FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 1997
( ) 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)
<TABLE>
<CAPTION>
<S> <C>
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)
</TABLE>
Registrant's telephone number, including area code 813-530-4800
- ---------------------------------------------------------------------
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 .001 per share, as of March 31, 1997 - 11,365,490 shares.
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- -----------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 322,374 $ 61,039
Accounts receivable, less allowance for
doubtful accounts of $14,563 in 1997 and
$28,074 in 1996 839,284 802,079
Notes receivable from officers and employees 52,000 102,000
Other current assets 329,204 438,763
--------- ---------
Total current assets 1,542,862 1,403,881
--------- ---------
Furniture and equipment 1,836,030 1,812,867
Less accumulated depreciation (654,811) (587,598)
---------- ---------
Net furniture and equipment 1,181,219 1,225,269
Note receivable from the sale of assets, less
allowance of $500,000 -- --
Deferred compensation 372,077 662,199
Intangible assets, net of accumulated amortization
of $691,666 in 1997 and $566,666 in 1996 958,334 1,083,334
Excess of cost over fair value of net assets
acquired, net of accumulated amortization of
$143,733 in 1997 and $75,034 in 1996 1,230,250 1,298,950
Other non-current assets 171,193 173,667
---------- ---------
$5,455,935 $5,847,300
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 3
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY IN ASSETS)
Current liabilities:
Borrowings under lines of credit $ 111,036 $ 182,651
Current portion of notes and debentures payable 3,775,017 3,180,758
Current portion of obligations under capital
leases 273,046 242,477
Accounts payable 1,219,914 1,452,192
Accrued expenses and other current liabilities 788,317 881,675
Accrued compensation and employee benefits 923,672 1,528,153
Deferred revenue 374,375 440,232
--------- ---------
Total current liabilities 7,465,377 7,908,138
obligations under capital leases, less current
portion 448,574 458,654
Accrued compensation 582,359 676,261
Other long-term liabilities 88,578 72,573
--------- --------
Total liabilities 8,584,888 9,115,626
--------- ---------
Common stock subject to rescission 674,124 709,124
--------- ---------
Stockholders' equity (deficiency in assets):
Class A convertible preferred stock, stated value
and liquidation preference $1.00 per share;
authorized 5,000,000 shares, issued and
outstanding 192,000 shares in 1996 -- 630
Class B convertible preferred stock, stated value
and liquidation preference - $1.00 per share;
authorized 10,000,000 shares, issued and
outstanding 4,550,000 shares in 1997 and 1996 2,491,745 2,491,745
Common stock - $.001 par value; authorized
50,000,000 shares, issued and outstanding
11,365,490 shares in 1997 and 10,626,874 shares
in 1996 11,366 10,627
Common stock to be issued -- 2,000,000
Additional paid in capital 17,772,080 16,823,526
Accumulated deficit (24,078,268) (25,303,978)
---------- ----------
Total stockholders' equity (deficiency in assets) ( 3,803,077) ( 3,977,450)
---------- ----------
$ 5,455,935 $ 5,847,300
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 4
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1997 1996
---------- ---------
(UNAUDITED)
<S> <C> <C>
Net revenues $ 1,125,724 $ 369,612
---------- ---------
Costs and expenses:
Cost of revenues -- 122,351
Selling and administrative expenses 1,374,470 1,233,472
Depreciation and amortization 253,590 239,880
--------- ---------
1,628,060 1,595,703
--------- ---------
(502,336) (1,226,091)
Interest income 2,018 3,359
Interest expense (111,565) (38,438)
Other income (expense), net 1,888,014 --
--------- ---------
Income(loss) from continuing operations
before income taxes 1,276,131 (1,261,170)
Provision(benefit) for income taxes -- (453,905)
--------- ---------
Income(loss) from continuing operations 1,276,131 (807,265)
--------- ---------
Discontinued operations:
Loss from operations of discontinued
telecommunications businesses (less income
tax benefit of $140,527 in 1996) (75,420) (236,112)
Gain from disposition of telecommunications
businesses 25,000 --
--------- --------
(50,420) (236,112)
--------- --------
Net income(loss) $1,225,711 $(1,043,377)
========== =========
Income(loss) per share:
Income(loss) from continuing operations $ .12 $ (.11)
Income(loss) from operations of discontinued
telecommunications businesses (.01) (.03)
---------- ---------
Net income (loss) $ .11 $ (.14)
========== =========
Weighted average number of
common shares outstanding 10,747,700 7,576,417
========== =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 5
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------
1997 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
Net cash used in operating activities $ (897,429) $(1,336,956)
----------- -----------
Cash flows from investing activities:
Acquisition of businesses, net of cash
acquired -- (47,034)
Expenditures for furniture and equipment (12,659) (480,110)
Notes receivable from officers and employees -- (50,000)
Other 2,474 --
---------- ----------
Net cash used in investing activities (10,185) (577,144)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock 152,000 1,341,208
Proceeds from notes and debentures payable 1,211,732 29,500
Payments on notes, debentures and capital
leases (88,168) (208,262)
Payments on borrowings under lines of credit (71,615) (2,083)
Payments on common stock subject to rescission (35,000) --
--------- ----------
Net cash provided by financing activities 1,168,949 1,160,363
--------- ----------
Net increase (decrease) in cash 261,335 (753,737)
Cash and cash equivalents at beginning of the
period 61,039 964,714
--------- ----------
Cash and cash equivalents at end of the period $ 322,374 $ 210,977
========= ==========
Supplemental Disclosure of Cash Flow Information and Non-cash
Investing and Financing Activities:
Equipment capital lease obligations $ 73,184 $ 570,675
Issuance of common stock upon conversion of
notes and debentures payable 596,318 21,617
Issuance of common stock as compensation 200,344 --
Waiver of common stock to be issued 2,000,000 --
Waiver of bonuses payable 695,214 --
Cash paid during the period for:
Interest 19,363 --
Income taxes -- --
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 6
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES - The unaudited consolidated
balance sheet at March 31, 1997 and the unaudited consolidated
statements of operations and cash flows for the three months
ended March 31,1997 and 1996 have been prepared in accordance
with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments, consisting of normal and
recurring accruals considered necessary for a fair presentation,
have been included. Results of operations for the three months
ended March 31, 1997 are not necessarily indicative of the
results for the full fiscal year.
2. ACQUISITIONS AND DISPOSITION OF BUSINESSES - 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
(goodwill) was $1,373,984 and was assigned a useful life of 15
years. The net assets acquired included $1,500,000 of medical
management computer software, which was assigned a useful life of
3 years.
The following unaudited pro forma summary operating results for
the three months ended March 31, 1996, include the results of
operations 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 summary is provided for
information purposes only. It is based on historical information
and does not necessarily reflect the actual results that would
have occurred nor is it necessarily indicative of future
operating results of the combined companies.
<TABLE>
<CAPTION>
Three Months
Ended March 31, 1996
--------------------
<S> <C>
Net revenues from continuing operations $ 572,684
---------
Loss from continuing operations $(839,399)
---------
Loss from operations of discontinued
telecommunications businesses $(236,112)
---------
Loss per share:
Loss from continuing operations $ (.11)
Loss from operations of discontinued
telecommunications businesses (.03)
---------
Net loss $ (.14)
=========
</TABLE>
<PAGE> 7
In January 1997 and May 1997, the Company disposed of
substantially all of the remaining assets of its
telecommunications segment. In January 1997, the Company sold, in
two separate transactions (i) TNI's long-distance customer base
and existing customer receivables for $76,000 in cash and (ii)
TNI's utility audit division customer base, agreements and work-
in-process for $25,000 in cash and a $500,000 convertible
debenture issued by the acquiring company. No value was assigned
to the $500,000 convertible debenture received by the Company. By
its terms, the convertible debenture is due on January 31, 1999
and bears interest at 8% per annum beginning on April 2, 1997 and
through the date of conversion. Such conversion is at the average
bid and ask prices of the acquiring company's common stock on the
effective date of a registration statement covering the shares
issuable upon conversion of the convertible debenture. Included
in the consolidated statement of operations for the three months
ended March 31, 1997, is a gain of $25,000 from the sale of the
assets of TNI's utility audit division.
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). In connection with the rescission of the ATI
acquisition agreement, the Company recognized a gain of
approximately $509,000 in the second quarter of 1997.
The operating results of the Company's discontinued
telecommunications businesses and the gains from the disposition
of TNI's audit division and ATI have been reported as components
of discontinued operations in the accompanying unaudited
statements of operations for all periods presented.
The assets and liabilities of the Company's discontinued
telecommunications businesses included in the accompanying
consolidated balance sheets as of March 31, 1997 and December 31,
1996 are summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ----------
<S> <C> <C>
Current assets $ 294,677 $ 332,856
Total assets 620,330 660,094
Current liabilities 887,182 886,206
Total liabilities 1,120,547 1,078,026
</TABLE>
<PAGE> 8
The revenues, costs and expenses of the Company's discontinued
telecommunications businesses, included in loss from operations
of discontinued telecommunications businesses in the accompanying
consolidated statements of operations for the three months ended
March 31, 1997 and 1996, are summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
----------- ----------
<S> <C> <C>
Net revenues $ 233,643 $ 657,943
Cost of revenues -- 466,962
Selling and administrative expenses 266,292 502,118
Depreciation and amortization 28,476 59,489
Interest income -- 971
Interest expense 20,217 7,039
Other income (expense), net 5,922 55
Loss from operations of discontinued
businesses, before income taxes (75,420) (376,639)
Income tax benefit -- 140,527
Loss from operations of discontinued
businesses (75,420) (236,112)
</TABLE>
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 second
quarter 1997 gain of approximately $281,000, which is to be
reported in other income (expense), net as a component of
operations from continuing businesses.
<PAGE> 9
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 ( approximately
$850,000) and pay other costs and expenses related to the
acquisition. The Agreement to Exchange Stock originally
contemplated a December 31, 1997 closing. The Company and HMG
now contemplate a closing as soon as both the Company and HMG
meet all of the conditions contained in the Agreement to Exchange
Stock.
As of December 31,1996, the Company had not issued the $2,000,000
of additional shares of common stock ( common stock to be issued
as shown in the accompanying
Consolidated Balance Sheet as of December 31, 1996) which were to
have been issued to the founders and management of NSC ("Retiring
Management") pursuant to the NSC acquisition agreement. In
connection with the January 1997 agreement between the Company
and Retiring Management, Retiring Management waived the issuance
by the Company of the $2,000,000 shares of common stock which
were to have been issued in connection with the acquisition
agreement. As a result of the waiver by Retiring Management of
the issuance of the $2,000,000 of additional shares of common
stock which were to have been issued, the Company removed the
common stock to be issued from the Company's consolidated balance
sheet and recorded a non-recurring gain of $2,000,000 as of March
31, 1997. Such gain is included in other income (expense), net.
3. NOTES AND DEBENTURES PAYABLE - On February 24, 1997, the
Company issued $1,120,000 of 4% convertible debentures due
October 1, 1998 in reliance upon exemptions under Regulation S of
the Securities Act of 1993. These debentures are convertible at
any time after 45 days from the date of their issuance until
maturity into the Company's common stock at a conversion price
equal to the lessor of (a) 80% of the average closing bid price
of the Company's common stock for the 5 days preceding the
issuance of the debentures or (b) 70% of the average closing bid
price of the Company's common stock for the 5 days preceding the
conversion date. The Company incurred costs in connection with
this financing of $120,000 and received net proceeds of
$1,000,000. The proceeds from the issuance of these debentures
were used to pay amounts due trade and other creditors.
4. EMPLOYMENT AGREEMENTS - Subsequent to December 31, 1996,
certain key employees subject to employment agreements resigned.
As a result of such resignations, the Company wrote-off deferred
compensation assets of approximately $304,000 and $340,000 in the
first and second quarters of 1997, respectively. The related
liabilities associated with such employment agreements continue
to be outstanding obligations of the Company and were not
adjusted as a result of such resignations.
5. STOCKHOLDERS' EQUITY - During the period from January 1, 1997
to March 31, 1997, the Company issued shares of its common stock
for an aggregate cash consideration of approximately $152,000,
96,000 shares upon conversion of class A preferred stock, 321,060
shares upon conversion of $582,000 of convertible debt, plus
accrued interest, and 169,000 shares, valued at approximately
$200,000, in consideration for services rendered to the Company.
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following table sets forth certain information derived from
the Consolidated Financial Statements of the Company for the
three months ended March 31, 1997 and 1996. The results from
continuing operations include the operations of NSC, acquired in
October 1995,and HMT, acquired in March 1996. NSC and HMT
comprise the Company's healthcare segment. The results of
operations 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; consequently, the results
of operations of these businesses and any gains from the
disposition of these businesses for all periods presented have
been reported as components of discontinued operations in the
accompanying consolidated statements of operations.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Operations of continuing businesses:
Net Revenues $ 1,125,724 $ 369,612
Cost of revenues -- 122,351
Selling and administrative expenses 1,023,039 1,233,472
Depreciation and amortization 605,021 239,880
Interest income 2,018 3,359
Interest expense 111,565 38,438
Other income(expense), net 1,888,014 --
Income(loss) from continuing operations before
income taxes 1,276,131 (1,261,170)
Income(loss) from continuing operations 1,276,131 (807,265)
Operations of discontinued telecommunications
businesses:
Net Revenues 233,643 657,943
Cost of revenues -- 466,962
Selling and administrative expenses 266,292 502,118
Depreciation and amortization 28,476 59,489
Interest income -- 971
Interest expense 20,217 7,039
Other income(expense), net 5,922 55
Loss from operations of discontinued
telecommunications businesses before
income taxes (75,420) (376,639)
Loss from operations of discontinued
telecommunications businesses (75,420) (236,112)
Gain from disposition of telecommunications
businesses 25,000 --
</TABLE>
The following discussion should be read in conjunction with the
Consolidated Financial Statements and notes thereto, appearing
elsewhere herein.
<PAGE> 11
NET REVENUES
The increase in net revenues from continuing businesses for the
three months ended March 31, 1997 as compared to the three months
ended March 31, 1996 is the result of the acquisition of HMT. HMT
was acquired by the Company in March 1996 and disposed of in a
rescission transaction on June 9, 1997 This increase was offset
by a reduction in revenues from the Company's NSC subsidiary.
HMT's revenues in the first quarter of 1997 were $1,048,987 as
compared to $123,910 for the period from the date of the
Company's acquisition of HMT to March 31, 1996. HMT's revenues
for the first quarter of 1997 as compared to the first quarter of
1996 also reflect an increase in revenues from the sale of
medical management computer software to a large hospital chain in
the State of Florida. The revenues of NSC were $76,737 in the
first quarter of 1997 compared to $245,702 in the first quarter
of 1996. The decrease in NSC's revenues is the result of lower
revenues from the Chrysler and Ford Motor Company contracts.
The revenues of the Company's discontinued telecommunications
businesses were $233,643 in the 1997 first quarter compared to
$657,943 in the 1996 first quarter. The decrease in revenues from
the Company's discontinued telecommunications businesses is the
result of the discontinuance of TNI's operations effective as of
December 31, 1996. This decrease was somewhat offset by an
increase in the revenues of the Company's ATI subsidiary from PPV
services in Mexico. The Company's acquisition of ATI was
rescinded in June 1997. See Note 2 to the Unaudited Consolidated
Financial Statements included elsewhere herein.
COST OF REVENUES
The decrease in cost of revenues applicable to continuing
operations is principally the result of lower revenues from NSC's
healthcare cost recovery services and adjustments related to
recoverable claims under the Chrysler contract.
The decrease in the cost of revenues of the Company's
discontinued telecommunication businesses is the result of the
discontinuance of TNI's operations effective as of December 31,
1996.
SELLING AND ADMINISTRATIVE EXPENSES
The decrease in selling and administrative expenses applicable to
continuing operations is principally due to the reversal of
accrued bonuses of $695,214 payable to Retiring Management but,
waived by Retiring Management in connection with an agreement
between the Company and the retiring management of NSC and the
effect of cost reduction measures undertaken during the first
quarter of 1997 due to continued operating losses. These
decreases were offset by an increase in selling and
administrative expenses arising from the March 1996 acquisition
of HMT and charges to income related to employment agreements.
The decrease in selling and administrative expenses applicable to
the operations of the Company's discontinued telecommunications
businesses is principally the result of the discontinuance of
TNI's operations effective as of December 31, 1996.
<PAGE> 12
DEPRECIATION AND AMORTIZATION
Depreciation and amortization applicable to continuing
operations for the three months ended March 31, 1997 increased
over the same period of last year by $365,141. This increase
is principally due to the amortization of intangibles and
goodwill recorded in connection with the Company's March 1996
acquisition of HMT, offset by lower amortization of intangibles
and goodwill recorded in connection with the acquisition of NSC.
The intangibles and goodwill recorded in connection with the
acquisition of NSC were written-off by the Company effective as
of December 31, 1996.
Depreciation and amortization applicable to the operations of the
Company's discontinued telecommunications businesses declined
principally as a result of the write-off in 1996 of goodwill
related to the acquisitions of TNI and Comstar.
INTEREST EXPENSE
The increases from period-to-period in interest expense from both
continuing operations and the operations of the Company's
discontinued telecommunications businesses are principally due to
higher levels of borrowings outstanding.
OTHER INCOME (EXPENSE), NET
Other income (expense), net for the first quarter of 1997,
includes a one-time gain of $2,000,000 to remove from the
Company's consolidated balance sheet additional shares of the
Company's common stock which were to have been issued to Retiring
Management in connection with the NSC acquisition agreement.
Pursuant to an agreement between the Company and Retiring
Management, Retiring Management waived the issuance of such
shares. Other income (expense), net for the first quarter of 1997
also includes financing fees related to the issuance of the
Company's 4% $1,120,000 convertible debentures due October 1,
1998.
INCOME TAXES
As of December 31, 1996, the Company's deferred income tax assets
exceeded its deferred income tax liabilities by approximately
$4,000,000. No provision for income taxes applicable to
continuing operations was made in the first quarter of 1997 due
the Company having a net loss from continuing operations for
income tax purposes. No provisions for tax applicable to the
operations of discontinued businesses or the gain from the
disposition of the Company's telecommunications businesses were
made due to the Company having an overall net loss for income tax
purposes.
LIQUIDITY AND CAPITAL RESOURCES
The Company has continued to use cash in its operations and has
relied on debt and equity financing to support its operations.
See the accompanying Unaudited Consolidated Statements of Cash
Flows for the three months ended March 31, 1997 and 1996. The
Company also anticipates that it will continue to consume cash
until such time as it is able to successfully market NSC's
healthcare management information systems technology and/or
consummate the acquisition of HMG and generate profits from that
business (see Note 2 to the Unaudited Consolidated Financial
Statements included elsewhere herein).
<PAGE> 13
The Company does not currently have any used or unused lines of
credit, any other committed and unused financing facilities or
other sources of liquidity other than from operations. The
Company has continued to use cash in its operations, is
continuing to experience cash flow difficulties and is subject to
numerous proceedings by its creditors for repayment of trade
and other obligations. Consequently, it is uncertain whether
or not the Company will have sufficient cash resources, either
from operations or from financing transactions, 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.
The Company is pursuing numerous avenues to finance its
continuing operations and consummate the acquisition of HMG but,
there is no assurance that the Company will be able to obtain any
additional financing, consummate the acquisition of HMG or, in
the event the Company is able to consummate the acquisition of
HMG, that the combined companies will generate sufficient cash
flows from operations in order to sustain operations.
<PAGE> 14
SYSTEMS COMMUNICATIONS, INC. AND
SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
All material pending legal proceedings to which the Registrant
and its subsidiaries are a party are described in the
registrant's Annual Report on Form 10-K for the year ended
December 31, 1996. There have been no changes in the status of
such legal proceedings or any new information concerning such
cases as of the date hereof.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(4)14.# Form of Offshore Securities Subscription Agreement for
$1,120,000 4% Convertible Debentures.
(10)35.## Heads of Agreement for change in Management of
National Solutions Corporation.
(10)36.## Rescission Agreement, dated May 21, 1997 by and
between the Company, Ameristar Telecommunications, Inc., Mark
Woodward and Russell Armstrong.
(10)37.## Promissory note dated May 21, 1997 between ATI and the
Company.
(10)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.
(10)39.## Cooperative Marketing and Option Agreement dated June 9,
1997 between HMT and the Company.
(10)40.## Purchase and Sale Agreement between TNI and International
TeleData Corporation dated January 31, 1997.
(10)41.## Form of Convertible Debenture in the amount of $500,000
between International TeleData Corporation and TNI.
(10)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.
(10)43.### Agreement to Exchange Stock, dated November 14, 1997,
by and between Grant Kolb and Patrick Loeprich (as "Sellers")
and the Company.
(17)1.## Resignation Letter of Stephen Williams.
(17)2.## Resignation Letter of David J. Olivet.
(27)4. * Financial Data Schedule ( Three Months Ended March 31, 1997).
(b) Reports on Form 8-K:
1. The Company filed a Form 8-K on March 27, 1997. The date of
the earliest event reported was November 21, 1996. On November
21, 1996 and November 26, 1996, the Company issued $300,000 and
$200,000, respectively, of 10% Cumulative Convertible Debentures
to RIC Investment Fund, Ltd. and RANA Investment Company,
respectively. Each of these debentures are due one year from the
date of issuance. On February 28, 1997, the Company issued a
$1,120,000 4% Cumulative Convertible Debenture due October 1,
1998 to Timboon, Ltd. The issuance of all of these Debentures
were made in reliance on Regulation S pursuant to an Offshore
Offering and Distribution Agreement between the Company and
Victory Investments, LLC, as placement agent.
<PAGE> 15
2. The Company filed a Form 8-K on July 28,1997. The date of the
earliest event reported was the sale, on January 31,1997, of
substantially all of the operating assets of TNI. Other events
reported in the Form 8-K were the rescission of the ATI and HMT
acquisition agreements in May and June, 1997, respectively,
disclosure regarding the late filings of reports required to be
filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 and certain other events, including recent management and
directorship changes, and the status of certain legal and
administrative proceedings in which the Company is involved.
3. 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
contemplated a December 31, 1997 closing.
# Incorporated by reference to the Company's Current Report on
Form 8-K as filed on March 27, 1997.
## Incorporated by reference to the Company's Current Report on
Form 8-K,
as filed on July 28,1997.
### Incorporated by reference to the Company's Current Report on
Form 8-K,
as filed on November 21,1997.
* Filed herewith
<PAGE> 16
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: February 20,1998
By /s/ James T. Kowalczyk
----------------------------
James T. Kowalczyk
President, Principal Executive Officer
and Director
By /s/ Edwin B. Salmon
----------------------------
Edwin B. Salmon
Principal Accounting Officer
and Director
<PAGE> 17
INDEX TO EXHIBITS
EXHIBIT NUMBER
(4)14.# Form of Offshore Securities Subscription Agreement for
$1,120,000 4% Convertible Debentures.
(10)35.## Heads of Agreement for change in Management of
National Solutions Corporation.
(10)36.## Rescission Agreement, dated May 21, 1997 by and
between the Company, Ameristar Telecommunications, Inc., Mark
Woodward and Russell Armstrong.
(10)37.## Promissory note dated May 21, 1997 between ATI and the Company.
(10)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.
(10)39.## Cooperative Marketing and Option Agreement dated June 9, 1997
between HMT and the Company.
(10)40.## Purchase and Sale Agreement between TNI and International
TeleData Corporation dated January 31, 1997.
(10)41.## Form of Convertible Debenture in the amount of $500,000
between International TeleData Corporation and TNI.
(10)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.
(10)43.### Agreement to Exchange Stock, dated November 14, 1997, by and
between Grant Kolb and Patrick Loeprich (as "Sellers")
and the Company.
(17)1.## Resignation Letter of Stephen Williams.
(17)2.## Resignation Letter of David J. Olivet.
(27)4. * Financial Data Schedule ( Three Months Ended March 31, 1997).
# Incorporated by reference to the Company's Current Report on
Form 8-K as filed on March 27, 1997.
## Incorporated by reference to the Company's Current Report on
Form 8-K, as filed on July 28,1997.
### Incorporated by reference to the Company's Current Report on
Form 8-K, as filed on November 21,1997.
* Filed herewith
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SYSTEMS COMMUNICATIONS,INC. FOR THE FISCAL PERIOD
ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000949857
<NAME> 1
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-01-1997
<EXCHANGE-RATE> 1
<CASH> 322,374
<SECURITIES> 0
<RECEIVABLES> 853,847
<ALLOWANCES> (14,563)
<INVENTORY> 0
<CURRENT-ASSETS> 1,542,862
<PP&E> 1,836,030
<DEPRECIATION> (654,811)
<TOTAL-ASSETS> 5,455,935
<CURRENT-LIABILITIES> 7,465,377
<BONDS> 3,775,017
0
2,491,745
<COMMON> 11,366
<OTHER-SE> (6,306,188)
<TOTAL-LIABILITY-AND-EQUITY> 5,455,935
<SALES> 1,125,724
<TOTAL-REVENUES> 1,125,724
<CGS> 0
<TOTAL-COSTS> 1,628,060
<OTHER-EXPENSES> (1,888,014)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 111,565
<INCOME-PRETAX> 1,276,131
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,276,131
<DISCONTINUED> (50,420)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,225,711
<EPS-PRIMARY> .11
<EPS-DILUTED> 0
</TABLE>
