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 June 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
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(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 June 30, 1997 - 11,183,961 shares.
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
---------- ----------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $134,012 $ 61,039
Accounts receivable, less allowance for
doubtful accounts of $8,404 in 1997 and
$28,074 in 1996 53,677 802,079
Notes receivable from officers and employees 52,000 102,000
Other current assets 193,671 438,763
--------- ---------
Total current assets 433,360 1,403,881
--------- ---------
Furniture and equipment 1,060,045 1,812,867
Less accumulated depreciation (290,316) (587,598)
--------- ---------
Net furniture and equipment 769,729 1,225,269
Note receivable from the sale of assets, less
allowance of $500,000 -- --
Deferred compensation 116,075 662,199
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
--------- ---------
$1,490,356 $ 5,847,300
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 3
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
---------- -----------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY IN ASSETS)
<S> <C> <C>
Current liabilities:
Borrowings under lines of credit $ -- $ 182,651
Current portion of notes and debentures payable 3,350,017 3,180,758
Current portion of obligations under capital
leases 193,134 242,477
Accounts payable 902,713 1,452,192
Accrued expenses and other current liabilities 946,746 881,675
Accrued compensation and employee benefits 737,056 1,528,153
Deferred revenue -- 440,232
---------- ----------
Total current liabilities 6,129,666 7,908,138
Obligations under capital leases, less current
portion 176,235 458,654
Accrued compensation 491,720 676,261
Other long-term liabilities 63,578 72,573
---------- ----------
Total liabilities 6,861,199 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 3,553,125 shares in 1997 and
4,550,000 shares in 1996 1,945,820 2,491,745
Common stock - $.001 par value; authorized
50,000,000 shares, issued and outstanding
11,183,961 shares in 1997 and 10,626,874 shares
in 1996 11,184 10,627
Common stock to be issued -- 2,000,000
Additional paid in capital 16,472,515 16,823,526
Accumulated deficit (24,474,486) (25,303,978)
---------- ----------
Total stockholders' equity (deficiency in assets) ( 6,044,967) ( 3,977,450)
---------- ----------
$ 1,490,356 $ 5,847,300
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 4
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
----------------------------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues $ 1,467,344 $ 709,863 $ 341,620 $ 340,251
--------- --------- -------- -------
Costs and expenses:
Cost of revenues 90,849 155,722 90,849 33,371
Selling and administrative
expenses 2,588,603 3,228,933 1,214,133 1,995,461
Depreciation and amortization 442,396 526,729 188,806 286,849
--------- --------- --------- ---------
3,121,848 3,911,384 1,493,788 2,315,681
--------- --------- --------- ---------
(1,654,504) (3,201,521)(1,152,168)(1,975,430)
Interest income 3,044 10,431 1,026 7,072
Interest expense (248,529) (149,737) (136,964) (111,299)
Other income(expense), net 2,166,470 -- 278,456 --
--------- --------- --------- ---------
Income(loss) from continuing
operations before income taxes 266,481 (3,340,827)(1,009,650)(2,079,657)
Provision(benefit) for income
taxes -- (1,079,500) -- (625,595)
--------- --------- --------- ---------
Income(loss) from continuing
operations 266,481 (2,261,327)(1,009,650)(1,454,062)
--------- --------- --------- ---------
Discontinued operations:
Loss from operations of
discontinued telecommunications
businesses (less income tax
benefit of $237,500 and
$140,527 in 1996, respectively) ( 76,381) ( 428,507) (961) (192,395)
Gain from disposition of
telecommunication businesses 639,392 -- 614,392 --
--------- -------- --------- --------
563,011 ( 428,507) 613,431 (192,395)
--------- -------- --------- ---------
Net income(loss) $ 829,492 $(2,689,834) $(396,219)$(1,646,457)
========= ========= ========= ==========
Earnings(loss) per share:
Income(loss)from continuing
operations $ .03 $ (.29) $ (.09)$ (.17)
Income(loss) from discontinued
telecommunications businesses -- (.05) -- (.02)
Gain from disposition of
telecommunications businesses .05 -- .05 --
--------- --------- --------- --------
Net income (loss) $ .08 $ (.34) $ (.04)$ (.19)
========= ========= ========= ========
Weighted average number of
common shares outstanding 10,936,609 7,894,808 11,272,699 8,398,362
========= ========= ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 5
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
June30,
---------------------------
1997 1996
---------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net cash used in operating activities $(1,475,539) $(2,458,875)
----------- -----------
Cash flows from investing activities:
Acquisitions of businesses, net of cash
acquired -- (46,817)
Disposition of businesses, net of cash
of businesses disposed of 368,343 --
Expenditures for furniture and equipment (23,751) (448,509)
Notes receivable from officers -- (50,000)
Other 2,474 --
---------- ----------
Net cash provided by (used in)
investing activities 347,066 (545,326)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock 229,500 1,826,129
Proceeds from notes and debentures payable 1,261,366 547,857
Payments on notes, debentures and
capital lease obligations (170,425) (218,205)
Payments on borrowings under lines of credit (75,000) (8,484)
Payments on common stock subject to rescission (35,000) --
Other (8,995) --
---------- ----------
Net cash provided by financing activities 1,201,446 2,147,297
---------- ----------
Net increase (decrease)in cash 72,973 (856,904)
Cash and cash equivalents at beginning
of the period 61,039 964,714
---------- ----------
Cash and cash equivalents at end of the period $ 134,012 $ 107,810
========== ==========
</TABLE>
<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>
<CAPTION>
June 30,
---------------------
1997 1996
---------- ---------
<S> <C> <C>
Equipment capital lease obligations $ 73,184 $ 701,475
Issuance of common stock upon conversion
of notes and debentures payable 716,318 199,007
Issuance of common stock as compensation 262,173 199,865
Waiver of common stock to be issued 2,000,000 --
Waiver of bonuses payable 695,214 --
Cash paid during the period for:
Interest 76,217 --
Income taxes -- --
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 7
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
1. SIGNIFICANT ACCOUNTING POLICIES - The unaudited consolidated
balance sheet at June 30, 1997, the unaudited consolidated
statements of operations for the six and three months ended June
30, 1997 and 1996 and unaudited consolidated statements of cash
flows for the six months ended June 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 six months ended June 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 six
months ended June 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. 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 six months ended June 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>
Six Months Ended
June 30, 1996
-------------
<S> <C>
Net revenues from continuing operations $ 912,935
-----------
Loss from continuing operations $ 2,293,461
-----------
Loss from operations of discontinued
telecommunications businesses $ 428,507
-----------
Net Loss $ 2,721,968
-----------
Loss per share:
Loss from continuing operations $ .27
Loss from operations of discontinued
telecommunications businesses .05
-----------
Net loss $ .32
===========
</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 six months
and three months ended June 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 ( including
$105,000 attributable to common stock purchase warrants issued in
1995 to the former shareholders of ATI in consideration of
extension of indebtedness).
<PAGE> 9
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 June 30, 1997 and December 31,
1996 are summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- --------
<S> <C> <C>
Current assets $ -- $ 332,856
Total assets -- 660,094
Current liabilities 291,542 886,206
Total liabilities 291,542 1,078,026
</TABLE>
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 six months and
three months ended June 30, 1997 and 1996, are summarized as
follows:
<TABLE>
<CAPTION>
Six Months Three Months
Ended June 30, Ended June 30,
-------------------- --------------------
1997 1996 1997 1996
-------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues $405,617 $ 1,268,477 $ 171,974 $ 610,534
Cost of revenues -- 853,064 -- 386,102
Selling and administrative expenses 408,411 934,266 142,119 432,148
Depreciation and amortization 47,460 133,751 18,984 74,262
Interest income -- 1,026 -- 55
Interest expense 32,049 14,429 11,832 7,390
Other income (expense), net 5,922 -- -- (55)
Loss from operations of discontinued
businesses, before income taxes (76,381) (666,007) (961) (289,368)
Income tax benefit -- 237,500 -- 96,973
Loss from operations of discontinued
businesses (76,381) (428,507) (961) (192,395)
</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 reported in
other income (expense), net as a component of operations from
continuing businesses.
<PAGE> 10
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.
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.
<PAGE> 11
5.STOCKHOLDERS' EQUITY - Following is a summary of common stock
transactions for the period from January 1, 1997 to June 30, 1997:
<TABLE>
<CAPTION>
<S> <C> <C>
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 362,500 --
Conversion of convertible debt 577,421 716,318
Issuance of common stock as compensation 311,857 262,173
Rescission of business acquisitions (994,247) (2,000,000)
</TABLE>
<PAGE> 12
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 six
months and three months ended June 30, 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 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>
Six Months Ended Three Months Ended
June 30, June 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Operations of continuing businesses:
Net revenues $1,467,344 $709,863 $ 341,620 $ 340,251
Cost of revenues 90,849 155,722 90,849 33,849
Selling and administrative expenses 2,588,603 3,228,933 1,214,133 1,995,461
Depreciation and amortization 442,396 526,729 188,806 286,849
Interest income 3,044 10,431 1,026 7,072
Interest expense 248,529 149,737 136,964 111,299
Other income(expense), net 2,166,470 -- 278,456 --
Income(loss) from continuing
operations before income taxes 266,481 (3,340,827) (1,009,650) (2,079,657)
Income(loss) from continuing operations 266,481 (2,261,327) (1,009,650) (1,454,062)
Operations of discontinued
telecommunications businesses:
Net revenues 405,617 1,268,477 171,974 610,534
Cost of revenues -- 853,064 -- 386,102
Selling and administrative expenses 408,411 934,266 142,119 432,148
Depreciation and amortization 47,460 133,751 18,984 74,262
Interest income -- 1,026 -- 55
Interest expense 32,049 14,429 11,832 7,390
Other income(expense), net 5,922 -- -- ( 55)
Loss from operations of discontinued
telecommunications businesses
before income taxes (76,381) (666,007) (961) (289,368)
Loss from operations of discontinued
telecommunications businesses (76,381) (428,507) (961) (192,395)
Gain from disposition of
telecommunications businesses 639,392 -- 614,392 --
</TABLE>
The following discussion should be read in conjunction with the
Consolidated Financial Statements and notes thereto, appearing
elsewhere herein.
<PAGE> 13
NET REVENUES
The increase in net revenues from continuing businesses for the
six months ended June 30, 1997 as compared to the six months
ended June 30, 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 (see Note 2 to the
accompanying Unaudited Consolidated Financial Statements). HMT
revenues included in the accompanying Consolidated Statements of
Operations for the six months ended June 30,1997 were $1,311,055,
compared to $465,160 for the six months ended June 30, 1996. This
increase was offset, slightly, by lower revenues from NSC's
healthcare cost recovery services under the Chrysler and Ford
Motor service agreements.
The increase in net revenues from continuing businesses for the
three months ended June 30, 1997 as compared to the three months
ended June 30, 1996 reflects a decrease in HMT revenues of
$79,182, principally as a result of the rescission of the HMT
acquisition agreement, and an increase in NSC revenues of
$80,551, principally as a result of adjustments to recoverable
healthcare claims under the Chrysler service agreement.
The decrease in 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. These decreases were somewhat offset by
increases from period to period in the revenues of the Company's
ATI subsidiary, principally from PPV services in Mexico. The
Company's acquisition of ATI was rescinded in June 1997. See Note
2 to the accompanying Unaudited Consolidated Financial Statements
included elsewhere herein.
COST OF REVENUES
The decrease in cost of revenues applicable to continuing
operations for the six months ended June 30, 1997 as compared to
the six months ended June 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 services agreement.
The increase in cost of revenues applicable to continuing
operations for the three months ended June 30, 1997 as compared
to the three months ended June 30, 1996 is principally the result
of adjustments related to recoverable healthcare claims under the
Chrysler services agreement.
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.
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 and cost reductions
initiated by the Company during the first quarter of 1997 due to
continued operating losses. These decreases were offset to some
extent by increases resulting from the March 1996 acquisition of
HMT and the write-off of deferred compensation assets of
approximately $304,000 and $340,000 in the first and second
quarters of 1997, respectively.
<PAGE> 14
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.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization applicable to continuing operations
for the six and three months ended June 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.
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 six and three months ended
June 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 six
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.
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 first or second quarters
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.
<PAGE> 15
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.
The Company also generated cash of approximately $ 358,000 from
the disposition of businesses during the second quarter of 1997.
See the accompanying Unaudited Consolidated Statements of Cash
Flows for the six months ended June 30, 1997 and 1996. 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
$4,356,944 from December 31, 1996 to June 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 decreased by $2,254,427 and $2,067,517,
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. 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 from the Company's
consolidated balance sheet, as of March 31, 1997, 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.
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
(a) 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)5. * Financial Data Schedule ( Six Months Ended June 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 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 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
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)5. * 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 JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
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<CASH> 134,012
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1,945,820
<COMMON> 11,184
<OTHER-SE> (8,001,971)
<TOTAL-LIABILITY-AND-EQUITY> 1,490,356
<SALES> 1,467,344
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<TOTAL-COSTS> 3,121,848
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