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, 1997
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.
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(Exact name of Registrant as specified in its charter)
FLORIDA 65-0036344
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
4707 140th Avenue North, Suite 107, Clearwater, Florida 33762
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(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__
The aggregate market value of the voting stock held by non-
affiliates of the registrant on March 31, 1998, (based on the
average of the high and low bid prices of such stock on the over-
the-counter securities market) was $3,023,000.
The number of shares of the registrant's common stock, $.001 par
value, outstanding as of March 31, 1998 was 14,174,052.
<PAGE> 2
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"), preferred
provider organizations ("PPO's") and healthcare benefit plan
administrators. To date, the Company has not been successful in
marketing its management information systems technology due to
numerous factors, including large operating losses from
businesses acquired and the effect of those losses on the ability
of the Company to continue to fund NSC's software development and
marketing efforts. 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 below, the Company's
acquisition of HMT was rescinded in June 1997.
<PAGE> 3
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.
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 stockholders of
Coast Communications, Inc. ("CCI") that the Company was canceling
the acquisition of CCI and terminating all of the related
acquisition documents. The former stockholders of CCI filed suit
to enforce promissory notes in the aggregate principal amount of
$300,000 issued by the Company in connection with the CCI
acquisition and the issuance by the Company of an additional
200,000 shares of the Company's Class A preferred stock they
allege are due them under the acquisition agreement. This matter
was referred by court order to mandatory arbitration in the State
of Florida. On February 3, 1998, the Arbitrators awarded in favor
of the former shareholders of CCI. The award requires, among
other things, that the Company (i) convert 200,000 shares of its
Class A Preferred Stock, held by the former shareholders of CCI,
into 100,000 shares of its common stock and (ii) issue another
200,000 shares of Class A Preferred Stock to the former CCI
stockholders, which is also convertible into 100,000 shares of
the Company's common stock, and gave the former shareholders of
CCI the ability to seek a summary judgment against the Company
for $500,000, without opposition, or accept 500,000 shares of the
Company's Class A Preferred Stock in lieu of a summary judgment.
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. 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. The arbitration award was confirmed by the United States
District Court, Northern District of Georgia on September 30,
1997 and the Company's motion for summary judgment was entered
October 1, 1997. On December 24, 1997, the Company, GECCS and
NEWS entered into a Confidential Settlement Agreement and Mutual
Full and Final Releases (the "Settlement Agreement"). Pursuant to
the Settlement Agreement, GECCS\NEWS paid $1,250,000 in full
satisfaction of the arbitration award granted to the Company. Of
that amount, the Company received approximately $750,000, which
is net of legal fees. The proceeds from the Settlement Agreement
were used to pay trade and other obligations of the Company,
including $468,000 of notes and debentures payable.
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> 4
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 and the cancellation of (i) the 6% notes payable
issued in connection with the acquisition and (ii) warrants
issued to the former ATI shareholders to purchase 168,668 shares
of the Company's common stock. See Notes 4 and 7 to the
accompanying consolidated financial statements.
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 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 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 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" and the consolidated financial statements included
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 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.
<PAGE> 5
For the past three fiscal years the Company has operated in two
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, Comstar and LCI from
their respective dates of acquisition and the operations of ATI
and CCI for all periods presented. In 1996 and 1997, the Company
disposed of substantially all of the assets of its
telecommunications businesses. Consequently, the healthcare
segment is the only segment in which the Company has continuing
operations. The operations of the Company's telecommunications
segment are classified as discontinued operations in the
consolidated statements of operations for all periods presented.
Following is a summary of segment information for each of the
three years in the period ended December 31, 1997:
1997 1996 1995
----------- ------------ ----------
Healthcare:
Net revenues $ 1,498,353 $ 2,832,123 $ 91,106
Operating loss(1) (1,502,336) (17,104,177) (363,857)
Telecommunications:
Net revenues 405,617 2,177,858 2,893,778
Operating loss(2) (91,768) (1,932,649) (4,036,371)
(1) Includes impairment and other losses of $1,898,953 in 1997
and $14,233,953 in 1996. See Note 5 to the consolidated financial
statements.
(2) Includes impairment and other losses of $194,901 and
$2,758,779 in 1996 and 1995, respectively. See Note 5 to the
consolidated financial statements.
<PAGE> 6
HEALTHCARE MANAGEMENT.
The Company's healthcare management segment consists of NSC and
HMT. The Company rescinded the acquisition of HMT in June 1997.
As of December 31, 1997, the operations of the Company's
healthcare segment consists solely of NSC.
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 or license 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, healthcare benefit
plan administrators and large pharmaceutical companies that have
outcomes analysis needs. 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. To date, the Company has not been successful in
marketing its management information systems technology due to
numerous factors, including large operating losses from
businesses acquired and the effect of those losses on the ability
of the Company to continue to fund NSC's software development and
marketing efforts.
CHAMPUS is a unique data-warehousing and outcomes analysis 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 right to use one of the largest
healthcare data banks in the world, NSC has the 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 30% of recovered
claims, to be paid to HMS. HMS's portion of revenues derived by
NSC typically approximates 50% of NSC's revenues.
<PAGE> 7
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.
In September 1997, the Company 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.
The Company contemplates that the HMG alliance and other
potential healthcare alliances will allow the Company to further
enhance its healthcare outcomes analysis, data-mining and
management information decision product capabilities and
facilitate the sale or license of value added decision making
services to its targeted customer base.
NSC's initial software development activities have resulted in an
analytical database product with extensive data-mining
capabilities 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 or generate any revenues from NSC's management information
systems technology. Also, as more fully discussed herein, it is
uncertain whether or not the Company will have available
sufficient resources to continue to fund NSC's operating
activities or whether or not NSC will be able to generate
profitable operations in the future.
HMT was founded 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. It develops and markets PC-based
software products for managing cases of work disability (absence)
that facilitate return to work and reduce healthcare costs. HMT's
market consists of mid to large U.S. employers, insurers,
hospitals, TPA', 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 the
stockholders of HMT. See above regarding rescission of HMT
acquisition.
<PAGE> 8
The revenues and operating loss of NSC were $187,478 and
$1,348,679, respectively, in 1997, $1,574,825 and $16,275,288,
respectively, in 1996 and $91,106 and $363,857, respectively,
from the date of acquisition (October 1995) to December 31, 1995.
The revenues and operating loss of HMT were $1,311,054 and
$153,656, respectively, for the period from January 1, 1997 to
the date of its disposition by the Company and $1,257,298 and
$828,895, respectively, for the period from the date of its
acquisition by the Company (March 1996) to December 31, 1996.
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.
<PAGE> 9
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. The Company, however, has not been
successful in marketing its management information systems
technology and is pursuing strategic alliances with other
healthcare management companies in order to sustain operations
and provide the funds required to further develop and market its
products. See "Item 1 - Business, Healthcare Management".
HMT's market consists of mid to large U.S. employers, insurers,
TPA's, PPO's, HMO's, and other healthcare management companies.
<PAGE> 10
CUSTOMERS.
NSC entered into a service agreement with Chrysler Corporation in
1993 which accounted for a majority of NSC's 1995 and 1996
revenues. As discussed above, this agreement was terminated in
September 1997, due to performance issues between Chrysler and
NSC's subcontractor, 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.
Net revenues recognized in 1997, 1996 and 1995 were $107,102,
$1,334,495, and $91,106, respectively, from Chrysler service
agreement and $80,376, $240,330, and $ -0-, respectively, from
the Ford service agreement.
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; and, the Company
has suspended software development due to its lack of financial
resources. These factors have adversely affected the Company's
competitive position (see "Management's Discussion and Analysis
of Financial Condition and Results of Operations").
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
operating 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, or abandoned, in May
1997 and May 1996, respectively.
<PAGE> 11
The operating results of the Company's telecommunications
businesses are classified as "Discontinued Operations" in the
consolidated statements of operations. The revenues and operating
loss of TNI were $1,481,317 and $1,792,795, respectively in 1996,
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. TNI had no revenues in 1997. Its operating
loss for 1997 was $52,307. The revenues and operating loss of ATI
were $405,617 and $39,461, respectively, for the period from
January 1, 1997 to the date of its disposition, $673,995 and
$116,460, respectively, in 1996 and $427,445 and $631,391,
respectively, in 1995; and, the revenues and operating loss of
CCI were $22,546 and $23,394, respectively, in 1996 and
$92,842,and $282,356, respectively, in 1995.
EMPLOYEES.
As of December 31, 1997, the Company and its subsidiaries had
four employees. The Company makes extensive use of independent
contractors for accounting, legal, administration and sales and
marketing.
<PAGE> 12
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, 1997.
<TABLE>
<CAPTION>
Square Annual Lease
Entity Location Footage Rental Expiration Date
- ----------- ------------------- ------- -------- --------------
<S> <C> <C> <C> <C>
The Company 4707 140th Avenue N.
Suite 107
Clearwater, Florida 1,450 $19,478 05-31-98
NSC 4241 Piedras
San Antonio, TX (1) 4,429 47,832 11-30-00
</TABLE>
(1) As of December 31, 1997, the Company is in default of the lease
agreement due to non-payment. The total amount of past due lease
payments is approximately $40,000.
<PAGE> 13
ITEM 3. LEGAL PROCEEDINGS.
The Company is subject to various legal and administrative
proceedings. These proceedings include (i) a consent order executed
between the Company and the State of Michigan requiring the Company
to use its best efforts to satisfy the prerequisites of the
Securities and Exchange Commission and the Michigan Securities
Bureau for registering the common stock sold by the Company to
purchasers of its securities in the State of Michigan, (ii) actions
brought against the Company by certain former employees and persons
formerly under contract with the Company for payments allegedly due
them, (iii) an action by a shareholder seeking the rescission of
the sale by the Company of its common stock to the shareholder,
(iv) an action by an equipment lessor seeking approximately
$500,000 in lease payments and other charges due under a lease
agreement and (v) an action by the former stockholders of CCI.
These legal proceedings are more fully described in Note 14 to the
consolidated financial statements included elsewhere herein.
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 1997.
<PAGE> 14
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 OTC Bulletin Board and the over-the-counter market.
The following table sets forth the approximate high and low bid
quotations for the Company's Common Stock for each quarter during
the last two years. These bid quotations are inter-dealer prices
without retail markup, mark-down or commission, and may not
represent actual transactions.
Quarter ended High bid Low bid
- ------------- -------- -------
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
December 31, 1997 $ 0.34375 $ 0.1875
The high and low bid quotations for the Company's common stock on
March 31, 1998 were $0.24 and $0.23 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 March 31, 1998, the Company had 558 registered owners of
its common stock.
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial data of the
Company for each of the five years in the period ending December
31, 1997. This table should be reviewed in conjunction with the
consolidated financial statements of the Company and the notes
thereto appearing elsewhere herein.
<TABLE>
<CAPTION>
INCOME STATEMENT DATA:
Year Ended December 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
--------- ---------- --------- ------- -------
Net revenues $1,498,533 $ 2,832,123 $ 91,106 $ -- $ --
Loss from
continuing operations
before income taxes(1) (1,789,310) (20,488,639) (2,004,228) (78,233) --
Loss from continuing
operations (1,306,310) (17,934,489) (1,989,104) (78,233) --
Income(loss) from
operations of
discontinued
telecommunications
businesses (1) 391,752 (1,322,179) (3,818,921) (50,769) 338,909
Gain from disposition
of discontinued
telecommunication
businesses 397,392 -- -- -- --
--------- ---------- --------- --------- -------
Net income (loss) $(517,166) $(19,256,668) $(5,808,025) $(129,002) $338,909
========= ========== ========= ========= =======
Basic earnings per share:
Loss from continuing
operations $ (.12) $ (2.15) $ (0.58) $ (0.06) $ --
Income(loss) from
operations of
discontinued
telecommunications
businesses .03 (0.16) (1.23) (0.04) 0.41
Income(loss) from
disposition of
telecommunication
discontinued businesses .04 -- -- -- --
-------- ---------- --------- -------- -------
Net income (loss) $ (.05) $ (2.31) $ (1.81) $ (0.10) $ 0.41
======== ========== ========= ======== =======
Weighted average number
of common shares
outstanding 10,802,103 8,349,459 3,201,991 1,306,493 825,765
========== =========== ========= ========= =======
<PAGE> 16
BALANCE SHEET DATA (2):
December 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- ---------- ---------- -------- -------
Current assets $ 256,883 $ 1,403,881 $ 4,156,868 $ 442,069 $492,216
Current liabilities 6,728,193 7,908,138 5,417,864 652,107 13,335
Total assets 388,194 5,847,300 21,545,654 780,222 578,549
Long-term liabilities(3) 310,794 1,207,488 4,597,671 77,750 553,750
Common stock subject
to rescission(4) 674,124 709,124 789,624 -- --
Common stock to be
issued(5) -- 2,000,000 2,000,000 -- --
Stockholders' equity
(deficiency in assets) (7,324,917) (5,977,450) 8,740,495 50,365 11,464
(1) Includes impairment and other losses of $1,898,953 and
$14,233,953 in 1997 and 1996, respectively, applicable to
continuing operations and $194,901 and $2,758,779 in 1996 and
1995, respectively, applicable to operations of discontinued
telecommunications businesses. See Note 5 to the consolidated
financial statements appearing elsewhere herein.
(2) Includes the assets and liabilities of discontinued
telecommunications businesses. See Note 4 to the consolidated
financial statements appearing 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
appearing elsewhere herein for a description of common stock
subject to rescission.
(5) Consists of shares issuable in connection with business
acquisitions. See Note 4 to the consolidated financial statements
appearing elsewhere herein.
<PAGE> 17
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, 1997. The
results from continuing operations include the operations of NSC,
acquired in October 1995,and HMT, acquired in March 1996 and
disposed of by a rescission of the acquisition agreement in June
1997. The results from discontinued telecommunications businesses
include the operations of TNI (including the operations of LCI
and Comstar), ATI and CCI. These businesses were sold or
otherwise disposed of in 1996 and 1997. The following discussion
should be read in conjunction with the consolidated financial
statements and notes thereto appearing elsewhere herein.
Year Ended December 31,
------------------------------------
1997 1996 1995
----------- ---------- ---------
Operations of continuing businesses:
Net revenues $ 1,498,533 $ 2,832,123 $ 91,106
Cost of revenues 109,563 827,063 --
Selling and administrative
expenses 3,027,384 6,322,627 1,887,275
Impairment and other losses 1,898,953 14,233,953 --
Depreciation and amortization 497,377 1,459,436 148,192
Gain from sale of license agreement 2,695,214 -- --
Gain from rescission of business
acquisition 259,352 -- --
Interest income 4,070 8,183 3,777
Interest expense 587,884 381,975 63,644
Other income(expense), net (125,318) (103,891) --
Loss from continuing operations before
income taxes (1,789,310) (20,488,639)(2,004,228)
Operations of discontinued
telecommunications businesses:
Net revenues 405,617 2,177,858 2,893,778
Cost of revenues -- 1,320,256 2,014,460
Selling and administrative expenses 449,925 2,304,059 1,845,775
Impairment and other losses -- 194,901 2,758,779
Depreciation and amortization 47,460 291,291 311,135
Interest income -- 971 627
Interest expense 32,393 38,713 20,466
Other income (expense), net 755,913 832 4,288
Income (loss) from operations of
discontinued businesses
before income taxes 631,752 (1,971,223)(4,060,498)
The operating results of acquired businesses are well below those
which were anticipated at the time of the respective
acquisitions. As more fully discussed below, the business of TNI
was severely damaged by the actions of GECCS and News; and, the
revenues and results of operations of the Company's healthcare
businesses are less than anticipated at the time of their
respective acquisitions, principally due to higher levels of
spending on software and systems development and on sales and
marketing than originally anticipated (and limitations on the
part of the Company to continue to fund those collective
efforts).
<PAGE> 18
These factors, combined, have strained the financial resources
of the Company and required the Company to undertake
restructuring measures, which included, among other things,
the sale of the operating assets of TNI in January 1997 and
the rescission of the ATI and HMT acquisition agreements in May
and June 1997, respectively. For further discussion of the
impact of these events and uncertainties on future operations
and the Company's financial condition, see "Liquidity and Capital
Resources"
OPERATIONS OF BUSINESS ACQUIRED AND DISPOSED OF
The Company acquired various businesses in 1996 and 1995 and
disposed of various businesses in 1996 and 1997. The more
significant acquisitions were: TNI acquired in July 1995; NSC
acquired in October 1995; and, HMT acquired in March 1996.
Disposals of businesses included (i) the sale, in January 1997,
of the operating assets of TNI, (ii) the rescission, in May 1997,
of the ATI acquisition agreement and (iii) the rescission, in
June 1997, of the HMT acquisition agreement (see Note 4 to the
consolidated financial statements appearing elsewhere herein). As
a result of the disposition of all businesses included in the
Company's telecommunications segment, the operations of the
Company's telecommunications segment are shown as discontinued
operations in the accompanying consolidated statements of
operations for all periods presented.
For purposes of the following discussion, the operations of TNI
include the operations of TNI, LCI and Comstar. TNI, LCI and
Comstar 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.
In 1997, TNI had no revenues and its loss from operations was
$52,307. The net revenues and loss from operations of TNI were
$1,481,317 and $1,792,795, respectively, in 1996 and $2,373,491
and $3,122,621 (including impairment losses of $2,758,779),
respectively, for the period from the date of its acquisition by
the Company (July 7, 1995) to December 31, 1995. TNI's operating
results for the periods subsequent to the date of acquisition
were adversely affected by (i) the failure of GECCS and News to,
among other things, provision customer accounts for
telecommunications products offered by GECCS/News and sold by TNI
pursuant to a contractual agreement among TNI, GECCS and News
(the "GECCS Agreement"), (ii) the cancellation of TNI customers
by GECCS and News, (iii)the failure of GECCS/News to properly
bill and collect revenues due to TNI and (iv) a diminution of
TNI's marketing and distribution organization as a result of such
failures and other actions taken by GECCS and News. TNI, as
claimant in a binding arbitration proceeding against GECCS and
News, was awarded damages under the GECCS Agreement in the amount
of approximately $1,250,000. The award, which was entered on
October 10, 1996, was appealed by GECCS to the U.S. District
Court for the Northern District of Georgia on the grounds that
the arbitrators exceeded their powers by awarding TNI damages
under the GECCS Agreement. On September 30, 1997, the U.S.
District Court confirmed the award; and, a motion for summary
judgment was entered on October 1, 1997. On December 24, 1997,
the Company, GECCS and News entered into a Confidential
Settlement Agreement and Mutual Full and Final
<PAGE> 19
Releases (the "Settlement Agreement"). Pursuant to the Settlement
Agreement, GECCS\News paid $1,250,000 in full satisfaction of the
arbitration award. Of that amount, the Company received
approximately $750,000, which is net of legal fees. The net
proceeds from the Settlement Agreement were used to pay trade and
other obligations. The net proceeds from the Settlement Agreement
are reflected in income (loss) from discontinued operations in
the accompanying consolidated statement of operations for the
year ended December 31, 1997.
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
$1,481,317 in 1996. This decrease is principally the result of
reduced revenues from the GECCS Agreement. The operating loss of
TNI was $343,842 in 1995 (before $2,758,779 of impairment losses)
compared to $1,792,795 in 1996. The increase in TNI's operating
loss (before impairment losses) 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.
In 1997 NSC had net revenues of $187,478 and an operating loss of
$1,348,679. NSC's operating loss for the year ended December 31,
1997 reflects impairment and other losses of approximately
$892,000. Excluding these items, NSC's 1997 operating loss would
have been approximately $457,000. The net revenues and operating
loss of NSC were $1,574,825 and $16,275,288 , respectively, in
1996 and $91,106 and $363,857 respectively, for the period from
the date of its acquisition by the Company (October 27, 1995) to
December 31, 1995. The loss from operations of NSC in 1996
includes one-time charges of $14,233,953, to write-off, as of
December 31, 1996, the unamortized cost of intangibles and
goodwill recorded by the Company in connection with its
acquisition of NSC. The write-off of the unamortized cost of
goodwill and intangibles recorded in connection with the
acquisition of NSC is due to the failure of NSC to successfully
market its healthcare management information systems technology,
the likelihood that NSC may not be able to market such technology
in the future without further significant capital investment and
the likelihood of the Company being able to provide NSC with
additional capital investment (see "Liquidity and Capital
Resources"). The decrease in NSC net revenues from 1996 to 1997
is the result of the termination of the Chrysler service
agreement, effective in September 1997, due to performance issues
between Chrysler and HMS, NSC's subcontractor, the expiration of
the Ford Motor Company services agreement by its terms, effective
March 31, 1997, and lower healthcare claim recoveries under the
service agreements from period to period. NSC's operating loss
decreased from 1996 to 1997 due principally to the elimination of
NSC' corporate offices, lower management compensation as a result
of the retirement of founding management and the suspension of
software development activities due to cash flow constraints.
<PAGE> 20
The net revenues and loss from operations of HMT were $1,311,055
and $153,656, respectively, for the period from January 1, 1997
to the date of the rescission of the HMT acquisition agreement
and $1,257,298 and $828,895, respectively, for the period from
the date of its acquisition by the Company to December 31, 1996.
HMT's 1997 net revenues reflect sales to one customer totaling
approximately $800,000. HMT's operating losses during the periods
principally reflect amortization of intangibles and goodwill
recorded in connection with the acquisition and spending for new
product development.
The revenues and operating losses of ATI were $405,617 and
$39,461, respectively, for the period from January 1, 1997 to the
date of disposition, $673,995 and $116,460, respectively, in
1996, and $427,445 and $289,791, respectively, in 1995. The
increasing trend in revenues reflects the introduction of ATI's
OSP and PPV services, beginning in 1996, into the Mexican
hospitality market. Similarly, operating losses have decreased
from period to period due to higher OSP and PPV revenues from
Mexico which carry higher profit margins when compared to margins
from domestic sales.
NET REVENUES
Net revenues for each of the three years in the period ending
December 31, 1997 are summarized as follows:
1997 1996 1995
---------- ---------- ----------
Net revenues from operations of
continuing businesses $ 1,498,533 $2,832,123 $ 91,106
Net revenues from discontinued
telecommunications businesses 405,617 2,177,858 2,893,778
---------- ---------- ----------
$ 1,904,150 $5,009,981 $2,984,884
========== ========== ==========
The decrease in net revenues from operations of continuing
businesses from 1996 to 1997 is the result of lower NSC revenues,
offset by higher HMT revenues. See "Operations of Businesses
Acquired and Disposed Of." The decrease in net revenues from
discontinued telecommunications businesses is the result of the
sale of the operating assets of TNI in January 1997 and the
disposition of ATI in May 1997.
The increase in net revenues from operations of continuing
businesses from 1995 to 1996 is the result of the acquisitions of
HMT and NSC. HMT contributed $1,257,298 to this increase and NSC
contributed $1,483,719. HMT was acquired in March 1996 and NSC
was acquired in October 1995. The decrease in net revenues from
discontinued telecommunications businesses from 1995 to 1996 is
due to lower revenues from the GECCS Agreement, offset by an
increase in net revenues of approximately $177,000 from the
Company's PPV business, principally in Mexico.
<PAGE> 21
COST OF REVENUES
Cost of revenues applicable to continuing operations in 1997
declined substantially as compared to 1996. This decrease is
attributable to lower healthcare claim recoveries under the
Chrysler and Ford Motor Company service agreements and final
revenue adjustments recorded in connection with the Chrysler and
Ford Motor Company service agreements. See "Operations of
Businesses Acquired and Disposed Of."
Cost of telecommunications revenues generally consists of the cost
of long-distance services sold by TNI under the GECCS Agreement. In
1997, no revenues were generated under that agreement. In addition,
the operating assets of TNI were sold in January 1997. See
"Operations of Businesses Acquired and Disposed Of."
The cost of revenues from discontinued telecommunications
businesses in 1996 was 61% of net revenues from discontinued
telecommunications businesses compared to 70% in 1995. This
decrease is the result of product mix changes, which included
lower revenues from the resale of domestic telecommunication
services under the GECCS Agreement and higher revenues from the
sale of pay-per-view and related telecommunication products to
the hospitality industry, principally in Mexico.
Cost of revenues from discontinued telecommunications businesses
was $2,014,460 in 1995 compared to $134,607 in 1994. This
increase was principally due to the acquisition of TNI and the
inclusion of the cost of long distance services sold by TNI in
the cost of telecommunications revenues. In 1995, the Company
also made a provision of $145,776 to reduce the value of obsolete
PPV equipment to net realizable value. Prior to 1995, the cost of
telecommunication revenues principally reflected the cost of PPV
installation, only.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses applicable to operations of
continuing businesses decreased from $6,322,627 in 1996 to
3,027,384 in 1997. This decrease principally reflects cost
reduction measures undertaken as a result of continued operating
losses and the effect from period to period of the disposition of
HMT. See "Operations of Businesses Acquired and Disposed Of".
Selling and administration expenses applicable to operations of
continuing businesses increased by $4,093,749 in 1996 over 1995.
This increase 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.
<PAGE> 22
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 were $449,925 in 1997, $2,304,059
in 1996, $1,845,775 in 1995 and $649,036 in 1994. The decrease in
1997 as compared to 1996 is due to the discontinuance of TNI's
operations and the rescission of the ATI acquisition agreement
and the increases in 1996 over 1995 and in 1995 over 1994 are due
to the acquisition of TNI. See "Operations of Businesses Acquired
and Disposed Of".
IMPAIRMENT AND OTHER LOSSES
Impairment and other losses recognized in 1997 include (i) the
write-off equipment under capital lease and certain other assets
related to equipment under lease from Boston Financial
Corporation totaling $768,545, (ii) provisions for loss
contingencies totaling $437,335 related to office space, which
has been vacated, leased equipment that the Company is no longer
using and settlement of actions brought against the Company by
Timboon, LTD and (iii) the write-off of $625,728 of deferred
compensation assets. See Note 5 to the consolidated financial
statements appearing elsewhere herein.
In 1996, the Company recognized impairment losses applicable to
operations from continuing businesses of $13,806,557, net of a
tax benefit of $427,396, to write off the unamortized cost, as of
December 31, 1996, of intangibles and goodwill recorded in
connection with the acquisition of NSC. The write-off of the
unamortized cost of goodwill and intangibles recorded in
connection with the acquisition of NSC is due to the failure of
NSC to successfully market its healthcare management information
systems technology, the likelihood that NSC may not be able to
market such technology in the future without further significant
capital investment and the likelihood of the Company being able
to provide NSC with additional capital investment (see "Liquidity
and Capital Resources").
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.
<PAGE> 23
As of December 31, 1995, the Company recognized a charge to
income of $2,758,779 to write off, with no associated income tax
benefit, all of the goodwill related to its acquisition of TNI.
This write-off, which is included in the operations of
discontinued telecommunications businesses in the consolidated
statement of operations for the year ended 1995, 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 more fully discussed herein and in the Notes to the
consolidated financial statements, the Company was awarded
approximately $1,250,000 in a binding arbitration proceeding with
GECCS/News. The arbitration award was confirmed by the United
States District Court, Northern District of Georgia on September
30, 1997 and the Company's motion for summary judgment was
entered October 1, 1997. On December 24, 1997, the Company, GECCS
and NEWS entered into a Confidential Settlement Agreement and
Mutual Full and Final Releases (the "Settlement Agreement").
Pursuant to the Settlement Agreement, GECCS\NEWS paid $1,250,000
in full satisfaction of the arbitration award granted to the
Company. Of that amount, the Company received approximately
$750,000, which is net of legal fees. The proceeds from the
Settlement Agreement were used to pay trade and other obligations
of the Company, including $468,000 of notes and debentures
payable.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization applicable to continuing operations
decreased by $962,059 in 1997 as compared to 1996. The decrease
principally reflects the write-off, effective as of December 31,
1996, of the goodwill and intangibles recorded in connection with
the acquisition of NSC.
Depreciation and amortization applicable to both operations of
continuing businesses and operations of discontinued
telecommunications businesses increased in 1996 over 1995 and in
1995 over 1994. These increases are principally due to the
amortization of intangibles and goodwill arising from business
acquisitions and a higher investment in furniture and equipment.
INTEREST EXPENSE
Interest expense applicable to both operations of continuing
businesses and operations of discontinued telecommunications
businesses totaled $620,277, $420,688 and $84,110 in 1997, 1996
and 1995, respectively. The increases from period-to-period in
interest expense are principally due to higher levels of average
borrowings outstanding during the periods and an increase in the
average effective rate on borrowings outstanding during 1997 as
compared to 1996.
OTHER ITEMS
In 1997, the Company recognized gains of approximately $2,695,000
and $259,000, respectively, from the sale of a license agreement
to the founding management of NSC and from the rescission of the
HMT acquisition agreement. See Note 4 to the consolidated
financial statements. The Company also incurred $120,000 of
financing fees in connection with the issuance of its 4%
convertible debentures.
<PAGE> 24
INCOME TAXES
Income tax benefits applicable to continuing operations were
30.0%, 12.5% and 0.75% of pre-tax loss from continuing operations
in 1997, 1996 and 1995, respectively. The principal reasons for
the differences between the effective income tax rates during the
periods and the Federal statutory rate of 46% were the changes
during each year in the net deferred income tax valuation
allowance, the tax effects from the rescission of business
acquisitions and impairment losses recognized in 1996. No
provisions for taxes currently payable were made in 1997, 1996 or
1995. As of December 31, 1997, the Company's deferred income tax
assets exceeded its deferred tax liabilities by $3,967,200, for
which the Company has provided a valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
Over the past three years the principal sources of liquidity have
been derived from financing activities. In 1997, 1996 and 1995,
the Company received cash of approximately $232,000, $2.2 million
and $4.1 million, respectively, from the issuance of 205,556
shares, 413,668 shares and 1,477,874 shares, respectively, of its
common stock in reliance upon exemptions under Regulation D of
the Securities Act of 1933 and approximately $1.6 million, $2.4
million and $475,000, respectively, from the issuance of notes
and debentures payable. In 1997, the Company also received cash
of approximately $371,000 from the disposition of businesses, net
of cash of businesses disposed of.
The proceeds from financing activities were used principally to
fund operating losses. In 1997, 1996 and 1995, the Company used
cash of approximately $1.4 million, $4.2 million and $1.8
million, respectively, in operating activities. See the
consolidated statements of cash flows. The other principal uses
of cash during these periods were capital expenditures of
approximately $553,000 and $132,000 in 1996 and 1995,
respectively, and cash of approximately $1.4 million used to
acquire NSC. In addition, during 1997, 1996 and 1995, the Company
made payments on notes and debentures payable of approximately
$687,000, $638,000 and $263,000, respectively.
Significant debt financing transactions during 1997, 1996 and
1995 were the issuance in February 1997 of $1,120,000 4%
convertible debentures due October 1, 1998 to Timboon, LTD
("Timboon",a non U.S. person) in reliance upon exemptions under
Regulation S of the Securities Act of 1933 and the issuance in
1996 of (i) a series of 10% cumulative convertible debentures,
due on various dates through November 1997, issued in reliance
upon exemptions under Regulation D of the Securities Act of 1933
and (ii) $500,000 10% cumulative convertible debentures, due in
November 1997, issued to RANA Investment Company ("RANA") and an
affiliate of RANA (non U.S. persons) in reliance upon exemptions
under Regulation S of the Securities Act of 1993. During 1997,
1996 and 1995, the Company also received proceeds of $286,743,
$562,735 and $475,349 from the issuance of notes and debentures
payable to officers, directors and shareholders of the Company.
<PAGE> 25
The 4% cumulative convertible debentures due October 1, 1997 are
convertible at any time after 45 days from the date of their
issuance, until maturity, into the Company's common stock at a
conversion price equal to the lesser of (a) 80% of the average
closing bid price of the Company's common stock for the five days
preceding the issuance of the debentures or (b) 70% of the
average closing bid price of the Company's common stock for the
five days preceding the conversion date. The Company incurred
costs in connection with this financing of $120,000 and received
net proceeds of $1,000,000. The Company, through December 31,
1997, converted $120,000 of the 4% Debentures issued to Timboon
into 256,361 shares of the Company's common stock. As a result of
the Company's refusal to convert additional debentures, Timboon,
LTD filed suit against the Company seeking the conversion or
payment of the debentures. The Company also filed a counterclaim
against Timboon alleging that Timboon breached the
representations and covenants it made in the Off-Shore Securities
Subscription Agreement. Effective March 2, 1998, the Company and
Timboon entered into a Settlement Agreement and Release (the
"Settlement Agreement") in settlement of all claims brought
against each other in connection with the 4% Debentures. Pursuant
to the Settlement Agreement, the Company is required to pay
Timboon $1,200,000, in cash, or by the liquidation by Timboon of
shares of the Company's common stock into which the 4% Debentures
are convertible. The Settlement Agreemment also provided that the
Company designate 4,000,000 shares of its common stock, to be
held in escrow, for liquidation by Timboon pursuant to the terms
of an escrow agreement.
The 10% cumulative convertible debentures due on various dates
through November 1997 are convertible into shares of the Company's
common stock on their respective maturity dates or on the effective
date of a registration statement under the Securities Act of 1993,
if earlier. The number of shares of common stock issuable upon
conversion of these debentures, in either case, 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
maturity date as set forth in the respective debenture. The Company
has been informed that $845,000 of these convertible debentures
have been assigned to persons residing in the State of Michigan.
The Company believes the shares issuable to the assignees of the
Company's 10% cumulative convertible debentures upon conversion may
violate the terms and conditions of the consent order entered into
between the Company and the State of Michigan (see Note 14 to the
consolidated financial statements). The Company has not made a
final determination as to the conversion rights of such assignees.
As a result of the Company not having converted these debentures on
their respective maturity dates, the Company is in default of the
terms of the debentures.
The 10% cumulative convertible debentures due in November 1997
are convertible into shares of the Company's common stock at any
time after 45 days from the date of their issuance and prior to
their scheduled one-year maturity dates. The conversion price of
these debentures, plus accrued and unpaid interest, is equal to
the lesser of (a) 70% of the average closing bid price of the
Company's common stock for the five days preceding the conversion
date or (b)80% of the average closing bid price of the Company's
common stock for the five days prior to issuance of the
debentures. In connection with the issuance of these debentures,
the Company incurred placement fees and other costs of
approximately $50,000 and received net proceeds of approximately
$450,000. As of December 31, 1997, the Company has converted
$330,000 of these debentures into 93,301 shares of the Company's
common stock and has outstanding unconverted debentures totaling
$170,000. The Company is in default of the terms of the unconverted
debenture outstanding at December 31, 1997 by virtue of not having
converted the debenture on its maturity date.
<PAGE> 26
The terms of notes and debentures outstanding at December 31,
1997, are more fully described in Note 7 to the consolidated
financial statements.
The amount of financing necessary to continue to support the
operations and capital needs of businesses acquired, the
continuing operating losses of businesses acquired, the lack of
equity and debt financing available to the Company (together with
the inability of the Company to meet its funding obligations
under the HMT acquisition agreement and its payment obligations
to trade and other creditors), and the desire of the former
shareholders of ATI and HMT to rescind the original purchases
transactions, among other factors, led to management's decision
to dispose of ATI and HMT and sell substantially all of the
operating assets of TNI. After the rescission of the ATI and HMT
acquisitions and the sale of the operating assets of TNI, the
remaining operations of the Company consist of NSC. NSC has
incurred substantial operating losses since its acquisition by
the Company in October 1995 and there is no assurance that NSC
will be able to reverse this trend in the future.
Other factors that may affect the future liquidity needs of the
Company, include (i) pending litigation, (ii) judgments currently
outstanding against the Company and its subsidiaries totaling
approximately $173,000 at December 31, 1997, (iii) the summary
judgment in the amount of $500,000 awarded in arbitration on
February 3, 1998 to the former shareholders of CCI, (iv)
outstanding guarantees by the Company of certain equipment lease
obligations of ATI, and (v) the obligation of the Company to make
a rescission offer to Michigan purchasers of its common stock
pursuant to a consent order executed by the Company and the State
of Michigan in December 1996. These factors are more fully
described in Note 14 to the consolidated financial statements.
As of December 31, 1997, the Company has a deficiency in assets
of approximately $7.3 million and current liabilities exceeded
current assets by approximately $6.5 million. In addition, as of
December 31, 1997, the Company does not have any used or unused
lines of credit or any other committed and unused financing
facilities. Consequently, it is uncertain whether or not the
Company will have sufficient cash resources, either from
operations or from financing activities, to carry on its business
operations, in which case the Company would be required to seek
other alternatives, including sale, merger or discontinuance of
operations.
<PAGE> 27
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("SFAS NO. 130"), which is effective for
fiscal years beginning after December 15, 1997. SFAS No. 130
establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-
purpose financial statements. Although SFAS No. 130 only impacts
display as opposed to actual amounts recorded, it represents a
change in financial reporting. 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.
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> 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Independent Auditors' Report on the Consolidated Financial
Statements for the year ended December 31, 1997 29
Independent Auditors' Report on the Consolidated Financial
Statements for the year ended December 31, 1996 and 1995 30
Consolidated Balance Sheets as of December 31, 1997 and 1996 31
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 1997 33
Consolidated Statements of Changes in Stockholders' Deficit
for each of the three years ended in the period
December 31, 1997 34
Consolidated Statements of Cash Flows for each of the three
years ended in the period December 31, 1997 36
Notes to Consolidated Financial Statements 37
<PAGE> 29
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Systems Communications, Inc.
Clearwater, Florida
We have audited the consolidated balance sheet of Systems
Communications, Inc. and Subsidiaries as of December 31, 1997, and
the related consolidated statement of operations, changes in
stockholders' deficit and cash flows for the year then ended. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Systems Communications, Inc. and Subsidiaries
at December 31, 1997, and the consolidated results of their
operations and their cash flows for the year ended December 31,
1997, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been
prepared assuming that Systems Communications, Inc. and
Subsidiaries will continue as a going concern. As more fully
described in Note 3, the Company has incurred operating losses
during each of the years in the three-year period ended December
31, 1997, and has a working capital deficiency and stockholders'
equity deficiency at December 31, 1997. In addition, the Company
has not complied with certain repayment terms of loan agreements
and currently has no source of significant operating revenues.
These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial
statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result
from the outcome of this uncertainty.
/s/ Moore Stephens Lovelace, P.L.
Orlando, Florida
May 8, 1998
<PAGE> 30
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Systems Communications, Inc.
We have audited the accompanying consolidated balance sheet of
Systems Communications, Inc. and Subsidiaries as of December 31,
1996 and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the two years in
the period ended December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial
position of Systems Communications, Inc. and Subsidiaries at
December 31, 1996, and the consolidated results of their operations
and their cash flows for each of the two years in the period ended
December 31, 1996, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been
prepared assuming that Systems Communications, Inc. and
Subsidiaries will continue as a going concern. As more fully
described in Note 3, the Company has incurred operating losses
during each of the years in the two-year period ended December 31,
1996, and has a working capital deficiency and stockholders' equity
deficiency at December 31, 1996. In addition, the Company has not
complied with certain repayment terms of loan agreements. These
conditions raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial statements
do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the
amounts and classification of liabilities that may result from the
outcome of this uncertainty.
/s/ Ernst & Young LLP
Tampa, Florida
December 24, 1997
<PAGE> 31
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 65,556 $ 61,039
Accounts receivable, less allowance for
doubtful accounts of $28,074 in 1996 -- 802,079
Notes and accounts receivable from officers
and employees 60,908 102,000
Other current assets 130,419 438,763
--------- --------
Total current assets 256,883 1,403,881
--------- ---------
Furniture and equipment 130,162 1,812,867
Less accumulated depreciation (56,774) (587,598)
--------- ---------
Net furniture and equipment 73,388 1,225,269
Note receivable from the sale of assets, less
allowance of $500,000 in 1997 -- --
Deferred compensation 52,941 662,199
Intangible assets, net of accumulated amortization
of $566,666 in 1996 -- 1,083,334
Excess of cost over fair value of net assets
acquired, net of accumulated amortization of
$75,034 in 1996 -- 1,298,950
Other non-current assets 4,982 173,667
--------- ---------
Total assets $ 388,194 $ 5,847,300
========= =========
See Notes to Consolidated Financial Statements
<PAGE> 32
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
DECEMBER 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Borrowings under lines of credit $ -- $ 182,651
Current portion of notes and debentures payable 3,361,700 3,180,758
Current portion of obligations under capital lease -- 242,477
Accounts payable 535,516 1,452,192
Accrued compensation and employee benefits 1,176,578 1,528,153
Accrued interest 497,514 286,312
Liabilities and accruals for claims, assessments
and other losses 1,129,823 --
Other current liabilities 27,062 595,363
Deferred revenue -- 440,232
---------- ----------
Total current liabilities 6,728,193 7,908,138
---------- ----------
Obligations under capital lease, less current portion -- 458,654
Deferred liabilities under employment agreements 310,794 676,261
Other liabilities -- 72,573
---------- ----------
Total liabilities 7,038,987 9,115,626
---------- ----------
Common stock subject to rescission 674,124 709,124
---------- ----------
Common stock to be issued -- 2,000,000
---------- ----------
Commitments and contingencies
Stockholders' deficit:
Class A convertible preferred stock, stated value
and liquidation preference - $1.00 per share;
authorized 5,000,000 shares, issued and
outstanding 192,000 shares in 1996 -- 630
Class B convertible preferred stock, stated value
and liquidation preference - $1.00 per share;
authorized 10,000,000 shares, issued and
outstanding 2,953,125 shares in 1997 and
4,550,000 shares in 1996 1,617,260 2,491,745
Common stock - $.001 par value; authorized
50,000,000 shares, issued and outstanding
12,083,646 shares in 1997 and 10,626,874
shares in 1996 12,084 10,627
Additional paid in capital 16,866,883 16,823,526
Accumulated deficit (25,821,144) (25,303,978)
---------- ----------
Total stockholders' deficit (7,324,917) (5,977,450)
---------- ----------
Total liabilities and stockholders' deficit $ 388,194 $ 5,847,300
========== ==========
See Notes to Consolidated Financial Statements
<PAGE> 33
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
---------------------------------------
1997 1996 1995
---------- ---------- -----------
<S> <C> <C> <C>
Net revenues $ 1,498,533 $ 2,832,123 $ 91,106
---------- ---------- -----------
Costs and expenses:
Cost of revenues 109,563 827,063 --
Selling and administrative expenses 3,027,384 6,322,627 1,887,275
Impairment and other losses 1,898,953 14,233,953 --
Depreciation and amortization 497,377 1,459,436 148,192
---------- ---------- ----------
Total operating costs and expenses 5,533,277 22,843,079 2,035,467
---------- ---------- ---------
(4,034,744) (20,010,956) (1,944,361)
Gain from sale of license agreement 2,695,214 -- --
Gain from rescission of business
acquisition 259,352 -- --
Interest income 4,070 8,183 3,777
Interest expense (587,884) (381,975) (63,644)
Other income (expense), net (125,318) (103,891) --
---------- ---------- ---------
Loss from continuing operations before
income taxes (1,789,310) (20,488,639) (2,004,228)
Income tax benefit (483,000) (2,554,150) ( 15,124)
---------- ---------- ---------
Loss from continuing operations (1,306,310) (17,934,489) (1,989,104)
Discontinued operations:
Income (loss) from operations of
discontinued telecommunications
businesses, less income tax expense
(benefit) of $240,000, ($649,044)
and ($241,577) in 1997, 1996 and
1995, respectively 391,752 ( 1,322,179) (3,818,921)
Gain from disposition of
telecommunication businesses, less
income tax expense of $243,000 397,392 -- --
---------- ----------- ---------
Net loss $ (517,166) $(19,256,668) $(5,808,025)
========== ========== =========
Basic earnings per share:
Loss from continuing operations $ (.12) $ (2.15) $ (0.58)
Income (loss) from operations of
discontinued telecommunications
businesses .03 (0.16) (1.23)
Gain from disposition of
telecommunications businesses .04 -- --
---------- ----------- ----------
Net loss $ (.05) $ (2.31) $ (1.81)
========== ========== ==========
Weighted average number of
common shares outstanding 10,802,103 8,349,459 3,201,991
========== ========== ==========
See Notes to Consolidated Financial Statements
<PAGE> 34
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
CLASS A CLASS B
PREFERRED PREFERRED COMMON STOCK
------------------ -------------------- ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------- --------- --------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 1,700,000 $ -- -- $ -- 2,797,485 $ 2,798
Issuance of common stock and warrants
for cash -- -- -- -- 1,477,874 1,478
Issuance of stock as compensation 1,525,000 20,625 -- -- 1,053,090 1,053
Issuance of stock and warrants in
consideration for extension of
related party indebtedness -- -- 140,000 236,600 -- --
Issuance of stock and warrants in
connection with business acquisitions 1,575,000 157,500 4,550,000 2,491,745 2,339,765 2,339
Reclassification of common stock
subject to rescission -- -- -- -- (242,416) (242)
Net loss -- -- -- -- -- --
--------- ------- --------- --------- ---------- ------
Balance at December 31, 1995 4,800,000 178,125 4,690,000 2,728,345 7,425,798 7,426
Issuance of common stock and warrants
for cash -- -- -- -- 413,688 414
Conversion of preferred stock (4,408,000)(177,495) (140,000) (236,600) 2,254,910 2,255
Issuance of common stock as
compensation -- -- -- -- 41,754 42
Issuance of common stock in connection
with business acquisitions -- -- -- -- 283,172 283
Issuance of stock for debt -- -- -- -- 207,552 207
Rescission of business acquisitions (200,000) -- -- -- -- --
Net loss -- -- -- -- -- --
--------- ------- --------- --------- ---------- ------
Balance at December 31, 1996 192,000 630 4,550,000 2,491,745 10,626,874 10,627
Issuance of common stock and warrants
for cash -- -- -- -- 205,556 206
Conversion of preferred stock (192,000) (630)(1,596,875) (874,485) 676,682 677
Issuance of common stock as
compensation -- -- -- -- 1,000,857 1,001
Issuance of stock for debt -- -- -- -- 577,421 577
Rescission of business acquisitions -- -- -- -- (994,247) (994)
Repayment of loan to officer -- -- -- -- (9,497) (10)
Net loss -- -- -- -- -- --
--------- ------- --------- --------- ---------- -----
Balance at December 31, 1997 -- $ -- 2,953,125 $1,617,260 12,083,646 $12,084
========= ======= ========= ========= ========== =======
See Notes to Consolidated Financial Statements
<PAGE> 35
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT(Continued)
Additional
Paid-In Accumulated
Capital Deficit Total
---------- ---------- ----------
<S> <C> <C> <C>
Balance at December 31, 1994 $ 286,852 $ (239,285) $ 50,365
Issuance of common stock and warrants
for cash 4,109,409 -- 4,110,887
Issuance of stock as compensation 430,095 -- 451,773
Issuance of stock and warrants in
consideration for extension of
related party indebtedness 105,000 -- 341,600
Issuance of stock and warrants in
connection with business acquisitions 7,731,935 -- 10,383,519
Reclassification of common stock
subject to rescission (789,382) -- (789,624)
Net loss -- (5,808,025) (5,808,025)
---------- ---------- ----------
Balance at December 31, 1995 11,873,909 (6,047,310) 8,740,495
Issuance of common stock and warrants
for cash 2,186,859 -- 2,187,273
Conversion of preferred stock 411,840 -- --
Issuance of common stock as
compensation 260,151 -- 260,193
Issuance of common stock in connection
with business acquisitions 1,891,824 -- 1,892,107
Issuance of stock for debt 198,943 -- 199,150
Rescission of business acquisitions -- -- --
Net loss -- (19,256,668) (19,256,668)
---------- ---------- ----------
Balance at December 31, 1996 16,823,526 (25,303,978) ( 5,977,450)
Issuance of common stock and warrants
for cash 231,294 -- 231,500
Conversion of preferred stock 874,438 -- --
Issuance of common stock as
compensation 383,234 -- 384,235
Issuance of stock for debt 715,741 -- 716,318
Rescission of business acquisitions (2,105,005) -- (2,105,999)
Repayment of loan to officer (56,345) -- (56,355)
Net loss -- (517,166) (517,166)
---------- ---------- ----------
Balance at December 31, 1997 $16,866,883 $ (25,821,144) $ (7,324,917)
========== ========== ==========
See Notes to Consolidated Financial Statements
<PAGE> 36
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
---------------------------------------
1997 1996 1995
---------- ---------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (517,166) $(19,256,668) $(5,808,025)
Adjustments to reconcile net loss to
net cash used in operations:
Depreciation and amortization 544,839 1,750,727 459,327
Amortization of deferred compensation, net (125,503) (16,552) 61,819
Provision for bad debts 39,816 522,687 181,753
Provision for inventory obsolescence -- -- 145,776
Stock and warrants issued for compensation
and as consideration for extension of debt 384,235 260,193 793,373
Deferred income taxes -- (3,203,194) (256,699)
Impairment losses 1,898,953 14,428,854 2,758,779
Gain from sale of license agreement (2,695,214) -- --
Gain from rescission of business acquisition (259,352) -- --
Gain from disposition of telecommunications
businesses (640,392) -- --
Increase (decrease) in cash from change
in operating assets and liabilities:
Accounts receivable 148,912 214,330 317,161
Equipment inventories -- 73,211 (80,091)
Deferred expenses -- 498,697 (92,130)
Other assets 52,252 67,037 (42,702)
Accounts payable (484,304) (39,308) (430,448)
Accrued expenses and other liabilities 401,166 1,060,019 224,948
Deferred revenue (109,957) (553,982) 5,937
---------- ---------- ---------
Net cash used in operating activities (1,361,719) (4,193,949) (1,761,222)
---------- ---------- ---------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired -- (46,854) (1,428,312)
Disposition of businesses, net of cash disposed of 370,844 -- --
Expenditures for furniture and equipment (7,693) (552,718) (131,744)
Notes receivable from officers and employees -- (50,000) (52,000)
Acquisition of other assets -- -- (64,852)
---------- ---------- -----------
Net cash provided by (used in) investing activities 363,151 (649,572) (1,676,908)
---------- ---------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 231,500 2,187,273 4,110,887
Proceeds from notes and debentures payable 1,568,443 2,422,752 475,349
Payments on notes payable and capital leases (686,858) (637,596) (262,814)
Payments on shares subject to rescission (35,000) (80,500) --
Proceeds from (payments on) borrowings under line of
credit (75,000) 47,917 (2,100)
---------- ---------- ---------
Net cash provided by financing activities 1,003,085 3,939,846 4,321,322
---------- ---------- ---------
Net increase (decrease) in cash 4,517 (903,675) 883,192
Cash and cash equivalents at beginning of the year 61,039 964,714 81,522
---------- ---------- ---------
Cash and cash equivalents at end of the year $ 65,556 $ 61,039 $ 964,714
========== ========== =========
See Notes to Consolidated Financial Statements
<PAGE> 37
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 FORMATION OF THE COMPANY AND DESCRIPTION OF BUSINESS
Systems Communications, Inc. (the "Company") was organized as
Florida One Capital Corporation in 1987 and in 1988 made an initial
public offering of its common stock as a blank check company for
the purpose of acquiring other companies. During 1990 and 1991, the
Company acquired and divested companies engaged in the eye glass
distribution and residential building industries and for a brief
period of time, operating under the name of Highland Healthcare
Corporation, was under the control of another publicly-owned blank
check company formed for the purpose of acquiring healthcare
related businesses. During the period from the fall of 1991 to the
date of the first acquisition described below, the Company had no
operations or assets and was dormant. During the period 1994
through 1997, the Company acquired and disposed of various
businesses and currently has one operating subsidiary ( "National
Solutions Corporation"). The acquisition and disposition of
businesses during this period are more fully described herein.
In 1994, the Company changed its name from Highland Healthcare
Corporation to Systems Communications, Inc. and, effective August
29, 1994, acquired all of the outstanding stock of (i) Ameristar
Telecommunications, Inc. ("ATI"), a re-seller of long-distance and
pay-per-view services and products, principally to the hospitality
industry, and (ii) Coast Communications, Inc. ("CCI"), whose
principal business is the installation and servicing of pay-per-
view equipment. The Company identified ATI as the accounting
acquirer and accounted for the transaction as a purchase business
combination.
Effective June 1, 1995, the Company completed the acquisition of
all of the outstanding stock of LCI Communications, Inc. ("LCI"), a
re-seller of telecommunication services, from a Director and
executive officer of the Company (a person designated as a
"promoter/shareholder" of the Company). The net assets acquired
were recorded at the promoter/shareholder's historical cost basis.
Effective June 12, 1995, the Company acquired all of the
outstanding stock of Comstar Network Services, Inc. ("Comstar"), a
re-seller of long-distance telephone services.
Effective July 7, 1995, the Company acquired all of the outstanding
stock of Telcom Network, Inc. ("TNI"), a re-seller of
telecommunications services and products, principally to
residential and small business customers. TNI also audits utility
and telecommunications payments and provides cost recovery services
to its customers (large and small businesses and governmental
entities) for a percentage of recovered savings.
Effective October 27, 1995, the Company acquired all of the
outstanding stock of National Solutions, Inc. ("NSC"). The
principal business of NSC is to (i) develop, for commercial use,
healthcare management information systems technology acquired from
the U.S. Government pursuant to the Federal Technology Transfer Act
of 1986, as amended, and (ii) sell the benefits from the use of
such technology to large, self-insured companies, insurers, third
party administrators ("TPA's"), health maintenance organizations
("HMO's") and healthcare plan administrators. To date, the
Company's revenues have been derived primarily from retroactive
analysis of claims paid using the services of subcontractors, with
respect to which the Company has received a percentage of the
recovered savings.
<PAGE> 38
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. The abandonment of CCI is
subject to an arbitration proceeding initiated by the former
shareholders of CCI (see Notes 4 and 14).
In January 1997, the Company sold substantially all of the
operating assets of TNI. As of that date, the only remaining
significant asset of TNI consisted of the arbitration award in the
amount of $1,250,000 granted to TNI in a binding arbitration
proceeding between and among TNI, GE Capital Communications
Services Corporation ("GECCS") and New Enterprise Wholesale
Services, Limited Partnership ("NEWS"). On December 24, 1997, the
Company, GECCS and NEWS entered into a Confidential Settlement
Agreement and Mutual Full and Final Releases (the "Settlement
Agreement") regarding the arbitration award in favor of the
Company. Pursuant to the Settlement Agreement, GECCS\NEWS paid
$1,250,000 in full satisfaction of the arbitration award. Of that
amount, the Company received approximately $750,000, which is net
of legal fees. The proceeds from the Settlement Agreement were used
to pay trade and other obligations.
In May 1997, the Company and the former shareholders of ATI entered
into a rescission agreement which provides for the rescission of
the Company's August 1994 acquisition of ATI; and, in June 1997,
the Company entered into an agreement with the former shareholders
of HMT to rescind the Company's March 1996 acquisition of HMT (See
Note 4).
The dispositions of CCI, TNI (which includes the operations of
Comstar and LCI subsequent to the dates of their respective
acquisitions) and ATI, all of which comprised the Company's
telecommunications segment, and the operations of those businesses
for all periods presented are reflected as components of
discontinued operations in the accompanying consolidated statements
of operations (See Note 4).
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All
significant inter-company transactions and balances have been
eliminated in consolidation.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity
of three months or less when purchased to be cash equivalents.
<PAGE> 39
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Depreciation is
provided using the straight-line method over periods that
approximate the assets' useful lives.
Capitalized lease assets are recorded at the lower of present value
of minimum future lease payments at inception of the lease or the
fair value of the asset and are amortized straight-line over the
shorter of the lease term or estimated useful life of the asset.
INTANGIBLE ASSETS
Intangible assets as of December 31, 1996 consist of the cost of
acquired medical management computer software ($1,500,000) and
acquired customer lists. The useful life assigned to medical
computer software was 3 years. As of December 31, 1996, the
unamortized cost of medical computer software was approximately
$1,083,000 and amortization for the year 1996 was approximately
$416,700. In 1997, the cost of medical computer software and
related accumulated amortization were removed from the Company's
consolidated balance sheet as a result of the rescission of the HMT
acquisition agreement. Amortization in 1997 for the period prior to
the rescission of the HMT acquisition agreement was approximately
$208,000. The cost of acquired customer lists ($150,000) was fully
amortized at December 31, 1995.
In 1995, the Company recorded $12,400,000 of intangible assets
(healthcare management decision software technology) acquired in
connection with its acquisition of NSC. The estimated useful life
of the acquired software technology was 20 years. The Company wrote-
off the unamortized cost of the software technology acquired in
connection with the NSC acquisition, as of December 31, 1996, due
to continued operating losses and the failure of NSC to
successfully market the acquired technology (See Note 5).
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
The Company assesses the recoverability of intangible assets,
including goodwill, if facts and circumstances suggest that the
carrying amount of intangible assets may have been impaired. In
making its assessment, the Company gives consideration to the
undiscounted cash flows from the use of such assets, the estimated
fair value of such assets and other factors which may affect the
recoverability of such assets. If such an assessment indicates that
the carrying value of intangible assets may not be recoverable, the
carrying value of intangible assets is reduced.
Excess of cost over the fair value of net assets acquired as of
December 31, 1996 consists of goodwill recorded in connection with
the acquisition of HMT and was assigned a useful life of 15 years.
In 1997, the excess of cost over the fair value of net assets
acquired associated with the HMT acquisition and related
accumulated amortization were removed from the Company's
consolidated balance sheet as a result of the rescission of the HMT
acquisition agreement (See Note 4).
In 1995, the Company recorded approximately $2,718,000 in goodwill
in connection with its acquisition of NSC. As of December 31, 1996,
the Company wrote-off the unamortized cost of goodwill recorded in
connection with the NSC acquisition, as an impairment loss, due to
the failure of NSC to successfully market the acquired technology
(See Note 5).
<PAGE> 40
REVENUE RECOGNITION
The Company recognizes revenue in the period in which the service
is provided or, in the case of software sales, at the time the
software is delivered. Revenues related to audit or retroactive
claims review services, which are based on a percentage of the
savings, are recognized at the time of third party approval of the
reimbursable amounts.
INCOME TAXES
The Company has applied, for all years presented, the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes," which requires an asset and liability approach
in accounting for income taxes.
EARNINGS PER SHARE
In 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" ("SFAS No. 128"), which
requires the presentation of both basic and diluted earning per
share. Basic earnings per share is computed based on the weighted
average number of common shares outstanding during each year.
Diluted earnings per share is to be computed based on the sum of
the weighted average number of common shares outstanding plus the
additional number of shares that would have been outstanding if all
potentially dilutive common shares, pursuant to stock purchase
warrants and options, convertible preferred stock and convertible
notes and debentures, had been issued. The Company has not
presented diluted earnings per share because the inclusion of
potential common shares, pursuant to stock purchase warrants and
options, convertible preferred stock and convertible notes and
debentures, would be antidilutive due to the Company having
operating losses for all periods presented. The adoption of SFAS
No. 128 did not have any impact on previously reported earnings per
share.
STATEMENT OF CASH FLOWS
The operating, investing and financing activities included in the
consolidated statements of cash flows are presented net of the
assets and liabilities acquired in connection with business
combinations and the assets and liabilities disposed of in
connection with the rescission of the ATI and HMT acquisition
agreements. As permitted by Statement of Financial Accounting
Standards No. 95, cash flows from operations of discontinued
telecommunications businesses are not separately presented.
LONG-LIVED ASSETS
The Company has applied, for all periods presented , the provisions
of Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-lived Assets and for Long-lived Assets
to Be Disposed Of", which requires impairment losses to be recorded
on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to
be generated by those assets are less than the assets' carrying
amount. Statement No. 121 also addresses the accounting for long-
lived assets that are expected to be disposed of (see Note 5).
<PAGE> 41
IMPACT OF OTHER RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("SFAS NO. 130"), which is effective for
fiscal years beginning after December 15, 1997. SFAS No. 130
establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-
purpose financial statements. Although SFAS No. 130 only impacts
display as opposed to actual amounts recorded, it represents a
change in financial reporting. The adoption of this statement will
not have an impact on the Company's reported earnings.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, Disclosures
about Segments of an Enterprise and Related Information ("SFAS No.
131"), which is effective for years beginning after December 15,
1997. SFAS No. 131 establishes standards for the way public
enterprises report information about operating segments in annual
financial statements and requires that those enterprises report
selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures
about products and services, geographic areas and major customers.
The adoption of this statement will not have a significant effect
on the Company's reported segments and related disclosures.
USE OF ESTIMATES
The process of preparing financial statements requires the use of
estimates and assumptions regarding certain types of assets,
liabilities, revenues and expenses. Such estimates primarily relate
to unsettled transactions and events as of the date of the
financial statements. Accordingly, upon settlement, actual results
may differ from estimated amounts.
RECLASSIFICATIONS
Certain amounts in the 1996 and 1995 consolidated financial
statements have been reclassified to conform to the 1997
presentation.
<PAGE> 42
NOTE 3 GOING CONCERN
The accompanying financial statements have been prepared on a going
concern basis which contemplates the realization of assets and
liquidation of liabilities in the ordinary course of business. The
Company incurred net losses (including losses from operations of
discontinued businesses) of $517,166, $19,256,668 and $5,808,025 in
1997, 1996 and 1995, respectively, and used approximately
$1,362,000, $4,194,000 and $1,761,000, respectively, of cash in
operations. The Company has a net working capital deficiency of
approximately $6.5 million and a deficiency in assets of
approximately $7.3 million at December 31, 1997 and is currently in
default of certain of its obligations to trade and other creditors
(see Notes 7 and 14). Additionally, as discussed in Note 14, the
Company is required to offer purchasers of the Company's common
stock in certain jurisdictions the right to rescind their stock
purchase transactions. Pursuant to a consent order from the State
of Michigan, the Company is required to make a rescission offer to
Michigan purchasers of the Company's common stock, unless such
purchasers are afforded an opportunity to resell their shares in
the public market pursuant to an effective registration statement
at prices higher than the cost of such shares to the Michigan
purchasers. The Company has not been be able to satisfy the
requirements of the consent order. It is uncertain whether or not
the failure by the Company to satisfy the requirements of the
consent order will have a material adverse impact on the
accompanying consolidated financial statements (See Note 14).
The Company is attempting to raise additional equity and debt
financing to support its business operations but, there is no
assurance that sufficient amounts of equity or debt financing will
be available to the Company. As of December 31, 1997, the Company
had no financing facilities available for working capital or for
other purposes.
Based on the foregoing factors, it is uncertain whether or not the
Company can generate adequate cash flows from operations, or from
financing transactions, to meet its obligations as they become due.
In that event, the Company would be required to seek other
alternatives, including sale, merger or discontinuance of
operations. The consolidated financial statements do not inclued
any adjustments that might result from the outcome of this
uncertainty.
<PAGE> 43
NOTE 4 ACQUISITIONS AND DISPOSITIONS OF BUSINESSES
On August 29, 1994, the Company acquired, in two separate
transactions, all of the outstanding stock of ATI and CCI in
exchange for an aggregate of 1,700,000 shares of the Company's
Class A convertible preferred stock and an aggregate of $550,000
principal amount of notes payable. Of the preferred stock issued in
connection with these acquisitions, 1,500,000 shares were issued to
the former shareholders of ATI and 200,000 shares were issued to
the former shareholders of CCI. Of the notes issued in connection
with these acquisitions, $300,000 were issued to the former
shareholders of CCI and $250,000 were issued to the former
shareholders of ATI. Each share of preferred stock issued in
connection with these acquisitions is convertible into one-half
share of the Company's common stock at the election of the holder
at any time prior to a public offering of the Company's common
stock and are automatically converted at the time of such public
offering. The shares of Class A convertible preferred stock issued
to the former shareholders of ATI were converted into 750,000
shares of common stock in August 1996. The shares of Class A
preferred stock issued to the former shareholders of CCI are
subject to an arbitration proceeding between the Company and the
former shareholders of CCI (See Note 14). The $550,000 of
acquisition notes payable bear interest at the rate of 6% per annum
and were originally due within 90 days of the date of such
acquisitions. Such notes have been extended from time to time and
are now due upon completion of a public offering of the Company's
common stock. The $300,000 of acquisition notes payable to the
former shareholders of CCI are also subject to an arbitration
proceeding between the Company and the former shareholders of CCI
(See Note 14). The Company identified ATI as the accounting
acquirer and accounted for the acquisition of ATI and CCI as a
purchase business combination. No goodwill was recorded in
connection with these business acquisitions.
In June 1995, the Company completed the acquisition of all of the
outstanding stock of LCI from a Director and executive officer of
the Company (a person designated as a promoter/shareholder of the
Company) in exchange for 1,075,000 shares of the Company's Class A
preferred stock. The net assets acquired were recorded at the
promoter/shareholder's historical cost. The cost basis of the
promoter/shareholder was de minimis.
In June 1995, the Company acquired all of the outstanding stock of
Comstar in exchange for 200,000 shares of the Company's common
stock, valued at $126,000,and 500,000 shares of its Class A
convertible preferred stock, valued at $157,500. The total purchase
price was $283,500. Each share of preferred stock issued in
connection with this acquisition is convertible into one-half share
of the Company's common stock at the election of the holder at any
time prior to a public offering of the Company's common stock and
are automatically converted at the time of such public offering.
The shares of Class A preferred stock issued to the former
shareholder(s) of Comstar were converted into 250,000 shares of
common stock in October 1996. The excess of the purchase price over
the fair value of net assets acquired ($273,250) was allocated to
goodwill and assigned a useful life of 5 years. The unamortized
cost of goodwill recorded in connection with the acquisition of
Comstar was written off as an impairment loss in 1996 with no
associated income tax benefit (see Note 5). This impairment loss is
included in the loss from operations of discontinued
telecommunications businesses for the year ended December 31, 1996.
<PAGE> 44
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 approximately .36 shares of the Company's common
stock at the election of the holder at any time prior to a public
offering of the Company's common stock and are automatically
converted at the time of such public offering. The 10% convertible
debentures issued in connection with the acquisition, plus accrued
interest, are due at the time of a public offering of the Company's
common stock and are convertible, at the election of the holder,
into the Company's common stock at the public offering price in
such public offering. The total purchase price for TNI was
$3,138,195. The excess of the purchase price over the fair value of
the net assets acquired was $2,943,401. The unamortized cost of
goodwill recorded in connection with the TNI acquisition was
written off as an impairment loss in 1995 with no associated income
tax benefit (see Note 5). This impairment loss is included in the
loss from operations of discontinued telecommunications businesses
for the year ended December 31, 1995. As of December 31, 1997, the
Company has converted 1,596,875 shares of Class B convertible
preferred stock issued in connection with the acquisition into
580,682 shares of common stock. There have been no conversions of
the notes issued in connection with the acquisition. Subsequent to
December 31, 1997, the Company made a redemption offer to the
holders of the $450,000 10% convertible debentures issued in
connection with the acquisition (see Notes 7 and 18).
In October 1995, the Company acquired all of the outstanding stock
of NSC in exchange for 2,000,000 shares of the Company's common
stock valued at $6,916,000, cash of $1,000,000 and $250,000 in
notes payable. The purchase price also included shares of the
Company's common stock, valued at $2,000,000, which were to have
been issued to the founders and management of NSC no later than
November 30, 1996. The dollar amount of the shares to be issued
($2,000,000) is shown as common stock to be issued in the
accompanying consolidated balance sheet as of December 31, 1996.
The number of additional shares to be issued was to be determined
at the date of issuance based upon a formula and upon issuance
valued at $2,000,000 in the aggregate. The formula to determine the
number of additional shares which were to have been issued is
$5,000,000 minus outstanding advances made to NSC by the Company
divided by the quoted market value of the Company's common stock.
The $250,000 in notes payable are non-interest bearing and are due
in equal monthly installments of $20,000 (see Note 7). The total
purchase price for NSC was $14.4 million, including the $2,000,000
in additional shares which were to have been issued in November
1996 pursuant to the acquisition agreement and approximately $1.7
million of liabilities assumed in excess of assets acquired and
deferred income taxes of approximately $1.0 million. The excess of
the purchase price over the fair value of the assets acquired
(approximately $2,718,000) was assigned a useful life of 20 years.
The net assets acquired also included $12,400,000 for healthcare
management decision software technology that was assigned a useful
life of 20 years. The Company wrote off the unamortized cost of
goodwill and intangibles recorded in connection with the
acquisition of NSC as of December 31, 1996, as an impairment loss
(See Note 5).
<PAGE> 45
As of December 31,1996, the Company had not issued any of the
shares of common stock which were to be issued to the founders and
management of NSC pursuant to the NSC acquisition agreement. In
January 1997, the founders and management of NSC (the "Retiring
Management") resigned in a negotiated agreement between the Company
and Retiring Management. The material features of the agreement
included the waiver by Retiring Management of (a) all accrued and
unpaid bonuses ($695,214) and (b) $2,000,000 of the Company's
common stock which was to be issued to Retiring Management pursuant
to the NSC acquisition agreement in exchange for a license
agreement for the exclusive use by Retiring Management of NSC's
software and technology to service state governments west of the
Mississippi River (excluding Utah), Mexico and Central and South
America. The license agreement, subject to minimum performance
standards, is to provide for a royalty fee of one-half of one
percent of all revenues derived by Retiring Management from such
license agreement and for (i) the sharing on a 50-50 basis, of the
net profits (to be defined) earned by NSC from the States of New
York and New Jersey and by Retiring Management from Mexico and (ii)
a requirement that Retiring Management use NSC, for a reasonable
fee, as its sole supplier of data processing services to process
work derived from the license agreement for a period of two years.
As a result of the waiver by Retiring Management of accrued and
unpaid bonuses and common stock to be issued, the Company removed
the common stock to be issued and the accrued and unpaid bonuses
from its consolidated balance sheet and recognized a gain from the
sale of the license agreement totaling approximately $2,695,000.
Effective March 12, 1996, the Company acquired all of the
outstanding stock of Health Management Technologies, Inc. ("HMT"),
whose principal business is the development, sale and maintenance
of medical management computer software, for 309,837 shares of its
common stock valued at $2,000,000. The total purchase price was
$2,140,000, including costs of $140,000. The excess of the purchase
price over the fair value of the net assets acquired ($1,373,984)
was assigned a useful life of 15 years. The net assets acquired
included $1,500,000 of medical computer software, which was
assigned a useful life of 3 years.
<PAGE> 46
The following unaudited pro forma summary operating results for the
year ended December 31, 1996, include the results of operations of
companies acquired in 1995 for the full year and the operating
results of HMT (with pro forma adjustments for amortization of
goodwill and intangible assets acquired) as if HMT was acquired as
of January 1, 1996. The pro forma operating results for the year
ended December 31, 1995 reflect the operating results of companies
acquired in 1995 and, HMT acquired in 1996, with pro forma
adjustments (primarily goodwill and intangible amortization) as if
the acquisitions were consummated on January 1, 1995. The pro forma
summary is provided for information purposes only. It is based on
historical information and does not necessarily reflect the actual
results that would have occurred nor is it necessarily indicative
of future operating results of the combined companies.
Year Ended December 31,
------------------------------
1996 1995
----------- -----------
Net revenues from continuing
operations $ 3,035,195 $ 2,384,874
------------ -----------
Loss from continuing operations $ (18,047,892) $(4,085,486)
------------ -----------
Loss from operations of discontinued
telecommunications businesses $ ( 1,322,179) $(3,794,890)
------------ -----------
Basic earnings per share:
Loss from continuing operations $ ( 2.16) $( 1.28)
Loss from operations of
discontinued telecommunications
businesses ( 0.16) ( 1.19)
------------ -----------
Net loss $ ( 2.32) $( 2.47)
============ ===========
All of the acquisitions described above have been accounted for
using the purchase method of accounting. The results of operations
of these acquired businesses have been included in the consolidated
financial statements since their respective dates of acquisition.
As more fully discussed below, the Company has sold or otherwise
disposed of the businesses included in the Company's
telecommunications segment. The operations of those businesses are
shown as operations of discontinued telecommunications businesses
in the above pro forma summary.
<PAGE> 47
In May 1996, the Company informed the principals of Coast
Communications, Inc. ("CCI") that the Company was canceling the
acquisition of CCI and terminating all of the related acquisition
documents; consequently, the Company removed the assets and
liabilities of CCI and the debt and preferred stock issued in
connection with the CCI acquisition from the Company's
consolidated balance sheet in May 1996 with no material effect on
the Company's results of operations. The principals of CCI filed
suit to enforce promissory notes in the aggregate principal
amount of $300,000, which were issued by the Company in
connection with the CCI acquisition and the issuance of 200,000
shares of the Company's Class A preferred stock they allege are
due them under the acquisition agreement. This matter was
referred by court order to mandatory arbitration in the State of
Florida. On February 3, 1998, the Arbitrators' awarded in favor
of the former shareholders of CCI. The award requires, among
other things, that the Company (i) convert 200,000 shares of its
Class A Preferred Stock, held by the former shareholders of CCI,
into 100,000 shares of its common stock and (ii) issue another
200,000 shares of Class A Preferred Stock to the former CCI
stockholders, which is also convertible into 100,000 shares of
the Company's common stock, and that the Company give the former
shareholders of CCI the ability to seek a summary judgment
against the Company for $500,000, without opposition, or accept
500,000 shares of the Company's Class A Preferred Stock in lieu
of a summary judgment (See Note 14).
As more fully discussed below, in January 1997 and May 1997, the
Company disposed of substantially all of the remaining assets of its
telecommunications segment, consisting of TNI (which include the
operations of Comstar and LCI) and ATI and, entered into an
agreement to rescind the March 1996 acquisition of HMT.
In January 1997, the Company sold, in two separate transactions (i)
TNI's long-distance customer base and existing customer receivables
for $76,000 in cash and (ii) TNI's utility audit division customer
base, agreements and work-in-process for $25,000 in cash and a
$500,000 convertible debenture issued by International Teledata
Corporation ("ITD"). No value was assigned to the $500,000
convertible debenture (the "ITD Note") received by the Company. By
its terms, the ITD Note is due on January 31, 1999 and bears
interest at 8% per annum beginning on April 2, 1997 and through the
date of conversion. Such conversion is at the average bid and ask
prices of the acquiring company's common stock on the effective date
of a registration (See Note 18).
In May 1997, the Company and ATI entered into an agreement to
rescind the August 1994 acquisition of ATI. The ATI rescission
agreement provides for the return of all of the ATI stock acquired
by the Company to the former ATI shareholders in exchange for
684,410 shares of the Company's common stock, the 6% acquisition
notes payable issued to the former shareholders of ATI and
unexercised warrants to purchase 168,668 shares of the Company's
common stock. In connection with the rescission of the ATI
acquisition, ATI issued a promissory note to the Company in the
amount of $180,000, payable upon the default by ATI of payments due
under certain of its lease agreements (those quaranteed by the
Company). Payments due the Company under the promissory note are to
be equal to the amount, if any, the Company may be required to pay
under the lease guaranty agreement(s) entered into between the
Company and ATI's equipment lessor(s). However, there is no
assurance that, upon an event of default by ATI, that ATI would have
sufficient funds to liquidate the promissory note.
The disposition of TNI and ATI resulted in gains of approximately
$392,000, net of tax, in the aggregate. The gains from the
disposition of TNI and ATI are reflected as a component of
discontinued operations in the accompanying consolidated statement
of operations for the year ended December 31, 1997.
<PAGE> 48
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. In connection with the rescission of the HMT
acquisition agreement, the Company recognized a gain of
approximately $259,000. which is included as a component of
continuing operations in the consolidated statement of operations
for the year ended December 31, 1997.
The consolidated operating results of the Company for all years
presented have been restated to segregate, as discontinued
operations, the results of operations of the Company's discontinued
telecommunications businesses. The assets and liabilities of the
telecommunications segment, included in the accompanying
consolidated balance sheets as of December 31, 1997 and 1996, are
summarized as follows:
1997 1996
--------- ---------
Current assets $ 539 $ 332,856
Total assets 539 660,094
Current liabilities 194,133 886,206
Total liabilities 194,133 1,078,026
The revenues, costs and expenses of the Company's
telecommunications businesses, included in income(loss) from
operations of discontinued telecommunications businesses in the
accompanying consolidated statements of operations for each of the
three years in the period ended December 31, 1997, are summarized
as follows:
1997 1996 1995
-------- ---------- ---------
Net revenues $405,617 $2,177,858 $2,893,778
Cost of revenues -- 1,320,256 2,014,460
Selling and administrative expenses 449,925 2,304,059 1,845,775
Impairment and other losses -- 194,901 2,758,779
Depreciation and amortization 47,460 291,291 311,135
Interest income -- (971) (627)
Interest expense 32,393 38,713 20,466
Other income(expense), net 755,913 832 4,288
Income(loss) from operations of
discontinued businesses, before
income taxes 631,752 (1,971,223) (4,060,498)
Income tax expense(benefit) 240,000 (649,044) (241,577)
Income(loss) from operations of
discontinued businesses 391,752 (1,322,179) (3,818,921)
<PAGE> 49
NOTE 5 IMPAIRMENT AND OTHER LOSSES
Impairment and other losses included in the accompanying
consolidated statements of operations are summarized as follows:
Year Ended December 31,
----------------------------------
1997 1996 1995
--------- ---------- ----------
Impairment and other losses included
in loss from continuing operations:
Write-off of capital lease and related
assets $ 768,545 $ -- $ --
Provision for loss contingencies 437,335 -- --
Write- off of deferred compensation
assets 625,728 -- --
Write-down of other assets 67,345 -- --
Write-off of NSC intangibles and goodwill -- 14,233,953 --
--------- ---------- ---------
1,898,953 14,233,953 --
--------- ---------- ---------
Impairment and other losses included
in loss from discontinued operations:
Write-off of TNI goodwill -- -- 2,758,779
Write-off of investment in Comstar 194,901 --
--------- ---------- ----------
-- 194,901 2,758,779
--------- ---------- ----------
$1,898,953 $14,428,854 $2,758,779
========= ========== ==========
In 1997, the Company removed, from its consolidated balance sheet,
the capital lease and other assets related to equipment under lease
from Boston Financial & Equity Corporation ("BFC") due to BFC
having taken possession of certain computer equipment leased by NSC
from BFC and the initiation by BFC of an action filed in the State
of Texas against the Company seeking approximately $500,000, due
under the lease agreement. The removal of the capital lease and
other assets related to equipment under lease resulted in a loss of
$768,545. The Company also recorded a loss contingency of
approximately $500,000 and removed the related capital lease
obligation from the Company's consolidated balance sheet, which
resulted in an additional loss provision of $122,986, which is
included in the provision for loss contingencies in the above
table.
In 1997, the Company also made various other provisions for loss
contingencies related to leased office space, which has been
vacated, leased equipment that the Company is not presently using
and for the loss from the settlement of claims brought against the
Company by Timboon, LTD. The total amount of these loss provisions
was $437,335, including $122,986 related to the BFC lease. Included
in this amount is $162,053 related to the Timboon Settlement
Agreement (see Notes 7 and 14).
The write-off of deferred compensation assets in 1997 is the result
of the resignation of certain employees subject to employment
agreements (see Note 13).
<PAGE> 50
Impairment and other losses in 1996 reflect the write-off of the
Company's investment in Comstar, including goodwill recorded in
connection with the acquisition, and the write-off of the
unamortized cost of goodwill and intangibles recorded in connection
with the Company's 1995 acquisition of NSC. The write-off of the
Company's investment in Comstar is the result of the Company's
decision to sell substantially all of the assets of TNI and abandon
its remaining Telecommunications businesses; and, the write-off of
the unamortized cost of goodwill and intangibles recorded in
connection with the acquisition of NSC is the result of continued
operating losses and the failure of NSC to successfully market the
software technology acquired by the Company in connection with the
acquisition. The write-off of the Company's investment in Comstar
is included in loss from operations of discontinued
telecommunications businesses for the year ended December 31, 1996;
and, the write-off of the unamortized cost of goodwill and
intangibles recorded in connection with the acquisition of NSC is
reflected in loss from continuing operations for the year ended
December 31, 1996.
At December 31, 1995, the Company recognized a charge to income
of $2,758,779, which is reflected as a component of discontinued
operations in the accompanying consolidated statement of
operations for the year ended December 31, 1995, to write off,
with no associated income tax benefit, all of the goodwill
related to its acquisition of TNI. This write-off reflects the
damages caused to the business of TNI as a result of actions
taken by GE Capital Communications Services Corporation ("GECCS")
and New Enterprise Wholesale Services, Ltd. ("News"), which
actions included, among other things, (i) the failure of GECCS
and News to provision customer accounts for telecommunications
products and services offered by GECCS and News and sold by TNI
pursuant to a contractual agreement among TNI, GECCS and News,
(ii) the cancellation of TNI customers by GECCS and News and
(iii) the failure of GECCS and News to properly bill and collect
revenues due to TNI. TNI, as claimant in a binding arbitration
proceeding against GECCS and News, was awarded damages under the
GECCS Agreement in the amount of approximately $1,250,000. The
award, which was entered on October 10, 1996, was appealed by
GECCS to the U.S. District Court for the Northern District of
Georgia on the grounds that the arbitrators exceeded their powers
by awarding TNI damages under the GECCS Agreement. On September
30, 1997, the U.S. District Court confirmed the award; and, a
motion for summary judgment was entered on October 1, 1997. On
December 24, 1997, the Company, GECCS and News entered into a
Confidential Settlement Agreement and Mutual Full and Final
Releases (the "Settlement Agreement"). Pursuant to the Settlement
Agreement, GECCS\News paid $1,250,000 in full satisfaction of the
arbitration award. Of that amount, the Company received
approximately $750,000, which is net of legal fees. The net
proceeds from the Settlement Agreement are reflected in
income(loss) from discontinued operations in the accompanying
consolidated statement of operations for the year ended December
31, 1997.
<PAGE> 51
NOTE 6 FURNITURE AND EQUIPMENT
Furniture and equipment consists of the following:
DECEMBER 31,
----------------------
1997 1996
------- ---------
Furniture and equipment $130,162 $ 917,869
Equipment held under capital lease -- 880,163
Leasehold improvements -- 14,835
------- ---------
130,162 1,812,867
Less: accumulated depreciation (56,744) (587,598)
------- ---------
Net furniture and equipment $ 73,388 $1,225,269
======= =========
Depreciation expense was $174,545, $330,973 and $122,471 in 1997,
1996 and 1995 respectively.
In 1997, the Company removed, from its consolidated balance sheet,
capital lease assets with a net carrying amount of $579,681 related
to equipment under lease from Boston Financial & Equity
Corporation. See Notes 5 and 14.
Included in furniture and equipment, net, as of December 31, 1996
is $327,237, applicable to discontinued telecommunications
businesses.
<PAGE> 52
NOTE 7 NOTES AND DEBENTURES PAYABLE
Notes and debentures payable consist of the following:
DECEMBER 31,
------------------------
1997 1996
----------- ---------
4% Cumulative convertible debentures
due October 1, 1998 $ 1,200,000 $ --
10% Cumulative convertible debentures
due on various dates through
November 1997 1,195,000 1,279,000
10% Cumulative convertible debentures
due on November 21, 1997 -- 300,000
10% Cumulative convertible debentures
due on November 26, 1997 170,000 200,000
10% Convertible debentures payable to
former shareholders of TNI 450,000 450,000
Notes payable to former shareholders of
NSC in equal monthly installments of
$20,000, non-interest bearing 150,000 150,000
6% Acquisition notes payable to former
shareholders of ATI, secured by the
stock of ATI -- 250,000
18% Cumulative Convertible Debenture
Note due January 15, 1999 80,000 --
12% Cumulative Convertible Debenture
Notes due on various dates through
November 1998 50,000 --
12% Convertible Promissory Note
due March 28, 1997, in default 30,000 --
10% Cumulative Convertible Debenture
Note due September 1998 30,000 --
8%-10% Notes payable to stockholders 1,700 162,741
Promissory note in default -- 200,000
10.75% demand note payable, secured by
certain accounts receivable -- 100,000
5% Note to former shareholder of CCI, due
on demand, secured by certain equipment -- 75,000
Other 5,000 14,017
--------- ---------
3,361,700 3,180,758
Less: current portion (3,361,700) (3,180,758)
--------- ---------
Long-term portion $ -- $ --
========= =========
<PAGE> 53
On February 24, 1997, the Company issued $1,120,000 of 4%
cumulative convertible debentures due October 1, 1998 (the "4%
Debentures") to Timboon, LTD ("Timboon", a non U.S. person) in
reliance upon exemptions under Regulation S of the Securities Act
of 1933. The 4% Debentures are convertible at any time after 45
days from the date of their issuance, until maturity, into the
Company's common stock at a conversion price equal to the lesser
of (a) 80% of the average closing bid price of the Company's
common stock for the five days preceding the issuance of the
debentures or (b) 70% of the average closing bid price of the
Company's common stock for the five days preceding the conversion
date. The Company incurred costs in connection with this financing
of $120,000 and received net proceeds of $1,000,000. The Company,
through December 31, 1997, converted $120,000 of the 4% Debentures
issued to Timboon into 256,361 shares of the Company's common
stock. On June 6, 1997, as a result of the Company's refusal to
convert additional 4% Debentures, Timboon, as Plaintiff, filed an
action in the United District Court, Southern District of New
York, against the Company, as Defendant, seeking the delivery of
163,438 shares of the Company's common stock to Plaintiff as a
result of the conversion of an additional $150,000 of 4%
Debentures and the payment of $970,000 (the principal amount of
the 4% Debentures that had not been converted by Timboon) to
Timboon, plus damages. The Company filed a counterclaim against
Timboon alleging that Timboon breached the representations and
covenants it made in the Off-Shore Securities Subscription
Agreement. These representations and covenants related to, among
other things, Timboon's investment intent in acquiring the
Company's securities and its possible "shorting" of the Company's
common stock in contemplation of conversion. In addition, the
Company alleged that Timboon participated in manipulative market
activity with the intent to artificially depress the market price
of the Company's common stock. Effective March 2, 1998, the
Company and Timboon entered into a Settlement Agreement and
Release (the "Settlement Agreement") in settlement of all claims
brought against each other in connection with the 4% Debentures.
Pursuant to the Settlement Agreement, the Company is required to
pay Timboon $1,200,000, in cash, or by the liquidation by Timboon
of shares of the Company's common stock into which the 4%
Debentures are convertible. The Company has designated 4,000,000
shares of its common stock, to be held in escrow, for liquidation
by Timboon pursuant to the terms of an escrow agreement (the
"Escrow Agreement"). The terms of the Escrow Agreement generally
provide that Timboon may liquidate during each four-week period
("Trading Period")(i)up to 50% of the aggregate trading volume of
the Company's common stock on the NASDAQ Bulletin Board, or such
other trading market on which the Company's may be publicly
traded, for the prior four-week period at no less than the "bid"
price, or for the first eight weeks of trading, up to 37.5% of the
trading volume for the previous four-week period at no less than
the "bid" price, provided a minimum "bid" price of $0.31 per
share, or greater, is maintained or (ii) up to 200,000 shares of
the Company's common stock during any Trading Period at or above
the average of the "bid" and "ask" price. In either case, the
liquidation of shares of the Company's common stock by Timboon is
not to exceed $200,000 of net proceeds, in the aggregate, during
any Trading Period. The Escrow Agreement also provides that when
Timboon receives cumulative net proceeds of $1,200,000, the escrow
agent is to return all remaining shares held in escrow, if any, to
the Company or, in the event Timboon receives cumulative net
proceeds of $1,200,000 from the liquidation of 600,000 shares, or
less, then the escrow agent is to return all remaining shares,
less 100,000 shares which are to be retained by Timboon. In
connection with the Settlement Agreement the Company increased the
principal balance of the 4% Debentures to equal $1,200,000 and
recognized a loss of approximately $162,000. See Note 5.
<PAGE> 54
During 1996, the Company privately placed, in reliance upon
exemptions under Regulation D of the Securities Act of 1933, a
series of one-year 10% cumulative convertible debentures in the
aggregate principal amount of $1,279,000. These debentures are
convertible into shares of the Company's common stock on various
dates through November 1997 or on the effective date of a
registration statement under the Securities Act of 1993, if
earlier. The number of shares of common stock issuable upon
conversion of these debentures, in either case, is generally to be
determined by dividing the principal amount of the debentures, plus
accrued and unpaid interest, by the lesser of (a) the fixed
conversion prices set forth in the debentures, which range from
$1.50 to $5.00 per share, or (b) a conversion price equal to 50% of
the average closing bid and ask prices of the Company's common
stock at the close of trading on the next day following the
maturity date as set forth in the respective debenture. The Company
has been informed that $845,000 of these convertible debentures
have been assigned to persons residing in the State of Michigan. On
September 24, 1997 the persons to whom these convertible debentures
were assigned filed a Schedule 13D under the Securities and
Exchange Act of 1934. The Schedule 13D filed by those persons
discloses that the persons to whom the debentures were assigned
beneficially own 5,045,102 shares of the Company's common stock,
including 4,801,640 shares of the Company's common stock which are
to be issued upon conversion of the debentures. All of these
persons share voting power in the shares beneficially owned by
them. The Company believes the shares issuable to the assignees of
the Company's 10% cumulative convertible debentures upon conversion
may violate the terms and conditions of the consent order entered
into between the Company and the State of Michigan (see Note 14).
The Company has not made a final determination as to the conversion
rights of such assignees. During 1997, the Company issued 19,033
shares upon conversion of $84,000 in principal amount of such
debentures, plus accrued interest. As a result of the Company not
having converted these debentures on their respective maturity
dates, the Company is in default of the terms of the debentures.
On November 21, 1996 and November 26, 1996, the Company privately
placed, in reliance upon exemptions under Regulation S of the
Securities Act of 1933, $300,000 and $200,000, respectively, of 10%
one-year cumulative convertible debentures. These debentures are
convertible into shares of the Company's common stock at any time
after 45 days from the date of their issuance and prior to their
scheduled one-year maturity dates. The conversion price of these
debentures, plus accrued and unpaid interest, is equal to the
lesser of (a) 70% of the average closing bid price of the Company's
common stock for the five days preceding the conversion date or
(b)80% of the average closing bid price of the Company's common
stock for the five days prior to issuance of the debentures. In
connection with the issuance of these debentures, the Company
incurred placement fees and other costs of approximately $50,000
and received net proceeds of approximately $450,000. As of December
31, 1997, the Company has converted $330,000 of these debentures
into 122,000 shares of the Company's common stock and has
outstanding unconverted debentures totaling $170,000. The Company
is in default of the terms of the debenture outstanding at December
31, 1997 by virtue of not having converted the debenture on its
maturity date.
<PAGE> 55
The 10% convertible debentures payable to the former shareholders
of TNI, plus accrued and unpaid interest, are due at the time of a
public offering of the Company's common stock and the filing of a
registration statement. These debentures are convertible at a
conversion price equal to the public offering price in such
registration statement at the election of the holder. In March
1997, the Company made an offer to each of the holders of these
convertible debentures to redeem the debentures in return for 1.5
shares of the Company's common stock for each dollar of principal,
plus accrued interest, due to each of the debenture holders, plus
common stock purchase warrants exercisable at any time over a five
year period at an exercise price of $0.20 per share. The number of
common stock purchase warrants to be issued upon acceptance of the
offer to redeem the debentures is to be determined by dividing the
principal amount of each debenture by two(2). As of March 31, 1998
(the expiration date of the offer), the Company received the
acceptance of all of the holders of the debentures. Pursuant to the
redemption offer, the Company is to issue 893,278 shares of its
common stock and 450,000 stock purchase warrants (225,000 of which
are exercisable at $1.50 per share by the terms of the respective
debenture note and 225,000 of which are exercisable at $0.20 per
share pursuant to the redemption offer).
The notes payable to the former shareholders of NSC, due in equal
monthly installments of $20,000, are currently in default. The
Company has not made any payments on these notes since April 1996.
The holders of these notes have not initiated collection efforts
for the amounts due to them under the notes. The Company is
currently accruing interest on these notes at 18% per annum, the
default rate of interest as called for by the notes.
The 6% acquisition notes payable to the former shareholders of ATI
were originally due within 90 days of the date of acquisition of
ATI. These notes were subsequently modified to delay their due date
to the date of a public offering of the Company's common stock or
upon placement of a bridge financing facility to refinance the
debt. These notes were also extended from time to time. In
consideration of these extensions, the Company issued 140,000
shares of its Class B preferred stock and 166,668 stock purchase
warrants exercisable at $1.50 per share to the note holders. The
140,000 shares of Class B preferred stock were converted into
50,910 shares of the Company's common stock in September 1996. The
acquisition notes payable, the stock purchase warrants and 684,410
shares of the Company's common stock issued to the former
shareholders of ATI in connection with the acquisition and as
consideration for extension of indebtedness are to be returned to
the Company in connection with the May 1997 rescission of the ATI
acquisition agreement(see Note 4).
The notes payable and debentures associated with the acquisitions
of subsidiaries, described above, are collateralized by the stock
of the respective subsidiaries.
The 18% Cumulative Convertible Debenture Note due January 15, 1999
is convertible into the Company's common stock, at the election of
the holder, at a conversion price of $2.50 per share, is guaranteed
by the Company's Chairman of the Board and is collateralized by
500,000 shares of the Company's common stock, which is held in
escrow pursuant to an escrow agreement.
<PAGE> 56
The 12% Cumulative Debenture Notes consist of two notes in the
principal amount of $25,000, each, and are due in October and
November 1998, respectively. These notes are convertible, at the
election of the holder, into shares of the Company's common stock
at an exercise price of $.10 per share. Interest accrued may also
be converted into shares of the Company's common stock at a price
equal to the average of the bid and ask prices of the Company's
common stock on the next day following conversion. Upon conversion,
the holders of the notes are also entitled to receive common stock
purchase warrants. The number of warrants to be issued upon
conversion of these notes is equal to the principal amount of the
notes divided by 0.1 and are exercisable at $0.10 per share.
The 12% Convertible Promissory Note due March 28, 1997 is in
default. The Note is convertible, at the election of the holder,
into the Company's common stock at $2.00 per share, plus 3,000
common stock purchase warrants, exercisable at $2.00 per share for
a two year period. The common stock purchase warrants are to be
issued either upon conversion or payment of the Note.
The 10% Convertible Debenture Note due September 1998 is payable,
at the election of the holder, from the proceeds of the GECCS\News
arbitration award, from the proceeds of the $500,000 note received
by the Company from the sale of certain of TNI assets (the "ITD
Note") or by the issuance of the Company's common stock at the
average of the bid and ask prices of the Company's common stock as
of the date of the note. This note was not paid from the proceeds
of the GECCS\News arbitration award and, in March 1998, the Company
canceled the ITD Note pursuant to an agreement between and among
the Company, ITD and certain former employees of the Company and
TNI (see Note 18). After these events, the note is either payable
in cash or by the issuance of the Company's common stock at the
election of the holder.
As of December 31, 1996, the Company had $162,741 of 8-10% notes
payable to stockholders due on various dates through December 1997.
These notes are generally due one year after the date of issuance
and provide the holder with the right to convert the principal
amount of the note, plus accrued and unpaid interest, into shares
of the Company's common stock at predetermined conversion prices at
any time prior to maturity. During 1997, these stockholders loaned
the Company an additional $91,443, the Company made payments of
$84,484 and $168,000 of such notes, plus accrued interest, were
converted into shares of the Company's common stock at a negotiated
conversion prices ranging from $0.90 to $1.00 per share.
The $200,000 promissory note in default outstanding as of December
31, 1996 was paid in December 1997 from the proceeds of the
Settlement Agreement with GECCS and News (see Note 4).
The 10.75% demand note payable in the amount of $100,000
outstanding at December 31, 1996 was paid in December 1997 from the
proceeds of the Settlement Agreement with GECCS and News (see Note
4).
The 5% note payable to a former shareholder of CCI in the amount of
$75,000 at December 31, 1996 was relieved, in full, as a result of
the rescission in May 1997 of the ATI acquisition (see Note 4).
As of December 31, 1997 and 1996, all of the Company's notes and
debentures outstanding are classified as current in the
accompanying balance sheet.
<PAGE> 57
NOTE 8 BORROWINGS UNDER LINES OF CREDIT
As of December 31, 1997, the Company had no used or unused lines of
credit. The Company, through two of its subsidiaries, had lines of
credit which were fully utilized at December 31, 1996.
NOTE 9 FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosures
about Fair Value of Financial Instruments" requires disclosure of
the estimated fair value of financial instruments. It is not
practicable to estimate the fair value of the Company's debt
instruments because most of the debt instruments that have been
issued by the Company are unique due to their terms being
negotiated as a part of the acquisition of companies or in
connection with private placements and, in many cases, comparable
instruments do not exist. The carrying amount of the Company's
other financial instruments, cash and cash equivalents and accounts
receivable, are a reasonable estimate of their fair value.
NOTE 10 INCOME TAXES
Income tax expense (benefit) for each of the three years in the
period ended December 31, 1997 consists of deferred income taxes
and is allocated among (i) continuing operations and (ii) the
components of discontinued operations in proportion to their
individual effects on income tax expense (benefit) for the year
after the allocation of income tax expense (benefit) applicable to
continuing operations. No provisions for income taxes currently
payable were made in 1997, 1996 or 1995.
The allocation of income tax expense (benefit) for each of the
three years in the period ended December 31, 1997 among continuing
operations and the components of discontinued operations is
summarized as follows:
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
-------- ---------- --------
Loss from continuing operations $(483,000) $(2,554,150) $(15,124)
Discontinued operations:
Income(loss) from operations of
discontinued telecommunications
businesses 240,000 ( 649,044) (241,577)
Gain from disposition of
telecommunications businesses 243,000 -- --
------- ---------- --------
Income tax expense (benefit) $ -- $(3,203,194) $(256,701)
======= ========== ========
<PAGE> 58
Income tax expense (benefit) applicable to continuing operations
differs from the amounts computed by applying the U.S. Federal
income tax rate of 34 percent to loss before income taxes as a
result of the following:
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
--------- ---------- ---------
Amount computed at statutory rate $(608,400) $(6,966,137) $(681,438)
Increase (reduction) in taxes
resulting from:
State income taxes ( 46,200) (819,546) (80,169)
Amortization of goodwill 38,900 80,158 9,490
Rescission of business acquisitions 176,900 -- --
Impairment losses -- 971,769 --
Change in valuation allowance ( 44,500) 4,011,702 732,893
Other 300 167,904 4,100
-------- --------- ---------
$(483,000) $(2,554,150) $( 15,124)
======== ========= =========
The principal reasons for the difference between the amounts of
income tax benefit allocated to loss from discontinued operations
in 1996 and 1995 and the amounts computed by applying the U.S.
federal income tax rate of 34 percent to loss from discontinued
operations before income taxes, is due primarily to amortization of
goodwill, impairment losses and adjustments to the valuation
allowance recorded as a reduction of goodwill in conjunction with
the Company's 1995 acquisition of NSC.
In the first ten months of 1995, the Company recorded net deferred
tax assets of approximately $930,000 with an addition to the
valuation allowance in the same amount. As part of the acquisition
of NSC, the Company recorded approximately $3.8 million of deferred
tax liabilities. Because the deferred tax liabilities after the NSC
acquisition exceeded the previously recorded gross deferred tax
assets, the Company reversed the valuation allowance (approximately
$980,000 as of October 31, 1995, $248,000 of which is applicable to
operations of discontinued businesses). Because this occurred as
part of a business combination rather than through operations, the
adjustment was recorded as a reduction in goodwill associated with
the NSC acquisition rather than as an adjustment to operations.
<PAGE> 59
The Company has temporary differences between the amounts of assets
and liabilities for financial reporting purposes and the amounts of
such assets and liabilities as measured by enacted tax laws. The
Company also has net operating loss carryforwards available to
reduce future taxable income. The significant components of the
Company's deferred tax assets and liabilities as of December 31,
1997 and 1996 are as follows:
1997 1996
--------- ---------
Deferred tax assets:
Net operating loss carryforwards $3,337,500 $3,999,122
Allowance for doubtful accounts 190,000 10,668
Accrued compensation and liabilities under
employment agreements 257,000 777,922
Accrued expenses and other current liabilities 250,800 --
--------- ---------
Total deferred tax assets 4,035,300 4,787,712
Less-valuation allowance (3,967,200) (4,011,705)
--------- ---------
Net deferred tax assets 68,100 776,007
--------- ---------
Deferred tax liabilities:
Intangible assets -- 371,029
Deferred compensation 68,100 389,401
Other -- 15,577
--------- ---------
Total deferred tax liabilities 68,100 776,007
--------- ---------
Net deferred income taxes $ -- $ --
========= =========
At December 31, 1997, the Company and its subsidiaries had unused
net operating loss carryforwards of approximately $8.8 million,
expiring on various dates through 2011. Of this amount,
approximately $7.7 million is not restricted as to use. The balance
of the carryforwards amounting to approximately $1.1 million is
restricted to offsetting future taxable income, if any, of the
respective companies which generated the carryforwards and may be
further limited as to utilization in any one year by existing tax
laws.
Prior to the acquisition of HMT (See Note 4), it was taxed under
Subchapter S of the Internal Revenue Code and consequently, was not
subject to Federal income tax.
<PAGE> 60
NOTE 11 - STOCKHOLDERS' EQUITY
CLASS A PREFERRED STOCK
The Company's Class A preferred stock is non-voting, has a stated
value and liquidation preference of $1.00 per share, is convertible
into one-half share of the Company's common stock at the election
of the holder at any time prior to a public offering of the
Company's common stock and automatically converts into common stock
at the time of such public offering. As of December 31, 1997, no
shares of Class A preferred stock were outstanding.
CLASS B PREFERRED STOCK
The Company's Class B preferred stock is non-voting, has a stated
value and liquidation preference of $1.00 per share, is convertible
into shares of the Company's common stock (with such number of
shares to be determined as of the date of issuance, based on the
stated value divided by the 10-day average closing bid price of the
Company's common stock) at the election of the holder at any time
prior to a public offering of the Company's common stock and
automatically converts into common stock at the time of such public
offering. As of December 31, 1997, the Company had 2,953,125 shares
of Class B preferred stock outstanding.
STOCK PURCHASE OPTIONS AND WARRANTS
The Company has issued common stock purchase warrants in
conjunction with the sale and issuance of common stock, preferred
stock and convertible debentures. The exercise prices of warrants
issued were determined based upon prices related to the issuance of
the Company's other securities. Such warrants are generally
exercisable at any time within two years from the date of issuance
and entitle the holder to receive one share of common stock for
each warrant. In August 1997, the Company, by written consent of
the Board of Directors, extended the exercise date of all warrants
with expiration dates in 1997 and 1998 to December 31, 1998.
The Company has also issued stock options to certain officers,
employees and directors. Options granted in 1996 totaled 1,000,000
and are exercisable at $6.00 per share. These options were canceled
effective as of December 31, 1997. Options granted in 1997 totaled
1,417,500. Of the total number of options granted in 1997, 117,500
are exercisable at any time over a two year period at an exercise
price of $1.50 per share and 1,300,000 are exercisable at any time
over a five year period at an exercise price of $0.10 per share.
<PAGE> 61
Options and warrants outstanding are summarized as follows:
Exercise Weighted
Price Range Average
Shares per Share Exercise Price
--------- ------------ --------------
Warrants outstanding
at December 31, 1995 1,680,936 $1.50-$8.00 $2.73
Warrants issued 1,822,098 $1.50-$10.00 $4.00
Options issued 1,000,000 $6.00 $6.00
---------
Warrants and options
outstanding at December 31, 1996 4,503,700 $1.50-$10.00 $3.78
Warrants issued 697,805 $0.10-$4.50 $1.06
Warrants canceled (166,668) $1.50 $1.50
Options issued 1,417,500 $.010-$1.50 $0.22
Option canceled (1,000,000) $6.00 $6.00
---------
Warrants and options
outstanding at December 31, 1997 5,452,337 $0.10-$10.00 $1.93
=========
The Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25)
and related Interpretations in accounting for its employee stock
options because, as discussed below, the alternative fair 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.
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 the options
granted in 1997 was estimated at the date of grant using a Black-
Scholes option pricing model with the following assumptions: risk-
free interest rate of 6.50%; no dividend yield; a volatility factor
of the expected market price of the Company's common stock of 173%;
and a weighted-average expected life of 4.75 years. The assumptions
used in 1996 to estimate the fair value of options granted in that
year were: 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.
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.
<PAGE> 62
For purposes of the following pro forma disclosure, the estimated
fair value of options granted to employees have been expensed. The
Company's pro forma net loss and basic earnings per share data
after giving effect to the charges to income, as if the Company
accounted for stock options under the provisions of Statement No.
123, for the years ended December 31, 1997 and 1996 are summarized
as follows:
1997 1996
--------- ----------
Loss from continuing operations $(1,292,600) $(19,614,489)
--------- ----------
Income (loss) from operations of discontinued
telecommunications businesses 238,300 (1,322,179)
Gain from disposition of discontinued
telecommunications businesses 241,600 --
--------- ---------
Net income (loss) $ (812,700) $(20,936,668)
========= ==========
Basic earnings per share:
Loss from continuing operations $ (.12) $(2.35)
Income (loss) from operations of
discontinued telecommunications businesses .02 (0.16)
Gain from disposition of discontinued
telecommunications businesses .02 --
--------- ---------
Net loss $ (.08) $ (2.51)
========= =========
<PAGE> 63
NOTE 12 LEASES
The capital lease obligations outstanding as of December 31, 1996
were removed from the Company's consolidated balance sheet in 1997
as a result of the rescission of the ATI acquisition agreement (see
Note 4) and the taking of possession by the lessor of certain
computer equipment leased by NSC (see Notes 5 and 14).
The Company leases office space and equipment under operating
leases expiring on various dates through November 31, 2000. Total
minimum future rental payments under non-cancelable operating
leases having remaining terms in excess of one year as of December
31, 1997 are as follows:
1998 $ 55,949
1999 47,833
2000 43,847
2001 --
2002 --
-------
Total minimum future rental payments $ 147,629
=======
Rental expense under all operating leases was $167,354, $359,474,
and $94,961 in 1997, 1996, and 1995, respectively. During 1997, the
Company vacated certain leased premises and is subject to certain
additional lease payments and other charges under the leases, all
which have been recorded as of December 31, 1997. In addition, the
Company is in default of the lease agreement on its San Antonio, TX
location.
<PAGE> 64
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 $675,966 at December 31,
1997. 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,
1997 and 1996:
1997 1996
--------- ---------
Deferred compensation assets included in:
Other current assets $ 126,627 $ 355,415
Deferred compensation (non-current) 52,941 647,355
--------- ----------
$ 179,568 $1,002,770
========= ==========
Deferred compensation liabilities included in:
Accrued expenses and other current
liabilities $ 365,172 $ 344,652
Deferred liabilities under employment
agreements 310,794 676,261
--------- ----------
$ 675,966 $1,020,913
========= ==========
During 1997, certain employees subject to the above described
employee agreements resigned resulting in charges to income, in the
aggregate, of approximately $626,000, to write-off the unamortized
portion of the related deferred compensation asset (see Note 5).
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). The unamortized deferred
compensation asset recorded in 1995 was written-off in 1997 due to
the resignation of that Chief Executive Officer.
<PAGE> 65
NOTE 14 COMMITMENTS AND CONTINGENCIES
The Company is subject to various legal and administrative
proceedings. These proceedings include (i) a consent order executed
between the Company and the State of Michigan requiring the Company
to use its best efforts to satisfy the prerequisites of the
Securities and Exchange Commission and the Michigan Securities
Bureau for registering the common stock sold by the Company to
purchasers of its securities in the State of Michigan, (ii) actions
brought against the Company by certain former employees and persons
formerly under contract with the Company for payments allegedly due
them, (iii) an action by a shareholder seeking the rescission of
the sale by the Company of its common stock to the shareholder,
(iv) an action by an equipment lessor seeking approximately
$500,000 in lease payments and other charges due under a lease
agreement and (v) an action by the former stockholders of CCI.
These legal and administrative actions are more fully described
below.
The consent order executed by the Company and the State of Michigan
in December 1996, requires the Company to use its best efforts to
satisfy the prerequisites of the Security and Exchange Commission
and the Michigan Securities Bureau for registering the common stock
sold to Michigan purchasers of its common stock for resale by them
in the public market. This action is the result of the sale by the
Company of its securities in the State of Michigan without an
exemption from registration under the Michigan Uniform Securities
Act. In the event the Company is unable to effect a registration
statement or such purchasers are unable to resell their shares
pursuant to such registration statement at a higher price than
their cost, then the Company is required to use its best efforts to
satisfy the prerequisites of the Securities and Exchange Commission
and the State of Michigan for making a rescission offer to all such
purchasers. Also, pursuant to the consent order, the Company must
cease the unregistered sale of securities in Michigan, has been
censured and has paid costs to the state of $2,500. Upon
satisfaction of the consent order, all sanctions are terminated. As
of December 31, 1997, the Company estimates its maximum potential
exposure as a result of any rescission offer which may be required
to be made in the State of Michigan to be approximately $795,739,
including interest of approximately $121,615. The number of shares
the Company believes may be subject to a rescission offer in the
State of Michigan, if such an offer were to be made, is
approximately 219,000 shares; and, the weighted average purchase
price of such shares is approximately $3.25 per share. The Company
has not satisfied the requirements of the consent order. Due to the
"best efforts" nature of the Company's compliance obligation, the
Company believes that its performance of the terms of the consent
order is deferred until such time it is able to both financially
and functionally comply with the consent order.
On April 15, 1997, Mr. Ken Lame, as Plaintiff, filed an action in
the United States District Court, District Court of Utah, Central
Division (Case No. 2:97CV0292W) against the Company and NSC, as
Defendants. This action arises from a consulting agreement between
Mr. Lame and the Company. The action seeks approximately $250,000,
plus interest, for payments Mr. Lame alleges are due under the
consulting agreement. The Company has accrued all amounts it
believes are due under the consulting agreement. The resolution of
this matter is not expected to result in liabilities materially in
excess of those that have already been accrued by the Company under
the consulting agreement.
<PAGE> 66
On May 21, 1997, Mr. Jeff Good, as Plaintiff, filed an action in
the United States District Court, Southern District of Iowa,
Davenport Division (Case No. 3-97-CV-80085) against the Company, as
Defendant, for amounts Mr. Good alleges are due under an employment
agreement between Mr. Good and one of the Company's subsidiaries
(which subsidiary is no longer conducting business). This action
seeks compensation and benefits under the employment agreement in
excess of $200,000. The Company believes this action to be without
merit and intends to vigorously defend it. However, it is not
possible to predict the likely outcome of this matter.
On May 1, 1997, Mr. John Jassy, as Plaintiff, filed an action in
the Circuit Court of the Sixth Judicial Circuit in and for Pinellas
County, Fl., Civil Division (Case No. 97-3103-CI-20) against the
Company, Mr. Stephen E. Williams and Mr. Edwin B. Salmon, Jr., as
Defendants. This action alleges that numerous misrepresentations
and deceptive statements were made to Mr. Jassy and certain family
members of Mr. Jassy to induce them to purchase the Company's
securities. The action seeks rescission of those security
purchases, payment of compensation Mr. Jassy alleges is due to him
from his employ by the Company as an executive officer and
repayment of a loan made to Mr. Williams by Mr. Jassy. This action
seeks approximately $500,000, plus interest and attorney's fees.
Included in the amounts claimed by plaintiff, are approximately
$450,000, including interest, to repurchase approximately 100,000
shares of the Company's common stock purchased by plaintiff and his
family members, approximately $60,000, plus interest, Mr. Jassy
alleges is payable to him in unpaid salary and benefits and $2,500,
plus interest, Mr. Jassy claims is owed to him by Mr. Williams, a
former President and Chief Executive Officer of the Company. The
Company believes this action to be without merit and intends to
vigorously defend it. In the event of an unfavorable outcome, it is
unlikely that the Company would be able to repurchase the shares of
common stock or pay other amounts subject to the action.
In May 1996, the Company informed the principals of Coast
Communications, Inc. ("CCI") that the Company was canceling the
acquisition of CCI and terminating all of the related acquisition
documents. The principals of CCI filed suit to enforce promissory
notes in the aggregate principal amount of $300,000, which were
issued by the Company in connection with the CCI acquisition and
the issuance of 200,000 shares of the Company's Class A preferred
stock they allege are due them under the acquisition agreement.
This matter was referred by court order to mandatory arbitration in
the State of Florida. On February 3, 1998, the Arbitrators' awarded
in favor of the former shareholders of CCI. The award requires,
among other things, that the Company (i) convert 200,000 shares of
its Class A Preferred Stock, held by the former shareholders of
CCI, into 100,000 shares of its common stock and (ii) issue another
200,000 shares of Class A Preferred Stock to the former CCI
stockholders, which is also convertible into 100,000 shares of the
Company's common stock, and gave the former shareholders of CCI the
ability to seek a summary judgment against the Company for
$500,000, without opposition, or accept 500,000 shares of the
Company's Class A Preferred Stock in lieu of a summary judgment. As
of December 31, 1997, the Company has recorded a loss contingency
of $111,000, related to this action. It is highly unlikely that the
Company would be able to satisfy a summary judgment should the
former shareholders of CCI decide to seek a summary judgment in
lieu of preferred stock.
<PAGE> 67
In October 1997, Boston Financial Corporation ("BFC") took
possession of certain computer equipment leased by NSC from BFC as
a result of the default by NSC of payments due under the lease. On
December 11, 1997, BFC filed an amended suit in District Court,
45th Judicial District, Bexar County, Texas (Case No. 97CI-14567)
against NSC and, as guarantors of the lease agreement, the Company,
ATI and TNI. This action seeks approximately $500,000 in lease
payments and other charges due under the lease agreement. The
Company is attempting to negotiate a settlement of this matter and
may have several counterclaims against BFC should the Company and
BFC fail to settle. However, it is not possible to predict the
likely outcome of such negotiations or any counterclaims the
Company may have against BFC. As of December 31, 1997, the Company
has recorded a loss contingency reserve of approximately $500,000
related to this action.
On June 6, 1997, Timboon, LTD ("Timboon"), as Plaintiff, filed an
action in the United States District Court, Southern District of
New York (Case No. 97 Civ. 4464 (JSR), against the Company, as
Defendant, seeking the delivery of 163,438 shares of the Company's
common stock to Plaintiff as a result of the conversion of $150,000
of the Company's 4% Convertible Debentures, issued to Timboon in
February 1997 in reliance upon exemptions under Regulation S of the
Securities Act of 1933, and the payment of $970,000 (the principal
amount of the Company's $4% Convertible Debentures that have not
been converted by Timboon) to Timboon, plus damages. The Company
filed a counterclaim against Timboon alleging that Timboon breached
the representations and covenants it made in the Off-Shore
Securities Subscription Agreement. These representations and
covenants related to, among other things, Timboon's investment
intent in acquiring the Company's securities and its possible
"shorting" of the Company's common stock in contemplation of
conversion. In addition, the Company alleged that Timboon
participated in manipulative market activity with the intent to
artificially depress the market price of the Company's common
stock. Effective March 2, 1998, the Company and Timboon Ltd.
entered into a Settlement Agreement and Release (the "Settlement
Agreement") in settlement of all claims brought against each other
in connection with the debentures issued to Timboon. See Note 7.
Prior to the rescission of the ATI acquisition agreement, the
Company obtained and guaranteed an equipment lease financing
facility for ATI's use. The financing facility was subsequently
terminated by the lessor due to non-payment by ATI of payments due
under the related lease agreements. In connection with the
rescission of the ATI acquisition agreement, ATI issued a
promissory note to the Company in the amount of $180,000, payable
upon the default by ATI of payments due under the lease financing
facility. Payments due to the Company under the promissory note are
to be equal to the amount, if any, the Company may be required to
pay under the lease guaranty agreement. In the event of a default
by ATI under the lease financing facility, it is uncertain whether
or not the Company would be able to satisfy the terms of the
guaranty agreement or whether or not ATI would be able to satisfy
the terms of the promissory note.
As of December 31, 1997, the Company and its subsidiaries have
pending outstanding judgments totaling approximately $170,000,
exclusive of the CCI judgment referred to above. These judgments
arose from cancellation of office and equipment leases and from non-
payment of obligations due to trade creditors.
The Company is also involved in numerous other legal and
administrative actions incurred in the ordinary course of business,
none of which are expected to have a material impact on the
Company's results of operations.
<PAGE> 68
NOTE 15 SEGMENT INFORMATION
The Company's operations are classified into two industry segments:
healthcare management and cost containment products and services
("Healthcare") and telecommunications products and services,
including pay-per-view related services ("Telecommunications"). In
1996 and 1997, the Company disposed of substantially all of the
assets of its telecommunications businesses. Consequently, the
healthcare segment is the only segment in which the Company has
continuing operations. The operations of the Company's
telecommunications segment are classified as discontinued
operations in the accompanying consolidated statements of
operations for all periods presented. For summary operating results
of the Company's discontinued telecommunications segment, see Note
4.
Capital expenditures of the Company's discontinued
telecommunications segment were $-0-, $12,561 and $208,503 in 1997,
1996 and 1995, respectively; and, the identifiable assets of the
Company's discontinued telecommunications segment included in the
consolidated balance sheets as of December 31, 1997 and 1996 are
$539 and $660,094, respectively.
In 1997, HMT had one customer that counted for approximately 50% of
the Company's consolidated net revenues from continuing operations.
In 1996 and 1995, the NSC had one customer that accounted for
approximately 47% and 100.0% of the Company's consolidated net
revenues from continuing operations. The Company has no inter-
segment revenues.
<PAGE> 69
NOTE 16 STATEMENTS OF CASH FLOWS SUPPLEMENTAL INFORMATION
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- ---------
Non-cash investing and financing activities:
Equipment capital leases $ 73,184 $703,215 $ 112,308
======== ======== =========
Notes payable issued in
connection with
business acquisitions $ -- $ -- $ 700,000
======== ======== =========
Issuance of stock for debt $716,318 $199,150 $ --
======== ======== =========
Cash paid during the period for:
Interest $131,635 $ -- $ 23,055
======== ======== =========
Income taxes $ -- $ -- $ --
======== ======== =========
<PAGE> 70
NOTE 17 EVENTS SUBSEQUENT TO DECEMBER 31, 1997
In March 1998, the Company made an offer to each of the holders of
its 10% convertible debentures payable to the former shareholders
of TNI to redeem the debentures in return for 1.5 shares of the
Company's common stock for each dollar of principal, plus accrued
interest, due to each of the debenture holders, plus common stock
purchase warrants exercisable at any time over a five year period
at an exercise price of $0.20 per share. The number of common stock
purchase warrants to be issued upon acceptance of the offer to
redeem the debentures is to be determined by dividing the principal
amount of each debenture by two(2). As of March 31, 1998 (the
expiration date of the offer), the Company received the acceptance
of all of the holders of the debentures. Pursuant to the redemption
offer, the Company is to issue 893,278 shares of its common stock
and 450,000 stock purchase warrants (225,000 of which are
exercisable at $1.50 per share by the terms of the respective
debenture note and 225,000 of which are exercisable at $0.20 per
share pursuant to the redemption offer).
In March 1998, the Company, TNI, International Teledata Corporation
("ITD") and certain former employees of the Company (the
"Employees") entered into an agreement (the "Agreement") which
provided for the transfer of certain ITD assets to the Employees.
The assets transferred pursuant to the Agreement were sold to ITD
by TNI pursuant to the Purchase and Sale Agreement, dated as of
January 31, 1997, between TNI and ITD. In connection with the
transfer of assets pursuant to the Agreement, the Company canceled
the $500,000 convertible debenture note issued by ITD (the "ITD
Note") in conjunction with the Purchase and Sale Agreement in
exchange for 496,902 shares of the Company's common stock
beneficially owned by the Employees and the waiver by the Employees
of accrued and unpaid compensation due to them and cancellation of
their employment agreements with the Company.
<PAGE> 71
NOTE 18 - Valuation and Qualifying Accounts
Valuation and qualifying accounts (which are deducted from the
assets to which they apply) consist of an allowance for doubtful
accounts.
Following is a summary of the allowance for doubtful accounts:
Balance, December 31, 1995 $510,000
Additions:
Provision for bad debts charged
to operations 522,687
Deductions:
Write-offs (985,254)
CCI Elimination (19,359)
-------
Balance, December 31, 1996 28,074
Additions:
Provision for bad debts charged
to operations 39,816
Deductions:
Write-offs (63,214)
Discontinued operations (4,676)
-------
Balance, December 31, 1997 $ --
=======
The provision for bad debts charged to operations applicable to
discontinued operations was $475,711 in 1996.
NOTE 19 - PROPOSED ACQUISITION
On November 14, 1997, the Company and the stockholders of HMG
Health Care Claims Auditing, Inc. ("HMG") entered into an agreement
to exchange stock ( the "Agreement to Exchange Stock"). Pursuant to
the Agreement to Exchange Stock, the Company is to acquire all of
the outstanding stock of HMG in exchange for shares of the
Company's common stock (the "HMG Acquisition Shares"). The number
of HMG Acquisition Shares is to be determined at closing and are to
be equal to 30% of the then outstanding common stock of the Company
after giving effect to the issuance of the HMG Acquisition Shares.
The acquisition of HMG is subject to, among other things, the
Company obtaining equity or debt financing to refinance the
existing indebtedness of HMG ($850,000) and pay other costs and
expenses related to the acquisition. The Agreement to Exchange
Stock contemplated a December 31, 1997 closing. Subsequent thereto,
the Agreement to Exchange Stock was terminated by the mutual
consent of the parties.
<PAGE> 72
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON FINANCIAL
DISCLOSURE.
Effective February 20, 1998, Ernst & Young LLP resigned as
independent auditor of the Registrant. The reports of Ernst &
Young LLP on the Registrant's consolidated financial statements
for the past two fiscal years did not contain an adverse opinion
or a disclaimer of opinion and were not qualified or modified as
to audit scope or accounting principles. The reports of Ernst &
Young LLP included an explanatory paragraph expressing substantial
doubt about the Registrant's ability to continue as a going
concern.
In connection with the audits of the Registrant's consolidated
financial statements for each of the two years ended December 31,
1996, and in the subsequent interim periods, there were no
disagreements with Ernst & Young LLP on any matters of accounting
principles or practices, financial statement disclosure, or
auditing scope and procedures which, if not resolved to the
satisfaction of Ernst & Young LLP, would have caused Ernst & Young
LLP to make reference to the matter in their report.
Ernst & Young LLP has furnished a letter addressed to the
Commission stating that it agrees with the statements contained
herein. A copy of that letter, dated February 25, 1998, is filed
as an exhibit to the Company's Form 8-K dated February 25, 1998.
Effective March 4, 1998, the Registrant engaged Moore Stephens
Lovelace, P.L. to audit its 1997 consolidated financial
statements. The decision to cease the registrant-auditor
relationship between Registrant and Ernst & Young LLP and the
engagement of Moore Stephens Lovelace, P.L. was not recommended or
approved by the Registrant's Board of Directors.
<PAGE> 73
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:
Director
Name Age Positions With Co. and Subsidiaries Since
- -------------------- --- ----------------------------------- --------
Edwin B. Salmon, Jr. 60 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
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> 74
Messrs. Kowalczyk, Sweet and Snapp were elected to the Board of
Directors at various times during 1997 by remaining Directors to
fill vacancies. The Company did not hold an annual meeting of
shareholders in 1997 due its inability to comply with the
information requirements of Rule 14a-3, as promulgated by the
Securities and Exchange Commission for the solicitation of proxies.
Rule 14a-3 requires registrants to furnish security holders with an
annual report which includes audited balance sheets as of the end
of the two most recent fiscal years and audited statements of
operations and cash flows for each of the three most recent fiscal
years. The Company was unable to comply with such requirements due
the Company not having timely filed its Annual Report on Form 10-K
for the year ended December 31,1996. The Company did not timely
file its Annual Report on Form 10-K for the year ended December 31,
1996 due to its inability to timely pay for the services of its
independent auditors and the time required by management to
complete its assessment of the carrying value of intangible assets
and goodwill recorded in connection with the acquisition of NSC.
The Company contemplates holding an annual meeting of shareholders
in 1998 after the filing of this 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 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> 75
Mr. Hugh M. Gibbons was appointed as the Company's Executive Vice
President in July 1977. For the past five years Mr. Gibbons has
served as President of Gibbons' Health Plan Recoveries, Inc.,
President of and Principal of Health Plan Audit Services, Inc.,
President of H.M. Gibbons & Associates, Inc. and Executive Vice
President of HMG Health Care Auditing, Inc. Mr. Gibbons has over
34 years of healthcare cost containment experience and has a Doctor
of Jurisprudence Degree from the University of Baltimore School of
Law.
<PAGE> 76
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 executive officers of the registrant
whose compensation exceeded $100,000 for the year ending December
31, 1997.
Annual Compensation
--------------------------------------------
Name & Principal Positions Long-Term
- -------------------------- Year Salary Bonus Other Compensation
---- ------ ------ ----- ------------
Stephen E. Williams 1997 $150,000 $ -- $ -- $ --
Chief Executive 1996 177,500 -- 7,500 --
Officer (1)(2)(3) 1995 190,625 -- 7,500 --
James T. Kowalczyk 1997 32,500 -- -- --
President and Director (4) 1996 N\A N\A N\A N\A
1995 N\A N\A N\A N\A
Edwin B. Salmon, Jr. 1997 150,000 -- -- --
Chief Financial Officer, 1996 177,000 -- 7,500 --
Treasurer and Chairman of 1995 99,630 -- 9,000 --
the Board(1)(4)
(1) The named executive officers 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. Effective December 1, 1996, the
annual salaries of Messrs. Salmon and Williams were reduced to
$150,000, each.
(2) In 1995, the Company issued, as additional compensation to Mr.
Williams, 500,000 shares of Common Stock, valued at $15,000, and
1,375,000 shares of Class A preferred stock, valued at $20,625, in
connection with the performance of certain conditions set forth in
a 1994 letter agreement. See Note 13 to the Consolidated Financial
Statements.
(3)In April and June 1997, Mr. Willliams resigned as the Company's
President and CEO and Director, respectively.
(4)In August 1997, each of Messrs. Kowalczyk and Salmon were
granted options to purchase 500,000 shares of the Registrant's
common stock, exercisable at $0.10 per share at any time over five
years.
N/A means the respective officer was not employed by the Company
during that period.
<PAGE> 77
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 February
28, 1998 by each shareholder known by the Company to be a
beneficial owner of more than five percent of the Company's common
stock, by each of the registrant's named directors and executive
officers, and by all directors and executive officers of the
registrant as a group. Except as indicated in the footnotes to this
table, the Company believes that the persons named in the table
have sole voting and investment power with respect to all shares of
common stock shown as beneficially owned by them.
Name of Amount and Nature Percent
Beneficial Owner of Beneficial Interest(1) of Class(1)
- ---------------------- ------------------------- -----------
Edwin B. Salmon, Jr. 625,762 (2a) 1.89
200,000 (2b) 0.60
261,533 (2c) 0.79
224,418 (2d) 0.68
40,000 (2e) 0.12
40,000 (2f) 0.12
James T. Kowalczyk 571,709 (3) 1.72
Richard A. Sweet 226,410 (4) 0.68
Larry R. Snapp 127,250 (4) 0.38
Hugh M. Gibbons 400,000 1.21
All Directors and Executive
Officers as a Group(5 persons) 2,717,082 (5) 8.19
4,000,000 (6) 12.06
NIDAN Corporation 7,746,389 (7)(8) 23.35
NIDAN Corporation 7,042,172 (9) 21.23
(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.
<PAGE> 78
(2c) These shares are owned by Brittany Leigh, Inc. Mr. Edwin B.
Salmon disclaims beneficial ownership of these shares. Mr. David
Salmon, Mr. Edwin B. Salmon's adult son, is a Director and the
President and Mr. Winfred Russell is a former President of this
corporation. Mr. Edwin B. Salmon was reported to be one of two
directors on the annual report for the corporation filed with the
State of Florida; but, Mr. David Salmon and Mr. Edwin B. Salmon
maintain that the annual report was filed in error and Mr. Edwin B.
Salmon neither is nor in the past two years has been a director or
officer of this corporation. Mr. Edwin B. Salmon is a creditor of
this corporation and has received repayment of his loans to the
corporation from proceeds realized by the corporation from the sale
of the registrant's common stock. Mr. Russell, in his capacity as
the former President of this corporation, also authorized Mr. Edwin
B. Salmon, in Mr. Russell's absence, to approve purchases and sales
of the registrant's common stock by the corporation when
unsolicited offers are received from brokers. Mr. Edwin B. Salmon
currently has no such authority. No purchases or sales of the
registrant's common stock by this corporation have been initiated
by the registrant. The address of Brittany Leigh, Inc. is 1520 San
Charles Drive, Dunedin, Florida 34698.
(2d) These shares are owned by American First Equipment Leasing,
Inc. Mr. Edwin B.Salmon disclaims beneficial ownership of these
shares. Mr. David Salmon, Mr. Edwin B. Salmon's adult son is a
Director and President and Mr. Winfred Russell is a former
President of this corporation. Mr. Edwin B. Salmon was reported to
be one of two directors on the annual report for the corporation
filed with the State of Florida; but, Mr. David Salmon and Mr.
Edwin B. Salmon maintain that the annual report was filed in error
and Mr. Edwin B. Salmon neither is nor in the past two years has
been a director or officer of the corporation. Mr. Salmon is a
creditor of this corporation and has received repayment of his
loans to the corporation from proceeds realized by the corporation
from the sale of the registrant's common stock. Mr. Russell, in his
capacity as the former President of this corporation, also
authorized Mr. Edwin B. Salmon, in Mr. Russell's absence, to
approve purchases and sales of the registrant's common stock by the
corporation when unsolicited offers are received from brokers. Mr.
Edwin B. Salmon currently has no such authority. No purchases or
sales of the registrant's common stock by this corporation have
been initiated by the registrant. The address of American First
Equipment Leasing, Inc. is 1520 San Charles Drive, Dunedin, Florida
34698.
(2e) These shares are owned by the Paige Irrevocable Trust. Mr.
Edwin B. Salmon is the grantor of this irrevocable trust; but, his
three adult children, including Mr. David Salmon, none of whom
reside with him, are the co-trustees and one of Mr. Edwin B.
Salmon's daughters is the sole beneficiary. Mr. Edwin B. Salmon
disclaims any beneficial interest in this trust. The address of the
trust is the address of the Company.
(2f) These shares are owned by the Jennifer Irrevocable Trust. Mr.
Edwin B. Salmon is the grantor of this irrevocable trust; but, his
three adult children, including Mr. David Salmon, none of whom
reside with him, are the co-trustees and one of Mr. Edwin B.
Salmon's daughters is the sole beneficiary. Mr. Edwin B. Salmon
disclaims any beneficial interest in this trust. The address of the
trust is 700 S.W. 66 nd Blvd. ,Gainesville, Fla. 32607.
(3) Includes options for 500,000 shares exercisable at an exercise
price of $0.10 per share at any time through August 15, 2002. The
address of Mr. Kowalczyk is the address of the Company.
<PAGE> 79
(4) Includes options for 100,000 shares exercisable at an exercise
price of $0.10 per share at any time through August 15, 2002. The
address of Mr. Sweet and Mr. Snapp is the addresses of the Company.
(5) Includes the shares and options referred to in (2a)-(2g)
above, plus the options referred to in (3) and (4). Mr. Edwin B.
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.
(6) Includes 4,000,000 shares issued in escrow pursuant to the
terms of a Settlement Agreement and Release dated as of March 2,
1998 between the Company and Timboon LTD. These shares are to be
liquidated by Timboon LTD in payment of $1,200,000 of 4% cumulative
convertible debentures. Timboon LTD has appointed the Board of
Directors ex-officio as proxy of Timboon with full power of
substitution to vote the number of shares Timboon LTD would be
entitled to cast if personally present at any annual meeting or
special meeting of stockholders of the Company at any time prior to
January 31, 1999. The address of Timboon LTD is 28 Hagvura Street,
Karni Shomron, Israel.
(7)Includes 7,746,389 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 as of February 28, 1998,
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.
(8) 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
McBain, Michigan 49657
Kenneth Earl Gilde 570 W. Blue Road
Falmouth, Michigan 49632
David E. Gilde 4565 Forward Road
Falmouth, Michigan 49632
Phillip S. Gilde 8200 S.McGee Road
McBain, Michigan 49657
Dale Meyering 9525 W. Watergate Road
McBain, Michigan 49657
Charles O. Helsel 9321 N. Burkett Road
Lake City, Michigan 49651
Edwin L. Helsel 5981 N. Edwards Rd.
Lake City, Michigan 49651
<PAGE> 80
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, may
violate the terms and conditions of the consent order entered into
between the Company and the State of Michigan. The Company has not
yet made a final determination as to conversion of the debentures
without a violation of Michigan law and the consent order.
(9) Includes 7,042,172 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) such convertible
debentures were converted as of February 28, 1998 and (ii) exercise
of warrants issuable upon conversion.
<PAGE> 81
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
At December 31, 1996, the Company had an outstanding $25,000 note
payable to Mr. Edwin B. Salmon bearing interest at 8%. This note,
plus accrued interest, was converted into 25,762 shares of the
Company's common stock in February 1997. During 1997, Mr. Salmon
loaned the Company $40,243 without interest and the Company repaid
Mr. Salmon $40,243.
At December 31, 1996, the Company had notes outstanding to American
First Equipment Leasing totaling $62,741. During 1997, the Company
borrowed $39,500 from American First Equipment Leasing, repaid
$44,241 of such notes, plus accrued interest, and converted $58,000
of such notes, plus accrued interest, into shares of the Company's
common stock at a conversion price of $1.00 per share. See Note
2(d) to Item 12 "Security Ownership of Certain Beneficial Owners
and Management."
During 1997, the Company borrowed $65,000 from Brittany Leigh, Inc.
and repaid $65,000, plus accrued interest. See Note 2(c) to Item 12
"Security Ownership of Certain Beneficial Owners and Management."
At December 31, 1996, the Company had outstanding notes payable to
Mr. Richard A. Sweet, a Director and shareholder of the Company,
totaling $40,000. During 1997, the Company converted the notes
payable outstanding to Mr. Sweet, plus accrued interest, into
41,565 shares of the Company's common stock.
As of December 31, 1996, the Company had outstanding notes payable
to the former shareholders of TNI totaling $450,000, bearing
interest at 10% per annum, and $250,000 outstanding to the former
shareholders of ATI, bearing interest at 6% per annum. Subsequent
to December 31, 1997, the Company issued 893,278 shares of its
common stock and 450,000 stock purchase warrants (225,000 of which
are exercisable at $1.50 per share by the terms of the respective
debenture note and 225,000 of which are exercisable at $0.20 per
share pursuant to a redemption offer) in satisfaction of the notes
payable to the former shareholders of TNI. The notes payable to the
former shareholders of ATI were removed from the consolidated
balance sheet in 1997 in connection with the rescission of the ATI
acquisition.
At December 31, 1996, the Company had outstanding notes to certain
shareholders (other than to Mr. Salmon, Brittany Leigh, Inc.,
American First Equipment Leasing, Inc. and Mr. Sweet) totaling
$235,000 bearing interest at 8% to 10% per annum. During 1997,
certain shareholders of the Company (other than Mr. Salmon,
Brittany Leigh, Inc., American First Equipment Leasing, Inc. and
Mr. Sweet) loaned the Company an aggregate amount of $135,000 at
10% interest. Of these notes, $170,000, plus accrued interest, was
converted during the year into shares of the Company's common stock
at prices ranging from $0.90 to $1.00 per share and $200,000, plus
accrued interest, was paid in cash.
<PAGE> 82
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. During 1997, the
Company converted $84,000 of these convertible debentures, plus
accrued interest, into 19,033 shares of the Company's common stock.
During 1997, the Company issued an aggregate of 142,857 shares of
its common stock to American First Equipment Leasing and Brittany
Leigh, valued at $61,829, for services rendered to the Company.
<PAGE> 83
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, 1997 29
Independent Auditors' Report on the Consolidated Financial
Statements for the years ended December 31, 1996 and 1995 30
Consolidated Balance Sheets as of December 31, 1997 and 1996 31
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 1997 33
Consolidated Statements of Stockholders' Equity for each of
the three years ended in the period December 31, 1997 34
Consolidated Statements of Cash Flows for each of the three
years ended in the period December 31, 1997 36
Notes to Consolidated Financial Statements 37
(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.
(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.
<PAGE> 84
11.# Form of Offshore Offering Distribution agreement by and
between Systems Communications, Inc. and Victory
Investments, LLC.
12.# Form of 10% cumulative Convertible Debentures due November
21, 1997 in the aggregate amount of $500,000.
13.# Form of Offshore Securities Subscription Agreement for
$500,000 10% Cumulative Convertible Debentures.
14.# Form of Offshore Securities Subscription Agreement for
$1,120,000 4% Convertible Debentures.
15.#### Form of 10% Cumulative Convertible Debenture Note.
16.++ Form of Settlement Agreement dated as of March 2,1998
between the Company and Timboon LTD, including Joint Escrow
Instructions and Revocable Proxy.
(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.
<PAGE> 85
P 20.** Telephone Agreement between Ameristar and U.S. Long
Distance, Inc., dated July 10, 1996
P 21.** License Agreement between Ameristar and VCA Pictures,
dated February 13, 1996
P 22.** Agreement between Ameristar and United International
Pictures, dated April 1, 1996
P 23.** Marketing Agreement, dated October 2, 1995, between
Ameristar and U.S. Osiris Corporation
P 24.** Operator Service Agreement dated April 15, 1995,
between Opticom and Ameristar
P 25.** Mitel OSS Servicing Agreement, dated September 1, 1993
between MasterCorp, Inc. and Ameristar
P 26.** Telecommunications Agreement, dated January 15, 1996
between Long Distance Exchange Corp. and Ameristar
P 27.** Agreement, dated January 1995, between LDOS
Communications, Inc. and Ameristar
P 28.** Agreement, dated February 28, 1994, between L.D.
Communications, Inc. and Ameristar
P 29.** Contract Operator Services Agreement for Public Pay
Phones and Letters of Agency, dated January 7, 1992, between
Fone America, Inc. and Ameristar
P 30.** Payphone Aggregator Agreement, dated July 22, 1993,
between Communication TeleSystems International and Ameristar
P 31.** Operator Service Agreements between Capital Network
System, Inc. and Ameristar
P 32.** Agreements between Ameristar Network Exchange, Inc. and
Ameristar
P 33.** Agreement dated November 11, 1991 between Ameristar and
Access Telecommunications, Inc.
P 34.** Agreement dated September 16, 1991 between Conquest
Operator Services Corporation and Ameristar
35.## Heads of Agreement for change in Management of
National Solutions Corporation.
36.## Rescission Agreement, dated May 21, 1997 by and between the
Company, Ameristar Telecommunications, Inc., Mark Woodward
and Russell Armstrong.
37.## Promissory note dated May 21, 1997 between ATI and
the Company.
38.## Agreement dated as of June 9,1997 by and among the
Company, Karen Wolfe and Eric Wolfe, Eric Wolfe, on behalf of
his infant son, Tyler Wolfe, and Lori Wolfe, wife of Eric
Wolfe, on behalf of herself and her infant son Tyler Wolfe.
39.## Cooperative Marketing and Option Agreement dated June 9, 1997
between HMT and the Company.
40.## Purchase and Sale Agreement between TNI and International
TeleData Corporation dated January 31, 1997.
41.## Form of Convertible Debenture in the amount of $500,000
between International TeleData Corporation and TNI.
42.## Memorandum dated June 16, 1997 from the Department of
the Army regarding renewal of the Cooperative Research and
Development Agreement between the Company and the Department
of the Army.
43.### Agreement to Exchange Stock, dated November 14, 1997, by and
between Grant Kolb and Patrick Loeprich (as "Sellers") and
the Company
(16) * Letter re change in certifying accountant
(16) 1.+ Letter re change in certifying accountant
<PAGE> 86
(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)
(27.4)**** Financial Data Schedule (Three months ended March 31, 1997)
(27.5)**** Financial Data Schedule (Six months ended June 30, 1997)
(27.6)**** Financial Data Schedule (Nine months ended September 30, 1997)
(27.7)+++ Financial Data Schedule (Year ended December 31, 1997)
(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 respective quarterly period.
# Incorporated by reference to the Company's Current Report on Form 8-K
as filed on March 27, 1997.
## Incorporated by reference to the Company's Current Report on Form 8-K,
as filed on July 28,1997.
### Incorporated by reference to the Company's Current Report on Form 8-K,
as filed on November 21,1997.
#### Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996.
+ Incorporated by reference to the Company's Current Report on Form
8-K, as filed on November 25, 1998.
++ Incorporated by reference to the Company's Current Report on
Form 8-K, as filed on March 10, 1998.
+++ Filed herewith.
<PAGE> 87
(b) Reports on Form 8-K
The following reports were filed on Form 8-K for the three months
ended December 31, 1997 and prior to the filing date hereof:
1. 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.
2. On November 25, 1997, the Company filed a Form 8-K. The date
of the event reported was November 20, 1997. The event reported
was the resignation of Ernst & Young LLP as independent auditor of
the Registrant.
3. On March 10, 1998, the Company filed a Form 8-K. The date of the
event reported was March 2, 1998. The event reported was the
agreement between the Company and Timboon LTD (the "Settlement
Agreement and Release") in settlement of all claims brought against
each other in connection with the Company's $1,120,000 4%
cumulative convertible debentures.
<PAGE> 88
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: May 8, 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> 89 INDEX TO 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
P10.* Convertible Debenture Note dated December 5, 1995,
between the Company and R. Thomas Jannarone.
11.# Form of Offshore Offering Distribution agreement by and
between Systems Communications, Inc. and Victory
Investments, LLC.
12.# Form of 10% cumulative Convertible Debentures due November
21, 1997 in the aggregate amount of $500,000.
13.# Form of Offshore Securities Subscription Agreement for
$500,000 10% Cumulative Convertible Debentures.
14.# Form of Offshore Securities Subscription Agreement for
$1,120,000 4% Convertible Debentures.
15.#### Form of 10% Cumulative Convertible Debenture Note.
16.++ Form of Settlement Agreement dated as of March 2, 1998
between the Company and Timboon LTD, including Joint Escrow
Instructions and Revocable Proxy.
(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
<PAGE> 90
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<PAGE> 85
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.
<PAGE> 91
P 34.** Agreement dated September 16, 1991 between Conquest
Operator Services Corporation and Ameristar
35.## Heads of Agreement for change in Management of
National Solutions Corporation.
36.## Rescission Agreement, dated May 21, 1997 by and between the
Company, Ameristar Telecommunications, Inc., Mark Woodward
and Russell Armstrong.
37.## Promissory note dated May 21, 1997 between ATI and the
Company.
38.## Agreement dated as of June 9,1997 by and among the Company,
Karen Wolfe and Eric Wolfe, Eric Wolfe, on behalf of his
infant son, Tyler Wolfe, and Lori Wolfe, wife of Eric Wolfe,
on behalf of herself and her infant son Tyler Wolfe.
39.## Cooperative Marketing and Option Agreement dated June 9, 1997
between HMT and the Company.
40.## Purchase and Sale Agreement between TNI and International
TeleData Corporation dated January 31, 1997.
41.## Form of Convertible Debenture in the amount of $500,000
between International TeleData Corporation and TNI.
42.## Memorandum dated June 16, 1997 from the Department of
the Army regarding renewal of the Cooperative Research and
Development Agreement between the Company and the Department of
the Army.
43.### Agreement to Exchange Stock, dated November 14, 1997, by and
between Grant Kolb and Patrick Loeprich (as "Sellers") and
the Company
(16) * Letter re change in certifying accountant
(16)1.+ Letter re change in certifying accountant
(17)1.## Resignation Letter of Stephen Williams.
(17)2.## Resignation Letter of David J. Olivet
P(21) * List of Subsidiaries of Registrant
(27.1)* Financial Data Schedule (Year ended December 31, 1995)
(27.2)**** Financial Data Schedule (Nine months ended September 30, 1996)
(27.3)#### Financial Data Schedule (Year ended December 31, 1996)
(27.4)**** Financial Data Schedule (Three months ended March 31, 1997)
(27.5)**** Financial Data Schedule (Six months ended June 30, 1997)
(27.6)**** Financial Data Schedule (Nine months ended September 30, 1997)
(27.7)+++ Financial Data Schedule (Year ended December 31, 1997)
(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")
<PAGE> 92
* 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 respective quarterly period.
# Incorporated by reference to the Company's Current Report on Form 8-K
as filed on March 27, 1997.
## Incorporated by reference to the Company's Current Report on Form 8-K,
as filed on July 28,1997.
### Incorporated by reference to the Company's Current Report on Form 8-K,
as filed on November 21,1997.
#### Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996.
+ Incorporated by reference to the Company's Current Report on Form
8-K, as filed on November 25, 1998.
++ Incorporated by reference to the Company's Current Report on
Form 8-K, as filed on March 10, 1998.
+++ Filed herewith.
</TABLE>
