<PAGE> 1
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-26668
SYSTEMS COMMUNICATIONS, INC.
- ------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
FLORIDA 65-0036344
- ------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4707 140th Avenue North, Suite 107, Clearwater, FL. 33762
- ------------------------------------------------------------------------------
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code 727-530-4800
- ------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) had filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes __ No x_
Number of shares outstanding of the issuer's Common Stock, par value $0.001
per share, as of September 30, 1998 - 36,862,159 shares.
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------- -----------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ -- $ 65,556
Accounts receivable - trade 147,868 --
Accounts receivable from officers and employees -- 60,908
Accounts receivable - other 25,000 --
Other current assets 147,334 130,419
--------- ----------
Total current assets 320,202 256,883
--------- ----------
Furniture and equipment 132,982 130,162
Less accumulated depreciation (76,960) (56,774)
--------- ----------
Net furniture and equipment 56,022 73,388
Note receivable from the sale of assets, less
allowance of $500,000 in 1997 -- --
Deferred compensation -- 52,941
Other non-current assets 4,982 4,982
--------- ----------
Total assets $ 381,206 $ 388,194
========= ==========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 3
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------- -----------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' DEFICIT
<S> <C> <C>
Current liabilities:
Notes and debentures payable $ 1,380,328 $ 3,361,700
Accounts payable 579,108 535,516
Accrued compensation and employee benefits 401,439 1,176,578
Liabilities and accruals for claims, assessments
and other losses 1,033,966 1,129,823
Accrued expenses and other current liabilities 408,473 524,576
---------- ----------
Total current liabilities 3,803,314 6,728,193
Deferred liabilities under employment agreements -- 310,794
---------- ----------
Total liabilities 3,803,314 7,038,987
---------- ----------
Common stock subject to rescission 674,124 674,124
---------- ----------
Stockholders' deficit:
Class A convertible preferred stock, stated value
and liquidation preference $1.00 per share;
authorized 5,000,000 shares; issued and
outstanding - 500,000 shares in 1998 55,000 --
Class B convertible preferred stock, stated value
and liquidation preference, $1.00 per share;
authorized 10,000,000 shares; issued and
outstanding, 100,000 shares in 1998 and
2,953,125 shares in 1997 54,764 1,617,260
Common stock - $.001 par value; authorized
50,000,000 shares; issued and outstanding,
36,862,159 shares in 1998 and 12,083,646
shares in 1997 36,862 12,084
Additional paid in capital 21,506,788 16,866,883
Accumulated deficit (25,749,646) (25,821,144)
---------- ----------
Total stockholders' deficit ( 4,096,232) (7,324,917)
---------- ----------
Total liabilities and stockholders' deficit $ 381,206 $ 388,194
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 4
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
Nine Months Ended Three Months Ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues $ 123,300 $ 1,467,344 $ 123,300 $ --
--------- --------- --------- ---------
Costs and expenses:
Cost of revenues -- 90,849 -- --
Selling, general and administrative
expenses 932,286 2,707,075 179,425 48,986
Impairment and other losses 29,273 643,501 29,273 17,773
Depreciation and amortization 19,889 490,873 9,533 48,477
--------- --------- --------- ---------
Total costs and expenses 981,448 3,932,298 218,231 115,236
--------- --------- --------- ---------
Operating loss (858,148) (2,464,954) ( 94,931) (115,236)
Gain from divestiture of subsidiaries 100,000 -- 100,000 --
Gain from sale of license agreement -- 2,695,214 -- --
Gain from rescission of business
acquisitions -- 281,421 -- --
Interest income 892 4,070 -- 1,026
Interest expense (172,206) (336,746) (35,351) (88,217)
Other income (expense), net 408,725 (114,992) -- (41)
--------- --------- --------- ---------
Income (loss) from continuing
operations (520,737) 64,013 ( 30,282) (202,468)
--------- --------- --------- ---------
Discontinued operations:
Income (loss) from operations of
discontinued telecommunications
businesses (less income tax benefit
of $29,000 for the nine months ended
September 30, 1997) 305,647 (56,893) -- (9,512)
Gain from disposition of
telecommunications businesses
(less income tax expense of
$29,000 for the nine months ended
September 30, 1997) -- 610,392 -- --
--------- --------- --------- ---------
Income (loss) before extraordinary
item (215,090) 617,512 ( 30.282) (211,980)
Extraordinary item - Gain from
extinquishment of debt 286,588 -- -- --
--------- --------- --------- ---------
Net income (loss) $ 71,498 $ 617,512 $ ( 30,282) $ (211,980)
========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 5
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
<TABLE>
Nine Months Ended Three Months Ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic earnings per share:
Income (loss) from continuing
operations $ (0.03) $ 0.01 $ -- $ (0.02)
Income (loss) from operations of
discontinued telecommunications
businesses 0.02 (0.01) -- --
Gain from disposition of
telecommunications businesses -- 0.06 -- --
Extraordinary item - Gain from
extinquishment of debt 0.02 -- -- --
--------- --------- --------- ---------
Net income (loss) $ 0.01 $ 0.06 $ -- $ (0.02)
========= ========= ========= =========
Weighted average number of
common shares outstanding 16,624,683 11,019,398 30,710,008 11,181,992
========== ========== ========== ==========
Diluted earnings per share:
Income (loss) from continuing
operations $ (0.03) $ -- $ -- $ (0.02)
Income (loss) from operations of
discontinued telecommunications
businesses 0.02 -- -- --
Gain from disposition of
telecommunications businesses -- 0.03 -- --
Extraordinary item - Gain from
extinquishment of debt 0.02 -- -- --
--------- --------- --------- ---------
Net income (loss) $ 0.01 $ 0.03 $ -- $ (0.02)
========= ========= ========= =========
Weighted average number of
common shares outstanding, 16,624,683 18,803,048 30,710,008 11,181,992
assuming dilution ========== ========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 6
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Nine Months
Ended September 30,
----------------------
1998 1997
------- ---------
<S> <C> <C>
Net cash used in operating activities $ (315,836) $(1,644,954)
------- ---------
Cash flows from investing activities:
Disposition of businesses, net of cash of
businesses disposed of -- 368,343
Expenditures for furniture and equipment (2,820) (23,753)
Other -- 2,475
------- ---------
Net cash used in investing activities (2,820) 347,065
------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock 40,000 229,500
Proceeds from notes and debentures payable 293,600 1,390,626
Payments on notes, debentures and capital
leases (80,500) (263,541)
Payments on borrowings under lines
of credit -- (75,000)
Payments on common stock subject
to rescission -- (35,000)
Other -- (8,995)
------- ---------
Net cash provided by financing activities 253,100 1,237,590
------- ---------
Net increase (decrease) in cash (65,556) (60,299)
Cash and cash equivalents at
beginning of the period 65,556 61,039
------- ---------
Cash and cash equivalents at
end of the period $ -- $ 740
======= =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 7
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Supplemental Disclosure of Cash Flow Information and Non-cash Investing and
Financing Activities:
<TABLE>
Nine Months
Ended September 30,
------------------------
1998 1997
--------- ---------
<S> <C> <C>
Equipment capital lease
obligations $ -- $ 73,184
Issuance of common stock upon conversion
of notes and debentures payable 1,980,963 716,318
Redemption of debentures payable 595,523 --
Issuance of common stock in
settlement of accrued and other
liabilities 1,128,530 --
Cash paid during the period for:
Interest 69,528 102,742
Income taxes -- --
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 8
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated balance sheet as of September 30, 1998, the
unaudited consolidated statements of operations for the nine months and three
months ended September 30, 1998 and 1997 and the unaudited consolidated
statements of cash flows for the nine months ended September 30, 1998 and
1997, have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments, consisting of normal and recurring accruals
considered necessary for a fair presentation, have been included. Results of
operations for the nine months ended September 30, 1998 are not necessarily
indicative of the results for the full fiscal year.
Certain amounts in the 1997 financial statements have been reclassified. Such
amounts conform to the 1998 presentation.
Earnings per Share
Basic and diluted earnings per share for the nine months ended September 30,
1998 and three months ended September 30, 1998 and 1997 are the same because
the inclusion of incremental shares in the computation of diluted earnings
per share from the assumed conversion of convertible notes, debentures and
preferred stock and exercise of outstanding options and warrants and warrants
to be issued in connection with conversion of convertible notes and
debentures would have had the effect of reducing the per share loss from
continuing operations for the respective periods. The number of potential
common shares issuable as of September 30, 1998 upon conversion of
convertible notes, debentures and preferred stock and exercise of outstanding
options and warrants and warrants to be issued in connection with the
conversion of convertible notes and debentures are summarized as follows:
Number of
Shares
---------
Convertible preferred stock 570,000
Convertible notes and debentures 2,782,439
Outstanding common stock options and warrants 9,967,669
Warrants issuable upon conversion of outstanding
notes and debentures 1,750,000
Following is a reconciliation of basic and diluted earnings per share for
income from continuing operations for the nine months ended September 30,
1997.
<TABLE>
Per
Income Shares Share
--------- ---------- -----
<S> <C> <C> <C>
Basic earnings per share $ 64,013 11,019,398 $ 0.01
=====
Effect of dilutive securities:
Options and warrants -- 928,200
Convertible preferred stock -- 9,450,000
--------- ----------
Diluted earnings per share $ 64,013 18,803,048 $ 0.00
========= ========== =====
</TABLE>
<PAGE> 9
NOTE 2 NOTE RECEIVABLE FROM THE SALE OF ASSETS
In March 1998, the Company, TNI, International Teledata Corporation ("ITD")
and certain former employees of the Company (the "Employees") entered into an
agreement (the "Agreement") which provided for the transfer of certain ITD
assets to the Employees. The assets transferred pursuant to the Agreement were
sold to ITD by TNI pursuant to the Purchase and Sale Agreement, dated as of
January 31, 1997, between TNI and ITD. In connection with the transfer of
assets pursuant to the Agreement, the Company canceled the $500,000
convertible debenture note issued by ITD (the "ITD Note") in conjunction with
the Purchase and Sale Agreement in exchange for 496,902 shares of the
Company's common stock beneficially owned by the Employees, the waiver by the
Employees of accrued and unpaid compensation due to them by the Company and
the cancellation of employment agreements between the Company and the
Employees. Included in income (loss) from operations of discontinued
telecommunications businesses for the nine months ended September 30, 1998 is
income of approximately $306,000 from the cancellation and partial recovery of
the ITD note.
NOTE 3 REDEMPTION OF CONVERTIBLE DEBENTURE NOTES
Effective as of March 31, 1998, the Company redeemed its $450,000 of
outstanding 10% convertible debenture notes in exchange for an aggregate of
893,278 shares of its common stock and 450,000 stock purchase warrants. The
carrying amount of the debt extinguished exceeded the fair value of the common
stock and warrants issued in exchange for the debt. The excess is classified
as an extraordinary gain in the accompanying unaudited consolidated statement
of operations for the nine months ended September 30, 1998. Of the 450,000
stock purchase warrants issued in connection with the redemption, 225,000 are
exercisable at $1.50 per share at any time over a period of two years and
225,000 are exercisable at $0.20 per share at any time over a period of five
years.
NOTE 4 EMPLOYMENT AGREEMENTS
On June 30, 1998, the Company and its former Chief Executive Officer (the
"Former CEO") entered into an agreement and mutual release (the "Release").
Pursuant to the Release, the Company agreed to issue 300,000 shares of its
common stock and release the Former CEO from any and all claims, demands,
contracts, and obligations of any kind whatsoever which the Company had, has
or may have against the Former CEO in exchange for a release from the Former
CEO of any and all claims, demands, contracts and obligations of any kind
whatsoever which the Former CEO had, has or may have against the Company
arising out of an employment agreement dated as of February 8, 1995 between
the Company and the Former CEO (the "Employment Agreement"). As a result of
the Release, the Company removed all liabilities previously accrued by the
Company under the Employment Agreement from its consolidated balance sheet and
recorded other income of approximately $380,000.
NOTE 5 STOCKHOLDERS' EQUITY
During the nine months ended September 30, 1998, the Company recorded the
issuance to Timboon, LTD ("Timboon") of 5,000,000 shares of the Company's
common stock, at $0.001 par value, and increased additional paid-in-capital by
$394,472 for the partial conversion by Timboon of the Company's 4% cumulative
convertible debentures. As of September 30, 1998, Timboon holds unconverted
debentures totaling approximately $800,000.
<PAGE> 10
In addition to the shares of common stock issued to Timboon during the nine
months ended September 30, 1998, the Company issued 358,333 shares for $40,000
in cash and 16,049,216 shares for the purpose and amounts set forth in the
following table.
<TABLE>
Number
of Shares Purpose of Issuance Amount
- --------- --------------------------------------- ---------
<S> <C> <C>
701,783 Conversion of Class B Preferred Stock $ 1,562,496
4,458,621 Exercise of stock options granted to
employees and consultants 470,862
893,278 Extinguishment of debt 223,320
200,000 CCI arbitration award 56,000
9,298,334 Conversion of debt 1,581,491
197,200 Consulting services 22,788
300,000 Settlement of employment agreement 300,000
</TABLE>
NOTE 6 BUSINESS ACQUISITIONS AND DIVESTITURES
In May 1998, the Company reactivated a dormant, wholly owned subsidiary,
owned since January 1995, for the purpose of divesting ownership and
control of the subsidiary in connection with the acquisition of one or
more businesses in the telecommunications industry. A majority of
ownership and control of the subsidiary was sold by the subsidiary to an
outside group of managers and investors, in July 1998, and the Company
received a payment of $100,000 from the subsidiary in consideration for
certain undertakings by the Company. Pursuant to a Recapitalization
Agreement in September 1998, the Company retained 625,000 shares of the
subsidiary's common stock out of 1,000,000 shares originally owned. In
October 1998, the subsidiary acquired a switchless reseller of long
distance telephone services. The subsidiary company is now known as
"Intelicom International, Inc. "Intelicom". The Company has partially
fulfilled its undertakings to Intelicom by transferring 255,000 shares of
Intelicom shares which it retained to certain persons, or their nominees,
identified by the management of Intelicom, who rendered consulting
services to Intelicom and by declaring a dividend to the Company's
stockholders of record on October 30, 1998, payable in an aggregate of
300,000 shares of Intelecom owned by the Company. The Company was to
retain 70,000 shares for investment and future sale. The designee of the
Company's chairman received 25,000 shares of Intelicom owned by the
Company in payment for services, which the chairman rendered to the
subsidiary.
As a result of the divestiture of this subsidiary, the Company recorded a gain
of $100,000 in the 1998 third quarter. The Company advanced $25,000 to
Intelicom for working capital. This advance is to be repaid, as funds become
available to Intelicom. The advance is classified as accounts receivable -
other in the accompanying consolidated balance sheet.
On November 6, 1998, Intelicom's board of directors, consisting solely of Mr.
Mark D. Cobb, approved a one share for ten shares reverse split, which reduced
the Company's retained shares to 37,000 shares, and authorized the issue of a
total of 234,000 shares to two investors of cash in Intelicom. On November 7,
1998, Mr. Cobb approved the issue of an aggregate of 750,000 shares to himself
and two consultants. On November 9, 1998, upon learning of Mr. Cobb's actions
as the sole director, the Company and other stockholders, believing they
comprised a majority of Intelicom's issued and outstanding voting stock, sought
to cancel Mr. Cobb's actions and to remove him as the director. Mr. Cobb
maintains this attempted action was not effective.
<PAGE> 11
At the date hereof, the Company has not determined whether it is appropriate
to proceed with distribution of the dividend given the limited number of shares
now available for that purpose. The Company has not determined whether or not
Mr. Cobb's position is correct or whether the Company will take action against
Mr. Cobb for breach of a director's fiduciary duty. The Company has been
advised that the seller in Intelicom's single acquisition has given notice of
financial breach and intends to recover ownership of the company sold to
Intelicom.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto, appearing elsewhere herein.
NET REVENUES
The Company had revenues of $123,300 for the nine months and three months ended
September 30, 1998. The revenues recorded during these periods consisted of the
Company's portion of healthcare claims recovered under service agreements. Net
revenues recorded by the Company in the nine months ended September 30, 1997
were $1,467,344 and were comprised of $1,311,055 from its HMT subsidiary, which
was disposed in June 1998, and $156,289 from its NSC subsidiary. No revenues
were recorded in the 3rd quarter of 1997. The changes in revenues, excluding
the effects of HMT, from period to period were the result of the timing and
amounts of healthcare claims recovered under service agreements.
Under the terms of the alliance agreement between the Company and HMG, the
Company and HMG are to share approximately $1,192,000 in revenue upon
completion of the healthcare cost recovery phase of the service agreement
(the "Agreement") between HMG and a "Big 3" auto maker, as provided for in
the Agreement. The Company anticipates that it will recognize additional
revenue, up-to approximately $548,000, from the Agreement beginning in either
the fourth quarter of 1998 or first quarter of 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $932,286 and $2,707,075,
respectively, for the nine months ended September 30, 1998 and 1997, and
$179,425 and $48,986, respectively, for the three months ended September 30,
1998 and 1997. The decrease in selling, general and administrative expenses for
the nine months ended September 30, 1998 versus 1997 was due to the disposition
of HMT and cost reduction measures undertaken in 1997 as a result of continued
operating losses. The selling, general and administrative expenses eliminated
from the results of operations for the nine months ended September 30, 1998
versus 1997 as a result of the disposition of HMT totaled $1,129,379; and, cost
reduction measures had the effect of reducing selling, general and
administrative expenses by approximately $645,000. Cost reduction measures
included consolidation of the Company's remaining operations, closure of the
corporate offices of subsidiaries and reductions in staffing levels due to
reduced business volume. The increase in selling, general and administrative
expenses for the three months ended September 30, 1998 versus 1997 is
principally due to higher legal fees associated with ongoing legal matters,
higher costs from consulting and other professional services related to the
Company's ongoing business and restructuring efforts and changes, from period-
to-period, in the net effect of changes in deferred compensation assets and
liabilities. The increase in costs related to the Company's ongoing business
is the result of increased sales and marketing activities.
<PAGE> 12
IMPAIRMENT AND OTHER LOSSES
For the nine months ended September 30, 1998, the Company reported impairment
and other losses totaling approximately $29,273 compared to $643,501 for the
same period last year. The Company wrote off, as impairment and other losses in
1997, approximately $625,700 of deferred compensation assets related to certain
employment agreements. For the three months ended September 30, 1998,
impairment and other losses were $29,273 as compared to $17,773 for the same
period last year. Impairment and other losses for the three-month periods are
principally the result of normal and recurring adjustments to the recorded
amounts of assets and liabilities.
DEPRECIATION AND AMORTIZATION
The decreases in depreciation and amortization from period-to-period are
primarily due to the disposition of HMT in June 1997 and the removal, in
December 1997, of repossessed capital lease assets from the Company's
consolidated balance sheet.
INTEREST EXPENSE
The decreases in interest expense from period-to-period are principally due
to the effects of lower aggregate amounts of notes and debentures
outstanding, the removal in December 1997 of capital lease liabilities
related to repossessed leased assets from the Company's consolidated balance
sheet and the elimination of interest expense on the Company's 4% cumulative
convertible debentures due October 1, 1998, as a result of the Settlement
Agreement entered into, effective as of March 2, 1998, between the Company
and Timboon. During the nine months ended September 30, 1998, the Company
converted approximately $2.2 million of debt into equity.
OTHER ITEMS
Results of operations for the nine months ended September 30, 1998 include a
gain, recorded as other income, of approximately $380,000 from the removal
from the Company's consolidated balance sheet of liabilities previously
accrued under an employment agreement (see Note 4) and a gain of $100,000,
which was recorded in the 1998 third quarter, from the divestiture of a
subsidiary (see Note 6).
Results of operations for the nine months ended September 30, 1997, include a
gain of approximately $2,695,000 from the sale of a license agreement, a gain
from the disposition of HMT in the amount of approximately $281,000 and
financing fees of approximately $112,000.
INCOME TAXES
As of September 30, 1998 and 1997, the Company's deferred tax assets exceeded
its deferred tax liabilities and were fully reserved at each of those dates.
Income taxes that otherwise would have been applicable to income (loss) from
continuing operations during the periods were fully offset by changes in the
valuation reserve.
DISCONTINUED OPERATIONS
Income (loss) from operations of discontinued telecommunications businesses
for the nine months ended September 30, 1998 includes income of approximately
$306,000, recognized in the first quarter of 1998, from the cancellation and
partial recovery of the $500,000 note receivable from the sale of assets in
exchange for the elimination of certain liabilities of the Company (see Note
2).
<PAGE> 13
For the nine months ended September 30, 1997, the Company recorded an after
tax gain of approximately $610,000 from the disposition of certain assets of
TNI and from the rescission of the ATI acquisition agreement. The pre-tax
gain from the sale of the TNI assets was $25,000; and, the pre-tax gain from
the disposition of ATI was approximately $614,400. The TNI assets were sold
in January 1997 and ATI was disposed of in May 1997.
EXTRAORDINARY GAIN
The Company's operating results for the nine months ended September 30, 1998
include an extraordinary gain of approximately $287,000 from the
extinguishment of its $450,000 10% convertible debentures (see Note 3).
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1998, the Company received cash of
$40,000 from the issuance of 358,333 shares of its common stock and $293,600
from the issuance of notes and debentures payable. For the corresponding 1997
period, the Company received cash of approximately $229,500 and $1.4 million
from the issuance of common stock and notes and debentures payable,
respectively. Payments on notes, debentures and capital leases during the
respective periods were $80,500 and $263,541. In 1997, the Company also used
approximately $75,000 and $35,000 in cash, respectively, to repay borrowings
outstanding under lines of credit and for the repurchase of common stock
subject to rescission and generated approximately $368,000 in cash from the
disposition of businesses. Capital expenditures were $2,820 for the nine
months ended September 30, 1998 versus $23,753 for the same period last year.
The net proceeds from financing activities were used principally to fund
operating losses. For the nine months ended September 30, 1998 and 1997, the
Company used cash of approximately $316,000 and $1.6 million, respectively,
in operating activities.
Over the past several years, the Company has incurred substantial operating
losses; and, at September 30, 1998, the Company has an excess of total
liabilities over total assets of approximately $3.5 million and an excess of
current liabilities over current assets of approximately $3.6 million. These
factors, among others, have diminished the Company's ability to attract
equity or debt capital, have required the Company to cease further
development of its healthcare management software technology and redirect its
business and have made it difficult for the Company to carry on normal
operating activities. As of September 30, 1998, the Company does not have any
used or unused lines of credit or any other committed and unused financing
facilities. Consequently, it is uncertain whether or not the Company will
have available sufficient cash resources to continue operations, in which
case the Company would be required to seek other alternatives, including
sale, merger or discontinuance of operations.
<PAGE> 14
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 2. Changes in Securities
During the nine months ended September 30, 1998, the Company issued 5,000,000
shares of its common stock in partial conversion of its $1,200,000 4%
cumulative convertible debentures and an aggregate of 7,742,929 shares of its
common stock upon conversion of its $1,195,000 10% cumulative convertible
debentures. The Company also issued approximately 12.0 million shares upon
conversion of Class B Preferred Stock, upon exercise of stock options granted
to employees and consultants and for other purposes (see Note 5 to the
consolidated financial statements included in Part I).
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits (filed herewith):
10.44 Form of Recapitalization Agreement
27.9 Financial Data Schedule ( Nine Months Ended September 30, 1998).
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SYSTEMS COMMUNICATIONS, INC. Date: November 13, 1998
By /s/ James T. Kowalczyk
----------------------------
James T. Kowalczyk
President, Principal Executive Officer
and Director
By /s/ Edwin B. Salmon
----------------------------
Edwin B. Salmon
Principal Accounting and Financial Officer
and Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SYSTEMS COMMUNICATIONS, INC. FOR THE FISCAL PERIOD
ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> US DOLLARS
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 172,868
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 320,202
<PP&E> 132,982
<DEPRECIATION> (76,960)
<TOTAL-ASSETS> 381,206
<CURRENT-LIABILITIES> 3,803,314
<BONDS> 1,380,328
0
109,764
<COMMON> 36,862
<OTHER-SE> (4,242,858)
<TOTAL-LIABILITY-AND-EQUITY> 381,206
<SALES> 123,300
<TOTAL-REVENUES> 123,300
<CGS> 0
<TOTAL-COSTS> 981,448
<OTHER-EXPENSES> (508,725)
<LOSS-PROVISION> (29,273)
<INTEREST-EXPENSE> 172,206
<INCOME-PRETAX> (520,737)
<INCOME-TAX> 0
<INCOME-CONTINUING> (520,737)
<DISCONTINUED> 305,647
<EXTRAORDINARY> 286,588
<CHANGES> 0
<NET-INCOME> 71,498
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
Exhibit 10.44
Intelicom International Holding, Inc.
RE-CAPITALIZATION AGREEMENT
This Agreement is entered into on this 8th day of September 1998 by and
between Intelicom International Holding, Inc., (hereinafter "Intelicom") with
offices at 28050 US 19 North, Suite 202, Clearwater, Florida 34621, Systems
Communications, Inc., (hereinafter"SCI") with offices at 4707 140th Avenue
North, Suite 107, Clearwater, Florida 33762, Affiliated Communications,
Company, Inc., (hereinafter "ACCI") with offices in Clearwater, Florida.
WHEREAS, SCI and ACCI are shareholders of Intelicom; and
WHEREAS, Intelicom is preparing to do a private placement to raise operating
capital; and
WHEREAS, Intelicom has done an analysis and determined the need to reduce the
number of issued and outstanding shares in order to provide an attractive
opportunity to investors; and
WHEREAS, Intelicom has presented the attached re-capitalization plan to the
parties; and
WHEREAS, SCI and ACCI recognizes the need for re-capitalization of Intelicom,
and would like to enhance the opportunity for Intelicom's success;
NOW THEREFORE, in consideration of the promises and covenants contained
herein, and other good and valuable consideration, the receipt and
sufficiency of which the Parties hereto acknowledge, the Parties agree as
follows:
1. SCI will surrender 375,000 shares of its 1,000,000 shares of Intelicom
common stock to Intelicom, for cancellation.
2. SCI will distribute 300,000 shares of the remaining stock as a dividend
to its existing shareholders to create a shareholder base for the Intelicom
common stock.
3. SCI will provide Intelicom verification that upon distribution of the
dividend to its shareholders that it will have a minimum of 300 shareholders
with a minimum of 100 shares each, in order to meet the requirements of
NASDQ.
4. The remaining 325,000 shares will be used to pay consultants and fees
associated with the furtherance of Intelicom. Of these shares, SCI will
administer 200,000 as agreed, with the prior approval of Bruce Baker, a third
party consultant. The additional 125,000 shares will be put into Dunn
Capital Corp., a consulting firm under an agreement that said shares will not
be distributed without the prior approval of Bruce Baker.
5. The parties agree to cancel the existing ACCI consulting Agreement by and
between the parties.
6. ACCI will return it's issued 2,000,000 shares of Intelicom stock to
Intelicom and Intelicom agrees to redistribute the stock in accordance with
attached re-capitalization as founders stock.
7. With the execution of this Agreement, Intelicom rescinds the
authorization of the additional 1,000,000 shares to ACCI that were approved
in the "Action by Written Consent of the Board of Directors dated August 9th
1998.
8. Intelicom will issue to Ken Allen as part of his employment agreement,
50,000 shares of restricted stock.
9. Intelicom will issue to Jackson Morris 25,000 shares of restricted stock.
10. The parties agree to the re-capitalization as set forth herein and
attached hereto and believe it to be in the best interest of the shareholders
and future investors.
11. This Agreement and interpretation thereof shall be governed by the laws
of the State of Florida and the State and/or Federal courts located in
Hillsborough County Florida shall be the exclusive proper jurisdiction for
any disputes arising hereunder.
IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have
executed this Agreement effective as of the date indicated above:
Intelicom International Holding, Inc. Systems Communications, Inc.
By: /s/________________________ By: /s/_________________
Mark D. Cobb James T. Kowalczyk,
President; Director President; Director
Date: _________________________ Date:________________________
Affiliated Communications Company, Inc. Systems Communications, Inc.
By: /s/------------------------ By: /s/__________________
Bruce Baker Edwin B. Salmon
President Director Secretary; Director
Date: ___________________________ Date: _______________________
