approximately $4-6
million, including obligations associated with its various business
acquisitions, to further expand the commercialization and marketing
of NSC's healthcare information systems technology and further develop
and enhance HMT's PC based software products for managed care and
occupational health. Additionally, the Company will require financing,
over the amount arranged to date, to fully implement ATI's strategic
initiatives in Mexico and in other foreign countries. The present
financing source for ATI's initiatives in Mexico has indicated its
willingness to provide additional financing subject to initial operating
results achieved by ATI from its entry into Mexico. Presently, the
Company does not intend to utilize resources to fund the switchless long-
distance resale operations of Telecom and is pursuing other available
alternatives regarding that business. The Company, however, has been
successful in expanding the business base of Telecom's utility audit
division and currently expects to support those efforts.
The Company is pursuing numerous avenues to finance its businesses and is
currently in discussion with various institutional investors and lenders
and potential strategic alliance healthcare related business partners.
These discussions may result in financing to implement the strategic and
operational plans of the Company and its subsidiaries, but there is no
assurance that any financing commitments will be obtained (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations").
If the Company is unable to obtain additional financing, it may not be able
to carry-out its strategic and business objectives in which case the
viability of the company would be in doubt. In such event, the Company
would be required to divest assets or businesses or seek other alternatives
in order to maintain operations.
<PAGE> 5
FINANCIAL INFORMATION (CONTINUED)
The future success of the Company is dependent upon numerous factors,
the most significant of which are: (i) successful completion of its
healthcare information systems development efforts and the
commercialization and marketing of that technology to others; (ii) the
ability of the Company to successfully implement a marketing and
distribution system for its existing and new healthcare management
products; (iii) the ability of the Company to generate profitable
operations from its pay-per-view and telecommunications related
businesses; and (iv) 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.")
As discussed elsewhere herein, the Company is encouraged by the prospects
of its healthcare management subsidiaries and believes they will make the
Company profitable in the future if the Company can invest sufficient
funds in them. These funds are required to fully implement marketing,
operational and new product development plans, and to provide working
capital until such time as these subsidiaries generate adequate cash flows
from 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 there is no assurance that it will be able to do so,
in which case the acquired companies could seek to enforce such financing
commitments. In that event, it is uncertain whether or not the Company
would be able to fulfill such financing commitments in which case the
Company the would be required to seek other available alternatives.
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, 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 is
expected to be required to offer a right of rescission to Michigan purchasers
of its securities. 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 Michigan. As of June 30, 1996,
the Company estimates its maximum potential exposure as a result of the
proposed rescission offer in the State of Michigan to be approximately
$827,000, including interest of approximately $38,000. The number of
shares subject to rescission in the State of Michigan is approximately
242,000. The Company is seeking a change to the proposed Michigan order
which would postpone any required rescission until after the Michigan
purchases have been afforded an opportunity to resell their shares pursuant
to registration under the Securities Act of 1933. It is unlikely that the
Company would be able to complete a rescission offer in Michigan without
additional financing commitments.
<PAGE> 6
FINANCIAL INFORMATION (CONTINUED)
Purchasers of the Company's securities in other states may have rescission
rights in the event it is determined that the Company has failed to meet
the requirements of an exemption from registration or qualification in any
such state. At the date of this registration statement, the Company has
not completed its evaluation of compliance with exemptions in other states
In the event all purchasers are determined to have rescission rights, the
Company's total exposure would be $4 to $6 million, including Michigan
purchasers.
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 information 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 costs and
manage healthcare benefits. 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.
The revenues of NSC to date have been derived from the analysis of
healthcare claims that have previously been paid by large self-insured
customers such as Chrysler Corporation. NSC processes these claims using
its healthcare management decision software technology and data bases and
subcontracts part of the medical coding process to Health Management
Services ("HMS"). The agreement with HMS calls for a portion of revenues
derived by NSC, which typically range from 25% to 30% of recovered claims,
to be paid to HMS. HMS's portion of revenues derived by NSC typically
ranges from 50% - 60%. NSC contemplates that its software capabilities
will ultimately allow it to minimize or eliminate 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 outcomes. The goal is to
achieve a significant reduction in both the human and financial toll of
work place accidents.
The revenues of NSC from the date of acquisition to December 31, 1995 and
for the six months ended June 30, 1996 were $91,106 and $244,703,
respectively. The revenues of HMT for the period from the date of
acquisition to June 30, 1996 were $465,160.
<PAGE> 7
HEALTHCARE MANAGEMENT SERVICES (CONTINUED)
Both NSC and HMT have recently announced the release of new and enhanced
healthcare management products. Continuum(R), released by NSC, is a
product enhancement to its present medical analysis support and episodic
treatment system (the "Medical Support Analysis System"). The CONTINUUM(R)
enhancement builds a continuum of illness for each patient beginning with
the first illness-related diagnosis and continues until the illness is
cured or the patient expires. CONTINUUM(R) groups diagnosis and treatment
data on the patient by the seventeen categories of illnesses established
by the AMA.
The recently released RETURN(R) for Managed Care by HMT is closely related
to its RETURN(R) for Occupational Health. Both are upstream data
collection, documentation and analysis tools targeted to their specific
markets for the purpose of managing Workers' Compensation, Short and Long
Term Disability and other group health costs. RETURN(R) for Occupational
Health is PC software designed for employers and medical providers to
document employee health issues related to Workers' Compensation and
other medical claims, monitor health status in context with regulatory
requirements to analyze the data, all leading to identify and preventing
new injuries or illness, thereby creating cost savings for employers.
RETURN(R) for Managed Care is PC software for insurers, Third Party
administrators, HMO's and healthcare management companies who cut health
costs on behalf of employers by applying managed care methodologies to
cases in order to keep the cases on course while using the software to
guide decisions and document the process.
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. The joint research and
development agreement for the license of NCS's acquired software expires on
June 1, 1997 at which time the agreement can be extended, on an exclusive
basis, upon mutual consent of the parties. Unless the agreement is extended
by the mutual consent of the parties, the license to use the software
technology will convert to a non-exclusive, perpetual license.
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.
<PAGE> 8
HEALTHCARE MANAGEMENT SERVICES (CONTINUED)
On March 9, 1995, HMT entered into an 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. The agreement
with Medicode gives HMT the right to resell Medicodes' standard medical coding
which is used in connection with HMT's RETURN(R) products. This is a value-
added product addition to HMT's product line which enables HMT to provide
medical coding services to its customers along with its RETURN(R) products.
Medicode is not currently involved nor is it contemplated that Medicode will
become involved in the development of HMT's software technology.
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. The RETURN(R) software products sold by HMT were developed by HMT.
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 several states and 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.
<PAGE> 9
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.
As described above, NSC pays a portion of the revenues it receives from
customers to certain subcontractors in return for medical coding 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 have 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.
HMT's principal competitors include Line Case Management Services, Conway
Computer, IMA Technologies, Pyramid W/C Claims and Care Ware Systems, Inc.
Because RETURN(R) can be used across various industries, competition varies by
market segment. The Company believes its RETURN(R) products are superior to
those of its competitors as the RETURN(R) products offer systems that can
integrate data across the data and information continuum.
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
Telecom Network, Inc. ("Telecom") and Ameristar Telecommunications, Inc.
("ATI").
Telecom 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.
<PAGE> 10
TELECOMMUNICATIONS SERVICES (CONTINUED)
Telecom'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 audit firm (subcontractor) provides the manpower and
audit methodology to identify erroneous utility and telephone charges made to
TNI's customers by the service provider. Typically, the customer receives
50%-60% of recovered monies and TNI and the audit firm, each, receive 20% -
25% of recovered monies. 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, Telecom was awarded contracts to
perform audits on $185 million of utility billings. In the first half of 1996,
Telecom has been awarded contracts for approximately $130 million of utility
billings. 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.
The contracts awarded to TNI in 1995 and 1996 are in the performance stage and
have not yet generated any significant amounts of revenue. These contract
awards are expected to generate revenues as the audits are completed and
amounts are recovered from the service provider. The backlog, as discussed
above, is over $300 million in auditable amounts.
Telecom has also operated as a switchless reseller of long distance services.
As a reseller of long-distance telephone and other
telecommunications services, TNI contracts with other long distance companies
and providers of telecommunications services, including GECCS and News, in a
subcontract marketing capacity. TNI markets these products and services to
residential and small business customers via sales distribution relationships
in return for a percentage of the billed and collected revenues of its
customers. While Telcom has the ability to continue this business, its
revenues and operations have been severely and adversely affected by a dispute
with GECCS and News (See "Legal Proceedings" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations"). This dispute is
subject to an arbitration proceeding, based on the latest information
available to the Company, it expects the arbitration panel to render its
decision by the end of September 1996.
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.
<PAGE> 11
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, Telecom had 16 employees and ATI had 5 employees.
<PAGE> 12
Item 2. FINANCIAL INFORMATION.
SELECTED FINANCIAL DATA
Set forth below is selected financial data for the last three fiscal years and
the first half of 1996. In 1992 and 1991, the Company had no operations or
assets and was dormant.
<TABLE>
<CAPTION>
Six Months Year Ended December 31,
Ended ----------------------------------
June 30,
1996 1995 1994 1993
------ ------ ----- -----
<S> <C> <C> <C> <C>
Net Revenues: $ 1,978,340 $2,984,884 $807,669 996,118
Income (loss) from operations(3,854,124) (5,980,730) (126,581) 336,707
Net income(loss) (2,689,833) (5,808,025) (129,002) 338,909
Earnings (loss) per share (.34) (1.81) (.10) .41
Current Assets 3,455,568 4,156,868 442,069 492,216
Current Liabilities 6,755,995 5,417,864(1) 652,107 13,335
Total Assets 23,082,284 21,545,654 780,222 578,549
Long-term Liabilities(2) 3,398,892 1,326,022 77,750 553,750
</TABLE>
(1) Includes $1,619,750 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.
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 six months ended June 30,
1996 and 1995. The following discussion should be read in conjunction with
the Consolidated Financial Statements and notes thereto, appearing elsewhere
herein.
<PAGE> 13
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
---------------------------- --------------------
1995 1994 1993 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Revenues:
Healthcare 91,106 -- -- $709,863 --
Telecommunications 2,893,778 807,669 996,188 1,268,477 307,724
--------- ------- ------- --------- -------
2,984,884 807,669 996,188 1,978,340 307,724
Cost of healthcare revenues 45,553 -- -- 155,722 --
Cost of telecommunication
revenues 2,014,460 134,607 1,221 853,064 56,077
Selling and administrative
expenses 3,687,495 727,269 644,513 4,963,198 59,192
Goodwill write-down 2,758,779 -- -- -- --
Depreciation and amortization 459,327 72,374 13,747 660,480 33,110
Income (loss) from operations(5,980,730) (126,581) 336,707 (3,854,124) (372,655)
</TABLE>
<PAGE> 14
Results Of Operations (Continued)
As more fully discussed below and elsewhere herein, the operating results of
acquired businesses are well below those which were anticipated at the time of
the respective acquisitions. The business of TNI has been severely damaged by
GECCS and News; the revenues of NSC are less than those which were anticipated
at the time of the acquisition; and, NSC's costs to fully complete the
commercialization, marketing, and sale of its healthcare information system
software technology are higher than those originally expected. These factors,
combined, have strained the financial resources of the Company. For further
discussion of the impact of these events and uncertainties on future
operations and the Company's financial position, See "Liquidity and Capital
Resources".
Operations of Business Acquired
In 1995, the Company acquired various businesses, the most significant of
which were Telecom, acquired July 1995, and NSC, acquired October 1995; and,
in March 1996, the Company acquired HMT.
The net assets of Telecom, NSC and HMT, at historical cost, as of the
respective dates of their acquisition by the Company are summarized as
follows:
<TABLE>
Telecom NSC HMT
------ --- ---
<S> <C> <C> <C>
Current assets $ 1,701,519 $ 526,975 $ 360,230
Long-term assets 58,369 41,494 167,234
Total assets 1,759,888 568,469 527,464
Current liabilities 1,708,793 2,245,258 607,108
Long-term liabilities 6,301 2,902 0
Total liabilities 1,715,094 2,248,160 607,108
Stockholders' equity 44,794 (1,679,691) (79,644)
Total liabilities and
Stockholders equity 1,759,888 568,469 527,464
</TABLE>
The Company's consolidated operating results for the year ended December 31,
1995 and the six months ended June 31, 1996 include the results of operations
of businesses acquired from their respective dates of acquisition, as follows:
<PAGE> 15
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31,1995 June 30, 1996
--------------- --------------
<S> <C> <C>
Net revenues:
Healthcare $ 91,106 $ 709,863
Telecommunications 2,373,491 1,024,231
--------- ---------
2,464,597 1,734,094
Cost of healthcare revenues 45,553 155,722
Cost of telecommunication revenues 1,838,082 844,990
Selling and administrative expenses 978,310 2,439,286
Goodwill write-down . 2,758,779 --
Depreciation and amortization 330,352 534,638
Loss from operations .. 3,486,478 2,240,542
</TABLE>
<PAGE> 16
The net revenues and loss from operations of Telecom 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 $1,024,231 and $590,811, respectively, for the six months ended June
30,1996. Telecom'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 Telecom pursuant to a contractual agreement among Telecom, GECCS and
News, (ii) the cancellation of Telecom customers by GECCS and News, (iii) the
failure of GECCS/News to properly bill and collect revenues due to Telecom and
(iv) a diminution of Telecom'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 Telecom'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 Telecom, continues to
adversely affect Telecom'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 $244,703 and $1,525,234, respectively, for the six
months ended June 30, 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 June 30, 1996 were $465,160 and $124,498
respectively. The loss from operations principally reflects costs related to
the enhancement of existing products and development of new products.
NET REVENUES
The increase in net revenues from 1994 to 1995 and in the first half of 1996
versus 1995 includes the net revenues of businesses acquired ($2,464,597 for
the year ended December 31, 1995 and $1,734,094 for the six months ended June
30, 1996) and a reduction in pay telephone revenues due to management's
decision to target the OSP and PPV hospitality market, which reduction has not
been fully offset by the growth in PPV and OSP revenues. 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.
<PAGE> 17
COST OF HEALTHCARE REVENUES
The changes in the cost of healthcare revenues from period to period are the
result of acquisitions 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 Telecom and the
inclusion of the cost of long distance services provided to Telecom'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 half 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,
including costs incurred in connection with the arbitration proceeding with
GECCS/News. 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 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. Based on the latest information available to the Company,
it expects the arbitration panel to render its decision by the end of
September 1996.
<PAGE> 18
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased in 1995 over 1994 and in the first
half of 1996 versus 1995 principally due to the amortization of intangibles
and goodwill arising from business acquisitions and a higher investment in
furniture and equipment. 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 $164,166 in the first half of 1996. The increases from
period-to-period in interest expense are principally due to higher levels of
borrowings outstanding, principally from related parties, and interest accrued
on common stock subject to rescission.
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 half of 1996, the Company
recorded a deferred income tax benefit of $1,317,000 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 half of 1996 were cash used in operations of approximately $2.5
million (see the Consolidated Statements of Cash Flows),capital expenditures
of approximately $450,000, and debt repayments, of approximately $227,000.
The positive impacts on liquidity in the first half of 1996 were the proceeds
of approximately $1.8 million from the issuance of common stock and proceeds
from related party notes and debentures of approximately $550,000.
The Company anticipates that it will continue to consume cash in its business
operations until such time as it is able to arrange financing (i) to expand
the commercialization and marketing of NSC's healthcare information systems
technology, (ii) further develop and enhance HMT's PC based software products
for managed care and occupational health and (iii) fund the capital
requirements of its OSP and PPV business. As of June 30, 1996, the Company
and its subsidiaries have no material used or unused lines of credit.
<PAGE> 19
LIQUIDITY AND CAPITAL RESOURCES (CONITNUED)
The Company is pursuing numerous avenues to finance the its businesses and is
currently in discussion with various institutional investors and lenders and
potential strategic alliance healthcare related business partners, which may
result in financing commitments to fund the activities described above, but
there is no assurance that any of these discussions will result in a financing
commitment. The Company is also waiting on a decision regarding the
GECCS/News arbitration proceeding which if favorable would provide the Company
with additional short-term liquidity. A decision by the arbitration panel is
expected by the end of September 1996. The Company also contemplates a public
offering of its common stock.
The Company has recently obtained a $250,000 financing commitment for its PPV
equipment needs for the first phase of its entrance into the Mexican market.
While this financing is in place, additional financing will be required to
fully implement the strategic objectives of ATI.
The Company currently believes that it will require approximately $4-6
million, including the obligations described in the following paragraph, to(i)
further expand the commercialization and marketing of NSC's healthcare
information systems technology, (ii) further develop and enhance HMT's PC
based software products for managed care and occupational health and (iii)
continue to develop its PPV and OSP business in Mexico. Without additional
financing, it is unlikely that the Company would be able to achieve profitable
operations, in which case the viability of the Company as a going concern is
in doubt. In such event, the Company would be required to divest assets or
businesses or seek other alternatives in order to maintain 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 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 there is no assurance that the
Company will in fact be able to do so, in which case the acquired companies
could seek to enforce such financing commitments. In that event, it is
uncertain whether or not the Company would be able to fulfill such financing
commitments in which case the Company would be required to seek other
available alternatives.
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, 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 is expected to
be required to offer a right of rescission to Michigan purchasers of its
securities. 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 Michigan. As of June 30, 1996, the Company
estimates its maximum potential exposure as a result of the proposed
rescission offer in the State of Michigan to be approximately $827,000,
including interest of approximately $38,000. The number of shares subject to
rescission in the State of Michigan is approximately 242,000.
<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES (CONITNUED)
The Company is seeking a change to the proposed Michigan order which
would postpone any required rescission until after the Michigan purchasers
have been afforded an opportunity to resell their shares pursuant to
registration under the Securities Act of 1933. It is unlikely that the
Company would be able to complete a rescission offer in Michigan without
additional financing commitments.
Based on the foregoing factors, it is uncertain whether or not the Company
will be able to meet its short-term or long-term liquidity needs in the
absence of additional financing or a strategic alliance which would provide
the funds required to further commercialize and market NSC's healthcare
information software technology and HMT's product development and marketing
efforts. A favorable resolution of the GECCS/News arbitration, however, would
provide the Company with the ability to meet its immediate and short-term
liquidity needs. Such needs include amounts due trade and other creditors of
the Company and its subsidiaries, a substantial portion of which are currently
past due. As discussed above, the Company is currently seeking additional
financing from institutional investors and lenders and from strategic alliance
partners in the healthcare industry but, there is no assurance that such
financing will be obtained and, if obtained, whether or not such financing
will be sufficient to carry-out the objectives of the Company and its
subsidiaries and satisfy existing obligations or obligations arising from
rescission offers the Company may be required to make to previous purchases of
its common stock as more fully described above.
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.
<PAGE> 21
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
Telecom 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>
<PAGE> 22
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(3) 500,000 5.9
Edwin B. Salmon, Jr.(3) 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.
3 Each of Messr. 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. These
options are currently exercisible.
- -----------------------
Certain officers and directors also beneficially own shares of the Company's
Class A and Class B Preferred Stock as set forth on the following page which
are currently convertible into shares of the Company's common stock. Other
than the beneficial ownership disclosed herein, no such persons have the right
to acquire shares pursuant to options, warrants or convertible securities.
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.
<PAGE> 23
<TABLE>
<CAPTION>
Amount and Nature
Name of Beneficial Ownership Percent
- ----- ----------------------- -------
Class A Class B
------- -------
<S> <C> <C> <C>
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(1) 750,000 Class A 15.6 1.5
70,000 Class B
Mark Woodward(1) 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 5.1
Executive 1,595,000 Class B
Officers as a Group
(7 Persons)
</TABLE>
- --------------------
(1) Each of Messrs. Woodward and Armstrong hold convertible notes issued in
connection with the acquisition of ATI. Such notes are convertible, at the
election of the holders, into shares of the Company's common stock at the time
of a public offering at the public offering price.
<PAGE> 24
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 Positions With Co. and Subsidiaries Since
- -------------------- --- --------------------------- ------
<S> <C> <C> <C>
Robert L. Alexander 52 Chief Operating Officer of SCI 1995
Russell H. Armstrong 34 Director and CEO/Sales &Marketing of ATI 1994
Edwin B. Salmon, Jr. 58 Director & Executive Vice President of SCI 1991
Stephen E. Williams 55 Director, President & CEO 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 1996
</TABLE>
<PAGE> 25
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.(CONTINUED)
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.
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 Telecom 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.
<PAGE> 26
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.
<PAGE> 27
Item 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In connection with the 1994 ATI acquisition, $250,000. aggregate principal
amount of notes payable with interest at 6% 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
during 1995 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, with an estimated fair value of $236,000 in the aggregate, and warrants
for the purchase of 83,334 shares of the Company's Common Stock, with an
estimated fair value of $105,000 in the aggregate, exercisable at $1.50 per
share. The shares of Class B preferred stock were valued based on a 50%
discount from the average of the over-the-counter bid for the Company's common
stock for the ten days prior to the date of the extension agreement(s) and
considering the conversion features of the Class B preferred stock. The 50%
discount takes into account the restrictions on the Company's stock and
consideration of blockage. The warrants issued to Messrs. Armstrong and
Woodward were valued using the "Black - Scholes" option pricing model plus
consideration of blockage and the bids quoted for publicly - traded warrants
and their respective stock bids.
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.
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. Because Mr. Salmon is considered to be a
"shareholder/promoter" by virtue of his having a substantial beneficial
ownership in the Company and as the sole owner of LCI, the Company recorded
this acquisition at Mr. Salmon's cost basis which was diminimis.
<PAGE> 28
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. (CONTINUED)
In June 1995, the Company issued 200,000 shares of its common stock, with an
estimated fair value of $126,000, and 500,000 shares of its Class A preferred
stock, with an estimated fair value of $157,500, to Mr. Alexander in
consideration for the acquisition of Comstar. Prior to the acquisition of
Comstar, Mr. Alexander did not exercise any control or own any shares of
outstanding stock of the Company. The value of the stock issued to Mr.
Alexander was based upon a 50% discount from the average reported over-the-
counter bid of the Company's common stock for the ten days prior to the
acquisition date. The 50% discount takes into account the restrictions on the
common stock and blockage.
In July 1995, the Company acquired all of the outstanding stock of TNI in
exchange for 4,550,000 shares of Class B preferred stock, valued at
$2,496,000, $450,000 of 10% convertible debentures and $50,000 in cash. At
the time of the acquisition of TNI, Mr. David Olivet became a Director of the
Company. Mr. Olivet currently holds 1,455,000 shares of class B preferred
stock issued in connection with the acquisition. Such shares were valued
based on a 50% discount from the average of the over-the-counter bid of the
Company's common stock for the ten days prior to the date of the acquisition
of TNI and considering the conversion features of the Class B preferred stock.
The 50% discount takes into account the restrictions on the common stock and
blockage.
At the time of the acquisition of TNI, the Company entered into a five year
employment agreement with Mr. Olivet. The employment agreement provides for
an annual base salary of $90,000, plus bonuses based on the operating
performance of the Company. No performance bonuses have been earned or paid
as of the date of this registration statement.
<PAGE> 29
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
filed briefs in June and July 1996. Based on the latest information available
to the Company, it expects the arbitration panel to render its decision by the
end of September 1996.
The Company has been notified by the Michigan Department of Commerce,
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 is expected to be required to offer a right of
rescission to Michigan purchasers of its securities. 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
Michigan. As of June 30, 1996, the Company estimates its maximum potential
exposure as a result of the proposed rescission offer in the State of Michigan
to be approximately $827,000, including interest of approximately $38,000.
The number of shares subject to rescission in the State of Michigan is
approximately 242,000. The Company is seeking a change to the proposed
Michigan order which would postpone any required rescission until after the
Michigan purchasers have been afforded an opportunity to resell their shares
pursuant to registration under the Securities Act of 1933. It is unlikely
that the Company would be able to complete a rescission offer in Michigan
without additional financing commitments.
Purchasers of the Company's securities in other states may have rescission
rights in the event it is determined that the Company has failed to meet the
requirements of an exemption from registration or qualification in any such
state. At the date of this registration statement, the Company has not
completed its evaluation of compliance with exemptions in other states.
In the event all purchasers are determined to have rescission rights, the
Company's total exposure would be $4 to $6 million, including Michigan
purchasers.
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. This matter has been referred by court order to mandatory arbitration
in the State of Florida. As of this date, no arbitration proceedings have
been initiated by CCI.
<PAGE> 30
LEGAL PROCEEDINGS (CONTINUED)
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.
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
July 31, 1996 $ 10.625 $7.50
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.
<PAGE> 31
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS.(CONTINUED)
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. There are no restrictions on the declaration or
payment of cash dividends or any provisions which restrict cash dividends. The
payment by the Company of dividends in the future rests within the discretion
of the Company's 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.
As of June 30, 1996, the Company had 547 beneficial owners of its common
stock.
Item 10. RECENT SALES OF UNREGISTERED SECURITIES.
During the period from January 1, 1993 to June 30, 1996, the Registrant issued
4,800,000 shares of Class A Preferred Stock, 4,690,000 shares of Class B
Preferred Stock and 7,449,318 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 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 June 30, 1996, the Registrant issued
3,275,000 shares of Class A Preferred Stock, 2,622,937 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
2,011,401 shares of Common Stock for an aggregate cash consideration of
$6,040,376 from 298 accredited and 32 unaccredited investors, 2,849,844 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 207,552 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.
<PAGE> 32
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 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 t he
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 Telecom 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; Post Office Box 15696, Denver, Colorado 80201-1596
serves an the Company's transfer agent.
<PAGE> 33
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 as 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.
<PAGE> 34
Item 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Systems Communications, Inc.
<S> <C>
Independent Auditors' Report on the Consolidated Financial
Statements for the year ended
December 31,1995 36
Independent Auditors' Report on the Consolidated Financial
Statements for the years ended December 31, 1994
and 1993 37
Consolidated Balance Sheets as of December 31, 1995 and 1994
and June 30,1996 (unaudited) 38
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 1995 and six months
ended June 30, 1996 and 1995 (unaudited) 41
Consolidated Statements of Stockholders' Equity for each of
the three years ended in the period December 31, 1995 and
six months ended June 30, 1996 (unaudited) 42
Consolidated Statements of Cash Flows for each of the three
years ended in the period December 31, 1995 and six months
ended June 30, 1996 and 1995 (unaudited) 44
Notes to Consolidated Financial Statements 46
Pro Forma Consolidated Statements of Operations for the year
ended December 31, 1995 and six months ended
June 30, 1996 (unaudited) 68
NATIONAL SOLUTIONS CORPORATION
Independent Auditors' Report 72
Balance Sheets as of December 31, 1994 and 1993 73
Statements of Operations for the year ended
December 31, 1994 and for the period May 19, 1993
(inception) to December 31,1993 74
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 75
Statements of Cash Flows for the year ended December 31, 1994
and for the period May 19, 1993 (inception) to
December 31, 1993 76
Notes to Financial Statements 77
<PAGE> 35
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)
Balance sheet as of October 31, 1995 (unaudited) 82
Statement of Operations for the ten months ended
October 31, 1995 (unaudited) 83
Statement of Cash flows for the ten months ended
October 31, 1995 (unaudited) 84
Notes to the unaudited interim financial statements,
October 31, 1995 85
TELECOM NETWORK, INC.
Independent Auditors' Report 86
Balance Sheet as of December 31, 1994 87
Income Statement for the year ended December 31, 1994 88
Statement of Stockholders' Equity for the year ended
December 31,1994 89
Statement of Cash Flows for the year ended December 31, 1994 90
Notes to Financial Statements 91
Balance Sheet as of June 30, 1995 (unaudited) 95
Income Statement for the six months ended June 30, 1995
(unaudited) 96
Statement of Cash Flows for the six months ended June 30, 1995
(unaudited) 97
Notes to unaudited interim financial statements June 30, 1995
(unaudited) 98
</TABLE>
<PAGE> 36
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
Tampa, Florida
June 19, 1996
<PAGE> 37
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
<PAGE> 38
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------------- ---------
1995 1994 1996
---------- ---------- ---------
(UNAUDITED)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents .$ 964,714 $ 81,522 $ 107,810
Accounts receivable, less allowance for
doubtful accounts of $510,000 in 1995,
$-0- in 1994 and $562,362 in 1996 1,322,469 61,518 1,526,110
Notes receivable from officers and employees 52,000 -- 102,000
Equipment inventories 228,344 294,029 --------
Deferred expenses 481,897 -- 428,360
Deferred income taxes 608,277 -- 608,278
Other current assets 499,167 5,000 683,010
--------- ------- -------
Total current assets 4,156,868 442,069 3,455,568
--------- ------- ----------
Furniture and equipment 693,046 355,765 1,663,286
Less accumulated depreciation (220,524) (88,669) (377,116)
---------- -------- ----------
Net furniture and equipment 472,522 267,096 1,286,170
Deferred compensation 1,190,374 -- 1,099,517
Intangible assets, net of accumulated amortization of
$253,333 in 1995, $-0- in 1994 and $563,333 in 1996 12,296,667 -- 11,986,667
Excess of cost over fair value of net assets
acquired, net of accumulated amortization of
$38,638 in 1995, $-0- in 1994 and $211,898 in 1996 3,125,675 -- 4,894,165
Other noncurrent assets 303,548 71,057 360,197
------------- --------- -----------
$ 21,545,654 $ 780,222 $ 23,082,284
============= ========= ===========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 39
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------- ---------
1995 1994 1996
----------- ----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED)
<S> <C> <C> <C>
Current liabilities:
Borrowings under line of credit $ 45,151 $ 47,251 $ 126,250
Current portion of related party notes and debentures 1,579,395 567,450 1,619,750
10.75% demand note payable, secured by certain
accounts receivable 100,000 -- 100,000
Current portion of obligations under capital leases 29,328 2,250 328,071
Accounts payable 1,260,990 24,278 1,663,908
Accrued expenses and other current liabilities 187,334 10,878 481,059
Accrued compensation and employee benefits 1,358,947 -- 1,302,900
Deferred revenue 856,719 -- 1,134,060
---------- -- ---------
Total current liabilities 5,417,864 652,107 6,755,998
---------- --------- ----------
Long-term portion of related party notes and debentures 46,005 60,300 --
Long-term portion of obligations under capital leases 129,190 17,450 363,717
Deferred compensation 1,150,827 -- 1,080,526
Deferred income taxes 3,271,649 -- 1,954,649
Total liabilities 10,015,535 729,857 10,154,890
Common stock subject to rescission 789,624 -- 789,624
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 7,425,798 shares in 1995,
2,797,485 shares in 1994 and 8,275,083 shares in 1996. 7,426 2,798 8,276
</TABLE>
<PAGE> 40
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------ -----------
1995 1994 1996
----------- ----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED)
<S> <C> <C> <C>
Common stock to be issued 2,000,000 -- 2,000,000
Additional paid in capital 11,873,909 286,852 15,960,167
Accumulated deficit (6,047,310) (239,285) (8,737,143)
---------- -------- -----------
Total stockholders' equity 10,740,495 50,365 12,137,770
---------- --------- -----------
$21,545,654 $780,222 $23,082,284
========== ========= ===========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 41
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
---------------------------------- --------------------
1995 1994 1993 1996 1995
------- ------- ------ ------ -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues:
Healthcare $ 91,106 $ -- $ -- $ 709,863 $ --
Telecommunications 2,893,778 807,669 996,188 1,268,477 307,724
---------- --------- -------- ---------- --------
2,984,884 807,669 996,188 1,978,340 307,724
---------- --------- -------- ---------- --------
Costs and expenses:
Cost of healthcare revenues 45,553 -- -- 155,722 --
Cost of telecommunication revenues 2,014,460 134,607 1,221 853,064 56,077
Selling and administrative expenses 3,687,495 727,269 644,513 4,163,198 591,192
Goodwill write-down 2,758,779 -- -- -- --
Depreciation and amortization 459,327 72,374 13,747 660,480 33,110
----------- --------- -------- --------- -------
8,965,614 934,250 659,481 5,832,464 680,379
----------- --------- -------- ---------- -------
Income (loss) from operations (5,980,730) (126,581) 336,707 (3,854,124) (372,655)
Interest income 4,404 -- 2,202 11,457 463
Interest expense (84,110) (2,421) -- (164,166) (6,463)
Other income (expense), net (4,288) -- -- -- (200)
----------- -------- -------- --------- --------
Income (loss) before income taxes (6,064,724) (129,002) 338,909 (4,006,833) (378,855)
Income tax benefit (256,699) -- -- (1,317,000) --
----------- ------- -------- ----------- -------
Net income (loss) $(5,808,025) $(129,002) $338,909 $(2,689,833) $ (378,855)
=========== ========= ======== ============ =========
Earnings (loss) per share $ (1.81) $ (.10) $ .41 $ (.34) $ (.14)
=========== ========= ========= ========== =========
Weighted average number of
common shares outstanding 3,201,991 1,306,493 825,765 7,894,808 2,739,020
=========== ========== ========= ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 42
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS A CLASS B COMMON
PREFERRED PREFERRED 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
Issuance 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
Reclassification of common stock
subject to rescission -- -- -- -- (242,416) (242)
Net loss -- -- -- -- -- --
---------- ------- ------- ------- ------- -----
Balance at December 31, 1995 4,800,000 178,125 4,690,000 2,728,345 7,425,798 7,426
Issuance of common stock for cash -- -- -- -- 331,807 332
Issuance of stock as compensation -- -- -- -- 26,754 27
Issuance of common stock in connection
with business acquisitions -- -- -- -- 283,172 283
Issuance of stock for debt -- -- -- -- 207,552 208
Net loss -- -- -- -- -- --
--------- -------- -------- --------- ------- ------
Balance at June 30, 1996
(unaudited) $4,800,000 $178,125 $4,690,000 $2,728,345 $8,275,083 $ 8,276
========= ======= ========= ========== ========= =======
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 43
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
<TABLE>
<CAPTION>
Common Additional
Stock to Paid-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
Issuance 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
Reclassification of common stock
subject to rescission -- (789,382) -- (789,624)
Net loss -- -- (5,808,025) (5,808,025)
----------- ----------- ----------- -----------
Balance at December 31, 1995 2,000,000 11,873,909 (6,047,310) 10,740,495
Issuance of common stock for cash -- 1,825,797 -- 1,826,129
Issuance of stock as compensation -- 199,838 -- 199,865
Issuance of common stock in connection
with business acquisitions -- 1,861,824 -- 1,862,107
Issuance of stock for debt -- 198,799 -- 199,007
Net loss -- -- (2,689,833) (2,689,833)
---------- ----------- ---------- -----------
Balance at June 30, 1996 (unaudited) $2,000,000 $15,960,167 $(8,737,143) $ 12,137,770
=========== =========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 44
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
------------------------ ----------------
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 $(2,689,833) $(378,855)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operations:
Depreciation and amortization 459,327 72,374 13,747 660,480 32,516
Amortization of deferred
compensation, net 61,819 -- -- 90,857 20,670
Provision for bad debts 181,753 -- -- 52,362 --
Provision for inventory
obsolescence 145,776 -- -- -- --
Stock and warrants issued for compensation 757,748 -- -- 199,865 66,702
Deferred income taxes (256,699) -- -- (1,317,000) --
Goodwill write-down 2,758,779 -- -- -- --
Deferred revenue 5,937 -- -- 49,896 --
Increase (decrease) in cash from
changes in operating assets
and liabilities:
Accounts receivable 317,161 13,908 (7,405) (39,376) (72,005)
Equipment inventories (80,091) 39,690 (333,719) 73,211 (47,266)
Deferred expenses (56,505) -- -- 70,337 --
Other current assets (42,702) (5,000) -- (111,338) (13,126)
Accounts payable (430,448) 12,247 4,974 333,439 3,423
Accrued expenses 84,297 9,574 (4,190) 143,988 36,848
Accrued compensation 140,651 -- -- 94,538 --
Deferred compensation -- -- -- (70,301) --
----------- --------- -------- ----------- --------
Net cash (used in) provided by operating
activities (1,761,222) 13,791 12,316 (2,458,875) (351,093)
----------- --------- -------- ----------- --------
Cash flows from investing activities:
Acquisition of businesses, net of
cash acquired (1,428,312) -- -- (46,817) (100,000)
Expenditures for furniture and equipment (131,744) (245,514) (91,002) (448,509) --
Loan to officer (52,000) -- -- (50,000) --
Acquisition of other assets (64,852) -- -- -- --
----------- --------- -------- ----------- -------
<PAGE> 45
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
------------------------ ----------------
1995 1994 1993 1996 1995
------- ------- ------- ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
(CONTINUED)
Net cash used in investing activities (1,676,908) (245,514) (91,002) (545,326) (100,000)
----------- --------- -------- ----------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 4,110,887 103,360 -- 1,826,129 123,600
Proceeds from notes payable 475,349 180,195 -- 547,857 297,895
Payments on notes payable and capital leases (262,814) (1,000) -- (218,205) (36,632)
Payments on borrowings under line of credit (2,100) -- -- (8,484) --
Stockholder contributions, net -- -- 120,921 -- --
Stockholder distributions, net -- (52,381) -- -- --
--------- --------- -------- ----------- --------
Net cash provided by financing
activities 4,321,322 230,174 120,921 2,147,297 384,863
----------- --------- -------- ----------- --------
Net increase (decrease) in cash 883,192 (1,549) 42,235 (856,904) (66,230)
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 $ 107,810 $ 15,292
=========== ========= ======== =========== ========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 46
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Company
identified ATI as the accounting acquirer and accounted for the
transaction as a purchase business combination.
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 Telecom 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 information
and decision software technology acquired from the U.S. Government
pursuant to the Federal Technology Transfer Act of 1986, as amended, and
<PAGE> 47
FORMATION OF THE COMPANY AND DESCRIPTION OF BUSINESS (CONTINUED)
(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.
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
inter-company 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).
<PAGE> 48
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 5 to 20 years.
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 shares outstanding during each period. Shares
issuable upon conversion of the Company's convertible preferred stock,
from exercise of outstanding stock purchase warrants and subject to
rescission 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
consolidated statements of cash flows are presented net of the assets and
liabilities acquired in connection with business combinations.
<PAGE> 49
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 June 30, 1996 and the
unaudited consolidated statements of operations, stockholders' equity
and cash flows for the six months ended June 30, 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 six months ended June 30, 1996 are not necessarily
indicative of the results for the full fiscal year.
<PAGE> 50
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 Company is required to make a stock purchase rescission offer to
purchasers of its common stock in Michigan. The Company has estimated its
exposure to be approximately $789,000 which is included in "Common Stock
subject to rescission" in the accompanying consolidated balance sheet.
It is unclear if the Company will be required to make similar stock
purchase rescission offers in other states. (See Note 14) The Company
is encouraged by the prospects of its healthcare management subsidiaries
and believes they will make the Company profitable in the future if the
Company can invest sufficient funds in them. These funds are required
to fully implement marketing plans, operational and new product
development plans, and to provide working capital until such time as the
Company generates adequate cash flows from operations.
The Company is in discussions with various institutional investors and
lenders and potential strategic alliance partners. These discussions may
result in financing commitments but, there is no assurance that such
commitments will materialize. The Company is also waiting on a decision
regarding the GECCS/News arbitration proceeding (See Note 14) which, if
favorable, would provide the Company with liquidity for the short-term.
The Company also contemplates a public offering of its common stock
subsequent to completion of any rescission offers that may be appropriate.
Based on the foregoing factors it is uncertain whether or not the Company
can generate adequate cash flows from operations, or from financing
transactions to meet its obligations as they become due. In that event,
the Company would be required to divest assets or businesses or seek other
alternatives to maintain its operations.
<PAGE> 51
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. The Company identified ATI as the
accounting acquirer and accounted for the transaction as a purchase
business combination.
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. The cost basis of the
promoter/shareholder was diminimis.
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. The total purchase price was $283,500.
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. The excess of the purchase price over the fair
value of net assets acquired ($273,250) was allocated to goodwill and
is being amortized over 5 years.
<PAGE> 52
ACQUISITIONS (CONTINUED)
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 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. The total purchase price for TNI was $3,138,450. The excess of
the purchase price over the fair value of the net assets acquired was
$2,758,779. This amount was written off, with no associated tax benefit,
as more fully described in Note 5.
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 dollar amount of the shares to be issued($2,000,000)
is shown as common stock to be issued in the accompanying consolidated
financial statements. The number of additional shares to be issued is to be
determined at the date of issuance based upon a formula and upon issuance
will be valued at $2,000,000 in the aggregate. The formula to determine
the number of additional shares to be issued 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 total purchase price
for NSC was $10.5 million, including the $2,000,000 in additional shares to be
issued in November 1996 pursuant to the acquisition agreement. The excess of
the purchase price over the fair value of the net assets acquired ($2,891,063)
is being amortized over 20 years. The net assets acquired include $12,400,000
for healthcare management decision software technology that is being amortized
over 20 years.
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.
<PAGE> 53
ACQUISITIONS (CONTINUED)
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 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.
<PAGE> 54
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 --
<PAGE> 55
RELATED PARTY NOTES AND DEBENTURES (CONTINUED)
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>
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 ATI 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>
<PAGE> 56
NOTE 8 BORROWINGS UNDER LINE OF CREDIT
The Company, through two of its subsidiaries, has lines of credit which
were fully utilized at December 31, 1995 and June 30, 1996.
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.
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>
<PAGE> 57
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 gross deferred tax
assets, the Company reversed the valuation allowance (approximately $980,000
as of October 31, 1995). Because this occurred as part of a business
combination rather than through operations, the adjustment is recorded as a
reduction in goodwill associated with the NSC acquisition rather than as an
adjustment to operations.
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 carry forwards 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>
<PAGE> 58
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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:
<PAGE> 59
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<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>
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:
<PAGE> 60
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<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>
<PAGE> 61
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<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 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, there is no assurance that it will be able to do so, in which
case the acquired companies could seek to enforce such financing commitments.
In that event it is uncertain whether or not the Company would be able to
fulfill such financing commitments in which case the Company would be required
to seek other available alternatives.
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 by the
end of September 1996.
<PAGE> 62
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company has been notified by the Michigan Department of Commerce,
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 is expected to be required to offer a right of
rescission to Michigan purchasers of its securities. 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
Michigan. As of June 30, 1996, the Company estimates its maximum potential
exposure as a result of the proposed rescission offer in the State of Michigan
to be approximately $827,000, including interest of approximately $38,000.
The number of shares subject to rescission in the State of Michigan is
approximately 242,000. The Company is seeking a change to the proposed
Michigan order which would postpone any required rescission until after the
Michigan purchases have been afforded an opportunity to resell their shares
pursuant to registration under the Securities Act of 1933. As discussed
above, it is unlikely that the Company would be able to complete a rescission
offer in Michigan without additional financing commitments.
Purchasers of the Company's securities in other states may have rescission
rights in the event it is determined that the Company has failed to meet the
requirements of an exemption from registration or qualification in any such
state. At the date of this registration statement, the Company has not
completed its evaluation of compliance with exemptions in other states. In
the event all purchasers are determined to have rescission rights, the
Company's total exposure would be $4 to $6 million, including Michigan
purchasers.
The shares subject to rescission offer in the State of Michigan are classified
in the accompanying balance sheets as "Common Stock Subject to Rescission."
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:
<PAGE> 63
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- -----------------
1995 1994 1993 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net revenues from unaffiliated customers:
Healthcare $ 91,106 $ -- $ -- $ 709,863 $ --
Telecommunications 2,893,778 807,669 996,188 1,268,477 307,724
----------- ---------- ---------- ----------- --------
2,984,884 807,669 996,188 1,978,340 307,724
=========== ========== ========== =========== ========
Income (loss) from operations:
Healthcare (363,857) -- -- (1,649,732) --
Telecommunications (3,690,064) 59,554 336,707 (670,052) (136,207)
Corporate expenses (1,922,104) (78,233) -- (1,516,399) (222,876)
Elimination's (4,705) (107,902) -- (17,941) (13,572)
----------- ---------- ---------- ----------- --------
(5,980,730) (126,581) 336,707 (3,854,124) (372,655)
Interest income 4,404 -- 2,202 11,457 463
Interest expense (84,110) (2,421) -- (164,166) (6,463)
Other income (expense) (4,288) -- -- -- (200)
----------- ---------- ---------- ----------- --------
Income (loss) before income taxes (6,064,724) (129,002) 338,909 (4,006,833) (378,855)
=========== ========== ========== =========== ========
Depreciation and amortization expense:
Healthcare 104,669 -- -- 480,394 --
Telecommunications 371,005 103,482 13,747 151,199 41,738
Corporate 18,548 -- -- 10,945 --
Elimination's (34,895) (31,108) -- 17,942 (8,628)
----------- ---------- ---------- ---------- --------
459,327 72,374 13,747 660,480 33,110
=========== ========== ========== =========== ========
Capital Expenditures:
Healthcare 41,999 -- -- 1,044,722 --
Telecommunications 227,436 408,938 91,002 183,298 198,387
Corporate 86,779 -- -- 29,693 --
Elimination's (18,933) (155,544) -- (287,474) (32,641)
----------- --------- ---------- ----------- --------
$ 337,281$ 253,394 $ 91,002 $ 970,239 $165,746
=========== ========== ========== =========== ========
</TABLE>
<PAGE> 64
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------ --------------------
1995 1994 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Identifiable Assets:
Healthcare $15,575,741 $ -- $18,561,826 $ --
Telecommunications 2,709,226 812,299 2,173,860 2,259,329
Corporate 3,373,297 75,825 2,441,757 193,949
Elimination's (112,610) (107,902) (95,159) (114,394)
----------- --------- ----------- ---------
$21,545,654 $ 780,222 $23,082,284 $2,338,884
=========== ========= =========== ==========
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.
<PAGE> 65
NOTE 16 STATEMENTS OF CASH FLOWS SUPPLEMENTAL INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ ----------------
1995 1994 1993 1996 1995
------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Non-cash transactions:
Equipment capital leases $ 112,308 $7,880 $ -- $701,475 $ 116,084
========== ====== ====== ======== ==========
Common stock issued for
compensation 451,773 -- -- 199,865 35,031
========== ====== ====== ======== ==========
Stock and warrants issued in
consideration for extension of
related party indebtedness 341,600 -- -- -- --
========== ====== ====== ======== ==========
Employment agreements 1,609,775 -- -- -- 1,110,923
========== ====== ====== ======== ==========
Notes payable issued in
connection with
business acquisitions 700,000 -- -- -- --
========== ====== ====== ======== ==========
Issuance of Stock for debt -- -- -- 199,007 --
========== ====== ====== ======== ==========
Cash paid during the period for:
Interest 23,055 2,421 -- -- 11,527
========== ====== ====== ======== ==========
Income taxes $ -- $ -- $ -- $ -- $ --
========== ====== ====== ======== ==========
</TABLE>
<PAGE> 66
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.
The following unaudited pro forma summary operating results for the six months
ended June 30, 1996, includes the results of operations of companies acquired
in 1995 for all six 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 six months ended June 30, 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>
SIX MONTHS ENDED
-------------------------------
JUNE 30,
-------------------------------
1996 1995
--------- ---------
<S> <C> <C>
Net revenues $ 2,181,412 $ 3,382,834
----------- ---------
Net loss (2,721,967) (1,181,899)
----------- ---------
Net loss per share $ (.34) $ (.23)
----------- ---------
</TABLE>
<PAGE> 67
NOTE 17 EVENTS SUBSEQUENT TO DECEMBER 31, 1995 (CONTINUED)
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 of CCI are included in the accompanying consolidated financial
statements through May 1996. The assets and liabilities of CCI were removed
from the Company's balance sheet in May 1996 with no material effect on
operations. 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
========
<PAGE> 68
SYSTEMS COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
AND SIX MONTHS ENDED JUNE 30, 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 six months ended
June 30, 1996 includes the historical effects of NSC and Telcom for all six
months and HMT for four months 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 diminimus.
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.
<PAGE> 69
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 amortization 459,327 3,176 5,009 44,006 516,667(4)
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
<PAGE> 70
SYSTEMS COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
HISTORICAL
------------------------------ PRO FORMA PRO FORMA
CONSOLIDATED(8) HMT(9) ADJUSTMENTS TOTALS
--------------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues:
Healthcare $ 709,863 $203,072 $ -- $ 912,935
Telecommunications 1,268,477 -- -- 1,268,477
----------- -------- --------- -----------
$ 1,978,340 $203,072 -- $ 2,181,412
----------- -------- --------- -----------
Costs and expenses:
Cost of healthcare revenues 155,722 -- -- 155,722
Cost of telecommunication revenues 853,064 -- -- 853,064
Selling and administrative expenses 4,163,198 213,991 -- 4,377,189
Depreciation and amortization 660,480 11,293 17,330(5) 689,103
----------- -------- --------- -----------
5,832,464 225,284 17,330 6,075,078
----------- -------- --------- -----------
Loss from operations (3,854,124) (22,212) (17,330) (3,893,666)
Interest income 11,457 -- -- 11,457
Interest expense (164,166) (1,666) -- (165,832)
----------- -------- --------- -----------
Loss before income taxes (4,006,833) (23,878) (17,330) (4,048,041)
Income tax benefit (1,317,000) -- (9,074)(10) (1,326,074)
----------- -------- --------- ----------
Net loss $(2,689,833) $(23,878) (8,256) $(2,721,967)
=========== ======== ========= ===========
Loss per share (.34) (.34)
=========== ===========
Weighted average number of common shares
outstanding 7,894,808 8,116,120(7)
=========== ===========
</TABLE>
See Accompanying Notes
<PAGE> 71
SYSTEMS COMMUNICATIONS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995 AND
SIX MONTHS ENDED JUNE 30, 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 six months ended
June 30, 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 six months ended June 30, 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 June 30, 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 period prior to its acquisition by the Company.
<PAGE> 72
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
<PAGE> 73
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 $(549,388) (90,832)
-------- --------
Total shareholders' equity (deficit) (548,810) (90,254)
-------- --------
Total Liabilities & Shareholders' Equity (Deficit) $782,804 $ 27,075
======== ========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
<PAGE> 74
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.
<PAGE> 75
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.
<PAGE> 76
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.
<PAGE> 77
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.
<PAGE> 78
NATIONAL SOLUTIONS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1993
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.
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.
<PAGE> 79
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.
<PAGE> 80
NATIONAL SOLUTIONS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1993
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.
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.
<PAGE> 81
NATIONAL SOLUTIONS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1993
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>
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.
<PAGE> 82
NATIONAL SOLUTIONS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
AS OF OCTOBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current Assets
Cash $ 10,193
Prepaid expenses 16,249
Advances to sub-contractor 75,141
Deferred Expense 425,392
-------
Total current assets 526,975
Furniture and equipment, net 21,551
Deposits 19,943
-------
Total Assets 568,469
========
LIABILITIES AND SHAREHOLDERS' EQUITY(DEFICIT)
Current Liabilities
Accounts payable 132,706
Accrued payroll, related taxes and withholdings 759,348
Lease payable, current portion 2,422
Advances from customer 850,782
Notes Payable 500,000
-------
Total current liabilities 2,245,258
Lease payable - non-current portion 2,902
-------
Total liabilities 2,248,160
---------
Shareholders' Equity (Deficit)
Common stock, no par value, 50,000,000
shares authorized, 5,782,900 shares issued
and outstanding 578
Deficit accumulated during the development stage (1,680,269)
----------
Total shareholders' equity (deficit) (1,679,691)
----------
Total Liabilities and Shareholders' Equity (Deficit) $ 568,469
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 83
NATIONAL SOLUTIONS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
For the ten Months Ended, October 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
Revenue $ 979,122
<S> <C>
Expenses
Computer Services 489,561
Professional Services 188,110
Salaries, related taxes and benefits 1,234,842
Office 124,278
Travel 73,212
---------
Total expenses 2,110,003
---------
Net Loss $ (1,130,881)
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 84
NATIONAL SOLUTIONS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
For the Ten Months ended, October 31, 1995
Cash flows from operating activities:
Net Loss $ (1,130,881)
Adjustments to reconcile net loss to net cash
used in operations:
Depreciation 1,971
Increase (decrease) in cash from changes
in operating assets and liabilities.
Accounts receivable (75,141)
Deferred expenses (425,392)
Other assets 688,475
Accounts payable 60,112
Accrued expenses 3,003
Accrued compensation 716,912
Other assets (363,481)
---------
Net cash used in operating activities (524,422)
---------
Cash flows from investing activities:
Expenditures for furniture and equipment (6,802)
---------
Cash used in investing activities (6,802)
---------
Cash flows from financing activities:
Proceeds from issuance of notes payable 500,000
--------
Cash provided by financing activities 500,000
--------
Net Decrease in cash (31,224)
Cash and cash equivalents at beginning of the period 41,417
--------
Cash and cash equivalents at end of the period $ 10,193
=========
The accompanying notes are an integral part of the financial statements.
<PAGE> 85
NATIONAL SOLUTIONS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
OCTOBER 31, 1995
NOTE 1 -The unaudited balance sheet at October 31, 1995 and the
unaudited statements of operations and cash flows for the ten
months ended October 31, 1995 have been prepared in accordance with generally
accepted accounting principals for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principals 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 ten months ended October 31, 1995 are
not necessarily indicative of the results for the full fiscal year.
NOTE 2 - Effective October 27, 1995, Systems Communications, Inc. ("SCI")
acquired all of the outstanding stock of the Company. In connection with the
acquisition, the stockholders of the Company received a combination of cash,
SCI Common Stock and notes plus additional shares to be issued in the future
based on certain performance measures. SCI also advanced approximately
$300,000 for working capital.
<PAGE> 86
[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
Tampa, Florida
<PAGE> 87
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.
<PAGE> 88
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.
<PAGE> 89
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.
<PAGE> 90
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.
<PAGE> 91
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 revenues in the period in which the service is
provided. Revenues related to the Company's telecommunication and
utility auditing services are recognized upon approval by the service
provider of the reimbursable amount.
<PAGE> 92
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>
<PAGE> 93
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.
<PAGE> 94
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.
<PAGE> 95
TELECOM NETWORK, INC.
BALANCE SHEET
AS OF JUNE 30, 1995
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current Assets
Cash $ 16,795
Accounts receivable, net of allowance for 1,684,724
doubtful accounts of $ 328,057 ---------
Total current assets 1,701,519
Property and equipment, net of accumulated
depreciation of $5,537 56,894
Other assets 1,475
---------
Total Assets 1,759,888
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities 1,608,793
Accounts Payable 100,000
Notes Payable -------
Total Current Liabilities 1,708,793
Other Liabilities 6,301
-------
Total Liabilities 1,715,094
-------
Shareholders' Equity
Common stock, (No par value, 1,500 shares authorized,
and no shares outstanding) --
Redeemable, convertible preferred stock 450,000
Retained Deficit <405,206>
-------
Total shareholders' equity 44,794
--------
Total Liabilities and Shareholders' Equity $ 1,759,888
==========
</TABLE> Read accompanying notes.
<PAGE> 96
TELECOM NETWORK, INC.
Income Statement
For the Six months ended,
June 30, 1995
<TABLE>
<S> <C>
SALES REVENUE:
NET SALES $ 2,668,626
COST OF SALES 2,274,860
---------
GROSS PROFIT 393,766
OPERATING EXPENSES:
Selling 10,268
General and Administrative 554,318
Depreciation 5,009
---------
Total Operating Expenses 569,595
---------
Loss From Operations (175,829)
--------
Other income (expense) 1,114
--------
Net Loss $ (174,715)
=========
Read accompanying notes.
</TABLE>
<PAGE> 97
TELECOM NETWORK, INC.
Statement of Cash Flows
For the Six months ended,
June 30, 1995
<TABLE>
<S>
CASH FLOWS FROM OPERATING ACTIVITIES: <C>
Net Loss $ (174,715)
Adjustments to reconcile net income to net cash
used in operating activities:
Deferred Income Tax
Depreciation 5,009
(Increase) Decrease in:
Accounts Receivable, net (1,035,590)
Other Assets (975)
(Increase) Decrease in:
Due to other officers (5,001)
Accounts Payable 950,325
-------
Net cash used in operating activities (260,947)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (54,816)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash from issuance of preferred stock 122,500
Cash from issuance of notes 100,000
-------
Net cash provided by investing and financing activities 167,684
-------
Net decrease in cash (93,263)
Cash and cash equivalents at beginning of year 110,058
-------
Cash and cash equivalents at the end of the year $ 16,795
========
</TABLE> Read accompanying notes.
</R
<PAGE> 98
TELECOM NETWORK, INC.
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
JUNE 30, 1995
NOTE 1 - The unaudited balance sheet at June 30, 1995 and the
unaudited statements of operations and cash flows for the six
months ended June 30, 1995 have been prepared in accordance with generally
accepted accounting principals for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principals 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 six months ended June 30, 1995 are
not necessarily indicative of the results for the full fiscal year.
NOTE 2 - In connection with and as a result of the acquisition of the Company
by Systems Communications, Inc., Systems Communications, Inc. has advanced
$100,000 to the Company for working capital. These advances are included in
notes payable in the accompanying balance sheet.
<PAGE> 99
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.
<PAGE> 100
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)
6. Telcom Restated Stock Purchase Agreement (June 16, 1995)
7. Employment Contracts
(a) Robert L. Alexander
(b) Russell H. Armstrong
(c) Edwin B. Salmon
<PAGE> 101
FINANCIAL STATEMENTS AND EXHIBITS. (CONTINUED)
(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. Authorized sales agent agreement between MCI
Telecommunications Corporation and Ameristar, dated June 12, 1995
17. Zero Plus-Zero Minus billing and information management
agreement between Zero Plus Dialing, Inc. and Ameristar,
dated May 16, 1996
18. Telecommunications Agreement between U.S. Long Distance,
Inc. and Ameristar
19. Tri-Party Agreement among Ameristar, U.S. Long Distance,
Inc. and Zero Plus Dialing, Inc.
20. Telephone Agreement between Ameristar and U.S. Long
Distance, Inc., dated July 10, 1996
21. License Agreement between Ameristar and VCA Pictures,dated
February 13, 1996
22. Agreement between Ameristar and United International
Pictures, dated April 1, 1996
23. Marketing Agreement, dated October 2, 1995, between
Ameristar and U.S. Osiris Corporation
24. Operator Service Agreement dated April 15, 1995, between
Opticom and Ameristar
25. Mitel OSS Servicing Agreement, dated September 1, 1993
between MasterCorp, Inc. and Ameristar
26. Telecommunications Agreement, dated January 15, 1996
<PAGE> 102
FINANCIAL STATEMENTS AND EXHIBITS. (CONTINUED)
between Long Distance Exchange Corp. and Ameristar
27. Agreement, dated January 1995, between LDOS
Communications, Inc. and Ameristar
28. Agreement, dated February 28, 1994, between L.D.
Communications, Inc. and Ameristar
29. Contract Operator Services Agreement for Public Pay Phones
and Letters of Agency, dated January 7, 1992, between Fone
America, Inc. and Ameristar
30. Payphone Aggregator Agreement, dated July 22, 1993,
between Communication TeleSystems International and
Ameristar
31. Operator Service Agreements between Capital Network
System, Inc. and Ameristar
32. Agreements between Ameristar Network Exchange, Inc. and
Ameristar
33. Agreement dated November 11, 1991 between Ameristar and
Access Telecommunications, Inc.
34. Agreement dated September 16, 1991 between Conquest
Operator Services Corporation and Ameristar
(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 (Six months ended June 30, 1996)
* Documents previously filed
<PAGE> 104
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: November 12,1996
By /s/ EDWIN B. SALMON, JR. 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
By /s/ DAVID OLIVET By /s/ STEPHEN E. WILLIAMS
---------------------------- ---------------------------------
DAVID OLIVET STEPHEN E. WILLIAMS
Director Director
By /s/ RUSSELL H. ARMSTRONG By /s/ MARK WOODWARD
---------------------------- ---------------------------------
RUSSELL H. ARMSTRONG MARK WOODWARD
Director Director
By /s/ EDWIN B. SALMON, JR.
----------------------------
EDWIN B. SALMON, JR.
Director
