FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-26668
SYSTEMS COMMUNICATIONS, INC.
- -----------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
FLORIDA 65-0036344
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4707 140th Avenue North, Suite 107, Clearwater, FL. 33762
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(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code 813-530-4800
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Indicate by check mark whether the registrant (1) had filed all
reports required to be filed by section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes___ No x_
Number of shares outstanding of the issuer's Common Stock, par
value .001 per share, as of March 31, 1998 - 14,174,052 shares.
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1998 1997
----------- -----------
(UNAUDITED)
ASSETS
[S] [C] [C]
Current assets:
Cash and cash equivalents $ 487 $ 65,556
Accounts receivable from officers and employees 62,495 60,908
Other current assets 145,587 130,419
---------- ----------
Total current assets 208,569 256,883
---------- ----------
Furniture and equipment 132,982 130,162
Less accumulated depreciation (63,278) (56,774)
---------- ----------
Net furniture and equipment 69,704 73,388
Note receivable from the sale of assets, less
allowance of $500,000 in 1997 -- --
Deferred compensation 21,375 52,941
Other non-current assets 4,982 4,982
---------- ----------
Total assets $ 304,630 $ 388,194
========== ==========
See Notes to Consolidated Financial Statements
<PAGE> 3
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Bank overdraft $ 56,042 $ --
Current portion of notes and debentures payable 2,922,200 3,361,700
Accounts payable 564,776 535,516
Accrued expenses and other current liabilities 2,571,036 2,830,977
---------- -----------
Total current liabilities 6,114,054 6,728,193
Deferred liabilities under employment agreements 145,762 310,794
---------- -----------
Total liabilities 6,259,816 7,038,987
---------- -----------
Common stock subject to rescission 674,124 674,124
---------- -----------
Stockholders' deficit:
Class A convertible preferred stock, stated value
and liquidation preference $1.00 per share;
authorized 5,000,000 shares; issued and
outstanding - none -- --
Class B convertible preferred stock, stated value
and liquidation preference, $1.00 per share;
authorized 10,000,000 shares; issued and
outstanding, 100,000 shares in 1998 and
2,953,125 shares in 1997 54,764 1,617,260
Common stock - $.001 par value; authorized
50,000,000 shares; issued and outstanding,
14,174,052 shares in 1998 and 12,083,646
shares in 1997 14,175 12,084
Additional paid in capital 18,882,103 16,866,883
Accumulated deficit (25,580,352) (25,821,144)
---------- -----------
Total stockholders' deficit (6,629,310) (7,324,917)
---------- -----------
Total liabilities and stockholders' deficit $ 304,630 $ 388,194
========== ===========
See Notes to Consolidated Financial Statements
<PAGE> 4
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31,
-----------------------
1998 1997
---------- ---------
<S> <C> <C>
Net revenues $ -- $1,125,724
---------- ---------
Costs and expenses:
Selling and administrative expenses 271,235 1,766,116
Impairment and other losses -- 303,568
Depreciation and amortization 6,504 253,590
---------- ---------
Total costs and expenses 277,739 2,323,274
---------- ---------
(277,739) (1,197,550)
Interest income -- 2,018
Gain from sale of license agreement -- 2,695,214
Interest expense (74,462) (111,565)
Other income (expense), net -- (111,986)
---------- ---------
Income (loss) from continuing operations (352,201) 1,276,131
---------- ---------
Discontinued operations:
Income (loss) from operations of discontinued
telecommunications businesses (less income
tax benefit of $9,500 in 1997) 306,405 (65,920)
Gain from disposition of telecommunications
businesses (less income tax expense of
$9,500 in 1997) -- 15,500
---------- ---------
Income (loss) before extraordinary item (45,696) 1,225,711
Extraordinary item - Gain from extinquishment
of debt 286,588 --
---------- ---------
Net income $ 240,792 $1,225,711
========== =========
See Notes to Consolidated Financial Statements
<PAGE> 5
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Continued)
Three Months Ended
March 31,
---------------------
1998 1997
--------- ---------
<S> <C> <C>
Basic earnings per share:
Income (loss) from continuing operations $ (0.03) $ 0.12
Income loss) from operations of discontinued
telecommunications businesses 0.03 (0.01)
Extraordinary item - Gain from extinquishment
of debt 0.02 --
--------- ---------
Net income $ 0.02 $ 0.11
========= =========
Diluted earnings per share:
Income (loss) from continuing operations $ (0.03) $ 0.08
Income loss) from operations of discontinued
telecommunications businesses 0.03 --
Extraordinary item - Gain from extinquishment
of debt 0.02 --
--------- --------
Net income (loss) $ 0.02 $ 0.08
========= ========
See Notes to Consolidated Financial Statements
<PAGE> 6
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months
Ended March 31,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
Net cash used in operating activities $(147,749) $ (897,429)
--------- ---------
Cash flows from investing activities:
Expenditures for furniture and equipment (2,820) (12,659)
Other -- 2,474
---------- ---------
Net cash used in investing activities (2,820) (10,185)
---------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock 25,000 152,000
Proceeds from notes and debentures payable 60,500 1,211,732
Payments on notes payable and capital leases -- (88,168)
Payments on borrowings under lines of credit -- (71,615)
Payments on common stock subject to rescission -- (35,000)
--------- --------
Net cash provided by financing activities 85,500 1,168,949
--------- --------
Net increase (decrease) in cash (65,069) 261,335
Cash and cash equivalents at beginning of the
period 65,556 61,039
--------- --------
Cash and cash equivalents at end of the period $ 487 $ 322,374
========= ========
Supplemental Disclosure of Cash Flow Information and Non-cash Investing and
Financing Activities:
Equipment capital lease obligations $ -- $ 73,184
Issuance of common stock upon conversion of notes
and debentures payable 52,343 596,318
Recovery of note receivable from sale of assets 305,345 --
Redemption of debentures payable 595,513 --
Issuance of common stock in settlement of
liabilities 56,000 --
Conversion of Class B preferred stock 1,562,496 --
Cash paid during the period for:
Interest 1,249 19,363
Income taxes -- --
See Notes to Consolidated Financial Statements
<PAGE> 7
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated balance sheet as of March 31, 1998 and
the unaudited consolidated statements of operations 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.
Certain amounts in the 1997 financial statements have been
reclassified to conform to the 1998 presentation.
Earnings per Share
Basic and diluted earnings per share for the three months ended
March 31, 1998 are the same because the inclusion of incremental
shares from the assumed conversions of convertible notes,
debentures and preferred stock and exercise of 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. The weighted average number of shares
outstanding for the three months ended March 31, 1998 was
12,491,225.
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
--------- ---------- -----
<S> <C> <C> <C>
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.
<PAGE> 8
NOTE RECEIVABLE FROM THE SALE OF ASSETS
In March 1998, the Company, TNI, International Teledata
Corporation ("ITD") and certain former employees of the Company
(the "Employees") entered into an agreement (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.
REDEMPTION OF CONVERTIBLE NOTES
Effective as of March 31, 1998, the Company redeemed its $450,000
of outstanding 10% convertible debenture notes in exchange for an
aggregate of 893,278 shares of its common stock and 450,000 stock
purchase warrants. The carrying amount of the debt extinguished
exceeded the fair value of the common stock and warrants issued
in exchange for the debt. The excess is classified as an
extraordinary gain in the accompanying unaudited consolidated
statement of operations for the three months ended March 31,
1998. Of the 450,000 stock purchase warrants, 225,000 are
exercisable at $1.50 per share and 225,000 are exercisable at
$0.20 per share. The warrants are exercisable at any time over
two years.
STOCKHOLDERS' EQUITY
During the period from January 1, 1998 to March 31, 1998, the
Company issued: 208,333 shares of its common stock for cash;
500,830 shares upon conversion of $50,000 of outstanding
convertible debentures; 893,278,shares upon redemption of
outstanding debenture notes; 701,783 shares upon conversion of
Class B preferred stock; 200,000 shares in connection with the
CCI arbitration; and, 97,200 shares, valued at approximately
$12,500, for services rendered to the Company.
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion should be read in conjunction with the
Consolidated Financial Statements and notes thereto, appearing
elsewhere herein.
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 operations of NSC. The net revenues of
HMT in the 1997 first quarter were $1,048,987.
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.
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 had no 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 balance sheet in the fourth
quarter of 1997.
INTEREST EXPENSE
The decrease in interest expense is principally due to a decrease
in notes and debentures outstanding and the removal of
capitalized lease assets from the Company's balance sheet in the
fourth quarter of 1997.
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.
<PAGE> 10
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 $500,000 note receivable from the sale of
assets in exchange for the elimination of certain liabilities of
the Company.
EXTRAORDINARY GAIN
The Company's operating results for the first quarter of 1998
include an extraordinary gain of approximately $287,000 from the
extinguishment of its $450,000 10% convertible debentures.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 1998, the Company received
cash of $25,000 from the issuance of 208,333 shares of its
common stock and $60,500 from the issuance of notes and
debentures payable. For the corresponding 1997 period, the
Company received cash of approximately $152,000 and $1.2 million
from the issuance of common stock and notes and debentures
payable, respectively.
The proceeds from financing activities were used principally to
fund operating losses. For the three months ended March 31, 1998
and 1997, the Company used cash of approximately $147,749 and
$897,000, respectively, in operating activities.
Over the past several years, the Company has incurred
substantial operating losses; and, at March 31, 1998, the
Company has an excess of total liabilities over total assets of
approximately $6.6 million and an excess of current liabilities
over current assets of approximately $5.9 million. These
factors, among others, have diminished the Company's ability to
attract equity or debt capital, required the Company to cease
further development of its healthcare management software
technology and have made it increasingly difficult for the
Company to carry on normal operating activities. As of March 31,
1998, 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 available sufficient cash resources to continue operations,
in which case the Company would be required to seek other
alternatives, including sale, merger or discontinuance of
operations.
<PAGE> 11
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
All material pending legal proceedings to which the Registrant
and its subsidiaries are a party are described in the
registrant's Annual Report on Form 10-K for the year ended
December 31, 1997. There have been no material changes in the
status of such legal proceedings or any new information
concerning such proceeding as of the date hereof.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.8* Financial Data Schedule (Three Months Ended March 31, 1998).
* Filed herewith
(b) Reports on Form 8-K:
The following reports were filed on Form 8-K for the three months
ended March 31, 1998, and prior to the filing date hereof:
1. On March 10, 1998, the Company filed a Form 8-K. The date of the
event reported was March 2, 1998. The event reported was the
agreement between the Company and Timboon LTD (the "Settlement
Agreement and Release") in settlement of all claims brought against
each other in connection with the Company's $1,120,000 4%
cumulative convertible debentures.
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SYSTEMS COMMUNICATIONS, INC. Date: May 13, 1998
By /s/ James T. Kowalczyk
----------------------------
James T. Kowalczyk
President, Principal Executive Officer
and Director
By /s/ Edwin B. Salmon
----------------------------
Edwin B. Salmon
Principal Accounting Officer
and Director
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SYSTEMS COMMUNICATIONS, INC. FOR THE FISCAL
PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 487
<SECURITIES> 0
<RECEIVABLES> 62,495
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 208,569
<PP&E> 132,982
<DEPRECIATION> (63,278)
<TOTAL-ASSETS> 304,630
<CURRENT-LIABILITIES> 6,114,054
<BONDS> 2,922,200
0
54,764
<COMMON> 14,175
<OTHER-SE> (6,698,249)
<TOTAL-LIABILITY-AND-EQUITY> 304,630
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 277,739
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 74,462
<INCOME-PRETAX> (352,201)
<INCOME-TAX> 0
<INCOME-CONTINUING> (352,201)
<DISCONTINUED> 306,405
<EXTRAORDINARY> 286,588
<CHANGES> 0
<NET-INCOME> 240,792
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
