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, 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 September 30, 1997 - 11,442,143
shares.
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTMBER 30, DECEMBER 31,
1997 1996
----------- -----------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 740 $ 61,039
Accounts receivable, less allowance for doubtful
accounts of $8,458 in 1997 and $28,074 in 1996 66,062 802,079
Notes receivable from officers and employees 52,000 102,000
Other current assets 184,542 438,763
--------- ---------
Total current assets 303,344 1,403,881
--------- ---------
Furniture and equipment 988,830 1,812,867
Less accumulated depreciation (317,774) (587,598)
--------- ---------
Net furniture and equipment 671,056 1,225,269
Note receivable from the sale of assets, less
allowance of $500,000 -- --
Deferred compensation 84,508 662,199
Intangible assets, net of accumulated amortization
of $150,000 in 1997 and $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 171,192 173,667
--------- ---------
$ 1,230,100 $ 5,847,300
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 3
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
---------- -----------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY OF ASSETS)
<S> <C> <C>
Current liabilities:
Borrowings under lines of credit $ -- $ 182,651
Current portion of notes and debentures
payable 3,419,200 3,180,758
Current portion of obligations under capital
leases 190,687 242,477
Accounts payable 894,090 1,452,192
Accrued expenses and other current liabilities 967,830 881,675
Accrued compensation and employee benefits 723,580 1,528,153
Deferred revenue -- 440,232
--------- ---------
Total current liabilities 6,195,387 7,908,138
Obligations under capital leases, less current
portion 145,643 458,654
Accrued compensation 404,627 676,261
Other long-term liabilities 63,578 72,573
--------- ---------
Total liabilities 6,809,235 9,115,626
--------- ---------
Common stock subject to rescission 674,124 709,124
--------- ---------
Stockholders' equity (deficiency of 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 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
11,442,143 shares in 1997 and 10,626,874
shares in 1996 11,443 10,627
Common stock to be issued -- 2,000,000
Additional paid in capital 16,804,504 16,823,526
Accumulated deficit (24,686,466) (25,303,978)
---------- ----------
Total stockholders' equity (deficiency of assets) ( 6,253,259) ( 3,977,450)
---------- ----------
$ 1,230,100 $ 5,847,300
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 4
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
---------------------- ---------------------------
1997 1996 1997 1996
---------- ---------- --------- ----------
(UNAUDITED) (UNAUDITED)(UNAUDITED)(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues $1,467,344 $1,166,465 $ -- $ 456,602
---------- --------- -------- ----------
Costs and expenses:
Cost of revenues 90,849 200,342 -- 44,620
Selling and administrative
expenses 2,655,362 4,801,135 66,759 1,572,202
Depreciation and amortization 490,873 809,347 48,477 282,618
---------- --------- -------- ----------
3,237,084 5,810,824 115,236 1,899,440
---------- --------- -------- ----------
(1,769,740) (4,644,359) (115,236) (1,442,838)
Interest income 4,070 13,455 1,026 3,024
Interest expense (336,746) (231,912) (88,217) (82,175)
Other income(expense), net 2,166,429 ( 1,252) ( 41) (1,252)
---------- --------- -------- ---------
Income(loss) from continuing
operations before income taxes 64,013 (4,864,068) (202,468) (1,523,241)
Provision(benefit) for income
taxes -- (1,683,173) -- (603,673)
---------- --------- -------- ----------
Income(loss) from continuing
operations 64,013 (3,180,895) (202,468) (919,568)
---------- --------- -------- ----------
Discontinued operations:
Loss from operations of
discontinued telecommunications
businesses (less income tax
benefit of $304,650 and $140,527
in 1996, respectively) (85,893) (538,044) (9,512) (109,537)
Gain from disposition of
telecommunication businesses 639,392 -- -- --
--------- -------- -------- ---------
553,499 (538,044) (9,512) (109,537)
--------- -------- -------- ---------
Net income(loss) $ 617,512 $(3,718,939) $(211,980) $(1,029,105)
========= ========= ======== =========
Earnings(loss) per share:
Income(loss)from continuing
operations $ .01 $ (.39) $ (.02) $ (.11)
Income(loss) from discontinued
telecommunications businesses (.01) (.07) -- (.01)
Gain from disposition of
telecommunications businesses .06 -- -- --
--------- --------- -------- ---------
Net income(loss) $ .06 $ (.46) $ (.02) $ (.12)
========= ========= ======== =========
Weighted average number of
common shares outstanding 11,019,398 8,077,218 11,181,992 8,727,554
========= ========= ========== =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 5
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
September 30,
-------------------------
1997 1996
----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net cash used in operating activities $(1,644,954) $(3,746,364)
---------- ----------
Cash flows from investing activities:
Acquisitions of businesses, net of cash
acquired -- 90,890
Disposition of businesses, net of cash
of businesses disposed of 368,343 --
Expenditures for furniture and equipment (23,753) (307,289)
Loan to officer -- (50,000)
Other 2,475 --
--------- ---------
Net cash provided by (used in)
investing activities 347,065 (266,399)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock 229,500 2,391,695
Proceeds from notes and debentures payable 1,390,626 798,397
Payments on notes, debentures and
capital lease obligations (263,541) (129,543)
Payments on borrowings under lines of credit (75,000) (12,500)
Payments on common stock subject to rescission (35,000) --
Other (8,995) --
--------- ---------
Net cash provided by financing activities 1,237,590 3,048,049
--------- ---------
Net decrease in cash (60,299) (964,714)
Cash and cash equivalents at beginning
of the period 61,039 964,714
--------- ---------
Cash and cash equivalents at end of the period $ 740 $ --
========= =========
<PAGE> 6
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Supplemental Disclosure of Cash Flow Information and Non-cash Investing and
Financing Activities:
</TABLE>
<TABLE>
<CAPTION>
September 30,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
Equipment capital lease obligations $ 73,184 $ 570,675
Issuance of common stock upon conversion
of notes and debentures payable 716,318 199,007
Issuance of common stock as compensation 266,861 260,192
Waiver of common stock to be issued 2,000,000 --
Waiver of bonuses payable 695,214 --
Cash paid during the period for:
Interest 102,742 --
Income taxes -- --
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 7
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
SIGNIFICANT ACCOUNTING POLICIES - The unaudited consolidated
balance sheet at September 30, 1997, the unaudited consolidated
statements of operations for the nine and three months ended
September 30, 1997 and 1996 and unaudited consolidated statements
of cash flows for the nine months ended September 30, 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 nine months ended September 30, 1997
are not necessarily indicative of the results for the full fiscal
year.
The operating, investing and financing activities included in the
Unaudited Consolidated Statements of Cash Flows for the nine
months ended September 30, 1997 and 1996 are presented net of the
assets and liabilities disposed of by the Company in connection
with the rescission of the ATI and HMT acquisition agreements and
the assets and liabilities acquired in connection with business
acquisitions, respectively. See Note 2.
2. ACQUISITIONS AND DISPOSITIONS 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 nine months ended September 30, 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.
<PAGE> 8
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1996
------------------
<S> <C>
Net revenues from continuing operations $ 1,369,537
-----------
Loss from continuing operations $ 3,231,029
-----------
Loss from operations of discontinued
telecommunications businesses $ 538,044
-----------
Net Loss $ 3,751,073
-----------
Loss per share:
Loss from continuing operations $ .39
Loss from operations of discontinued
telecommunications businesses .07
-----------
Net loss $ .46
===========
</TABLE>
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 statements of operations for the nine months
ended September 30, 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 $614,000 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.
<PAGE> 9
The assets and liabilities of the Company's discontinued
telecommunications businesses included in the accompanying
consolidated balance sheets as of September 30, 1997 and December
31, 1996 are summarized as follows:
September 30, December 31,
1997 1996
----------- ----------
Current assets $ -- $ 332,856
Total assets -- 660,094
Current liabilities 299,322 886,206
Total liabilities 291,322 1,078,026
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 nine months and
three months ended September 30, 1997 and 1996, are summarized as
follows:
Nine Months Three Months
Ended September 30, Ended September 30,
--------------------- -------------------
1997 1996 1997 1996
--------- --------- -------- --------
Net revenues $ 405,617 $1,715,674 $ -- $ 447,197
Cost of revenues -- 1,107,982 -- 254,918
Selling and administrative
expenses 417,590 1,305,952 9,179 371,686
Depreciation and amortization 47,460 117,699 -- (16,052)
Interest income -- 971 -- (55)
Interest expense 32,383 26,867 333 12,438
Other income (expense), net 5,923 (837) -- 837
Loss from operations of
discontinued businesses,
before income taxes (85,893) (842,692) (9,512) (176,685)
Income tax benefit -- 304,648 -- 67,148
Loss from operations of
discontinued businesses (85,893) (538,044) (9,512) (109,537)
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 reported in other
income (expense), net as a component of operations from continuing
businesses.
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 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.
<PAGE> 10
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.
During the nine months ended September 30, 1997, the Company also
issued other notes and debentures payable totaling $270,626.
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 - Following is a summary of common stock
transactions for the period from January 1, 1997 to September 30,
1997:
Shares Amount
------- --------
Issuance of common stock for cash 203,556 $229,500
Issuance of common stock upon:
Conversion of Class A Preferred Stock 96,000 --
Conversion of Class B Preferred Stock 580,682 --
Conversion of convertible debt 577,421 716,318
Issuance of common stock as compensation 311,897 262,861
Rescission of business acquisitions (994,247)(2,000,000)
<PAGE> 11
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 nine
months and three months ended September 30, 1997 and 1996. The
results from continuing operations include the operations of NSC,
acquired in October 1995,and HMT, acquired in March 1996 and
disposed of in June 1997 in connection with the rescission of the
HMT acquisition agreement. 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
the 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>
Nine Months Ended Three Months Ended
September 30, September 30,
--------------------- ------------------
1997 1996 1997 1996
---------- --------- -------- --------
<S> <C> <C> <C> <C>
Operations of continuing
businesses:
Net revenues $1,467,344 $1,166,465 $ -- $ 456,602
Cost of revenues 90,849 200,342 -- 44,620
Selling and administrative
expenses 2,655,362 4,801,135 66,759 1,572,202
Depreciation and amortization 490,873 809,347 48,477 282,618
Interest income 4,070 13,455 1,026 3,024
Interest expense 336,746 231,912 88,217 (82,175)
Other income(expense), net 2,166,429 (1,252) (41) (1,252)
Income(loss) from continuing
operations before income taxes 64,013 (4,864,068) (202,468) (1,523,241)
Income(loss) from continuing
operations 64,013 (3,180,895) (202,468) ( 919,568)
Operations of discontinued
telecommunications businesses:
Net revenues 405,617 1,715,674 -- 447,197
Cost of revenues -- 1,107,982 -- 254,918
Selling and administrative
expenses 417,590 1,305,952 9,179 371,686
Depreciation and amortization 47,460 117,699 -- (16,052)
Interest income -- 971 -- (55)
Interest expense 32,383 26,867 333 12,438
Other income(expense), net 5,923 (837) -- 837
Loss from operations of
discontinued telecommunications
businesses before income taxes ( 85,893) (842,692) ( 9,512) ( 176,685)
Loss from operations of discontinued
telecommunications businesses ( 85,893) (538,044) ( 9,512) ( 109,537)
Gain from disposition of
telecommunications businesses 639,392 -- -- --
</TABLE>
<PAGE> 12
The following discussion should be read in conjunction with the
Consolidated Financial Statements and notes thereto, appearing
elsewhere herein.
NET REVENUES
Net revenues from continuing businesses for the nine months ended
September 30, 1997 increased by $300,879 as compared to the nine
months ended September 30, 1996. This increase 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
(see Note 2 to the accompanying Unaudited Consolidated Financial
Statements). HMT revenues included in the accompanying Unaudited
Consolidated Statements of Operations for the nine months ended
September 30,1997 were $1,311,055, compared to $845,081 for the
nine months ended September 30, 1996. This increase was offset by
lower revenues from NSC's healthcare cost recovery services. The
decrease in NSC revenues is the result of the termination of the
Chrysler services agreement, effective in September 1997, due to
performance issues among NSC, Chrysler and HMS, and the expiration
of the Ford Motor Company services agreement, effective March 31,
1997.
The Company had no net revenues from continuing businesses for the
three months ended September 30, 1997 due to the termination of
the Chrysler services agreement, expiration of the Ford Motor
Company services agreement and the rescission of the HMT
acquisition agreement. Net revenues from continuing businesses for
the three months ended September 30, 1996 included $379,921 from
HMT and $76,681 from NSC.
The decrease in net revenues from the Company's discontinued
telecommunications businesses from period to period is the result
of the discontinuance of TNI's operations effective as of December
31, 1996 and the disposal of ATI in May 1997. Net revenues from
the Company's discontinued telecommunications businesses for the
nine months ended September 30, 1997 do, however, reflect an
increase in the revenues of the Company's ATI subsidiary,
principally from PPV services in Mexico.
COST OF REVENUES
The decrease in cost of revenues applicable to continuing
operations for the nine months ended September 30, 1997 as
compared to the nine months ended September 30, 1996 is
principally the result of lower revenues from NSC's healthcare
cost recovery services, offset by adjustments related to
recoverable healthcare claims under the Chrysler service
agreement.
The decrease in cost of revenues applicable to continuing
operations for the three months ended September 30, 1997 as
compared to the three months ended September 30, 1996 is
principally due to the termination of the Chrysler services
agreement and the expiration of the Ford Motor Company services
agreement. During the three months ended September 30, 1997, the
Company did not generate any revenues from NSC's healthcare cost
recovery services.
The decreases in the cost of revenues of the Company's
discontinued telecommunication businesses from period to period
are the result of the discontinuance of TNI's operations,
effective as of December 31, 1996, and the disposal of ATI in May
1997.
<PAGE> 13
SELLING AND ADMINISTRATIVE EXPENSES
The decreases in selling and administrative expenses applicable to
continuing operations from period to period reflect the reversal
of accrued bonuses of $695,214 in the first quarter of 1997 which
were payable to Retiring Management but, waived by Retiring
Management in connection with an agreement between the Company and
the retiring management of NSC, cost reductions initiated by the
Company during the first quarter of 1997 due to continued
operating losses and the disposition of HMT in June 1997. These
decreases were offset to some extent by the write-off of deferred
compensation assets of approximately $304,000 and $340,000 in the
first and second quarters of 1997, respectively.
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, and the
disposal of ATI in May 1997.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization applicable to continuing operations
for the nine and three months ended September 30, 1997 decreased
as compared to the same periods of last year. These decreases are
principally due to lower amortization of intangibles and goodwill
recorded in connection with the Company's March 1996 acquisition
of HMT and the write of intangibles and goodwill recorded in
connection with the acquisition of NSC, effective as of December
31, 1996. As mentioned above, the HMT acquisition agreement was
rescinded on June 9, 1997.
Depreciation and amortization applicable to the operations of the
Company's discontinued telecommunications businesses declined from
period to period principally as a result of the write-off in 1996
of goodwill related to the acquisitions of TNI and Comstar, the
discontinuance of TNI's operations, effective December 31, 1996,
and the disposal of ATI in May 1997.
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 nine months ended September
30, 1997 reflect a one-time gain of $2,000,000 recorded in the
first quarter 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 and a gain recorded in the second
quarter of approximately $281,000 from the disposition of HMT.
Income (expense), net for the first nine months of 1997 also
includes financing fees related to the issuance of the Company's
4% $1,120,000 convertible debentures due October 1, 1998.
<PAGE> 14
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 provisions for income taxes applicable to
continuing operations were made in the third quarter or for the
first nine months 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 in the third quarter or for the first nine
months of 1997 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. In
the nine months ended September 30, 1997, the Company used
$1,644,954 in cash from operating activities, which is net of non-
cash gains recorded during the period from the rescission of
business acquisitions, the reversal of accrued bonuses payable to
the Retiring Management of NSC and the removal of common stock to
be issued to Retiring Management. In the first nine months of
1997, the Company generated cash of approximately $ 358,000 from
the rescission of business acquisitions and cash, net of
repayments, of $1,237,590 from financing activities. See the
accompanying Unaudited Consolidated Statements of Cash Flows. The
Company 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 accompanying Unaudited Consolidated Financial
Statements included elsewhere herein).
The total assets of the Company and its subsidiaries decreased by
$4,617,200 from December 31, 1996 to September 30, 1997. This
decrease is principally the result of the rescission of the ATI
and HMT acquisition agreements in May and June 1997, respectively,
amortization and depreciation and the write-off of deferred
compensation assets. Similarly, total liabilities and
stockholders' equity (deficiency in assets) decreased by
$2,306,391 and $2,275,809, respectfully. The decrease in total
liabilities principally reflects the effect of the rescission of
the ATI and HMT acquisition agreements and reductions in amounts
due trade and other creditors (including the reversal of bonuses
due to Retiring Management), offset by a net increase in notes and
debentures payable and other accrued liabilities. The decrease in
total stockholders' equity principally reflects the effect of the
rescission of the HMT acquisition agreement, the sale of common
stock by the Company in reliance upon exemptions under Regulation
D of the Securities Act of 1933, conversions of debt into common
stock and earnings for the period, which included non-recurring
gains of $2,000,000 from the removal of common stock to be issued
to Retiring Management from the Company's consolidated balance
sheet and approximately $920,000 from the rescission of the ATI
and HMT acquisition agreements ( see Note 2 to the accompanying
Unaudited Consolidated Financial Statements).
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.
<PAGE> 15
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> 16
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
Exhibits:
(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)6. * Financial Data Schedule ( Nine Months Ended September 30, 1997).
(b) Reports on Form 8-K:
1. 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.
<PAGE> 17
2. 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 Acquisition 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 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> 18
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 24, 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>19
INDEX TO EXHIBITS
EXHIBIT NUMBER
(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)6. * Financial Data Schedule ( Six Months Ended June 30, 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 SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINAICIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 740
<SECURITIES> 0
<RECEIVABLES> 74,520
<ALLOWANCES> (8,458)
<INVENTORY> 0
<CURRENT-ASSETS> 303,344
<PP&E> 988,830
<DEPRECIATION> (317,774)
<TOTAL-ASSETS> 1,230,100
<CURRENT-LIABILITIES> 6,195,387
<BONDS> 3,419,200
0
1,617,260
<COMMON> 11,443
<OTHER-SE> (7,881,692)
<TOTAL-LIABILITY-AND-EQUITY> 1,230,100
<SALES> 1,467,344
<TOTAL-REVENUES> 1,467,344
<CGS> 90,849
<TOTAL-COSTS> 3,237,084
<OTHER-EXPENSES> (2,166,429)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 336,746
<INCOME-PRETAX> 64,013
<INCOME-TAX> 0
<INCOME-CONTINUING> 64,013
<DISCONTINUED> 553,499
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 617,512
<EPS-PRIMARY> .06
<EPS-DILUTED> 0
</TABLE>
