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, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-26668
SYSTEMS COMMUNICATIONS, INC.
- ---------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
FLORIDA 65-0036344
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(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)
Registrant's telephone number, including area code 727-530-4800
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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 x No ___
Number of shares outstanding of the issuer's Common Stock, par
value $0.001 per share, as of June 30, 1998 - 23,881,873
shares.
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
JUNE 30, DECEMBER 31,
1998 1997
--------- -----------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 12,940 $ 65,556
Accounts receivable from officers and
employees 4,569 60,908
Other current assets 145,086 130,419
--------- ----------
Total current assets 162,595 256,883
--------- ----------
Furniture and equipment 132,982 130,162
Less accumulated depreciation (67,428) (56,774)
--------- ----------
Net furniture and equipment 65,554 73,388
Note receivable from the sale of assets, less
allowance of $500,000 in 1997 -- --
Deferred compensation -- 52,941
Other non-current assets 4,982 4,982
--------- ----------
Total assets $ 233,131 $ 388,194
========= ==========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 3
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
JUNE 30, DECEMBER 31,
1998 1997
---------- -----------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' DEFICIT
<S> <C> <C>
Current liabilities:
Notes and debentures payable $ 2,785,928 $ 3,361,700
Accounts payable 507,808 535,516
Accrued compensation and employee benefits 758,910 1,176,578
Liabilities and accruals for claims,
assessments and other losses 1,084,012 1,129,823
Accrued expenses and other current liabilities 470,786 524,576
---------- ----------
Total current liabilities 5,607,444 6,728,193
Deferred liabilities under employment agreements -- 310,794
---------- ----------
Total liabilities 5,607,444 7,038,987
---------- ----------
Common stock subject to rescission 674,124 674,124
---------- ----------
Stockholders' deficit:
Class A convertible preferred stock, stated value
and liquidation preference $1.00 per share;
authorized 5,000,000 shares; issued and
outstanding - none -- --
Class B convertible preferred stock, stated value
and liquidation preference, $1.00 per share;
authorized 10,000,000 shares; issued and
outstanding, 100,000 shares in 1998 and
2,953,125 shares in 1997 54,764 1,617,260
Common stock - $.001 par value; authorized
50,000,000 shares; issued and outstanding,
23,881,873 shares in 1998 and 12,083,646
shares in 1997 23,882 12,084
Additional paid in capital 19,592,281 16,866,883
Accumulated deficit (25,719,364) (25,821,144)
---------- ----------
Total stockholders' deficit (6,048,437) (7,324,917)
---------- ----------
Total liabilities and stockholders' deficit $ 233,131 $ 388,194
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 4
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
Six Months Ended Three Months Ended
June 30, June 30,
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Net revenues $ -- $ 1,467,344 $ -- $ 341,620
--------- --------- ---------- ---------
Costs and expenses:
Cost of revenues -- 90,849 -- 90,849
Selling, general and administrative
expenses 752,861 2,658,089 481,626 891,973
Impairment and other losses -- 625,728 -- 322,160
Depreciation and amortization 10,356 442,396 3,852 188,806
--------- --------- --------- ---------
Total costs and expenses 763,217 3,817,062 485,478 1,493,788
--------- --------- --------- ---------
Operating loss (763,217) (2,349,718) (485,478) (1,152,168)
Gain from sale of license agreement -- 2,695,214 -- --
Gain from rescission of business
acquisitions -- 281,421 -- 281,421
Interest income 892 3,044 892 1,026
Interest expense (136,855) (248,529) (62,393) (136,964)
Other income (expense), net 408,725 (114,951) 408,725 (2,965)
--------- --------- --------- ---------
Income (loss) from continuing
operations ( 490,455) 266,481 (138,254) (1,009,650)
--------- --------- --------- ---------
Discontinued operations:
Income (loss) from operations of
discontinued telecommunications
businesses (less income tax benefit
of $29,000 and $19,500 in 1997,
respectively) 305,647 (47,381) (758) 18,539
Gain from disposition of
telecommunications businesses
(less income tax expense of
$29,000 and $19,500 in 1997,
respectively) -- 610,392 -- 594,892
--------- --------- --------- ---------
Income (loss) before extraordinary
item (184,808) 829,492 (139,012) (396,219)
Extraordinary item - Gain from
extinquishment of debt 286,588 -- -- --
--------- --------- --------- ---------
Net income (loss) $ 101,780 $ 829,492 $ (139,012) $ (396,219)
========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 5
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
<TABLE>
Six Months Ended Three Months Ended
June 30, June 30,
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic earnings per share:
Income (loss) from continuing
operations $ (0.04) $ 0.02 $ (0.01) $ (0.09)
Income (loss) from operations of
discontinued telecommunications
businesses 0.02 -- -- --
Gain from disposition of
telecommunications businesses -- 0.06 -- 0.05
Extraordinary item - Gain from
extinquishment of debt 0.02 -- -- --
--------- --------- --------- ---------
Net income (loss) $ -- $ 0.08 $ (0.01) $ (0.04)
========= ========= ========= =========
Weighted average number of
common shares outstanding 13,810,977 10,936,609 16,525,089 11,272,699
========== ========== ========== ==========
Diluted earnings per share:
Income (loss) from continuing
operations $ (0.04) $ 0.02 $ (0.01) $ (0.09)
Income (loss) from operations of
discontinued telecommunications
businesses 0.02 -- -- --
Gain from disposition of
telecommunications businesses -- 0.05 -- 0.05
Extraordinary item - Gain from
extinquishment of debt 0.02 -- -- --
--------- --------- --------- ---------
Net income (loss) $ -- $ 0.07 $ (0.01) $ (0.04)
========= ========= ========= =========
Weighted average number of
common shares outstanding, 13,810,977 12,243,826 16,525,089 11,272,699
assuming dilution ========== ========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 6
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Six Months
Ended June 30,
------------------------
1998 1997
--------- -----------
<S> <C> <C>
Net cash used in operating activities $ (237,796) $(1,475,539)
--------- -----------
Cash flows from investing activities:
Disposition of businesses, net of cash of
businesses disposed of -- 368,343
Expenditures for furniture and equipment (2,820) (23,751)
Other -- 2,474
--------- -----------
Net cash used in investing activities (2,820) 347,066
--------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 40,000 229,500
Proceeds from notes and debentures payable 288,500 1,261,366
Payments on notes, debentures and capital
leases (80,500) (170,425)
Payments on borrowings under lines
of credit -- (75,000)
Payments on common stock subject
to rescission -- (35,000)
Other -- (8,995)
--------- ----------
Net cash provided by financing activities 188,000 1,201,446
--------- ----------
Net increase (decrease) in cash (52,616) 72,973
Cash and cash equivalents at
beginning of the period 65,556 61,039
--------- ----------
Cash and cash equivalents at
end of the period $ 12,490 $ 134,012
========= ==========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 7
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Supplemental Disclosure of Cash Flow Information and Non-cash Investing
and Financing Activities:
<TABLE>
Six Months
Ended June 30,
------------------------
1998 1997
--------- ---------
<S> <C> <C>
Equipment capital lease
obligations $ -- $ 73,184
Issuance of common stock upon conversion
of notes and debentures payable 276,125 716,318
Recovery of note receivable from
sale of assets 305,345 --
Redemption of debentures payable 286,588 --
Issuance of common stock in
settlement of accrued and other
liabilities 526,862 --
Conversion of Class B preferred
stock 1,562,496 --
Cash paid during the period for:
Interest 7,277 76,217
Income taxes -- --
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 8
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated balance sheet as of June 30, 1998,
the unaudited consolidated statements of operations for the six
months and three months ended June 30, 1998 and 1997 and the
unaudited consolidated statements of cash flows for the six
months ended June 30, 1998 and 1997, have been prepared in
accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not
include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments,
consisting of normal and recurring accruals considered
necessary for a fair presentation, have been included. Results
of operations for the six months ended June 30, 1998 are not
necessarily indicative of the results for the full fiscal year.
Certain amounts in the 1997 financial statements have been
reclassified to conform to the 1998 presentation.
Earnings per Share
Basic and diluted earnings per share for the six months ended
June 30, 1998 and three months ended June 30, 1998 and 1997 are
the same because the inclusion of incremental shares in the
computation of diluted earnings per share from the assumed
conversion of convertible notes, debentures and preferred stock
and exercise of outstanding options and warrants and warrants
to be issued in connection with conversion of convertible notes
and debentures would have had the effect of reducing the per
share loss from continuing operations for the respective
periods. The number of potential common shares issuable as of
June 30, 1998 upon conversion of convertible notes, debentures
and preferred stock and exercise of outstanding options and
warrants and warrants to be issued in connection with the
conversion of convertible notes and debentures are summarized
as follows(see Notes 3 and 4):
<TABLE>
Number of
Shares
---------
<S> <C>
Convertible preferred stock 36,364
Convertible notes and debentures 9,699,721
Outstanding common stock purchase warrants 9,531,835
Outstanding options 1,417,500
Warrants issuable upon conversion of outstanding
notes and debentures 2,807,175
</TABLE>
Following is a reconciliation of basic and diluted earnings per
share for income from continuing operations for the six months
ended June 30, 1997.
<TABLE>
Per
Income Shares Share
--------- ---------- ------
<S> <C> <C> <C>
Basic earnings per share $ 266,481 10,936,609 $ 0.02
======
Effect of dilutive securities:
Options and warrants -- 638,611
Convertible preferred stock -- 848,606
--------- ----------
Diluted earnings per share $ 266,481 12,243,826 $ 0.02
========= ========== ======
</TABLE>
<PAGE> 9
NOTE 2 NOTE RECEIVABLE FROM THE SALE OF ASSETS
In March 1998, the Company, TNI, International Teledata
Corporation ("ITD") and certain former employees of the Company
(the "Employees") entered into an agreement (the "Agreement")
which provided for the transfer of certain ITD assets to the
Employees. The assets transferred pursuant to the Agreement
were sold to ITD by TNI pursuant to the Purchase and Sale
Agreement, dated as of January 31, 1997, between TNI and ITD.
In connection with the transfer of assets pursuant to the
Agreement, the Company canceled the $500,000 convertible
debenture note issued by ITD (the "ITD Note") in conjunction
with the Purchase and Sale Agreement in exchange for 496,902
shares of the Company's common stock beneficially owned by the
Employees, the waiver by the Employees of accrued and unpaid
compensation due to them by the Company and the cancellation of
employment agreements between the Company and the Employees.
Included in income (loss) from operations of discontinued
telecommunications businesses for the six months ended June 30,
1998 is income of approximately $306,000 from the cancellation
and partial recovery of the ITD note.
NOTE 3 REDEMPTION OF CONVERTIBLE DEBENTURE NOTES
Effective as of March 31, 1998, the Company redeemed its $450,000
of outstanding 10% convertible debenture notes in exchange for an
aggregate of 893,278 shares of its common stock and 450,000 stock
purchase warrants. The carrying amount of the debt extinguished
exceeded the fair value of the common stock and warrants issued
in exchange for the debt. The excess is classified as an
extraordinary gain in the accompanying unaudited consolidated
statement of operations for the six months ended June 30, 1998.
Of the 450,000 stock purchase warrants issued in connection with
the redemption, 225,000 are exercisable at $1.50 per share at any
time over a period of two years and 225,000 are exercisable at
$0.20 per share at any time over a period of five years.
NOTE 4 EMPLOYMENT AGREEMENTS
On June 30, 1998, the Company and its former Chief Executive
Officer (the "Former CEO") entered into an agreement and mutual
release (the "Release"). Pursuant to the Release, the Company
agreed to issue 300,000 shares of its common stock and release
the Former CEO from any and all claims, demands, contracts, and
obligations of any kind whatsoever which the Company had, has
or may have against the Former CEO in exchange for a release
from the Former CEO of any and all claims, demands, contracts
and obligations of any kind whatsoever which the Former CEO
had, has or may have against the Company arising out of an
employment agreement dated as of February 8, 1995 between the
Company and the Former CEO (the "Employment Agreement"). As a
result of the Release, the Company removed all liabilities
previously accrued by the Company under the Employment
Agreement from its consolidated balance sheet as of June 30,
1998 and recorded other income of approximately $380,000.
NOTE 5 STOCKHOLDERS' EQUITY
During the three months ended June 30, 1998, the Company
recorded the issuance to Timboon, LTD ("Timboon") of 5,000,000
shares of the Company's common stock, at $0.001 par value, and
increased additional paid-in-capital by $218,773 for the
partial conversion by Timboon of the Company's 4% cumulative
convertible debentures. The dollar amount of debentures held
and to be converted by Timboon into shares of the Company's
common stock from time-to-time is determined based on the
proceeds received by Timboon from the sale, in open market or
block transactions, of the shares of common stock issued to
Timboon by the Company.
<PAGE> 10
As of June 30, 1998, the Company has been informed by Timboon
that it has sold approximately 1.6 million shares of the
Company's common stock and has received proceeds of
approximately $220,000; and, the Company estimates that Timboon
holds approximately $980,000 of unconverted debentures and
approximately 3.4 million shares of the Company's common stock
into which the debentures are convertible. The Company expects
that it will either (i) issue additional shares of its common
stock to Timboon until such time as the debentures held by
Timboon are fully converted or (ii) liquidate the remaining
debentures held by Timboon by the payment of cash. The Company
is not able to determine (i) the number of additional shares,
if any, that it may issue in the future in order for Timboon to
fully convert the debentures or (ii) if it will have sufficient
cash to satisfy any remaining debentures, after the sale by
Timboon of shares issued to date, or which may be issued in the
future, in conversion of the debentures.
In addition to the shares of common stock issued to Timboon
during the six months ended June 30, 1998, the Company issued
358,333 shares for $40,000 in cash and 6,951,712 shares for the
purpose and amounts set forth in the following table.
<TABLE>
Number
of Shares Purpose of Issuance Amount
- --------- --------------------------------------- -----------
<S> <C> <C>
701,783 Conversion of Class B Preferred Stock $ 1,562,496
4,458,621 Exercise of stock options granted to
employees and consultants 470,862
893,278 Extinguishment of debt 223,320
200,000 CCI arbitration award 56,000
500,830 Conversion of debt 52,342
197,200 Consulting services 22,788
</TABLE>
In July 1998, the Company issued an aggregate of 7,742,929
shares of its common stock and 2,000,000 common stock purchase
warrants in conversion of $1,195,000 of its 10% cumulative
convertible debentures due on various dates through November
1997. Of the common stock purchase warrants issued in
connection with the conversion of the 10% cumulative
convertible debentures, 1,000,000 warrants are exercisable at
$0.20 per share and 1,000,000 warrants are exercisable at $0.25
per share. All of these warrants are exercisable at any time
over a period of two years from the date of issue.
NOTE 6 BUSINESS ACQUISITIONS
On July 28, 1998, a subsidiary of the Company, Affiliated
Communications Intergrators, Inc. ("Affiliated"), agreed to
purchase FiberOptic Network, Inc. ("FiberOptic"), a Florida
company located in Winter Park, Florida. On the same date
Affiliated changed its name to FiberOptic Holding,
Inc.("Holding"). On August 5, 1998, Holding mailed a notice to
the shareholders of FiberOptic that it was rescinding the
acquisition agreement based on material misrepresentations and
breach of representations and warranties in connection with the
acquisition agreement.
Holding is pursuing a business strategy independant of the
Company. The Company owns 850,000 shares of Holding out of
4,450,000 shares issued and outstanding. The Company intends to
use up to 250,000 of its Holding shares to compensate
consultants and to distribute the remaining 600,000 shares to
its stockholders as a dividend in kind. A date for the dividend
distribution has not been set.
<PAGE> 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto, appearing
elsewhere herein.
NET REVENUES
The Company had no revenues for the six months or three months
ended June 30, 1998. Net revenues for the six months and three
months ended June 30, 1997 were $1,125,724 and $341,620,
respectively. The decrease in net revenues from period-to-
period is due to the disposition of HMT coupled with the lack
of revenues in 1998 from the operations of NSC. The net
revenues of HMT and NSC in the first half of 1997 were
$1,311,055 and $156,289, respectively.
As of June 30, 1998, the Company has not realized any
significant income from its alliance agreement with HMG Health
Care Auditing, Inc. ("HMG") or from HMG's services agreement
(the "Agreement") with a "Big 3" U.S.automotive company. Under
the terms of the alliance agreement between the Company and
HMG, the Company and HMG are to share approximately $1,192,000
from the Agreement upon completion of the healthcare cost
recovery phase, as provided for in the Agreement. The Company
anticipates that it will recognize approximately $548,000 in
income from the Agreement.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $752,861 and
$2,658,089, respectively, for the six months ended June 30,
1998 and 1997 and $481,626 and $891,973, respectively, for the
three months ended June 30, 1998 and 1997. The principal
reasons for the decreases in selling, general and
administrative expenses for the respective periods were the
effects of the disposition of HMT, cost reduction measures
undertaken in 1997 due to continued operating losses and cash
flow constraints and lower costs from redirection of the
Company's business. The disposition of HMT had the effect of
reducing selling, general and administrative expenses by
approximately $1.1 million for the six months ended June 30,
1998 versus the same period last year; and, net cost reductions
from continuing businesses totaled approximately $800,000.
IMPAIRMENT AND OTHER LOSSES
In the first half of 1997, the Company wrote off approximately
$625,700 of deferred compensation assets related to certain
employment agreements.
DEPRECIATION AND AMORTIZATION
The decreases in depreciation and amortization from period-to-
period are primarily due to the disposition of HMT in June 1997
and the removal in December 1997 of repossessed capital lease
assets from the Company's consolidated balance sheet.
INTEREST EXPENSE
The decreases in interest expense from period-to-period are
principally due to the effects of lower aggregate amounts of
notes and debentures outstanding during the periods, the
removal in December 1997 of capital lease liabilities, related
to repossessed leased assets, from the Company's consolidated
balance sheet and the elimination of interest expense on the
Company's 4% cumulative convertible debentures due October 1,
1998, as a result of the Settlement
<PAGE> 12
Agreement entered into, effective as of March 2, 1998, between
the Company and Timboon.
OTHER ITEMS
Results of operations for the six months ended June 30, 1998,
include a gain, recorded as other income, of approximately
$380,000 from the removal from the Company's consolidated
balance sheet of liabilities previously accrued under an
employment agreement (see Note 4).
Results of operations for the six months ended June 30, 1997,
include a gain of $2,695,000 from the sale of a license
agreement, a gain from the disposition of HMT in the amount of
approximately $281,000 and financing fees of approximately
$112,000.
INCOME TAXES
As of June 30 and March 31, 1998 and 1997, the Company's
deferred tax assets exceeded its deferred tax liabilities and
were fully reserved at each of those dates. Income taxes that
otherwise would have been applicable to income (loss) from
continuing operations during the periods were fully offset by
changes in the valuation reserve.
DISCONTINUED OPERATIONS
Income (loss) from operations of discontinued
telecommunications businesses for the six months ended June 30,
1998 includes income of approximately $306,000, recognized in
the first quarter of 1998, from the cancellation and partial
recovery of the $500,000 note receivable from the sale of
assets in exchange for the elimination of certain liabilities
of the Company (see Note 2).
For the six months ended June 30, 1997, the Company recorded an
after tax gain of approximately $610,000 from the disposition
of certain assets of TNI and from the rescission of the ATI
acquisition agreement. The pre-tax gain from the sale of the
TNI assets was $25,000; and, the pre-tax gain from the
disposition of ATI was approximately $614,400. The TNI assets
were sold in January 1997 and ATI was disposed of in May 1997.
EXTRAORDINARY GAIN
The Company's operating results for the first six months of
1998 include an extraordinary gain of approximately $287,000
from the extinguishment of its $450,000 10% convertible
debentures (see Note 3).
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1998, the Company received
cash of $40,000 from the issuance of 358,333 shares of its
common stock and $288,500 from the issuance of notes and
debentures payable. For the corresponding 1997 period, the
Company received cash of approximately $229,500 and $1.3
million from the issuance of common stock and notes and
debentures payable, respectively. Payments on notes, debentures
and capital leases during the respective periods were $80,500
and $170,425. In 1997, the Company also used approximately
$75,000 and $35,000 in cash, respectively, to repay borrowings
outstanding under lines of credit and for the repurchase of
common stock subject to rescission and generated approximately
$368,000 in cash from the disposition of businesses. Capital
expenditures were $2,820 for the six months ended June 30, 1998
versus $23,751 in 1997.
The net proceeds from financing activities were used
principally to fund operating losses. For the six months ended
June 30, 1998 and 1997, the Company
<PAGE> 13
used cash of approximately $238,000 and $1.5 million,
respectively, in operating activities.
Over the past several years, the Company has incurred
substantial operating losses; and, at June 30, 1998, the
Company has an excess of total liabilities over total assets of
approximately $6.0 million and an excess of current liabilities
over current assets of approximately $5.4 million. These
factors, among others, have diminished the Company's ability to
attract equity or debt capital, have required the Company to
cease further development of its healthcare management software
technology and redirect its business and have made it difficult
for the Company to carry on normal operating activities. As of
June 30, 1998, the Company does not have any used or unused
lines of credit or any other committed and unused financing
facilities. Consequently, it is uncertain whether or not the
Company will have available sufficient cash resources to
continue operations, in which case the Company would be
required to seek other alternatives, including sale, merger or
discontinuance of operations.
<PAGE> 14
SYSTEMS COMMUNICATIONS, INC. AND
SUBSIDIARIES
PART II - OTHER INFORMATION
Item 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, 1997 and in the Registrant's Current Report on
Form 8-K dated June 15, 1998. There have been no material
changes in the status of such legal proceedings or any material
new information concerning such proceedings as of the date
hereof, except that on August 14, 1998, the Company issued
500,000 shares of its Class A Preferred Stock in contemplation
of settlement of the February 3, 1998 arbitration award issued
in favor of Coast Communications, Inc. and the scheduling of a
hearing for September 8, 1998 in connection with the
Involuntary Petition filed June 1, 1998 against the Company
under Chapter 7 of the Bankruptcy Act. See Item 6(b) Reports on
Form 8-K.
Item 2. Changes in Securities
During the six months ended June 30, 1998, the Company issued
5,000,000 shares of its common stock in partial conversion of
its $1,200,000 4% cumulative convertible debentures and, in
July 1998, the Company issued an aggregate of 7,742,929 shares
of its common stock upon conversion of its $1,195,000 10%
cumulative convertible debentures. The Company also issued
approximately 7.3 million shares during the six months ended
June 30, 1998 upon conversion of Class B Preferred Stock,
exercise of stock options granted to employees and consultants
and for other purposes (see Note 5 to the consolidated
financial statements included in Part I).
Item 5. Other Information
On July 28, 1998, a subsidiary of the Company, Affiliated
Communications Intergrators, Inc. ("Affiliated"), agreed to
purchase FiberOptic Network, Inc. ("FiberOptic"), a Florida
company located in Winter Park, Florida. On the same date
Affiliated changed its name to FiberOptic Holding,
Inc.("Holding"). On August 5, 1998, Holding mailed a notice to
the shareholders of FiberOptic that it was rescinding the
acquisition agreement based on material misrepresentations and
breach of representations and warranties in connection with the
acquisition agreement.
Holding is pursuing a business strategy independant of the
Company. The Company owns 850,000 shares of Holding out of
4,450,000 shares issued and outstanding. The Company intends to
use up to 250,000 of its Holding shares to compensate
consultants and to distribute the remaining 600,000 shares to
its stockholders as a dividend in kind. A date for the dividend
distribution has not been set.
The notice to the shareholders of FiberOptic demanded the
return of 3,100,000 shares, in the aggregate, issued in
connection with the the acquisition for cancellation. The
shares issued in connection with the acquisition and rescinded
are not included in the 4,450,000 issued and outstanding shares
of Holding.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.8 Financial Data Schedule ( Six Months Ended June 30, 1998).
Filed herewith
<PAGE> 15
(b) Reports on Form 8-K:
The following report was filed on Form 8-K for the three months
ended June 30, 1998, and prior to the filing date hereof:
1. On June 15, 1998, the Company filed a Form 8-K. The date of
the earliest event reported was June 1, 1998. The event
reported was the filing of an involuntary bankruptcy petition
(the "Petition") against the Company in the United States
Bankruptcy Court for the Middle District of Florida (Case No.
98-09299-8P7). The Company has denied all allegations as set
forth in the Petition and has requested the Court to dismiss
the Petition and assess damages including attorney fees, cost
and punitive damages against the petitioning creditors for
filing the Petition in bad faith. A hearing has been scheduled
for September 8, 1998 in the United States Bankruptcy Court for
the Middle District of Florida (see "Item 1 Legal
Proceedings").
In the Report on Form 8-K filed on June 15,1998, the Company
also revised the description of its business, previously
included in its Annual Report on Form 10-K for the year ended
December 31, 1998, and disclosed a redirection in the Company's
business.
<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: August 17, 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
<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, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 12,940
<SECURITIES> 0
<RECEIVABLES> 4,569
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 162,595
<PP&E> 132,982
<DEPRECIATION> 67,428
<TOTAL-ASSETS> 233,131
<CURRENT-LIABILITIES> 5,607,444
<BONDS> 2,785,928
0
54,764
<COMMON> 23,882
<OTHER-SE> (6,127,083)
<TOTAL-LIABILITY-AND-EQUITY> 233,131
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 763,217
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 136,855
<INCOME-PRETAX> (490,455)
<INCOME-TAX> 0
<INCOME-CONTINUING> (490,455)
<DISCONTINUED> 305,647
<EXTRAORDINARY> 286,588
<CHANGES> 0
<NET-INCOME> 101,780
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
