As filed with Securities and Exchange Commission on July 17, 1998.
Registration No. ___________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
Under the Securities Act of 1933
SYSTEMS COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
FLORIDA
(State or other jurisdiction of incorporation or organization)
65-0036344
(Taxpayer Identification No.)
8741
(Primary Standard Industrial Classification Code Number)
Suite 107, 4707 140th Avenue, North, Clearwater, Florida 33762, (727) 530-4800
(Address including zip code, telephone number, including area code, of
registrant's principal executive offices)
Edwin B. Salmon, Jr., Chairman, Suite 107, 4707 140th Avenue, North,
Clearwater, Florida 33762, Telephone: (727) 530-4800 FAX: (727) 530-4707
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copy to:
Jackson L. Morris, Esq.
3116 West North A Street
Tampa, Florida 33609
Telephone: (813) 874-8854 FAX: (813) 873-9628
CALCULATION OF REGISTRATION FEE:
<TABLE>
Title of each class Proposed maximum Proposed maximum Amount of
of securities Amount to be offering price per aggregate offering the registration
to be registered registered share or unit (1) price fee
- ------------------- ------------- ------------------ ------------------ ----------------
<S> <C> <C> <C> <C>
Common Stock 12,434,053 (2) $ 0.1025 $ 1,274,490 $440
Common Stock 9,572,914 (3) 0.1992 1,906,666 657
Common Stock 1,968,585 (4) 0.1417 278,998 96
Common Stock 900,000 (5) 0.1025 92,250 32
</TABLE>
(1) Estimated solely for purposes of calculating the registration
fee based upon the average bid quotation of the Company's common
stock on the date preceding the date hereof, except as to
warrants, options and debentures as described in (3) and (4)
below.
(2)Registered for sale by selling security holders.
(3)Registered for sale upon exercise of outstanding common stock
purchase warrants and options and upon exercise of warrants and
options to be issued in connection with the conversion of
convertible debentures. Per share price is based on the exercise
prices of the warrants and options.
(4)Registered for sale upon conversion of outstanding convertible
notes and debentures. The registrant hereby registers such
additional and undetermined number of shares as may be required
for issue to cover interest accrued from the date hereof to the
date(s) of conversion and such additional and undetermined number
of Shares as may be required for changes in the Company's stock
price.
(5)Registered for issue in payment of consulting fees.
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this
Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415
under the Securities Act of 1933 check the following box. [ X ]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list
the Securities Act registration statement number and the earlier
effective registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. [ ]
The registrant hereby amends this registration statement on such
date or dates as may be necessary to delay its effective date
until the registrant shall file a further amendment which
specifically states that this registration statement shall
thereafter become effective in accordance with Section 8 of the
Securities Act of 1933 or until the registration statement shall
become effective on such date as the Commission, acting pursuant
to Section 8(a), may determine.
CROSS-REFERENCE SHEET
The following table sets forth the location in the prospectus of
the information required to be included therein by Part I of Form
S-1.
<TABLE>
<S> <C>
Item of Form S-1 Location in the Prospectus
Item 1. Forepart of the registration statement and outside front
cover page
Item 2. Inside front cover and outside back cover of prospectus
Item 3. Summary information and risk factors
Item 4. Use of proceeds - Use of Proceeds
Item 5. Determination of offering price -Description of Securities
to be Registered
Item 6. Dilution - Not applicable
Item 7. Selling security holders - Selling Security Holders
Item 8. Plan of distribution - Plan of Distribution; Selling
Security Holders
Item 9. Description of securities to be registered - Description
of Securities to be Registered
Item 10. Interest of named experts and counsel - Legal Matters
and Interest of Counsel; Experts
Item 11. Information with respect to the registrant - The Company;
Capitalization; Selected Financial Data; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Business; Management; Certain
Transactions with Management and Others
Item 12. Disclosure of Commission position on indemnification for
Securities Act liabilities - Management
</TABLE>
<PAGE> 1
<LEGEND PRINTED IN RED ON PRELIMINARY PROSPECTUS>
Information contained herein is subject to completion or
amendment. A registration statement relating to these securities
has been filed with the Securities and Exchange Commission.
These securities may not be sold nor may offers to buy be
accepted prior to the time the registration becomes effective.
The prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of
these securities in any State in which such offer, solicitation
or sale would be unlawful prior to registration or qualification
under the securities laws of any such State.
PRELIMINARY PROSPECTUS DATED July 17, 1998. SUBJECT TO COMPLETION
SYSTEMS COMMUNICATIONS, INC.
COMMON STOCK, $.001 PAR VALUE PER SHARE
12,434,053 SHARES OFFERED BY SELLING SECURITY HOLDERS
12,441,499 SHARES OFFERED BY THE COMPANY
12,434,053 shares of the Common Stock covered by this Prospectus
are being offered by selling security holders ("Selling Security
Holders") for their own account in open market or block
transactions. Selling Security Holders may sell shares to or
through broker-dealers and the broker-dealers' compensation may
be in the form of discounts, concessions or commissions from the
Selling Stockholders and commissions from or mark ups charged to
purchasers. The Selling Stockholders and participating broker-
dealers may be deemed to be "underwriters" as that term is
defined in the Securities Act of 1933, as amended, (the
"Securities Act"), in which event any discounts, concessions or
commissions they receive, or any profit on resales of the Shares
by them, may be deemed to be underwriting commissions or
discounts under the Securities Act. The Company has been advised
by Selling Shareholders that none of them have underwriting
arrangements for their Shares. See "Plan of Distribution".
12,441,499 shares of Common Stock are being offered by Systems
Communications, Inc. (the "Company"), 9,572,914 shares thereof
for sale upon exercise of outstanding common stock purchase
warrants and options and upon exercise of warrants and options to
be issued in connection with the conversion of convertible
debentures ("Warrants and Options"), 1,968,585 shares thereof for
sale upon conversion of outstanding convertible debentures and
notes ("Debentures") and 900,000 shares thereof in payment of
consulting fees.
The shares offered by Selling Security Holders and the shares
offered by the Company are collectively referred to as the
"Shares". The Company will not receive any of the proceeds from
the sale of the Shares offered by the Selling Security Holders.
The expenses of the offering are being paid by the Company. The
exercise prices of the Warrants and Options and the conversion
prices of the Debentures have been negotiated arbitrarily by the
Company and do not bear any relationship to earnings, assets or
other criterion of value. The value of the Shares to be issued
in payment of consulting fees are expected to be equal to the
current average bid quotation for the Shares at the time of their
issuance by the Company.
At the date of this Prospectus, the Company's Common Stock is
traded in the over-the-counter securities market is are quoted on
the OTC Bulletin Board under the symbol "SCMI".
The Company is engaged in the healthcare cost containment
business. See "Description of Business".
AN INVESTMENT IN THE SHARES INVOLVES A HIGH DEGREE OF RISK. See
"RISK FACTORS"
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
U.S. SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is July 17, 1998
<PAGE> 2
TABLE OF CONTENTS Page
The Company 5
Risk Factors 6
Use of Proceeds 8
Capitalization 9
Selected Financial Data 11
Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Description of Business 23
Legal Proceedings 26
Management 29
Management Compensation 31
Certain Transactions with Management and Others 32
Principal Stockholders 33
Description of Securities 35
Selling Security Holders 37
Plan of Distribution 40
Market price of and Dividends on Common Stock
and Related Stockholder Matters 41
Legal Matters and Interest of Counsel 42
Experts 42
Changes in and Disagreements with Accountants
on Financial Disclosure 42
Index to Financial Statements 43
<PAGE> 3
REPORTS TO SECURITY HOLDERS
The Company intends to furnish to security holders annual reports
containing financial information examined and reported upon by an
independent certified public accountant and, upon request by
security holders, unaudited financial statements for each of the
first three quarters of each fiscal year. In addition, the
Company may from time to time furnish to security holders
additional information about the Company and its business as
deemed appropriate by management.
ADDITIONAL INFORMATION
The Company has filed with the U.S. Securities and Exchange
Commission a registration statement on Form S-1, Commission File
No. _______, (herein, together with all amendments thereto, the
"Registration Statement") under the Securities Act of 1933, as
amended, with respect to the securities described in this
Prospectus. This Prospectus, filed as part of the Registration
Statement, omits certain information and exhibits contained in
the Registration Statement. The Registration Statement and
exhibits may be inspected at the office of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Northeast
Regional Office of the Commission at Seven World Trade Center,
Suite 1300, New York, New York 10049. Copies of such material
may be obtained from the Public Reference Section of the
Commission at 450 Fifth Street N.W., Room 1024, Washington, D.C.
20549, upon payment of prescribed fees. The Commission maintains
a web site that contains registration statements, reports, proxy
and information statements and other information filed
electronically with the Commission at http://www.sec.gov.
UNTIL_______(90 DAYS AFTER THE EFFECTIVE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
No dealer, salesman or other person has been authorized to give
any information or to make any representations other than those
contained in this Prospectus and, if given or made, such
information or representations must not be relied upon as having
been authorized by the Company. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to
buy, any securities other than the securities to which it
relates, or to any person in a jurisdiction where such offer or
sale would be unlawful. Neither delivery of this Prospectus nor
any sale made hereunder shall under any circumstances create any
implication that there has been no change in the affairs of the
Company since the date hereof or that the information herein is
correct as of any time subsequent to any of the dates as of which
information is furnished herein or the date hereof.
<PAGE> 4
PROSPECTUS SUMMARY
The following is a summary of certain information contained in
the Prospectus and is qualified in its entirety by the more
detailed information and consolidated financial statements,
including the notes thereto, appearing elsewhere in the
Prospectus and the Registration Statement of which the Prospectus
is a part.
The Company
Systems Communications, Inc. (the "Company") is a Florida
corporation and was organized in 1987.
The Business
The Company's business is to develop a network of healthcare
management companies, third-party healthcare plan administrators
and other healthcare management organizations that collectively
offer a wide array of healthcare cost containment services and
products for resale by the Company to large self insured
companies and utilize the "CHAMPUS" healthcare claims database to
better manage the healthcare programs of large self insured
companies (see "Description of Business").
Offering by Selling Security Holders
12,434,053 Shares are offered for resale by existing stockholders
into the public securities market through their individual
accounts at securities brokerage firms at the market price
prevailing at the time of sale. The Company will not receive any
proceeds from sales of Shares by Selling Security Holders.
Offering by the Company
12,441,499 Shares are offered for sale by the Company to holders
of outstanding Warrants and Options, to holders of Warrants to be
issued upon conversion of Debentures, to holders of the
Debentures and for payment by the Company of consulting fees. The
Company will receive $1,906,666 in the event all Warrants and
Options are exercised by the holders thereof, exercise being in
their individual discretion. The Company will convert $278,998
of debt into 1,968,585 Shares, as of the date hereof, in the
event all of the Debentures are converted, conversion being at
the individual discretion of the Debenture holder. The Company
expects to pay consulting fees in an amount equal to the current
bid quotation for 900,000 Shares at the time of their issuance by
the Company.
Risk Factors
Investment in the Shares involves a high degree of risk. See
"Risk Factors."
Selected Financial Data
See " Selected Financial Data."
<PAGE> 5
THE COMPANY
Systems Communications, Inc. (the "Company"), a Florida
corporation, was incorporated as Florida One Capital Corporation
in 1987 and made an initial public offering of its common stock
in 1988 as a "blank check" company for the purpose of acquiring
other companies. The Company underwent several corporate name
changes from its inception until 1991 when it changed its name to
Systems Communications, Inc. During 1990 and 1991, the Company
acquired companies engaged in merchandising optical products and
developing residential properties. These acquisitions were
rescinded and Company was inactive from 1991 until August 1994.
Beginning in August 1994, the Company acquired a number of
companies engaged in various telecommunications businesses and
businesses engaged in the healthcare cost containment industry.
The following table sets forth the name of each acquired company,
beginning in 1994, the year of its acquisition by the Company,
the general nature of its business and, if applicable, year of
its disposition by the Company.
<TABLE>
Year Year of
Name Acquired Business Disposition (5)
- ------------------ --------- ---------------------- ---------------
<S> <C> <C> <C>
Ameristar 1994 Pay-per-view television 1997 (1)
Telecommunications, services and products
Inc. ("ATI")
Coast Communications, 1994 Installation of pay-per- 1996 (1)
Inc.("CCI" or "Coast") view television
equipment
LCI Communications, 1995 Switch-less re-seller of 1997 (2)
Inc.("LCI") long-distance telephone
services
Comstar Network 1995 Switch-less re-seller of 1997 (2)
Services, Inc. long-distance telephone
("Comstar") services
Affiliated 1995 Switch-less re-seller of 1997 (4)
Communications long-distance telephone
Integrators, Corp. services
Telcom Network, Inc. 1995 Switch-less re-seller of 1997 (3)
("TNI") long-distance telephone
services
National Solutions 1995 Healthcare cost N/A
Corporation ("NSC") containment services and
products
Health Management 1996 Developer of medical 1997 (1)
Technologies, Inc. management computer
("HMT") software
</TABLE>
(1) Transaction rescinded.
(2) Business and assets transferred to TNI. The Company is now a
dormant wholly owned subsidiary.
(3) Business sold. The Company is now a dormant wholly owned
subsidiary.
(4) This Company was inactive at the date of its acquisition and is a
dormant wholly owned subsidiary of the Company.
(5) For a description of the effect of the rescissions and sales
identified in this table, see "Management's Discussion and
Analysis of Financial
Condition and Results of Operations" and the consolidated
financial statements and the notes thereto appearing elsewhere
herein.
<PAGE> 6
The principal executive offices of the Company are located at
Suite 107, 4707 140th Avenue North, Clearwater, Florida 33762
and the telephone number at that office is (727) 530-4800.
RISK FACTORS
Investment in the Shares involves a high degree of risk. The
following risk factors should be considered carefully in
evaluating the Company, its business and its financial prospects
before purchasing any of the Shares. These risk factors are not
necessarily exhaustive and additional risk factors, if any, may
be material or have significance to an individual investor. Many
investment opportunities involve a risk of loss and the existence
of normal and certain extraordinary risks. The existence of
these risks and possibly others should not necessarily be the
sole determining factor in whether or not to purchase the Shares.
All of the information in this Prospectus should be carefully
considered in connection with the risk factors described below.
This Prospectus contains forward looking statements which involve
risks and uncertainties. Those statements appear in a number of
places in this Prospectus and include statements regarding the
intent, belief and current expectations of the Company, its
directors and management with respect to, among other things:
(i) the Company's future plans and (ii) prospects for increased
revenues and profitability. Prospective purchasers of the Shares
are cautioned that any such forward looking statements are not
guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from
those projected in the forward looking statements as a result of
various factors, many of which are beyond the control of the
Company. The information contained in this Prospectus, including
without limitation the information set forth under the headings
"Risk Factors", "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Description
of Business", identifies important factors which could cause or
contribute to such differences.
Operating History
The Company has had limited net revenues and has not earned
profits from its businesses. The Company is subject to the risks
inherent in a relatively new business, including complications,
delays, unexpected costs and shortages of capital and other
resources. See "Description of Business" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
Liquidity and Capital Resources
The Company has been consuming more cash in its operations than
it has been generating from operations and, as of March 31, 1998,
has a working capital deficiency of approximately $5.9 million
and no significant sources of
liquidity. These factors, among others, have required the Company
to suspend development of its healthcare management information
systems technology and have made it difficult to carry on
operating activities. When the Company experiences net revenues
and operating profits, of which there is no assurance, the
Company expects it will also have a need for increasing amounts
of cash to finance its working capital needs. In the event the
Company either becomes profitable or does not, the Company may
find it necessary to sell additional securities or obtain other
financing commitments to continue operations; but, there is no
assurance that additional securities can be sold or that any
other financing commitments will be
<PAGE> 7
available, or if additional financing is available, whether such
financing will be in the amount then needed to carry on
operations. If the Company is unable to either sell additional
securities or arrange other financing to cover its cash
requirements, the Company may find it necessary to seek
alternatives, including sale, merger or discontinuance of
operations. The Company will not receive any proceeds from the
sale of Shares by Selling Security Holders. See "Description of
Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Going Concern
The Company's auditors have raised substantial doubt about the
Company's ability to continue as a going concern. See the reports
of the Company's independent auditors' included elsewhere herein.
Data Processing Capabilities
The Company is dependent on third parties to provide healthcare
cost containment data processing services. The Company may find
it necessary to raise additional capital or seek other financing
sources to develop its healthcare software technology and data
processing capabilities in the future.
Lack of Dividends
The Company has not declared or paid dividends on its Common
Stock and may elect to retain all or most of its net profits, if
any, in the foreseeable future to provide operating capital and
funding for capital investment. The Company cannot predict if or
when it will have current and retained earnings or surplus from
which to legally declare and pay dividends. There is no assurance
as to if or when the Board of Directors will declare a dividend
on the Common Stock which includes the Shares. See "Market Price
of and Dividends on Common Stock and Related Shareholder
Matters."
Competition
The Company is not aware of any other organizations which market
the services of multiple providers of healthcare cost containment
and case management products and services. The Company believes
its primary competition is the providers of healthcare management
services with whom the Company does not have a marketing
agreement or affiliation. The Company believes that this field
is highly fragmented, with numerous companies which have
substantially far greater financial and other resources and
healthcare cost containment experience than the Company. Because
the Company's healthcare business is relatively new and has an
uncertain financial condition, the Company believes that it faces
many competitive disadvantages.
Management
The Company's management has limited experience in the healthcare
cost containment field and relies on healthcare insurance
professionals, who are
under contract with the Company, to advise management on the
potential of its current business, which is to develop a wide
array of products and services from multiple healthcare cost
containment companies for resale to large, self-insured
employers, PPO's, HMO"S and insurers.
Legal Proceedings
The Company is subject to various legal and administrative
proceedings. These proceedings include (i) a consent order
executed between the Company and the State of Michigan requiring
the Company to use its best efforts to satisfy the prerequisites
of the Securities and Exchange Commission and the Michigan
Securities Bureau for registering the common stock sold by the
Company to purchasers of its securities in the State of Michigan,
(ii) actions brought against the Company by
<PAGE> 8
certain former employees and persons formerly under contract with
the Company for payments allegedly due them, (iii) an action by a
shareholder seeking the rescission of the sale by the Company of
its common stock to the shareholder, (iv) an action by an
equipment lessor seeking approximately $500,000 in lease payments
and other charges due under a lease agreement and (v) an action
by the former stockholders of CCI. An unfavorable outcome in one
or more of these actions could significantly impair the Company's
ability to generate positive cash flows from operations or
continue in operations. See "Legal Proceedings."
Involuntary Petition under Chapter 7
The Company learned on June 8, 1998 that an Involuntary Petition
was filed on June 1, 1998 against the Company in the United
States Bankruptcy Court for the Middle District of Florida. On
June 23, 1998, the Company filed a motion to dismiss the
Involuntary Petition on the grounds that the Company is indebted
to only one of the Petitioners and for other reasons. See "Legal
Proceedings."
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of
the Shares by Selling Security Holders. The Company will receive
proceeds from the sale of the Shares upon exercise of Warrants
and Options. The Warrants and Options covered by this Prospectus
are exercisable at the election of the respective holders at
prices ranging from $0.10 per share to $1.00 per share. In the
event all the Warrants and Options are exercised, the aggregate
proceeds to the Company would be $1,906,666. There is no
assurance as to if or when any of the Warrants and Options will
be exercised. Accordingly, the Company is not able to plan the
application of the proceeds from such exercise for any specific
purposes. The proceeds, if any, from the exercise of Warrants
and Options, will be used by the Company for general working
capital purposes, capital investment or other purposes which the
Company has identified at the time of the receipt of such
proceeds. The Company will not receive any proceeds upon
conversion of Debentures or upon issuance of Shares in payment of
consulting fees but, will be relieved of related liabilities.
[Remainder of page left blank]
<PAGE> 9
CAPITALIZATION
The following table sets forth the capitalization of the Company
at March 31, 1998. This table should be reviewed in conjunction
with the consolidated financial statements of the Company and the
notes thereto included elsewhere in this Prospectus.
<TABLE>
<S> <C>
Notes and debentures payable $ 2,922,200
Common stock subject to rescission 674,124
Stockholders' deficit:
Class A convertible preferred stock --
Class B convertible preferred stock 54,764
Common stock, $.001 par value;
50,000,000 shares authorized;
14,174,052 shares issued and outstanding 14,175
Additional paid in capital 18,882,103
Accumulated deficit (25,580,352)
----------
Total stockholders' deficit ( 6,629,310)
----------
Total capitalization $( 3,032,986)
==========
Subsequent to March 31, 1998, the Company has issued and expects
to issue shares of its common stock, as follows:
(a) 5,242,929 shares upon conversion of $845,000 of 10 % cumulative
convertible debentures. The Company expects to issue these shares prior
to the effective date of the registration statement, of which this
Prospectus is a part, upon conversion of the debentures. These debentures
were issued in the principal amounts of $500,000 in June 1996 and
$345,000 in July 1996. See "Principal Stockholders", "Selling Security
Holders", and "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
(b) 2,500,000 shares upon conversion of $350,000 of 10%
cumulative convertible debentures. The Company expects to issue
these shares prior to the effective date of the registration
statement, of which this Prospectus is a part, upon conversion of
the debentures. These debentures were issued during the period
October 1996 to December 1996. See "Principal Stockholders",
"Selling Security Holders", and "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
(c) 1,958,622 shares issued to employees and consultants upon conversion
of outstanding stock options pursuant to a registration statement on Form
S-8, as filed on May 12, 1998.
(d) 2,500,000 shares issued to employees and consultants upon conversion
of outstanding stock options pursuant to a registration statement on Form
S-8, as filed on June 22, 1998.
(e) 150,000 shares issued for cash totaling $15,000.
(f) 1,000,000 shares issued to Timboon, LTD in partial conversion
of the Company's 4% cumulative convertible debentures issued on
February 24, 1997. The Company also released 4,000,000 shares of
its common stock, held in escrow, for the sale by Timboon, LTD in
open market or block transactions, also in partial conversion of
its 4% cumulative convertible debentures. The amount of
debentures converted is to be determined based on the proceeds
received by Timboon, LTD from sale of the shares. See Note 7 to
the consolidated financial statements included elsewhere herein
and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
<PAGE> 10
(g) 3,381,670 shares to officers and directors in payment of
accrued compensation totaling approximately $380,000. The Company
expects to issue these shares prior to the effective date of the
registration statement, of which this Prospectus is a part (see
"Principal Stockholders" and "Selling Security Holders").
[Remainder of page left blank]
<PAGE> 11
SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the
Company for each of the five years in the period ended December
31, 1997 and for the three months ended March 31, 1998 and 1997.
This table should be reviewed in conjunction with the
consolidated financial statements of the Company and the notes
thereto appearing elsewhere herein.
INCOME STATEMENT DATA:
</TABLE>
<TABLE>
Three
Months Ended
Year Ended December 31, March 31,
--------------------------------------------------------- --------------------
1997 1996 1995 1994 1993 1998 1997
--------- ---------- --------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues $ 1,498,533 $ 2,832,123 $ 91,106 $ -- $ -- $ -- $ 1,236,734
Income (loss) from
continuing operations
before income taxes (1,789,310) (20,488,639) (2,004,228) (78,233) -- (352,201) 1,276,131
Income (loss) from
continuing operations (1,306,310) (17,934,489) (1,989,104) (78,233) -- (352,201) 1,276,131
Income(loss) from
operations of
discontinued
telecommunications
businesses 391,752 (1,322,179) (3,818,921) (50,769) 338,909 306,405 (65,920)
Gain from disposition
of discontinued
telecommunication
businesses 397,392 -- -- -- -- -- 15,500
--------- ---------- --------- ------- ------- ------- ---------
Income (loss) before
extraordinary item (517,166) $(19,256,668) $(5,808,025) (129,002) 338,909 (45,696) 1,225,711
Extraordinary item -
Gain from
extinguishment
of debt -- -- -- -- -- 286,588 --
--------- ---------- --------- ------- ------- ------- ---------
Net income (loss) $ (517,166) $(19,256,668) $(5,808,025) $(129,002) $338,909 $240,792 $ 1,225,711
========= ========== ========= ======= ======= ======= ---------
Basic earnings
per share:
Income (loss) from
continuing
operations $ (.12) $ (2.15) $ (0.58) $ (0.06) $ -- $ (0.03) $ 0.12
Income (loss) from
operations of
discontinued
telecommunications
businesses .03 (0.16) (1.23) (0.04) 0.41 0.03 (0.01)
Gain from disposition
of discontinued
telecommunication
businesses .04 -- -- -- -- -- --
Extraordinary item -- -- -- -- -- 0.02 --
--------- ---------- --------- ------- ------- ------- ---------
Net income (loss) $ (.05) $ (2.31) $ (1.81) $ (0.10) $ 0.41 $ 0.02 $ 0.11
========= ========== -======== ======= ======= ======= -========
Weighted average number
of common shares
outstanding 10,802,103 8,349,459 3,201,991 1,306,493 825,765 12,491,131 10,747,700
========== ========== ========= ========= ======= ========== ==========
</TABLE>
<PAGE> 12
INCOME STATEMENT DATA (Continued):
<TABLE> Three
Months Ended
Year Ended December 31, March 31,
----------------------------------------------------------- --------------------
1997 1996 1995 1994 1993 1998 1997
--------- ---------- --------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Diluted earnings
per share:
Income (loss) from
continuing
operations S (0.12) $ (2.15) $ (0.58) $ (0.06) $ -- $ (0.03) $ 0.08
Income (loss) from
operations of
discontinued
telecommunications
businesses 0.03 (0.16) (1.23) (0.04) 0.41 0.03 --
Gain from disposition
of discontinued
telecommunications
businesses 0.04 -- -- -- -- -- --
Extraordinary item -- -- -- -- -- 0.02 --
--------- ---------- --------- ------- ------- ------- ---------
Net income (loss) $ (0.05) $ (2.31) $ (1.81) $ (0.10) $ 0.41 $ 0.02 $ 0.08
========= ========== ========- ======= ======= ======= =========
Weighted average number
of common shares,
assuming dilution 10,802,103 8,349,459 3,201,991 1,306,493 825,765 12,491,131 15,935,629
========== ========== ========= ========= ======= ========== -=========
BALANCE SHEET DATA:
December 31, March 31,
-------------------------------------------------------- --------------------
1997 1996 1995 1994 1993 1998 1997
--------- --------- --------- ------- ------- ------- ---------
Current assets $ 256,883 $ 1,403,881 $ 4,156,868 $ 442,069 $ 492,216 $ 208,569 $ 1,542,862
Current liabilities 6,728,193 7,908,138 5,417,864 652,107 13,335 6,114 054 7,465,377
Total assets 388,194 5,847,300 21,545,654 780,222 578,549 304,630 5,455,935
Long-term liabilities 310,794 1,207,488 4,597,671 77,750 553,750 145,762 1,119,511
Common stock subject
to rescission 674,124 709,124 789,624 -- -- 674,124 674,124
Common stock to be
issued -- 2,000,000 2,000,000 -- -- -- --
Stockholders' equity
(deficit) (7,324,917) (5,977,450) 8,740,495 50,365 11,464 (6,629,310) (3,803,077)
</TABLE>
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following tables set forth certain information derived from
the Company's consolidated financial statements for each of the
three years ended December 31, 1997 and for the three months
ended March 31, 1998 and 1997. The results from continuing
operations include the operations of National Solutions
Corporation ("NSC"), acquired in October 1995, and Healthcare
Management Technologies, Inc. ("HMT"), acquired in March 1996 and
disposed of by a rescission of the acquisition agreement in June
1997. The results from discontinued telecommunications businesses
include the operations of Telcom Network, Inc. ("TNI", including
the operations of LCI Communications, Inc.("LCI"), Comstar
Network Services, Inc. ("Comstar"), Ameristar Telecommunications,
Inc. ("ATI") and Coast Communications, Inc. ("CCI"). These
businesses were sold or otherwise disposed of in 1996 and 1997.
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto appearing
elsewhere herein.
<TABLE>
Three
Months Ended
Year Ended December 31, March 31,
----------------------------------- --------------------
1997 1996 1995 1998 1997
--------- ---------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
Operations of continuing businesses:
Net revenues $ 1,498,533 $ 2,832,123 $ 91,106 $ -- $ 1,125,724
Cost of revenues 109,563 827,063 -- -- --
Selling and administrative
expenses 3,027,384 6,322,627 1,887,275 271,235 1,766,116
Impairment and other losses 1,898,953 14,233,953 -- -- 303,568
Depreciation and amortization 497,377 1,459,436 148,192 6,504 253,590
Gain from sale of license agreement 2,695,214 -- -- -- 2,695,214
Gain from rescission of business
acquisition 259,352 -- -- -- --
Interest income 4,070 8,183 3,777 -- 2,018
Interest expense 587,884 381,975 63,644 74,462 111,565
Other income (expense), net (125,318) (103,891) -- -- (111,986)
Income (loss) from continuing operations
before income taxes (1,789,310) (20,488,639) (2,004,228) (352,201) 1,276,131
Operations of discontinued
telecommunications businesses:
Net revenues 405,617 2,177,858 2,893,778 -- 233,643
Cost of revenues -- 1,320,256 2,014,460 -- --
Selling and administrative expenses 449,925 2,304,059 1,845,775 -- 155,292
Impairment and other losses -- 194,901 2,758,779 -- --
Depreciation and amortization 47,460 291,291 311,135 -- 28,476
Interest income -- 971 627 -- --
Interest expense 32,393 38,713 20,466 -- 20,217
Other income (expense), net 755,913 832 4,288 306,405 5,922
Income (loss) from operations of
discontinued businesses
before income taxes 631,752 (1,971,223) (4,060,498) 306,405 (75,420)
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 VERSUS 1997
Net Revenues
The Company had no revenues for the three months ended March 31,
1998. Net revenues in the 1997 first quarter were $1,125,724. The
decrease in net revenues from period to period is due to the
disposition of HMT coupled with the lack of revenues in the
current period from the Company's healthcare cost containment
business. The net revenues of HMT in the 1997 first quarter were
$1,048,987.
<PAGE> 14
Selling and Administrative Expenses
The principal reasons for the decrease in selling and
administrative expenses for the three months ended March 31, 1998
versus the same period last year were the effects of the
disposition of HMT on the quarter to quarter comparison and cost
reduction measures undertaken in 1997 due to continued operating
losses. Cost reduction measures included the retirement of the
founders and management of NSC and the consolidation of NSC's
corporate offices with those of the Company, the relocation of
the Company's offices to lower cost leased premises, reductions
in corporate staff and the closure of NSC's data processing
facilities and discontinuance of NSC's development of the CHAMPUS
software.
Impairment and Other Losses
In the first quarter of 1997, the Company wrote-off approximately
$303,600 of deferred compensation assets related to certain
employment agreements. The Company did not recognize any
impairment losses in the first quarter of 1998.
Depreciation and Amortization
Depreciation and amortization for the three months ended March
31, 1998 decreased by approximately $247,000 as compared to the
same period last year. Depreciation and amortization in 1997
included amortization of goodwill and intangible assets from the
acquisition of HMT and amortization of capitalized lease assets
that were removed from the Company's consolidated balance sheet
in the fourth quarter of 1997.
Interest Expense
The decrease in interest expense is principally due to a decrease
in the average level of notes and debentures outstanding and the
removal of capitalized lease liabilities from the Company's
consolidated balance sheet in the fourth quarter of 1997.
Interest expense will be reduced in future periods due to the
conversion, in June 1998, of the Company's $1,195,000 of 10%
cumulative convertible debentures.
Other Items
Results of operations for the three months ended March 31, 1997,
include a one-time gain of $2,695,000 from the sale of a license
agreement and financing fees of approximately $112,000.
Income Taxes
As of March 31, 1998 and 1997, the Company's deferred tax assets
exceeded its deferred tax liabilities and were fully reserved at
each of those dates. Income taxes that otherwise would have been
applicable to income (loss) from continuing operations during the
periods were fully offset by changes in the valuation reserve.
Discontinued Operations
Income (loss) from operations of discontinued telecommunications
businesses for the three months ended March 31, 1998 includes
income of approximately $306,000 from the cancellation and
partial recovery of the ITD $500,000 note receivable. The ITD
note was valued at zero at the date of the sale by the Company of
certain of TNI's assets to ITD and was canceled in exchange for
the elimination of indebtedness to and obligations under
employment agreements with certain former employees of the
Company (see Note 17 to the consolidated financial statements).
Extraordinary Item
The Company's operating results for the first quarter of 1998
include an extraordinary gain of approximately $287,000 from the
extinguishment of its
<PAGE> 15
$450,000 10% convertible debentures. These debentures were
extinguished, in March 1998, by the issuance of 893,278 shares of
the Company's common stock and 450,000 common stock purchase
warrants (see Note 17 to the consolidated financial statements).
YEARS ENDED DECEMBER 31, 1997 VERSUS 1996 AND 1996 VERSUS 1995
The operating results of acquired businesses were below those
which were anticipated at the time of the respective
acquisitions. As more fully discussed below, the business of TNI
was severely damaged by the actions of GE Capital Communications
Services Corporation ("GECCS") and New Enterprise Wholesale
Services, Limited Partnership ("News") and, the revenues and
results of operations of the Company's healthcare businesses were
less than anticipated at the time of their respective
acquisitions, principally due to higher levels of spending on
software and systems development and on sales and marketing than
originally anticipated (and limitations on the part of the
Company to continue to fund those collective efforts). These
factors, combined, have strained the financial resources of the
Company and required the Company to undertake restructuring
measures, which included, among other things, the sale of the
operating assets of TNI in January 1997 and the rescission of the
ATI and HMT acquisition agreements in May and June 1997,
respectively. For further discussion of the impact of these
events and uncertainties on future operations and the Company's
financial condition, see "Liquidity and Capital Resources".
OPERATIONS OF BUSINESS ACQUIRED AND DISPOSED OF
The Company acquired various businesses in 1994, 1995 and 1996
and disposed of various businesses in 1996 and 1997.
The more significant acquisitions were: TNI acquired in July
1995; NSC acquired in October 1995; and, HMT acquired in March
1996. Disposals of businesses included (i) the sale, in January
1997, of the operating assets of TNI, (ii) the rescission, in May
1997, of the ATI acquisition agreement and (iii) the rescission,
in June 1997, of the HMT acquisition agreement (see Note 4 to the
consolidated financial statements appearing elsewhere herein). As
a result of the disposition of all of the businesses included in
the Company's telecommunications segment, the operations of the
Company's telecommunications segment are shown as discontinued
operations in the accompanying consolidated statements of
operations for all periods presented.
For purposes of the following discussion, the operations of TNI
include the operations of TNI, LCI and Comstar. TNI, LCI and
Comstar operated as switch-less re-sellers of long-distance
telephone services and products and were combined into one
operating division after the acquisition of TNI.
In 1997, TNI had no revenues and its loss from operations was
$52,307. The net revenues and loss from operations of TNI were
$1,481,317 and $1,792,795, respectively, in 1996 and $2,373,491
and $3,122,621 (including impairment losses of $2,758,779),
respectively, for the period from the date of its acquisition by
the Company (July 7, 1995) to December 31, 1995. TNI's operating
results for the periods subsequent to the date of acquisition
were adversely affected by (i) the failure of GECCS and News to,
among other things, provision customer accounts for
telecommunications products offered by GECCS/News and sold by TNI
pursuant to a contractual agreement among TNI, GECCS and News
(the "GECCS Agreement"), (ii) the cancellation of TNI customers
by GECCS and News, (iii)the failure of GECCS/News to properly
bill and collect revenues due to TNI and (iv) a diminution of
TNI's marketing and distribution organization as a result of such
failures and other actions taken by GECCS and News. TNI, as
claimant in a binding arbitration proceeding against GECCS and
News, was awarded damages under the GECCS Agreement in the amount
of approximately $1,250,000. The award, which was entered on
October 10, 1996, was appealed by GECCS to the U.S. District
Court for the Northern District of Georgia on the grounds that
the arbitrators exceeded their powers by awarding TNI damages
under the GECCS Agreement. On September 30, 1997, the U.S.
District Court confirmed the award; and, a motion for summary
judgment was entered on October 1, 1997.
<PAGE> 16
On December 24, 1997, the Company, GECCS and News entered
into a Confidential Settlement Agreement and Mutual Full and
Final Releases (the "Settlement Agreement"). Pursuant to the
Settlement Agreement, GECCS\News paid $1,250,000 in full
satisfaction of the arbitration award. Of that amount, the
Company received approximately $750,000, which is net of legal
fees. The net proceeds from the Settlement Agreement were used to
pay trade and other obligations and are reflected in income
(loss) from discontinued operations in the consolidated statement
of operations for the year ended December 31, 1997.
The diminution in TNI'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 TNI, also
adversely affected TNI's operations. As a result thereof, in
January 1997, the Company sold substantially all of TNI's
operating assets. The sale of TNI's assets generated
approximately $101,000 in cash; and, the Company received a
$500,000 note receivable from ITD, the purchaser of certain of
TNI's assets. This note was canceled in March 1998 in exchange
for the elimination of approximately $306,000 of indebtedness to
and obligations under employment agreements with certain former
employees of the Company (see Note 17 to the consolidated
financial statements).
The revenues of TNI declined from $2,373,491 in 1995 to
$1,481,317 in 1996. This decrease is principally the result of
reduced revenues from the GECCS Agreement. The operating loss of
TNI was $343,842 in 1995 (before $2,758,779 of impairment losses)
compared to $1,792,795 in 1996. The increase in TNI's operating
loss (before impairment losses) was due to the reduction in
revenues from the GECCS Agreement and valuation adjustments
recorded at year-end 1996 to reduce assets sold in January 1997
to their net realizable value and the write-off of the Company's
remaining investment in Comstar, including goodwill, the effects
of which were not fully offset by reduced operating expenses.
Asset valuation adjustments recorded at year-end 1996 totaled
approximately $370,000 and the write-off of the Company's
investment in Comstar totaled approximately $194,000.
In 1997 NSC had net revenues of $187,478 and an operating loss of
$1,348,679. NSC's operating loss for the year ended December 31,
1997 reflects impairment and other losses of approximately
$892,000. Excluding impairment and other losses, NSC's 1997
operating loss would have been approximately $457,000. The net
revenues and operating loss of NSC were $1,574,825 and
$16,275,288, respectively, in 1996 and $91,106 and $363,857,
respectively, for the period from the date of its acquisition by
the Company (October 27, 1995) to December 31, 1995. The loss
from operations of NSC in 1996 includes one-time charges of
$14,233,953, to write-off, as of December 31, 1996, the
unamortized cost of intangibles and goodwill recorded by the
Company in connection with its acquisition of NSC. The write-off
of the unamortized cost of goodwill and intangibles recorded in
connection with the acquisition of NSC is due to the failure of
NSC to successfully market its healthcare management information
systems technology, the likelihood that NSC may not be able to
market such technology in the future without further significant
capital investment and the likelihood of the Company being able
to provide NSC with additional capital investment (see "Liquidity
and Capital Resources"). The decrease in NSC net revenues from
1996 to 1997 is the result of the termination of the Chrysler
Corporation Service Agreement, effective in September 1997, due
to performance issues between Chrysler Corporation and Health
Management Services, a healthcare claims management company
located in New York, NY ("HMS"), NSC's subcontractor, the
expiration of the Ford Motor Company services agreement by its
terms, effective March 31, 1997, and lower healthcare claim
recoveries under the service agreements from period to period.
NSC's operating loss decreased from 1996 to 1997 due principally
to the elimination of NSC's corporate offices, lower management
compensation as a result of the retirement of founding management
and the suspension of software development activities due to cash
flow constraints.
The net revenues and loss from operations of HMT were $1,311,055
and $153,656, respectively, for the period from January 1, 1997
to the date of the rescission of the HMT acquisition agreement
and $1,257,298 and $828,895, respectively, for the
<PAGE> 17
period from the date of its acquisition by the Company to
December 31, 1996. HMT's 1997 net revenues reflect sales to one
customer totaling approximately $800,000. HMT's operating losses
during the periods principally reflect amortization of
intangibles and goodwill recorded in connection with the
acquisition and spending for new product development.
The revenues and operating losses of ATI were $405,617 and
$39,461, respectively, for the period from January 1, 1997 to the
date of disposition, $673,995 and $116,460, respectively, in
1996, and $427,445 and $289,791, respectively, in 1995. The
increasing trend in revenues reflects the introduction of ATI's
Operator Service Provider ("OSP") and television pay-per-view
("PPV") services, beginning in 1996, into the Mexican hospitality
market. Similarly, operating losses decreased from period to
period due to higher OSP and PPV revenues from Mexico which carry
higher profit margins when compared to margins from domestic
sales.
Net Revenues
Net revenues for each of the three years in the period ending
December 31, 1997 are summarized as follows:
<TABLE>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net revenues from operations of
continuing businesses $ 1,498,533 $ 2,832,123 $ 91,106
Net revenues from discontinued
telecommunications businesses 405,617 2,177,858 2,893,778
---------- ---------- ----------
$ 1,904,150 $ 5,009,981 $2,984,884
========== ========== ==========
</TABLE>
The decrease in net revenues from operations of continuing
businesses from 1996 to 1997 is the result of lower NSC revenues,
offset by higher HMT revenues. See "Operations of Businesses
Acquired and Disposed Of". The decrease in net revenues from
discontinued telecommunications businesses is the result of the
sale of the operating assets of TNI in January 1997 and the
disposition of ATI in May 1997.
The increase in net revenues from operations of continuing
businesses from 1995 to 1996 is the result of the acquisitions of
HMT and NSC. HMT contributed $1,257,298 to this increase and NSC
contributed $1,483,719. HMT was acquired in March 1996 and NSC
was acquired in October 1995. The decrease in net revenues from
discontinued telecommunications businesses from 1995 to 1996 is
due to lower revenues from the GECCS Agreement, offset by an
increase in net revenues of approximately $177,000 from the
Company's PPV business, principally in Mexico.
Cost of Revenues
Cost of revenues applicable to continuing operations in 1997
declined substantially as compared to 1996. This decrease is
attributable to lower healthcare claim recoveries under the
Chrysler Corporation and Ford Motor Company service agreements
and final revenue adjustments recorded upon the cancellation and
expiration of the Chrysler and Ford Motor Company service
agreements. See "Operations of Businesses Acquired and Disposed
Of".
Cost of telecommunications revenues generally consists of the
cost of long-distance services sold by TNI under the GECCS
Agreement. In 1997, no revenues were generated under that
agreement. In addition, the operating assets of TNI were sold in
January 1997. See "Operations of Businesses Acquired and Disposed
Of".
The cost of revenues from discontinued telecommunications
businesses in 1996 was 61% of net revenues from discontinued
telecommunications businesses compared to 70% in 1995. This
decrease is the result of product mix changes, which included
lower revenues from the resale of domestic telecommunication
services under the GECCS
<PAGE> 18
Agreement and higher revenues from the sale of pay-per-view and
related telecommunication products to the hospitality industry,
principally in Mexico.
Cost of revenues from discontinued telecommunications businesses
was $2,014,460 in 1995 compared to $134,607 in 1994. This
increase was principally due to the acquisition of TNI and the
inclusion of the cost of long distance services sold by TNI 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.
Selling and Administrative Expenses
Selling and administrative expenses applicable to operations of
continuing businesses decreased from $6,322,627 in 1996 to
$3,027,384 in 1997. This decrease principally reflects cost
reduction measures undertaken as a result of continued operating
losses and the effect from period to period of the disposition of
HMT. See "Operations of Businesses Acquired and Disposed Of".
Selling and administration expenses applicable to operations of
continuing businesses increased by $4,093,749 in 1996 over 1995.
This increase reflected the operations of businesses acquired and
higher corporate expenses. Corporate expenses increased primarily
due to costs associated with the registration of the Company's
securities under the Securities Exchange Act of 1934, costs
related to a failed attempt by the Company to file a registration
statement under the Securities Act of 1933 and costs associated
with the development, sale and marketing of NSC's healthcare
management information products. Offsetting this increase was a
reduction in stock compensation expense and the effect of stock
purchase warrants.
Selling and administrative expenses applicable to operations of
continuing businesses increased by $2,150,645 in 1995 over 1994.
This increase included the selling and administrative expenses of
acquired businesses and higher corporate expenses for personnel,
office space and information systems for expanded operations,
legal, professional and consulting costs incurred in connection
with the Company's acquisition activities and $793,373 from the
issuance of stock and common stock purchase warrants for services
rendered and in consideration for extension of related party
indebtedness.
Selling and administrative expenses applicable to discontinued
telecommunications businesses were $449,925 in 1997, $2,304,059
in 1996, $1,845,775 in 1995 and $649,036 in 1994. The decrease in
1997 as compared to 1996 was due to the discontinuance of TNI's
operations and the rescission of the ATI acquisition agreement
and the increases in 1996 over 1995 and in 1995 over 1994 are due
to the acquisition of TNI. See "Operations of Businesses Acquired
and Disposed Of".
Impairment and Other Losses
Impairment and other losses recognized in 1997 include (i) the
write-off equipment under capital lease and certain other assets
related to equipment under lease from Boston Financial
Corporation totaling $768,545, (ii) provisions for loss
contingencies totaling $437,335 related to office space, which
has been vacated, leased equipment that the Company is no longer
using and settlement of actions brought against the Company by
Timboon, LTD and (iii) the write-off of $625,728 of deferred
compensation assets. See Note 5 to the consolidated financial
statements appearing elsewhere herein.
In 1996, the Company recognized impairment losses applicable to
operations from continuing businesses of $13,806,557, net of a
tax benefit of $427,396, to write off the unamortized cost, as of
December 31, 1996, of intangibles and goodwill recorded in
connection with the acquisition of NSC. The write-off of the
unamortized cost of goodwill and intangibles recorded in
connection with the acquisition of NSC was due to the failure of
NSC to successfully market its healthcare management information
systems technology, the likelihood that NSC may
<PAGE> 19
not be able to market such technology in the future without
further significant capital investment and the likelihood of the
Company being able to provide NSC with additional capital
investment (see "Liquidity and Capital Resources").
Impairment losses applicable to discontinued telecommunications
businesses recognized in 1996 consisted of the write-off the
Company's remaining investment in Comstar. Comstar was acquired
in June 1995 and its operations were combined with the operations
of TNI. As a result of the Company's decision to divest TNI, the
Company wrote-off its remaining investment in Comstar.
As of 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, which is included in the operations of
discontinued telecommunications businesses in the consolidated
statement of operations for the year ended 1995, reflected the
Company's belief that the business of TNI was 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 more fully discussed herein and in the Notes to the
consolidated financial statements, the Company was awarded
approximately $1,250,000 in a binding arbitration proceeding with
GECCS/News. The arbitration award was confirmed by the United
States District Court, Northern District of Georgia on September
30, 1997 and the Company's motion for summary judgment was
entered October 1, 1997. On December 24, 1997, the Company, GECCS
and NEWS entered into a Confidential Settlement Agreement and
Mutual Full and Final Releases (the "Settlement Agreement").
Pursuant to the Settlement Agreement, GECCS\NEWS paid $1,250,000
in full satisfaction of the arbitration award granted to the
Company. Of that amount, the Company received approximately
$750,000, which is net of legal fees. The proceeds from the
Settlement Agreement were used to pay trade and other obligations
of the Company, including $468,000 of notes and debentures
payable.
Depreciation and Amortization
Depreciation and amortization applicable to continuing operations
decreased by $962,059 in 1997 as compared to 1996. The decrease
principally reflects the write-off, effective as of December 31,
1996, of the goodwill and intangibles recorded in connection with
the acquisition of NSC.
Depreciation and amortization applicable to both operations of
continuing businesses and operations of discontinued
telecommunications businesses increased in 1996 over 1995 and in
1995 over 1994. These increases are principally due to the
amortization of intangibles and goodwill arising from business
acquisitions and a higher investment in furniture and equipment.
Interest Expense
Interest expense applicable to both operations of continuing
businesses and operations of discontinued telecommunications
businesses totaled $620,277, $420,688 and $84,110 in 1997, 1996
and 1995, respectively. The increases from period-to-period in
interest expense are principally due to higher levels of average
borrowings outstanding and an increase in the average effective
rate on borrowings outstanding.
Other Items
In 1997, the Company recognized gains of approximately $2,695,000
and $259,000, respectively, from the sale of a license agreement
to the founding management of NSC and from the rescission of the
HMT acquisition agreement. See Note 4 to the consolidated
financial statements appearing elsewhere herein. The Company also
<PAGE> 20
incurred $120,000 of financing fees in connection with the
issuance of its 4% convertible debentures.
Income Taxes
Income tax benefits applicable to continuing operations were
30.0%, 12.5% and 0.75% of pre-tax loss from continuing operations
in 1997, 1996 and 1995, respectively. The principal reasons for
the differences between the effective income tax rates during the
periods and the Federal statutory rate of 46% were the changes
during each year in the net deferred income tax valuation
allowance, the tax effects from the rescission of business
acquisitions and impairment losses recognized in 1996. No
provisions for taxes currently payable were made in 1997, 1996 or
1995. As of December 31, 1997, the Company's deferred income tax
assets exceeded its deferred tax liabilities by $3,967,200, for
which the Company has provided a valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
Over the past three fiscal years and in the first quarter of
1998, the principal sources of liquidity have been derived from
financing activities. In the 1998 first quarter and in fiscal
1997, 1996 and 1995, the Company received cash of approximately
$25,000, $232,000, $2.2 million and $4.1 million, respectively,
from the issuance of 208,333,shares, 205,556 shares, 413,668
shares and 1,477,874 shares, respectively, of its common stock in
reliance upon exemptions under Regulation D of the Securities Act
of 1933 and approximately $60,500, $1.6 million, $2.4 million and
$475,000, respectively, from the issuance of notes and debentures
payable. In 1997, the Company also received cash of approximately
$371,000 from the disposition of businesses, net of cash of
businesses disposed of.
The proceeds from financing activities were used principally to
fund operating losses. In the first quarter of 1998 and in fiscal
1997, 1996 and 1995, the Company used cash of approximately
$148,000, $1.4 million, $4.2 million and $1.8 million,
respectively, in operating activities. See the consolidated
statements of cash flows. The other principal uses of cash during
these periods were capital expenditures of approximately $553,000
and $132,000 in 1996 and 1995, respectively, and cash of
approximately $1.4 million used to acquire NSC. In addition,
during 1997, 1996 and 1995, the Company made payments on notes
and debentures payable of approximately $687,000, $638,000 and
$263,000, respectively. The Company did not make any payments on
notes and debentures payable in the 1998 first quarter.
Significant debt financing transactions during 1997, 1996 and
1995 and in the first quarter of 1998 were the issuance in
February 1997 of $1,120,000 4% convertible debentures due October
1, 1998 to Timboon, LTD ("Timboon", a non U.S. person) in
reliance upon exemptions under Regulation S of the Securities Act
of 1933 and the issuance in 1996 of (i) a series of 10%
cumulative convertible debentures, due on various dates through
November 1997, issued in reliance upon exemptions under
Regulation D of the Securities Act of 1933 and (ii) $500,000 10%
cumulative convertible debentures, due in November 1997, issued
to RANA Investment Company ("RANA") and an affiliate of RANA (non
U.S. persons) in reliance upon exemptions under Regulation S of
the Securities Act of 1993. During 1997, 1996 and 1995, the
Company also received proceeds of $286,743, $562,735 and $475,349
from the issuance of notes and debentures payable to officers,
directors and shareholders of the Company.
The 4% cumulative convertible debentures due October 1, 1997 were
convertible at any time after 45 days from the date of their
issuance, until maturity, into the Company's common stock at a
conversion price equal to the lesser of (a) 80% of the average
closing bid price of the Company's common stock for the five days
preceding the issuance of the debentures or (b) 70% of the
average closing bid price of the Company's common stock for the
five days preceding the conversion date. The Company incurred
costs in connection with this financing of $120,000 and received
net proceeds of $1,000,000. The Company, through December 31,
1997, converted $120,000
<PAGE> 21
of the 4% Debentures issued to Timboon into 256,361 shares of the
Company's common stock. As a result of the Company's refusal to
convert additional debentures, Timboon, LTD filed suit against
the Company seeking the conversion or payment of the debentures.
Effective March 2, 1998, the Company and Timboon entered into a
Settlement Agreement and Release (the "Settlement Agreement") in
settlement of all claims brought against each other in connection
with the 4% Debentures. Pursuant to the Settlement Agreement, the
Company is required to pay Timboon $1,200,000, in cash, or by the
liquidation by Timboon of shares of the Company's common stock
into which the 4% Debentures are convertible. The Settlement
Agreement also provided that the Company designate 4,000,000
shares of its common stock for the sale by Timboon in open market
or block transactions in conversion of the debentures. The amount
of debentures converted is to be determined based on the proceeds
received by Timboon from the sale of the shares.
As of the date of this Prospectus, the Company has been informed
that Timboon has sold approximately 1.6 million shares of the
Company's common stock and has received total proceeds of
approximately $220,000; and, the Company estimates the remaining
unconverted debentures held by Timboon total approximately
$980,000. The Company estimates that Timboon holds approximately
2,400,000 shares, including 1,000,000 of additional shares issued
by the Company to Timboon in June 1998. The Company expects that
it will either (i) issue additional shares of its common stock to
Timboon until such time as the debentures held by Timboon are
fully converted or (ii) liquidate the remaining debentures held
by Timboon by the payment of cash. The Company, however, is not
able to determine (i) the number of additional shares, if any,
that it may issue in the future in order for Timboon to fully
convert the debentures or (ii) if it will have sufficient cash to
satisfy any remaining debentures, after the sale by Timboon of
shares issued to date, or which may be issued in the future, in
conversion of the debentures.
The 10% cumulative convertible debentures due on various dates
through November 1997 were convertible into shares of the
Company's common stock on their respective maturity dates or on
the effective date of a registration statement under the
Securities Act of 1993, if earlier. The number of shares of
common stock issuable upon conversion of these debentures, in
either case, was generally to be determined by dividing the
principal amount of the debentures, plus accrued and unpaid
interest, by the lesser of (a) the fixed conversion prices set
forth in the debentures, which range from $1.50 to $5.00 per
share, or (b) a conversion price equal to 50% of the average
closing bid and ask prices of the Company's common stock at the
close of trading on the next day following the maturity date as
set forth in the respective debenture. As of December 31, 1997,
the Company and the holders of these debentures were in dispute
regarding conversion of the debentures. As of the date of this
Prospectus, the Company and the holders of the debenture notes
have reached an agreement(s) to settle the dispute; and, the
Company expects to issue an aggregate of 7,742,919 shares of its
common stock prior to the effective date of the registration
statement, of which this Prospectus is a part, upon conversion of
the debenture notes. See "Capitalization", "Principal
Stockholders" and "Selling Security Holders."
The 10% cumulative convertible debentures due in November 1997
were convertible into shares of the Company's common stock at any
time after 45 days from the date of their issuance and prior to
their scheduled one-year maturity dates. The conversion price of
these debentures, plus accrued and unpaid interest, is equal to
the lesser of (a) 70% of the average closing bid price of the
Company's common stock for the five days preceding the conversion
date or (b)80% of the average closing bid price of the Company's
common stock for the five days prior to issuance of the
debentures. In connection with the issuance of these debentures,
the Company incurred placement fees and other costs of
approximately $50,000 and received net proceeds of approximately
$450,000. As of December 31, 1997, the Company has converted
$330,000 of these debentures into 93,301 shares of the Company's
common stock and has outstanding unconverted debentures totaling
$170,000. The Company is in default of the terms of the
outstanding unconverted debentures by virtue of not having
converted the debentures on their maturity dates.
<PAGE> 22
The terms of notes and debentures outstanding at December 31,
1997, are more fully described in Note 7 to the consolidated
financial statements appearing elsewhere herein.
The Company is subject to various legal and administrative
proceedings. These proceedings include (i) a consent order
executed between the Company and the State of Michigan requiring
the Company to use its best efforts to satisfy the prerequisites
of the Securities and Exchange Commission and the Michigan
Securities Bureau for registering the common stock sold by the
Company to purchasers of its securities in the State of Michigan,
(ii) actions brought against the Company by certain former
employees and persons formerly under contract with the Company
for payments allegedly due them, (iii) an action by a shareholder
seeking the rescission of the sale by the Company of its common
stock to the shareholder, (iv) an action by an equipment lessor
seeking approximately $500,000 in lease payments and other
charges due under a lease agreement and (v) an action by the
former stockholders of CCI. In addition, the Company learned on
June 8, 1998 that an Involuntary Petition was filed on June 1,
1998 against the Company in the United States Bankruptcy Court
for the Middle District of Florida. An unfavorable outcome in one
or more of these actions could significantly impair the Company's
ability to generate positive cash flows from operations or
continue in operations. See "Legal Proceedings" and Note 17 to
the consolidated financial statements.
The amount of financing necessary to continue to support the
operations and capital needs of businesses acquired, the
continuing operating losses of businesses acquired, the lack of
equity and debt financing available to the Company (together with
the inability of the Company to meet its funding obligations
under the HMT acquisition agreement and its payment obligations
to trade and other creditors), and the desire of the former
shareholders of ATI and HMT to rescind the original purchases
transactions, among other factors, led to management's decision
to dispose of ATI and HMT and sell substantially all of the
operating assets of TNI. After the rescission of the ATI and HMT
acquisitions and the sale of the operating assets of TNI, the
remaining operations of the Company consist of NSC. NSC has
incurred substantial operating losses since its acquisition by
the Company in October 1995 and there is no assurance that NSC
will be able to reverse this trend in the future.
As of December 31, 1997, the Company has a deficiency in assets
of approximately $7.3 million and current liabilities exceeded
current assets by approximately $6.5 million. In addition, the
Company does not have any used or unused lines of credit or any
other committed and unused financing facilities. Consequently, it
is uncertain whether or not the Company will have sufficient cash
resources, either from operations or from financing activities,
to carry on its business operations, in which case the Company
would be required to seek other alternatives, including sale,
merger or discontinuance of operations.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("SFAS No. 130"), which is effective for
fiscal years beginning after December 15, 1997. SFAS No. 130
establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-
purpose financial statements. Although SFAS No. 130 only impacts
display as opposed to actual amounts recorded, it represents a
change in financial reporting. The Company has no accumulated or
other comprehensive income and has no revenues, expenses, gains
or losses that are includable in comprehensive income but
excluded from net income (loss). Accordingly, the Company has not
presented a statement of comprehensive income.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, Disclosures
about Segments of an Enterprise and Related Information ("SFAS
No. 131"), which is effective for years beginning after December
15, 1997. SFAS No. 131 establishes standards for the way public
<PAGE> 23
enterprises report information about operating segments in annual
financial statements and requires that those enterprises report
selected information about operating segments in interim
financial reports. It also establishes standards for related
disclosures about products and services, geographic areas and
major customers. The adoption of this statement did not have a
significant effect on the Company's reported segments or
financial statement disclosures.
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
several years and, the Company does not anticipate that
inflationary factors will have a significant impact on future
operations.
DESCRIPTION OF BUSINESS
Business Development and Suspended Operations-
With the acquisition of NSC in 1995, the Company entered the
healthcare cost containment field. The Company pursued
development for commercial use of healthcare management
information systems technology designed to manage healthcare
benefit costs. The Company licensed the systems technology
("CHAMPUS Software") under a Cooperative Research and Development
Agreement ("CRDA") with the U.S. Army. The CHAMPUS Software is
part of the Civilian Health and Medical Program for the
Uniformed Services ("CHAMPUS") program developed by the U.S.
Armed Services. The Company's license under the CRDA includes
the right to use, within its field of use, as defined, the
CHAMPUS database which includes the healthcare claims and
treatment histories of the men and women serving in the uniformed
services.
The Company has enhanced the CHAMPUS Software, which it has
copyrighted under the name "Continuum", to improve the management
and administration of healthcare benefits by intelligent
application of data analysis with strategies to identify
misapplied expenditures and overpayments. The proprietary
enhancements included in Continuum significantly expanded its
capabilities as a healthcare claims case management, treatment
analysis and data mining tool for use by commercial users in
controlling their healthcare costs. The Company planned to
operate a data center using Continuum and sell the benefits of
the Continuum operating system to the U.S. automotive industry,
other large, self-insured companies, healthcare insurers, PPO's,
HMO's, healthcare benefit plan administrators and large
pharmaceutical companies who the Company believes have a need to
analyze the outcomes of medical treatment regimes and drug
therapies. The Company suspended further development of
Continuum in June 1997, prior to completion of a fully working
and marketable management information operating system.
The Company does not have any facilities, equipment or financial
resources to pursue further development of the Continuum
operating system and is pursuing potential uses of the Continuum
operating system and CHAMPUS database in lieu of further
development activities.
The CRDA expires in June 1998 and, unless extended, the license
becomes perpetual and non-exclusive. The Company has requested
renewal of the CRDA on an exclusive basis. The renewal of the
CRDA on an exclusive basis may require the payment of a fee to
the U.S. Army, the amount of which has not yet been determined
and which neither NSC nor the Company are likely to have at the
time of renewal. See "Licenses and Copyrights."
In 1993 and 1995, respectively, NSC entered into service
agreements with Chrysler Corporation and Ford Motor Company to
audit healthcare claims which had been previously paid. Both
companies have self-insured health programs for its employees
administered by third party administrators. The purpose of the
audits was to
<PAGE> 24
recover payments of claims which were not covered under their
self-insured health benefit programs. In 1993, the Company
entered into a subcontract agreement with Health Management
Services ("HMS"), a healthcare claims management company located
in New York, NY, under which HMS used its own analytical software
to audit these healthcare claims. The Company received ten to
thirty percent of recovered payments and generally shared half of
its receipts from recovered claims with HMS. Due to a dispute
between the Company and HMS, the subcontract with HMS was
terminated in May 1997; and, due to performance issues between
Chrysler Corporation and HMS, the Company's 1993 service
agreement with Chrysler Corporation was terminated in September
1997. The Company's 1995 service agreement with Ford Motor
Company expired by its terms in March 1997. See "Continuing
Operations".
Continuing Operations-
In September 1997, the Company entered into an alliance agreement
with HMG Health Care Claims Auditing, Inc. located in Pittsburg,
PA ("HMG") to replace HMS as the Company's subcontractor for
healthcare cost containment contracts the Company might obtain in
the future. The Company believes HMG's proprietary computer
software programs provide a greater range of healthcare cost
containment features and services than those offered by HMS.
These features and services include, among others, electronic
review and reporting of health care claims paid and on an ongoing
basis to identify duplicate, erroneous or medically inconsistent
charges, payments for ineligible patients and other responsible
party liabilities from other group benefit programs, workers'
compensation coverage, motor vehicle or third party liability
coverage, payments for non-covered services, misapplied
deductibles and co-payments and provider agreement compliance.
The Company was able to negotiate a service agreement with
Chrysler Corporation beginning January 1998 to perform
pharmaceutical retrospective analysis and recovery services. As
a result of the Company's uncertain financial condition, however,
Chrysler Corporation and HMG entered into the agreement directly.
Pursuant to the services agreement between HMG and Chrysler
Corporation and the alliance agreement between the Company and
HMG, the Company and HMG are to receive a monthly fee of $4,000
and $12,000, respectively, from Chrysler Corporation and will
share on a 50%-50% basis twenty percent (20%) of the claim
recoveries, up to a maximum of $5,000,000 in claim recoveries,
under the services agreement between HMG and Chrysler
Corporation. HMG began performance under the services agreement
with Chrysler Corporation in May 1998.
Following suspension of development of Continuum, the Company
redirected its business to focus on the development of a network
of healthcare cost containment companies, providers of healthcare
products and services and third-party healthcare plan
administrators, beginning with HMG, with an objective of
obtaining the right to market a wide array of non-competing
healthcare cost containment services and products to large, self-
insured companies on a fee or revenue sharing basis. The Company
has entered into an alliance agreement with Haddon National
Companies, Inc. located in Maple Shade, NJ ("HNCI") and
anticipates that it will enter into an alliance will a major
pharmaceutical manufacturer in the near future. The alliance
agreement with HNCI gives the Company the ability to sell and
market HNCI's claims administration and processing services,
medical and surgical cost containment services and Medicare A and
B validation services to large self-insured corporations, third
party administrators, commercial health insures and other managed
healthcare companies. The proposed alliance with a major
pharmaceutical manufacturer contemplates the use of the CHAMPUS
database, with the approval of the U.S. Army (see "Licenses and
Copyrights"), and the Continuum software to enhance the
manufacturer's mathematical models for its disease management
programs and expansion of its existing disease management
programs to include other diseases.
Market and Marketing-
The market for the products and services offered and expected to
be offered by the Company include large corporations that self-
insure and rely on third-party administrators to manage their
healthcare benefit programs, the third-party
<PAGE> 25
administrators themselves, HMO's, PPO's and healthcare insurers.
Healthcare programs administered by state and municipal
governments also represent potential customers for the products
and services the Company expects to market. The Company believes
that interest in healthcare cost containment, including
recovering payments of healthcare claims which should not have
been made and prepayment screening of claims, will become
increasingly more important to large corporations, third-party
administrators, HMO's, PPO's and healthcare insurers.
The Company believes that its focus on alliance relationships and
the wide array of healthcare cost containment products and
services currently available via alliance relationships will
provide the Company with the ability to generate profitable
operations in the future.
Competition-
The Company is not aware of any other organizations which are
marketing the services of multiple providers of healthcare cost
containment and case management products and services. The
Company believes its primary competition is the providers of such
services with whom the Company does not have a marketing
agreement or affiliation. The Company believes that this field
is fragmented, with many companies providing healthcare claims
auditing and prepayment claims screening services.
Licenses and Copyrights-
On June 2, 1994 before acquisition by the Company, NSC entered
into the CRDA with the U.S. Army. Under the original CRDA, NSC
has an irrevocable, perpetual license to use the CHAMPUS Software
and CHAMPUS database to perform evaluation, analysis and
recovery of benefit payments involving the healthcare benefit
programs of the U.S. automotive industry and their down-line
vendors, including indemnity claims, coordinated benefits and
workers compensation claims, and to perform in-depth studies of
the U.S. automobile industry's healthcare benefit programs
("field of use"). The original CRDA expired in June 1997 and was
extended for an additional one-year period, beginning June 18,
1997. The extension of the CRDA also gave NSC the ability, with
the prior approval of the U.S. Army, to use the CHAMPUS database
to analyze the healthcare benefits of companies outside of the
U.S. automotive industry. NSC has not made such a request and
has no reason to believe that if such a request were made, it
would be unreasonably withheld. The license to use the CHAMPUS
database will convert to a non-exclusive, perpetual license,
unless the CRDA is further extended on an exclusive basis by the
mutual consent of the parties. The Company has requested an
exclusive extension. As of the date of this Prospectus, the
Company is unable to predict the likelihood of whether or not the
request for exclusive extension of the CRDA will be granted. The
Company or NSC may be required to pay a fee for the extension,
the amount of which has not been determined. NSC and the Company
do not currently have the resources to pay an extension fee.
NSC is not required to turn over to the U.S. Army the
enhancements which it has made to the CHAMPUS Software in the
development of Continuum and is entitled to patent any inventions
made and copyright any works created under the CRDA.
Facilities and Employees-
The Company does not own any facilities. All office space,
consisting of a corporate office with approximately 1,450 sq.
ft., is leased. The monthly rental is approximately $1,600. The
Company believes the leased facilities are adequate for its
current needs and that additional suitable space will be
available as needed. The Company has three executive employees
and one administrative assistant. The Company makes extensive use
of independent contractors for accounting, administration and
sales and marketing and currently has approximately 10 persons
under contract providing such services. The Company also has
commission-based marketing representatives who serve over 20
major metropolitan areas.
<PAGE> 26
LEGAL PROCEEDINGS
The Company is subject to various legal and administrative
proceedings. These proceedings include (i) a consent order
executed between the Company and the State of Michigan requiring
the Company to use its best efforts to satisfy the prerequisites
of the Securities and Exchange Commission and the Michigan
Securities Bureau for registering the common stock sold by the
Company to purchasers of its securities in the State of Michigan,
(ii) actions brought against the Company by certain former
employees and persons formerly under contract with the Company
for payments allegedly due them, (iii) an action by a shareholder
seeking the rescission of the sale by the Company of its common
stock to the shareholder, (iv) an action by an equipment lessor
seeking approximately $500,000 in lease payments and other
charges due under a lease agreement and (v) an action by the
former stockholders of CCI. In addition, the Company learned on
June 8, 1998 that an Involuntary Petition was filed on June 1,
1998 against the Company in the United States Bankruptcy Court
for the Middle District of Florida.
These legal and administrative actions are more fully described
below.
The consent order executed by the Company and the State of
Michigan in December 1996, requires the Company to use its best
efforts to satisfy the prerequisites of the Security and Exchange
Commission and the Michigan Securities Bureau for registering the
common stock sold to Michigan purchasers of its common stock for
resale by them in the public market. This action is the result of
the sale by the Company of its securities in the State of
Michigan without an exemption from registration under the
Michigan Uniform Securities Act. In the event the Company is
unable to effect a registration statement or such purchasers are
unable to resell their shares pursuant to such registration
statement at a higher price than their cost, then the Company is
required to use its best efforts to satisfy the prerequisites of
the Securities and Exchange Commission and the State of Michigan
for making a rescission offer to all such purchasers. Also,
pursuant to the consent order, the Company must cease the
unregistered sale of securities in Michigan, has been censured
and has paid costs to the state of $2,500. Upon satisfaction of
the consent order, all sanctions are terminated. As of December
31, 1997, the Company estimates its maximum potential exposure as
a result of any rescission offer which may be required to be made
in the State of Michigan to be approximately $795,739, including
interest of approximately $121,615. The number of shares the
Company believes may be subject to a rescission offer in the
State of Michigan, if such an offer were to be made, is
approximately 219,000 shares; and, the weighted average purchase
price of such shares is approximately $3.25 per share. The
Company has not satisfied the requirements of the consent order.
Due to the "best efforts" nature of the Company's compliance
obligation, the Company believes that its performance of the
terms of the consent order is deferred until such time it is able
to both financially and functionally comply with the consent
order.
On April 15, 1997, Mr. Ken Lame, as Plaintiff, filed an action in
the United States District Court, District Court of Utah, Central
Division (Case No. 2:97CV0292W) against the Company and NSC, as
Defendants. This action arises from a consulting agreement
between Mr. Lame and the Company. The action seeks approximately
$250,000, plus interest, for payments Mr. Lame alleges are due
under the consulting agreement. The Company has accrued all
amounts it believes are due under the consulting agreement. The
resolution of this matter is not expected to result in
liabilities materially in excess of those that have already been
accrued by the Company under the consulting agreement.
On May 21, 1997, Mr. Jeff Good, as Plaintiff, filed an action in
the United States District Court, Southern District of Iowa,
Davenport Division (Case No. 3-97-CV-80085) against the Company,
as Defendant, for amounts Mr. Good alleges are due under an
employment agreement between Mr. Good and one of the Company's
subsidiaries (which subsidiary is no longer conducting business).
This action seeks compensation and benefits under the employment
agreement in excess of $200,000. The Company believes this
action to be without merit and intends to vigorously defend it.
However, it is not possible to predict the likely outcome of
this matter.
<PAGE> 27
On May 1, 1997, Mr. John Jassy, as Plaintiff, filed an action in
the Circuit Court of the Sixth Judicial Circuit in and for
Pinellas County, Fl., Civil Division (Case No. 97-3103-CI-20)
against the Company, Mr. Stephen E. Williams and Mr. Edwin B.
Salmon, Jr., as Defendants. This action alleges that numerous
misrepresentations and deceptive statements were made to Mr.
Jassy and certain family members of Mr. Jassy to induce them to
purchase the Company's securities. The action seeks rescission of
those security purchases, payment of compensation Mr. Jassy
alleges is due to him from his employ by the Company as an
executive officer and repayment of a loan made to Mr. Williams by
Mr. Jassy. This action seeks approximately $500,000, plus
interest and attorney's fees. Included in the amounts claimed by
plaintiff, are approximately $450,000, including interest, to
repurchase approximately 100,000 shares of the Company's common
stock purchased by plaintiff and his family members,
approximately $60,000, plus interest, Mr. Jassy alleges is
payable to him in unpaid salary and benefits and $2,500, plus
interest, Mr. Jassy claims is owed to him by Mr. Williams, a
former President and Chief Executive Officer of the Company. The
Company believes this action to be without merit and intends to
vigorously defend it. In the event of an unfavorable outcome, it
is unlikely that the Company would be able to repurchase the
shares of common stock or pay other amounts subject to the
action. On May 11, 1998, the Company was notified of dismissal of
this case.
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 of CCI filed suit to enforce promissory
notes in the aggregate principal amount of $300,000, which were
issued by the Company in connection with the CCI acquisition and
the issuance of 200,000 shares of the Company's Class A preferred
stock they allege are due them under the acquisition agreement.
This matter was referred by court order to mandatory arbitration
in the State of Florida. On February 3, 1998, the Arbitrators'
awarded in favor of the former shareholders of CCI. The award
requires, among other things, that the Company (i) convert
200,000 shares of its Class A Preferred Stock, held by the former
shareholders of CCI, into 100,000 shares of its common stock and
(ii) issue another 200,000 shares of Class A Preferred Stock to
the former CCI stockholders, which is also convertible into
100,000 shares of the Company's common stock, and gave the former
shareholders of CCI the ability to seek a summary judgment
against the Company for $500,000, without opposition, or accept
500,000 shares of the Company's Class A Preferred Stock in lieu
of a summary judgment. As of December 31, 1997, the Company has
recorded a loss contingency of $111,000, related to this action.
It is highly unlikely that the Company would be able to satisfy a
summary judgment should the former shareholders of CCI decide to
seek a summary judgment in lieu of preferred stock.
In October 1997, Boston Financial Corporation ("BFC") took
possession of certain computer equipment leased by NSC from BFC
as a result of the default by NSC of payments due under the
lease. On December 11, 1997, BFC filed an amended suit in
District Court, 45th Judicial District, Bexar County, Texas (Case
No. 97CI-14567) against NSC and, as guarantors of the lease
agreement, the Company, ATI and TNI. This action seeks
approximately $500,000 in lease payments and other charges due
under the lease agreement. The Company is attempting to negotiate
a settlement of this matter and may have several counterclaims
against BFC should the Company and BFC fail to settle. However,
it is not possible to predict the likely outcome of such
negotiations or any counterclaims the Company may have against
BFC. As of December 31, 1997, the Company has recorded a loss
contingency reserve of approximately $500,000 related to this
action.
On June 6, 1997, Timboon, LTD ("Timboon"), as Plaintiff, filed an
action in the United States District Court, Southern District of
New York (Case No. 97 Civ. 4464 (JSR), against the Company, as
Defendant, seeking the delivery of 163,438 shares of the
Company's common stock to Plaintiff as a result of the conversion
of $150,000 of the Company's 4% Convertible Debentures, issued to
Timboon in February 1997 in reliance upon exemptions under
Regulation S of the Securities Act of 1933, and the payment of
$970,000 (the principal amount of the Company's 4% Convertible
Debentures that have not been converted by Timboon) to Timboon,
plus damages.
<PAGE> 28
Effective March 2, 1998, the Company and Timboon Ltd. entered
into a Settlement Agreement and Release (the "Settlement
Agreement") in settlement of all claims brought against each
other in connection with the debentures issued to Timboon. See
Note 7 to the consolidated financial statements appearing
elsewhere herein and "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Prior to the rescission of the ATI acquisition agreement, the
Company obtained and guaranteed an equipment lease financing
facility for ATI's use. The financing facility was subsequently
terminated by the lessor due to non-payment by ATI of payments
due under the related lease agreements. In connection with the
rescission of the ATI acquisition agreement, ATI issued a
promissory note to the Company in the amount of $180,000, payable
upon the default by ATI of payments due under the lease financing
facility. Payments due to the Company under the promissory note
are to be equal to the amount, if any, the Company may be
required to pay under the lease guaranty agreement. In the event
of a default by ATI under the lease financing facility, it is
uncertain whether or not the Company would be able to satisfy the
terms of the guaranty agreement or whether or not ATI would be
able to satisfy the terms of the promissory note.
As of December 31, 1997, the Company and its subsidiaries have
pending outstanding judgments totaling approximately $170,000,
exclusive of the CCI judgment referred to above. These judgments
arose from cancellation of office and equipment leases and from
non-payment of obligations due to trade creditors.
The Company is also involved in numerous other legal and
administrative actions incurred in the ordinary course of
business, none of which are expected to have a material impact on
the Company's results of operations.
Chapter 7 Involuntary Bankruptcy Petition
The Company learned on June 8, 1998 that an Involuntary Petition
(the "Petition") was filed on June 1, 1998 against the Company in
the United States Bankruptcy Court for the Middle District of
Florida (Case No. 98-09299-8P7) under Chapter 7 of the Bankruptcy
Act (the "Proceeding") by certain petitioners (the
"Petitioners"). The names of the Petitioners and the amounts of
their alleged claims are set forth in the following table.
Petitioner Name Amount
Claimed
Kenneth D. Lame $212,519
Barry L. Johnson 9,171
Jon T. Lame 2,325
Jack Arthur 26,498
K. Philip Lame 489
Keith A. Krenz 77,442
Kenneth Lame served as a consultant to NSC from October 31, 1995
to January 17, 1997 and as its President and Chief Executive
Officer from January 1997 to March 1997. Part of Kenneth Lame's
assigned duties as the President and Chief Executive Officer of
NSC was development of a business, operating and marketing plan
for NSC's "CHAMPUS software and data base." Kenneth Lame did not
deliver any business, operating or marketing plans to NSC and NSC
terminated the services of Kenneth Lame in March 1997. The
alleged claim of Kenneth Lame, which is properly against NSC, is
disputed by NSC. Kenneth Lame arranged for NSC to engage the
services of Petitioners Johnson, Jon T. Lame, Arthur and K.
Philip Lame to assist him in development of the business,
operating and marketing plan. The Company believes that it never
employed Kenneth Lame or the Petitioners named in the preceding
sentence and is not indebted to them in any amount. Furthermore,
the Company believes the alleged claims of Petitioners Arthur,
Jon. T. Lame and K. Philip Lame have been paid in full and the
alleged claim of Petitioner Johnson has been reduced to $4,000.
<PAGE> 29
Kenneth Lame introduced Health Management Technologies, Inc.
("HMT") to the Company which the Company ultimately acquired and
later divested. The Company and Kenneth Lame entered into a
letter agreement dated July 16, 1996 for payment of a finder's
fee to Kenneth Lame for the HMT acquisition. The Company
believes it has satisfied in full all of its monetary obligations
to Kenneth Lame under the letter agreement. Furthermore, Kenneth
Lame has a suit pending against the Company and NSC in The United
States District Court, District of Utah (case no. 2:97-cv-00292
C) for the claims which he asserts against the Company in the
Petition. Accordingly, the Company believes Petitioners Kenneth
Lame, Johnson, Jon T. Lame, Arthur and K. Philip Lame are
creditors of NSC, to the extent of provable claims, and not
creditors of the Company.
Petitioner Krenz was a shareholder of NSC at the time it was
acquired by the Company. As a part of the acquisition agreement,
the Company issued a promissory note to Mr. Krenz in the amount
of $129,070. The Company paid $51,628 of this note prior to May
1996; but, suspended payments because the Company discovered the
business, assets and prospects of NSC had been misrepresented.
The Company has not received any correspondence or any demand for
payment from Mr. Krenz since the date it suspended payments to
Mr. Krenz.
On June 23, 1998, the Company filed a motion to dismiss the
Petition on the grounds that it does not have any outstanding
obligation to five of the six Petitioners and contests its
obligation to the sixth petitioner. The Company intends to seek
sanctions against the Petitioners and its counsel for any damages
its sustains as a result of the Petition. The Company believes
that the Petitioners have filed the Petition in bad faith and
with malice and that the Petition contains fraudulent
misrepresentations to the Court. The Company intends to
vigorously defend against the Petition.
MANAGEMENT
The names and ages of directors (including the year in which each
became a director) and executive officers of the Company as of
the date hereof are set forth in the following table:
<TABLE>
Director
Name Age Positions With Co. and Subsidiaries Since
- ---------------------- --- ----------------------------------- --------
<S> <C> <C> <C>
Edwin B. Salmon, Jr. 60 Chairman of the Board of Directors 1991
and Chief Financial Officer
James T. Kowalczyk 58 Director and President 1997
Richard A. Sweet 64 Director 1997
Larry R. Snapp 52 Director 1997
Hugh M. Gibbons 57 Executive Vice President N/A
</TABLE>
N/A means the named executive officer is not a director.
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 officer salaries, if the Director is also an
executive officer, and stock options that may be granted from
time-to-time for their services as Directors (see Item 11
"Executive Compensation" and Item 12 "Security Ownership of
Certain Beneficial Owners and Management"). In the event the
Company has directors who are not also officers, the Company may
reimburse such directors for travel expenses related to Company
business. The directors and officers of the Company are
indemnified against liabilities which they incur by virtue of
being directors and officers under the
<PAGE> 30
corporate laws of the State of Florida. The articles of
incorporation and bylaws of the Company do not contain any
provisions with respect to indemnification of directors and
officers. The Company has been advised that in the opinion of the
Securities and Exchange Commission, indemnification for
liabilities arising under the federal securities laws is against
public policy and may be unenforceable. The Company would seek
approval of any such indemnification by a court of competent
jurisdiction.
Messrs. Kowalczyk, Sweet and Snapp were elected to the Board of
Directors at various times during 1997 by remaining Directors to
fill vacancies. The Company did not hold an annual meeting of
shareholders in 1997 due its inability to comply with the
information requirements of Rule 14a-3, as promulgated by the
Securities and Exchange Commission for the solicitation of
proxies. Rule 14a-3 requires registrants to furnish security
holders with an annual report which includes audited balance
sheets as of the end of the two most recent fiscal years and
audited statements of operations and cash flows for each of the
three most recent fiscal years. The Company was unable to comply
with such requirements due the Company not having timely filed
its Annual Report on Form 10-K for the year ended December
31,1996. The Company did not timely file its Annual Report on
Form 10-K for the year ended December 31, 1996 due to its
inability to timely pay for the services of its independent
auditors and the time required by management to complete its
assessment of the carrying value of intangible assets and
goodwill recorded in connection with the acquisition of NSC. The
Company contemplates holding an annual meeting of shareholders in
1998. It is uncertain, however, whether or not the Company will
be able to prepare and mail proxy solicitation materials to its
shareholders due to limitations on the part of the Company to
fund those collective efforts. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Mr. Edwin B. Salmon, Jr. has been associated with the Company in
various capacities since its formation. Mr. Salmon is currently
Chairman of the Board of Directors and the Company's Chief
Financial Officer and previously held the position of the
Company's Executive Vice President. 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 the 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. Mr. Salmon was also the founder of LCI
Communications, Inc., which was acquired by the Company in June
of 1995.
Mr. James T. Kowalczyk became a Director and was appointed
President of the Company in July 1997. For the past 30 years, Mr.
Kowalczyk was a co-founder, director and franchiser in
Pittsburgh, Pennsylvania with Budget Marketing, Inc. and was a co-
founder and senior officer of 2001/VIP Clubs of America.
Mr. Richard A. Sweet became a Director of the Company in April
1997. For the past five years, Mr. Sweet has been a Branch
Manager for Insurance Adjustors and Services Corporation of
Tampa, Florida and from 1960 to 1986 was Branch Manager and
Supervisor of Claims for Indiana Insurance Co.
Mr. Larry R. Snapp became a Director of the Company in May 1997.
Mr. Snapp has over 30 years of banking industry experience and,
for the last five years was Vice President of National City Bank
of Indiana, a position he recently retired from.
Mr. Hugh M. Gibbons was appointed as the Company's Executive Vice
President in July 1977. For the past five years Mr. Gibbons has
served as President of Gibbons' Health Plan Recoveries, Inc.,
President of and Principal of Health Plan Audit Services, Inc.,
President of H.M. Gibbons & Associates, Inc. and Executive Vice
President of HMG Health Care Auditing, Inc. Mr. Gibbons has over
34 years of healthcare cost containment experience and has a
Doctor of Jurisprudence Degree from the University of Baltimore
School of Law.
<PAGE> 31
MAMAGEMENT COMPENSATION
The following table sets forth the compensation paid or accrued
to the chief executive officer of the Registrant or person
discharging comparable duties and to the executive officers of
the registrant whose compensation exceeded $100,000 for each of
the three years in the period ending December 31, 1997.
<TABLE>
Annual Compensation
----------------------------------------------------
Name & Principal Positions Long-Term
- -------------------------- Year Salary Bonus Other Compensation
---- ------ ----- ----- ------------
<S> <C> <C> <C> <C> <C>
Stephen E. Williams 1997 $150,000 $ -- $ -- $ --
Chief Executive 1996 177,500 -- 7,500 --
Officer (1)(2)(3) 1995 190,625 -- 7,500 --
James T. Kowalczyk 1997 32,500 -- -- --
President and Director (4) 1996 N\A N\A N\A
N\A
1995 N\A N\A N\A
N\A
Edwin B. Salmon, Jr. 1997 150,000 -- -- --
Chief Financial Officer, 1996 177,000 -- 7,500 --
Treasurer and Chairman of 1995 99,630 -- 9,000 --
the Board(1)(4)
</TABLE>
(1) The Company entered into employment agreements with Mr. Williams and
Mr. Salmon. 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. See Note 13 to the consolidated financial statements. Effective
December 1, 1996, the annual salaries of Messrs. Salmon and Williams were
reduced to $150,000, each.
(2) In 1995, the Company issued, as additional compensation to
Mr. Williams, 500,000 shares of Common Stock, valued at $15,000,
and 1,375,000 shares of Class A preferred stock, valued at
$20,625, in connection with the performance of certain conditions
set forth in a 1994 letter agreement. See Note 13 to the
consolidated financial statements appearing elsewhere herein.
(3)In April and June 1997, Mr. Williams resigned as the Company's
President and CEO and Director, respectively.
(4)In August 1997, each of Messrs. Kowalczyk and Salmon were
granted options to purchase 500,000 shares of the Registrant's
common stock, exercisable at $0.10 per share at any time over
five years.
N/A means the respective officer was not employed by the Company
during that period.
<PAGE> 32
CERTAIN TRANSACTIONS WITH MANAGEMENT AND OTHERS
At December 31, 1996, the Company had an outstanding $25,000 note
payable for money borrowed from Mr. Edwin B. Salmon bearing
interest at 8%. This note, plus accrued interest, was converted
into 25,762 shares of the Company's common stock in February
1997. During 1997, Mr. Salmon loaned the Company $40,243 without
interest and the Company repaid Mr. Salmon $40,243.
At December 31, 1996, the Company had notes outstanding for money
borrowed from American First Equipment Leasing totaling $62,741.
During 1997, the Company borrowed $39,500 from American First
Equipment Leasing, repaid $44,241 of such notes, plus accrued
interest, and converted $58,000 of such notes, plus accrued
interest, into shares of the Company's common stock at a
conversion price of $1.00 per share. See Note 2(d) to Item 12
"Security Ownership of Certain Beneficial Owners and Management."
During 1997, the Company borrowed $65,000 from Brittany Leigh,
Inc. and repaid $65,000, plus accrued interest. See Note 2(c) to
Item 12 "Security Ownership of Certain Beneficial Owners and
Management."
At December 31, 1996, the Company had outstanding notes payable
for money borrowed from Mr. Richard A. Sweet, a Director and
shareholder of the Company, totaling $40,000. During 1997, the
Company converted these notes, plus accrued interest, into 41,565
shares of the Company's common stock.
As of December 31, 1996, the Company had outstanding notes
payable to the former shareholders of TNI totaling $450,000
issued in connection with the acquisition of TNI by the Company,
bearing interest at 10% per annum, and $250,000 outstanding to
the former shareholders of ATI issued in connection with the
acquisition of ATI by the Company, bearing interest at 6% per
annum. Effective March 31, 1998, the Company issued 893,278
shares of its common stock and 450,000 stock purchase warrants
(225,000 of which are exercisable at $1.50 per share by the terms
of the respective debenture note and 225,000 of which are
exercisable at $0.20 per share pursuant to a redemption offer) in
satisfaction of the notes payable to the former shareholders of
TNI. The notes payable to the former shareholders of ATI were
removed from the consolidated balance sheet in 1997 in connection
with the rescission of the ATI acquisition.
At December 31, 1996, the Company had outstanding notes for money
borrowed from certain shareholders (other than from Mr. Salmon,
Brittany Leigh, Inc., American First Equipment Leasing, Inc. and
Mr. Sweet) totaling $235,000 bearing interest at 8% to 10% per
annum. During 1997, certain shareholders of the Company (other
than Mr. Salmon, Brittany Leigh, Inc., American First Equipment
Leasing, Inc. and Mr. Sweet) loaned the Company an aggregate
amount of $135,000 at 10% interest. Of these notes, $170,000,
plus accrued interest, was converted during the year into shares
of the Company's common stock at prices ranging from $0.90 to
$1.00 per share and $200,000, plus accrued interest, was paid in
cash.
During 1996, the Company issued $1,195,000 of 10% convertible
debentures to NIDAN Corporation. Subsequent to the issuance of
these debentures, the Company and NIDAN entered into addendum
agreements to revise the terms of such convertible debentures to
provide for (i) the conversion of such debentures into shares of
the Company's common stock at the lesser of 50% the bid-ask price
of the Company's common stock at the close of trading on the
first day next following the conversion date, defined as the
earlier of either the maturity date of the respective debenture
or the date of an effective registration statement covering the
shares issuable upon conversion, or at the per share conversion
price as set forth in the respective debenture and (ii) reset the
exercise price of warrants which are to be issued upon conversion
of the debentures to the lesser of 50% the bid-ask price of the
Company's common stock at the close of trading on the first day
next following the conversion date, defined as the earlier of
either the maturity date or the date of an effective registration
statement covering the shares issuable upon conversion, or the
per share exercise price as set forth in the respective warrant
agreement.
<PAGE> 33
During 1997, the Company converted $84,000 of these convertible
debentures, plus accrued interest, into 19,033 shares of the
Company's common stock. As of December 31, 1997, the Company and
the holders of these debentures were in dispute regarding
conversion of the remaining debentures. As of the date of this
Prospectus, the Company and the holders of the debenture notes
have reached an agreement(s) to settle the dispute; and, the
Company expects to issue, prior to the effective date of the
registration statement, of which this Prospectus is a part, upon
conversion of the debenture notes (i) an aggregate of 7,742,927
shares of its common stock and (ii) 2,000,000 common stock
purchase warrants, 1,000,000 of which will be exercisable at
$0.20 per share and 1,000,000 of which will be exercisable at
$0.25 per share. See "Capitalization", "Principal Stockholders"
and "Selling Security Holders."
During 1997, the Company issued an aggregate of 142,857 shares of
its common stock to American First Equipment Leasing and Brittany
Leigh, valued at $61,829, for services rendered to the Company.
The services rendered to the Company included computer hardware
and software support and market research as to the Company's and
operating division performance.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding
beneficial ownership of the Company's common stock as of June 30,
1998 by each shareholder known by the Company to be a beneficial
owner of more than five percent of the Company's common stock, by
each of the registrant's named directors and executive officers,
and by all directors and executive officers of the registrant as
a group. Except as indicated in the footnotes 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.
<TABLE>
Name of Amount and Nature Percent
Beneficial Owner of Beneficial Interest(1) of Class(1)
- ---------------------- ------------------------- -----------
<S> <C> <C>
Edwin B. Salmon, Jr. 3,247,782 (2a) 8.29
212,143 (2b) 0.54
22,300 (2c) 0.06
40,000 (2d) 0.10
40,000 (2e) 0.10
300,000 (2f) 0.77
James T. Kowalczyk 1,738,000 (3) 4.44
Richard A. Sweet 266,410 (4) 0.68
Larry R. Snapp 167,250 (4) 0.43
Hugh M. Gibbons 2,176,761 (5) 5.56
All Directors and Executive Officers
as a Group(5 persons) 8,210,646 (6) 20.97
Meyering, Gilde and Helsel Group 5,486,391 (7) 14.01
Nidan Corporation 4,511,118 (8) 11.52
</TABLE>
(1) Based on information available to the Company, unless
otherwise indicated such shares are owned of record by the named
beneficial owner or the named beneficial owner and spouse, and
represent sole voting and investment power. Such person's
percentage ownership has been calculated assuming (i) that all
warrants, options and convertible debentures held by such person
that are exercisable within 6 months have been exercised, but
that no other outstanding warrants, options or convertible
debentures have been exercised (ii) that the shares to be issued
to officers and directors in payment of accrued compensation are
issued (see (2a), (3) and (5) below).
(2a) Includes options for 500,000 shares exercisable at an
exercise price of $0.10 per share at any time through August 15,
2002 and 2,022,020 shares to be issued in
<PAGE> 34
payment of accrued and unpaid compensation. Mr. Salmon has sole
voting and investment power over these shares. The address of Mr.
Salmon is the address of the Company.
(2b) These shares are owned by Brittany Leigh, Inc. Mr. Edwin B.
Salmon disclaims beneficial ownership of these shares. Mr. David
Salmon, Mr. Edwin B. Salmon's adult son, is a Director and the
President and Mr. Winfred Russell is a former
President of this corporation. Mr. Edwin B. Salmon was reported
to be one of two directors on the annual report for the
corporation filed with the State of Florida; but, Mr. David
Salmon and Mr. Edwin B. Salmon maintain that the annual report
was filed in error and Mr. Edwin B. Salmon neither is nor in the
past two years has been a director or officer of this
corporation. Mr. Edwin B. Salmon is a creditor of this
corporation and has received repayment of his loans to the
corporation from proceeds realized by the corporation from the
sale of the registrant's common stock. Mr. Russell, in his
capacity as the former President of this corporation, also
authorized Mr. Edwin B. Salmon, in Mr. Russell's absence, to
approve purchases and sales of the registrant's common stock by
the corporation when unsolicited offers are received from
brokers. Mr. Edwin B. Salmon currently has no such authority. No
purchases or sales of the registrant's common stock by this
corporation have been initiated by the registrant. The address of
Brittany Leigh, Inc. is 1520 San Charles Drive, Dunedin, Florida
34698.
(2c) These shares are owned by American First Equipment Leasing,
Inc. Mr. Edwin B. Salmon disclaims beneficial ownership of these
shares. Mr. David Salmon, Mr. Edwin B. Salmon's adult son is a
Director and President and Mr. Winfred Russell is a former
President of this corporation. Mr. Edwin B. Salmon was reported
to be one of two directors on the annual report for the
corporation filed with the State of Florida; but, Mr. David
Salmon and Mr. Edwin B. Salmon maintain that the annual report
was filed in error and Mr. Edwin B. Salmon neither is nor in the
past two years has been a director or officer of the corporation.
Mr. Salmon is a creditor of this corporation and has received
repayment of his loans to the corporation from proceeds realized
by the corporation from the sale of the registrant's common
stock. Mr. Russell, in his capacity as the former President of
this corporation, also authorized Mr. Edwin B. Salmon, in Mr.
Russell's absence, to approve purchases and sales of the
registrant's common stock by the corporation when unsolicited
offers are received from brokers. Mr. Edwin B. Salmon currently
has no such authority. No purchases or sales of the registrant's
common stock by this corporation have been initiated by the
registrant. The address of American First Equipment Leasing, Inc.
is 1520 San Charles Drive, Dunedin, Florida 34698.
(2d) These shares are owned by the Paige Irrevocable Trust. Mr.
Edwin B. Salmon is the grantor of this irrevocable trust; but,
his three adult children, including Mr. David Salmon, none of
whom reside with him, are the co-trustees and one of Mr. Edwin B.
Salmon's daughters is the sole beneficiary. Mr. Edwin B. Salmon
disclaims any beneficial interest in this trust. The address of
the trust is the address of the Company.
(2e) These shares are owned by the Jennifer Irrevocable Trust.
Mr. Edwin B. Salmon is the grantor of this irrevocable trust;
but, his three adult children, including Mr. David Salmon, none
of whom reside with him, are the co-trustees and one of Mr. Edwin
B. Salmon's daughters is the sole beneficiary. Mr. Edwin B.
Salmon disclaims any beneficial interest in this trust. The
address of the trust is 700 S.W. 66 nd Blvd., Gainesville, Fla.
32607. The address of Brittany Leigh, Inc. is 1520 San Charles
Drive, Dunedin, Florida 34698.
(2f) These shares are owned by the David E. Salmon Irrevocable
Living Trust. Mr. David E. Salmon is an adult child of Mr. Edwin
B. Salmon. Mr. Edwin B. Salmon disclaims any beneficial interest
in this trust. The address of Mr. David E. Salmon is 1520 San
Charles Drive, Dunedin, Florida 34698.
(3) Includes options for 500,000 shares exercisable at an exercise price
of $0.10 per share at any time through August 15, 2002 and 790,000 shares
to be issued in
<PAGE> 35
payment of accrued and unpaid compensation. The address of Mr.
Kowalczyk is the address of the Company.
(4) Includes options for 100,000 shares exercisable at an
exercise price of $0.10 per share at any time through August 15,
2002. The address of Mr. Sweet and Mr. Snapp is the addresses of
the Company.
(5) Includes warrants to purchase 500,000 shares at an exercise
price of $0.47 at any time through December 22, 1999 and
1,019,650 shares to be issued in payment of accrued and unpaid
compensation.
(6) Includes the shares and options referred to in (2a)-(2f) above, plus
the options and warrants referred to in (3), (4) and (5). Mr. Edwin B.
Salmon disclaims beneficial ownership of the shares referred to in (2c)-
(2f) above. The address of each director and executive officer of the
Company is the address of the Company.
(7) The following persons have filed a Form 13D which discloses
they share the power to vote or direct the vote and share the
power to dispose or to direct the disposition of the shares. See
"Selling Security Holders."
Name Address
- ------------------- ----------------------
Harold Meyering 235 S. Pine St.
McBain, Michigan 49657
Kenneth Edward Gilde 1630 W. Blue Road
McBain, Michigan 49657
Kenneth Earl Gilde 570 W. Blue Road
Falmouth, Michigan 49632
David E. Gilde 4565 Forward Road
Falmouth, Michigan 49632
Phillip S. Gilde 8200 S.McGee Road
McBain, Michigan 49657
Dale Meyering 9525 W. Watergate Road
McBain, Michigan 49657
Charles O. Helsel 9321 N. Burkett Road
Lake City, Michigan 49651
Edwin L. Helsel 5981 N. Edwards Rd.
Lake City, Michigan 49651
(8) Includes 2,500,000 shares to be issued prior to the effective
date of the registration statement, of which this Prospectus is a
part, upon conversion of outstanding debentures and 2,000,000
common stock purchase warrants. See "Selling Security Holders".
DESCRIPTION OF SECURITIES TO BE REGISTERED
The authorized capital stock of the Company consists of fifteen
million shares of Preferred Stock and fifty million shares of
Common Stock, $.001 par value per share. The Board of Directors
designated five million shares of the preferred stock as Class A
Convertible Preferred Stock and the balance of ten million shares
as Class B Convertible Preferred Stock.
A total of 35,756,472 shares of Common Stock are issued and
outstanding, including 11,874,599 shares to be issued to certain
selling security holders prior to the effective date of the
registration statement, of which this Prospectus is a part (see
"Selling Security Holders"). Assuming all the Common Stock
offered by the Company pursuant to this Prospectus to the holders
of Warrants and Options, to the holders of Warrants to be issued
upon the conversion of Debentures, to the holders of the
Debentures and for payment by the Company of consulting fees is
sold, 48,197,971 shares will be issued and outstanding. The
holders of the Common Stock (i) have equal and ratable rights
with all holders of issued and outstanding Common Stock to
dividends from funds legally available therefor, when, as and if
declared
<PAGE> 36
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, after distribution of the liquidation preference on
any outstanding Preferred 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 on election of each director and other matters
submitted to a vote of stockholders. All shares of Common Stock
outstanding are, and with respect to the Common Stock issuable
upon exercise of the Warrants and Options when issued and
delivered against payment therefore will be, duly authorized,
legally issued, fully paid and non-assessable.
TRANSFER AGENT
United Stock Transfer, Inc., 13275 East Fremont Place, Suite 302,
Englewood, Colorado 80112 serves an the Company's transfer agent.
[Remainder of page left blank]
<PAGE> 37
SELLING SECURITY HOLDERS
The Company is registering 12,434,053 Shares on behalf of certain
of its existing security holders identified in the following
table ("Selling Security Holder"). The following table also
indicates whether the Selling Security Holder has or has had any
position, office or other material relationship with the Company
during the last three years, the total number of shares owned by
such Selling Security Holder and the number of Shares which may
be offered for sale by such Selling Security Holder pursuant to
this Prospectus and, assuming the sale of all such Shares, the
number of Shares which will be owned after the offering. None of
the Selling Security Holders will own more than one percent of
the Company's total issued and outstanding Common Stock after the
offering, assuming all of the Shares are sold, except for Mr.
Edwin Salmon who will own 4.92% of the outstanding shares of
issued and outstanding Common Stock after the offering.
<TABLE>
Number
of Number
Shares Number of
Owned of Shares
Prior to Shares Owned
Name the Being After
Offering Offered the Offering
- ----------------------------- -------- ------- -----------
<S> <C> <C> <C>
Edwin Salmon (1) 2,872,782 500,000 2,372,782
James Kowalczyk (2) 1,238,000 1,138,000 100,000
Hugh Gibbons (3) 1,551,761 1,451,761 100,000
Managerial Advisory Services,
Inc.(4) 122,200 122,200 --
Donald Calder 4,537 3,000 1,537
Ronald Soderling 83,443 50,000 33,443
Steve Donatelli 1,000 1,000 --
Steve Katzman 20,000 20,000 --
Spense Brock 34,000 34,000 --
Jack and Addrienne Moye 17,001 2,000 15,001
ICS Communications, Inc. 165,000 165,000 --
Quantum Trust 25,000 25,000 --
The Bracken Group 20,000 20,000 --
Edward and Martha Cary 434,666 208,333 226,333
David Delbaugh 150,000 150,000 --
Mark and Virginia Blanchard 500,830 500,830 --
Ken Gilde, Jr. (5) 1,050,531 843,869 206,662
Kenneth Earl Gilde (5) 785,456 772,956 12,500
David E Gilde (5) 755,520 755,520 --
Phillip S. Gilde (5) 365,074 352,574 12,500
Harold Meyering (5) 986,056 986,056 --
Dale Meyering (5) 67,287 67,287 --
Charles Helsel (5) 523,056 523,056 --
Edwin Helsel (5) 476,562 476,562 --
Sharon Ruetz (5) 50,754 50,754 --
Robert Bloomfiel(5) 13,457 13,457 --
Calvin Hutchinson (5) 38,450 38,450 --
George Meekhof (5) 19,224 19,224 --
David Fleszar (5) 34,605 34,605 --
George Miller (5) 3,845 3,845 --
Kenneth Meyering (5) 16,822 16,822 --
Kathryn Loeks (5) 16,822 16,822 --
Shery DuVall (5) 3,845 3,845 --
Steve Anderson (5) 76,900 76,900 --
Betty Cotter (5) 13,457 13,457 --
Leon Hamming (5) 26,915 26,915 --
Rodger Hamming (5) 19,225 19,225 --
Alexander Lamkin (5) 30,760 30,760 --
Roland Lamkin Pension Fund (5) 34,605 34,605 --
Craig Swartz (5) 3,845 3,845 --
Daniel and Judith Druskovich (5) 7,690 7,690 --
<PAGE> 38
Mary Lou Henry (5) 3,845 3,845 --
Brian Getty (5) 7,690 7,690 --
Norm Brown (5) 3,845 3,845 --
Terry Crouse (5) 19,224 19,224 --
Dennis Crouse (5) 19,224 19,224 --
Nidan Corporation (6) 2,500,000 2,500,000 --
Stephen Williams(7) 300,000 300,000 --
</TABLE>
(1) Mr. Salmon is the Chairman of the Board of Directors and has held
numerous executive officer positions with the Company over the past five
years. The number of shares owned by Mr. Salmon prior to the offering
includes 2,022,020 shares to be issued in payment of accrued compensation
prior to the effective date of the registration statement, of which this
Prospectus is a part.
(2) Mr. Kowalczyk is the Company's President, Chief Executive
Officer and Director since June 1997. The number of shares owned
by Mr. Kowalczyk prior to the offering includes 790,000 shares to
be issued in payment of accrued compensation prior to the
effective date of the registration statement, of which this
Prospectus is a part.
(3) Mr. Gibbons is the Company's Executive Vice President since
June 1997. The number of shares owned by Mr. Gibbons prior to the
offering includes 1,019,650 shares to be issued in payment of
accrued compensation prior to the effective date of the
registration statement, of which this Prospectus is a part.
(4) The principal of Managerial Advisory Services, Inc. is a
former employee of the Company and served as the Assistant
Secretary of the Company until June 1997.
(5) The Company expects to issue, prior to the effective date of the
registration statement of which this Prospectus is a part, 5,242,929
shares of its common stock to the Meyering, Gilde and Helsel Group (the
"Group"). The shares are to be issued at the direction of Group. See
"Principal Stockholders". The shares were acquired by the Group upon
conversion of $845,000 of the Company's 10% cumulative convertible
debentures.
(6) The Company expects to issue, prior to the effective date of the
registration statement of which this Prospectus is a part, 2,500,000
shares of its common stock to Nidan Corporation upon conversion of
$350,000 of the Company's 10% cumulative convertible debentures. The
Company also expects to issue 2,000,000 common stock purchase warrants,
1,000,000 of which will be exercisable at $0.20 per share and 1,000,000
of which will be exercisable at $0.25 per share. The shares of common
stock underlying these warrants are also being registered hereby (see
"Plan of Distribution by the Company").
(7) Mr. Williams is a former President and Chief Executive Office
of the Company. The Company expects to issue the Shares prior to
the effective date of the registration statement, of which this
Prospectus is a part, as consideration for the extinquishment of
obligations due to Mr. Williams under an employment agreement
between the Company and Mr. Williams.
The Shares included in this Prospectus on behalf of Selling
Security Holders and additional shares which they own were
acquired by the Selling Security Holders in private transactions.
Shares purchased by Selling Security Holders prior to the twelve
months preceding the date of this Prospectus, except for certain
shares
<PAGE> 39
owned by officers and directors, are not included herein and are
eligible for sale under Rule 144.
The Company believes that the Selling Security Holders have an
interest in selling up to all of the Shares covered by this
Prospectus. The decision whether on not to sell any Shares is
within the discretion of each Selling Security Holder. There is
no assurance as to whether or when any Selling Security Holder
will sell any Shares. The Company believes that the decision by
any Selling Security Holder to sell any Shares will be based upon
the price of the Shares on the OTC Bulletin Board.
The Shares covered by this Prospectus must be sold by the Selling
Security Holders through a registered securities broker-dealer
into the public securities market, if sold pursuant to this
Prospectus. The Company will not receive any proceeds from the
sales of those Shares. The Company is paying the cost of the
registration. Each of the Selling Security Holders is expected
to make his or her own decision as to whether or not, when and at
what price to sell his or her Shares. Each Selling Security
Holder will need to make arrangements with a securities broker-
dealer of his or her own choice for the sale of his or her
Shares. The Company and, to the Company's knowledge, none of the
Selling Security Holders have made any arrangement with a
security broker/dealer for the sale of the Shares in the public
securities market, although some of the Selling Security Holders
have deposited their Shares into their personal accounts at the
securities brokerage firms with which they normally do business.
Pursuant to the provisions under the Securities Exchange Act of
1934, as amended, ("Exchange Act") and the rules and regulations
thereunder, any person engaged in a distribution of the Shares
offered by this Prospectus may not simultaneously engage in
market making activities with respect to the Shares during the
applicable "cooling off" period prior to the commencement of such
distribution. In addition, and without limiting the foregoing,
the Selling Stockholders will be subject to applicable provisions
of the Exchange Act and the rules and regulations thereunder
including, without limitation, Regulation M, which provisions may
limit the timing of purchases and sales of Shares by the Selling
Stockholders.
Any Selling Stockholder or any affiliate of a Selling Stockholder
or any Selling Stockholders who are acting in concert may violate
Regulation M promulgated by the U.S. Securities and Exchange
Commission pursuant to the Securities Exchange of Act of 1934, as
amended, in the event any such person, directly or indirectly,
places a bid to purchase, purchases, or attempts to induce
another person to bid for or purchase shares of the Common Stock
in the public market before the time such Selling Stockholder or
all the Selling Stockholders who are acting in concert, as the
case may be, have sold all of their shares of Common Stock which
are covered by this Prospectus. Accordingly, no Selling
Stockholder and no affiliate of a Selling Stockholder and no
Selling Stockholders who are acting in concert should place bids
for the purchase of, purchase or attempts to induce another
person to bid for or purchase shares of the Common Stock in the
public market for the Common Stock, in the event a public market
develops, until such person has sold all of his shares covered by
this Prospectus. Any person who, directly or indirectly, bids
for or effects any purchase of the Common stock for the purpose
of pegging, fixing or maintaining the price of the Common Stock
(known as "stabilizing"), which bid or purchase does not comply
with Regulation M, will be in violation of the regulation.
Furthermore, no stabilizing is permitted at a price that the
person stabilizing knows or has reason to know does not comply
with Regulation M or which is the result of activity that is
fraudulent, manipulative, or deceptive under the federal
securities laws and regulations.
<PAGE> 40
PLAN OF DISTRIBUTION BY THE COMPANY
The Company is registering 7,464,999 Shares for sale upon
exercise of outstanding Warrants, 1,300,000 Shares for sale upon
exercise of outstanding Options and 807,175 Shares for sale upon
exercise of Warrants to be issued upon conversion of outstanding
Debentures.
The Company will sell these Shares directly to the Warrant and
Option holders upon receipt of a notice of exercise accompanied
by the respective Warrant or Option certificate and tender of the
exercise price by cashier's check or cleared bank funds. The
exercise prices of the Warrants range from a low of $.10 to a
high of $1.00, as stated in the individual Warrant agreements.
The exercise price of the Options is $.10. The number of Shares
issuable and registered hereby at each exercise price level are
as follows:
<TABLE>
No. of Shares Exercise Price Expiration Date
<S> <C> <C>
Warrants
65,000 $0.100 August 1999
624,999 0.100 March 2000
500,000 0.100 April 2000
57,175 0.100 (1)
250,000 0.125 (1)
500,000 0.150 N\A
250,000 0.150 (1)
1,000,000 0.200 November 1999
1,000,000 0.200 (1)
225,000 0.200 April 2003
500,000 0.200 N\A
250,000 0.200 (1)
1,000,000 0.250 (1)
500,000 0.250 N\A
500,000 0.300 N\A
500,000 0.350 N\A
500,000 0.470 December 1999
50,000 1.000 February 1999
Options
1,300,000 0.10 August 2002
</TABLE>
N\A These warrants have no expiration date and are cancelable by
the Company at any time prior to exercise by the Holder.
(1) These warrants are issuable upon conversion of outstanding
Debentures and are exercisable for two years after the date of
their issuance. The conversion of the Debentures is at the
individual discretion of the Debenture holder.
The warrants outstanding as of the date of this Prospectus
typically have a life of two years from their issue date; the
earliest to expire being February 9, 1999, and the latest to
expire being April 1, 2000, except for the 250,000 warrants
issued in March 1998 in connection with the extinguishment of the
Company's acquisition indebtedness to the former shareholders of
TNI, exercisable at $0.20 per share, which expire in 2003. All of
the other warrants are exercisable at prices ranging from $.10 to
$1.00 per share. The Options, all of which are held by
management, have a life of 5 years and expire August 15, 2002.
Each Warrant and Option holder is hereby referred to his
respective Warrant and Option agreement for the specified terms
thereof. The Company reserves the right to decrease the exercise
price of any Warrant or Option, provided all Warrants or Options
of the same issue are similarly treated, in the event the Company
believes such price reduction will encourage exercise by the
holders or for other purposes. The Company also reserves the
right to extend the expiration date, if it believes extension
would benefit the
<PAGE> 41
Company. There is no assurance any Warrants or Options will be
exercised or when any exercise may occur. From time to time the
Company may solicit or encourage the exercise of the Warrants by
the holders thereof and may engage securities broker-dealers to
make such solicitation, paying a commission or solicitation fee
not to exceed ten percent of the exercise price.
The Company has outstanding 4,066,836 stock purchase warrants,
exercisable at prices ranging from $1.50 to $10.00 per share, and
117,500 options, exercisable at $1.50 per share. The shares of
common stock issuable upon exercise of these warrants and options
are not covered by this Prospectus. Based on the present bid and
ask range of the Company's common stock, the Company does not
anticipate the exercise of such warrants and options by the
holders thereof in the immediate future.
The Company is registering 1,956,792 Shares for issuance upon
conversion of outstanding Debentures that are convertible into
common stock at the election of the individual Debenture holder
at any time prior to payment of the Debenture. The Principal
amount of and accrued interest on the Debentures at the date of
this Prospectus is $278,998, convertible at an average price of
$.14 per share. Interest accruing on these debentures after the
date of this Prospectus to and including the conversion date by a
holder will also be convertible into Shares. The Debentures may
be converted in whole or in part by any holder. The Company's
management intends to encourage Debenture holders to convert,
but, there is no assurance as to if or when any conversions will
occur.
The Company is also registering 900,000 shares for issuance in
payment of consulting fees.
MARKET PRICE OF AND DIVIDENDS ON COMMON STOCK AND RELATED
SHAREHOLDER MATTERS.
The Company's common stock is quoted under the stock symbol
"SCMI" on the OTC 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
- ------------- -------- -------
September 30, 1996 $ 9.00 $ 6.125
December 31, 1996 $ 5.875 $ 4.25
March 31, 1997 $ 1.50 $ 1.4375
June 30, 1997 $ 0.3125 $ 0.28125
September 30, 1997 $ 0.40625 $ 0.1875
December 31, 1997 $ 0.34375 $ 0.1875
March 31, 1998 $ 0.5625 $ 0.13
June 30, 1998 $ 0.33 $ 0.09
The high and low bid quotations for the Company's common stock on
July 16, 1998 were $.105 and $.10 per share, respectively. As of
the date hereof, there is no market for the Company's outstanding
warrants, options or debentures and a market is not expected to
develop.
<PAGE> 42
The Company has not paid any dividends on its common stock from
the date of its incorporation. There are no restrictions on the
declaration or payment of dividends or any provisions which
restrict 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, its financial condition and
other relevant factors.
As of June 30, 1998, Company had 555 registered owners of its
common stock.
LEGAL MATTERS AND INTEREST OF COUNSEL
The Company will rely on an opinion given by Jackson L. Morris,
Esq., Tampa, Florida, as to the legality of the Shares. Mr.
Morris is the holder of 200,000 Shares of the Company's Common
Stock and warrants to purchase 12,500 shares at $2.00 per share.
EXPERTS
The audited financial statements of the Company as of December
31, 1997 and for the year then ended have been audited by Moore
Stephens Lovelace, P.L., independent certified public
accountants, as stated in their opinion and have been included in
reliance upon authority of that firm as experts in accounting and
auditing.
The audited financial statements of the Company as of December
31, 1996 and for each of the two years in the period then ended
included in this Prospectus have been audited by Ernst & Young,
LLP, independent certified public accountants, as stated in their
opinion, and have been included in reliance upon the authority of
that firm as experts in accounting and auditing.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON FINANCIAL
DISCLOSURE.
Effective February 20, 1998, Ernst & Young LLP resigned as
independent auditor of the Registrant. The reports of Ernst &
Young LLP on the Registrant's consolidated 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 Ernst &
Young LLP included an explanatory paragraph expressing
substantial doubt about the Registrant's ability to continue as a
going concern.
In connection with the audits of the Registrant's consolidated
financial statements for each of the two years ended December 31,
1996, and in the subsequent interim periods, there were no
disagreements with Ernst & Young LLP on any matters of accounting
principles or practices, financial statement disclosure, or
auditing scope and procedures which, if not resolved to the
satisfaction of Ernst & Young LLP, would have caused Ernst &
Young LLP to make reference to the matter in their report.
Ernst & Young LLP has furnished a letter addressed to the
Commission stating that it agrees with the statements contained
herein. A copy of that letter, dated February 25, 1998, is filed
as an exhibit to the Company's Form 8-K dated February 25, 1998.
Effective March 4, 1998, the Registrant engaged Moore Stephens
Lovelace, P.L. to audit its 1997 consolidated financial
statements. The decision to cease the registrant-auditor
relationship between Registrant and Ernst & Young LLP and the
engagement of Moore Stephens Lovelace, P.A. was not recommended
or approved by the Registrant's Board of Directors.
<PAGE> 43
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report on the Consolidated Financial
Statements for the year ended December 31, 1997 44
Independent Auditors' Report on the Consolidated Financial
Statements for the year ended December 31, 1996 and 1995 45
Consolidated Balance Sheets as of December 31, 1997 and 1996 46
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 1997 48
Consolidated Statements of Changes in Stockholders' Deficit for
each of the three years ended in the period
December 31, 1997 50
Consolidated Statements of Cash Flows for each of the three
years ended in the period December 31, 1997 52
Notes to Consolidated Financial Statements 53
<PAGE> 44
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Systems Communications, Inc.
Clearwater, Florida
We have audited the consolidated balance sheet of Systems
Communications, Inc. and Subsidiaries as of December 31, 1997,
and the related consolidated statement of operations, changes in
stockholders' deficit 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 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Systems Communications, Inc. and
Subsidiaries at December 31, 1997, and the consolidated results
of their operations and their cash flows for the year ended
December 31, 1997, 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
during each of the years in the three-year period ended December
31, 1997, and has a working capital deficiency and stockholders'
equity deficiency at December 31, 1997. In addition, the Company
has not complied with certain repayment terms of loan agreements
and currently has no source of operating revenues. 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/ Moore Stephens Lovelace, P.A.
Orlando, Florida
April 8, 1998
<PAGE> 45
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,
1996 and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the two years in
the period ended December 31, 1996. 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 financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Systems Communications, Inc. and
Subsidiaries at December 31, 1996, and the consolidated results
of their operations and their cash flows for each of the two
years in the period ended December 31, 1996, 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
during each of the years in the two-year period ended December
31, 1996, and has a working capital deficiency and stockholders'
equity deficiency at December 31, 1996. In addition, the Company
has not complied with certain repayment terms of loan agreements.
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
December 24, 1997
<PAGE> 46
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
DECEMBER 31,
----------------------- MARCH 31,
1997 1996 1998
--------- --------- --------
ASSETS (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 65,556 $ 61,039 $ 487
Accounts receivable, less allowance for
doubtful accounts of $28,074 in 1996 -- 802,079 --
Notes and accounts receivable from officers
and employees 60,908 102,000 62,495
Other current assets 130,419 438,763 145,587
--------- --------- --------
Total current assets 256,883 1,403,881 208,569
--------- --------- --------
Furniture and equipment 130,162 1,812,867 132,982
Less accumulated depreciation (56,774) (587,598) (63,278)
--------- --------- --------
Net furniture and equipment 73,388 1,225,269 69,704
Note receivable from the sale of assets, less
allowance of $500,000 in 1997 -- -- --
Deferred compensation 52,941 662,199 21,375
Intangible assets, net of accumulated
amortization of $566,666 in 1996 -- 1,083,334 --
Excess of cost over fair value of net assets
acquired, net of accumulated amortization of
$75,034 in 1996 -- 1,298,950 --
Other non-current assets 4,982 173,667 4,982
--------- --------- --------
Total assets $ 388,194 $ 5,847,300 $304,630
========= ========= ========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 47
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
DECEMBER 31,
----------------------- MARCH 31,
1997 1996 1998
---------- ---------- ----------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' DEFICIT
<S> <C> <C> <C>
Current liabilities:
Bank overdraft $ -- $ -- $ 56,042
Borrowings under lines of credit -- 182,651 --
Current portion of notes and debentures payable 3,361,700 3,180,758 2,922,200
Current portion of obligations under
capital lease -- 242,477 --
Accounts payable 535,516 1,452,192 564,776
Accrued compensation and employee benefits 1,176,578 1,528,153 1,042,916
Accrued interest 497,514 286,312 419,321
Liabilities and accruals for claims,
assessments and other losses 1,129,823 -- 1,108,799
Other current liabilities 27,062 595,363 --
Deferred revenue -- 440,232 --
---------- ---------- ----------
Total current liabilities 6,728,193 7,908,138 6,114,054
---------- ---------- ----------
Obligations under capital lease, less
current portion -- 458,654 --
Deferred liabilities under employment agreements 310,794 676,261 145,762
Other liabilities -- 72,573 --
---------- ---------- ----------
Total liabilities 7,038,987 9,115,626 6,259,816
---------- ---------- ----------
Common stock subject to rescission 674,124 709,124 674,124
---------- ---------- ----------
Common stock to be issued -- 2,000,000 --
---------- ---------- ----------
Commitments and Contingencies
Stockholders' deficit:
Class A convertible preferred stock, stated
value and liquidation preference - $1.00 per
share; authorized 5,000,000 shares, issued
and outstanding 192,000 shares in 1996 -- 630 --
Class B convertible preferred stock, stated
value and liquidation preference - $1.00 per
share; authorized 10,000,000 shares, issued
and outstanding 2,953,125 shares in 1997,
4,550,000 shares in 1996 and 100,000
shares in 1998 1,617,260 2,491,745 54,764
Common stock - $.001 par value; authorized
50,000,000 shares, issued and outstanding
12,083,646 shares in 1997, 10,626,874 shares
in 1996 and 14,174,052 shares in 1998 12,084 10,627 14,175
Additional paid in capital 16,866,883 16,823,526 18,882,103
Accumulated deficit (25,821,144) (25,303,978) (25,580,352)
---------- ---------- ----------
Total stockholders' deficit (7,324,917) (5,977,450) (6,629,310)
---------- ---------- ----------
Total liabilities and stockholders' deficit $ 388,194 $ 5,847,300 $ 304,630
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 48
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
Three Months Ended
Year Ended December 31, March 31,
--------------------------------------- -------------------
1997 1996 1995 1998 1997
---------- ---------- ----------- ------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues $ 1,498,533 $ 2,832,123 $ 91,106 $ -- $ 1,125,724
---------- ---------- ----------- ------- ---------
Costs and expenses:
Cost of revenues 109,563 827,063 -- -- --
Selling and administrative expenses 3,027,384 6,322,627 1,887,275 271,235 1,766,116
Impairment and other losses 1,898,953 14,233,953 -- -- 303,568
Depreciation and amortization 497,377 1,459,436 148,192 6,504 253,590
---------- ---------- --------- ------- ---------
Total operating costs and expenses 5,533,277 22,843,079 2,035,467 277,739 2,323,274
---------- ---------- --------- ------- ---------
(4,034,744) (20,010,956) (1,944,361) 277,739 (1,197,550)
Gain from sale of license agreement 2,695,214 -- -- -- 2,695,214
Gain from rescission of business
acquisition 259,352 -- -- -- --
Interest income 4,070 8,183 3,777 -- 2,018
Interest expense (587,884) (381,975) (63,644) (74,462) (111,565)
Other income (expense), net (125,318) (103,891) -- -- (111,986)
---------- ---------- --------- ------- ---------
Income (loss) from continuing
operations before income taxes (1,789,310) (20,488,639) (2,004,228) (352,201) 1,276,131
Income tax benefit (483,000) (2,554,150) ( 15,124) -- --
---------- ---------- --------- ------- ---------
Income (loss) from continuing
operations (1,306,310) (17,934,489) (1,989,104) (352,201) 1,276,131
Discontinued operations:
Income (loss) from operations of
discontinued telecommunications
businesses, less income tax expense
(benefit) of $240,000, ($649,044)
($241,577), $-0-, and ($9,500),
respectively 391,752 ( 1,322,179) (3,818,921) 306,405 (65,920)
Gain from disposition of
telecommunication businesses, less
income tax expense of $243,000, $-0-,
$-0-, $-0- and $9,500, respectively 397,392 -- -- -- 15,500
---------- ---------- --------- -------- ---------
Income (loss) before extraordinary
item (517,166) (19,256,668) (5,803,025) (45,696) 1,225,711
Extraordinary item - Gain from
extinguisment of debt -- -- -- 286,588 --
---------- ---------- --------- ------- ---------
Net income (loss) $ (517,166) $(19,256,668) $(5,808,025) $ 240,792 $ 1,225,711
========== ========== ========= ======= =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 49
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
<TABLE>
Three Months Ended
Year Ended December 31, March 31,
---------------------------------- -----------------------
1997 1996 1995 1998 1997
---------- --------- --------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Basic earnings per share:
Income (loss) from continuing
operations $ (0.12) $ (2.15) $ (0.58) $ (0.03) $ 0.12
Income (loss) from operations of
discontinued telecommunications
businesses 0.03 (0.16) (1.23) 0.03 (0.01)
Gain from disposition of
telecommunications businesses 0.04 -- -- -- --
Extraordinary item - Gain from
extinguishment of debt -- -- -- 0.02 --
---------- --------- --------- ---------- ----------
Net loss $ (.05) $ (2.31) $ (1.81) $ 0.02 $ 0.11
========== ========= ========= ========== ----------
Weighted average number of
common shares outstanding 10,802,103 8,349,459 3,201,991 12,491,225 10,747,700
========== ========= ========= ========== ==========
Diluted earnings per share:
Income (loss) from continuing
operations $ (0.12) $ (2.15) $ (0.58) $ (0.03) $ 0.08
Income (loss) from operations of
discontinued telecommunications
businesses 0.03 (0.16) (1.23) 0.03 --
Gain from disposition of
telecommunications businesses 0.04 -- -- -- --
Extraordinary item - Gain from
extinguishment of debt -- -- -- 0.02 --
---------- --------- --------- ---------- ----------
Net loss $ (.05) $ (2.31) $ (1.81) $ 0.02 $ 0.08
========== ========= ========= ========== ==========
Weighted average number of
common shares outstanding,
assuming dilution 10,802,103 8,349,459 3,201,991 12,491,225 15,935,629
========== ========= ========= ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 50
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
<TABLE>
CLASS A CLASS B
PREFERRED PREFERRED COMMON STOCK
------------------ -------------------- ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------- --------- --------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 1,700,000 $ -- -- $ -- 2,797,485 $ 2,798
Issuance of common stock and warrants
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 business acquisitions 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 and warrants
for cash -- -- -- -- 413,688 414
Conversion of preferred stock (4,408,000)(177,495) (140,000) (236,600) 2,254,910 2,255
Issuance of common stock as
compensation -- -- -- -- 41,754 42
Issuance of common stock in connection
with business acquisitions -- -- -- -- 283,172 283
Issuance of stock for debt -- -- -- -- 207,552 207
Rescission of business acquisitions (200,000) -- -- -- -- --
Net loss -- -- -- -- -- --
--------- ------- --------- --------- ---------- ------
Balance at December 31, 1996 192,000 630 4,550,000 2,491,745 10,626,874 10,627
Issuance of common stock and warrants
for cash -- -- -- -- 205,556 206
Conversion of preferred stock (192,000) (630)(1,596,875) (874,485) 676,682 677
Issuance of common stock as
compensation -- -- -- -- 1,000,857 1,001
Issuance of stock for debt -- -- -- -- 577,421 577
Rescission of business acquisitions -- -- -- -- (994,247) (994)
Repayment of loan to officer -- -- -- -- (9,497) (10)
Net loss -- -- -- -- -- --
--------- ------- --------- --------- ---------- -----
Balance at December 31, 1997 -- -- 2,953,125 1,617,260 12,083,646 12,084
Issuance of common stock for cash -- -- -- -- 208,333 208
Conversion of preferred stock -- -- (2,853,125)(1,562,496) 701,783 702
Issuance of common stock as
compensation -- -- -- -- 97,200 97
Issuance of stock and warrants for
debt -- -- -- -- 1,083,090 1,084
Net income -- -- -- -- -- --
--------- ------- --------- --------- ---------- ------
Balance at March 31, 1998 (Unaudited) -- $ -- 100,000 $ 54,764 14,174,052 $14,075
========= ======= ========= ========= ========== ======
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 51
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT (Continued)
<TABLE>
Additional
Paid-In Accumulated
Capital Deficit Total
---------- ---------- ----------
<S> <C> <C> <C>
Balance at December 31, 1994 $ 286,852 $ (239,285) $ 50,365
Issuance of common stock and warrants
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 business acquisitions 7,731,935 -- 10,383,519
Reclassification of common stock
subject to rescission (789,382) -- (789,624)
Net loss -- (5,808,025) (5,808,025)
---------- ---------- ----------
Balance at December 31, 1995 11,873,909 (6,047,310) 8,740,495
Issuance of common stock and warrants
for cash 2,186,859 -- 2,187,273
Conversion of preferred stock 411,840 -- --
Issuance of common stock as
compensation 260,151 -- 260,193
Issuance of common stock in connection
with business acquisitions 1,891,824 -- 1,892,107
Issuance of stock for debt 198,943 -- 199,150
Rescission of business acquisitions -- -- --
Net loss -- (19,256,668) (19,256,668)
---------- ---------- ------------
Balance at December 31, 1996 16,823,526 (25,303,978) ( 5,977,450)
Issuance of common stock and warrants
for cash 231,294 -- 231,500
Conversion of preferred stock 874,438 -- --
Issuance of common stock as
compensation 383,234 -- 384,235
Issuance of stock for debt 715,741 -- 716,318
Rescission of business acquisitions (2,105,005) -- (2,105,999)
Repayment of loan to officer (56,345) -- (56,355)
Net loss -- (517,166) (517,166)
---------- ---------- ----------
Balance at December 31, 1997 16,866,883 (25,821,144) (7,324,917)
Issuance of common stock for cash 24,792 -- 25,000
Conversion of preferred stock 1,561,794 -- --
Issuance of common stock as
compensation 12,441 -- 12,538
Issuance of stock and warrants for
debt 416,193 -- 417,277
Net income -- 240,792 240,792
---------- ---------- ---------
Balance at March 31, 1998 (Unaudited) $ 16,882,103 $ (25,580,352) $(6,629,310)
========== ========== =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 52
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Three Months Ended
Year Ended December 31, March 31,
------------------------------------- --------------------
1997 1996 1995 1998 1997
---------- ---------- --------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (517,166) $(19,256,668) $(5,808,025) $ 240,792 $1,225,711
Adjustments to reconcile net loss to
net cash used in operations:
Depreciation and amortization 544,839 1,750,727 459,327 6,504 282,066
Amortization of deferred compensation, net (125,503) (16,552) 61,819 (57,726) 6,563
Provision for bad debts 39,816 522,687 181,753 -- 41,333
Provision for inventory obsolescence -- -- 145,776 -- --
Stock and warrants issued for compensation
and as consideration for extension of debt 384,235 260,193 793,373 12,538 200,344
Deferred income taxes -- (3,203,194) (256,699) -- --
Impairment losses 1,898,953 14,428,854 2,758,779 -- 303,568
Gain from sale of license agreement (2,695,214) -- -- -- (2,695,214)
Gain from disposition of telecommunications
businesses (640,392) -- -- -- --
Gain from extinguishment of debt -- -- -- (286,578) --
Recovery of note receivable from sale of
assets -- -- -- (305,345) --
Other losses -- -- -- -- 41,526
Increase (decrease) in cash from change
in operating assets and liabilities:
Bank overdraft -- -- -- 56,042 --
Accounts receivable 148,912 214,330 317,161 (1,500) (23,694)
Equipment inventories -- 73,211 (80,091) -- --
Deferred expenses -- 498,697 (92,130) -- --
Other assets 52,252 67,037 (42,702) (15,168) 634
Accounts payable (484,304) (39,308) (430,448) 31,414 (232,278)
Accrued expenses and other liabilities 401,166 1,060,019 224,948 171,278 17,869
Deferred revenue (109,957) (553,982) 5,937 -- (65,857)
---------- ---------- --------- ------- ---------
Net cash used in operating activities (1,361,719) (4,193,949) (1,761,222) (147,749) (897,429)
---------- ---------- --------- ------- ---------
Cash flows from investing activities:
Acquisition of businesses -- (46,854) (1,428,312) -- --
Disposition of businesses 370,844 -- -- -- --
Expenditures for furniture and equipment (7,693) (552,718) (131,744) (2,820) (12,659)
Notes receivable from officers and employees -- (50,000) (52,000) -- --
Other -- -- (64,852) -- 2,474
---------- ---------- ----------- ------- ---------
Net cash provided by (used in) investing
activities 363,151 (649,572) (1,676,908) (2,820) (10,185)
---------- ----------- --------- ------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock 231,500 2,187,273 4,110,887 25,000 152,000
Proceeds from notes and debentures payable 1,568,443 2,422,752 475,349 60,500 1,211,732
Payments on notes payable and capital leases (686,858) (637,596) (262,814) -- (88,168)
Payments on shares subject to rescission (35,000) (80,500) -- -- (35,000)
Proceeds from (payments on) borrowings under
line of credit (75,000) 47,917 (2,100) -- (71,615)
---------- ---------- --------- ------- ---------
Net cash provided by financing activities 1,003,085 3,939,846 4,321,322 85,500 1,168,949
---------- ---------- --------- ------- ---------
Net increase (decrease) in cash 4,517 (903,675) 883,192 (65,069) 261,335
Cash and cash equivalents at beginning of the
period 61,039 964,714 81,522 65,556 61,039
---------- ---------- --------- ------- ---------
Cash and cash equivalents at end of the
period $ 65,556 $ 61,039 $ 964,714 $ 487 $ 322,374
========== ========== ========= ======= =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 53
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 healthcare related businesses. During the period from
the fall of 1991 to the date of the first acquisition described
below, the Company had no operations or assets and was dormant.
During the period 1994 through 1997, the Company acquired and
disposed of various businesses and currently has one operating
subsidiary ( "National Solutions Corporation"). The acquisition
and disposition of businesses during this period are more fully
described herein.
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 re-seller 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 re-seller of telecommunication services, from a Director and
executive officer of the Company (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 re-seller of long-distance telephone services.
Effective July 7, 1995, the Company acquired all of the
outstanding stock of Telcom Network, Inc. ("TNI"), a re-seller 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) develop, for commercial use,
healthcare management information systems technology acquired
from the U.S. Government pursuant to the Federal Technology
Transfer Act of 1986, as amended, and (ii) sell the benefits from
the use of such technology to large, self-insured companies,
insurers, third party administrators ("TPA's"), health
maintenance organizations ("HMO's") and healthcare plan
administrators. To date, the Company's revenues have been derived
primarily from retroactive analysis of claims paid using the
services of subcontractors, with respect to which the Company has
received a percentage of the recovered savings.
Effective March 12, 1996, the Company acquired all of the
outstanding stock of Healthcare Management Technologies ("HMT").
The principal business of HMT is the development, sale and
maintenance of medical management "Windows" based computer
software.
<PAGE> 54
In May 1996, the Company gave notice to the principals of CCI
that it was canceling all of the related acquisition agreements
and abandoning the business of CCI. The abandonment of CCI is
subject to an arbitration proceeding initiated by the former
shareholders of CCI (see Notes 4 and 14).
In January 1997, the Company sold substantially all of the
operating assets of TNI. As of that date, the only remaining
significant asset of TNI consisted of the arbitration award in
the amount of $1,250,000 granted to TNI in a binding arbitration
proceeding between and among TNI, GE Capital Communications
Services Corporation ("GECCS") and New Enterprise Wholesale
Services, Limited Partnership ("NEWS"). On December 24, 1997, the
Company, GECCS and NEWS entered into a Confidential Settlement
Agreement and Mutual Full and Final Releases (the "Settlement
Agreement") regarding the arbitration award in favor of the
Company. Pursuant to the Settlement Agreement, GECCS\NEWS paid
$1,250,000 in full satisfaction of the arbitration award. Of that
amount, the Company received approximately $750,000, which is net
of legal fees. The proceeds from the Settlement Agreement were
used to pay trade and other obligations.
In May 1997, the Company and the former shareholders of ATI
entered into a rescission agreement which provides for the
rescission of the Company's August 1994 acquisition of ATI; and,
in June 1997, the Company entered into an agreement with the
former shareholders of HMT to rescind the Company's March 1996
acquisition of HMT (See Note 4).
The dispositions of CCI, TNI (which includes the operations of
Comstar and LCI subsequent to the dates of their respective
acquisitions) and ATI, all of which comprised the Company's
telecommunications segment, and the operations of those
businesses for all periods presented are reflected as components
of discontinued operations in the accompanying consolidated
statements of operations (See Note 4).
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All
significant 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.
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 as of December 31, 1996 consist of the cost of
acquired medical management computer software ($1,500,000) and
acquired customer lists. The useful life assigned to medical
computer software was 3 years. As of December 31, 1996, the
unamortized cost of medical computer software was approximately
$1,083,000 and amortization for the year 1996 was approximately
$416,700. In 1997, the cost of medical computer software and
related accumulated amortization were removed from the Company's
consolidated balance sheet as a result of the rescission of the
HMT acquisition agreement. Amortization in 1997 for the period
prior to the rescission
<PAGE> 55
of the HMT acquisition agreement was approximately $208,000. The
cost of acquired customer lists ($150,000) was fully amortized at
December 31, 1995.
In 1995, the Company recorded $12,400,000 of intangible assets
(healthcare management decision software technology) acquired in
connection with its acquisition of NSC. The estimated useful life
of the acquired software technology was 20 years. The Company
wrote-off the unamortized cost of the software technology
acquired in connection with the NSC acquisition, as of December
31, 1996, due to continued operating losses and the failure of
NSC to successfully market the acquired technology (See Note 5).
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
The Company assesses the recoverability of intangible assets,
including goodwill, if facts and circumstances suggest that the
carrying amount of intangible assets may have been impaired. In
making its assessment, the Company gives consideration to the
undiscounted cash flows from the use of such assets, the
estimated fair value of such assets and other factors which may
affect the recoverability of such assets. If such an assessment
indicates that the carrying value of intangible assets may not be
recoverable, the carrying value of intangible assets is reduced.
Excess of cost over the fair value of net assets acquired as of
December 31, 1996 consists of goodwill recorded in connection
with the acquisition of HMT and was assigned a useful life of 15
years. In 1997, the excess of cost over the fair value of net
assets acquired associated with the HMT acquisition and related
accumulated amortization were removed from the Company's
consolidated balance sheet as a result of the rescission of the
HMT acquisition agreement (See Note 4).
In 1995, the Company recorded approximately $2,718,000 in
goodwill in connection with its acquisition of NSC. As of
December 31, 1996, the Company wrote-off the unamortized cost of
goodwill recorded in connection with the NSC acquisition, as an
impairment loss, due to the failure of NSC to successfully market
the acquired technology (See Note 5).
REVENUE RECOGNITION
The Company recognizes revenue in the period in which the service
is provided or, in the case of software sales, at the time the
software is delivered. 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.
INCOME TAXES
The Company has applied, for all years presented, 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.
EARNINGS PER SHARE
In 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" ("SFAS No. 128"), which
requires the presentation of both basic and diluted earning per
share. Basic earnings per share is computed based on the weighted
average number of common shares outstanding during each year.
Diluted earnings per share is computed based on the sum of the
weighted average number of common shares outstanding plus the
additional number of shares that would have been outstanding if
all potentially dilutive common shares, pursuant to stock
purchase warrants and options, convertible preferred stock and
convertible notes and debentures, had been issued. The adoption
of SFAS No. 128 did not have any impact on previously reported
earnings per share.
Basic and diluted earnings per share for each of the three years
in the period ending December 31, 1997 and for the three months
ending March 31, 1998 are the
<PAGE> 56
same because the inclusion of additional shares from the assumed
conversion of convertible notes, debentures and preferred stock
and exercise of stock options and warrants in the computation of
diluted earnings per share would have had the effect of reducing
the per share loss from continuing operations.
Following is a reconciliation of basic and diluted earnings per
share for income from continuing operations for the three months
ended March 31, 1997.
Per
Income Shares Share
--------- ---------- -----
Basic earnings per share $1,276,131 10,747,700 $ 0.12
=====
Effect of dilutive securities:
Options and warrants -- 1,277,221
Convertible preferred stock -- 1,718,545
Convertible notes and debentures 55,370 2,192,163
--------- ----------
Diluted earnings per share $1,331,501 15,935,629 $0.08
========= ========== =====
Options and warrants outstanding to purchase approximately
1,971,000 shares of common stock were not included in the
computation of diluted earnings per share for the three months
ended March 31, 1997 because the options' and warrants' exercise
prices were greater than the average market price of the common
shares. The number of shares issuable upon conversion of certain
convertible notes and debentures and exercise of certain warrants
are based on and fluctuate with the market price of the common
shares.
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 and the assets and
liabilities disposed of in connection with the rescission of the
ATI and HMT acquisition agreements. As permitted by Statement of
Financial Accounting Standards No. 95, cash flows from operations
of discontinued telecommunications businesses are not separately
presented.
LONG-LIVED ASSETS
The Company has applied, for all periods presented, the
provisions of 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 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 (see Note 5).
IMPACT OF OTHER RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("SFAS NO. 130"), which is effective for
fiscal years beginning after December 15, 1997. SFAS No. 130
establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-
purpose financial statements. Although SFAS No. 130 only impacts
display as opposed to actual amounts recorded, it represents a
change in financial reporting. The adoption of this statement
will not have an impact on the Company's reported earnings.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, Disclosures
about Segments of an Enterprise
<PAGE> 57
and Related Information ("SFAS No. 131"), which is effective for
years beginning after December 15, 1997. SFAS No. 131 establishes
standards for the way public enterprises report information about
operating segments in annual financial statements and requires
that those enterprises report selected information about
operating segments in interim financial reports. It also
establishes standards for related disclosures about products and
services, geographic areas and major customers. The adoption of
this statement will not have a significant effect on the
Company's reported segments and related disclosures.
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 1996 and 1995 consolidated financial
statements have been reclassified to conform to the 1997
presentation.
INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The unaudited consolidated balance sheet at March 31, 1998, and
the unaudited consolidated statements of operations, changes in
stockholders' deficit and cash flows for the three months ended
March 31, 1998 and 1997, have been prepared in accordance with
generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments, consisting of normal and
recurring accruals considered necessary for a fair presentation,
have been included. Results of operations for the three months
ended March 31, 1998 are not necessarily indicative of the
results for the full fiscal year.
NOTE 3 GOING CONCERN
The accompanying financial statements have been prepared on a
going concern basis which contemplates the realization of assets
and liquidation of liabilities in the ordinary course of
business. The Company incurred net losses (including losses from
operations of discontinued businesses) of $517,166, $19,256,668
and $5,808,025 in 1997, 1996 and 1995, respectively, and used
approximately $1,362,000, $4,194,000 and $1,761,000,
respectively, of cash in operations. The Company has a net
working capital deficiency of approximately $6.5 million and a
deficiency in assets of approximately $7.3 million at December
31, 1997 and is currently in default of certain of its
obligations to trade and other creditors (see Notes 7 and 14).
Additionally, as discussed in Note 14, the Company is required to
offer purchasers of the Company's common stock in certain
jurisdictions the right to rescind their stock purchase
transactions. Pursuant to a consent order from the State of
Michigan, the Company is required to make a rescission offer to
Michigan purchasers of the Company's common stock, unless such
purchasers are afforded an opportunity to resell their shares in
the public market pursuant to an effective registration statement
at prices higher than the cost of such shares to the Michigan
purchasers. The Company has not been be able to satisfy the
requirements of the consent order. It is uncertain whether or not
the failure by the Company to satisfy the requirements of the
consent order will have a material adverse impact on the
accompanying consolidated financial statements (See Note 14).
The Company is attempting to raise additional equity and debt
financing to support its business operations but, there is no
assurance that sufficient amounts of equity or debt financing
will be available to the Company. As of December 31, 1997, the
Company had no financing facilities available for working capital
or for other purposes.
<PAGE> 58
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 seek other alternatives, including sale, merger or
discontinuance of operations. The consolidated financial
statements do not included any adjustments that might result from
the outcome of this uncertainty.
NOTE 4 ACQUISITIONS AND DISPOSITIONS OF BUSINESSES
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. Of the preferred stock issued
in connection with these acquisitions, 1,500,000 shares were
issued to the former shareholders of ATI and 200,000 shares were
issued to the former shareholders of CCI. Of the notes issued in
connection with these acquisitions, $300,000 were issued to the
former shareholders of CCI and $250,000 were issued to the former
shareholders of ATI. 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 shares of Class A convertible preferred stock
issued to the former shareholders of ATI were converted into
750,000 shares of common stock in August 1996. The shares of
Class A preferred stock issued to the former shareholders of CCI
are subject to an arbitration proceeding between the Company and
the former shareholders of CCI (See Note 14). 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 $300,000 of acquisition notes payable to the
former shareholders of CCI are also subject to an arbitration
proceeding between the Company and the former shareholders of CCI
(See Note 14). The Company identified ATI as the accounting
acquirer and accounted for the acquisition of ATI and CCI as a
purchase business combination. No goodwill was recorded in
connection with these business acquisitions.
In June 1995, the Company completed the acquisition of all of the
outstanding stock of LCI from a Director and executive officer of
the Company (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 de minimis.
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 shares of Class A preferred stock issued to the
former shareholder(s) of Comstar were converted into 250,000
shares of common stock in October 1996. The excess of the
purchase price over the fair value of net assets acquired
($273,250) was allocated to goodwill and assigned a useful life
of 5 years. The unamortized cost of goodwill recorded in
connection with the acquisition of Comstar was written off as an
impairment loss in 1996 with no associated income tax benefit
(see Note 5). This impairment loss is included in the loss from
operations of discontinued telecommunications businesses for the
year ended December 31, 1996.
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
<PAGE> 59
of the convertible debentures are also entitled to receive an
aggregate of 225,000 stock purchase warrants, valued and recorded
at $141,750, exercisable 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 approximately .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 issued in connection with the
acquisition, 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 $3,138,195. The
excess of the purchase price over the fair value of the net
assets acquired was $2,943,401. The unamortized cost of goodwill
recorded in connection with the TNI acquisition was written off
as an impairment loss in 1995 with no associated income tax
benefit (see Note 5). This impairment loss is included in the
loss from operations of discontinued telecommunications
businesses for the year ended December 31, 1995. As of December
31, 1997, the Company has converted 1,596,875 shares of Class B
convertible preferred stock issued in connection with the
acquisition into 580,682 shares of common stock. There have been
no conversions of the notes issued in connection with the
acquisition. Subsequent to December 31, 1997, the Company made a
redemption offer to the holders of the $450,000 10% convertible
debentures issued in connection with the acquisition (see Notes 7
and 18).
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, which
were to have been issued to the founders and management 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 balance sheet as of December 31,
1996. The number of additional shares to be issued was to be
determined at the date of issuance based upon a formula and upon
issuance valued at $2,000,000 in the aggregate. The formula to
determine the number of additional shares which were to have been
issued is $5,000,000 minus outstanding advances made to NSC by
the Company divided by the quoted market value of the Company's
common stock. The $250,000 in notes payable are non-interest
bearing and are due in equal monthly installments of $20,000 (see
Note 7). The total purchase price for NSC was $14.4 million,
including the $2,000,000 in additional shares which were to have
been issued in November 1996 pursuant to the acquisition
agreement and approximately $1.7 million of liabilities assumed
in excess of assets acquired and deferred income taxes of
approximately $1.0 million. The excess of the purchase price over
the fair value of the assets acquired (approximately $2,718,000)
was assigned a useful life of 20 years. The net assets acquired
also included $12,400,000 for healthcare management decision
software technology that was assigned a useful life of 20 years.
The Company wrote off the unamortized cost of goodwill and
intangibles recorded in connection with the acquisition of NSC as
of December 31, 1996, as an impairment loss (See Note 5).
As of December 31,1996, the Company had not issued any of the
shares of common stock which were to be issued to the founders
and management of NSC pursuant to the NSC acquisition agreement.
In January 1997, the founders and management of NSC (the
"Retiring Management") resigned in a negotiated agreement between
the Company and Retiring Management. The material features of the
agreement included the waiver by Retiring Management of (a) all
accrued and unpaid bonuses ($695,214) and (b) $2,000,000 of the
Company's common stock which was to be issued to Retiring
Management pursuant to the NSC acquisition agreement in exchange
for a license agreement for the exclusive use by Retiring
Management of NSC's software and technology to service state
governments west of the Mississippi River (excluding Utah),
Mexico and Central and South America. The license agreement,
subject to minimum performance standards, is to provide for a
royalty fee of one-half of one percent of all revenues derived by
Retiring Management from such license agreement and for (i) the
sharing on a 50-50 basis, of the net profits (to be defined)
earned
<PAGE> 60
by NSC from the States of New York and New Jersey and by Retiring
Management from Mexico and (ii) a requirement that Retiring
Management use NSC, for a reasonable fee, as its sole supplier of
data processing services to process work derived from the license
agreement for a period of two years. As a result of the waiver by
Retiring Management of accrued and unpaid bonuses and common
stock to be issued, the Company removed the common stock to be
issued and the accrued and unpaid bonuses from its consolidated
balance sheet and recognized a gain from the sale of the license
agreement totaling approximately $2,695,000.
Effective March 12, 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 total
purchase price was $2,140,000, including costs of $140,000. The
excess of the purchase price over the fair value of the net
assets acquired ($1,373,984) was assigned a useful life of 15
years. The net assets acquired included $1,500,000 of medical
computer software, which was assigned a useful life of 3 years.
The following unaudited pro forma summary operating results for
the year ended December 31, 1996, include the results of
operations of companies acquired in 1995 for the full year and
the operating results of HMT (with pro forma adjustments for
amortization of goodwill and intangible assets acquired) as if
HMT was acquired as of January 1, 1996. The pro forma operating
results for the year ended December 31, 1995 reflect 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>
Year Ended December 31,
--------------------------------
1996 1995
----------- -----------
<S> <C> <C>
Net revenues from continuing
operations $ 3,035,195 $ 2,384,874
------------ -----------
Loss from continuing operations $(18,047,892) $(4,085,486)
------------ -----------
Loss from operations of discontinued
telecommunications businesses $( 1,322,179) $(3,794,890)
------------ -----------
Basic earnings per share:
Loss from continuing operations $( 2.16) $( 1.28)
Loss from operations of
discontinued telecommunications
businesses ( 0.16) ( 1.19)
------------ -----------
Net loss $( 2.32) $( 2.47)
============ ===========
</TABLE>
All of the acquisitions described above 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.
As more fully discussed below, the Company has sold or otherwise
disposed of the businesses included in the Company's
telecommunications segment. The operations of those businesses
are shown as operations of discontinued telecommunications
businesses in the above pro forma summary.
<PAGE> 61
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; consequently, the Company removed the assets and
liabilities of CCI and the debt and preferred stock issued in
connection with the CCI acquisition from the Company's
consolidated balance sheet in May 1996 with no material effect on
the Company's results of operations. The principals of CCI filed
suit to enforce promissory notes in the aggregate principal
amount of $300,000, which were issued by the Company in
connection with the CCI acquisition and the issuance of 200,000
shares of the Company's Class A preferred stock they allege are
due them under the acquisition agreement. This matter was
referred by court order to mandatory arbitration in the State of
Florida. On February 3, 1998, the Arbitrators' awarded in favor
of the former shareholders of CCI. The award requires, among
other things, that the Company (i) convert 200,000 shares of its
Class A Preferred Stock, held by the former shareholders of CCI,
into 100,000 shares of its common stock and (ii) issue another
200,000 shares of Class A Preferred Stock to the former CCI
stockholders, which is also convertible into 100,000 shares of
the Company's common stock, and that the Company give the former
shareholders of CCI the ability to seek a summary judgment
against the Company for $500,000, without opposition, or accept
500,000 shares of the Company's Class A Preferred Stock in lieu
of a summary judgment (See Note 14).
As more fully discussed below, in January 1997 and May 1997, the
Company disposed of substantially all of the remaining assets of
its telecommunications segment, consisting of TNI (which include
the operations of Comstar and LCI) and ATI and, entered into an
agreement to rescind the March 1996 acquisition of HMT.
In January 1997, the Company sold, in two separate transactions
(i) TNI's long-distance customer base and existing customer
receivables for $76,000 in cash and (ii) TNI's utility audit
division customer base, agreements and work-in-process for
$25,000 in cash and a $500,000 convertible debenture issued by
International Teledata Corporation ("ITD"). No value was assigned
to the $500,000 convertible debenture (the "ITD Note") received
by the Company. By its terms, the ITD Note is due on January 31,
1999 and bears interest at 8% per annum beginning on April 2,
1997 and through the date of conversion. Such conversion is at
the average bid and ask prices of the acquiring company's common
stock on the effective date of a registration statement (See Note
17).
In May 1997, the Company and ATI entered into an agreement to
rescind the August 1994 acquisition of ATI. The ATI rescission
agreement provides for the return of all of the ATI stock
acquired by the Company to the former ATI shareholders in
exchange for 684,410 shares of the Company's common stock, the 6%
acquisition notes payable issued to the former shareholders of
ATI and unexercised warrants to purchase 168,668 shares of the
Company's common stock. In connection with the rescission of the
ATI acquisition, ATI issued a promissory note to the Company in
the amount of $180,000, payable upon the default by ATI of
payments due under certain of its lease agreements (those
quaranteed by the Company). Payments due the Company under the
promissory note are to be equal to the amount, if any, the
Company may be required to pay under the lease guaranty
agreement(s) entered into between the Company and ATI's equipment
lessor(s). However, there is no assurance that, upon an event of
default by ATI, that ATI would have sufficient funds to liquidate
the promissory note.
The disposition of TNI and ATI resulted in gains of approximately
$392,000, net of tax, in the aggregate. The gains from the
disposition of TNI and ATI are reflected as a component of
discontinued operations in the accompanying consolidated
statement of operations for the year ended December 31, 1997.
In June 1997, the Company entered into an agreement with the
former shareholders of HMT to rescind the Company's March 1996
acquisition of HMT. The HMT rescission agreement provides for the
return of all of the HMT stock acquired by the Company to the
former shareholders of HMT in exchange for $450,000 in cash (in
payment of inter-company loans to HMT from the Company) and the
309,837 shares of the Company's common stock issued in connection
with the acquisition. In connection
<PAGE> 62
with the rescission agreement, the Company and HMT entered into a
separate Cooperative Marketing and Option Agreement. The
Cooperative Marketing and Option Agreement provides both the
Company and HMT the non-exclusive right, for a five (5) year
period, to market each other's products, on a fee basis, and
granted the Company a non-transferable option, exercisable at any
time for eighteen months after the date of grant (June 9, 1997),
to acquire approximately 10% of HMT, adjusted for stock splits,
stock dividends, reclassifications, reorganizations,
consolidations or mergers, for approximately $45,000 in cash.
The HMT rescission agreement also had the effect of relieving the
Company of its obligation to provide financing to HMT under the
terms of the acquisition agreement. In connection with the
rescission of the HMT acquisition agreement, the Company
recognized a gain of approximately $259,000, which is included as
a component of continuing operations in the consolidated
statement of operations for the year ended December 31, 1997.
The consolidated operating results of the Company for all years
presented have been restated to segregate, as discontinued
operations, the results of operations of the Company's
discontinued telecommunications businesses. The assets and
liabilities of the telecommunications segment, included in the
accompanying consolidated balance sheets as of December 31, 1997
and 1996, are summarized as follows:
1997 1996
--------- ---------
Current assets $ 539 $ 332,856
Total assets 539 660,094
Current liabilities 194,133 886,206
Total liabilities 194,133 1,078,026
The revenues, costs and expenses of the Company's
telecommunications businesses, included in income(loss) from
operations of discontinued telecommunications businesses in the
accompanying consolidated statements of operations for each of
the three years in the period ended December 31, 1997, are
summarized as follows:
<TABLE>
1997 1996 1995
-------- --------- ---------
<S> <C> <C> <C>
Net revenues $405,617 $2,177,858 $2,893,778
Cost of revenues -- 1,320,256 2,014,460
Selling and administrative expenses 449,925 2,304,059 1,845,775
Impairment and other losses -- 194,901 2,758,779
Depreciation and amortization 47,460 291,291 311,135
Interest income -- (971) (627)
Interest expense 32,393 38,713 20,466
Other income(expense), net 755,913 832 4,288
Income (loss) from operations of
discontinued businesses, before
income taxes 631,752 (1,971,223) (4,060,498)
Income tax expense (benefit) 240,000 (649,044) (241,577)
Income (loss) from operations of
discontinued businesses 391,752 (1,322,179) (3,818,921)
</TABLE>
<PAGE> 63
NOTE 5 IMPAIRMENT AND OTHER LOSSES
Impairment and other losses included in the accompanying
consolidated statements of operations are summarized as follows:
<TABLE>
Year Ended December31,
-----------------------------------
1997 1996 1995
--------- ---------- ---------
<S> <C> <C> <C>
Impairment and other losses included
in loss from continuing operations:
Write-off of capital lease and related
assets $ 768,545 $ -- $ --
Provision for loss contingencies 437,335 -- --
Write- off of deferred compensation
assets 625,728 -- --
Write-down of other assets 67,345 -- --
Write-off of NSC intangibles and goodwill -- 14,233,953 --
--------- ---------- ---------
1,898,953 14,233,953 --
--------- ---------- ---------
Impairment and other losses included
in loss from discontinued operations:
Write-off of TNI goodwill -- -- 2,758,779
Write-off of investment in Comstar 194,901 --
--------- ---------- ---------
-- 194,901 2,758,779
--------- ---------- ---------
$1,898,953 $14,428,854 $2,758,779
========= ========== =========
</TABLE>
In 1997, the Company removed, from its consolidated balance
sheet, the capital lease and other assets related to equipment
under lease from Boston Financial & Equity Corporation ("BFC")
due to BFC having taken possession of certain computer equipment
leased by NSC from BFC and the initiation by BFC of an action
filed in the State of Texas against the Company seeking
approximately $500,000, due under the lease agreement. The
removal of the capital lease and other assets related to
equipment under lease resulted in a loss of $768,545. The Company
also recorded a loss contingency of approximately $500,000 and
removed the related capital lease obligation from the Company's
consolidated balance sheet, which resulted in an additional loss
provision of $122,986, which is included in the provision for
loss contingencies in the above table.
In 1997, the Company also made various other provisions for loss
contingencies related to leased office space, which has been
vacated, leased equipment that the Company is not presently using
and for the loss from the settlement of claims brought against
the Company by Timboon, LTD. The total amount of these loss
provisions was $437,335, including $122,986 related to the BFC
lease. Included in this amount is $162,053 related to the Timboon
Settlement Agreement (see Notes 7 and 14).
The write-off of deferred compensation assets in 1997 is the
result of the resignation of certain employees subject to
employment agreements (see Note 13).
Impairment and other losses in 1996 reflect the write-off of the
Company's investment in Comstar, including goodwill recorded in
connection with the acquisition, and the write-off of the
unamortized cost of goodwill and intangibles recorded in
connection with the Company's 1995 acquisition of NSC. The write-
off of the Company's investment in Comstar is the result of the
Company's decision to sell substantially all of the assets of TNI
and abandon its remaining Telecommunications businesses; and, the
write-off of the unamortized cost of goodwill and intangibles
recorded in connection with the acquisition of NSC is the result
of continued operating losses and the failure of NSC to
successfully market the software
<PAGE> 64
technology acquired by the Company in connection with the
acquisition. The write-off of the Company's investment in Comstar
is included in loss from operations of discontinued
telecommunications businesses for the year ended December 31,
1996; and, the write-off of the unamortized cost of goodwill and
intangibles recorded in connection with the acquisition of NSC is
reflected in loss from continuing operations for the year ended
December 31, 1996.
At December 31, 1995, the Company recognized a charge to income
of $2,758,779, which is reflected as a component of discontinued
operations in the accompanying consolidated statement of
operations for the year ended December 31, 1995, to write off,
with no associated income tax benefit, all of the goodwill
related to its acquisition of TNI. This write-off reflects the
damages caused to the business of TNI as a result of actions
taken by GE Capital Communications Services Corporation ("GECCS")
and New Enterprise Wholesale Services, Ltd. ("News"), which
actions included, among other things, (i) the failure of GECCS
and News to provision customer accounts for telecommunications
products and services offered by GECCS and News and sold by TNI
pursuant to a contractual agreement among TNI, GECCS and News,
(ii) the cancellation of TNI customers by GECCS and News and
(iii) the failure of GECCS and News to properly bill and collect
revenues due to TNI. TNI, as claimant in a binding arbitration
proceeding against GECCS and News, was awarded damages under the
GECCS Agreement in the amount of approximately $1,250,000. The
award, which was entered on October 10, 1996, was appealed by
GECCS to the U.S. District Court for the Northern District of
Georgia on the grounds that the arbitrators exceeded their powers
by awarding TNI damages under the GECCS Agreement. On September
30, 1997, the U.S. District Court confirmed the award; and, a
motion for summary judgment was entered on October 1, 1997. On
December 24, 1997, the Company, GECCS and News entered into a
Confidential Settlement Agreement and Mutual Full and Final
Releases (the "Settlement Agreement"). Pursuant to the Settlement
Agreement, GECCS\News paid $1,250,000 in full satisfaction of the
arbitration award. Of that amount, the Company received
approximately $750,000, which is net of legal fees. The net
proceeds from the Settlement Agreement are reflected in
income(loss) from discontinued operations in the accompanying
consolidated statement of operations for the year ended December
31, 1997.
NOTE 6 FURNITURE AND EQUIPMENT
Furniture and equipment consists of the following:
DECEMBER 31,
----------------------
1997 1996
------- ---------
Furniture and equipment $130,162 $ 917,869
Equipment held under capital lease -- 880,163
Leasehold improvements -- 14,835
------- ---------
130,162 1,812,867
Less: accumulated depreciation (56,744) (587,598)
------- ---------
Net furniture and equipment $ 73,388 $1,225,269
======= =========
Depreciation expense was $174,545, $330,973 and $122,471 in 1997,
1996 and 1995 respectively.
In 1997, the Company removed, from its consolidated balance
sheet, capital lease assets with a net carrying amount of
$579,681 related to equipment under lease from Boston Financial &
Equity Corporation. See Notes 5 and 14.
Included in furniture and equipment, net, as of December 31, 1996
is $327,237, applicable to discontinued telecommunications
businesses.
<PAGE> 65
NOTE 7 NOTES AND DEBENTURES PAYABLE
Notes and debentures payable consist of the following:
<TABLE>
DECEMBER 31,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
4% Cumulative convertible debentures
due October 1, 1998 $ 1,200,000 $ --
10% Cumulative convertible debentures
due on various dates through
November 1997 1,195,000 1,279,000
10% Cumulative convertible debentures
due on November 21, 1997 -- 300,000
10% Cumulative convertible debentures
due on November 26, 1997 170,000 200,000
10% Convertible debentures payable to
former shareholders of TNI 450,000 450,000
Notes payable to former shareholders of
NSC in equal monthly installments of
$20,000, non-interest bearing 150,000 150,000
6% Acquisition notes payable to former
shareholders of ATI, secured by the
stock of ATI -- 250,000
18% Cumulative Convertible Debenture
Note due January 15, 1999 80,000 --
12% Cumulative Convertible Debenture
Notes due on various dates through
November 1998 50,000 --
12% Convertible Promissory Note
due March 28, 1997, in default 30,000 --
10% Cumulative Convertible Debenture
Note due September 1998 30,000 --
8%-10% Notes payable to stockholders 1,700 162,741
Promissory note in default -- 200,000
10.75% demand note payable, secured by
certain accounts receivable -- 100,000
5% Note to former shareholder of CCI, due
on demand, secured by certain equipment -- 75,000
Other 5,000 14,017
--------- ----------
3,361,700 3,180,758
Less: current portion (3,361,700) (3,180,758)
--------- ---------
Long-term portion $ -- $ --
========= =========
</TABLE>
On February 24, 1997, the Company issued $1,120,000 of 4%
cumulative convertible debentures due October 1, 1998 (the "4%
Debentures") to Timboon, LTD ("Timboon", a non U.S. person) in
reliance upon exemptions under Regulation S of the Securities Act
of 1933. The 4% Debentures are convertible at any time after 45
days from the date of their issuance, until maturity, into the
Company's common stock at a conversion price equal to the lesser
of (a) 80% of the average closing bid price of the Company's
common stock for the five days preceding the issuance of the
debentures or (b) 70% of the average closing bid price of the
Company's common stock for the five days preceding the conversion
date. The Company incurred costs in connection with this
financing of $120,000 and received net proceeds of $1,000,000.
The Company, through December 31, 1997, converted $120,000 of the
4% Debentures issued to Timboon into 256,361 shares of the
Company's common stock. On June 6, 1997, as a result of the
Company's refusal to convert additional 4% Debentures, Timboon,
as Plaintiff, filed an action in the United District Court,
Southern District of New York, against the Company, as Defendant,
seeking the
<PAGE> 66
delivery of 163,438 shares of the Company's common stock to
Plaintiff as a result of the conversion of an additional $150,000
of 4% Debentures and the payment of $970,000 (the principal
amount of the 4% Debentures that had not been converted by
Timboon) to Timboon, plus damages. The Company filed a
counterclaim against Timboon alleging that Timboon breached the
representations and covenants it made in the Off-Shore Securities
Subscription Agreement. These representations and covenants
related to, among other things, Timboon's investment intent in
acquiring the Company's securities and its possible "shorting" of
the Company's common stock in contemplation of conversion. In
addition, the Company alleged that Timboon participated in
manipulative market activity with the intent to artificially
depress the market price of the Company's common stock. Effective
March 2, 1998, the Company and Timboon entered into a Settlement
Agreement and Release (the "Settlement Agreement") in settlement
of all claims brought against each other in connection with the
4% Debentures. Pursuant to the Settlement Agreement, the Company
is required to pay Timboon $1,200,000, in cash, or by the
liquidation by Timboon of shares of the Company's common stock
into which the 4% Debentures are convertible. The Company has
designated 4,000,000 shares of its common stock, to be held in
escrow, for liquidation by Timboon pursuant to the terms of an
escrow agreement (the "Escrow Agreement"). The terms of the
Escrow Agreement generally provide that Timboon may liquidate
during each four-week period ("Trading Period")(i)up to 50% of
the aggregate trading volume of the Company's common stock on the
NASDAQ Bulletin Board, or such other trading market on which the
Company's may be publicly traded, for the prior four-week period
at no less than the "bid" price, or for the first eight weeks of
trading, up to 37.5% of the trading volume for the previous four-
week period at no less than the "bid" price, provided a minimum
"bid" price of $0.31 per share, or greater, is maintained or (ii)
up to 200,000 shares of the Company's common stock during any
Trading Period at or above the average of the "bid" and "ask"
price. In either case, the liquidation of shares of the Company's
common stock by Timboon is not to exceed $200,000 of net
proceeds, in the aggregate, during any Trading Period. The Escrow
Agreement also provides that when Timboon receives cumulative net
proceeds of $1,200,000, the escrow agent is to return all
remaining shares held in escrow, if any, to the Company or, in
the event Timboon receives cumulative net proceeds of $1,200,000
from the liquidation of 600,000 shares, or less, then the escrow
agent is to return all remaining shares, less 100,000 shares
which are to be retained by Timboon. In connection with the
Settlement Agreement the Company increased the principal balance
of the 4% Debentures to equal $1,200,000 and recognized a loss of
approximately $162,000. See Note 5.
As of the date of this Prospectus, the Company has been informed
that Timboon has sold approximately 1.6 million shares of the
Company's common stock and has received total proceeds of
approximately $220,000; and, the Company estimates the remaining
unconverted debentures held by Timboon total approximately
$980,000. The Company estimates that Timboon holds approximately
2,400,000 shares, including 1,000,000 of additional shares issued
by the Company to Timboon in June 1998. The Company expects that
it will either (i) issue additional shares of its common stock to
Timboon until such time as the debentures held by Timboon are
fully converted or (ii) liquidate the remaining debentures held
by Timboon by the payment of cash. The Company, however, is not
able to determine (i) the number of additional shares, if any,
that it may issue in the future in order for Timboon to fully
convert the debentures or (ii) if it will have sufficient cash to
satisfy any remaining debentures, after the sale by Timboon of
shares issued to date, or which may be issued in the future, in
conversion of the debentures.
During 1996, the Company privately placed, in reliance upon
exemptions under Regulation D of the Securities Act of 1933, a
series of one-year 10% cumulative convertible debentures in the
aggregate principal amount of $1,279,000. These debentures are
convertible into shares of the Company's common stock on various
dates through November 1997 or on the effective date of a
registration statement under the Securities Act of 1993, if
earlier. The number of shares of common stock issuable upon
conversion of these debentures, in either case, is generally to
be determined by dividing the principal amount of the debentures,
plus accrued and unpaid interest, by the lesser of (a) the fixed
conversion prices set forth in the
<PAGE> 67
debentures, which range from $1.50 to $5.00 per share, or (b) a
conversion price equal to 50% of the average closing bid and ask
prices of the Company's common stock at the close of trading on
the next day following the maturity date as set forth in the
respective debenture. The Company has been informed that $845,000
of these convertible debentures have been assigned to persons
residing in the State of Michigan. On September 24, 1997 the
persons to whom these convertible debentures were assigned filed
a Schedule 13D under the Securities and Exchange Act of 1934. The
Schedule 13D filed by those persons discloses that the persons to
whom the debentures were assigned beneficially own 5,045,102
shares of the Company's common stock, including 4,801,640 shares
of the Company's common stock which are to be issued upon
conversion of the debentures. All of these persons share voting
power in the shares beneficially owned by them. The Company
believes the shares issuable to the assignees of the Company's
10% cumulative convertible debentures upon conversion may violate
the terms and conditions of the consent order entered into
between the Company and the State of Michigan (see Note 14). The
Company has not made a final determination as to the conversion
rights of such assignees. During 1997, the Company issued 19,033
shares upon conversion of $84,000 in principal amount of such
debentures, plus accrued interest. As a result of the Company not
having converted these debentures on their respective maturity
dates, the Company is in default of the terms of the debentures.
On November 21, 1996 and November 26, 1996, the Company privately
placed, in reliance upon exemptions under Regulation S of the
Securities Act of 1933, $300,000 and $200,000, respectively, of
10% one-year cumulative convertible debentures. These debentures
are convertible into shares of the Company's common stock at any
time after 45 days from the date of their issuance and prior to
their scheduled one-year maturity dates. The conversion price of
these debentures, plus accrued and unpaid interest, is equal to
the lesser of (a) 70% of the average closing bid price of the
Company's common stock for the five days preceding the conversion
date or (b)80% of the average closing bid price of the Company's
common stock for the five days prior to issuance of the
debentures. In connection with the issuance of these debentures,
the Company incurred placement fees and other costs of
approximately $50,000 and received net proceeds of approximately
$450,000. As of December 31, 1997, the Company has converted
$330,000 of these debentures into 122,000 shares of the Company's
common stock and has outstanding unconverted debentures totaling
$170,000. The Company is in default of the terms of the debenture
outstanding at December 31, 1997 by virtue of not having
converted the debenture on its maturity date.
The 10% convertible debentures payable to the former shareholders
of TNI, plus accrued and unpaid interest, are due at the time of
a public offering of the Company's common stock and the filing of
a registration statement. These debentures are convertible at a
conversion price equal to the public offering price in such
registration statement at the election of the holder. In March
1998, the Company made an offer to each of the holders of these
convertible debentures to redeem the debentures in return for 1.5
shares of the Company's common stock for each dollar of
principal, plus accrued interest, due to each of the debenture
holders, plus common stock purchase warrants exercisable at any
time over a five year period at an exercise price of $0.20 per
share. The number of common stock purchase warrants to be issued
upon acceptance of the offer to redeem the debentures is to be
determined by dividing the principal amount of each debenture by
two(2). As of March 31, 1998 (the expiration date of the offer),
the Company received the acceptance of all of the holders of the
debentures. Pursuant to the redemption offer, the Company is to
issue 893,278 shares of its common stock and 450,000 stock
purchase warrants (225,000 of which are exercisable at $1.50 per
share by the terms of the respective debenture note and 225,000
of which are exercisable at $0.20 per share pursuant to the
redemption offer).
The notes payable to the former shareholders of NSC, due in equal
monthly installments of $20,000, are currently in default. The
Company has not made any payments on these notes since April
1996. The holders of these notes have not initiated collection
efforts for the amounts due to them under the notes. The
<PAGE> 68
Company is currently accruing interest on these notes at 18% per
annum, the default rate of interest as called for by the notes.
The 6% acquisition notes payable to the former shareholders of
ATI were originally due within 90 days of the date of acquisition
of ATI. These notes were subsequently modified to delay their due
date to the date of a public offering of the Company's common
stock or upon placement of a bridge financing facility to
refinance the debt. These notes were also extended from time to
time. In consideration of these 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 to the note
holders. The 140,000 shares of Class B preferred stock were
converted into 50,910 shares of the Company's common stock in
September 1996. The acquisition notes payable, the stock purchase
warrants and 684,410 shares of the Company's common stock issued
to the former shareholders of ATI in connection with the
acquisition and as consideration for extension of indebtedness
are to be returned to the Company in connection with the May 1997
rescission of the ATI acquisition agreement(see Note 4).
The notes payable and debentures associated with the acquisitions
of subsidiaries, described above, are collateralized by the stock
of the respective subsidiaries.
The 18% Cumulative Convertible Debenture Note due January 15,
1999 is convertible into the Company's common stock, at the
election of the holder, at a conversion price of $2.50 per share,
is guaranteed by the Company's Chairman of the Board and is
collateralized by 500,000 shares of the Company's common stock,
which is held in escrow pursuant to an escrow agreement.
The 12% Cumulative Debenture Notes consist of two notes in the
principal amount of $25,000, each, and are due in October and
November 1998, respectively. These notes are convertible, at the
election of the holder, into shares of the Company's common stock
at an exercise price of $.10 per share. Interest accrued may also
be converted into shares of the Company's common stock at a price
equal to the average of the bid and ask prices of the Company's
common stock on the next day following conversion. Upon
conversion, the holders of the notes are also entitled to receive
common stock purchase warrants. The number of warrants to be
issued upon conversion of these notes is equal to the principal
amount of the notes divided by 0.1 and are exercisable at $0.10
per share.
The 12% Convertible Promissory Note due March 28, 1997 is in
default. The Note is convertible, at the election of the holder,
into the Company's common stock at $2.00 per share, plus 3,000
common stock purchase warrants, exercisable at $2.00 per share
for a two year period. The common stock purchase warrants are to
be issued either upon conversion or payment of the Note.
The 10% Convertible Debenture Note due September 1998 is payable,
at the election of the holder, from the proceeds of the
GECCS\News arbitration award, from the proceeds of the $500,000
note received by the Company from the sale of certain of TNI
assets (the "ITD Note") or by the issuance of the Company's
common stock at the average of the bid and ask prices of the
Company's common stock as of the date of the note. This note was
not paid from the proceeds of the GECCS\News arbitration award
and, in March 1998, the Company canceled the ITD Note pursuant to
an agreement between and among the Company, ITD and certain
former employees of the Company and TNI (see Note 18). After
these events, the note is either payable in cash or by the
issuance of the Company's common stock at the election of the
holder.
As of December 31, 1996, the Company had $162,741 of 8-10% notes
payable to stockholders due on various dates through December
1997. These notes are generally due one year after the date of
issuance and provide the holder with the right to convert the
principal amount of the note, plus accrued and unpaid interest,
into shares of the Company's common stock at predetermined
conversion prices at any time prior to maturity. During 1997,
these stockholders loaned the Company an additional $91,443, the
Company made payments of $84,484 and $168,000 of such notes, plus
<PAGE> 69
accrued interest, were converted into shares of the Company's
common stock at a negotiated conversion prices ranging from $0.90
to $1.00 per share.
The $200,000 promissory note in default outstanding as of
December 31, 1996 was paid in December 1997 from the proceeds of
the Settlement Agreement with GECCS and News (see Note 4).
The 10.75% demand note payable in the amount of $100,000
outstanding at December 31, 1996 was paid in December 1997 from
the proceeds of the Settlement Agreement with GECCS and News (see
Note 4).
The 5% note payable to a former shareholder of CCI in the amount
of $75,000 at December 31, 1996 was relieved, in full, as a
result of the rescission in May 1997 of the ATI acquisition (see
Note 4).
As of December 31, 1997 and 1996, all of the Company's notes and
debentures outstanding are classified as current in the
accompanying balance sheet.
NOTE 8 BORROWINGS UNDER LINES OF CREDIT
As of December 31, 1997, the Company had no used or unused lines
of credit. The Company, through two of its subsidiaries, had
lines of credit which were fully utilized at December 31, 1996.
NOTE 9 FINANCIAL INSTRUMENTS
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 that have been
issued by the Company are unique due to their terms being
negotiated as a part of the acquisition of companies or in
connection with private placements and, in many cases, 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.
<PAGE> 70
NOTE 10 INCOME TAXES
Income tax expense (benefit) for each of the three years in the
period ended December 31, 1997 consists of deferred income taxes
and is allocated among (i) continuing operations and (ii) the
components of discontinued operations in proportion to their
individual effects on income tax expense (benefit) for the year
after the allocation of income tax expense (benefit) applicable
to continuing operations. No provisions for income taxes
currently payable were made in 1997, 1996 or 1995.
The allocation of income tax expense (benefit) for each of the
three years in the period ended December 31, 1997 among
continuing operations and the components of discontinued
operations is summarized as follows:
<TABLE>
YEAR ENDED DECEMBER 31
------------------------------------
1997 1996 1995
-------- ---------- --------
<S> <C> <C> <C>
Loss from continuing operations $(483,000) $(2,554,150) $ (15,124)
Discontinued operations:
Income(loss) from operations of
discontinued telecommunications
businesses 240,000 ( 649,044) (241,577)
Gain from disposition of
telecommunications businesses 243,000 -- --
------- --------- ---------
Income tax expense (benefit) $ -- $(3,203,194) $ (256,701)
======= ========= =========
</TABLE>
Income tax expense (benefit) applicable to continuing operations
differs from the amounts computed by applying the U.S. Federal
income tax rate of 34 percent to loss before income taxes as a
result of the following:
<TABLE>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
------- --------- --------
<S> <C> <C> <C>
Amount computed at statutory rate $(608,400) $(6,966,137) $(681,438)
Increase (reduction) in taxes
resulting from:
State income taxes ( 46,200) (819,546) (80,169)
Amortization of goodwill 38,900 80,158 9,490
Rescission of business acquisitions 176,900 -- --
Impairment losses -- 971,769 --
Change in valuation allowance (44,500) 4,011,702 732,893
Other 300 167,904 4,100
------- --------- -------
$(483,000) $(2,554,150) $(15,124)
======= ========= =======
</TABLE>
The principal reasons for the difference between the amounts of
income tax benefit allocated to loss from discontinued operations
in 1996 and 1995 and the amounts computed by applying the U.S.
federal income tax rate of 34 percent to loss from discontinued
operations before income taxes, is due primarily to amortization
of goodwill, impairment losses and adjustments to the valuation
allowance recorded as a reduction of goodwill in conjunction with
the Company's 1995 acquisition of NSC.
In the first ten months of 1995, the Company recorded net
deferred tax assets of approximately $930,000 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, $248,000 of which is applicable to operations of
discontinued businesses). Because this occurred as part of a
business combination rather than through
<PAGE> 71
operations, the adjustment was 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 carryforwards
available to reduce future taxable income. The significant
components of the Company's deferred tax assets and liabilities
as of December 31, 1997 and 1996 are as follows:
<TABLE>
December 31,
----------------------
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $3,337,500 $3,999,122
Allowance for doubtful accounts 190,000 10,668
Accrued compensation and liabilities under
employment agreements 257,000 777,922
Accrued expenses and other current liabilities 250,800 --
--------- ---------
Total deferred tax assets 4,035,300 4,787,712
Less-valuation allowance (3,967,200) (4,011,705)
--------- ---------
Net deferred tax assets 68,100 776,007
--------- ---------
Deferred tax liabilities:
Intangible assets -- 371,029
Deferred compensation 68,100 389,401
Other -- 15,577
--------- ---------
Total deferred tax liabilities 68,100 776,007
--------- ---------
Net deferred income taxes $ -- $ --
========= =========
</TABLE>
At December 31, 1997, the Company and its subsidiaries had unused
net operating loss carryforwards of approximately $8.8 million,
expiring on various dates through 2011. Of this amount,
approximately $7.7 million is not restricted as to use. The
balance of the carryforwards amounting to approximately $1.1
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 the acquisition of HMT (See Note 4), it was taxed under
Subchapter S of the Internal Revenue Code and consequently, was
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. As of December
31, 1997, no shares of Class A preferred stock were outstanding.
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
<PAGE> 72
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. As of December 31,
1997, the Company had 2,953,125 shares of Class B preferred stock
outstanding.
STOCK PURCHASE OPTIONS AND 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 were determined based upon prices related to the issuance
of the Company's other securities. Such warrants are generally
exercisable 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. In August 1997, the Company, by written
consent of the Board of Directors, extended the exercise date of
all warrants with expiration dates in 1997 and 1998 to December
31, 1998.
The Company has also issued stock options to certain officers,
employees and directors. Options granted in 1996 totaled
1,000,000 and are exercisable at $6.00 per share. These options
were canceled effective as of December 31, 1997. Options granted
in 1997 totaled 1,417,500. Of the total number of options granted
in 1997, 117,500 are exercisable at any time over a two year
period at an exercise price of $1.50 per share and 1,300,000 are
exercisable at any time over a five year period at an exercise
price of $0.10 per share.
Options and warrants outstanding are summarized as follows:
Exercise Weighted
Price Range Average
Shares per Share Exercise Price
--------- ------------ --------------
Warrants outstanding
at December 31, 1995 1,680,936 $1.50-$8.00 $2.73
Warrants issued 1,822,098 $1.50-$10.00 $4.00
Options issued 1,000,000 $6.00 $6.00
---------
Warrants and options
outstanding at
December 31, 1996 4,503,700 $1.50-$10.00 $3.78
Warrants issued 697,805 $0.10-$4.50 $1.06
Warrants canceled (166,668) $1.50 $1.50
Options issued 1,417,500 $.010-$1.50 $0.22
Options canceled (1,000,000) $6.00 $6.00
---------
Warrants and options
outstanding at
December 31, 1997 5,452,337 $0.10-$10.00 $1.93
=========
The Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25) and related Interpretations in accounting for its employee
stock options because, as discussed below, the alternative fair
n
n 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. In connection with the issuance of such
shares, the Company recorded deferred compensation of $35,625
which is being amortized over the life of the related employment
agreement(5 years). The unamortized deferred compensation asset
recorded in 1995 was written-off in 1997 due to the resignation
of that Chief Executive Officer.
NOTE 14 COMMITMENTS AND CONTINGENCIES
The Company is subject to various legal and administrative
proceedings. These proceedings include (i) a consent order
executed between the Company and the State of Michigan requiring
the Company to use its best efforts to satisfy the prerequisites
of the Securities and Exchange Commission and the Michigan
Securities Bureau for registering the common stock sold by the
Company to purchasers of its securities in the State of Michigan,
(ii) actions brought against the Company by certain former
employees and persons formerly under contract with the Company
for payments allegedly due them, (iii) an action by a shareholder
seeking the rescission of the sale by the Company of its common
stock to the shareholder, (iv) an action by an equipment lessor
seeking approximately $500,000 in lease payments and other
charges due under a lease agreement and (v) an action by the
former stockholders of CCI.
These legal and administrative actions are more fully described
below.
The consent order executed by the Company and the State of
Michigan in December 1996, requires the Company to use its best
efforts to satisfy the prerequisites of the Security and Exchange
Commission and the Michigan Securities Bureau for registering the
common stock sold to Michigan purchasers of its common stock for
resale by them in the public market. This action is the result of
the sale by the Company of its securities in the State of
Michigan without an exemption from registration under the
Michigan Uniform Securities Act. In the event the Company is
unable to effect a registration statement or such purchasers are
unable to resell their shares pursuant to such registration
statement at a higher price than their cost, then the Company is
required to use its best efforts to satisfy the prerequisites of
the Securities and Exchange Commission and the State of Michigan
for making a rescission offer to all such purchasers. Also,
pursuant to the consent order, the Company must cease the
unregistered sale of securities in Michigan, has been censured
and has paid costs to the state of $2,500. Upon satisfaction of
the consent order, all sanctions are terminated. As of December
31, 1997, the Company estimates its maximum potential exposure as
a result of any rescission offer which may be required to be made
in the State of Michigan to be approximately $795,739, including
interest of approximately $121,615. The number of shares the
Company believes may be subject to a rescission offer in the
State of Michigan, if such an offer were to be made, is
approximately 219,000 shares; and, the weighted average purchase
price of such shares is approximately $3.25 per share. The
Company has not satisfied the requirements of the consent order.
Due to the "best efforts" nature of the Company's compliance
obligation, the Company believes that its performance of the
terms of the consent order is deferred until such time it is able
to both financially and functionally comply with the consent
order.
On April 15, 1997, Mr. Ken Lame, as Plaintiff, filed an action in
the United States District Court, District Court of Utah, Central
Division (Case No. 2:97CV0292W) against the Company and NSC, as
Defendants. This action arises from a consulting agreement
between Mr. Lame and the Company. The action seeks approximately
$250,000, plus interest, for payments Mr.Lame alleges are due
under the consulting agreement. The Company has accrued all
amounts it believes are due under the consulting agreement. The
resolution of this matter is not expected to result in
<PAGE> 76
liabilities materially in excess of those that have already been
accrued by the Company under the consulting agreement.
On May 21, 1997, Mr. Jeff Good, as Plaintiff, filed an action in
the United States District Court, Southern District of Iowa,
Davenport Division (Case No. 3-97-CV-80085) against the Company,
as Defendant, for amounts Mr. Good alleges are due under an
employment agreement between Mr. Good and one of the Company's
subsidiaries (which subsidiary is no longer conducting business).
This action seeks compensation and benefits under the employment
agreement in excess of $200,000. The Company believes this action
to be without merit and intends to vigorously defend it. However,
it is not possible to predict the likely outcome of this matter.
On May 1, 1997, Mr. John Jassy, as Plaintiff, filed an action in
the Circuit Court of the Sixth Judicial Circuit in and for
Pinellas County, Fl., Civil Division (Case No. 97-3103-CI-20)
against the Company, Mr. Stephen E. Williams and Mr. Edwin B.
Salmon, Jr., as Defendants. This action alleges that numerous
misrepresentations and deceptive statements were made to Mr.
Jassy and certain family members of Mr. Jassy to induce them to
purchase the Company's securities. The action seeks rescission of
those security purchases, payment of compensation Mr. Jassy
alleges is due to him from his employ by the Company as an
executive officer and repayment of a loan made to Mr. Williams by
Mr. Jassy. This action seeks approximately $500,000, plus
interest and attorney's fees. Included in the amounts claimed by
plaintiff, are approximately $450,000, including interest, to
repurchase approximately 100,000 shares of the Company's common
stock purchased by plaintiff and his family members,
approximately $60,000, plus interest, Mr. Jassy alleges is
payable to him in unpaid salary and benefits and $2,500, plus
interest, Mr. Jassy claims is owed to him by Mr. Williams, a
former President and Chief Executive Officer of the Company. The
Company believes this action to be without merit and intends to
vigorously defend it. In the event of an unfavorable outcome, it
is unlikely that the Company would be able to repurchase the
shares of common stock or pay other amounts subject to the
action.
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 of CCI filed suit to enforce promissory
notes in the aggregate principal amount of $300,000, which were
issued by the Company in connection with the CCI acquisition and
the issuance of 200,000 shares of the Company's Class A preferred
stock they allege are due them under the acquisition agreement.
This matter was referred by court order to mandatory arbitration
in the State of Florida. On February 3, 1998, the Arbitrators'
awarded in favor of the former shareholders of CCI. The award
requires, among other things, that the Company (i) convert
200,000 shares of its Class A Preferred Stock, held by the former
shareholders of CCI, into 100,000 shares of its common stock and
(ii) issue another 200,000 shares of Class A Preferred Stock to
the former CCI stockholders, which is also convertible into
100,000 shares of the Company's common stock, and gave the former
shareholders of CCI the ability to seek a summary judgment
against the Company for $500,000, without opposition, or accept
500,000 shares of the Company's Class A Preferred Stock in lieu
of a summary judgment. As of December 31, 1997, the Company has
recorded a loss contingency of $111,000, related to this action.
It is highly unlikely that the Company would be able to satisfy a
summary judgment should the former shareholders of CCI decide to
seek a summary judgment in lieu of preferred stock.
In October 1997, Boston Financial Corporation ("BFC") took
possession of certain computer equipment leased by NSC from BFC
as a result of the default by NSC of payments due under the
lease. On December 11, 1997, BFC filed an amended suit in
District Court, 45th Judicial District, Bexar County, Texas (Case
No. 97CI-14567) against NSC and, as guarantors of the lease
agreement, the Company, ATI and TNI. This action seeks
approximately $500,000 in lease payments and other charges due
under the lease agreement. The Company is attempting to negotiate
a settlement of this matter and may have several counterclaims
against BFC should the Company and BFC fail to settle. However,
it is not possible to predict the likely outcome of such
negotiations or any counterclaims the Company may have against
BFC. As of
<PAGE> 77
December 31, 1997, the Company has recorded a loss contingency
reserve of approximately $500,000 related to this action.
On June 6, 1997, Timboon, LTD ("Timboon"), as Plaintiff, filed an
action in the United States District Court, Southern District of
New York (Case No. 97 Civ. 4464 (JSR), against the Company, as
Defendant, seeking the delivery of 163,438 shares of the
Company's common stock to Plaintiff as a result of the conversion
of $150,000 of the Company's 4% Convertible Debentures, issued to
Timboon in February 1997 in reliance upon exemptions under
Regulation S of the Securities Act of 1933, and the payment of
$970,000 (the principal amount of the Company's $4% Convertible
Debentures that have not been converted by Timboon) to Timboon,
plus damages. The Company filed a counterclaim against Timboon
alleging that Timboon breached the representations and covenants
it made in the Off-Shore Securities Subscription Agreement. These
representations and covenants related to, among other things,
Timboon's investment intent in acquiring the Company's securities
and its possible "shorting" of the Company's common stock in
contemplation of conversion. In addition, the Company alleged
that Timboon participated in manipulative market activity with
the intent to artificially depress the market price of the
Company's common stock. Effective March 2, 1998, the Company and
Timboon Ltd. entered into a Settlement Agreement and Release (the
"Settlement Agreement") in settlement of all claims brought
against each other in connection with the debentures issued to
Timboon. See Note 7.
Prior to the rescission of the ATI acquisition agreement, the
Company obtained and guaranteed an equipment lease financing
facility for ATI's use. The financing facility was subsequently
terminated by the lessor due to non-payment by ATI of payments
due under the related lease agreements. In connection with the
rescission of the ATI acquisition agreement, ATI issued a
promissory note to the Company in the amount of $180,000, payable
upon the default by ATI of payments due under the lease financing
facility. Payments due to the Company under the promissory note
are to be equal to the amount, if any, the Company may be
required to pay under the lease guaranty agreement. In the event
of a default by ATI under the lease financing facility, it is
uncertain whether or not the Company would be able to satisfy the
terms of the guaranty agreement or whether or not ATI would be
able to satisfy the terms of the promissory note.
As of December 31, 1997, the Company and its subsidiaries have
pending outstanding judgments totaling approximately $170,000,
exclusive of the CCI judgment referred to above. These judgments
arose from cancellation of office and equipment leases and from
non-payment of obligations due to trade creditors.
The Company is also involved in numerous other legal and
administrative actions incurred in the ordinary course of
business, none of which are expected to have a material impact on
the Company's results of operations.
On June 8, 1998, the Company learned that an Involuntary Petition
was filed on June 1, 1998 against the Company in the United
States Bankruptcy Court for the Middle District of Florida (see
Note 17).
NOTE 15 SEGMENT INFORMATION
The Company's operations are classified into two industry
segments: healthcare management and cost containment products and
services ("Healthcare") and telecommunications products and
services, including pay-per-view related services
("Telecommunications"). In 1996 and 1997, the Company disposed of
substantially all of the assets of its telecommunications
businesses. Consequently, the healthcare segment is the only
segment in which the Company has continuing operations. The
operations of the Company's telecommunications segment are
classified as discontinued operations in the accompanying
consolidated statements of operations for all periods presented.
For summary operating results of the Company's discontinued
telecommunications segment, see Note 4.
<PAGE> 78
Capital expenditures of the Company's discontinued
telecommunications segment were $-0-, $12,561 and $208,503 in
1997, 1996 and 1995, respectively; and, the identifiable assets
of the Company's discontinued telecommunications segment included
in the consolidated balance sheets as of December 31, 1997 and
1996 are $539 and $660,094, respectively.
In 1997, HMT had one customer that counted for approximately 50%
of the Company's consolidated net revenues from continuing
operations. In 1996 and 1995, the NSC had one customer that
accounted for approximately 47% and 100.0% of the Company's
consolidated net revenues from continuing operations. The Company
has no inter-segment revenues.
NOTE 16 STATEMENTS OF CASH FLOWS SUPPLEMENTAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- -------------------
1997 1996 1995 1998 1997
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Non-cash investing and
financing activities:
Equipment capital leases $ 73,184 $ 703,215 $ 112,308 $ -- $ 73,184
======== ======== ======== ======== ========
Notes payable issued in
connection with
business acquisitions $ -- $ -- $ 700,000 $ -- $ --
======== ======== ========= ======== ========
Issuance of stock for debt $ 716,318 $ 199,150 $ -- $ 108,343 $ 596,318
======== ======== ========= ======== ========
Redemption of debentures
payable $ -- $ -- $ -- $ 595,513 $ --
======== ======== ========= ======== ========
Recovery of note receivable
from the sale of assets $ -- $ -- $ -- $ 305,345 $ --
======== ======== ========= ======== ========
Cash paid during the period for:
Interest $ 131,635 $ -- $ 23,055 $ 1,249 $ 19,363
======== ======== ========= ======== ========
Income taxes $ -- $ -- $ -- $ -- $ --
======== ======== ========= ======== ========
</TABLE>
NOTE 17 EVENTS SUBSEQUENT TO DECEMBER 31, 1997
In March 1998, the Company made an offer to each of the holders
of its 10% convertible debentures payable to the former
shareholders of TNI to redeem the debentures in return for 1.5
shares of the Company's common stock for each dollar of
principal, plus accrued interest, due to each of the debenture
holders, plus common stock purchase warrants exercisable at any
time over a five year period at an exercise price of $0.20 per
share. The number of common stock purchase warrants to be issued
upon acceptance of the offer to redeem the debentures is to be
determined by dividing the principal amount of each debenture by
two(2). As of March 31, 1998 (the expiration date of the offer),
the Company has received the acceptance of all of the holders of
the debentures. Pursuant to the redemption offer, the Company
issued 893,278 shares of its common stock and 450,000 stock
purchase warrants (225,000 of which are exercisable at $1.50 per
share by the terms of the respective debenture note and 225,000
of which are exercisable at $0.20 per share pursuant to the
redemption offer). The carrying amount of the debt extiguished
exceeded the fair value of the common stock and warrants issued
in exchange for the debt. This excess is classified as an
extraordinary gain in the accompanying unaudited consolidated
statement of operations for the three months ended March 31,
1998.
In March 1998, the Company, TNI, International Teledata
Corporation ("ITD") and certain former employees of the Company
(the "Employees") entered into an agreement
<PAGE> 79
(the "Agreement") which provided for the transfer of certain ITD
assets to the Employees. The assets transferred pursuant to the
Agreement were sold to ITD by TNI pursuant to the Purchase and
Sale Agreement, dated as of January 31, 1997, between TNI and
ITD. In connection with the transfer of assets pursuant to the
Agreement, the Company canceled the $500,000 convertible
debenture note issued by ITD (the "ITD Note") in conjunction with
the Purchase and Sale Agreement in exchange for 496,902 shares of
the Company's common stock beneficially owned by the Employees,
the waiver by the Employees of accrued and unpaid compensation
due to them and the cancellation of their employment agreements
with the Company. Included in income (loss) from operations of
discontinued telecommunications businesses for the three months
ended March 31, 1998 is income of approximately $306,000 from the
cancellation and partial recovery of the ITD Note.
The Company learned on June 8, 1998 that an Involuntary Petition
(the "Petition") was filed on June 1, 1998 against the Company in
the United States Bankruptcy Court for the Middle District of
Florida (Case No. 98-09299-8P7) under Chapter 7 of the Bankruptcy
Act (the "Proceeding") by certain petitioners (the
"Petitioners"). The names of the Petitioners and the amounts of
their alleged claims are set forth in the following table.
Petitioner Name Amount Claimed
Kenneth D. Lame $212,519
Barry L. Johnson 9,171
Jon T. Lame 2,325
Jack Arthur 26,498
K. Philip Lame 489
Keith A. Krenz 77,442
Kenneth Lame served as a consultant to NSC from October 31, 1995
to January 17, 1997 and as its President and Chief Executive
Officer from January 1997 to March 1997. Part of Kenneth Lame's
assigned duties as the President and Chief Executive Officer of
NSC was development of a business, operating and marketing plan
for NSC's "CHAMPUS software and data base." Kenneth Lame did not
deliver any business, operating or marketing plans to NSC and NSC
terminated the services of Kenneth Lame in March 1997. The
alleged claim of Kenneth Lame, which is properly against NSC, is
disputed by NSC. Kenneth Lame arranged for NSC to engage the
services of Petitioners Johnson, Jon T. Lame, Arthur and K.
Philip Lame to assist him in development of the business,
operating and marketing plan. The Company believes that it never
employed Kenneth Lame or the Petitioners named in the preceding
sentence and is not indebted to them in any amount. Furthermore,
the Company believes the alleged claims of Petitioners Arthur,
Jon. T. Lame and K. Philip Lame have been paid in full and the
alleged claim of Petitioner Johnson has been reduced to $4,000.
Kenneth Lame introduced Health Management Technologies, Inc.
("HMT") to the Company which the Company ultimately acquired and
later divested. The Company and Kenneth Lame entered into a
letter agreement dated July 16, 1996 for payment of a finder's
fee to Kenneth Lame for the HMT acquisition. The Company
believes it has satisfied in full all of its monetary obligations
to Kenneth Lame under the letter agreement. Furthermore, Kenneth
Lame has a suit pending against the Company and NSC in The United
States District Court, District of Utah (case no. 2:97-cv-00292
C) for the claims which he asserts against the Company in the
Petition. Accordingly, the Company believes Petitioners Kenneth
Lame, Johnson, Jon T. Lame, Arthur and K. Philip Lame are
creditors of NSC, to the extent of provable claims, and not
creditors of the Company.
Petitioner Krenz was a shareholder of NSC at the time it was
acquired by the Company. As a part of the acquisition agreement,
the Company issued a promissory note to Mr. Krenz in the amount
of $129,070. The Company paid $51,628 of this note prior to May
1996; but, suspended payments because the Company discovered the
business, assets and prospects of NSC had been misrepresented.
The Company has not
<PAGE> 80
received any correspondence or any demand for payment from Mr.
Krenz since the date it suspended payments to Mr. Krenz.
On June 23, 1998, the Company filed a motion to dismiss the
Petition on the grounds that it does not have any outstanding
obligation to five of the six Petitioners and contests its
obligation to the sixth petitioner. The Company intends to seek
sanctions against the Petitioners and its counsel for any damages
its sustains as a result of the Petition. The Company believes
that the Petitioners have filed the Petition in bad faith and
with malice and that the Petition contains fraudulent
misrepresentations to the Court. The Company intends to
vigorously defend against the Petition.
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.
Following is a summary of the allowance for doubtful accounts:
Balance, December 31, 1995 $510,000
Additions:
Provision for bad debts charged
to operations 522,687
Deductions:
Write-offs (985,254)
CCI Elimination (19,359)
-------
Balance, December 31, 1996 28,074
Additions:
Provision for bad debts charged
to operations 39,816
Deductions:
Write-offs (63,214)
Discontinued operations (4,676)
-------
Balance, December 31, 1997 $ --
=======
The provision for bad debts charged to operations
applicable to discontinued operations was $475,711 in
1996.
NOTE 19 - PROPOSED ACQUISITION
On November 14, 1997, the Company and the stockholders of HMG
Health Care Claims Auditing, Inc. ("HMG") entered into an
agreement to exchange stock ( the "Agreement to Exchange Stock").
Pursuant to the Agreement to Exchange Stock, the Company is to
acquire all of the outstanding stock of HMG in exchange for
shares of the Company's common stock (the "HMG Acquisition
Shares"). The number of HMG Acquisition Shares is to be
determined at closing and are to be equal to 30% of the then
outstanding common stock of the Company after giving effect to
the issuance of the HMG Acquisition Shares. The acquisition of
HMG is subject to, among other things, the Company obtaining
equity or debt financing to refinance the existing indebtedness
of HMG ($850,000) and pay other costs and expenses related to the
acquisition. The Agreement to Exchange Stock contemplated a
December 31, 1997 closing. Subsequent thereto, the Agreement to
Exchange Stock was terminated by the mutual consent of the
parties.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
Filing Fees:
U.S. Securities and Exchange Commission $ 1,225
Transfer Agent and Registrar's Fee *
Accounting Fees and Expenses *
Printing and Engraving Expenses *
TOTAL * $
*To be filed by amendment.
Item 14. Indemnification of Directors and Officers.
The Florida Business Corporation Act, effective July 1, 1990 as
revised, empowers a Florida corporation to provide
indemnification to directors, officers, employees and agents of
the corporation (including persons who serve at the request of
the corporation in such capacities in another corporation,
partnership, joint venture, trust or other enterprise) by reason
of his service in such capacity (a) against liability (including
attorneys fees and costs and costs of settlement) in an action,
otherwise than by or in the right of the corporation, if he acted
in good faith and in a manner he reasonably believed to be in, or
not opposed to, the best interests of the corporation and with
respect to criminal proceedings had no reasonable cause to
believe his conduct was unlawful, provided that a judgment,
order, settlement, conviction or plea of nolo contendre shall not
create a presumption that such person is not entitled to
indemnity; and (b) against expenses and amounts paid in
settlement in an action by or in the right of the corporation, if
he acted in good faith and in a manner he reasonably believed to
be in, or not opposed to, the best interests of the corporation,
but not to the extent such person is adjudged liable except as
the court shall determine such person is fairly and reasonably
entitled to indemnification for expenses. Indemnification shall
be made only when specifically authorized in the particular case
by a majority of a quorum of disinterested directors or by a
majority of a committee designated by the board or by independent
legal counsel or by a majority of disinterested stockholders.
Expenses of litigation may be advanced by the corporation, if the
indemnified person undertakes to repay such amounts in the event
it later is determined that he is not entitled to
indemnification. Any such person may apply to a court of
competent jurisdiction for indemnification, notwithstanding a
contrary determination by the board of directors or the
stockholder.
[Remainder of page left blank]
Item 15. RECENT SALES OF UNREGISTERED SECURITIES.
During the three years ended December 31, 1997, the Company has
sold the securities set forth in the following tables in reliance
upon exemption from registration under the Securities Act of
1933, as provided by Section 4(2) thereof.
(a) The following table sets forth cash sales of the Company's
common stock during each of the three years ended December 31,
1997. The persons who acquired the Company's common stock were
existing shareholders of the Company, were known by the Company's
management or were introduced to the Company's management by
other investors or persons acquainted with the Company.
Approximate
Year Ended Number of Number Total
December Investors of Proceeds
31, Shares
- --------- ---------- -------- ---------
1995 130 1,477,874 $4,110,887
1996 70 413,688 2,187,273
1997 10 205,556 231,500
(b) The following table sets forth the number of shares and the
value assigned to the shares of the Company's common stock issued
during each of the three years ended December 31, 1997 as
compensation for services rendered to the Company by Directors,
officers, consultants, legal counsel and other advisors.
Approximate
Year Ended number Number of
December of Shares Amount
31, recipients
- --------- ---------- --------- -------
1995 31 1,053,090 $431,148
1996 7 41,754 260,193
1997 10 1,000,857 384,235
(c) The following table sets forth the number of shares and the
value assigned to the shares of the Company's common stock issued
in connection with the acquisition of businesses and assets for
the three years ended December 31, 1997.
<TABLE>
Approximate
number Business or Number
Date of Assets of Amount
recipients Acquired Shares
- --------- ---------- ------------- -------- ---------
<S> <C> <C> <C> <C>
June 1995 1 Comstar 200,000 $126,000
September 6 Long-distance
1995 customer
base 19,763 74,111
October 1995 3 NSC 2,000,000 6,916,000
October 1995 1 NSC acquisition
fees 100,000 346,000
December 1995 1 Long-distance
customer
base 20,002 130,413
March 1996 2 HMT 309,837 2,000,000
July 1996 1 HMT acquisition
fees 23,333 65,000
</TABLE>
(d) The following table sets forth the number of shares of the
Company's common stock issued upon conversion of the Company's
Class A and Class B preferred stock and the amount of Class A and
Class B preferred stock which was converted into shares of the
Company's common stock for each of the three years ended December
31, 1997. See (f) below.
<TABLE>
Approximate Class of Number
Year Ended number Security of
December of converted into common Amount
31, recipients common stock shares
- --------- ---------- -------------- ------ ---------
<S> <C> <C> <C> <C>
1995 N\A N\A N\A N\A
1996 6 Class A 2,204,000 $177,495
preferred
2 Class B
preferred 50,910 236,600
1997 4 Class A
preferred 96,000 630
2 Class B
preferred 580,682 874,485
</TABLE>
(e) The following table sets forth the number of shares of the
Company's common stock issued upon conversion of the Company's
convertible notes and debentures and the amount of convertible
note and debenture indebtedness which was converted into shares
of the Company's common stock for the three years ended December
31, 1997. See (g) below.
<TABLE>
Number of
Date of common Amount of
Name of Lender Conversion shares Indebtedness
- -------------- ---------- --------- ------------
<S> <C> <C> <C>
Renee Woody March 1996 1,000 $ 1,500
Robert Sweet March 1996 1,000 1,500
Richard Sweet March 1996 9,845 14,768
Lynn Hennegan March 1996 1,000 1,500
Sean Davis March 1996 1,000 1,500
Bart Andeer March 1996 250 375
Floroe Andeer March 1996 250 375
Brittany Leigh, March 1996 76,740 110,837
Inc.
American First
Equipment Leasing,
Inc. March 1996 116,467 66,652
Ken Gilde, Jr. February 1997 19,033 85,899
Richard Sweet February 1997 41,565 41,565
Edwin Salmon February 1997 25,762 25,762
Lee Mullineaux February 1997 51,296 46,395
American First
Equipment Leasing,
Inc. February 1997 61,404 61,404
RIC Investment February 1997 90,113 304,356
Fund
RANA Investment
Company April 1997 31,887 30,937
Timboon, LTD May 1997 87,912 50,000
Timboon, LTD May 1997 168,449 70,000
</TABLE>
In addition to the shares of common stock issued upon conversion
of notes and debentures, the Company has reserved 500,000 shares,
held in escrow, which are to be issued to a holder of a
debentures note in the amount of $70,000 upon a default in the
payment of the related indebtedness. The name of the holder is
Henry Rodriguez. See (g) below.
(f) The following table sets forth the number of shares of the
Company's Class A and Class B preferred stock and the value
assigned to the shares of the Company's Class A and Class B
preferred stock issued in connection with the acquisition of
businesses and for other purposes for the three years ended
December 31, 1997. See (d) above.
<TABLE>
Approximate Business or assets Number
number acquired or other Class of of
Date of purpose for Security preferred Amount
recipients issuance shares
- ------- --------- ------------------ -------- --------- --------
<S> <C> <C> <C> <C> <C>
June 1 Acquisition of LCI Class A
1995 preferred 1,075,000 $ -0-
June 1 Officer Class A
1995 compensation preferred 1,375,000 20,625
June 1 Acquisition of Class A
1995 Comstar preferred 500,000 157,500
August 1 Consulting fees Class A
1995 preferred 150,000 -0-
July 7 Acquisition of TNI Class B
1995 preferred 4,550,000 2,491,745
February 2 Extension of Class B
1996 indebedness preferred 140,000 236,600
</TABLE>
(g) The following table sets forth the date, name and amount of
note and debenture indebtedness issued for cash by the Company
for the three years ended December 31, 1997. The persons who
acquired the Company's notes and debentures were existing
shareholders of the Company, were known by the Company's
management or were introduced to the Company's management by
other investors or persons acquainted with the Company. See (e)
above.
<TABLE>
Date Name Amount
- ------------ ---------------------- -------
<S> <C> <C>
January 1995 American First
Equipment Leasing, Inc. $ 32,000
February 1995 American First
Equipment Leasing, Inc. 5,000
February 1995 Brittany Leigh, Inc. 1,000
March 1995 Brittany Leigh, Inc. 17,150
April 1995 Brittany Leigh, Inc. 113,750
May 1995 Brittany Leigh, Inc. 39,500
May 1995 American First
Equipment Leasing, Inc. 16,000
June 1995 Richard Sweet 20,000
June 1995 American First
Equipment Leasing, Inc. 10,000
July 1995 Brittany Leigh, Inc. 10,000
October 1995 American First
Equipment Leasing, Inc. 15,000
October 1995 Brittany Leigh, Inc. 52,000
November 1995 American First
Equipment Leasing, Inc. 100,000
March 1996 Richard Sweet 25,000
April 1996+ Toby Walker 200,000
April 1996 American First
Equipment Leasing, Inc. 49,000
June 1996 Nidan Corporation 500,000
July 1996 Nidan Corporation 345,000
August 1996 Toby Walker 200,000
September 1996 American First
Equipment Leasing, Inc. 5,000
October 1996 American First
Equipment Leasing, Inc. 24,000
October 1996 Nidan Corporation 246,000
November 1996 Nidan Corporation 65,000
November 1996 RIC Investment Fund 300,000
November 1996 RANA Investment Company 200,000
December 1996 American First
Equipment Leasing, Inc. 4.717
December 1996 Richard Sweet 15,000
December 1996 Nidan Corporation 39,000
January 1997 Lee Mullineaux 10,000
January 1997 Tuzo Jerger 30,000
January 1997 Judson Marquart 20,000
February 1997 Timboon, LTD 1,120,000
April 1997 American First
Equipment Leasing, Inc. 30,000
April 1997 Edwin B. Salmon 9,633
April 1997 Brittany Leigh, Inc. 55,000
July 1997 American First
Equipment Leasing, Inc. 4,500
August 1997 Veronica Tully 2,000
August 1997 Paige Clarke 3,000
September 1997 Edwin B. Salmon 10,000
September 1997 American First
Equipment Leasing, Inc. 5,000
September 1997 Brittany Leigh, Inc. 10,000
September 1997 Energy Electric, Inc. 30,000
October 1997 Edwin B. Salmon 5,500
October 1997 Mark and Virginia
Blanchard 25,000
November 1997 Henry Rodriguez 70,000
November 1997 Mark and Virginia
Blanchard 25,000
December 1997 RTR Financial
Coporation 80,000
</TABLE>
(h) The following table sets forth the date, name and amount of
note and debenture indebtedness issued by the Company for the
three years ended December 31, 1997 in connection with the
acquisition of businesses. See Notes 7 and 17 to the consolidated
financial statements.
<TABLE>
Business
Date Name acquired Amount
- --------- ------------------- -------- -------
<S> <C> <C> <C>
July 1995 Telcom United North TNI 225,000
July 1995 Donald McAlister TNI 75,000
July 1995 David Fink TNI 25,000
July 1995 Leonard D'Innocenzo TNI 25,000
July 1995 Dean Colantino TNI 25,000
July 1995 Don Dugan TNI 25,000
July 1995 Comgi Retirement Trust TNI 12,500
July 1995 John and Sharon Lang TNI 12,500
July 1995 Dale Higgins TNI 12,500
July 1995 Thomas Jannarone TNI 12,500
October 1995 Keith Krenz NSC 129,071
October 1995 Dinesh Khaladkar NSC 120,929
</TABLE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
3.i. *Articles of Incorporation, as amended
3.ii.*By-laws, as amended
4. Convertible Debentures
P 1.* Convertible Debenture Note, dated December 5, 1995,
between the Company and Telcom United North, Inc.
P 2.* Convertible Debenture Note, dated December 5, 1995,
between the Company and Donald T. McAllister, M.D
P 3.* Convertible Debenture Note, dated December 5, 1995,
between the Company and David Fisk.
P 4.* Convertible Debenture Note, dated December 5, 1995,
between the Company and Leonard F. D'Innocenzo
P 5.* Convertible Debenture Note, dated December 5, 1995,
between the Company and Dean Charles Colantino
P 6.* Convertible Debenture Note, dated December 5, 1995,
between the Company and Donald P. Dugan.
P 7.* Convertible Debenture Note, dated December 5, 1995,
between the Company and Comgi Retirement Trust,
John R. Lang, M.D./Sharon B. Lang: Trustees
P 8.* Convertible Debenture Note, dated December 5, 1995,
between the Company and John R. Lang, M.D./Sharon B. Lang.
P 9.* Convertible Debenture Note, dated December 5, 1995,
between the Company and Dale D. Higgins
P 10.* Convertible Debenture Note dated December 5, 1995,
between the Company and R. Thomas Jannarone.
11.# Form of Offshore Offering Distribution agreement by and
between Systems Communications, Inc. and Victory
Investments, LLC.
12.# Form of 10% cumulative Convertible Debentures due November
21, 1997 in the aggregate amount of $500,000.
13.# Form of Offshore Securities Subscription Agreement for
$500,000 10% Cumulative Convertible Debentures.
14.# Form of Offshore Securities Subscription Agreement for
$1,120,000 4% Convertible Debentures.
15.#### Form of 10% Cumulative Convertible Debenture Note.
16.++ Form of Settlement Agreement dated as of March 2,
1998 between the Company and Timboon LTD, including
Joint Escrow Instructions and Revocable Proxy.
17.+++ Form of Non-Statutory Incentive Stock Option Agreement
5.1 +++ Opinion of Jackson L. Morris, Esq.
5.2 ++++ Opinion of Jackson L. Morris, Esq.
5.2 x Opinion of Jackson L. Morris, Esq.
10. Material Contracts
P 1.* Ameristar Stock Acquisition Agreement
P 2.* HMT Stock Purchase Agreement (March 12, 1996)
P 3.* NSC Agreement to Exchange Stock (August 24, 1995)
P 4.* NSC Restated Agreement to Exchange Stock (October 13, 1995)
P 5.* NSC Assignment and Amendment of Restated Agreement to
Exchange Stock (October 20, 1995)
P 6.* Telcom Restated Stock Purchase Agreement (June 16, 1995)
7. Employment Contracts
P (a)* Robert L. Alexander
P (b)* Russell H. Armstrong
P (c)* Edwin B. Salmon
P (d)* Stephen E. Williams
P (e)* Mark Woodward
P (f)* John D. Looney
P (g)* John A. Paolicelli
P (h)* James L. Tolley
P (i)* David J. Olivet
(j)## Karen Wolfe
(k)## James W. Wolfe
(l)## Eric R. Wolfe
P 8.* HMT Trademark Registration for "RETURN" Software Program
(December 8, 1992)
P 9.* HMT - Medicode Value-Added Reseller Software Development,
Marketing, and Maintenance Agreement (March 9, 1995)
P 10.* NSC Cooperative Research and Development Agreement Between
NSC and the U.S. Army (June 2, 1994)
P 11.* Services and Marketing Agreement By and Among GE Capital
Communication Services Corporation and Telcom
(March 31,1995)
P 12.* Joint Venture Agreement Between Universal Network
Services, Inc. and Telcom (February 13, 1995).
P 13.* Comstar Acquisition Agreement
P 14.* Coast Communications Acquisition Agreement
P 15.* Teaming Agreement with Health Management Systems, Inc.
P 16.** Authorized sales agent agreement between MCI
Telecommunications Corporation and Ameristar, dated June
12,1995
P 17.** Zero Plus-Zero Minus billing and information management
agreement between Zero Plus Dialing, Inc. and Ameristar,
dated May 16, 1996
P 18.** Telecommunications Agreement between U.S. Long Distance,
Inc. and Ameristar
P 19.** Tri-Party Agreement among Ameristar, U.S. Long Distance,
Inc. and Zero Plus Dialing, Inc.
P 20.** Telephone Agreement between Ameristar and U.S. Long
Distance, Inc., dated July 10, 1996
P 21.** License Agreement between Ameristar and VCA Pictures,
dated
February 13, 1996
P 22.** Agreement between Ameristar and United International
Pictures, dated April 1, 1996
P 23.** Marketing Agreement, dated October 2, 1995, between
Ameristar and U.S. Osiris Corporation
P 24.** Operator Service Agreement dated April 15, 1995, between
Opticom and Ameristar
P 25.** Mitel OSS Servicing Agreement, dated September 1, 1993
between MasterCorp, Inc. and Ameristar
P 26.** Telecommunications Agreement, dated January 15, 1996
between Long Distance Exchange Corp. and Ameristar
P 27.** Agreement, dated January 1995, between LDOS
Communications, Inc. and Ameristar
P 28.** Agreement, dated February 28, 1994, between L.D.
Communications, Inc. and Ameristar
P 29.** Contract Operator Services Agreement for Public Pay Phones
and Letters of Agency, dated January 7, 1992, between Fone
America, Inc. and Ameristar
P 30.** Payphone Aggregator Agreement, dated July 22, 1993,
between Communication TeleSystems International and
Ameristar
P 31.** Operator Service Agreements between Capital Network
System, Inc. and Ameristar
P 32.* Agreements between Ameristar Network Exchange, Inc. and
Ameristar
P 33.** Agreement dated November 11, 1991 between Ameristar and
Access Telecommunications, Inc.
P 34.** Agreement dated September 16, 1991 between Conquest
Operator Services Corporation and Ameristar
35.## Heads of Agreement for change in Management of National
Solutions Corporation.
36.## Rescission Agreement, dated May 21, 1997 by and between
the Company, Ameristar Telecommunications, Inc., Mark
Woodward and Russell Armstrong.
37.## Promissory note dated May 21, 1997 between ATI and the
Company.
38.## Agreement dated as of June 9,1997 by and among the Company,
Karen Wolfe and Eric Wolfe, Eric Wolfe, on behalf of his
infant son, Tyler Wolfe, and Lori Wolfe, wife of Eric
Wolfe, on behalf of herself and her infant son Tyler
Wolfe.
39.## Cooperative Marketing and Option Agreement dated June 9, 1997
between HMT and the Company.
40.## Purchase and Sale Agreement between TNI and International
TeleData Corporation dated January 31, 1997.
41.## Form of Convertible Debenture in the amount of $500,000
between International TeleData Corporation and TNI.
42.## Memorandum dated June 16, 1997 from the Department of the Army
regarding renewal of the Cooperative Research and Development
Agreement between the Company and the Department of the Army.
43.### Agreement to Exchange Stock, dated November 14, 1997, by and
between Grant Kolb and Patrick Loeprich (as "Sellers") and
the Company
16.* Letter re change in certifying accountant
16.1.+ Letter re change in certifying accountant
17.1.## Resignation Letter of Stephen Williams.
17.2.## Resignation Letter of David J. Olivet
P 21 * List of Subsidiaries of Registrant
23.1 +++ Consent of Jackson L. Morris, Esq.(included in Exhibit 5.1)
23.2 +++ Consent of Ernst & Young, LLP
23.3 +++ Consent of Moore Stephens Lovelace, P.A.
23.4 ++++ Consent of Jackson L. Morris, Esq.(included in Exhibit 5.2)
23.5 ++++ Consent of Ernst & Young, LLP
23.6 ++++ Consent of Moore Stephens Lovelace, P.A.
23.1 x Consent of Jackson L. Morris, Esq.(included in Exhibit 5.3)
23.2 x Consent of Ernst & Young, LLP
23.3 x Consent of Moore Stephens Lovelace, P.A.
27.1 * Financial Data Schedule (Year ended December 31, 1995)
27.2 **** Financial Data Schedule (Nine months ended September 30, 1996)
27.3 #### Financial Data Schedule (Year ended December 31, 1996)
27.4 **** Financial Data Schedule (Three months ended March 31, 1997)
27.5 **** Financial Data Schedule (Six months ended June 30, 1997)
27.6 **** Financial Data Schedule (Nine months ended September 30, 1997)
27.7 #### Financial Data Schedule (Year ended December 31, 1997)
27.8 **** Financial Data Schedule (Three months ended December 31, 1998)
99. Additional Exhibits
1. *** Arbitration award in the matter of the Arbitration between
Telcom Network, Inc. and GE Capital Communication Services
("GECCS") and New Enterprise Wholesale Services, Ltd.
(News")
* Incorporated by reference to the Company's Form 10 as filed
with the Commission on July 23, 1996.
** Incorporated by reference to the Company's Registration Statement on
Form 10/A as filed with the Commission on September 17, 1996.
*** Incorporated by reference to the Company's Current Report on Form 8-K
dated October 29, 1996.
**** Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the respective quarterly period.
# Incorporated by reference to the Company's Current Report on Form 8-K
as filed on March 27, 1997.
## Incorporated by reference to the Company's Current Report on Form 8-K,
as filed on July 28,1997.
### Incorporated by reference to the Company's Current Report on Form 8-K,
as filed on November 21,1997.
#### Incorporated by reference to the Company's Annual Report on Form 10-K
for the respective annual period.
+ Incorporated by reference to the Company's Current Report on
Form 8-K, as filed on November 25, 1998.
++ Incorporated by reference to the Company's Current Report on
Form 8-K, as filed on March 10, 1998.
+++ Incorporated by reference to the Company's registration
statement on Form S-8, File No. 333-52455.
++++ Incorporated by reference to the Company's registration
statement on Form S-8, File No. 333-57685.
X To be filed by Amendment.
(b) Financial Statement Schedules
No schedules are being filed as a part of this registration statement
as such schedules are not applicable, are not required or the
required information is included in the consolidated financial
statements or notes thereto.
Item 17.Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) (230.424(b) of this chapter) if, in
the aggregate, the changes in volume and price represent no more than a
20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
[Remainder of page left blank]
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned thereunto duly authorized
in Clearwater, Florida on the 16th day of July 1998.
SYSTEMS COMMUNICATIONS, INC. Date: June 17, 1998
/s/ James T. Kowalczyk
- ---------------------------------
JAMES T. KOWALCZYK
President, Principal Executive Officer
and Director
/s/ Richard A. Sweet
- ---------------------------------
RICHARD A. SWEET
Director
/s/ Larry R. Snapp
- ---------------------------------
LARRY R. SNAPP
Director
/s/EDWIN B. SALMON, JR.
- ---------------------------------
EDWIN B. SALMON, JR.
Principal Accounting Officer and Director,
Chairman
