UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
_x_ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number 000-26668
SYSTEMS COMMUNICATIONS, INC.
- ---------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
FLORIDA 65-0036344
- ---------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
4707 140th Avenue North, Suite 107, CLEARWATER, FLORIDA 33762
- ---------------------------------------------------------------------------
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code (813)530-4800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
===========================================================================
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during 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___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. _x__
<PAGE> 2
The aggregate market value of the voting stock held by non-affiliates of
the registrant on December 22, 1997, (based on the average of the high and
low bid prices of such stock on the over-the-counter securities market) was
$3,168,468.
The number of shares of the registrant's common stock, $.001 par value,
outstanding as of December 22, 1997 was 12,099,176.
<PAGE> 3
ITEM 1. BUSINESS
Systems Communications, Inc. (the " Company"), a Florida corporation, was
organized as Florida One Capital Corporation in 1987 and made an initial
public offering of its common stock 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., and at various times, as a result of
business acquisitions, was a merchandiser of optical products and a
developer of residential homes. All business acquisitions made by the
Company prior to 1991 were rescinded in 1991 or earlier and the Company
was inactive from 1991 until August 1994. In August 1994, the Company
acquired Ameristar Telecommunications, Inc. ("ATI"), an Illinois
corporation, and Coast Communications, Inc. ("CCI"), an Arizona
corporation. ATI sells Operator Service Provider ("OSP"), long-distance
telephone and Pay-Per-View ("PPV") television services and products to
small and medium-sized hotels and motels. CCI is in the business of
installing and servicing PPV equipment. As more fully discussed below, the
acquisitions by the Company of ATI and CCI were rescinded in May of 1997
and 1996, respectively.
In June 1995, the Company acquired LCI Communications, Inc. ("LCI"), from
an officer and director of the Company, and Comstar Network Services, Inc.
("Comstar"), both of which are Florida corporations; and, in July 1995,
the Company acquired Telcom Network, Inc. ("TNI"), a Delaware corporation.
All of these companies, individually, operated as switch-less re-sellers of
long-distance telephone services and products and were combined into one
operating division (hereinafter referred to, collectively, as "TNI"). TNI
is also in the business of providing utility and telecommunications audit
and cost recovery services to large and small businesses and governmental
entities. As more fully discussed below, the Company sold substantially all
of the operating assets of TNI in January 1997.
In October 1995, the Company acquired National Solutions Corporation
("NSC"), a Pennsylvania corporation; and, in March 1996, the Company
acquired Health Management Technologies ("HMT"), a California corporation.
The principal business of NSC is (i) to develop, for commercial use,
healthcare management information systems technology obtained under a
Cooperative Research and Development Agreement ("CRDA") between NSC and the
U.S. Department of the Army (the "U.S. Army") pursuant to the Federal
Technology Transfer Act of 1986, as amended, and (ii) sell the benefits
from the use of such technology to the U.S. automotive industry (and its
down-line vendors), other large, self-insured companies, healthcare
insurers, intermediaries, including health maintenance organizations
("HMO's") and preferred provider organizations ("PPO's"), and healthcare
benefit plan administrators. HMT develops and markets PC based occupational
health software products for managing cases of work disability (absence)
that facilitate return to work and reduce disability related costs. As more
fully discussed herein, the Company's acquisition of HMT was rescinded in
June 1997.
<PAGE> 4
The amounts and types of consideration paid by the Company in connection
with each of these acquisitions, the nature and terms of the CCI, ATI and
HMT rescission transactions and the terms of the sale of substantially all
of the operating assets of TNI are more fully described below and in the
Notes to the Consolidated Financial Statements appearing elsewhere herein.
During the periods following the dates on which these acquisitions
occurred, large operating losses have been incurred. These operating losses
have principally been funded by the private placement of the Company's debt
and equity securities (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations").
In May 1996, the Company informed the former shareholders of CCI that it
was canceling the acquisition of CCI and terminating all of the acquisition
related documents (principally as a result of non-performance by CCI under
the agreements). Pursuant to the terms of the acquisition and related
pledge agreements, the former shareholders of CCI are to receive the shares
of stock of CCI acquired by the Company in the August 1994 acquisition of
CCI in return for 200,000 shares of the Company's Class A Preferred Stock
and $300,000 of debt securities issued by the Company in connection with
the acquisition ( see "Legal Proceedings" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" ).
In January 1997, the Company sold substantially all of the assets of TNI,
in two separate transactions, for an aggregate of $101,000 in cash and a
$500,000 convertible debenture issued by International TeleData Corporation
(see Note 17 to the Consolidated Financial Statements). The sale of TNI's
assets did not include the award in the amount of approximately $1,250,000
granted to TNI in a binding arbitration proceeding between and among GE
Capital Communication Services Corporation ("GECCS"), New Enterprise
Wholesale Services, Limited Partnership ("News") and TNI (see "Legal
Proceedings"). 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") regarding the arbitration award in favor of the Company (see
Note 14). 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,
including the obligations to Mr. Telford Walker and Mr. James Gary May also
referred to in Note 14 to the accompanying consolidated financial
statements.
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.
<PAGE> 5
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 to the former shareholders of ATI (see Note 7 to the Consolidated
Financial Statements, included elsewhere herein) and warrants to purchase
168,668 shares of the Company's common stock.
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 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.
After the sale of substantially all of the operating assets of TNI and the
rescission of the CCI, ATI and HMT acquisitions, the Company's remaining
operations consist of NSC. As more fully discussed herein, it is uncertain
whether or not NSC's operating activities will generate profitable
operations in the future or whether or not the Company will have available
sufficient resources to fund NSC's future operating activities.
At the time the Company acquired these businesses, it anticipated that such
businesses would generate higher revenues and operating income than those
that have been achieved to date and that the amount of financing needed by
the acquired businesses would be less than the amount the Company has
provided to date and will likely be needed by those businesses in the
future in order for them to attain profitable operations. The principal
reasons for the shortfall from the original expectations of the Company for
acquired businesses include, among others, (i) the failure, to date, of NSC
to successfully market the technology acquired under the CRDA, (ii)
constraints on the part of the Company to fund the continuing operating
losses of businesses acquired, (iii) higher than anticipated product
development, sales and marketing costs incurred by both NSC and HMT, (iv)
the damage to TNI's business caused by GECCS and News from the failure of
GECCS and News to, among other things, provision customer accounts for
telecommunication services and products offered by GECCS and News and sold
by TNI pursuant the GECCS Agreement (which is more fully discussed herein -
see "Legal Proceedings" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations") and (v) constraints on the
part of the Company to fund the PPV capital requirements of new business
opportunities available to ATI. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
<PAGE> 6
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 purchase 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. See "Liquidity and
Capital Resources".
After the rescission of the CCI, ATI and HMT acquisitions and the sale of
substantially all 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. NSC's
operating loss for the period from the date of its acquisition by the
Company to December 31, 1995 was $363,857, and for 1996 was $16,275,288,
including the write-off as of December 31, 1996 of the unamortized cost
($14,233,953) of intangibles and goodwill recorded by the Company in
connection with the acquisition (see Note 5 to the Consolidated Financial
Statements).
The Company's operations are classified into two (2) industry segments:
healthcare management information products and services ("Healthcare
Management"); and, telecommunications products and services
("Telecommunications"). The Healthcare segment includes the operations of
NSC and HMT from their respective dates of acquisition; and, the
Telecommunications segment includes the operations of TNI from the date of
its acquisition in June 1995, and the operations of ATI and CCI for all
periods presented. As a result of the disposition of the operations of ATI
and CCI and the sale of substantially all of the assets of TNI, the
operating results of the Company's telecommunications businesses are shown
as discontinued operations in the accompanying consolidated financial
statements.
<PAGE> 7
Following is a summary of segment information for each of the three years
in the period ended December 31, 1996, excluding corporate and other:
1996 1995 1994
----------- ----------- -----------
Healthcare:
Net revenues $ 2,832,123 $ 91,106 $ --
Operating loss(1) (17,104,177) (363,857) --
Telecommunications:
Net revenues 2,177,858 2,893,778 807,669
Operating loss(1) (1,932,649) (4,036,371) ( 48,348)
(1) Includes impairment losses in 1996 of $14,233,953 and $194,901,
recognized in the Healthcare and Telecommunications segments, respectively,
and $2,758,779 of impairment losses in 1995, recognized in the
Telecommunications segment. See Note 5 to the Consolidated Financial
Statements.
<PAGE> 8
HEALTHCARE MANAGEMENT
The Company's healthcare management segment consists of NSC and HMT.
The principal business of NSC is (i) to develop, for commercial use,
healthcare management information systems technology obtained under the
CRDA between NSC and the U.S. Army in connection with the Civilian Health
and Medical Program for the Uniformed Services ("CHAMPUS") developed by the
U.S Army, Navy and Air Force (the "Tri-Services") and (ii) sell the
benefits from the use of such technology to the U.S. automotive industry
(and its down-line vendors), other large, self-insured companies,
healthcare insurers, PPO's, HMO's and healthcare benefit plan
administrators. NSC's systems technology is designed to identify
unnecessary costs and manage healthcare benefits. NSC anticipates using
its management information systems technology to assist large self-insured
companies, insurers, PPO's, HMO's and healthcare plan administrators to
improve the management and administration of healthcare benefits by
combining intelligent application of data analysis with strategies to
identify misapplied expenditures and overpayments, together with quality
management services to effect positive changes in benefits planning.
CHAMPUS is a unique data-warehousing system with extensive data-mining
capabilities and has reduced the healthcare related costs of retirees and
dependents of men and women serving in the uniformed services. The CHAMPUS
data base covers over 18 million individuals. It was developed by the Tri-
Services at a cost of over twenty million dollars. This technology has been
enhanced and incorporated into NSC's technology base. Analytical
measurements, profiling and other decision-making tools have also been
incorporated into NSC's software and databases, increasing the
comprehensive analysis and decision-making capabilities of NSC's current
technology.
The CHAMPUS healthcare program and database is one of the largest in the
world. By having the exclusive rights to one of the largest healthcare data
banks in the world, NSC has the unique ability to provide potential users
of NCS's technology with extensive data-mining capabilities to assist them
in managing and controlling their healthcare costs.
The revenues of NSC to date have been derived from the analysis and
recovery of healthcare claims that have previously been paid by large self-
insured companies such as Chrysler Corporation and Ford Motor Company using
the services of Health Management Services ("HMS") on a subcontract basis.
The agreement with HMS (the "Teaming Agreement") calls for a portion of
revenues derived by NSC, which typically range from 10% to 20% of recovered
claims, to be paid to HMS. HMS's portion of revenues derived by NSC
typically ranges from 50% to 60%.
The Company, NSC and HMS are currently in dispute regarding the performance
of HMS under the Teaming Agreement and the amounts due to HMS by NSC under
the Teaming Agreement; consequently, the Teaming Agreement was terminated
by provisions contained therein, effective May 16, 1997. On August 19,
1997, HMS filed a notice of intent to arbitrate and demand for arbitration.
No date for arbitration has been set.
<PAGE> 9
The Company has entered into a strategic alliance with another healthcare
claims management company ( HMG Health Care Claims Auditing, Inc. ("HMG")
to replace HMS, as its subcontractor, on terms comparable to those under
the HMS Teaming Agreement. HMG provides a full range of healthcare cost
containment services. HMG's services are broader than those offered by HMS
and 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 utilizing data bases available to HMG and
those available to NSC under the CRDA.
To date, no revenues have been derived from NSC's management information
systems technology but, the Company is encouraged by the future prospects
of NSC's business in light of its exclusive rights to use the sophisticated
healthcare management information systems technology and the statistical
databases obtained under the CRDA. However, as more fully described herein,
it is uncertain whether or not the Company will have available sufficient
resources to continue to fund NSC's future operating activities or, whether
or not NSC will be able to generate profitable operations in the future.
NSC's initial software development activities are now virtually complete
and two distinct products have evolved: an analytical database product with
extensive data-mining capabilities; and a retrospective healthcare cost
containment product which uses selective reporting formats within the
databases. The analytical database product contains extensive revisions to
the healthcare management information systems technology obtained from the
U.S. Army and unique features applicable to both the indemnity and managed
care markets. The Company to date, however, has not been able to
successfully market these products.
HMT, founded in June 1986, in response to the emerging PC industry in
combination with the growing need to capture better healthcare data and
produce reports useful to employers and occupational-health medical
providers, develops and markets PC-based software products for managing
cases of work disability (absence) that facilitate return to work and
reduce overall health claims costs. HMT's market consists of mid to large
U.S. employers, insurers, hospitals, Third Party Administrators ("TPA's"),
PPO's, HMO's and other healthcare management companies. As discussed
elsewhere herein, the Company and the former shareholders of HMT entered
into an agreement in June 1997 to rescind the acquisition agreement between
the Company and HMT.
<PAGE> 10
The revenues and operating loss of NSC in 1996 were $1,574,825 and
$16,275,288, respectively, and $91,106 and $363,857, respectively, from
the date of acquisition (October 1995) to December 31, 1995. The 1996
operating loss includes a charge to income of $14,233,953 to write-off the
unamortized cost of goodwill and intangibles recorded by the Company in
connection with the acquisition of NSC (see Note 5 to the Consolidated
Financial Statements). 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 date, 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 revenues and operating loss of HMT for the period from the
date of acquisition (March 1996) to December 31, 1996 were $1,257,298 and
$828,895, respectively.
SERVICES AND PRODUCTS.
NSC has developed the technology licensed under the CRDA to include a broad
form of episode building, which has been copyrighted as Continuum. This
proprietary technology allows NSC to review multiple hospitalizations and
medical services around a common clinical connection. Continuum also
includes enhancements to the CHAMPUS software obtained under the CRDA which
provides for a broad array of clinical reports, demographic and provider
analyses along with special reports that help users evaluate adverse
outcomes, surgical cases, trauma cases, AIDS cases and catastrophic cases.
Continuum analyzes claims from both a wide and narrow focus with extensive
data-mining capabilities within the database and has wide application in
the managed care environment, which is the chief use within the CHAMPUS-Tri-
Care environment. The system is also able to perform pharmaceutical and
research studies for special projects.
NSC has also developed a retrospective healthcare cost containment product,
together with a third party healthcare management company, that utilizes
NSC's software analytical tools to focus specifically on coordination of
benefit concepts and, with the selective use of variables, identify
healthcare claim overpayments. The Company also anticipates using its
technology, in connection with the formation of cost containment
partnerships, to implement pre-payment reviews of healthcare claims before
they are paid to identify those claims which should be pended for further
documentation and review. NSC contemplates that its services, once these
cost containment partnerships are formed, will include the review of
healthcare expenditures for misapplied expenditures on both a retrospective
and a concurrent/pre-payment basis. The services contemplated by NCS,
together with those available to NSC from strategic alliances, are
anticipated to go beyond those services traditionally offered by its
competitors, which are usually limited to duplicate payments and
coordination of benefits for other insurance and for Medicare coverage.
There is no assurance, however, that the Company will be able to
successfully market its healthcare management information systems
technology and related cost containment services and products.
<PAGE> 11
LICENSES, TRADEMARKS AND AGREEMENTS
On June 2, 1994, NSC entered into a Cooperative Research and Development
Agreement ("CRDA") with the U.S. Army to further develop and commercialize,
on an exclusive basis, the healthcare management information systems used
by the Tri-Services to reduce the cost associated with the CHAMPUS program.
Under the CRDA, NSC has an irrevocable, perpetual license to use the
CHAMPUS database and software technology 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 U.S. CAR'S healthcare benefit programs
("field of use"). The original CRDA expired on June 1, 1997 and was
extended for an additional one-year period, effective June 18, 1997. The
extension of the CRDA also gave the Company the ability, with the prior
approval of the U.S. Army, to use the management information systems
technology and CHAMPUS databases obtained under the CRDA to analyze the
healthcare benefits of companies outside of the U.S. automotive industry.
The license to use the management information systems technology and
databases obtained under the CRDA 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.
NSC is entitled to patent any inventions made by NSC through the course of
the CRDA. Similarly, NSC is entitled to copyright any works created by NSC
during the course of the CRDA.
MARKET.
The market for NSC's services presently includes the U.S. Automotive
industry, and their down-line vendors. As discussed elsewhere herein, the
Company has been granted the ability to expand its market ("field of use"),
with prior approval of the U.S. Army, to include other large corporations,
outside of the U.S. automobile industry, that self-insure and have relied
on third-party administrators (TPA's) to manage their healthcare benefit
programs, the TPA's themselves, HMO's, PPO's and insurers. NSC has also
targeted healthcare programs administered by state and municipal
governments, which it believes have cost-control needs for their healthcare
programs at least comparable to those of the large corporations which self-
insure. Should opportunities arise to expand NSC's field of use, the
Company has no reason to believe that the approval of the U.S Army would be
unreasonably withheld.
HMT's market consists of mid to large U.S. employers, insurers, TPA's,
PPO's, HMO's, and other healthcare management companies.
<PAGE> 12
CUSTOMERS.
NSC entered into a service agreement with Chrysler Corporation in 1993
which accounted for a majority of NSC's 1995 and 1996 revenues. This
agreement was terminated in September 1997, due to performance issues among
NSC, Chrysler and HMS. In October 1995, NSC entered into a service
agreement with Ford Motor Company. The service agreement with Ford expired
by its terms on March 31, 1997. The service agreement with Ford has not
been extended as of this date. The Company is currently pursuing renewal of
the Chrysler and Ford service agreements but, there is no assurance that
the Company will be successful in securing such renewals.
As compensation for its services, NSC receives a percentage of the savings
which it obtains for its customers. As described above, NSC pays a portion
of the revenues it receives from customers to certain subcontractors in
return for certain medical coding and analytical services.
HMT's customers include insurers, payors and self-insured companies. As
more fully described herein, the Company and the former shareholders of HMT
entered into an agreement in June 1997 which provides for the rescission of
the Company's acquisition of HMT.
COMPETITION.
Other healthcare management information companies, insurers, TPA's, PPO's
and HMO's are currently the competition for the Company's approach to
control the healthcare costs of large self-insured companies. The Company's
competitors have substantially greater financial resources than the Company
but, management believes none of these competitors has the advanced
management information systems technology and database capabilities of the
Company. The Company, however, has not been successful, to date, in
marketing such technology.
EMPLOYEES.
As of December 31, 1996, NSC had 8 employees and HMT had 18 employees.
<PAGE> 13
TELECOMMUNICATIONS.
The businesses included in the Company's Telecommunications segment include
TNI, Comstar, LCI, CCI and ATI. Following the acquisition of TNI, the
operations of TNI, Comstar and LCI were combined into one operating
division ( collectively referred to herein as "TNI" ).
TNI, until the sale by the Company of substantially all of its assets,
operated as a switch-less re-seller of long distance services and provided
utility and telecommunications audit and cost recovery services to large
and small businesses and governmental entities.
ATI sells Operator Service Provider ("OSP"), long-distance telephone and
PPV television products to small and medium sized hotels and motels; and,
CCI is engaged in the business of installing and servicing PPV equipment.
As discussed elsewhere herein, these companies were disposed of in May 1997
and May 1996, respectively.
The revenues and operating loss of TNI in 1996 were $1,481,317 and
$1,792,795 respectively, and $2,373,491 and $3,122,623, respectively, in
1995. Included in TNI's operating loss for the year ended December 31, 1995
is the write-off of goodwill recorded in connection with the acquisition of
TNI by the Company. The revenues and operating loss of ATI in 1996 were
$673,995 and $116,460, respectively, and $427,445 and $631,391,
respectively, in 1995; and, the revenues and operating loss of CCI in 1996
were $22,546 and $23,394, respectively, and $92,842,and $282,356,
respectively, in 1995.
EMPLOYEES.
As of December 31, 1996, TNI had 8 employees and ATI had 6 employees.
Employees of the parent company (the "Registrant"), as of December 31,
1996, totaled ten (10).
<PAGE> 14
ITEM 2. PROPERTIES
The Company and its subsidiaries do not own any properties. All office
space is leased and the Company believes the leased facilities are adequate
for its current needs and that additional suitable space will be available
as required.
The following table sets forth information with respect to the office space
leased by the Company and its subsidiaries as of December 31, 1996.
<TABLE>
<CAPTION>
Square Annual Lease
Entity Location Footage Rental Expiration
Date
- ----------- ------------------- ------- -------- -----------
<S> <C> <C> <C> <C>
The Company 2575 Ulmerton Road
Clearwater, FL (1) 3,959 $52,952 09-14-98
ATI 1151 Old McHenry Rd.
Buffalo Grove, IL (2) 1,888 19,500 05-01-97
TNI 25 S. Magnolia
Orlando, FL (2) 1,200 21,168 N/A
408 Nutmeg Street
San Diego, CA (2)(4) 6,600 47,520 03-31-00
NSC 602 Sarasota Quay
Sarasota, FL (3) 3,316 52,860 10-13-99
4241 Piedras
San Antonio, TX 4,429 47,832 11-30-00
HMT 1150 Moraga Way
Moraga, CA (2) 9,239 67,814 12-10-97
</TABLE>
N/A means that this location is being leased on a month-to-month basis.
(1) On June 1, 1997, the Company relocated its corporate offices to 4707
140th Avenue North, Suite 107, Clearwater, Florida 33762. The lease
agreement for these premises expires on May 31, 1998 and the annual rental
is $19,478.
(2) These leased facilities are no longer in use by the Company as a result
of the rescission of the ATI and HMT acquisition agreements and the sale
of substantially all of the assets of TNI (see "Business").
(3) The Company has closed its Sarasota Quay, FL office and has relocated
the NSC Corporate functions performed at that location to the Company's
offices in Clearwater, FL.
(4) The TNI San Diego, CA location was closed on December 31, 1996 and is
currently being subleased.
<PAGE> 15
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various legal and administrative proceedings. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 14 to the Consolidated Financial Statements, included
elsewhere herein. 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, for resale by them in the public market, (ii) an action,
in arbitration, by the former shareholders of CCI to enforce promissory
notes in the principal amount of $300,000 issued by the Company in
connection with the acquisition of CCI and canceled by the Company in May
1996 in connection with the Company's decision to cancel all of the
acquisition related documents, (iii) actions on the part of certain
creditors to enforce the terms of certain promissory notes, (iv) actions
brought against the Company by certain former employees and persons
formerly under contract with the Company for payments allegedly due them,
(v) an action by a shareholder seeking the rescission of the sale by the
Company of its common stock to the shareholder and (vi) an action by a
purchaser of the Company's convertible debentures issued in reliance upon
exemptions under Regulation S of the Securities Act of 1933 seeking
performance of the terms of the related offering and subscription
agreements. The Company and its subsidiaries are also subject to a suit
filed by Boston Financial Corporation seeking amounts owed to Boston
Financial Corporation under a lease agreement entered into between Boston
Financial Corporation and NSC. The lease agreement was guaranteed by the
Company, ATI and TNI.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 1996.
<PAGE> 16
PART II
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is quoted under the stock symbol "SCMI" on the
NASDA 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 and for
the first three quarters of 1997. These bid quotations are inter-dealer
prices without retail markup, mark-down or commission, and may not
represent actual transactions.
Quarter ended High bid Low bid
- ------------- -------- -------
March 31, 1995 $ 4.25 $ 2.00
June 30, 1995 $ 3.875 $ .75
September 30, 1995 $ 8.50 $ 2.625
December 31, 1995 $ 15.50 $ 3.25
March 31, 1996 $ 17.75 $ 9.375
June 30, 1996 $ 12.375 $ 8.50
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
The high and low bid quotations for the Company's common stock on December
22, 1997 were $.3125 and $.2812 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.
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 December 22, 1997, the Company had 571 beneficial owners of its
common stock.
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company for
the years 1993 through 1996. In 1992, the Company had no operations or
assets and was dormant. This table should be reviewed in conjunction with
the Consolidated Financial Statements of the Company and the notes thereto
included elsewhere herein.
<TABLE>
<CAPTION>
INCOME STATEMENT DATA:
Year Ended December 31,
------------------------------------------
1996 1995 1994 1993
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
Net revenues $ 2,832,123 $ 91,106 $ -- $ --
Loss from continuing operations
before income taxes (1) (20,488,639) (2,004,228) (78,233) --
Loss from continuing operations (17,934,489) (1,989,104) (78,233) --
Income (loss) from operations of
discontinued telecommunications
businesses (less income tax
benefit of $649,044 in 1996
and $241,577 in 1995) (1) ( 1,322,179) (3,818,921) (50,769) 338,909
Net income (loss) (19,256,668) (5,808,025) (129,002) 338,909
Income (loss) per share:
Loss from continuing operations $ (2.15) $ (0.58) $ (0.06) $ --
Income (loss) from operations of
discontinued telecommunications
businesses (0.16) (1.23) (0.04) 0.41
----------- ---------- -------- ---------
$ (2.31) $ (1.81) $ (0.10) $ 0.41
=========== ========== ======== =======
Weighted average number
of common shares and common
share equivalents outstanding 8,349,459 3,201,991 1,306,493 825,765
=========== ========== ========= =======
<PAGE> 18
BALANCE SHEET DATA (2):
December 31,
------------------------------------------
1996 1995 1994 1993
--------- --------- -------- --------
Current assets $ 1,403,881 $4,156,868 $442,069 $492,216
Current liabilities 7,908,138 5,417,864 652,107 13,335
Total assets 5,847,300 21,545,654 780,222 578,549
Long-term liabilities(3) 1,207,488 4,597,671 77,750 553,750
Common stock subject to
rescission(4) 709,124 789,624 -- --
Stockholders' equity (deficit) (3,977,450) 10,740,495 50,365 11,464
</TABLE>
(1) Includes impairment losses of $14,233,953 applicable to continuing
operations and $194,901 applicable to operations of discontinued
telecommunications businesses in 1996 and $2,758,779 applicable to
discontinued telecommunications businesses in 1995. See Note 5 to the
Consolidated Financial Statements.
(2) Includes the assets and liabilities of discontinued telecommunications
businesses. See Note 4 to the Consolidated Financial Statements
included elsewhere herein.
(3) Includes long-term portion of notes and debentures payable; obligations
under capital leases, deferred compensation and other long-term
liabilities.
(4) See Note 14 to the consolidated financial statements for a description
of common stock subject to rescission.
<PAGE>19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth certain information derived from the
Consolidated Financial Statements of the Company for each of the three
years in the period ended December 31, 1996. The results from continuing
operations include the operations of NSC, acquired in October 1995,and HMT,
acquired in March 1996. NSC and HMT comprise the Company's healthcare
segment. The results from discontinued telecommunications businesses
include the operations of TNI (including the operations of LCI and
Comstar), ATI and CCI. These businesses were sold or otherwise disposed of
in 1996 and 1997 (see Note 4 to the Consolidated Financial Statements). The
following discussion should be read in conjunction with the Consolidated
Financial Statements and notes thereto, appearing elsewhere herein.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1996 1995 1994
-------- --------- --------
<S> <C> <C> <C>
Operations of continuing businesses:
Net revenues $ 2,832,123 $ 91,106 $ --
Cost of revenues 827,063 -- --
Selling and administrative
expenses 6,322,627 1,887,275 78,233
Impairment losses 14,233,953 -- --
Depreciation and amortization 1,459,436 148,192 --
Interest income (8,183) (3,777) --
Interest expense 381,975 63,644 --
Other, net 103,891 -- --
Loss from continuing operations
before income taxes 20,488,639 2,004,228 78,233
Operations of discontinued
telecommunications businesses:
Net revenues 2,177,858 2,893,778 807,669
Cost of revenues 1,320,256 2,014,460 134,607
Selling and administrative expenses 2,304,059 1,845,775 649,036
Impairment losses 194,901 2,758,779 --
Depreciation and amortization 291,291 311,135 72,374
Interest income (971) (627) --
Interest expense 38,713 20,466 2,421
Other, net 832 4,288 --
Loss from operations of discontinued
businesses before income taxes 1,971,223 4,060,498 50,769
</TABLE>
<PAGE> 20
As more fully discussed below and elsewhere herein, the operating results
of acquired businesses (including businesses acquired and subsequently
disposed of in 1996 and 1997) are well below those which were anticipated
at the time of the respective acquisitions. The business of TNI (which is
included in operations of discontinued telecommunications businesses) has
been severely damaged by the actions of GECCS and News (See Note 14 to the
Consolidated Financial Statements) and, the revenues and results of
operations of the Company's healthcare businesses are less than anticipated
at the time of the respective acquisitions of NSC and HMT, principally due
to delays in NSC's software development activities and higher levels of
spending for software development and marketing than originally anticipated
(and limitations on the part of the Company to fund those collective
efforts). These factors, combined, have strained the financial resources of
the Company. For further discussion of the impact of these events and
uncertainties on future operations and the Company's financial condition,
see "Liquidity and Capital Resources"
OPERATIONS OF BUSINESS ACQUIRED
The Company acquired various businesses in 1995 and 1996, the most
significant of which were TNI, acquired in July 1995, NSC, acquired in
October 1995, and HMT, acquired in March 1996. For purposes of the
following discussion, the operations of TNI include the operations of TNI,
LCI and Comstar. TNI, LCI and Comstar all operate as switch-less re-sellers
of long-distance telephone services and products and were combined into one
operating division after the acquisition of TNI.
<PAGE> 21
The net revenues and loss from operations of TNI (which are included in
operations of discontinued telecommunications businesses) for the period
from the date of acquisition (July 7, 1995) to December 31, 1995 were
$2,373,491 and $3,122,621 (including impairment losses of $2,758,779),
respectively, and $1,480,541 and $1,791,788, respectively, for the year
ended December 31, 1996. TNI's operating results for the period 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. 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, including the obligations to Mr. Telford
Walker and Mr. James Gary May referred to in Note 14 to the accompanying
consolidated financial statements. The accompanying consolidated financial
statements do not give effect to the award.
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 disposed of
substantially all of TNI's operating assets.
The revenues of TNI declined from $2,373,491 in 1995 to $1,480,541 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 $1,791,788 in 1996. The
increase in TNI's net loss (before impairment losses)is 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.
<PAGE> 22
The net revenues and loss from operations of NSC (which are included in
operations from continuing businesses) for the period from the date of
acquisition (October 27, 1995) to December 31, 1995 were $91,106 and
$363,857 respectively, and $1,574,825 and $16,275,288 , respectively, for
the year ended December 31, 1996. 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 date, 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"). Also negatively
impacting NSC's operating results during these periods were lower than
expected revenues from retrospective healthcare claims analysis and
recovery services, which services to date have been executed on a
subcontract basis, costs associated with delays in NSC's software
development activities and costs related to sales and marketing.
The net revenues and loss from operations of HMT (which are included in
operations from continuing businesses) for the period from the date of
acquisition (March 12, 1996) to December 31, 1996 were $1,257,298 and
$828,895 respectively. The loss from operations principally reflects
amortization of intangibles and goodwill and costs related to new product
development, sales and marketing.
<PAGE> 23
OPERATIONS OF BUSINESSES DISPOSED OF
In May 1996, the Company informed the former shareholders of CCI that it
was canceling the acquisition of CCI and terminating all of the acquisition
related documents, principally as a result of non-performance by CCI under
the agreements (see "Legal Proceedings"). In January 1997, the Company
sold substantially all of the assets of TNI; and, 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. As a result of the disposition of the businesses included in the
Company's telecommunications segment, the operations of the
telecommunications segment are shown as discontinued operations in the
accompanying consolidated statements of operations. 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 operations of HMT
are shown as continuing operations along with the Company's other
healthcare subsidiary ( NSC) in the accompanying consolidated statements of
operations.
The revenues and operating losses, respectively, of CCI, TNI, and ATI
(which are included in operations of discontinued telecommunications
businesses) were $22,546, and $23,394, respectively, $1,481,317 and
$1,792,795, respectively, and $673,995 and $116,460, respectively, in 1996,
and $92,842, and $282,356, respectively, $2,373,491 and $3,122,621,
respectively, and $427,445 and $289,791, respectively, in 1995. The
revenues and operating loss of HMT (which are included in operations of
continuing businesses) were $1,257,298 and $828,895, respectively, in 1996.
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 ( see "Liquidity and
Capital Resources").
NET REVENUES
Net revenues are summarized as follows:
1996 1995 1994
-------- --------- ---------
Net revenues from operations of
continuing businesses $2,832,123 $ 91,106 $ --
Net revenues from discontinued
telecommunications businesses 2,177,858 2,893,778 807,669
-------- --------- ---------
$5,009,981 $2,984,884 $ 807,669
========= ========= =========
<PAGE> 24
The increase in net revenues from operations of continuing businesses from
1995 to 1996 reflects higher healthcare revenues. The increase in
healthcare revenues 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
pay-per-view business, principally in Mexico.
The increase in net revenues from operations of continuing businesses from
1994 to 1995 is the result of the acquisition of NSC; and, the increase in
net revenues from discontinued telecommunications businesses from 1994 to
1995 is the result of the acquisition of TNI in July 1995, offset by a
reduction in the pay telephone revenues of the Company's ATI subsidiary.
The reduction in pay telephone revenues is the result of management's
decision to target the OSP and PPV hospitality market.
COST OF REVENUES
Cost of revenues from operations of continuing businesses in 1996 consists
of the cost of healthcare revenues of businesses acquired.
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 Agreement and higher revenues
from the sale of pay-per-view and related telecommunication products to the
hospitality industry, principally in Mexico.
The relationship of cost of revenues from discontinued telecommunications
businesses to net revenues of discontinued telecommunications businesses
changed dramatically in 1995 as compared to 1994. This change was
principally due to the acquisition of TNI and the inclusion of the cost of
long distance services provided to TNI's customers in the cost of
telecommunications revenues. In 1995, the Company also made a provision of
$145,776 to reduce the value of obsolete PPV equipment to net realizable
value. Prior to 1995, the cost of telecommunication revenues principally
reflected the cost of PPV installation, only.
<PAGE> 25
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administration expenses applicable to operations of continuing
businesses increased by $4,093,749 in 1996 over 1995. This increase
reflects 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
issued in 1995 in connection with the extension of related party
indebtedness.
Selling and administrative expenses applicable to discontinued
telecommunications businesses increased by $845,441 in 1996 over 1995. This
increase principally reflects the selling and administrative costs of TNI
which was acquired by the Company in July 1995.
Selling and administrative expenses applicable to operations of continuing
businesses increased by $2,150,645 in 1995 over 1994. This increase
includes 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 increased by $809,582 in 1995 over 1994. This
increase principally reflects the selling and administrative costs of TNI
which was acquired by the Company in July 1995 and costs incurred in
connection with the GECCS/News arbitration.
IMPAIRMENT LOSSES
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 is due to the failure,
to date, 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").
<PAGE> 26
Impairment losses applicable to discontinued telecommunications businesses
recognized in 1996 consist 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 operations of discontinued telecommunications businesses,
reflects 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
further discussed in Note 14 to the Consolidated Financial Statements and
elsewhere herein, the Company is claimant in a binding arbitration
proceeding with GECCS/News.
DEPRECIATION AND AMORTIZATION
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 $420,688,
$84,110 and $2,421 in 1996, 1995 and 1994, respectively. The increases from
period-to-period in interest expense are principally due to higher levels
of borrowings outstanding, interest accrued on common stock subject to
rescission and the accrual of default interest on certain notes and
debentures payable. See Note 7 to the Consolidated Financial Statements.
INCOME TAXES
For information concerning the deferred income tax benefits recorded in
1996 and 1995, as well as information regarding deferred income tax assets
and liabilities as of December 31, 1996 and 1995 and the Company's
effective tax rate, see Note 10 to the Consolidated Financial Statements.
<PAGE> 27
In 1996 and 1995, the Company recorded deferred income tax benefits
applicable to operations of continuing businesses of $2,554,150 and
$15,124, respectively. The effective tax rate applicable to continuing
operations was 12.5% in 1996 and 0.7% in 1995. The difference between the
Federal statutory rate of 34% and the Company's effective tax rate
applicable to continuing operations for the year ended December 31, 1996 is
principally due to an increase in the net deferred tax asset valuation
allowance as a result of the write-off of intangibles and goodwill recorded
in connection with the acquisition of NSC; and, the difference for the year
ended December 31, 1995 is primarily attributable to the tax effect of
intangibles acquired in connection with the acquisition of NSC. No tax
benefit applicable to continuing operations was recognized in 1994 due to
the Company having net deferred tax assets which were fully reserved.
Income tax benefits allocated to operations of discontinued
telecommunications businesses were $649,044 and $241,517 in 1996 and 1995,
respectively. The difference between income tax benefits applicable to
discontinued operations, 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 acquisition of NSC.
LIQUIDITY AND CAPITAL RESOURCES
The principal factors having a negative impact on the Company's liquidity
during 1996 were cash used in operations of approximately $4.2 million (see
the Consolidated Statements of Cash Flows), capital expenditures of
$553,000 and cash used in connection with the acquisition of HMT. The
Company also loaned a member of Retiring Management (see Note 17) $50,000
during the year, repurchased $80,500 of common stock subject to rescission
in the State of Michigan and made payments on notes and capital leases
totaling approximately $637,600. The positive impacts on liquidity were
proceeds from the sale of common stock and issuance of notes and debentures
payable, which in the aggregate totaled approximately $4.6 million.
During 1996, the Company received $2,187,273 in cash from the sale of
2,254,910 shares of its common stock and $2,422,752 from the issuance of
notes and debentures. Of the $2,422,752 of notes and debentures issued
during the year 1996, $1,279,000 were 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
$500,000 were 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. See Note 7 for a description of notes and
debentures payable. The remaining notes and debentures totaling $643,752
were issued to shareholders, officers, directors and creditors of the
Company in private placement transactions.
<PAGE> 28
The 10% cumulative convertible debentures issued in reliance upon
exemptions under Regulation D of the Securities Act of 1933, are
convertible into shares of the Company's common stock on various dates
through November 1997 but may be converted earlier if the Company has an
effective registration statement under the Securities Act of 1933 covering
the sale of the shares of common stock issuable upon conversion of the
debentures. As of the date hereof, the Company has not filed a registration
statement covering the shares of common stock issuable upon conversion and
no conversions have been made. 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
price set forth in the debentures 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 conversion date as set forth
in the respective convertible debenture. The fixed conversion prices set
forth in these debentures range from $1.50 to $5.00 per share.
The 10% cumulative convertible debentures issued to RANA Investment Company
("RANA") and its affiliate in reliance upon exemptions under Regulation S
of the Securities Act of 1933 are convertible at any time for one year
after the date of issuance, or any time thereafter, into shares of the
Company's common stock at a conversion price equal to the lesser of (a) 70%
of the average closing bid price of the Company's common stock for the five
trading days immediately preceding the conversion date or (b) 80% of the
average closing bid price of the Company's common stock for the five days
preceding the issuance of the debentures. The net proceeds, after fees,
from the issuance of these debentures were $450,000. As of September 30,
1997, the Company has converted $330,000 of such convertible debentures
into 93,301 shares of the Company's common stock and has pending notices of
conversion in the amount of $60,000, convertible into 162,554 shares of the
Company's common stock.
The principal factors having a negative impact on the Company's liquidity
during fiscal 1995 were cash used in operations of approximately $1.8
million (see the Consolidated Statements of Cash Flows), acquisitions of
businesses which required approximately $1.4 million in cash and other
investing activities of approximately $250,000. The positive impacts on
liquidity during the fiscal year were the proceeds of approximately $4.1
million from the issuance of common stock, sold in reliance upon exemptions
under Regulation D of the Securities Act of 1933, and borrowings,
principally from related parties, net of repayments, of approximately
$213,000.
<PAGE> 29
In 1996 and prior to the rescission of the Company's acquisition of ATI,
the Company obtained, and guaranteed, a $250,000 financing facility for
ATI's PPV equipment needs for its entrance into the Mexican hospitality
market. As of December 31, 1996, ATI had used $59,025 of this equipment
financing facility and had $199,975 available. This financing facility was
terminated by the lender in 1997 due to non-payment by ATI of payments due
under the related lease agreements. At the time of termination of this
facility, the aggregate minimum lease payments due the lessor totaled
approximately $180,000. 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 the
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(s) entered into between the Company and
ATI's equipment lessor(s). There is no assurance, however, that the Company
would be able to satisfy the terms of the guarantee agreement(s).
On February 24, 1997, the Company issued $1,120,000 of 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. These 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
September 30, 1997, has converted $120,000 of the convertible debentures
issued to Timboon into 256,361 shares of the Company's common stock and has
subsequently received conversion notices from Timboon to convert $20,000
of the convertible debentures into 126,554 shares of the Company's common
stock. Such conversion notices have not been effected; and, the Company is
currently in litigation with Timboon arising from the issuance and
conversion of the debentures (see "Legal Proceedings" and Note 14 to the
Consolidated Financial Statements).
The proceeds from the financing transactions described above were used
primarily to fund the operating losses of acquired businesses and corporate
overhead.
The Company is having cash flow difficulties and is currently unable to
meet all of its trade and other obligations (a substantial portion of which
are currently past due and some of which are subject to legal and
administrative proceedings for collection) and is attempting to raise
additional debt or equity financing to provide the Company with sufficient
funds to carry-on its operations. While the Company has been successful in
raising debt and equity financing in the past, there is no assurance that
additional financing will be available in sufficient amounts or, if
available, that such financing will be available on terms acceptable to the
Company. As of December 31, 1996, the Company and its subsidiaries have no
material used or unused lines of credit.
<PAGE> 30
As discussed elsewhere herein, 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 during the first half of 1997.
After the rescission of the CCI acquisition in May 1996, the rescission of
the ATI and HMT acquisitions in the first half of 1997 and the sale of
substantially all of the operating assets of TNI in January 1997, 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. NSC's operating loss for the period from the date
of its acquisition by the Company (October 1995) to December 31, 1995 was
$363,857, and for the year 1996 was $16,275,288, including the write-off as
of December 31, 1996 of the unamortized cost ($14,233,953) of intangibles
and goodwill recorded by the Company in connection with the acquisition
(see Note 5 to the Consolidated Financial Statements).
The Company currently believes that it will require additional equity or
debt financing (excluding the net proceeds, if any, from the GECCS and News
arbitration award) to fund NSC's operating activities. It is uncertain,
however, whether or not NSC's operating activities will generate profitable
operations in the future or whether or not the Company will have available
sufficient resources to fund NSC's future operating activities. The
proceeds from any additional financing which may be available to the
Company, if obtained, are intended to be used by the Company to fund the
introduction of NSC's products into the market place. There is no
assurance, however, that the Company will be able to (i) successfully
market NSC's products and services or attain profitable operations in the
future or (ii) that additional financing will be available, or if
available, that such financing will be available, in sufficient amounts, or
on terms acceptable to the Company. The Company does not currently have any
available financing facilities for working capital or for other purposes.
<PAGE> 31
The Company is subject to various legal and administrative proceedings
which could have an adverse impact on the Company's cash flows (see Note 14
to the Consolidated Financial Statements). These 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, for resale by them in the public
market, (ii) an action, in arbitration, by the former shareholders of CCI
to enforce promissory notes in the principal amount of $300,000 issued by
the Company in connection with the acquisition of CCI and canceled by the
Company in May 1996 in connection with the Company's decision to cancel all
of the acquisition related documents, (iii) actions on the part of certain
other creditors to enforce the terms of certain other promissory notes,
(iv) actions brought against the Company by certain former employees and
persons formerly under contract with the Company for payments allegedly due
them, (v) an action by a shareholder seeking the rescission of the sale by
the Company of its common stock to the shareholder and (vi) an action by a
purchaser ("Timboon") of the Company's convertible debentures issued in
reliance upon exemptions under Regulation S of the Securities Act of 1933
seeking performance of the terms of the related offering and subscription
agreements. The Company and its subsidiaries are also subject to a suit
filed by Boston Financial Corporation seeking amounts owed to Boston
Financial Corporation under a lease agreement entered into between Boston
Financial Corporation and NSC. The lease agreement was guaranteed by the
Company, ATI and TNI.
<PAGE> 32
As mentioned above, the Company is subject to a consent order executed
between the Company and the State of Michigan arising from the sale of its
securities in the State of Michigan without an exemption from registration
under the Michigan Uniform Securities Act. The consent order requires the
Company to use its best efforts by December 31, 1997 to satisfy the
prerequisites of the Securities and Exchange Commission and the Michigan
Securities Bureau for either (i) registering the shares of common stock
sold to Michigan purchasers of its common stock for resale by them in the
public market or (ii) making a rescission offer to all such purchasers. As
of the date hereof, the Company has not nor is it likely that the Company
will be able to satisfy the requirements of the consent order within the
time frame required, if at all. First, the Company is unable to satisfy the
prerequisites of the Securities and Exchange Commission for registering the
shares of common stock sold to Michigan shareholders for resale by them in
the public market or for making a rescission offer to the Michigan
purchasers of its common stock. The inability of the Company to register
the shares of common stock sold to Michigan shareholders or make a
rescission offer is due to the Company not having filed all reports
required to be filed with the Securities and Exchange Commission pursuant
to sections 13 or 15(d) of the Securities Exchange Act of 1934. The Company
has not yet filed its quarterly reports on Form 10-Q for the year 1997 due
principally to the delay in the filing of its Annual Report on Form 10-K
for the year ended December 31, 1996. The delay in filing of the Annual
Report on Form 10-K for the year ended December 31, 1996 is principally due
to the inability of the Company 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. Furthermore, the Company
anticipates, upon filing of its quarterly reports on Form 10-Q, the time
required from that point to obtain an effective registration statement will
extend beyond the date for filing the Company's 1997 Annual Report on Form
10-K in which audited financial statements for the year ended December 31,
1997 are required to be included. Based upon the current price of the
Company's common stock, a rescission offer is the only means of compliance
with the Michigan consent order. At this time, the Company does not have
sufficient financial resources available to it to carry-out a rescission
offer if an offer were to be made. The consent order contemplates that any
rescission offer made to Michigan purchasers of the Company's common stock
would be at a price per share at least equal to the purchasers' per share
cost, plus interest thereon, which the Company estimates would total
approximately $800,000 (see Note 14 to the consolidated financial
statements included elsewhere herein).
Based on the foregoing factors, it is uncertain whether or not the Company
will be able to generate sufficient cash from operations or from financing
transactions to enable it to meet its short-term or long-term liquidity
needs, satisfy the requirements of the Michigan consent order and pay its
outstanding obligations to trade and other creditors. In the event the
Company is unable to generate sufficient cash flows from operations or from
financing activities, the Company would be required to seek other
alternatives, including sale, merger or discontinuance of operations.
<PAGE> 33
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the FASB issued Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-
lived Assets to be Disposed Of," which requires impairment losses to be
recognized when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the
assets' carrying amount. Statement No. 121 also addresses the accounting
for long-lived assets expected to be disposed of. The Company adopted
Statement No. 121 for the year ended December 31, 1995. As a result of the
adoption of SFAS No. 121, the Company recorded impairment losses in both
1995 and 1996. See Note 5 to the Consolidated Financial Statements.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation." SFAS 123
allows companies to continue following existing accounting rules as
prescribed by Accounting Principals Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations (which the Company
has elected to follow) but, requires pro forma disclosure of what net
income and earnings per share would have been had the Company accounted for
employee stock options under the fair value method(s) prescribed by SFAS
123. These disclosures are included in Note 11 to the Consolidated
Financial Statements.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 "Earnings Per Share". SFAS No.
128 requires presentation of basic earnings per share and diluted earnings
per share. Basic earnings per share is computed by dividing income
available to common shareholders by the weighted average number of common
shares outstanding. Diluted earnings per share takes into consideration
common shares outstanding (computed as under basic earnings per share) and
potentially dilutive common shares. SFAS No 128 is effective for interim
and annual financial statements for periods ending after December 15, 1997.
The adoption of SFAS No. 128 is not expected to have any material impact on
previously reported EPS.
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 ststements. Although SFAS No. 130 only impacts display as
opposed to actual amounts recorded, it represents a change in financial
reporting. Management has not completed its review of SFAS No. 130, but
does not anticipate that the adoption of this statement will have a
significant impact on the Company's reported earnings.
<PAGE> 34
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 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. Management has not
completed its review of this statement, but does not anticipate that the
adoption of the statement will have a significant effect on the Company's
reported segments.
IMPACT OF INFLATION
The impact of inflation on the costs of the Company and its business units,
and the ability to pass on cost increases to its customers over time is
dependent upon market conditions. The Company is not aware of any
inflationary pressures that have had any significant impact on the
Company's operations over the past three years and, the Company does not
anticipate that inflationary factors will have a significant impact on
future operations.
<PAGE> 35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report on the Consolidated Financial
Statements for the year ended December 31, 1996 and 1995 36
Independent Auditors' Report on the Consolidated Financial
Statements for the year ended December 31, 1994 37
Consolidated Balance Sheets as of December 31, 1996 and 1995 38
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 1996 40
Consolidated Statements of Stockholders' Equity for each of
the three years ended in the period December 31, 1996 41
Consolidated Statements of Cash Flows for each of the three
years ended in the period December 31, 1996 43
Notes to Consolidated Financial Statements 44
<PAGE> 36
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Systems Communications, Inc.
We have audited the accompanying consolidated balance sheets of Systems
Communications, Inc. and Subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity,
and cash flows for each of the years 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 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 1995,and the
consolidated results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that Systems Communications, Inc. and Subsidiaries will continue
as a going concern. As more fully described in Note 3, the Company has
incurred operating losses during each of the years in the three-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> 37
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Systems Communications, Inc.
Clearwater, Florida
We have audited the consolidated statements of operations, changes in
stockholders' equity and cash flows of Systems Communications, Inc. and
Subsidiaries for the year ended December 31, 1994. 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 results of operations and
cash flows of Systems Communications, Inc. and Subsidiaries for the year
ended December 31, 1994, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company
incurred a loss from operations for the year ended December 31, 1994 and
had a net working capital deficiency and an accumulated deficit at December
31, 1994. Additionally, the Company is dependent upon successfully
obtaining financing sufficient to pay its obligations. These factors, among
other things, raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters
are described in Note 3 to the consolidated financial statements. The
financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/ Lovelace, Roby & Company, P.A.
Orlando, Florida
March 29, 1995
<PAGE> 38
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
----------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 61,039 $ 964,714
Accounts receivable, less allowance for
doubtful accounts of $28,074 in 1996
and $510,000 in 1995 802,079 1,322,469
Notes receivable from officers and employees 102,000 52,000
Equipment inventories -- 228,344
Deferred expenses -- 481,897
Deferred income taxes -- 608,277
Other current assets 438,763 499,167
----------- -----------
Total current assets 1,403,881 4,156,868
----------- -----------
Furniture and equipment 1,812,867 693,046
Less accumulated depreciation (587,598) (220,524)
----------- -----------
Net furniture and equipment 1,225,269 472,522
Deferred compensation 662,199 1,190,374
Intangible assets, net of accumulated
amortization of $566,666 in 1996 and
$253,333 in 1995 1,083,334 12,296,667
Excess of cost over fair value of net assets
acquired, net of accumulated amortization
of $75,034 in 1996 and $38,638 in 1995 1,298,950 3,125,675
Other non-current assets 173,667 303,548
----------- -----------
$ 5,847,300 $ 21,545,654
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 39
SYSTEMS COMMUNICATIONS,INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY IN ASSETS)
<S> <C> <C>
Current liabilities:
Borrowings under lines of credit $182,651 $ 45,151
Current portion of notes and debentures
payable 3,180,758 1,679,395
Current portion of obligations under capital
leases 242,477 29,328
Accounts payable 1,452,192 1,260,990
Accrued expenses and other current
liabilities 881,675 187,334
Accrued compensation and employee benefits 1,528,153 1,358,947
Deferred revenue 440,232 856,719
---------- ----------
Total current liabilities 7,908,138 5,417,864
---------- ----------
Notes and debentures payable, less current
portion -- 46,005
Obligations under capital leases, less current
portion 458,654 129,190
Deferred compensation 676,261 1,150,827
Deferred income taxes -- 3,271,649
Other liabilities 72,573 --
---------- ----------
Total liabilities 9,115,626 10,015,535
---------- ----------
Common stock subject to rescission 709,124 789,624
---------- ----------
Stockholders' equity (deficiency in assets):
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 and 4,800,000 shares in 1995 630 178,125
Class B convertible preferred stock, stated
value and liquidation preference - $1.00
per share; authorized 10,000,000 shares,
issued and outstanding 4,550,000 shares
in 1996 and 4,690,000 shares in 1995 2,491,745 2,728,345
Common stock - $.001 par value; authorized
50,000,000 shares, issued and
outstanding 10,626,874 shares in 1996
and 7,425,798 shares in 1995 10,627 7,426
Common stock to be issued 2,000,000 2,000,000
Additional paid in capital 16,823,526 11,873,909
Accumulated deficit (25,303,978) (6,047,310)
------------ -----------
Total stockholders' equity
(deficiency in assets) (3,977,450) 10,740,495
------------ -----------
$ 5,847,300 $ 21,545,654
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 40
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1996 1995 1994
----------- ---------- ---------
<S> <C> <C> <C>
Net revenues: $ 2,832,123 $ 91,106 $ --
----------- ---------- ---------
Costs and expenses:
Cost of revenues 827,063 -- --
Selling and administrative expenses 6,322,627 1,887,275 78,233
Impairment losses 14,233,953 -- --
Depreciation and amortization 1,459,436 148,192 --
----------- ---------- ---------
22,843,079 2,035,467 78,233
----------- ---------- ---------
(20,010,956) (1,944,361) ( 78,233)
Interest income 8,183 3,777 --
Interest expense (381,975) (63,644) --
Other, net (103,891) -- --
----------- ---------- --------
Loss from continuing operations before
income taxes (20,488,639) (2,004,228) ( 78,233)
Income tax benefit (2,554,150) ( 15,124) --
----------- ---------- --------
Loss from continuing operations (17,934,489) (1,989,104) ( 78,233)
Loss from operations of discontinued
telecommunications businesses (less
income tax benefit of $649,044 in 1996
and $241,577 in 1995) ( 1,322,179) (3,818,921) ( 50,769)
----------- ---------- --------
Net loss $(19,256,668) $(5,808,025) $(129,002)
============ =========== =========
Loss per share:
Loss from continuing operations $( 2.15) $( 0.58) $( 0.06)
Loss from operations of discontinued
telecommunications businesses ( 0.16) ( 1.23) ( 0.04)
------------ ----------- ---------
Net loss $( 2.31) $( 1.81) $( 0.10)
============ =========== =========
Weighted average number of
common shares outstanding 8,349,459 3,201,991 1,306,493
============ =========== =========
See Notes to Consolidated Financial Statements
<PAGE> 41
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DEFICIENCY IN ASSETS)
<CAPTION> CLASS A CLASS B COMMON
PREFERRED PREFERRED STOCK
------------------- ------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- -------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 1,700,000 $ -- -- $ -- 825,765 $ 826
Issuance of common stock as
compensation -- -- -- -- 1,770,000 1,770
Issuance of common stock for
cash -- -- -- -- 201,720 202
Stockholders distributions, net -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------- -------- --------- --------- --------- --------
Balance at December 31, 1994 1,700,000 -- -- -- 2,797,485 2,798
Issuance of common stock 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
========= ======== ========= ========== ========== ========
See Notes to Consolidated Financial Statements
<PAGE> 42
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DEFICIENCY IN ASSETS), Continued
<CAPTION> Common Additional
Stock to Paid-In Accumulated
be issued Capital Deficit Total
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 -- $ 120,921 $ (110,283) $ 11,464
Issuance of common stock as
compensation -- 69,030 -- 70,800
Issuance of common stock for cash -- 103,158 -- 103,360
Stockholders distributions, net -- (6,257) -- (6,257)
Net loss -- -- (129,002) (129,002)
--------- ---------- ---------- --------
Balance at December 31, 1994 -- 286,852 (239,285) 50,365
Issuance of common stock 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 2,000,000 7,731,935 -- 12,383,519
Reclassification of common stock
subject to rescission -- (789,382) -- (789,624)
Net loss -- -- (5,808,025) (5,808,025)
--------- ---------- ---------- ----------
Balance at December 31, 1995 2,000,000 11,873,909 (6,047,310) 10,740,495
Issuance of common stock 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 $ 2,000,000 $16,823,526 $(25,303,978) $(3,977,450)
=========== =========== ============ ==========
See Notes to Consolidated Financial Statements
<PAGE> 43
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended December 31,
-------------------------------------
1996 1995 1994
----------- ---------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (19,256,668) $(5,808,025) $(129,002)
Adjustments to reconcile net loss to
net cash provided by (used in)
operations:
Depreciation and amortization 1,750,727 459,327 72,374
Amortization of deferred
compensation, net (16,552) 61,819 --
Provision for bad debts 522,687 181,753 --
Provision for inventory
obsolescence -- 145,776 --
Stock and warrants issued for
compensation and as consideration
for extension of debt 260,193 793,373 --
Deferred income taxes (3,203,194) (256,699) --
Impairment losses 14,428,854 2,758,779 --
Increase (decrease) in cash from
change in operating assets and
liabilities:
Accounts receivable 214,330 317,161 13,908
Equipment inventories 73,211 (80,091) 39,690
Deferred expenses 498,697 (92,130) --
Other assets 67,037 (42,702) (5,000)
Accounts payable (39,308) (430,448) 12,247
Accrued expenses 703,117 84,297 9,574
Accrued compensation 356,902 140,651 --
Deferred revenue (553,982) 5,937 --
---------- --------- -------
Net cash provided by (used in)
operating activities (4,193,949) (1,761,222) 13,791
---------- --------- -------
Cash flows from investing activities:
Acquisition of businesses, net of
cash acquired (46,854) (1,428,312) --
Expenditures for furniture and
equipment (552,718) (131,744) (245,514)
Notes receivable from officers
and employees (50,000) (52,000) --
Acquisition of other assets -- (64,852) --
---------- --------- -------
Net cash used in investing activities (649,572) (1,676,908) (245,514)
---------- --------- -------
Cash flows from financing activities:
Proceeds from issuance of common
stock 2,187,273 4,110,887 103,360
Proceeds from notes and debentures
payable 2,422,752 475,349 180,195
Payments on notes payable and
capital leases (637,596) (262,814) (1,000)
Payments on shares subject to
rescission (80,500) -- --
Proceeds from (payments on) borrowings
under line of credit 47,917 (2,100) --
Stockholder distributions, net -- -- (52,381)
--------- --------- -------
Net cash provided by financing
activities 3,939,846 4,321,322 230,174
--------- --------- -------
Net increase (decrease)in cash (903,675) 883,192 (1,549)
Cash and cash equivalents at beginning
of the year 964,714 81,522 83,071
--------- --------- -------
Cash and cash equivalents at end of the
year $ 61,039 $964,714 $ 81,522
========= ========= ========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 44
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.
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.
<PAGE> 45
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, 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.
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. Pursuant to the terms of the acquisition and related
pledge agreements, the effect of the cancellation of the acquisition
agreements is that the former shareholders of CCI will receive the shares
of stock in CCI acquired in 1994 by the Company in return for the shares of
preferred stock and debt issued by the Company to the former shareholders
of CCI in connection with the acquisition (see Note 14).
In January 1997, the Company sold substantially all of the operating assets
of TNI. The only remaining significant asset of TNI consists of the
arbitration award of $1,250,000 granted to TNI in a binding arbitration
proceeding between and among TNI, GECCS and 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, including the
obligations to Mr. Telford Walker and Mr. James Gary May referred to in
Note 14.
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 17).
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, are reflected
as operations of discontinued telecommunications businesses in the
accompanying consolidated statements of operations(see Note 4).
<PAGE> 46
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant inter-
company transactions and balances have been eliminated in consolidation.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
EQUIPMENT INVENTORIES
Equipment inventories, consisting of pay-per-view equipment, are net of an
allowance for obsolescence and are stated at the lower of cost or market.
Cost is determined by the specific identification method. These inventories
were eliminated from the Company's consolidated balance sheet as a result
of the cancellation, in May 1996, of the CCI acquisition agreement.
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 and acquired customer lists. The cost
of medical computer software ($1,500,000) is being amortized over 3 years.
As of December 31,1996, the unamortized cost of medical computer software
was $1,083,333 and amortization for the year 1996 was $416,667. 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 date, to successfully market the technology acquired in connection
with the acquisition.
<PAGE> 47
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 (see Note
5).
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 is being amortized over 15 years. In 1995, the Company recorded
$2,718,169 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, to date, of NSC to successfully market the technology
acquired.
REVENUE RECOGNITION
The Company generally 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.
LOSS PER SHARE
Loss per share is computed by dividing net loss by the average number of
common shares outstanding during each period. Shares issuable upon
conversion of the Company's outstanding convertible preferred stock and
convertible debentures, shares issuable upon exercise of outstanding stock
purchase options and warrants and shares subject to rescission were not
included in the calculation of loss per share because their inclusion would
be anti-dilutive.
<PAGE> 48
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 "Earnings Per Share". SFAS No.
128 requires presentation of basic earnings per share and diluted earnings
per share. Basic earnings per share is computed by dividing income
available to common shareholders by the weighted average number of common
shares outstanding. Diluted earnings per share takes into consideration
common shares outstanding (computed as under basic earnings per share) and
potentially dilutive common shares. SFAS No 128 is effective for interim
and annual financial statements for periods ending after December 15, 1997.
The adoption of SFAS No. 128 is not expected to have any material impact on
previously reported EPS.
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. 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 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", beginning in fiscal 1995, 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 ststements. Although SFAS No. 130 only impacts display as
opposed to actual amounts recorded, it represents a change in financial
reporting. Management has not completed its review of SFAS No. 130, but
does not anticipate that the adoption of this statement will have a
significant impact on the Company's reported earnings.
<PAGE> 49
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 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. Management has not
completed its review of this statement, but does not anticipate that the
adoption of the statement will have a significant effect on the Company's
reported segments.
USE OF ESTIMATES
The process of preparing financial statements requires the use of estimates
and assumptions regarding certain types of assets, liabilities, revenues
and expenses. Such estimates primarily relate to unsettled transactions and
events as of the date of the financial statements. Accordingly, upon
settlement, actual results may differ from estimated amounts.
RECLASSIFICATIONS
Certain amounts in the 1994 consolidated financial statements have been
reclassified to conform to the 1996 and 1995 presentation.
<PAGE> 50
NOTE 3 GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and liquidation of
liabilities in the ordinary course of business. The Company incurred losses
(including losses from operations of discontinued businesses)of $19,256,668
and $5,808,025 in 1996 and 1995, respectively, and used approximately
$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 $4 million at December 31, 1996 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 obligated to provide or arrange for approximately $1.5 million
of additional working capital and equipment financing for acquired
companies (none of which financing has currently been arranged) and may be
required to offer purchasers of the Company's common stock in certain
jurisdictions the right to rescind their stock purchase transactions.
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 no later than in December 1997, unless such purchasers are
afforded an opportunity to resell their shares in the public market
pursuant to an effective registration statement prior thereto at prices
higher than the cost of such shares to the Michigan purchasers. It is
unlikely the Company will be able to satisfy the requirements of the
consent order. In the event the Company is unable 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.
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 31,1996, the Company had no financing facilities available for
working capital or for other purposes. The Company is awaiting final
resolution of the GECCS/News arbitration award (see Note 14) which, upon
collection thereof, would provide the Company with the ability to meet
certain of its obligations to trade and other creditors.
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.
Subsequent to December 31, 1996, the Company entered into certain
transactions which relieved the Company of its financing obligations to
acquired companies (see Note 17); and, the award in the GECCS and News
arbitration was confirmed by the U.S. District Court for the Northern
District of Georgia (see Note 14).
<PAGE> 51
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 administrative
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 the administrative 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.
<PAGE> 52
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 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 .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 31,1996, there have been no conversions of the preferred stock or
notes issued in connection with the acquisition.
<PAGE> 53
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 be 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 financial statements. 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 be
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 $10.5 million, including the $2,000,000 in additional shares which
were to have been issued in November 1996 pursuant to the acquisition
agreement. The excess of the purchase price over the fair value of the net
assets acquired ($2,718,169) is being amortized over 20 years. The net
assets acquired also included $12,400,000 for healthcare management
decision software technology that is being amortized over 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
("Retiring Management") pursuant to the NSC acquisition agreement. In
connection with the January 1997 agreement between the Company and
"Retiring Management"(see Note 17), Retiring Management waived the issuance
by the Company of the $2,000,000 shares of common stock which were to have
been issued in connection with the acquisition. As a result of the waiver
by Retiring Management of the issuance of the $2,000,000 of additional
shares of common stock which were to have been issued, the Company will
remove the common stock to be issued from the Company's consolidated
balance sheet and record a gain of $2,000,000 in the first quarter of 1997.
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) is being amortized over 15 years. The net assets acquired
included $1,500,000 of medical computer software, which is being amortized
over 3 years.
<PAGE> 54
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 operating results also separately reflect the results of operations
of discontinued telecommunications businesses. The pro forma summary is
provided for information purposes only. It is based on historical
information and does not necessarily reflect the actual results that would
have occurred nor is it necessarily indicative of future operating results
of the combined companies.
<TABLE>
<CAPTION>
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)
------------ -----------
Loss per share:
Loss from continuing operations $( 2.16) $( 1.28)
Loss from operations of
discontinued telecommunications
businesses ( 0.16) ( 1.19)
------------ -----------
$( 2.32) $( 2.47)
============ ===========
</TABLE>
<PAGE> 55
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.
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.
In May 1996, the Company gave notice to the principals of CCI that it was
canceling all of the CCI acquisition agreements and abandoning its
investment in CCI. Pursuant to the terms of the acquisition and related
pledge agreements, the effect of such cancellation and abandonment is that
the former shareholders of CCI will receive the shares of stock in CCI
acquired in 1994 by the Company in return for the shares of preferred stock
and debt securities issued by the Company to the former shareholders of CCI
in connection with the acquisition (See Note 14). The assets and
liabilities of CCI and the debt and preferred stock issued in connection
with the CCI acquisition were removed from the Company's consolidated
balance sheet in May 1996 with no material effect on the Company's results
of operations.
In 1997, the Company sold or otherwise disposed of substantially all of the
remaining assets of its Telecommunications segment, consisting of TNI
(which included the operations of Comstar and LCI) and ATI, and entered
into an agreement to rescind the March 1996 acquisition of HMT (see Note
17). The disposition of TNI and ATI resulted in gains of approximately
$534,000, in the aggregate. The gains from the disposition of TNI and ATI
are to be recognized, as gains on the disposition of discontinued
businesses, in the first and second quarters of 1997. The rescission of the
HMT acquisition agreement resulted in a gain of approximately $281,000,
which is to be recognized as a component of continuing operations in the
second quarter of 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, as of December 31, 1996, of the telecommunications
segment included in the accompanying consolidated balance sheet are
summarized as follows:
Current assets $ 332,856
Total assets 660,094
Current liabilities 886,206
Total liabilities 1,078,026
<PAGE> 56
The revenues, costs and expenses of the Company's telecommunications
businesses, included in 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,
1996, are summarized as follows:
1996 1995 1994
---------- ---------- --------
Net revenues $2,177,858 $2,893,778 $807,669
Cost of revenues 1,320,256 2,014,460 134,607
Selling and administrative expenses 2,304,059 1,845,775 649,036
Impairment losses 194,901 2,758,779 --
Depreciation and amortization 291,291 311,135 72,374
Interest income ( 971) (627) --
Interest expense 38,713 20,466 --
Other expense, net 832 4,288 2,421
Loss from operations of discontinued
businesses, before income taxes 1,971,223 4,060,498 50,769
Income tax benefit (649,044) (241,577) --
Loss from operations of discontinued
businesses 1,322,179 3,818,921 50,769
NOTE 5 IMPAIRMENT LOSSES
Impairment losses included in the accompanying consolidated financial
statements are as follows:
Year Ended December 31,
--------------------------------
1996 1995 1994
--------- ---------- --------
Impairment losses included in loss from
continuing operations:
Write-off of NSC intangibles and goodwill $14,233,953 $ -- $ --
Impairment losses included in loss from
operations of discontinued businesses:
Write-off of TNI goodwill -- 2,758,779 --
Write-off of investment in Comstar 194,901 -- --
<PAGE> 57
At December 31, 1995, the Company recognized a charge to income of
$2,758,779 to write off, with no associated income tax benefit, all of the
goodwill related to its acquisition of TNI. This write-off reflects the
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/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. TNI is the
claimant in a binding arbitration proceeding involving GE Capital
Communications Services Corporation("GECCS") and New Enterprise Wholesale
Services, Ltd. ("News") seeking damages arising out of a breach of contract
for the purchase and resale of telecommunications services. An arbitration
award in the amount of $1,250,000 in favor of TNI was entered on October
10, 1996, and was subsequently 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")
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, including the
obligations to Mr. Telford Walker and Mr. James Gary May referred to in
Note 14. The accompanying consolidated financial statements do not give
effect to the amount awarded TNI. As a result of the disposition of the
Company's telecommunications businesses, the impairment loss of $2,758,779
from the write-off of TNI goodwill is included in loss from operations of
discontinued telecommunications businesses in the accompanying consolidated
statement of operations for the year ended December 31, 1995.
Impairment losses recognized 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 date, to successfully market the software 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.
<PAGE> 58
NOTE 6 FURNITURE AND EQUIPMENT
Furniture and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- ---------
<S> <C> <C>
Furniture and equipment $ 917,869 $558,461
Equipment held under capital lease 880,163 120,188
Leasehold improvements 14,835 14,397
---------- ---------
1,812,867 693,046
Less: accumulated depreciation (587,598) (220,524)
---------- ---------
Net furniture and equipment $1,225,269 $472,522
========== =========
</TABLE>
Depreciation expense was $330,973, $122,471 and $72,374 in 1996, 1995 and
1994 respectively.
Included in furniture and equipment, net, as of December 31, 1996 is
$327,237, applicable to discontinued telecommunications businesses.
<PAGE> 59
NOTE 7 NOTES AND DEBENTURES PAYABLE
Notes and debentures payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- ----------
<S> <C> <C>
10% Cumulative convertible debentures
due on various dates through
November 1997 $ 1,279,000 $ --
10% Cumulative convertible debentures
due on November 21, 1997 300,000 --
10% Cumulative convertible debentures
due on November 26, 1997 200,000 --
Promissory note in default 200,000 --
10% Convertible debentures payable to
former shareholders of TNI 450,000 450,000
6% Acquisition notes payable to former
shareholders of ATI, secured by the
stock of ATI 250,000 250,000
6% Acquisition notes payable to former
shareholders of CCI, secured by the
stock of CCI -- 300,000
Notes payable to former shareholders of
NSC in equal monthly installments of
$20,000, non-interest bearing 149,994 210,000
8%-10% Notes payable to stockholders due
on various dates through December 1997 162,741 290,400
10.75% demand note payable, secured by
certain accounts receivable 100,000 100,000
5% Note to former shareholder of CCI, due
on demand, secured by certain equipment 75,000 75,000
10.50% Demand note payable to an officer,
secured by certain accounts receivable -- 50,000
Other 14,023 --
---------- ----------
3,180,758 1,725,400
Less: current portion (3,180,758) (1,679,395)
---------- ----------
$ -- $ 46,005
========== ==========
</TABLE>
<PAGE> 60
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 ($1,279,000 in the aggregate). These
debentures are convertible into shares of the Company's common stock on
various dates through November 1997 or at any time thereafter and may be
converted earlier if the Company has an effective registration statement
under the Securities Act of 1933 covering the sale of the shares of common
stock issuable upon conversion of the debentures. As of February 16, 1998,
the Company has not filed a registration statement covering the shares of
common stock issuable upon conversion of the debentures. 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 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 conversion date as set forth
in the respective debenture.
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 the date hereof, 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.
On or about August 14, 1996, the Company issued a promissory note to a
shareholder in the amount of $200,000. The promissory note was to be repaid
45 days from the date of its issuance and is currently in default. The
Company has entered into a settlement agreement, which requires the Company
to pay $238,220 in satisfaction of the note no later than on March 31,
1998, which amount is secured by a lien and encumbrance on the proceeds of
the award in arbitration between and among TNI, GECCS and NEWS.
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.
<PAGE> 61
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
acquisition notes payable and the stock purchase warrants issued to the
former shareholders of ATI are to be returned to the Company in connection
with the May 1997 rescission of the ATI acquisition agreement(see Note 17).
The notes payable and debentures associated with the acquisitions of
subsidiaries, described above, are collateralized by the stock of the
respective subsidiaries.
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 Company is currently accruing interest on these notes at 18% per
annum, the default rate of interest as called for by the notes.
As of December 31, 1996, the Company has $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. Of the notes
outstanding at December 31,1996, $158,000, plus accrued interest, were
converted in February 1997, into shares of the Company's common stock at a
negotiated conversion price of $1.00 per share.
The 10.75% demand note payable in the amount of $100,000 outstanding at
December 31, 1996 and 1995 is currently in default. See Note 14.
The 5% note payable to a former shareholder of CCI in the amount of $75,000
at December 31, 1996 and 1995 is currently due in full. The obligations, if
any, of the Company under this note were relieved, in full, as a result of
the rescission in May 1997 of the ATI acquisition (see Note 17).
The $300,000 of 6% acquisition notes payable to the former shareholders of
CCI outstanding as of December 31, 1995 were eliminated in May 1996 as a
result of the Company's decision to cancel all related acquisition
agreements and abandon its investment in CCI. Pursuant to the terms of the
acquisition and related pledge agreements, the effect of such abandonment
is that the former shareholders of CCI will receive the shares of stock in
CCI acquired in 1994 by the Company in return for the shares of preferred
stock and notes issued by the Company to the former shareholders of CCI in
connection with the acquisition (See Note 14).
<PAGE> 62
As of December 31, 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
The Company, through two of its subsidiaries, has lines of credit which
were fully utilized at December 31, 1996 and 1995.
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 of its debt securities 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.
NOTE 10 INCOME TAXES
Income tax benefits recorded in 1996 and 1995 consist of deferred income
taxes. No provisions for taxes currently payable were made in 1996, 1995 or
1994 due to operating losses in each of those years for income tax
purposes. Income tax benefits applicable to continuing operations differ
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>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
Amount computed at statutory rate $(6,966,137) $( 681,438) $ (26,599)
Increase (reduction) in taxes
resulting from:
State income taxes (819,546) ( 80,169) (3,129)
Nondeductible goodwill amortization 80,158 9,490 --
Impairment losses 971,769 -- --
Change in valuation allowance 4,011,702 732,893 29,728
Other 167,904 4,100 --
------------ ------------ ----------
$(2,554,150) $ ( 15,124) $ --
============ ============ ==========
</TABLE>
<PAGE> 63
Income tax benefits allocated to operations of discontinued
telecommunications businesses were $649,044 and $241,577 in 1996 and 1995,
respectively. The difference between income tax benefits applicable to
discontinued operations, 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 acquisition of NSC.
At December 31, 1994, the Company recorded a valuation allowance of $49,021
which was equal to the net deferred tax assets of the Company as of that
date. In the first ten months of 1995, the Company recorded additional net
deferred tax assets of approximately $930,000 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, approximately $248,000 of which is applicable to operations of
discontinued businesses). Because this occurred as part of a business
combination rather than through operations, the adjustment was recorded as
a reduction in goodwill associated with the NSC acquisition rather than as
an adjustment to operations.
<PAGE> 64
The Company has temporary differences between the amounts of assets and
liabilities for financial reporting purposes and the amounts of such assets
and liabilities as measured by enacted tax laws. The Company also has net
operating loss carry forwards available to reduce future taxable income.
The significant components of the Company's deferred tax assets and
liabilities as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $3,999,122 $1,402,574
Allowance for doubtful accounts 10,668 193,728
Equipment inventory valuation reserves -- 55,395
Accrued compensation 777,922 953,714
---------- ----------
Total deferred tax assets 4,787,712 2,605,411
Less-valuation allowance (4,011,705) --
---------- ----------
Net deferred tax assets 776,007 2,605,411
---------- ----------
Deferred tax liabilities:
Intangible assets 371,029 4,672,733
Deferred compensation 389,401 596,050
Other 15,577 --
---------- ----------
Total deferred tax liabilities 776,007 5,268,783
---------- ----------
Net deferred income taxes $ -- $2,663,372
========== ==========
</TABLE>
At December 31, 1996, the consolidated group of companies had unused net
operating loss carryforwards of approximately $10.5 million, expiring on
various dates through 2010. Of this amount approximately $9.3 million is
not restricted as to use. The balance of the carryforwards amounting to
approximately $1.2 million is restricted to offsetting future taxable
income, if any, of the respective companies which generated the
carryforwards and may be further limited as to utilization in any one year
by existing tax laws.
Prior to the acquisitions by the Company of ATI, CCI and HMT (See Note 4),
those companies were taxed under Subchapter S of the Internal Revenue Code
and consequently, were not subject to Federal income tax.
<PAGE> 65
NOTE 11 - STOCKHOLDERS' EQUITY
CLASS A PREFERRED STOCK
The Company's Class A preferred stock is non-voting, has a stated value and
liquidation preference of $1.00 per share, is convertible into one-half
share of the Company's common stock at the election of the holder at any
time prior to a public offering of the Company's common stock and
automatically converts into common stock at the time of such public
offering.
CLASS B PREFERRED STOCK
The Company's Class B preferred stock is non-voting, has a stated value and
liquidation preference of $1.00 per share, is convertible into shares of
the Company's common stock (with such number of shares to be determined as
of the date of issuance, based on the stated value divided by the 10-day
average closing bid price of the Company's common stock) at the election of
the holder at any time prior to a public offering of the Company's common
stock and automatically converts into common stock at the time of such
public offering.
STOCK PURCHASE 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. Stock options issued to certain officers and directors are
exercisable at any time for two years from the date of grant. 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.
Options outstanding at December 31, 1996 total 1,000,000 and are
exercisable at $6.00 per share. Such options were issued in March 1996 and
expire in March 1998. The exercise price of options is equal to the
estimated fair market value of the Company's common stock at the date of
grant.
<PAGE> 66
Options and warrants outstanding are summarized as follows:
<TABLE>
<CAPTION>
Exercise Weighted
Price Range Average
Shares per Share Exercise
Price
--------- ----------- ----------
- ----
<S> <C> <C> <C>
Warrants outstanding
at December 31, 1994 --- --- ---
Issued during the year 1,680,936 $1.50-$8.00 $2.73
---------
Warrants outstanding
at December 31, 1995 1,680,936 $1.50-$8.00 $2.73
Warrants issued during the year 1,822,098 $1.50-$10.00 $4.00
Options issued during the year 1,000,000 $6.00 $6.00
---------
Warrants and options
outstanding at December 31, 1996 4,503,700 $1.50-$10.00 $3.78
=========
</TABLE>
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 value accounting provided for under
FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires
use of option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
In 1996, the Company issued options to management personnel to acquire
1,000,000 shares of the Company's common stock at an exercise price of
$6.00 per share. Such options are exercisable, in full or in part, at any
time over the two-year period following the date of grant.
Pro forma information regarding net income and earnings per share is
required by Statement No. 123, and has been determined as if the Company
had accounted for its employee stock options under the fair value method of
that Statement. The fair value for these options was estimated at the date
of grant using a Black-Scholes option pricing model with the following
assumptions: risk-free interest rate of 6.66%; no dividend yield; a
volatility factor of the expected market price of the Company's common
stock of 40.77%; and a weighted-average expected life of two years.
<PAGE> 67
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no restrictions and
are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, the existing models, in management's opinion, do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of the pro forma disclosure, the estimated fair value of the
options and warrants granted in 1996 have been expensed. The Company's 1996
pro forma loss and loss per share data after giving effect to the charge to
income as if the Company accounted for stock options under the provisions
of Statement No. 123 are summarized as follows:
Loss from continuing operations $19,614,489
----------
Loss from operations of discontinued
telecommunications businesses $ 1,322,179
----------
Loss per share:
Loss from continuing operations $ 2.35
Loss from operations of discontinued
telecommunications businesses 0.16
----------
Net loss $ 2.51
==========
<PAGE> 68
NOTE 12 LEASES
The Company leases certain equipment under capital leases expiring on
various dates through 2001. The amortization of assets under capital leases
is included in depreciation expense. Minimum future lease payments for
assets under capital leases as of December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997 $ 360,409
1998 357,446
1999 138,389
2000 41,293
2001 8,801
---------
Total minimum lease payments 906,338
Less: future amount representing interest (205,207)
----------
Present value of future minimum lease payments 701,131
Less: current portion (242,477)
----------
$ 458,654
==========
</TABLE>
The Company also leases office space and equipment under operating leases
expiring on various dates through 2001. Total minimum future rental payment
sunder non-cancelable operating leases having remaining terms in excess of
one year as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 280,700
1998 170,353
1999 120,842
2000 57,226
2001 -0-
----------
Total minimum future rental payments $ 629,121
==========
</TABLE>
Rental expense under all operating leases was $359,474, $94,961, and
$22,000 in 1996, 1995, and 1994, respectively.
<PAGE> 69
NOTE 13 - EMPLOYMENT AGREEMENTS
Employment agreements with certain key employees provide for, among other
things, the payment of compensation over 5 years from the date of
employment regardless of whether or not the employee remains in the employ
of the Company. The present value of future obligations under such
agreements was $1,020,913 at December 31, 1996. The Company also has
deferred compensation assets related to these agreements. Deferred
compensation has been reported on the basis that the related employee(s)
continue to provide meaningful service to the Company. In the event the
employee(s) cease to provide such service, deferred compensation is reduced
accordingly. Following is a summary of amounts included in the accompanying
consolidated balance sheets for such agreements as of December 31, 1996 and
1995:
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995
--------- ----------
Deferred compensation assets included in:
Other current assets $ 355,415 $ 406,675
Deferred compensation (non-current) 647,355 1,168,405
--------- ----------
$1,002,770 $1,575,080
========= ==========
</TABLE>
<TABLE>
<S> <C> <C>
Deferred compensation liabilities included in:
Accrued compensation and employee benefits $ 344,652 $ 458,948
Deferred compensation (non-current) 676,261 1,150,827
--------- ----------
$1,020,913 $1,609,775
========= ==========
</TABLE>
<PAGE> 70
Effective in May 1994, the Company entered into a letter agreement to
employ its then current Chief Executive Officer. In connection with that
letter agreement, the Company reserved 500,000 shares of its common stock,
valued at $15,000, and 1,375,000 shares of its Class A preferred stock,
valued at $20,625, to be issued as additional compensation upon
satisfaction of certain conditions as set forth in the letter agreement.
Such conditions were met during 1995 and the shares of common stock and
Class A preferred stock previously reserved for issuance were issued. 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).
Subsequent to December 31, 1996, certain key employees subject to the above
described employee agreements resigned resulting in charges to income, in
the aggregate, of approximately $644,000 in the first and second quarters
of 1997.
NOTE 14 COMMITMENTS AND CONTINGENCIES
As of December 31, 1996, the Company was committed to provide financing,
totaling approximately $1.5 million, to certain of its subsidiary
companies. As a result of the disposition HMT in June 1997 and the passage
of time, the Company is not committed, by agreement, to provide any
additional financing to subsidiary companies.
One of the Company's subsidiaries ("TNI") is the claimant in a binding
arbitration proceeding involving GE Capital Communications Services
Corporation ("GECCS") and New Enterprise Wholesale Services, Ltd. ("News")
seeking damages arising out of a breach of contract for the purchase and
resale of telecommunications services. An arbitration award in the amount
of $1,250,000 was entered in favor of TNI on October 10, 1996. The award
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") 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, including the obligations to Mr. Telford
Walker and Mr. James Gary May referred to below. The accompanying
consolidated financial statements do not give effect to the award. (See
Note 17 - Events Subsequent to December 31, 1996).
<PAGE> 71
The Company is subject to various other 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, for resale by them in the public market, (ii) an action, in
arbitration, by the former shareholders of CCI to enforce promissory notes
in the principal amount of $300,000 issued by the Company in connection
with the acquisition of CCI and canceled by the Company in May 1996 in
connection with the Company's decision to cancel all of the acquisition
related documents, (iii) actions on the part of certain creditors to
enforce the terms of certain promissory notes (see Note 7), (iv) actions
brought against the Company by certain former employees and persons
formerly under contract with the Company for payments allegedly due them,
(v) an action by a shareholder seeking the rescission of the sale by the
Company of its common stock to the shareholder and (vi) an action by a
purchaser ("Timboon") of the Company's convertible debentures issued in
reliance upon exemptions under Regulation S of the Securities Act of
seeking performance of the terms of the related offering and subscription
agreements. 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, no later
than in December 1997, 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, 1996,
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 $778,000, including interest of approximately $69,000.
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. It is unlikely the Company
will be able to satisfy the requirements of the consent order within the
time required by the consent order, if at all. Due to the "best efforts"
nature of the Company's compliance obligation, the Company believes that
its performance of the terms of the consent is deferred until such time it
is able to both financially and functionally comply.
<PAGE> 72
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 (see Note 7) and the issuance of 200,000 shares of the
Company's Class A preferred stock they allege are due them under the
acquisition agreement. The notes and associated documentation call for a
return of CCI shares in the event of non-payment of secured notes issued in
consideration for the acquisition agreement. This matter has been referred
by court order to mandatory arbitration in the State of Florida. On May
21, 1997, the principals of CCI filed a demand for arbitration with the
American Arbitration Association. Arbitration of this matter has been set
for February 1998. 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 or the financial statement effect, if any, in
the event of an unfavorable outcome.
On January 21, 1997, Mr. Telford Walker, as Plaintiff, filed an action in
the Superior Court in the State of California in and for the County of
Orange (Case No. 774312) against the Company, Mr. Stephen E. Williams and
Mr. Edwin B. Salmon, as Defendants. This action arises from the default by
the Company under a $200,000 loan agreement between the Company and Mr.
Walker. This action is subject to a settlement agreement (the "Settlement
Agreement") which requires the Company to pay Mr. Walker $238,220 no later
than on March 31, 1998, which amount is secured by a lien and encumbrance
on the proceeds of the award in arbitration between and among TNI, GECCS
and NEWS. Upon payment of the settlement amount, Mr. Walker is to return
15,000 shares of the Company's common stock issued by the Company in
connection with the loan agreement. The Company has accrued the settlement
liability in the accompanying consolidated financial statements. This
obligation was paid on December 31, 1997 from the proceeds of the
arbitration award.
On January 10, 1997, Mr. James Gary May, as Plaintiff, filed an action in
the Circuit Court of the Tenth Judicial Circuit in and for Polk County,
Florida (Case No. GC-G-97-80-Section 07) against the Company and NSC, as
Defendants. This action arises out of a loan agreement entered into between
NSC and Mr. May (see Note 7). The principal amount of the loan agreement is
$100,000 and is in default. This action was settled by the payment of
approximately $116,000 to Mr. May on December 31, 1997 with no material
effect on the results of operations of the Company.
<PAGE> 73
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 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.
Mr. John Looney, a former principal and executive officer of NSC, filed an
action with the Texas Employment Commission (Claim No. 97-004016-1) against
SCI and NSC for unpaid salary, bonuses and benefits. This action was
decided in favor of Mr. Looney in the amount of approximately $71,000 in
October 1997, which amount has been provided for in the accompanying
consolidated financial statements. This decision has been appealed by the
Company.
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.
<PAGE> 74
On June 6, 1997, Timboon, LTD ("Timboon"), as Plaintiff, filed an action in
the United 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 has
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 alleges that Timboon
participated in manipulative market activity with the intent to
artificially depress the market price of the Company's common stock. The
Company seeks nullification of the Off-Shore Securities Subscription
Agreement, a declaration that it is not obligated to convert any of the
securities submitted by Timboon and damages for the injuries caused by
Timboon. The Company is unable to predict the likely outcome of this matter
and does not expect to incur liabilities materially in excess of those
included in the Company's consolidated financial statements. But, the
Company may be required to issue shares of its common stock in satisfaction
of its obligations to Timboon at per share prices significantly below those
contemplated at the time of the Off-Shore Securities Subscription
Agreement.
In October 1997, Boston Financial Corporation took possession of certain
computer equipment leased by NSC from Boston Financial Corporation as a
result of the default by NSC of payments due under the lease. On December
11, 1997, Boston Financial Corporation filed an amended suit against NSC
and , as guarantors of the lease agreement, the Company, ATI and TNI. This
action seeks approximately $550,000 in lease payments and other charges due
under the lease agreement. It is not possible to predict the likely outcome
of this matter. The Company is currently in negotiations with Boston
Financial Corporation to settle this dispute. Further, the Company may have
several counterclaims against Boston Financial Corporation should the
Company and Boston Financial Corporation fail to settle the dispute.
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.
<PAGE> 75
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 operations of the
Company's telecommunications businesses are classified as discontinued
operations in the accompanying consolidated statements of operations for
all years presented. Following is a summary of segmented information. Such
segmented information sets forth selected income statement and balance
sheet data for each of the three years in the period ended December 31,
1996, including the results of operations and balance sheet data of
discontinued operations, and the separate operating results and balance
sheet data of discontinued operations.
Segmented information, including the results of operations and balance data
of discontinued operations, is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
------------ ----------- ---------
<S> <C> <C> <C>
Net revenues from unaffiliated customers:
Healthcare $ 2,832,123 $ 91,106 $ --
Telecommunications 2,177,858 2,893,778 807,669
----------- ---------- --------
5,009,981 2,984,884 807,669
----------- ---------- --------
Income (loss) from operations:
Healthcare (17,104,177) ( 363,857) --
Telecommunications ( 1,932,649) (4,036,371) ( 48,348)
Corporate expenses (2,906,779) (1,580,504) ( 78,233)
----------- ---------- --------
(21,943,605) (5,980,732) (126,581)
Interest income 9,154 4,404 --
Interest expense (420,688) (84,110) (2,421)
Other expense (104,723) (4,288) --
----------- ---------- --------
Loss before income taxes $ 22,459,862) $(6,064,726) $(129,002)
------------ ---------- --------
Depreciation and amortization expense:
Healthcare $ 1,421,925 $ 129,644 $ --
Telecommunications 291,291 311,135 72,374
Corporate 37,511 18,548 --
----------- ---------- --------
$ 1,750,727 $ 459,327 $ 72,374
----------- ---------- --------
Capital Expenditures:
Healthcare $ 1,062,612 $ 41,999 $ --
Telecommunications 12,561 208,503 253,394
Corporate 44,648 86,779 --
----------- ---------- --------
$ 1,119,821 $ 337,281 $ 253,394
=========== ========== =========
<PAGE> 76
DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ----------- ----------
<S> <C> <C> <C>
Identifiable Assets:
Healthcare $ 3,698,484 $15,629,280 $ --
Telecommunications 660,094 2,596,619 704,397
Corporate 1,488,722 3,319,755 75,825
------------ ----------- ----------
$ 5,847,300 $ 21,545,654 $ 780,222
============ =========== ==========
</TABLE>
Included in the above segmented information are the results of operations
and selected balance sheet data of discontinued operations as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
------------ ----------- ----------
<S> <C> <C> <C>
Net revenues from discontinued
telecommunications businesses $ 2,177,858 $ 2,893,778 $ 807,669
------------ ----------- ----------
Loss from operations of discontinued
telecommunications businesses, before
income taxes, interest and other (1,932,649) (4,036,371) (48,348)
Interest income 971 627 --
Interest expense ( 38,713) (20,466) (2,421)
Other expense ( 832) ( 4,288) --
----------- ----------- ---------
Loss from operations of discontinued
businesses, before income taxes ( 1,971,223) (4,060,498) ( 50,769)
----------- ----------- ----------
Depreciation and amortization expense 291,291 311,135 72,374
----------- ----------- ---------
Capital Expenditures $ 12,561 $ 208,503 $ 253,394
----------- ----------- ---------
Identifiable Assets $ 660,094 $ 2,596,619 $ 704,397
=========== =========== =========
</TABLE>
The Company has no inter-segment revenues.
In 1996, the Company had one customer that accounted for 26.6% of the
Company's revenues. For each of the two years in the period ended December
31, 1995, the Company had no customers that accounted for more than 10% of
the Company's net revenues.
<PAGE> 77
NOTE 16 STATEMENTS OF CASH FLOWS SUPPLEMENTAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
---------- ----------- ---------
<S> <C> <C> <C>
Non-cash transactions:
Equipment capital leases $ 703,215 $ 112,308 $ 7,880
========== ========== =========
Common stock issued for
compensation $ 260,193 $ 451,773 $ --
========== ========= =========
Stock and warrants issued in
consideration for extension of
related party indebtedness $ -- $ 341,600 $ --
========== ========== =========
Employment agreements $ -- $ 1,609,775 $ --
========== ========== =========
Notes payable issued in
connection with
business acquisitions $ -- $ 700,000 $ --
========== ========== =========
Issuance of Stock for debt $ 264,150 $ -- $ --
========== ========== =========
Cash paid during the period for:
Interest $ -- $ 23,055 $ 2,421
========== ========== =========
Income taxes $ -- $ -- $ --
========== ========== =========
</TABLE>
<PAGE> 78
NOTE 17 EVENTS SUBSEQUENT TO DECEMBER 31, 1996
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 include (i) 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 and
(ii) an undertaking by the Company to negotiate a license agreement with
Retiring Management for the exclusive use of NSC's software and technology
to service state governments west of the Mississippi River(excluding Utah),
Mexico and Central and South America, subject to minimum performance
standards, in consideration for a royalty fee of one-half of one percent of
all revenues derived by Retiring Management from such license agreement.
The license agreement is to provide for (i) the sharing on a 50-50 basis,
of the net profits (to be defined) earned 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.
In January 1997 and May 1997, the Company disposed of substantially all of
the remaining assets of its Telecommunications segment. 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
the acquiring company; and, in May 1997, the Company and ATI entered into
an agreement to rescind the August 1994 acquisition of ATI by the Company.
The accompanying consolidated financial statements include adjustments to
reduce the carrying amount of the TNI assets sold to their net realizable
value. No value was assigned to the $500,000 convertible debenture received
from the sale of TNI's utility audit division. By its terms, the
convertible debenture 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
covering the shares issuable upon conversion of the convertible debenture.
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 to the former shareholders of ATI (see Note 7) and 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 lease agreements guaranteed 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).
<PAGE> 79
On February 24, 1997, the Company issued $1,120,000 of 4% convertible
debentures due October 1, 1998 in reliance upon exemptions under Regulation
S of the Securities Act of 1993. These 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 lessor of (a) 80%
of the average closing bid price of the Company's common stock for the 5
days preceding the issuance of the debentures or (b) 70% of the average
closing bid price of the Company's common stock for the 5 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. Conversion
of these debentures is subject to a legal proceeding between the Company
and the purchaser of the debentures (see Note 14).
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 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.
<PAGE> 80
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 Acuisition
Shares. The acquisition of HMG is subject to, among other things, the
Company obtaining 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 contemplates a December 31, 1997 closing
but, it is unlikely that that all conditions contemplated in the Agreement
to Exchange Stock will be met by December 31, 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") regarding the arbitration award in favor of the
Company (see Note 14). 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 $750,000, which is net of legal
fees. The proceeds from the Settlement Agreement were used to pay trade and
other obligations, including the obligations to Mr. Telford Walker and Mr.
James Gary May referred to in Note 14.
NOTE 18 - Valuation and Qualifying Accounts
Valuation and qualifying accounts (which are deducted from the assets to
which they apply) consist of an allowance for doubtful accounts ($ 28,074
and $510,000 at December 31, 1996 and 1995, respectively) and a reserve for
obsolete equipment inventories at December 31, 1995 of $145,776. This
reserve was provided in 1995 and was eliminated from the Company's
consolidated financial statements in 1996 in conjunction with the
abandonment of the CCI investment (See Notes 4 and 14).
<PAGE> 81
Following is a summary of the allowance for doubtful accounts:
Balance, December 31, 1994 $ --
Additions:
Acquisition of businesses 328,247
Provision for bad debts charged
to operations 181,753
Deductions --
----------
Balance, December 31, 1995 510,000
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
==========
The provision for bad debts charged to operations in 1996 and 1995,
applicable to discontinued operations, were $475,711 and $159,346,
respectively.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON FINANCIAL
DISCLOSURE.
Not Applicable
<PAGE> 82
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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>
<CAPTION>
Director
Name Age Positions With Co. and Subsidiaries Since
- ---------------------- --- --------------------------------------- --------
<S> <C> <C> <C>
Edwin B. Salmon, Jr. 59 Chairman of the Board of Directors 1991
and Chief Financial Officer
James T. Kowalczyk 57 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 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.
<PAGE> 83
Messrs. Kowalcsyk, 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 subsequent
to the completion of its Annual Report on Form 10-K for the year ended
December 31, 1997. It is uncertain, however, whether or not the Company
will be able to obtain a timely audit of its consolidated financial
statements, timely file its Annual Report on Form 10-K for the year ended
December 31, 1997 and 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.
<PAGE> 84
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.
ITEM 11. EXECUTIVE 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 three most highly compensated officers of the registrant
whose compensation exceeded $100,000 for each of the three years in the
period ended December 31, 1996.
<TABLE>
<CAPTION>
Annual Compensation
-----------------------------------------------
Long-Term
Name & Principal Positions Year Salary Bonus Other Compensation
- -------------------------- ------ ------ ----- ----- -----------
<S> <C> <C> <C> <C> <C>
Stephen E. Williams 1996 $177,500 None $7,500 None
Chief Executive 1995 190,625 None 7,500 None
Officer (1)(2)(3)(4) 1994 N/A N/A N/A N/A
Edwin B. Salmon, Jr. 1996 $177,000 None $7,500 None
Executive Vice 1995 99,630 None 9,000 None
President and 1994 None None None None
Treasurer (1)(3)(4)
Robert L. Alexander 1996 $129,000 None $6,750 None
Chief Operating 1995 52,000 None None None
Officer (1)(4) 1994 N/A N/A N/A N/A
</TABLE>
(1) Each of the executive officers named above have entered into employment
agreements with the Company. 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 and
Note 4 below. Effective December 1, 1996, the annual salaries of Messrs.
Salmon and Williams were reduced to $150,000, each and Mr. Alexander to
$96,000.
(2) 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.
<PAGE> 85
(3) Each of Messrs. Salmon and Williams have options to purchase 500,000
shares of the Company's Common Stock at an exercise price of $6.00 per
share. Such options were issued in March 1996 at an exercise price equal to
the then estimated fair market value and are exercisable at any time for
two years from the date of grant. As of December 31, 1996, no other options
are held by management. See Item 12 "Security Ownership of Certain
Beneficial Owners and Management" for information on options granted to
officers and directors in 1997.
(4) In February 1997, the Company discontinued the employ of Mr. Alexander;
in April and June 1997, Mr. Willliams resigned as the Company's President
and CEO and as Director, respectively; and, Mr. Salmon resigned as the
Company's Executive Vice President but retained his position as Chairman of
the Board.
N/A means the respective officer was not employed by the Company during
that period.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of November 30, 1997 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>
<S> <C> <C>
Name of Amount and Nature Percent
Beneficial Owner of Beneficial Interest(1) of Class(1)
- ---------------------- ------------------------- -----------
Edwin B. Salmon, Jr. 625,762 (2a) 2.10
200,000 (2b) 0.67
261,533 (2c) 0.88
224,418 (2d) 0.75
40,000 (2e) 0.13
40,000 (2f) 0.13
70,000 (2g) 0.24
All Directors and Executive Officers
as a Group(5 persons) 2,382,082 (3) 8.33
NIDAN Corporation 7,721,853 (4) (5) 25.90
NIDAN Corporation 6,798,537 (6) 22.80
Timboon LTD 2,240,000 (7) 7.51
</TABLE>
<PAGE> 86
(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 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.
(2a)Includes options for 500,000 shares exercisable at an exercise price of
$0.10 per share at any time through August 15, 2002. 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 the SBE Trust. Mr. Salmon is the grantor and
beneficiary of this revocable trust; but, his two adult daughters who do
not reside with him are the co-trustees. The address of the trust is the
address of the Company.
(2c) These shares are owned by Brittany Leigh, Inc. Mr. Salmon disclaims
beneficial ownership of these shares. David Salmon, Mr. Salmon's adult son,
is the Director and President and Winfred Russell is a former President of
this corporation. Mr. Salmon was reported to be one of two directors on the
annual report for the corporation filed with the State of Florida; but,
David Salmon and Mr. Salmon maintain that the annual report was filed in
error and Mr. Salmon neither is nor in the past two years has been a
director or officer of this corporation. Mr. Salmon is a creditor of this
corporation and has received partial repayment of his loans 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. 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. Salmon currently has no
such authority. No purchases or sales of the Registrant's common stock by
this corporation have been initiated by the corporation. The address of
Brittany Leigh, Inc. is 1520 San Charles Drive, Dunedin, Florida 34698.
<PAGE> 87
(2d) These shares are owned by American First Equipment Leasing, Inc. Mr.
Salmon disclaims beneficial ownership of these shares. David Salmon, Mr.
Salmon's adult son is the Director and President and Winfred Russell is a
former President of this corporation. Mr. Salmon was reported to be one of
two directors on the annual report for the corporation filed with the State
of Florida; but, David Salmon and Mr. Salmon maintain that the annual
report was filed in error and Mr. 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 partial repayment of his
loans 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. 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.
Salmon currently has no such authority. No purchases or sales of the
Registrant's common stock by this corporation have been initiated by the
corporation. The address of American First Equipment Leasing, Inc. is 1520
San Charles Drive, Dunedin, Florida 34698.
(2e) These shares are owned by the Paige Irrevocable Trust. Mr. Salmon is
the grantor of this irrevocable trust; but, his three adult children,
including David Salmon, none of whom reside with him, are the co-trustees
and one of Mr. Salmon's daughters is the sole beneficiary. Mr. Salmon
disclaims any beneficial interest in this trust. The address of the trust
is the address of the Company.
(2f) These shares are owned by the Jennifer Irrevocable Trust. Mr. Salmon
is the grantor of this irrevocable trust; but, his three adult children,
including David Salmon, none of whom reside with him, are the co-trustees
and one of Mr. Salmon's daughters is the sole beneficiary. Mr. Salmon
disclaims any beneficial interest in this trust. The address of the trust
is 700 S.W. 66 nd Blvd. ,Gainesville, Fla. 32607.
(2g) These shares are owned by Managerial Advisory Services, Inc. David
Salmon is a director and the President of this corporation. Mr. Salmon has
no interest of any nature in and is not a creditor of this corporation. The
address of the corporation is 2205 Web Avenue, Dunedin, Florida 34698.
(3)Includes the shares and options referred to in (2a)-(2g) above, plus
options for 700,000 shares issued in 1997 to officers and directors, other
than to Mr. Edwin B. Salmon, exercisable at an exercise price of $0.10 per
share at any time through August 15, 2002. Mr. Salmon disclaims beneficial
ownership of the shares referred to in (2c)-(2g) above. The address of each
director and executive officer of the Company is the address of the
Company.
<PAGE> 88
(4)Includes 7,478,391 of shares issuable upon the conversion of $1,195,000
of outstanding 10% cumulative convertible debentures issued by the Company
to NIDAN Corporation ("NIDAN") , assuming such convertible debentures were
converted on November 30, 1997, and 243,462 shares of common stock owned by
the persons referred to in (5) below. NIDAN is a Florida corporation whose
address is 13015 S.W. 89 Place, Suite 212, Miami, FL 33176.
(5)The Company has been informed that NIDAN has assigned to other persons
$845,000 of the Company's $1,195,000 of outstanding 10% cumulative
convertible debentures. To the best of the Company's knowledge, these
persons are not stockholders of NIDAN. On September 24, 1997, those persons
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.
Following are the names and addresses of these persons:
Name Address
- ------------------- ----------------------
Harold Meyering 235 S. Pine St.
McBain, Michigan 49657
Kenneth Edward Gilde 1630 W. Blue Road
Mc Bain Michigan 49657
Kenneth Earl Gulde 570 W. Blue Road
Falmouth, Michigan 49632
David E. Gulde 4565 Forward Road
Falmouth, Michigan 49632
Phillip S. Gulde 8200 S.McGee Road
Mc Bain, 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
The Company believes the issuance of shares to the above named persons upon
conversion of the 10% cumulative convertible debentures, which debentures
were originally issued to NIDAN and subsequently assigned to the above
named persons by NIDAN, violate the terms and conditions of the consent
order entered into between the Company and the State of Michigan (see "Note
14 to the Consolidated Financial Statements" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations"). The
Company has not made a final determination as to the conversion rights of
the above named persons.
<PAGE> 89
(6)Includes 6,798,537 shares issuable upon exercise of warrants to be
issued to NIDAN at the time of the conversion of convertible debentures
issued to NIDAN, assuming (i) conversion of the debentures on November 30,
1997 and (ii) exercise on that date of the warrants issuable upon
conversion.
(7)Includes 2,240,000 shares issuable upon conversion of $1,000,000 of
outstanding 4% convertible debentures issued to Timboon LTD, assuming such
debentures were converted on November 30, 1997. See Note 17 to the
Consolidated Financial Statements included elsewhere herein. The address of
Timboon LTD is 28 Hagvura Street, Karni Shomron, Israel.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1996, Mr. Salmon loaned the Company $25,000 at 8% interest.
Borrowings outstanding to Mr. Salmon ($25,000 at December 31, 1996), plus
accrued interest, were converted into 25,762 shares of the Company's common
stock in February 1997.
As of December 31, 1995, the Company had outstanding notes payable to
Brittany Leigh, Inc. and American First Equipment Leasing, Inc. totaling
$270,400. During 1996, (i) American First Equipment Leasing, Inc. loaned
the Company $62,735 at 8% interest and (ii) the Company repaid notes
payable to Brittany Leigh, Inc. and American First Equipment Leasing, Inc.
totaling $100,000, plus accrued interest, and converted $170,400 of such
notes, plus accrued interest, into 193,207 shares of the Company's common
stock. As of December 31, 1996, the Company had notes outstanding to
American First Equipment Leasing totaling $62,735. Subsequent to December
31, 1996, the Company repaid $4,735 of such notes, plus accrued interest,
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 and
borrowed an additional $10,000 from Brittany Leigh, Inc. at 8% interest.
See Notes 2(c) and 2(d) to Item 12 "Security Ownership of Certain
Beneficial Owners and Management".
As of December 31, 1995, the Company had outstanding notes payable to Mr.
Richard A. Sweet, a Director of the Company, totaling $20,000. During 1996,
(i) Mr. Sweet loaned the Company an additional $40,000, at interest rates
ranging from 8% to 10% and (ii) the Company converted $20,000 of such
notes, plus accrued interest, into 14,345 shares of the Company's common
stock. Subsequent to December 31, 1996, the Company converted the remaining
outstanding notes payable to Mr. Sweet in the amount of $40,000, plus
accrued interest, into 41,565 shares of the Company's common stock.
As of December 31, 1995, the Company had outstanding notes payable to the
former shareholders of TNI totaling $450,000, $250,000 outstanding to the
former shareholders of ATI and $300,000 outstanding to the former
shareholders of CCI.
<PAGE> 90
In May 1996, the Company gave notice to the principals of CCI that it was
canceling all of the CCI acquisition agreements and abandoning its
investment in CCI. Pursuant to the terms of the acquisition and related
pledge agreements, the effect of such cancellation and abandonment is that
the former shareholders of CCI will receive the shares of stock in CCI
acquired in 1994 by the Company in return for the shares of preferred stock
and debt securities issued by the Company to the former shareholders of CCI
in connection with the acquisition (See Note 14 to the Consolidated
Financial Statements included elsewhere herein).
Subsequent to December 31, 1997, the Company and the former shareholders of
ATI entered into an agreement to rescind the acquisition of ATI by the
Company (see Note 17 to the Consolidated Financial Statements included
elsewhere herein). The ATI rescission agreement provides for the return of
all of the ATI stock acquired by the Company to the former shareholders of
ATI in exchange for 684,410 shares of the Company's common stock, the
$250,000 of 6% acquisition notes payable to the former shareholders of ATI
and warrants held by the former shareholders of ATI to purchase 168,668
shares of the Company's common stock.
During 1996, 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 $435,000; and, the Company repaid
$200,000 of these notes, plus accrued interest. At December 31, 1996, the
Company had outstanding notes to these shareholders totaling $235,000
bearing interest at 8% to 10%. Amounts outstanding to these shareholders
include a $200,000 note which is in default and subject to a settlement
agreement in the amount of $238,220, payable in March 1997 (see Note 7 to
the Consolidated Financial Statements included elsewhere herein).
Subsequent to December 31, 1997, the Company borrowed an additional $10,000
and converted $45,000 of such notes, plus accrued interest, into 51,296
shares of the Company's common stock.
During 1996, the Company issued $1,195,000 of 10% convertible debentures to
NIDAN. 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> 91
As of December 31, 1995, the Company had an outstanding note payable to a
former shareholder of NSC (and a current shareholder of the Company) in the
amount of $50,000. This note, plus accrued interest, was paid during 1996.
<PAGE> 92
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Independent Auditors' Report on the Consolidated Financial
Statements for the year ended December 31, 1996 and 1995 36
Independent Auditors' Report on the Consolidated Financial
Statements for the year ended December 31, 1994 37
Consolidated Balance Sheets as of December 31, 1996 and 1995 38
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 1996 40
Consolidated Statements of Stockholders' Equity for each of
the three years ended in the period December 31, 1996 41
Consolidated Statements of Cash Flows for each of the three
years ended in the period December 31, 1996 43
Notes to Consolidated Financial Statements 44
(a) 2. 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.
<PAGE> 93
(a) 3. 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.
<PAGE> 94
(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
<PAGE> 95
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.
<PAGE> 96
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
(17) 1.## Resignation Letter of Stephen Williams.
(17) 2.## Resignation Letter of David J. Olivet
P(21) * List of Subsidiaries of Registrant
(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)
(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")
(b) Reports on Form 8-K
The following reports were filed on Form 8-K for the three months ended
December 31, 1996 and prior to the filing date hereof:
1. The date of the event reported on Form 8-K was October 10, 1986. On
that date the Company was notified of a decision and award in the
arbitration of the Company's claim against GE Capital Communication
Services Corp. ("GECCS") and New Enterprise Wholesale Services, Ltd.
("News") for compensatory damages in the amount of $1,253,364 (See "Legal
Proceedings").
2. The Company filed a Form 8-K on March 27, 1997. The date of the
earliest event reported was November 21, 1996. On November 21, 1996 and
November 26, 1996, the Company issued $300,000 and $200,000, respectively,
of 10% Cumulative Convertible Debentures to RIC Investment Fund, Ltd. and
RANA Investment Company, respectively. Each of these debentures are due
one year from the date of issuance. On February 28, 1997, the Company
issued a $1,120,000 4% Cumulative Convertible Debenture due October 1, 1998
to Timboon, Ltd. The issuance of all of these Debentures were made in
reliance on Regulation S pursuant to an Offshore Offering and Distribution
Agreement between the Company and Victory Investments, LLC, as placement
agent.
<PAGE> 97
3. The Company filed a Form 8-K on July 28,1997. The date of the earliest
event reported was the sale, on January 31,1997, of substantially all of
the operating assets of TNI. Other events reported in the Form 8-K were the
rescission of the ATI and HMT acquisition agreements in May and June, 1997,
respectively, disclosure regarding the late filings of reports required to
be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
and certain other events, including recent management and directorship
changes, and the status of certain legal and administrative proceedings in
which the Company is involved.
4. The Company filed a Form 8-K on November 21, 1997. The date of the
earliest event reported was November 14, 1997. 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 Acuisition Shares. The acquisition of HMG
is subject to, among other things, the Company obtaining 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
contemplates a December 31, 1997 closing.
* Incorporated by reference to the Company's Registration Statement on
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 quarterly period ended September 30, 1996
# 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.
#### Filed herewith
<PAGE> 98
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: February 19, 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
<PAGE> 99
INDEX TO EXHIBITS
Exhibit number Description of 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.
<PAGE> 100
(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
<PAGE> 101
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
(17) 1.## Resignation Letter of Stephen Williams.
<PAGE> 102
(17) 2.## Resignation Letter of David J. Olivet
P(21) * List of Subsidiaries of Registrant
(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)
(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 Registration Statement on
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 quarterly period ended September 30, 1996
# 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.
#### Filed herewith
<PAGE> 103
Ex-4.15
[DESCRIPTION] Form of 10% Cumulative Convertible Debenture Note
THIS SECURITY (AND THE UNDERLYING SECURITY, IF ANY) HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 (AND IS A "RESTRICTED SECURITY" AS DEFINED
UNDER SAID ACT) OR UNDER THE SECURITIES LAWS OF ANY STATE OR JURISDICTION.
TEN (10%) PERCENT CUMULATIVE CONVERTIBLE DEBENTURE NOTE
$__________ This __th day of ____________
Clearwater, Florida
FOR VALUE RECEIVED, SYSTEMS COMMUNICATIONS INC., a Florida corporation
(hereinafter called "BORROWER"), promises to pay NIDAN, INC or registered
assigns (hereinafter called "REGISTERED HOLDER"), the sum of _____________,
together with interest (computed on the basis of a 365 day year for the
actual number of days elapsed) on the outstanding principal balance
remaining unpaid from time to time until paid at ten percent (10%) per
annum. At any time next following the 365th day following the date hereof
there would occur and be continuing an Event of Default in payment of
principal or interest or both. In such event, BORROWER shall upon default
pay to REGISTERED HOLDER interest on the outstanding principal amount of
this Note at the highest rate of interest allowable by law from the date of
such Event of Default until such Event of Default shall be cured or waived
until this Note, with interest thereon, is fully paid as otherwise provided
herein.
Said principal and interest shall be payable at the principal office of
BORROWER by hand delivery or deposit of shares of BORROWER's Common Stock
and BORROWER's Warrants, as provided below, in the U.S. Mail, first class
postage prepaid, addressed to REGISTERED HOLDER at its address registered
on the books of the BORROWER or at such other address as REGISTERED HOLDER
may designate from time to time.
Interest on the outstanding principal balance of this Note (unless upon
default as aforesaid) shall accrue at 10% per annum commencing on the date
set forth above until paid as herein provided.
PRINCIPAL AND INTEREST PAID BY CONVERSION:
The number of shares of BORROWER's Common Stock by which this Note shall be
automatically repaid and into which this Note shall be converted
automatically shall be _______ Common Shares as to principal (i.e.: $______
per share conversion) and the interest accrual payment shall be determined
by dividing the outstanding accrued interest on the effective date set
forth below by the average of the BID-ASK price of said shares at the close
of trading on the first trading day next following the effective date of
issuing of the forthcoming (1996) registration statement for BORROWER's
Common Stock which is the "EFFECTIVE DATE". The certificates for such
shares of Common Stock shall be delivered as of the effective date.
Page 1 of 4
<PAGE> 104
The date of such repayment and automatic conversion of the principal
($______) shall be the effective date of BORROWER's first registration
statement after the date hereof pursuant to the Securities Act of 1933, as
amended, for the sale of Common Stock to be issued by the BORROWER.
Notwithstanding any other provision of this Note or of any instrument with
respect to this Note or any other instrument executed in connection with
the loan evidenced by this Note, it is expressly agreed that the amounts
payable under this Note or under the aforesaid instruments for the payment
of interest or any other payment in the nature of or which would be
considered as interest or other charge for the use or loan of money shall
not exceed the highest contract rate allowable by law of the State of
Florida, from time to time, and in the event the provisions of this Note or
of such other instruments referred to herein with respect to the payment of
interest or other payments in the nature of or which would be considered as
interest or other charge for the use or loan of money shall result in
exceeding such limitation, then the excess over such limitation shall not
be payable and the amount otherwise agreed to have been paid shall be
reduced by the excess so that such limitation will not be exceeded, and if
any payment actually made shall result in such limitation being exceeded,
the amount of the excess shall constitute and be treated as a payment on
the unpaid principal balance hereof and shall operate to reduce such
principal balance by the amount of such excess, or if in excess of the
principal indebtedness, such excess shall be refunded to BORROWER.
BORROWER does hereby (a) agree to no course of dealing or delay or omission
or forbearance on the part of REGISTERED HOLDER in exercising or enforcing
any of REGISTERED HOLDER's rights or remedies hereunder or under any
instrument with respect to this Note or under any other instrument executed
in connection with the loan evidenced by this Note shall impair or
prejudice any of REGISTERED HOLDER's rights and remedies hereunder or the
enforcement hereof and that REGISTERED HOLDER may extend or renew this Note
for any term (whether or not longer than the original one (1) year term of
this Note), may extend, modify or postpone the time and manner of payment
and performance of this Note, and (b) waive notice of acceptance of this
Note, notice of the occurrence of any default under this Note and
presentment, demand, protest, notice of dishonor and notice of protest.
The happening of any of the following events shall constitute a default
hereunder:
(a) default in the payment of any principal on this Note as and when the same
shall become due and payable; or
(b) default in the payment of any interest on this Note as and when the same
shall become due and payable (it being understood that such payments become
payable on a date subsequent to the date they become due in accordance with
the provisions hereof); or
<PAGE> 105
(c) breach, failure or default on the part of BORROWER in the performance or
observance of any covenant, condition or agreement of BORROWER under this
Note for a period of thirty (30) days following written notice thereof
unless such breach, failure or default shall have been cured within such
thirty (30) day period; or
Page 2of 4
(d) a receiver, liquidator, assignee, custodian, trustee, conservator
sequestrator, regulatory authority (or other similar official) shall take
possession or BORROWER or its property or business, or exercise control
thereofor thereover, without its consent or a court having jurisdiction in
the premises shall enter a decree or order for relief in respect of
BORROWER in a involuntary case under any applicable bankruptcy, insolvency
or other similar laws now or hereafter in effect, or appointing a receiver,
liquidator, assignee, custodian, trustee, conservator, sequestrator,
regulatory authority (or other similar official) of BORROWER or for the
property or business thereof, or ordering the winding-up or liquidation of
its affairs and such decree or order shall continue unstayed and in effect
for a period of thirty consecutive days, or BORROWER shall commence a
voluntary case under any applicable bankruptcy, insolvency or other similar
law now or hereafter in effect, or shall consent to the entry of an order
for relief in an involuntary case under any such law, or shall consent to
the appointment of or taking possession by a receiver, liquidator,
assignee, custodian, trustee, conservator sequestrator, regulatory
authority (or other similar official) of BORROWER or of any substantial
part of its property or business, or shall make any general assignment for
the benefit of creditors, or shall take any corporate action in furtherance
of any of the foregoing; or
If a default occurs hereunder, then at the option of REGISTERED HOLDER (a)
the entire principal amount then remaining unpaid and accrued interest
thereon shall immediately become due and payable without notice or demand,
it being agreed that interest not paid when due shall, at the option of
REGISTERED HOLDER, be added to the outstanding principal amount and draw
interest at the rate provided herein; (b) the unpaid principal amount shall
accrue interest at the highest rate of interest allowable by Florida law;
and (c) all other liabilities of BORROWER to REGISTERED HOLDER
(notwithstanding any provisions thereof), shall immediately become due and
payable without notice or demand (but with such adjustments, if any, with
respect to any interest or other charges as may be provided for in this
Note or other writing evidencing such liability). Failure to exercise this
option shall not constitute a waiver of the right to exercise the same in
the event of any subsequent default.
BORROWER agrees to pay to REGISTERED HOLDER reasonable attorneys' fees and
costs, whether or not an action be brought, for the services of counsel
employed after maturity or default to collect this Note or any principal or
interest due hereunder, or to protect the security, if any, or enforce the
performance of any other agreement contained in this Note or in any
instrument of security as aforesaid, including costs or attorneys' fees on
appeal, in bankruptcy matters or post judgment relief.
<PAGE> 106
BORROWER shall have no right to set-off against REGISTERED HOLDER under
this
Note or under any instruments securing this Note or executed in connection
with the loan evidenced by this Note. REGISTERED HOLDER shall have the
right, however, immediately and without further action or notice by it, to
set-off against this Note all money owed by REGISTERED HOLDER in any
capacity to BORROWER, whether or not due, and also to set-off against all
other liabilities of REGISTERED HOLDER to BORROWER all money owed by
REGISTERED HOLDER in that capacity to BORROWER.
Page 3 of 4
This Note is executed under seal, constitutes a contract under the law of
the State of Florida, and shall be enforceable in a court of competent
jurisdiction in said State, without regard to the place in which this Note
is executed.
Signed and sealed this __TH day of ________________.
SYSTEMS COMMUNICATION INC.
(CORPORATE SEAL)
Attest:_________________________
By:__________________________________________
Secretary Stephen E. Williams, Chief Executive
Officer
Page 4 of 4
<PAGE> 107
Addendum
This amendment modifies the Cumulative Convertible Debenture Note in the
amount of $__________ dated ____________, except as herein provided the
original Cumulative Convertible Debenture Note shall remain in full force
and effect.
The number of shares of BORROWER's common stock by which this Cumulative
Convertible Debenture Note shall be automatically repaid and into which
this note shall be converted automatically shall be determined by dividing
the principal amount plus interest on the earlier to occur of the maturity
date or the effective date of the BORROWER's first registration statement
after the date hereof, pursuant to the Securities Act of 1933, as amended,
by the lesser of either fifty percent (50%) of the BID-ASK price at the
close of trading on the first trading day next following the conversion
date or the original per share conversion price as shown on the original
Cumulative Convertible Debenture Note.
(Seal)
Edwin B. Salmon Jr.
Executive Vice President
Attest: _______________________
<PAGE>108
Warrant Addendum
This certifies that upon conversion of the convertible debenture dated ___
_____________ in the sum of $_________ issued to ___________________,
Holder or registered assigns, is entitled hereby to be issued a common
stock purchase warrant of Systems Communications, Inc., a Florida
corporation.
The number of shares which may be purchased under the warrant to be issued
shall be ______, (subject to adjustment for stock splits and
recapitalization).
The purchase price of each share of common stock subject to the warrant
shall be $____, adjusted with respect to any adjustments made in the number
of shares for stock splits and recapitalization.
Systems Communications, Inc.
Stephen E. Williams
Chief Executive Officer
ATTEST:
Edwin B. Salmon Jr.
Secretary
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
Exhibit No.27.3 Financial Data Schedule (Year Ended December 31, 1996)
<LEGEND>
Exhibit 27.3
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SYSTEMS COMMUNICATIONS, INC. FOR THE FISCAL PERIOD
ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 61,039
<SECURITIES> 0
<RECEIVABLES> 932,153
<ALLOWANCES> (28,074)
<INVENTORY> 0
<CURRENT-ASSETS> 1,403,881
<PP&E> 1,812,867
<DEPRECIATION> (587,598)
<TOTAL-ASSETS> 5,847,300
<CURRENT-LIABILITIES> 7,908,138
<BONDS> 3,180,758
0
2,492,375
<COMMON> 10,627
<OTHER-SE> (6,480,452)
<TOTAL-LIABILITY-AND-EQUITY> 5,847,300
<SALES> 2,832,123
<TOTAL-REVENUES> 2,832,123
<CGS> 827,063
<TOTAL-COSTS> 22,843,079
<OTHER-EXPENSES> 103,891
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 381,975
<INCOME-PRETAX> (20,488,639)
<INCOME-TAX> (2,554,150)
<INCOME-CONTINUING> (17,934,489)
<DISCONTINUED> ( 1,322,179)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,256,668)
<EPS-PRIMARY> (2.31)
<EPS-DILUTED> 0
</TABLE>
