As filed with Securities and Exchange Commission on November 3, 1998.
Registration No. 333-59283
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
PRE-EFFECTIVE AMENDMENT NO. 1
Under the Securities Act of 1933
SYSTEMS COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
FLORIDA
(State or other jurisdiction of incorporation or organization)
65-0036344
(Taxpayer Identification No.)
8741
(Primary Standard Industrial Classification Code Number)
Suite 107, 4707 140th Avenue, North, Clearwater, Florida 33762, (727) 530-4800
(Address including zip code, telephone number, including area code, of
registrant's principal executive offices)
Edwin B. Salmon, Jr., Chairman, Suite 107, 4707 140th Avenue, North,
Clearwater, Florida 33762, Telephone: (727) 530-4800 FAX: (727) 530-4707
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copy to:
Jackson L. Morris, Esq.
3116 West North A Street
Tampa, Florida 33609
Telephone: (813) 874-8854 FAX: (813) 873-9628
CALCULATION OF REGISTRATION FEE:
<TABLE>
Title of each Proposed maximum Proposed
class of offering price maximum Amount of
securities to Amount to be per share or aggregate registration
be registered registered unit (1) offering price fee
- ------------- -------------- ---------------- -------------- ------------
<S> <C> <C> <C> <C>
Common stock 25,536,509 (2) $ 0.04 $ 1,021,460 $ 352
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee based
upon the closing price quotation of the Company's common stock on the OTC
Bulletin Board on the date preceding the date hereof.
(2)Registered for sale by selling security holders.
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [ X ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number and the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8 of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a),
may determine.
CROSS-REFERENCE SHEET
The following table sets forth the location in the prospectus of the
information required to be included therein by Part I of Form S-1.
Item of Form S-1 Location in the Prospectus
Item 1. Forepart of the registration statement and outside front
cover page
Item 2. Inside front cover and outside back cover of prospectus
Item 3. Summary information and risk factors
Item 4. Use of proceeds - Use of Proceeds
Item 5. Determination of offering price -Description of Securities
to be Registered
Item 6. Dilution - Not applicable
Item 7. Selling security holders - Selling Security Holders
Item 8. Plan of distribution - Selling Security Holders
Item 9. Description of securities to be registered - Description
of Securities to be Registered
Item 10. Interest of named experts and counsel - Legal Matters
and Interest of Counsel; Experts
Item 11. Information with respect to the registrant - The Company;
Capitalization; Selected Financial Data; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Business; Management; Certain
Transactions with Management and Others
Item 12. Disclosure of Commission position on indemnification for
Securities Act liabilities - Management
<PAGE> 1
<LEGEND PRINTED IN RED ON PRELIMINARY PROSPECTUS>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration becomes effective.
The prospectus shall not constitute an offer to sell or the solicitation of an
offer to buy nor shall there be any sale of these securities in any State in
which such offer, solicitation or sale would be unlawful prior to registration
or qualification under the securities laws of any such State.
PRELIMINARY PROSPECTUS DATED NOVEMBER 3, 1998. SUBJECT TO COMPLETION
SYSTEMS COMMUNICATIONS, INC.
COMMON STOCK, $.001 PAR VALUE PER SHARE
25,536,509 SHARES OFFERED BY SELLING SECURITY HOLDERS
The shares of Common Stock covered by this Prospectus are being offered by
selling security holders (the "Selling Security Holders") for their own
account in open market or block transactions. The shares offered by Selling
Security Holders are referred to herein as the "Shares". Selling Security
Holders may sell Shares to or through broker-dealers and the broker-dealers'
compensation may be in the form of discounts, concessions or commissions from
the Selling Security Holders and commissions from or mark ups charged to
purchasers. The Selling Security Holders and broker-dealers may be deemed to
be "underwriters" as that term is defined in the Securities Act of 1933, as
amended (the "Securities Act"), in which event any discounts, concessions or
commissions they receive, or any profit on resale of the Shares by them, may
be deemed to be underwriting commissions or discounts under the Securities
Act. The Company has been advised by Selling Shareholders that none of them
have underwriting arrangements for their Shares. See "Selling Security
Holders".
Of the total number of shares of Common Stock covered by this Prospectus,
11,552,013 shares of Common Stock are being offered by Selling Security Holders
for resale upon exercise of outstanding common stock purchase warrants and
options, upon exercise of warrants and options to be issued in connection with
the conversion of convertible debentures (collectively, the "Warrants and
Options"), upon conversion of outstanding convertible debentures and notes
(the "Debentures") and upon conversion of Class A Preferred Stock.
The Company will not receive any of the proceeds from the sale of the Shares
offered by the Selling Security Holders but will receive $1,012,750 if the
Warrants and Options are exercised and will convert 500,000 shares of Class A
Preferred Stock and $240,000 in principal amount of Debentures into Shares if
the holders of the Class A Preferred Stock and Debentures elect to convert
their Class A Preferred Stock and Debentures into Shares.
The expenses of the offering are being paid by the Company. The exercise
prices of the Warrants and Options and the conversion prices of the Class A
Preferred Stock and Debentures have been negotiated by the Company and do not
bear any relationship to earnings, assets or other criterion of value.
At the date of this Prospectus, the Company's Common Stock is traded in the
over-the-counter securities market and is quoted on the OTC Bulletin Board
under the symbol "SCMI".
The Company is engaged in the healthcare cost containment business. See
"Description of Business".
<PAGE> 2
AN INVESTMENT IN THE SHARES INVOLVES A HIGH DEGREE OF RISK. See "RISK FACTORS"
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE U.S. SECURITIES
AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Prospectus is November 3, 1998
TABLE OF CONTENTS Page
The Company 6
Risk Factors 7
Use of Proceeds 10
Capitalization 11
Selected Financial Data 12
Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Description of Business 27
Legal Proceedings 29
Management 34
Management Compensation 36
Certain Transactions with Management and Others 37
Principal Stockholders 38
Description of Securities 40
Selling Security Holders 41
Market price of and Dividends on Common Stock
and Related Stockholder Matters 46
Legal Matters and Interest of Counsel 47
Experts 47
Changes in and Disagreements with Accountants
on Financial Disclosure 47
Index to Financial Statements 48
<PAGE> 3
REPORTS TO SECURITY HOLDERS
The Company intends to furnish to security holders annual reports containing
financial information examined and reported upon by an independent certified
public accountant and, upon request by security holders, unaudited financial
statements for each of the first three quarters of each fiscal year. In
addition, the Company may from time to time furnish to security holders
additional information about the Company and its business as deemed
appropriate by management.
ADDITIONAL INFORMATION
The Company has filed with the U.S. Securities and Exchange Commission a
registration statement on Form S-1, Commission File No. 333-59283, (herein,
together with all amendments thereto, the "Registration Statement") under the
Securities Act of 1933, as amended, with respect to the securities described in
this Prospectus. This Prospectus, filed as part of the Registration Statement,
omits certain information and exhibits contained in the Registration Statement.
The Registration Statement and exhibits may be inspected at the office of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Northeast Regional Office of the Commission at Seven World Trade Center, Suite
1300, New York, New York 10049. Copies of such material may be obtained from
the Public Reference Section of the Commission at 450 Fifth Street N.W., Room
1024, Washington, D.C. 20549, upon payment of prescribed fees. The Commission
maintains a web site that contains registration statements, reports, proxy and
information statements and other information filed electronically with the
Commission at http://www.sec.gov.
UNTIL_______(90 DAYS AFTER THE EFFECTIVE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
No dealer, salesman or other person has been authorized to give any information
or to make any representations other than those contained in this Prospectus
and, if given or made, such information or representations must not be relied
upon as having been authorized by the Company. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, any
securities other than the securities to which it relates, or to any person in a
jurisdiction where such offer or sale would be unlawful. Neither delivery of
this Prospectus nor any sale made hereunder shall under any circumstances create
any implication that there has been no change in the affairs of the Company
since the date hereof or that the information herein is correct as of any time
subsequent to any of the dates as of which information is furnished herein or
the date hereof.
<PAGE> 4
PROSPECTUS SUMMARY
The following is a summary of certain information contained in the Prospectus
and is qualified in its entirety by the more detailed information and
consolidated financial statements, including the notes thereto, appearing
elsewhere in the Prospectus and the Registration Statement of which the
Prospectus is a part.
The Company
Systems Communications, Inc. (the "Company") is a Florida corporation and was
organized in 1987. As of the date of this Prospectus, the Company has one
active subsidiary, National Solutions Corporation, and four inactive
subsidiaries (see the table of businesses acquired and disposed of and the
footnotes thereto under the caption "The Company").
The Business
The Company's business is to develop a network of healthcare management
companies, third-party healthcare plan administrators and other healthcare
management organizations that collectively offer a wide array of healthcare cost
containment services and products for resale by the Company to large self
insured companies. Currently, the Company has no significant business operations
and no significant sources of revenue other than revenue the Company anticipates
receiving from its alliance agreement with HMG Health Care Auditing, Inc.
("HMG")and the service agreement between HMG and Chrysler Corporation (see
"Description of Business, Continuing Operations"). The Company is also consuming
more cash than it is generating from current operations and has no significant
sources of liquidity other than from operations (see "Management's Discussion
and Analysis of Financial Condition and Results of Operations").
Offering by Selling Security Holders
25,536,509 Shares are offered for resale by the Selling Security Holders into
the public securities market through their individual accounts at securities
brokerage firms at the market price prevailing at the time of sale. The Company
will not receive any proceeds from sales of Shares by Selling Security Holders.
Certain of the Company's officers and directors are participating in this
offering as Selling Security Holders. The number of shares and the percentage of
their holdings covered by this Prospectus are as follows:
Percentage of
Name Number of shares holdings
- ---- ---------------- -------------
Edwin B. Salmon, Jr. 3,732,389 (1) 93.30%
James T. Kowalczyk 1,104,156 (1) 77.36%
Richard A. Sweet 266,410 (2) 100.00%
Larry R. Snapp 167,250 (2) 100.00%
Hugh M. Gibbons 1,819,999 (3) 58.79%
(1) Includes options for 500,000 shares exercisable at an exercise price of
$0.10 per share at any time through August 15, 2002.
(2) Includes options for 100,000 shares exercisable at an exercise price of
$0.10 per share at any time through August 15, 2002.
(3) Includes warrants for 500,000 shares exercisable at an exercise price of
$0.47 per share at any time through December 22, 1999.
<PAGE> 5
Risk Factors
Investment in the Shares involves a high degree of risk. See "Risk Factors."
Selected Financial Data
See " Selected Financial Data.
[Remainder of page left blank]
<PAGE> 6
THE COMPANY
Systems Communications, Inc. (the "Company"), a Florida corporation, was
incorporated as Florida One Capital Corporation in 1987 and made an initial
public offering of its common stock in 1988 as a "blank check" company for the
purpose of acquiring other companies. The Company underwent several corporate
name changes from its inception until 1991 when it changed its name to Systems
Communications, Inc. During 1990 and 1991, the Company acquired companies
engaged in merchandising optical products and developing residential properties.
These acquisitions were rescinded and Company was inactive from 1991 until
August 1994. Beginning in August 1994, the Company acquired a number of
companies engaged in various telecommunications businesses and businesses
engaged in the healthcare cost containment industry. The following table sets
forth the name of each acquired company, beginning in 1994, the year of its
acquisition by the Company, the general nature of its business and, if
applicable, year of its disposition by the Company.
<TABLE>
Year of
Name Year Acquired Business Disposition (5)
- ---- ------------- -------- ---------------
<S> <C> <C> <C>
Ameristar 1994 Pay-per-view 1997 (1)
Telecommunications, Inc. television
("ATI") services and products
Coast Communications, 1994 Installation of 1996 (1)
Inc.("CCI" or pay-per-view
"Coast") television equipment
LCI Communications, 1995 Switch-less reseller 1997 (2)
Inc. ("LCI") of long-distance
telephone services
Comstar Network 1995 Switch-less reseller 1997 (2)
Services, Inc. of long-distance
("Comstar") telephone services
Affiliated Communications 1995 Switch-less reseller 1997 (4)
Integrators Corp. of long-distance
telephone services
Telcom Network, 1995 Switch-less reseller 1997 (3)
Inc. ("TNI") of long-distance
telephone services
National Solutions 1995 Healthcare cost N\A
Corporation ("NSC") containment services
and products
Health Management 1996 Developer of medical 1997 (1)
Technologies, Inc. management computer
("HMT") software
</TABLE>
(1) Transaction rescinded or business abandoned.
(2) Business and assets transferred to TNI. The Company is now a dormant wholly
owned subsidiary.
(3) Business sold. The Company is now a dormant wholly owned subsidiary.
(4) This Company was inactive at the date of its acquisition and is a dormant
wholly owned subsidiary of the Company.
<PAGE> 7
(5) For a description of the effect of the rescissions and sales identified in
this table, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and the notes thereto appearing elsewhere herein.
The principal executive offices of the Company are located at Suite 107, 4707
140th Avenue North, Clearwater, Florida 33762 and the telephone number at that
office is (727) 530-4800.
RISK FACTORS
Investment in the Shares involves a high degree of risk. The following risk
factors should be considered carefully in evaluating the Company, its business
and its financial prospects before purchasing any of the Shares. These risk
factors are not necessarily exhaustive and additional risk factors, if any, may
be material or have significance to an individual investor. Many investment
opportunities involve a risk of loss and the existence of normal and certain
extraordinary risks. The existence of these risks and possibly others should
not necessarily be the sole determining factor in whether or not to purchase
the Shares. All of the information in this Prospectus should be carefully
considered in connection with the risk factors described below.
This Prospectus contains forward looking statements which involve risks and
uncertainties. Those statements appear in a number of places in this
Prospectus and include statements regarding the intent, belief and current
expectations of the Company, its directors and management with respect to, among
other things: (i) the Company's future plans and (ii) prospects for increased
revenues and profitability. Prospective purchasers of the Shares are cautioned
that any such forward looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those projected in the forward looking statements as a
result of various factors, many of which are beyond the control of the
Company. The information contained in this Prospectus, including without
limitation the information set forth under the headings "Risk Factors",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Description of Business", identifies important factors which
could cause or contribute to such differences.
Operating History
The Company has had limited net revenues and has not earned profits from its
businesses. Currently, the Company has no significant sources of revenue other
than from its alliance agreement with HMG Health Care Claims Auditing, Inc.
("HMG") and HMG's service agreement with Chrysler Corporation. The Company is
also in various stages of negotiating other healthcare alliances and cost
containment proposals which may generate future revenues. However, there is no
assurance the Company will be able to generate sufficient net revenues and
operating profits from its current business to become profitable in the future.
Without sufficient net revenues and operating profits the Company will likely be
unable to create value in the Shares, to pay dividends or to continue in
operation. The Company is subject to the risks inherent in a relatively new
business, including complications, delays, unexpected costs and shortages of
capital and other resources. See "Description of Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<PAGE> 8
Liquidity and Capital Resources
The Company has been consuming more cash in its operations than it has been
generating from operations and, as of June 30, 1998, has a working capital
deficiency of approximately $5.4 million and no significant sources of
liquidity other than cash provided by operations. These factors, among others,
have required the Company to suspend development of its healthcare management
information systems technology and have made it difficult to carry on normal
operating activities. When the Company experiences net revenues and operating
profits, of which there is no assurance, the Company expects it will also
have a need for increasing amounts of cash to finance its working capital needs.
In the event the Company either becomes profitable or does not, the Company may
find it necessary to sell additional securities or obtain other financing
commitments to continue operations; but, there is no assurance that additional
securities can be sold or that any other financing commitments will be
available, or if additional financing is available, whether such financing will
be in the amount then needed to carry on operations. If the Company is unable
to either sell additional securities or arrange other financing to cover its
cash requirements, the Company may find it necessary to seek alternatives,
including sale, merger or discontinuance of operations. The Company will not
receive any proceeds from the sale of Shares by Selling Security Holders. See
"Description of Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Going Concern
The Company's auditors have raised substantial doubt about the Company's
ability to continue as a going concern. See the reports of the Company's
independent auditors' included elsewhere herein.
Data Processing Capabilities
The Company is dependent on third parties to provide healthcare cost
containment data processing services. The Company may find it necessary to raise
additional capital or seek other financing sources to develop its healthcare
software technology and data processing capabilities in the future.
Lack of Dividends
The Company has not declared or paid dividends on its Common Stock and may
elect to retain all or most of its net profits, if any, in the foreseeable
future to provide operating capital and for capital investment. The Company
cannot predict if or when it will have current and retained earnings or surplus
from which to legally declare and pay dividends. There is no assurance as to if
or when the Board of Directors will declare a dividend on the Common Stock
which includes the Shares. See "Market Price of and Dividends on Common Stock
and Related Shareholder Matters."
Competition
The Company is not aware of any other organizations which market the services
of multiple providers of healthcare cost containment and case management
products and services. The Company believes its primary competition is the
providers of healthcare management services with whom the Company does not have
a marketing agreement or affiliation. The Company believes that this field is
highly fragmented, with numerous companies which have substantially far greater
financial and other resources and healthcare cost containment experience than
the Company. Because the Company's healthcare business is relatively new and has
an uncertain financial condition, the Company believes that it faces many
competitive disadvantages.
<PAGE> 9
Management
The Company's management has limited experience in the healthcare cost
containment field and relies on healthcare insurance professionals, who are
under contract with the Company, to advise management on the potential of its
current business, which is to develop a wide array of products and services
from multiple healthcare cost containment companies for resale to large,
self-insured employers, PPO's, HMO'S and insurers.
Legal Proceedings
The Company and its subsidiaries are subject to various legal and
administrative proceedings arising from the sale of its securities, disputes
with certain persons formerly associated with the Company and its subsidiary
companies as employees or who were under contract in a consulting capacity, from
cancellation or defaults under certain non-cancelable lease agreements and from
non-payment of certain of its debts. An unfavorable outcome in one or more of
these actions could significantly impair the Company's ability to generate
positive cash flows from operations or continue in operations. See "Legal
Proceedings."
Involuntary Petition under Chapter 7
The Company learned on June 8, 1998 that an Involuntary Petition was filed on
June 1, 1998 against the Company in the United States Bankruptcy Court for the
Middle District of Florida. The Company filed a motion to dismiss the Petition
on the grounds that it does not meet the requirements of the U.S. Bankruptcy
Code and the Petitioners filed a motion for summary judgment. On October 27,
1998, the U.S. Bankruptcy Court denied the motion for summary judgement and set
a hearing date of January 12, 1999. See "Legal Proceedings."
Failure to Timely File Exchange Act Reports
The Company did not timely file its Annual Reports on Form 10-K for the years
ended December 31, 1997 and 1996. The Company's failure to timely file its 1996
Annual Report was due to its inability to timely pay for the services of its
independent auditors and the time required by management to complete its
assessment of the carrying value of intangible assets and goodwill recorded in
connection with the acquisition of NSC (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations"). The Company's
failure to timely file its 1997 Annual Report was due to the failure of the
Company to timely file its 1996 Annual Report, the resignation of Ernst & Young
LLP as the Company's independent auditor on February 20,1998, the day after the
Company filed its 1996 Annual Report, and the time required by the Company's
new independent auditor, Moore Stephens Lovelace, P.A., to audit the Company's
1997 financial statements. The Company's 1997 Annual Report was filed on May 8,
1998 (see "Changes in and Disagreements with Accountants on Financial
Disclosure").
The Company did not hold an annual meeting of shareholders in 1997 due its
inability to comply with the information requirements of Rule 14a-3, as
promulgated by the Securities and Exchange Commission for the solicitation of
proxies. The Company was unable to comply with such requirements due the
Company not having timely filed its Annual Report on Form 10-K for the year
ended December 31,1996. The Company contemplates holding an annual meeting of
shareholders in 1998. It is uncertain, however, whether or not the Company will
be able to prepare and mail proxy solicitation materials to its shareholders due
to limitations on the part of the Company to fund those collective efforts.
<PAGE> 10
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of Shares
offered by Selling Security Holders. Of the total number of Shares offered for
resale by Selling Security Holders, 11,552,013 Shares are being offered for
resale upon exercise of Warrants and Options, upon conversion of Debentures and
upon conversion of Class A Preferred Stock. Assuming exercise of the Warrants
and Options, the aggregate proceeds to the Company would be $1,012,750. There is
no assurance as to if or when any of the Warrants and Options will be
exercised. Accordingly, the Company is not able to plan the application of the
proceeds from such exercise for any specific purposes. The proceeds, if any,
from the exercise of Warrants and Options, will be used by the Company for
general working capital purposes, capital investment or other purposes which
the Company has identified at the time of the receipt of such proceeds. The
Company will not receive any proceeds upon conversion of Class A Preferred Stock
or Debentures but will convert 500,000 shares of Class A Preferred Stock into
Shares and will be relieved of debenture indebtedness in the aggregate principal
amount of $240,000.
[Remainder of page left blank]
<PAGE> 11
CAPITALIZATION
The following table sets forth the capitalization of the Company at June 30,
1998. This table should be reviewed in conjunction with the consolidated
financial statements of the Company and the notes thereto included elsewhere
in this Prospectus.
<TABLE>
<S> <C>
Notes and debentures payable $ 2,785,928
Common stock subject to rescission 674,124
Stockholders' deficit:
Class A convertible preferred stock -- (1)
Class B convertible preferred stock 54,764
Common stock, $.001 par value;
50,000,000 shares authorized;
23,881,873 shares issued and outstanding 23,882
Additional paid in capital 19,592,281
Accumulated deficit (25,719,364)
----------
Total stockholders' deficit ( 6,048,437)
----------
Total capitalization $( 2,588,385)
==========
</TABLE>
{1) On August 4, 1998, the Company issued 500,000 shares of its Class A
Preferred Stock to the former shareholders of CCI in satisfaction of an award in
arbitration (see "Legal Proceedings").
[Remainder of page left blank]
<PAGE> 12
SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company for each
of the five years in the period ended December 31, 1997 and for the six months
ended June 30, 1998 and 1997. This table should be reviewed in conjunction with
the consolidated financial statements of the Company and the notes thereto
appearing elsewhere herein.
<TABLE>
INCOME STATEMENT DATA:
Six
Months Ended
Year Ended December 31, June 30,
--------------------------------------------------------- --------------------
1997 1996 1995 1994 1993 1998 1997
--------- ---------- --------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues $ 1,498,533 $ 2,832,123 $ 91,106 $ -- $ -- $ -- $ 1,467,344
Income (loss) from
continuing operations
before income taxes (1,789,310) (20,488,639) (2,004,228) (78,233) -- (490,455) 266,481
Income (loss) from
continuing operations (1,306,310) (17,934,489) (1,989,104) (78,233) -- (490,455) 266,481
Income(loss) from
operations of
discontinued
telecommunications
businesses 391,752 (1,322,179) (3,818,921) (50,769) 338,909 305,647 (47,381)
Gain from disposition
of discontinued
telecommunication
businesses 397,392 -- -- -- -- -- 610,392
--------- ---------- --------- ------- ------- ------- ---------
Income (loss) before
extraordinary item (517,166) $(19,256,668) $(5,808,025) (129,002) 338,909 (184,808) 829,492
Extraordinary item -
Gain from
extinguishment
of debt -- -- -- -- -- 286,588 --
--------- ---------- --------- ------- ------- ------- ---------
Net income (loss) $ (517,166) $(19,256,668) $(5,808,025) $(129,002) $338,909 $ 101,780 $ 829,492
========= ========== ========= ======= ======= ======= ---------
Basic earnings
per share:
Income (loss) from
continuing
operations $ (.12) $ (2.15) $ (0.58) $ (0.06) $ -- $ (0.04) $ 0.02
Income (loss) from
operations of
discontinued
telecommunications
businesses .03 (0.16) (1.23) (0.04) 0.41 0.02 --
Gain from disposition
of discontinued
telecommunication
businesses .04 -- -- -- -- -- 0.06
Extraordinary item -- -- -- -- -- 0.02 --
--------- ---------- --------- ------- ------- ------- ---------
Net income (loss) $ (.05) $ (2.31) $ (1.81) $ (0.10) $ 0.41 $ -- $ 0.08
========= ========== -======== ======= ======= ======= -========
Weighted average number
of common shares
outstanding 10,802,103 8,349,459 3,201,991 1,306,493 825,765 13,810,977 10,936,609
========== ========== ========= ========= ======= ========== ==========
</TABLE>
<PAGE> 13
INCOME STATEMENT DATA (Continued):
<TABLE>
Six
Months Ended
Year Ended December 31, June 30,
----------------------------------------------------------- --------------------
1997 1996 1995 1994 1993 1998 1997
--------- ---------- --------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Diluted earnings
per share:
Income (loss) from
continuing
operations S (0.12) $ (2.15) $ (0.58) $ (0.06) $ -- $ (0.04) $ 0.02
Income (loss) from
operations of
discontinued
telecommunications
businesses 0.03 (0.16) (1.23) (0.04) 0.41 0.02 --
Gain from disposition
of discontinued
telecommunications
businesses 0.04 -- -- -- -- -- 0.05
Extraordinary item -- -- -- -- -- 0.02 --
--------- ---------- --------- ------- ------- ------- ---------
Net income (loss) $ (0.05) $ (2.31) $ (1.81) $ (0.10) $ 0.41 $ -- $ 0.07
========= ========== ========- ======= ======= ======= =========
Weighted average number
of common shares,
assuming dilution 10,802,103 8,349,459 3,201,991 1,306,493 825,765 13,810,977 12,243,826
========== ========== ========= ========= ======= ========== -=========
BALANCE SHEET DATA:
December 31, June 30,
-------------------------------------------------------- --------------------
1997 1996 1995 1994 1993 1998 1997
--------- --------- --------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets $ 256,883 $ 1,403,881 $ 4,156,868 $ 442,069 $ 492,216 $ 162,595 $ 433,360
Current liabilities 6,728,193 7,908,138 5,417,864 652,107 13,335 5,607,444 6,129,666
Total assets 388,194 5,847,300 21,545,654 780,222 578,549 233,131 1,490,356
Long-term liabilities 310,794 1,207,488 4,597,671 77,750 553,750 -- 731,533
Common stock subject
to rescission 674,124 709,124 789,624 -- -- 674,124 674,124
Common stock to be
issued -- 2,000,000 2,000,000 -- -- -- --
Stockholders' equity
(deficit) (7,324,917) (5,977,450) 8,740,495 50,365 11,464 (6,048,437) (6,044,967)
</TABLE>
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following tables set forth certain information derived from the Company's
consolidated financial statements for each of the three years ended December
31, 1997 and for the six months ended June 30, 1998 and 1997. The results from
continuing operations include the operations of National Solutions Corporation
("NSC"), acquired in October 1995, and Healthcare Management Technologies,
Inc. ("HMT"), acquired in March 1996 and disposed of by a rescission of the
acquisition agreement in June 1997. The results from discontinued
telecommunications businesses include the operations of Telcom Network, Inc.
("TNI", including the operations of LCI Communications, Inc.("LCI"), Comstar
Network Services, Inc. ("Comstar"), Ameristar Telecommunications, Inc. ("ATI")
and Coast Communications, Inc. ("CCI"). These businesses were sold or
otherwise disposed of in 1996 and 1997. The following discussion should be
read in conjunction with the consolidated financial statements and notes
thereto appearing elsewhere herein.
<TABLE>
Six
Months Ended
Year Ended December 31, June 30,
----------------------------------- --------------------
1997 1996 1995 1998 1997
--------- ---------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
Operations of continuing businesses:
Net revenues $ 1,498,533 $ 2,832,123 $ 91,106 $ -- $ 1,467,344
Cost of revenues 109,563 827,063 -- -- 90,849
Selling and administrative
expenses 3,027,384 6,322,627 1,887,275 752,861 2,658,089
Impairment and other losses 1,898,953 14,233,953 -- -- 625,728
Depreciation and amortization 497,377 1,459,436 148,192 10,356 442,396
Gain from sale of license agreement 2,695,214 -- -- -- 2,695,214
Gain from rescission of business
acquisition 259,352 -- -- -- 281,421
Interest income 4,070 8,183 3,777 892 3,044
Interest expense 587,884 381,975 63,644 136,855 248,529
Other income (expense), net (125,318) (103,891) -- 408,725 (114,951)
Income (loss) from continuing operations
before income taxes (1,789,310) (20,488,639) (2,004,228) (490,455) 266,481
Operations of discontinued
telecommunications businesses:
Net revenues 405,617 2,177,858 2,893,778 -- 405,617
Cost of revenues -- 1,320,256 2,014,460 -- --
Selling and administrative expenses 449,925 2,304,059 1,845,775 994 408,411
Impairment and other losses -- 194,901 2,758,779 -- --
Depreciation and amortization 47,460 291,291 311,135 -- 47,460
Interest income -- 971 627 -- --
Interest expense 32,393 38,713 20,466 -- 32,049
Other income (expense), net 755,913 832 4,288 306,641 5,922
Income (loss) from operations of
discontinued businesses
before income taxes 631,752 (1,971,223) (4,060,498) 305,647 (76,381)
</TABLE>
<PAGE> 15
SIX MONTHS ENDED JUNE 30, 1998 VERSUS 1997
Net Revenues
The Company had no revenues for the six months ended June 30, 1998. Net
revenues for the six months ended June 30, 1997 were $1,467,344. 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 Chrysler Corporation. 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 net revenues from the Agreement. The bulk of these revenues are
expected to be recognized in the first quartet of 1999.
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. The principal
reasons for the decrease in selling, general and administrative expenses from
period-to-period 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. Cost reductions from
period-to-period included approximately $535,000 in salaries, wages, employee
benefits and travel expenses due to the retirement of NSC management, lower
corporate staffing levels due to restructuring of the Company's operations,
reductions in office rent and equipment lease expense from consolidation of
operations and termination of various consulting agreements (see "Legal
Proceedings").
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. No
similar charges were incurred in the 1998 period.
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 decrease in interest expense is principally due to the effects of lower
aggregate amounts of notes and debentures outstanding, the removal in December
1997 of capital lease liabilities, related to repossessed leased assets, from
the Company's consolidated balance sheet and the elimination of interest
expense on the Company's 4% cumulative convertible debentures due October 1,
1998, as a result of the Settlement Agreement entered into, effective as of
March 2, 1998, between the Company and Timboon.
<PAGE> 16
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 settlement of
liabilities previously accrued under an employment agreement (see Note 17).
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. Subsequent to June 30, 1997, the Company recorded
additional costs associated with the disposition of HMT, which reduced the net
gain from approximately $281,000 to approximately $259,000.
Income Taxes
As of June 30, 1998, the Company's deferred tax assets exceeded its deferred
tax liabilities and were fully reserved. 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
17).
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 $614,000. 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 17).
YEARS ENDED DECEMBER 31, 1997 VERSUS 1996 AND 1996 VERSUS 1995
The operating results of acquired businesses were below those which were
anticipated at the time of the respective acquisitions. As more fully
discussed below, the business of TNI was severely damaged by the actions of
GE Capital Communications Services Corporation ("GECCS") and New Enterprise
Wholesale Services, Limited Partnership ("News") and, the revenues and
results of operations of the Company's healthcare businesses were less than
anticipated at the time of their respective acquisitions, principally due to
higher levels of spending on software and systems development and on sales
and marketing than originally anticipated (and limitations on the part of
the Company to continue to fund those collective efforts). These factors,
combined, have strained the financial resources of the Company and required
the Company to undertake restructuring measures, which included, among other
things, the sale of the operating assets of TNI in January 1997 and the
rescission of the ATI and HMT acquisition agreements in May and June 1997,
respectively. For further discussion of the impact of these events and
uncertainties on future operations and the Company's financial condition,
see "Liquidity and Capital Resources".
<PAGE> 17
OPERATIONS OF BUSINESS ACQUIRED AND DISPOSED OF
The Company acquired various businesses in 1994, 1995 and 1996 and disposed
of various businesses in 1996 and 1997.
The more significant acquisitions were: TNI acquired in July 1995; NSC
acquired in October 1995; and, HMT acquired in March 1996. Disposals of
businesses included (i) the sale, in January 1997, of the operating assets of
TNI, (ii) the rescission, in May 1997, of the ATI acquisition agreement and
(iii) the rescission, in June 1997, of the HMT acquisition agreement (see Note
4 to the consolidated financial statements appearing elsewhere herein). As a
result of the disposition of all of the businesses included in the Company's
telecommunications segment, the operations of the Company's telecommunications
segment are shown as discontinued operations in the accompanying consolidated
statements of operations for all periods presented.
For purposes of the following discussion, the operations of TNI include the
operations of TNI, LCI and Comstar. TNI, LCI and Comstar operated as switch-
less re-sellers of long-distance telephone services and products and were
combined into one operating division after the acquisition of TNI.
In 1997, TNI had no revenues and its loss from operations was $52,307. The net
revenues and loss from operations of TNI were $1,481,317 and $1,792,795,
respectively, in 1996 and $2,373,491 and $3,122,621 (including impairment
losses of $2,758,779), respectively, for the period from the date of its
acquisition by the Company (July 7, 1995) to December 31, 1995. TNI's
operating results for the periods subsequent to the date of acquisition were
adversely affected by (i) the failure of GECCS and News to, among other
things, provision customer accounts for telecommunications products offered by
GECCS/News and sold by TNI pursuant to a contractual agreement among TNI,
GECCS and News (the "GECCS Agreement"), (ii) the cancellation of TNI customers
by GECCS and News, (iii)the failure of GECCS/News to proqerly bill and collect
revenues due to TNI and (iv) a diminution of TNI's marketing and distribution
organization as a result of such failures and other actions taken by GECCS and
News. TNI, as claimant in a binding arbitration proceeding against GECCS and
News, was awarded damages under the GECCS Agreement in the amount of
approximately $1,250,000. The award, which was entered on October 10, 1996,
was appealed by GECCS to the U.S. District Court for the Northern District of
Georgia on the grounds that the arbitrators exceeded their powers by awarding
TNI damages under the GECCS Agreement. On September 30, 1997, the U.S.
District Court confirmed the award; and, a motion for summary judgment was
entered on October 1, 1997. On December 24, 1997, the Company, GECCS and News
entered into a Confidential Settlement Agreement and Mutual Full and Final
Releases (the "Settlement Agreement"). Pursuant to the Settlement Agreement,
GECCS\News paid $1,250,000 in full satisfaction of the arbitration award. Of
that amount, the Company received approximately $750,000, which is net of
legal fees. The net proceeds from the Settlement Agreement were used to pay
trade and other obligations and are reflected in income (loss) from
discontinued operations in the consolidated statement of operations for the
year ended December 31, 1997.
The diminution in TNI's marketing and distribution organization that occurred
as a result of such failures and other actions taken by GECCS and News,
together with limitations on the ability of the Company to provide additional
working capital to TNI, also adversely affected TNI's operations. As a result
thereof, in January 1997, the Company sold substantially all of TNI's
operating assets. The sale of TNI's assets generated approximately $101,000 in
cash; and, the Company received a $500,000 note receivable from ITD, the
purchaser of certain of TNI's assets. This note was canceled in March 1998 in
exchange for the elimination of approximately $306,000 of indebtedness to and
obligations under employment agreements with certain former employees of the
Company (see Note 17 to the consolidated financial statements).
<PAGE> 18
The revenues of TNI declined from $2,373,491 in 1995 to $1,481,317 in 1996.
This decrease is principally the result of reduced revenues from the GECCS
Agreement. The operating loss of TNI was $343,842 in 1995 (before $2,758,779
of impairment losses) compared to $1,792,795 in 1996. The increase in TNI's
operating loss (before impairment losses) was due to the reduction in revenues
from the GECCS Agreement and valuation adjustments recorded at year-end 1996
to reduce assets sold in January 1997 to their net realizable value and the
write-off of the Company's remaining investment in Comstar, including
goodwill, the effects of which were not fully offset by reduced operating
expenses. Asset valuation adjustments recorded at year-end 1996 totaled
approximately $370,000 and the write-off of the Company's investment in
Comstar totaled approximately $194,000.
In 1997 NSC had net revenues of $187,478 and an operating loss of $1,348,679.
NSC's operating loss for the year ended December 31, 1997 reflects impairment
and other losses of approximately $892,000. Excluding impairment and other
losses, NSC's 1997 operating loss would have been approximately $457,000. The
net revenues and operating loss of NSC were $1,574,825 and $16,275,288,
respectively, in 1996 and $91,106 and $363,857, respectively, for the period
from the date of its acquisition by the Company (October 27, 1995) to December
31, 1995. The loss from operations of NSC in 1996 includes one-time charges of
$14,233,953, to write-off, as of December 31, 1996, the unamortized cost of
intangibles and goodwill recorded by the Company in connection with its
acquisition of NSC. The write-off of the unamortized cost of goodwill and
intangibles recorded in connection with the acquisition of NSC is due to the
failure of NSC to successfully market its healthcare management information
systems technology, the likelihood that NSC may not be able to market such
technology in the future without further significant capital investment and
the likelihood of the Company being able to provide NSC with additional
capital investment (see "Liquidity and Capital Resources"). The decrease in
NSC net revenues from 1996 to 1997 is the result of the termination of the
Chrysler Corporation Service Agreement, effective in September 1997, due to
performance issues between Chrysler Corporation and Health Management
Services, a healthcare claims management company located in New York, NY
("HMS"), NSC's subcontractor, the expiration of the Ford Motor Company
services agreement by its terms, effective March 31, 1997, and lower
healthcare claim recoveries under the service agreements from period to
period. NSC's operating loss decreased from 1996 to 1997 due principally to
the elimination of NSC's corporate offices, lower management compensation as a
result of the retirement of founding management and the suspension of software
development activities due to cash flow constraints.
The net revenues and loss from operations of HMT were $1,311,055 and $153,656,
respectively, for the period from January 1, 1997 to the date of the
rescission of the HMT acquisition agreement and $1,257,298 and $828,895,
respectively, for the period from the date of its acquisition by the Company
to December 31, 1996. HMT's 1997 net revenues reflect sales to one customer
totaling approximately $800,000. HMT's operating losses during the periods
principally reflect amortization of intangibles and goodwill recorded in
connection with the acquisition and spending for new product development.
The revenues and operating losses of ATI were $405,617 and $39,461,
respectively, for the period from January 1, 1997 to the date of disposition,
$673,995 and $116,460, respectively, in 1996, and $427,445 and $289,791,
respectively, in 1995. The increasing trend in revenues reflects the
introduction of ATI's Operator Service Provider ("OSP") and television pay-
per-view ("PPV") services, beginning in 1996, into the Mexican hospitality
market. Similarly, operating losses decreased from period to period due to
higher OSP and PPV revenues from Mexico which carry higher profit margins when
compared to margins from domestic sales.
<PAGE> 19
Net Revenues
Net revenues for each of the three years in the period ending December 31, 1997
are summarized as follows:
<TABLE>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net revenues from operations of
continuing businesses $ 1,498,533 $ 2,832,123 $ 91,106
Net revenues from discontinued
telecommunications businesses 405,617 2,177,858 2,893,778
---------- ---------- ----------
$ 1,904,150 $ 5,009,981 $ 2,984,884
========== ========== ==========
</TABLE>
The decrease in net revenues from operations of continuing businesses from
1996 to 1997 is the result of lower NSC revenues, offset by higher HMT
revenues. See "Operations of Businesses Acquired and Disposed Of." The
decrease in net revenues from discontinued telecommunications businesses is
the result of the sale of the operating assets of TNI in January 1997 and the
disposition of ATI in May 1997.
The increase in net revenues from operations of continuing businesses from
1995 to 1996 is the result of the acquisitions of HMT and NSC. HMT
contributed $1,257,298 to this increase and NSC contributed $1,483,719. HMT
was acquired in March 1996 and NSC was acquired in October 1995. The
decrease in net revenues from discontinued telecommunications businesses
from 1995 to 1996 is due to lower revenues from the GECCS Agreement, offset
by an increase in net revenues of approximately $177,000 from the Company's
PPV business, principally in Mexico.
Cost of Revenues
Cost of revenues applicable to continuing operations in 1997 declined
substantially as compared to 1996. This decrease is attributable to lower
healthcare claim recoveries under the Chrysler Corporation and Ford Motor
Company service agreements and final revenue adjustments recorded upon the
cancellation and expiration of the Chrysler and Ford Motor Company service
agreements. See "Operations of Businesses Acquired and Disposed Of."
Cost of telecommunications revenues generally consists of the cost of long-
distance services sold by TNI under the GECCS Agreement. In 1997, no
revenues were generated under that agreement. In addition, the operating
assets of TNI were sold in January 1997. See "Operations of Businesses
Acquired and Disposed Of."
The cost of revenues from discontinued telecommunications businesses in
1996 was 61% of net revenues from discontinued telecommunications
businesses compared to 70% in 1995. This decrease is the result of product
mix changes, which included lower revenues from the resale of domestic
telecommunication services under the GECCS Agreement and higher revenues
from the sale of pay-per-view and related telecommunication products to the
hospitality industry, principally in Mexico.
Cost of revenues from discontinued telecommunications businesses was
$2,014,460 in 1995 compared to $134,607 in 1994. This increase was
principally due to the acquisition of TNI and the inclusion of the cost of
long distance services sold by TNI in the cost of telecommunications
revenues. In 1995, the Company also made a provision of $145,776 to reduce
the value of obsolete PPV equipment to net realizable value. Prior to 1995,
the cost of telecommunication revenues principally reflected the cost of PPV
installation, only.
<PAGE> 20
Selling and Administrative Expenses
Selling and administrative expenses applicable to operations of continuing
businesses decreased from $6,322,627 in 1996 to $3,027,384 in 1997. This
decrease principally reflects cost reduction measures undertaken as a result
of continued operating losses and the effect from period to period of the
disposition of HMT (see "Operations of Businesses Acquired and Disposed
Of"). The disposition of HMT had the effect of reducing selling and
administrative expenses by approximately $ 443,000 in 1997 versus 1996.
Significant cost reduction measures included the retirement of NSC
management in January 1997 and the elimination of all related salaries,
wages, benefits, travel and other administrative expenses of NSC, closure of
NSC's corporate offices, consolidation of the Company's remaining
operations, reductions in corporate staff and termination of certain
consulting agreements. As a result of these cost reduction measures, the
selling and administrative expenses of NSC declined by approximately $1.4
and corporate expenses declined by approximately $900,000.
Selling and administration expenses applicable to operations of continuing
businesses increased by $4,093,749 in 1996 over 1995. This increase
reflected the operations of businesses acquired and higher corporate
expenses. Corporate expenses increased primarily due to costs associated
with the registration of the Company's securities under the Securities
Exchange Act of 1934, costs related to a failed attempt by the Company to
file a registration statement under the Securities Act of 1933 and costs
associated with the development, sale and marketing of NSC's healthcare
management information products. Offsetting this increase was a reduction
in stock compensation expense and the effect of stock purchase warrants.
Selling and administrative expenses applicable to operations of continuing
businesses increased by $2,150,645 in 1995 over 1994. This increase included
the selling and administrative expenses of acquired businesses and higher
corporate expenses for personnel, office space and information systems for
expanded operations, legal, professional and consulting costs incurred in
connection with the Company's acquisition activities and $793,373 from the
issuance of stock and common stock purchase warrants for services rendered
and in consideration for extension of related party indebtedness.
Selling and administrative expenses applicable to discontinued
telecommunications businesses were $449,925 in 1997, $2,304,059 in 1996,
$1,845,775 in 1995 and $649,036 in 1994. The decrease in 1997 as compared to
1996 was due to the discontinuance of TNI's operations and the rescission of
the ATI acquisition agreement and the increases in 1996 over 1995 and in
1995 over 1994 are due to the acquisition of TNI. See "Operations of
Businesses Acquired and Disposed Of".
Impairment and Other Losses
Impairment and other losses recognized in 1997 include (i) the write-off
equipment under capital lease and certain other assets related to equipment
under lease from Boston Financial Corporation totaling $768,545, (ii)
provisions for loss contingencies totaling $437,335 related to office space,
which has been vacated, leased equipment that the Company is no longer using
and settlement of actions brought against the Company by Timboon, LTD and
(iii) the write-off of $625,728 of deferred compensation assets. See Note 5
to the consolidated financial statements appearing elsewhere herein.
In 1996, the Company recognized impairment losses applicable to operations
from continuing businesses of $13,806,557, net of a tax benefit of $427,396,
to write off the unamortized cost, as of December 31, 1996, of intangibles
and goodwill recorded in connection with the acquisition of NSC. The write-
<PAGE> 21
off of the unamortized cost of goodwill and intangibles recorded in
connection with the acquisition of NSC was due to the failure of NSC to
successfully market its healthcare management information systems
technology, the likelihood that NSC may not be able to market such
technology in the future without further significant capital investment and
the likelihood of the Company being able to provide NSC with additional
capital investment (see "Liquidity and Capital Resources").
Impairment losses applicable to discontinued telecommunications businesses
recognized in 1996 consisted of the write-off the Company's remaining
investment in Comstar. Comstar was acquired in June 1995 and its operations
were combined with the operations of TNI. As a result of the Company's
decision to divest TNI, the Company wrote-off its remaining investment in
Comstar.
As of December 31, 1995, the Company recognized a charge to income of
$2,758,779 to write off, with no associated income tax benefit, all of the
goodwill related to its acquisition of TNI. This write-off, which is
included in the operations of discontinued telecommunications businesses in
the consolidated statement of operations for the year ended 1995, reflected
the Company's belief that the business of TNI was severely damaged as a
result of actions taken by GECCS and News which actions included, among
other things, (i) the failure of GECCS/News to provision customer accounts
for telecommunications products and services offered by GECCS/News and sold
by TNI pursuant to a contractual agreement among TNI, GECCS and News, (ii)
the cancellation of TNI customers by GECCS/News and (iii) the failure of
GECCS/News to properly bill and collect revenues due to TNI. As more fully
discussed herein and in the Notes to the consolidated financial statements,
the Company was awarded approximately $1,250,000 in a binding arbitration
proceeding with GECCS/News. The arbitration award was confirmed by the
United States District Court, Northern District of Georgia on September 30,
1997 and the Company's motion for summary judgment was entered October 1,
1997. On December 24, 1997, the Company, GECCS and NEWS entered into a
Confidential Settlement Agreement and Mutual Full and Final Releases (the
"Settlement Agreement"). Pursuant to the Settlement Agreement, GECCS\NEWS
paid $1,250,000 in full satisfaction of the arbitration award granted to the
Company. Of that amount, the Company received approximately $750,000, which
is net of legal fees. The proceeds from the Settlement Agreement were used
to pay trade and other obligations of the Company, including $468,000 of
notes and debentures payable.
Depreciation and Amortization
Depreciation and amortization applicable to continuing operations decreased
by $962,059 in 1997 as compared to 1996. The decrease principally reflects
the write-off, effective as of December 31, 1996, of the goodwill and
intangibles recorded in connection with the acquisition of NSC.
Depreciation and amortization applicable to both operations of continuing
businesses and operations of discontinued telecommunications businesses
increased in 1996 over 1995 and in 1995 over 1994. These increases are
principally due to the amortization of intangibles and goodwill arising
from business acquisitions and a higher investment in furniture and
equipment.
Interest Expense
Interest expense applicable to both operations of continuing businesses and
operations of discontinued telecommunications businesses totaled $620,277,
$420,688 and $84,110 in 1997, 1996 and 1995, respectively. The increases
from period-to-period in interest expense are principally due to higher
levels of average borrowings outstanding and an increase in the average
effective rate on borrowings outstanding.
<PAGE> 22
Other Items
In 1997, the Company recognized gains of approximately $2,695,000 and
$259,000, respectively, from the sale of a license agreement to the
founding management of NSC and from the rescission of the HMT acquisition
agreement. See Note 4 to the consolidated financial statements appearing
elsewhere herein. The Company also incurred $120,000 of financing fees in
connection with the issuance of its 4% convertible debentures.
Income Taxes
Income tax benefits applicable to continuing operations were 30.0%, 12.5%
and 0.75% of pre-tax loss from continuing operations in 1997, 1996 and
1995, respectively. The principal reasons for the differences between the
effective income tax rates during the periods and the Federal statutory
rate of 46% were the changes during each year in the net deferred income
tax valuation allowance, the tax effects from the rescission of business
acquisitions and impairment losses recognized in 1996. No provisions for
taxes currently payable were made in 1997, 1996 or 1995. As of December
31, 1997, the Company's deferred income tax assets exceeded its deferred
tax liabilities by $3,967,200, for which the Company has provided a
valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
Over the past three fiscal years and the first six months of 1998, the
principal sources of liquidity have been derived from financing
activities. During the first six months of 1998 and in fiscal 1997, 1996
and 1995, the Company received cash of approximately $40,000, $232,000,
$2.2 million and $4.1 million, respectively, from the issuance of 358,333
shares, 205,556 shares, 413,668 shares and 1,477,874 shares, respectively,
of its common stock in reliance upon exemptions under Regulation D of the
Securities Act of 1933 and approximately $288,500, $1.6 million, $2.4
million and $475,000, respectively, from the issuance of notes and
debentures payable. In 1997, the Company also received cash of
approximately $371,000 from the disposition of businesses, net of cash of
businesses disposed of. Payments on notes, debentures and capital leases
during the respective periods were approximately $80,500, $687,000,
$638,000 and $263,000. 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, in 1995 used cash of approximately $1.4 million to
acquire NSC. Capital expenditures were $2,820 for the six months ended
June 30, 1998 and ranged from a low of approximately $7,700 in 1997 to a
high of approximately $553,000 in 1996.
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 increasingly 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> 23
The proceeds from financing activities were used principally to fund
operating losses. In the first half of 1998 and in fiscal 1997, 1996 and
1995, the Company used cash of approximately $238,000, $1.4 million, $4.2
million and $1.8 million, respectively, in operating activities. See the
consolidated statements of cash flows.
Significant debt financing transactions during 1997, 1996 and 1995 and in
the first half of 1998 were the issuance in February 1997 of $1,120,000 4%
convertible debentures due October 1, 1998 to Timboon, LTD ("Timboon", a non
U.S. person) in reliance upon exemptions under Regulation S of the
Securities Act of 1933 and the issuance in 1996 of (i) a series of 10%
cumulative convertible debentures, due on various dates through November
1997, issued in reliance upon exemptions under Regulation D of the
Securities Act of 1933 and (ii) $500,000 10% cumulative convertible
debentures, due in November 1997, issued to RANA Investment Company ("RANA")
and an affiliate of RANA (non U.S. persons) in reliance upon exemptions
under Regulation S of the Securities Act of 1993. During 1997, 1996 and
1995, the Company also received proceeds of $286,743, $562,735 and $475,349
from the issuance of notes and debentures payable to officers, directors and
shareholders of the Company.
The Company realized $1 million in net proceeds after financing costs of
$120,000 from the sale of its $1,200,000 4% convertible debentures to
Timboon. These debentures were convertible at the election of the holder
into the Company's common stock beginning forty-five days after issuance
until maturity on October 1, 1997. The number of shares issuable in
conversion to common stock was determinable as a percentage of the
average bid for the Company's common stock on the OTC Bulletin Board
during one of two five day periods, whichever computation resulted in
the issuance of a greater number of shares to the holder. The Company
converted $120,000 principal amount of these debentures into 256,361
shares of common stock through December 31, 1997. Based on a belief that
short sales were driving the Company's stock price downward, the Company
refused to convert any more of the 4% convertible debentures. Timboon
filed suit to force either conversion or repayment. The Company entered
into a Settlement Agreement and Release ("Settlement") with Timboon,
effective March 2, 1998 covering this litigation. The Settlement
provides for the Company's payment of $1,200,000 in full satisfaction of
outstanding principal of and accrued interest on these debentures or the
Company's issuance to Timboon of such number of shares of its common
stock as can be sold by Timboon with net proceeds of $1,200,000. As of
the date hereof, the Company has issued an aggregate of 5,000,000 shares
to Timboon and the Company is advised by Timboon that it has sold all of
such shares with net proceeds of approximately $400,000. The Company has
treated an equal amount of the 4% convertible debentures as converted,
leaving an outstanding obligation of approximately $800,000. The Company
is unable to estimate the total number of shares which it may be
required to issue under the Settlement, in the event it is not able to
repay its obligation with cash; but, at the date of this Prospectus, the
number of shares would be approximately 19,000,000, based upon current
bid quotations. See "Market Price of and Dividends on Common Stock and
Related Shareholder Matters".
<PAGE> 24
The 10% cumulative convertible debentures, due on various dates through
November 1997, were issued to Nidan Corporation. These debentures were
convertible into shares of the Company's common stock on their respective
maturity dates or on the effective date of a registration statement under
the Securities Act of 1993, if earlier. The number of shares of common
stock issuable upon conversion of these debentures, in either case, was
generally to be determined by dividing the principal amount of the
debentures, plus accrued and unpaid interest, by the lesser of (a) the
fixed conversion prices set forth in the debentures, which range from $1.50
to $5.00 per share, or (b) a conversion price equal to 50% of the average
closing bid and ask prices of the Company's common stock at the close of
trading on the next day following the maturity date as set forth in the
respective debenture. Nidan transferred a significant portion of these
debentures to residents of the State of Michigan without the consent of the
Company. The Company believed that the conversion of these debentures could
have constituted a violation of Michigan securities law as a result of the
Company being subject to a consent order; accordingly, the Company refused
to convert these debentures at maturity. Subsequent negotiations determined
that the offer to Michigan residents of the underlying common stock was
made by the conversion feature of the debentures and that the issuance of
common stock in conversion would not in of itself constitute an additional
violation under the consent order. As of the date of this Prospectus, these
debentures have been converted into an aggregate of 7,742,919 shares of the
Company's common stock.
The 10% cumulative convertible debentures, due in November 1997, were
issued to a non-U.S. person other than Timboon. These debentures were
convertible into shares of the Company's common stock at any time after 45
days from the date of their issuance and prior to their scheduled one-year
maturity dates. The conversion price of these debentures, plus accrued and
unpaid interest, is equal to the lesser of (a) 70% of the average closing
bid price of the Company's common stock for the five days preceding the
conversion date or (b) 80% of the average closing bid price of the
Company's common stock for the five days prior to issuance of the
debentures. In connection with the issuance of these debentures, the
Company incurred placement fees and other costs of approximately $50,000
and received net proceeds of approximately $450,000. As of December 31,
1997, the Company has converted $330,000 of these debentures into 93,301
shares of the Company's common stock and has outstanding unconverted
debentures totaling $170,000. At the time the Company determined not to
convert any more of the Timboon debentures for the reasons described above,
it decided not to convert any more of these debentures for the same
reasons. As of the date of this Prospectus, the unconverted debentures
outstanding at December 31, 1997 are still outstanding and no attempts have
been made by the holders of the debentures to force their conversion or
repayment.
The terms of notes and debentures outstanding at December 31, 1997, are more
fully described in Note 7 to the consolidated financial statements appearing
elsewhere herein.
The Company and its subsidiaries are subject to various legal and
administrative proceedings arising from the sale of its securities, disputes
with certain persons formerly associated with the Company and its subsidiary
companies as employees or who were under contract in a consulting capacity,
from cancellation or defaults under certain non-cancelable lease agreements
and from non-payment of certain of its debts. Also, as more fully described
in "Legal Proceedings", the Company is subject to an Involuntary Petition
under Chapter 7 of the Bankruptcy Act in the United States Bankruptcy Court
for the Middle District of Florida. As of the date of this Prospectus, the
Company has accrued loss reserves totaling approximately $2.0 million for
claims, assessments and losses related to pending legal and administrative
<PAGE> 25
actions, including approximately $820,000 for the potential rescission offer
the Company may be required to make to the purchasers of the Company's
securities who reside in the State of Michigan. The loss reserves accrued
for these legal and administrative actions are generally equal to the
amounts claimed by the plaintiffs' in such actions, with the exception of
the actions brought by Mr. Ken Lame and Mr. Jeff Good, both of whom were
formerly associated with the Company or its subsidiaries as an employee or
consultant. The amounts claimed by these two persons are in excess of
$450,000 and the Company has recorded loss reserves for these actions
totaling approximately $120,000. In the event of an adverse outcome in
either action, the Company may be required to make additional loss
provisions. The Company, however, believes that adequate provision has been
made for the aggregate amount of existing loss contingencies as of the date
hereof (see "Legal Proceedings").
All of the pending legal and administrative proceedings are stayed pending
resolution of the involuntary Chapter 7 bankruptcy proceeding against the
Company (see "Legal Proceedings"). In the event the bankruptcy proceeding
is dismissed and the Company is required to satisfy the obligations it may
have as a result of resolution of the legal and administrative actions
described above, it is unlikely the Company would have a sufficient amount
of cash to sustain operations.
The amount of financing necessary to continue to support the operations and
capital needs of businesses acquired, the continuing operating losses of
businesses acquired, the lack of equity and debt financing available to the
Company (together with the inability of the Company to meet its funding
obligations under the HMT acquisition agreement and its payment obligations
to trade and other creditors), and the desire of the former shareholders of
ATI and HMT to rescind the original purchases transactions, among other
factors, led to management's decision to dispose of ATI and HMT and sell
substantially all of the operating assets of TNI. After the rescission of
the ATI and HMT acquisitions and the sale of the operating assets of TNI,
the remaining operations of the Company consist of NSC. NSC has incurred
substantial operating losses since its acquisition by the Company in October
1995 and there is no assurance that NSC will be able to reverse this trend
in the future.
The Company's present business strategy is to grow its healthcare cost
containment revenue base, of which there is no assurance, through joint
venture alliances or other partnership arrangements that will not require
significant future outlays of capital resources. As of the date of this
Prospectus, the Company has three alliance agreements in place. One of the
alliance partners has a service agreement with a major automobile maker,
which the Company believes will serve as the base for future revenue growth.
The Company expects that the bulk of the revenues from this alliance
customer will be realized during the first quarter of 1999 (see "Business,
Continuing Operations"). The anticipated revenues from these alliances and
other service agreements, of which there is no assurance, are expected to be
sufficient to fund the Company's intended future business operations.
<PAGE> 26
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income
("SFAS No. 130"), which is effective for fiscal years beginning after
December 15, 1997. SFAS No. 130 establishes standards for the reporting and
display of comprehensive income and its components in a full set of general-
purpose financial statements. Although SFAS No. 130 only impacts display as
opposed to actual amounts recorded, it represents a change in financial
reporting. The Company has no accumulated or other comprehensive income and
has no revenues, expenses, gains or losses that are includable in
comprehensive income but excluded from net income (loss). Accordingly, the
Company has not presented a statement of comprehensive income.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS No. 131"), which is effective for
years beginning after December 15, 1997. SFAS No. 131 establishes standards
for the way public enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers. The adoption of this
statement did not have a significant effect on the Company's reported
segments or financial statement disclosures.
IMPACT OF INFLATION
The impact of inflation on the costs of the Company and its business units,
and the ability to pass on cost increases to its customers over time is
dependent upon market conditions. The Company is not aware of any
inflationary pressures that have had any significant impact on the Company's
operations over the past several years and, the Company does not anticipate
that inflationary factors will have a significant impact on future
operations.
YEAR 2000 ISSUES
The Company has not fully assessed all of its relationships or its state of
readiness for the Year 2000 but believes that it is largely dependent on its
customers and suppliers for Year 2000 compliance. The Company's information
systems, except for its "Continuum" software, are purchased and maintained
by nationally recognized third parties. The Company does not anticipate
spending any significant amounts for Year 2000 compliance and, assuming the
Company's suppliers and customers are Year 2000 compliant, does not
anticipate Year 2000 compliance will cause any loss of business or have any
material adverse effect on the Company's results of operations or financial
condition. The Company anticipates its costs for Year 2000 compliance will
be less than $25,000, unless the Company decides to initiate further
development of its "Continuum" software. The Company has not assessed the
cost of Year 2000 compliance and is not able to estimate the cost of Year
2000 compliance should it decide to initiate further development of its
"Continuum" software (see "Description of Business")
<PAGE> 27
DESCRIPTION OF BUSINESS
Business Development and Suspended Operations-
With the acquisition of NSC in 1995, the Company entered the healthcare cost
containment field. The Company pursued development for commercial use of
healthcare management information systems technology designed to manage
healthcare benefit costs. The Company licensed the systems technology
("Champus Software") and statistical databases under a Cooperative Research
and Development Agreement ("CRDA") with the U.S. Army. The Champus Software
and statistical data bases are part of the Civilian Health and Medical
Program for the Uniformed Services ("Champus") program developed by the U.S.
Armed Services. The CRDA expired in June 1998. As a result, the Company's
license agreement to use the Champus systems and databases is non-exclusive.
As discussed below, the Company suspended further development of its systems
technology in June 1997 and has not determined if it will initiate any
further development efforts or if the existing license will be of any future
benefit to the Company.
The Company initially enhanced the Champus Software, which it has
copyrighted under the name "Continuum", to improve the management and
administration of healthcare benefits by intelligent application of data
analysis with strategies to identify misapplied expenditures and
overpayments. The proprietary enhancements included in Continuum
significantly expanded its capabilities as a healthcare claims case
management, treatment analysis and data mining tool for use by commercial
users in controlling their healthcare costs. The Company planned to operate
a data center using Continuum and sell the benefits of the Continuum
operating system to the U.S. automotive industry, other large, self-insured
companies, healthcare insurers, PPO's, HMO's, healthcare benefit plan
administrators and large pharmaceutical companies who the Company believes
have a need to analyze the outcomes of medical treatment regimes and drug
therapies. The Company suspended further development of Continuum in June
1997, prior to completion of a fully working and marketable management
information operating system.
In 1993 and 1995, respectively, NSC entered into service agreements with
Chrysler Corporation and Ford Motor Company to audit healthcare claims which
had been previously paid. Both companies have self-insured health programs
for its employees administered by third party administrators. The purpose of
the audits was to recover payments of claims which were not covered under
their self-insured health benefit programs. In 1993, the Company entered
into a subcontract agreement with Health Management Services ("HMS"), a
healthcare claims management company located in New York, NY, under which
HMS used its own analytical software to audit these healthcare claims. The
Company received ten to thirty percent of recovered payments and generally
shared half of its receipts from recovered claims with HMS. Due to a dispute
between the Company and HMS, the subcontract with HMS was terminated in May
1997; and, due to performance issues between Chrysler Corporation and HMS,
the Company's 1993 service agreement with Chrysler Corporation was
terminated in September 1997. The Company's 1995 service agreement with
Ford Motor Company expired by its terms in March 1997. See "Continuing
Operations".
<PAGE> 28
Continuing Operations-
In September 1997, the Company entered into an alliance agreement with HMG
Health Care Claims Auditing, Inc. located in Pittsburg, PA ("HMG") to
replace HMS as the Company's subcontractor for healthcare cost containment
contracts the Company might obtain in the future. The Company believes HMG's
proprietary computer software programs provide a greater range of healthcare
cost containment features and services than those offered by HMS. These
features and services include, among others, electronic review and reporting
of health care claims paid and on an ongoing basis to identify duplicate,
erroneous or medically inconsistent charges, payments for ineligible
patients and other responsible party liabilities from other group benefit
programs, workers' compensation coverage, motor vehicle or third party
liability coverage, payments for non-covered services, misapplied
deductibles and co-payments and provider agreement compliance.
The Company was able to negotiate a service agreement with Chrysler
Corporation beginning January 1998 to perform pharmaceutical retrospective
analysis and recovery services. As a result of the Company's uncertain
financial condition, however, Chrysler Corporation and HMG entered into the
agreement directly. Pursuant to the services agreement between HMG and
Chrysler Corporation and the alliance agreement between the Company and HMG,
the Company and HMG are to receive a monthly fee of $4,000 and $12,000,
respectively, from Chrysler Corporation and will share on a 50%-50% basis
twenty percent (20%) of the claim recoveries, up to a maximum of $5,000,000
in claim recoveries, under the services agreement between HMG and Chrysler
Corporation. HMG began performance under the services agreement with
Chrysler Corporation in May 1998.
Following suspension of development of Continuum, the Company redirected its
business to focus on the development of a network of healthcare cost
containment companies, providers of healthcare products and services and
third-party healthcare plan administrators, beginning with HMG, with an
objective of obtaining the right to market a wide array of non-competing
healthcare cost containment services and products to large, self-insured
companies on a fee or revenue sharing basis. The Company has entered into an
alliance agreement with Haddon National Companies, Inc. located in Maple
Shade, NJ ("HNCI") and is negotiating an agreement with a major
pharmaceutical manufacturer. The alliance agreement with HNCI gives the
Company the ability to sell and market HNCI's claims administration and
processing services, medical and surgical cost containment services and
Medicare A and B validation services to large self-insured corporations,
third party administrators, commercial health insures and other managed
healthcare companies. The agreement under negotiation with a major
pharmaceutical manufacturer, if consummated, will allow the Company to sell
and market the healthcare cost containment products of its other alliance
partners to the customers of the pharmaceutical manufacturer.
Market and Marketing-
The market for the products and services offered and expected to be offered
by the Company include large corporations that self-insure and rely on
third-party administrators to manage their healthcare benefit programs, the
third-party administrators themselves, HMO's, PPO's and healthcare insurers.
Healthcare programs administered by state and municipal governments also
represent potential customers for the products and services the Company
expects to market. The Company believes that interest in healthcare cost
containment, including recovering payments of healthcare claims which should
not have been made and prepayment screening of claims, will become
increasingly more important to large corporations, third-party
administrators, HMO's, PPO's and healthcare insurers.
<PAGE> 29
The Company believes that its focus on alliance relationships and the wide
array of healthcare cost containment products and services currently
available via alliance relationships will provide the Company with the
ability to generate profitable operations in the future.
Competition-
The Company is not aware of any other organizations which are marketing the
services of multiple providers of healthcare cost containment and case
management products and services. The Company believes its primary
competition is the providers of such services with whom the Company does not
have a marketing agreement or affiliation. The Company believes that this
field is fragmented, with many companies providing healthcare claims
auditing and prepayment claims screening services.
Licenses and Copyrights-
The Company has a non-exclusive license to use the Champus Software and
databases to perform evaluation, analysis and recovery of benefit payments
involving the healthcare benefit programs of the U.S. automotive industry
and their down-line vendors, including indemnity claims, coordinated
benefits and workers compensation claims, and to perform in-depth studies of
the U.S. automobile industry's healthcare benefit programs ("field of use").
The Company also has the ability, with prior approval of the U.S. Army, to
use the Champus Software and databases to analyze the healthcare benefits of
companies outside of the U.S. automotive industry. As mentioned above, the
Company has not determined if this license has any future benefit to the
Company in light of its decision to suspend development and
commercialization of the Champus software technology.
NSC is not required to turn over to the U.S. Army the enhancements which it
has made to the CHAMPUS Software in the development of Continuum and is
entitled to patent any inventions made and copyright any works created under
the CRDA.
Facilities and Employees-
The Company does not own any facilities. All office space, consisting of a
corporate office with approximately 1,450 sq. ft., is leased. The monthly
rental is approximately $1,600. The Company believes the leased facilities
are adequate for its current needs and that additional suitable space will
be available as needed. The Company has three executive employees and one
administrative assistant. The Company makes extensive use of independent
contractors for accounting, administration and sales and marketing and
currently has approximately 10 persons under contract providing such
services. The Company also has commission-based marketing representatives
who serve over 20 major metropolitan areas.
LEGAL PROCEEDINGS
The Company and its subsidiaries are subject to various legal and
administrative proceedings arising from the sale of its securities, disputes
with certain persons formerly associated with the Company and its subsidiary
companies as employees or who were under contract in a consulting capacity,
from cancellation or defaults under certain non-cancelable lease agreements
and from non-payment of certain of its debts. Also, as more fully described
below the, the Company is subject to an Involuntary Petition under Chapter 7
of the Bankruptcy Act in the United States Bankruptcy Court for the Middle
District of Florida. Significant proceedings and actions in which the
Company is involved are summarized as follows.
<PAGE> 30
A consent order executed by the Company and the State of Michigan in
December 1996, requires the Company to use its best efforts to satisfy the
prerequisites of the Security and Exchange Commission and the Michigan
Securities Bureau for registering the common stock sold by the Company to
residents of the State of Michigan for resale by them in the public market.
This action is the result of the sale of securities in the State of Michigan
without an exemption from registration under the Michigan Uniform Securities
Act. In the event the Company is unable to effect a registration statement
or such purchasers are unable to resell their shares pursuant to such
registration statement at a higher price than their cost, then the Company
is required to use its best efforts to satisfy the prerequisites of the
Securities and Exchange Commission and the State of Michigan for making a
rescission offer to all such purchasers. Also, pursuant to the consent
order, the Company must cease the unregistered sale of securities in
Michigan, has been censured and has paid costs to the state of $2,500. Upon
satisfaction of the consent order, all sanctions are terminated. As of
December 31, 1997, the Company estimates its maximum potential exposure as a
result of any rescission offer which may be required to be made in the State
of Michigan to be approximately $795,739, including interest of
approximately $121,615. Interest is being accrued at the statutory rate of
8% per annum. Interest accrued on the potential rescission offer for the six
months ended June 30, 1998 totaled $26,596. The number of shares the Company
believes may be subject to a rescission offer in the State of Michigan, if
such an offer were to be made, is approximately 219,000 shares; and, the
weighted average purchase price of such shares is approximately $3.25 per
share. The Company has not satisfied the requirements of the consent order.
Due to the "best efforts" nature of the Company's compliance obligation, the
Company believes that its performance of the terms of the consent order is
deferred until such time it is able to both financially and functionally
comply with the consent order.
On April 15, 1997, Mr. Ken Lame, as Plaintiff, filed an action in the United
States District Court, District Court of Utah, Central Division (Case No.
2:97CV0292W) against the Company and NSC, as Defendants. This action arises
from a consulting agreement between Mr. Lame and NSC. The action seeks
approximately $250,000, plus interest and attorney's fees, for payments Mr.
Lame alleges are due under the consulting agreement. The Company has accrued
$118,500, representing its best estimate the maximum amount it believes may
be due under the consulting agreement. In the event of an adverse outcome,
the Company may be required to provide for an additional loss.
On May 21, 1997, Mr. Jeff Good, as Plaintiff, filed an action in the United
States District Court, Southern District of Iowa, Davenport Division (Case
No. 3-97-CV-80085) against the Company, as Defendant, for amounts Mr. Good
alleges are due under an employment agreement between Mr. Good and one of
the Company's subsidiaries (which subsidiary is no longer conducting
business). This action seeks compensation and benefits under the employment
agreement in excess of $200,000. The Company believes this action to be
without merit and intends to vigorously defend it; however, it is not
possible to predict the likely outcome of this matter and no provision has
been made for any potential loss in the event of an unfavorable outcome.
On May 1, 1997, Mr. John Jassy, as Plaintiff, filed an action in the Circuit
Court of the Sixth Judicial Circuit in and for Pinellas County, Fl., Civil
Division (Case No. 97-3103-CI-20) against the Company, Mr. Stephen E.
Williams and Mr. Edwin B. Salmon, Jr., as Defendants. This action alleges
that numerous misrepresentations and deceptive statements were made to Mr.
Jassy and certain family members of Mr. Jassy to induce them to purchase the
Company's securities. The action seeks rescission of those security
purchases, payment of compensation Mr. Jassy alleges is due to him from his
employ by the Company as an executive officer and repayment of a loan made
to Mr. Williams by Mr. Jassy. This action seeks approximately $500,000, plus
<PAGR> 31
interest and attorney's fees. Included in the amounts claimed by plaintiff,
are approximately $450,000, including interest, to repurchase approximately
100,000 shares of the Company's common stock purchased by plaintiff and his
family members, approximately $47,000, plus interest, Mr. Jassy alleges is
payable to him in unpaid salary and benefits and $2,500, plus interest, Mr.
Jassy claims is owed to him by Mr. Williams, a former President and Chief
Executive Officer of the Company. On May 11, 1998, the Company was notified
of dismissal of this case.
In May 1996, the Company informed the principals of Coast Communications,
Inc. ("CCI") that the Company was canceling the acquisition of CCI and
terminating all of the related acquisition documents. The principals of CCI
filed suit to enforce promissory notes in the aggregate principal amount of
$300,000, which were issued by the Company in connection with the CCI
acquisition and the issuance of 200,000 shares of the Company's Class A
preferred stock they allege are due them under the acquisition agreement.
This matter was referred by court order to mandatory arbitration in the
State of Florida. On February 3, 1998, the Arbitrators' awarded in favor of
the former shareholders of CCI. The award requires, among other things, that
the Company (i) convert 200,000 shares of its Class A Preferred Stock, held
by the former shareholders of CCI, into 100,000 shares of its common stock
and (ii) issue another 200,000 shares of Class A Preferred Stock to the
former CCI stockholders, which is also convertible into 100,000 shares of
the Company's common stock, and gave the former shareholders of CCI the
ability to seek a summary judgment against the Company for $500,000, without
opposition, or accept 500,000 shares of the Company's Class A Preferred
Stock in lieu of a summary judgment. As of December 31, 1997, the Company
has recorded a loss contingency of $111,000, related to this action. On
August 4, 1998, the Company issued 500,000 shares of its Class A Preferred
Stock to the former shareholders of CCI in full satisfaction of the award in
arbitration with no material adjustment to the previously accrued loss
reserve.
In October 1997, Boston Financial Corporation ("BFC") took possession of
certain computer equipment leased by NSC from BFC as a result of the default
by NSC of payments due under the lease. On December 11, 1997, BFC filed an
amended suit in District Court, 45th Judicial District, Bexar County, Texas
(Case No. 97CI-14567) against NSC and, as guarantors of the lease agreement,
the Company, ATI and TNI. This action seeks approximately $500,000 in lease
payments and other charges due under the lease agreement. The Company is
attempting to negotiate a settlement of this matter and may have several
counterclaims against BFC should the Company and BFC fail to settle.
However, it is not possible to predict the likely outcome of such
negotiations or any counterclaims the Company may have against BFC. As of
December 31, 1997, the Company has recorded a loss contingency reserve of
approximately $500,000 related to this action.
[Remainder of page left blank]
<PAGE> 32
Prior to the rescission of the ATI acquisition agreement, the Company
obtained and guaranteed an equipment lease financing facility for ATI's use.
The financing facility was subsequently terminated by the lessor due to non-
payment by ATI of payments due under the related lease agreements. In
connection with the rescission of the ATI acquisition agreement, ATI issued
a promissory note to the Company in the amount of $180,000, payable upon the
default by ATI of payments due under the lease financing facility. Payments
due to 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. The lessor has filed suit against the Company and ATI, as
defendants, in the Circuit Court of the Thirteenth Judicial Circuit Court in
Hillsborough County, Florida, Civil Division (Case No. 98-02557) seeking
approximately $150,000, plus interest and attorney's fees. The Company has
accrued the potential loss related to this action. As of the date hereof,
it is uncertain whether or not the Company will be able to recover any
amounts from ATI under the terms of the promissory note between the Company
and ATI.
As of December 31, 1997, the Company and its subsidiaries have pending
outstanding judgments totaling approximately $170,000. These judgments arose
from cancellation of office and equipment leases and from non-payment of
obligations due to trade creditors.
The Company is also involved in numerous other legal and administrative
actions incurred in the ordinary course of business, none of which are
expected to have a material impact on the Company's results of operations or
financial position. As described above, the Company believes it has made
adequate provision for the financial impact of such actions.
Chapter 7 Involuntary Bankruptcy Petition
The Company learned on June 8, 1998 that an Involuntary Petition (the
"Petition") was filed on June 1, 1998 against the Company in the United
States Bankruptcy Court for the Middle District of Florida (Case No. 98-
09299-8P7) under Chapter 7 of the Bankruptcy Act (the "Proceeding") by
certain petitioners (the "Petitioners"). The names of the Petitioners and
the amounts of their alleged claims are set forth in the following table.
Petitioners Name Amount Claimed
- ---------------- --------------
Kenneth D. Lame $212,519
Barry L. Johnson 9,171
Jon T. Lame 2,325
Jack Arthur 26,498
K. Philip Lame 489
Keith A. Krenz 77,442
Kenneth Lame served as a consultant to NSC from October 31, 1995 to January
17, 1997 and as its President and Chief Executive Officer from January 1997
to March 1997. Part of Kenneth Lame's assigned duties as the President and
Chief Executive Officer of NSC was development of a business, operating and
marketing plan for NSC's "Champus Software and databases." Kenneth Lame did
not deliver any business, operating or marketing plans to NSC and NSC
terminated the services of Kenneth Lame in March 1997. The alleged claim of
Kenneth Lame, which is properly against NSC, is disputed by NSC. Kenneth
Lame arranged for NSC to engage the services of Petitioners Johnson, Jon T.
Lame, Arthur and K. Philip Lame to assist him in development of the
business, operating and marketing plan. The Company believes that it never
employed Kenneth Lame or the Petitioners named in the preceding sentence and
is not indebted to them in any amount. Furthermore, the Company believes the
alleged claims of Petitioners Arthur, Jon. T. Lame and K. Philip Lame have
been paid in full and the alleged claim of Petitioner Johnson has been
reduced to $4,000.
<PAGE> 33
Kenneth Lame introduced Health Management Technologies, Inc. ("HMT") to the
Company, which the Company ultimately acquired and later divested. The
Company and Kenneth Lame entered into a letter agreement dated July 16, 1996
for payment of a finder's fee for the HMT acquisition under his consulting
agreement with NSC. The Company believes it has satisfied in full all of
its monetary obligations to Kenneth Lame under the letter agreement.
Furthermore, Kenneth Lame has a suit pending against the Company and NSC in
The United States District Court, District of Utah (case no. 2:97-cv-00292
C) for the claims which he asserts against the Company and NSC in the
Petition. Accordingly, the Company believes Petitioners Kenneth Lame,
Johnson, Jon T. Lame, Arthur and K. Philip Lame are creditors of NSC, to the
extent of provable claims, and not creditors of the Company.
Petitioner Krenz was a shareholder of NSC at the time it was acquired by the
Company. As a part of the acquisition agreement, NSC issued a promissory
note to Mr. Krenz in the amount of $129,070. This note was reduced by
$51,628 prior to May 1996 but has not been reduced since then. The Company
nor NSC have received any correspondence or any demand for payment from Mr.
Krenz since the date NSC suspended payments to Mr. Krenz.
Subsequent to the filing of the original petition, five additional creditors
joined in the petition. Four of the five additional petitioners are
creditors of NSC and not the Company and the Company disputes the claim of
the other creditor.
The Company filed a motion to dismiss the Petition on the grounds that it
does not meet the requirements of the U.S. Bankruptcy Code and the
Petitioners filed a motion for summary judgment. On October 27, 1998, the
U.S. Bankruptcy Court denied the motion for summary judgement and set a
hearing date of January 12, 1999. In the event the Company prevails, it
intends to seek sanctions against the Petitioners and its counsel for any
damages it sustains as a result of the Petition.
<PAGE> 34
MANAGEMENT
The names and ages of directors (including the year in which each became a
director) and executive officers of the Company as of the date hereof are
set forth in the following table:
<TABLE>
Name Age Positions With Co. and Subsidiaries Since
- ---------------------- --- ----------------------------------- -----
<S> <C> <C> <C>
Edwin B. Salmon, Jr. 61 Chairman of the Board of Directors
and Chief Financial Officer 1991
James T. Kowalczyk 58 Director and President 1997
Richard A. Sweet 64 Director 1997
Larry R. Snapp 52 Director 1997
Hugh M. Gibbons 57 Executive Vice President N/A
</TABLE>
N/A means the named executive officer is not a director.
Each director is elected by holders of a majority of the Common Stock to
serve for a term of one year ending on the next following annual meeting of
stockholders and until his successor is elected and qualified. Officers
serve at the will of the board. Directors are not compensated for their
services apart from their executive officer salaries, if the Director is
also an executive officer, and stock options that may be granted from time-
to-time for their services as Directors (see Item 11 "Executive
Compensation" and Item 12 "Security Ownership of Certain Beneficial Owners
and Management"). In the event the Company has directors who are not also
officers, the Company may reimburse such directors for travel expenses
related to Company business. The directors and officers of the Company are
indemnified against liabilities which they incur by virtue of being
directors and officers under the corporate laws of the State of Florida. The
articles of incorporation and bylaws of the Company do not contain any
provisions with respect to indemnification of directors and officers. The
Company has been advised that in the opinion of the Securities and Exchange
Commission, indemnification for liabilities arising under the federal
securities laws is against public policy and may be unenforceable. The
Company would seek approval of any such indemnification by a court of
competent jurisdiction.
Messrs. Kowalczyk, Sweet and Snapp were elected to the Board of Directors at
various times during 1997 by remaining Directors to fill vacancies. The
Company did not hold an annual meeting of shareholders in 1997 due its
inability to comply with the information requirements of Rule 14a-3, as
promulgated by the Securities and Exchange Commission for the solicitation
of proxies. Rule 14a-3 requires registrants to furnish security holders with
an annual report which includes audited balance sheets as of the end of the
two most recent fiscal years and audited statements of operations and cash
flows for each of the three most recent fiscal years. The Company was unable
to comply with such requirements due to the Company not having timely filed
its Annual Report on Form 10-K for the year ended December 31,1996. The
Company
<PAGE> 35
did not timely file its Annual Report on Form 10-K for the year ended
December 31, 1996 due to its inability to timely pay for the services of its
independent auditors and the time required by management to complete its
assessment of the carrying value of intangible assets and goodwill recorded
in connection with the acquisition of NSC. The Company contemplates holding
an annual meeting of shareholders in 1998. It is uncertain, however, whether
or not the Company will be able to prepare and mail proxy solicitation
materials to its shareholders due to limitations on the part of the Company
to fund those collective efforts. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
Mr. Edwin B. Salmon, Jr. has been associated with the Company in various
capacities since its formation. Mr. Salmon is currently Chairman of the
Board of Directors and the Company's Chief Financial Officer and previously
held the position of the Company's Executive Vice President. In 1991, Mr.
Salmon became President and a controlling stockholder of Associated
Healthcare Industries, Inc. ("Associated"), a publicly owned shell
corporation, which changed its name to Contour Medical, Inc. in connection
with the acquisition of a disposable medical products manufacturing
business. In 1993, Mr. Salmon left Associated to resume his efforts in the
Company's acquisition of operating businesses. Mr. Salmon was also the
founder of LCI Communications, Inc., which was acquired by the Company in
June of 1995.
Mr. James T. Kowalczyk became a Director and was appointed President of the
Company in July 1997. For the past 30 years, Mr. Kowalczyk was a co-founder,
director and franchiser in Pittsburgh, Pennsylvania with Budget Marketing,
Inc. and was a co-founder and senior officer of 2001/VIP Clubs of America.
Mr. Richard A. Sweet became a Director of the Company in April 1997. For the
past five years, Mr. Sweet has been a Branch Manager for Insurance Adjustors
and Services Corporation of Tampa, Florida and from 1960 to 1986 was Branch
Manager and Supervisor of Claims for Indiana Insurance Co.
Mr. Larry R. Snapp became a Director of the Company in May 1997. Mr. Snapp
has over 30 years of banking industry experience and, for the last five
years was Vice President of National City Bank of Indiana, a position he
recently retired from.
Mr. Hugh M. Gibbons was appointed as the Company's Executive Vice President
in July 1977. For the past five years Mr. Gibbons has served as President of
Gibbons' Health Plan Recoveries, Inc., President of and Principal of Health
Plan Audit Services, Inc., President of H.M. Gibbons & Associates, Inc. and
Executive Vice President of HMG Health Care Auditing, Inc. Mr. Gibbons has
over 34 years of healthcare cost containment experience and has a Doctor of
Jurisprudence Degree from the University of Baltimore School of Law.
<PAGE> 36
MAMAGEMENT COMPENSATION
The following table sets forth the compensation paid or accrued to the chief
executive officer of the Registrant or person discharging comparable duties
and to the executive officers of the registrant whose compensation exceeded
$100,000 for each of the three years in the period ending December 31, 1997.
<TABLE>
Annual Compensation
---------------------------------------------------
Long-Term
Name & Principal Positions Year Salary Bonus Other Compensation
- -------------------------- ---- ------ ----- ----- ------------
<S> <C> <C> <C> <C> <C>
Stephen E. Williams 1997 $150,000 $ -- $ -- $ --
Chief Executive 1996 177,500 -- 7,500 --
Officer (1)(2)(3) 1995 190,625 -- 7,500 --
James T. Kowalczyk 1997 32,500 -- -- --
President and Director (4) 1996 N\A -- -- --
1995 N\A -- -- --
Edwin B. Salmon, Jr. 1997 150,000 -- -- --
Chief Financial Officer, 1996 177,000 -- 7,500 --
Treasurer and Chairman of 1995 99,630 -- 9,000 --
the Board(1)(4)
</TABLE>
(1) The Company entered into employment agreements with Mr. Williams and Mr.
Salmon. These agreements provide, among other things, for the payment of
compensation over 5 years from the date of employment, regardless of whether
or not these executive officers remain in the employ of the Company. See
Note 13 to the consolidated financial statements. Effective December 1,
1996, the annual salaries of Messrs. Salmon and Williams were reduced to
$150,000, each. On June 30, 1998, the Company and Mr. Stephen Williams
entered into an agreement and mutual release (the "Release"). Pursuant to
the Release, the Company issued 300,000 shares of its common stock and
released Mr. Williams from any and all claims, demands, contracts, and
obligations of any kind whatsoever which the Company had, has or may have
against Mr. Williams in exchange for a release from Mr. Williams of any and
all claims, demands, contracts and obligations of any kind whatsoever which
Mr. Williams had, has or may have against the Company arising out of his
employment with the Company.
(2) In 1995, the Company issued, as additional compensation to Mr. Williams,
500,000 shares of Common Stock, valued at $15,000, and 1,375,000 shares of
Class A preferred stock, valued at $20,625, in connection with the
performance of certain conditions set forth in a 1994 letter agreement. See
Note 13 to the consolidated financial statements appearing elsewhere herein.
(3)In April and June 1997, Mr. Williams resigned as the Company's President
and CEO and Director, respectively.
(4)In August 1997, each of Messrs. Kowalczyk and Salmon were granted options
to purchase 500,000 shares of the Registrant's common stock, exercisable at
$0.10 per share at any time over five years.
N/A means the respective officer was not employed by the Company during that
period.
<PAGE> 37
CERTAIN TRANSACTIONS WITH MANAGEMENT AND OTHERS
At December 31, 1996, the Company had an outstanding $25,000 note payable
for money borrowed from Mr. Edwin B. Salmon bearing interest at 8%. This
note, plus accrued interest, was converted into 25,762 shares of the
Company's common stock in February 1997. During 1997, Mr. Salmon loaned the
Company $40,243 without interest and the Company repaid Mr. Salmon $40,243.
At December 31, 1996, the Company had notes outstanding for money borrowed
from American First Equipment Leasing totaling $62,741. During 1997, the
Company borrowed $39,500 from American First Equipment Leasing, repaid
$44,241 of such notes, plus accrued interest, and converted $58,000 of such
notes, plus accrued interest, into shares of the Company's common stock at a
conversion price of $1.00 per share. See Note 2(d) to Item 12 "Security
Ownership of Certain Beneficial Owners and Management."
During 1997, the Company borrowed $65,000 from Brittany Leigh, Inc. and
repaid $65,000, plus accrued interest. See Note 2(c) to Item 12 "Security
Ownership of Certain Beneficial Owners and Management."
At December 31, 1996, the Company had outstanding notes payable for money
borrowed from Mr. Richard A. Sweet, a Director and shareholder of the
Company, totaling $40,000. During 1997, the Company converted these notes,
plus accrued interest, into 41,565 shares of the Company's common stock.
As of December 31, 1996, the Company had outstanding notes payable to the
former shareholders of TNI totaling $450,000 issued in connection with the
acquisition of TNI, bearing interest at 10% per annum, and $250,000
outstanding to the former shareholders of ATI which were issued in
connection with the acquisition of ATI, bearing interest at 6% per annum.
Effective March 31, 1998, the Company issued 893,278 shares of its common
stock and 450,000 stock purchase warrants (225,000 of which are exercisable
at $1.50 per share by the terms of the respective debenture note and 225,000
of which are exercisable at $0.20 per share pursuant to a redemption offer)
in satisfaction of the notes payable to the former shareholders of TNI. The
notes payable to the former shareholders of ATI were removed from the
consolidated balance sheet in 1997 in connection with the rescission of the
ATI acquisition.
At December 31, 1996, the Company had outstanding notes for money borrowed
from certain shareholders (other than from Mr. Salmon, Brittany Leigh,
Inc., American First Equipment Leasing, Inc. and Mr. Sweet) totaling
$235,000 bearing interest at 8% to 10% per annum. During 1997, certain
shareholders of the Company (other than Mr. Salmon, Brittany Leigh, Inc.,
American First Equipment Leasing, Inc. and Mr. Sweet) loaned the Company an
aggregate amount of $135,000 at 10% interest. Of these notes, $170,000, plus
accrued interest, was converted during the year into shares of the Company's
common stock at prices ranging from $0.90 to $1.00 per share and $200,000,
plus accrued interest, was paid in cash.
During 1996, the Company issued $1,195,000 of 10% convertible debentures to
Nidan Corporation. The terms of these debentures provided for their
conversion into shares of the Company's common stock at the lesser of 50%
the bid-ask price of the Company's common stock at the close of trading on
the first day next following the conversion date, defined as the earlier of
either the maturity date of the respective debenture or the date of an
effective registration statement covering the shares issuable upon
conversion of the debentures or at the per share conversion price as set
forth in the debenture. During 1997, the Company converted $84,000 of these
debentures, plus accrued interest, into 19,033 shares of the Company's
<PAGE> 38
common stock As of the date of this Prospectus, the Company has issued an
additional 7,742,927 shares of its common stock and 2,000,000 common stock
purchase warrants in satisfaction of the debenture indebtedness. See
"Capitalization", "Principal Stockholders" and "Selling Security Holders."
During 1997, the Company issued an aggregate of 142,857 shares of its common
stock to American First Equipment Leasing and Brittany Leigh, valued at
$61,829, for services rendered to the Company. The services rendered to the
Company included computer hardware and software support and market research
as to the Company's and operating division performance.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's common stock as of the date hereof by each
shareholder known by the Company to be a beneficial owner of more than five
percent of the Company's common stock, by each of the registrant's named
directors and executive officers, and by all directors and executive
officers of the registrant as a group. Except as indicated in the footnotes
to this table, the Company believes that the persons named in the table have
sole voting and investment power with respect to all shares of common stock
shown as beneficially owned by them.
<TABLE>
Name of Amount and Nature Percent
Beneficial Owner of Beneficial Interest(1) of Class(1)
- ---------------------- ------------------------- ---------
<S> <C> <C>
Edwin B. Salmon, Jr. 3,934,689 (2a)-(2e) 9.66
James T. Kowalczyk 1,104,156 (3) 2.71
Richard A. Sweet 266,410 (4) 0.65
Larry R. Snapp 167,250 (4) 0.41
Hugh M. Gibbons 1,819,999 (5) 4.47
All Directors and Executive Officers
as a Group(5 persons) 7,292,504 (6) 17.91
Nidan Corporation 4,500,000 (7) 11.05
</TABLE>
(1) Based on information available to the Company, unless otherwise
indicated such shares are owned of record by the named beneficial owner or
the named beneficial owner and spouse, and represent sole voting and
investment power. Such person's percentage ownership has been calculated
assuming that all warrants and options held by such person that are
exercisable within 6 months have been exercised, but that no other
outstanding warrants and options have been exercised.
(2a) Includes options for 500,000 shares exercisable at an exercise price of
$0.10 per share at any time through August 15, 2002. The address of Mr.
Salmon is the address of the Company.
(2b) Includes 100,000 shares owned by Brittany Leigh, Inc. Mr. Edwin B.
Salmon disclaims beneficial ownership of these shares. Mr. David Salmon, Mr.
Edwin B. Salmon's adult son, is a Director and the President and Mr. Winfred
Russell is a former President of this corporation. Mr. Edwin B. Salmon was
reported to be one of two directors on the annual report for the corporation
filed with the State of Florida; but, Mr. David Salmon and Mr. Edwin B.
Salmon maintain that the annual report was filed in error and Mr. Edwin B.
Salmon neither is nor in the past two years has been a director or officer
of this corporation. Mr. Edwin B. Salmon is a creditor of this corporation
and has received repayment of his loans to the corporation from proceeds
realized by the corporation from the sale of the registrant's common stock.
Mr. Russell, in his capacity as the former President of this corporation,
also authorized Mr. Edwin B. Salmon, in Mr. Russell's absence, to approve
purchases and sales of the registrant's common stock by the corporation when
unsolicited offers are received from brokers. Mr. Edwin B. Salmon currently
<PAGE> 39
has no such authority. No purchases or sales of the registrant's common
stock by this corporation have been initiated by the registrant. The address
of Brittany Leigh, Inc. is 1520 San Charles Drive, Dunedin, Florida 34698.
(2c) Includes 22,300 shares owned by American First Equipment Leasing, Inc.
Mr. Edwin B. Salmon disclaims beneficial ownership of these shares. Mr.
David Salmon, Mr. Edwin B. Salmon's adult son is a Director and President
and Mr. Winfred Russell is a former President of this corporation. Mr.
Edwin B. Salmon was reported to be one of two directors on the annual report
for the corporation filed with the State of Florida; but, Mr. David Salmon
and Mr. Edwin B. Salmon maintain that the annual report was filed in error
and Mr. Edwin B. Salmon neither is nor in the past two years has been a
director or officer of the corporation. Mr. Salmon is a creditor of this
corporation and has received repayment of his loans to the corporation from
proceeds realized by the corporation from the sale of the registrant's
common stock. Mr. Russell, in his capacity as the former President of this
corporation, also authorized Mr. Edwin B. Salmon, in Mr. Russell's absence,
to approve purchases and sales of the registrant's common stock by the
corporation when unsolicited offers are received from brokers. Mr. Edwin B.
Salmon currently has no such authority. No purchases or sales of the
registrant's common stock by this corporation have been initiated by the
registrant. The address of American First Equipment Leasing, Inc. is 1520
San Charles Drive, Dunedin, Florida 34698.
(2d) Includes 40,000 shares owned by the Paige Irrevocable Trust. Mr. Edwin
B. Salmon is the grantor of this irrevocable trust; but, his three adult
children, including Mr. David Salmon, none of whom reside with him, are the
co-trustees and one of Mr. Edwin B. Salmon's daughters is the sole
beneficiary. Mr. Edwin B. Salmon disclaims any beneficial interest in this
trust. The address of the trust is the address of the Company.
(2e) Includes 40,000 shares owned by the Jennifer Irrevocable Trust. Mr.
Edwin B. Salmon is the grantor of this irrevocable trust; but, his three
adult children, including Mr. David Salmon, none of whom reside with him,
are the co-trustees and one of Mr. Edwin B. Salmon's daughters is the sole
beneficiary. Mr. Edwin B. Salmon disclaims any beneficial interest in this
trust. The address of the trust is 700 S.W. 66 nd Blvd., Gainesville, Fla.
32607. The address of Brittany Leigh, Inc. is 1520 San Charles Drive,
Dunedin, Florida 34698.
(3) Includes options for 500,000 shares exercisable at an exercise price of
$0.10 per share at any time through August 15, 2002. The address of Mr.
Kowalczyk is the address of the Company.
(4) Includes options for 100,000 shares exercisable at an exercise price of
$0.10 per share at any time through August 15, 2002. The address of Mr.
Sweet and Mr. Snapp is the addresses of the Company.
(5) Includes warrants to purchase 500,000 shares at an exercise price of
$0.47 at any time through December 22, 1999. The address of Mr. Gibbons is
the address of the Company.
(6) Includes the shares and options referred to in (2a)-(2e) above, plus the
options and warrants referred to in (3), (4) and (5). Mr. Edwin B. Salmon
disclaims beneficial ownership of the shares referred to in (2b)-(2e) above.
The address of each director and executive officer of the Company is the
address of the Company.
(7) Includes 2,000,000 common stock purchase warrants, 1,000,000 of which
are exercisable at $0.20 per share and 1,000,000 are exercisable at $0.25
per share
<PAGE> 40
DESCRIPTION OF SECURITIES TO BE REGISTERED
The authorized capital stock of the Company consists of fifteen million
shares of Preferred Stock and fifty million shares of Common Stock, $.001
par value per share. The Board of Directors designated five million shares
of the preferred stock as Class A Convertible Preferred Stock and the
balance of ten million shares as Class B Convertible Preferred Stock.
A total of 37,319,022 shares of Common Stock are issued and outstanding as
of the date hereof. Assuming the shares of common stock issuable and
registered hereby for resale by the Selling Security Holders upon exercise
of Warrants and Options, conversion of Debentures and conversion of Class A
Preferred Stock, 48,871,035 shares will be issued and outstanding.
The holders of the Common Stock (i) have equal and ratable rights with all
holders of issued and outstanding Common Stock to dividends from funds
legally available therefor, when, as and if declared by the Board of
Directors of the Company; (ii) are entitled to share ratably in all of the
assets of the Company available for distribution, after distribution of the
liquidation preference on any outstanding Preferred Stock, upon liquidation,
dissolution or winding up of the affairs of the Company; (iii) do not have
preemptive, subscription or conversion rights; (iv) have no redemption or
sinking fund provisions applicable thereto; and (v) have one vote on
election of each director and other matters submitted to a vote of
stockholders. All shares of Common Stock outstanding are, and with respect
to the Common Stock issuable upon exercise of the Warrants and Options when
issued and delivered against payment therefore will be, duly authorized,
legally issued, fully paid and non-assessable.
TRANSFER AGENT
United Stock Transfer, Inc., 13275 East Fremont Place, Suite 302, Englewood,
Colorado 80112 serves as the Company's transfer agent.
[Remainer of page left blank]
<PAGE> 41
SELLING SECURITY HOLDERS
The Company is registering 25,536,509 shares of its common stock for resale
by the Selling Security Holders identified in the following tables. The
tables also indicate whether the Selling Security Holder has or has had any
position, office or other material relationship with the Company during the
last three fiscal years. None of the Selling Security Holders will own more
than one percent of the Company's total issued and outstanding Common Stock
after the offering, assuming all of the Shares offered for resale are sold.
The following table sets forth the names of Selling Security Holders
offering for resale an aggregate of 13,984,496 Shares of currently issued
and outstanding common stock, the number of Shares offered by each named
Security Holder and the number of Shares which are owned before and after
the offering by each named Security Holder.
<TABLE>
Number of Number of Number of
shares owned shares shares owned
prior to being after the
the offering offered offering
------------ --------- ------------
<S> <C> <C> <C>
Edwin Salmon (1) 3,232,389 2,982,389 250,000
James Kowalczyk (2) 604,156 354,156 250,000
Hugh Gibbons (3) 1,319,999 1,069,999 250,000
Richard Sweet(4) 166,410 166,410 --
Larry Snapp(4) 67,250 67,250 --
Managerial Advisory Services, Inc.(5) 122,200 122,200 --
Donald Calder 4,537 3,000 1,537
Ronald Soderling 83,443 50,000 33,443
Steve Donatelli 1,000 1,000 --
Steve Katzman 20,000 20,000 --
Spense Brock 34,000 34,000 --
Jack and Addrienne Moye 17,001 2,000 15,001
ICS Communications, Inc. 165,000 165,000 --
Quantum Trust 25,000 25,000 --
The Bracken Group 20,000 20,000 --
Edward and Martha Cary 434,666 208,333 226,333
David Delbaugh 150,000 150,000 --
Mark and Virginia Blanchard 500,830 500,830 --
Ken Gilde, Jr. 1,050,531 843,869 206,662
Kenneth Earl Gilde 785,456 772,956 12,500
David E Gilde 755,520 755,520 --
Phillip S. Gilde 365,074 352,574 12,500
Harold Meyering 986,056 986,056 --
Dale Meyering 67,287 67,287 --
Charles Helsel 523,056 523,056 --
Edwin Helsel 476,562 476,562 --
Sharon Ruetz 50,754 50,754 --
Robert Bloomfiel( 13,457 13,457 --
Calvin Hutchinson 38,450 38,450 --
George Meekhof 19,224 19,224 --
David Fleszar 34,605 34,605 --
George Miller 3,845 3,845 --
Kenneth Meyering 16,822 16,822 --
Kathryn Loeks 16,822 16,822 --
Shery DuVall 3,845 3,845 --
Steve Anderson 76,900 76,900 --
Betty Cotter 13,457 13,457 --
Leon Hamming 26,915 26,915 --
Rodger Hamming 19,225 19,225 --
Alexander Lamkin 30,760 30,760 --
<PAGE> 42
Number of Number of Number of
shares owned shares shares owned
prior to being after the
the offering offered offering
------------ --------- ------------
Roland Lamkin Pension Fund 34,605 34,605 --
Craig Swartz 3,845 3,845 --
Daniel and Judith Druskovich 7,690 7,690 --
Mary Lou Henry 3,845 3,845 --
Brian Getty 7,690 7,690 --
Norm Brown 3,845 3,845 --
Terry Crouse 19,224 19,224 --
Dennis Crouse 19,224 19,224 --
Nidan Corporation 2,500,000 2,500,000 --
Stephen Williams (6) 300,000 300,000 --
</TABLE>
(1) Mr. Salmon is the Chairman of the Board of Directors and
has held numerous executive officer positions with the Company
over the past five years.
(2) Mr. Kowalczyk is the Company's President, Chief Executive
Officer and a Director since July 1997.
(3) Mr. Gibbons is the Company's Executive Vice President
since July 1997.
(4) Mr. Sweet and Mr. Snapp are Directors of the Company since
April 1997 and May 1997, respectively.
(5) The principal of Managerial Advisory Services, Inc. is a
former employee of the Company and served as the Assistant
Secretary of the Company until June 1997.
(6) Mr. Williams is a former President and Chief Executive
Office of the Company.
The following table sets forth the names of Selling Security Holders
offering for resale an aggregate of 5,714,999 Shares issuable upon
exercise of outstanding Warrants and Options, the number of Shares offered
by each named Security Holder upon exercise of Warrants and Options and
the number of Shares which are owned before and after the offering by each
named Security Holder.
[Remainder of page left blank]
<PAGE> 43
<TABLE>
Number of Number of Number
shares owned shares of shares
prior to the being owned after
offering(4) offered the offering
---------- --------- -------------
<S> <C> <C> <C>
Edwin B. Salmon (1) 500,000 500,000 --
James Kowalczyk (2) 500,000 500,000 --
Larry R. Snapp (3) 100,000 100,000 --
Richard A. Sweet (3) 100,000 100,000 --
Ronald Tevan 100,000 100,000 --
Donald T. McAllister 37,500 37,500 --
Telcom United North 112,500 112,500 --
David Fink 12,500 12,500 --
Leornarn D'innocenco 12,500 12,500 --
Dean Colantino 12,500 12,500 --
Donald Dugan 12,500 12,500 --
Comgi Retirement Trust 6,250 6,250 --
John and Sharon Lang 6,250 6,250 --
Dale Higgins 6,250 6,250 --
Thomas Jannarone 6,250 6,250 --
Mark and Virginia Blanchard 250,000 250,000 --
Mark and Virginia Blanchard 250,000 250,000 --
Henry Rodiguiez 1,000,000 1,000,000 --
Ronald Soderling 65,000 65,000 --
Edward and Martha Cary 416,666 416,666 --
Suzanne Kuhns 208,333 208,333 --
Nidan Corporation 1,000,000 1,000,000 --
Nidan Corporation 1,000,000 1,000,000 --
</TABLE>
(1) Mr. Salmon is the Chairman of the Board of Directors and
has held numerous executive officer positions with the Company
over the past five years.
(2) Mr. Kowalczyk is the Company's President, Chief Executive
Officer and a Director since July 1997.
(3) Mr. Sweet and Mr. Snapp are Directors of the Company since
April 1997 and May 1997, respectively.
(4) Assumes exercise of Warrants and Options.
The following table sets forth, at each exercise price level, the number
of Shares issuable and registered hereby for resale by the Selling
Security Holders named in the above table upon exercise of outstanding
Warrants and Options and the expiration dates of the Warrants and
Options.
<TABLE>
Number of Exercise Date of
shares price expiration
- ---------- -------- ----------
<S> <C> <C>
65,000 $0.10 8/13/99
250,000 $0.10 10/30/99
250,000 $0.10 11/13/99
624,999 $0.10 3/2/00
300,000 $0.10 8/14/02
1,000,000 $0.10 8/15/02
1,000,000 $0.17 11/13/99
1,000,000 $0.20 7/6/00
225,000 $0.20 3/31/03
1,000,000 $0.25 7/6/00
</TABLE>
<PAGE> 44
The following table sets forth the names of Selling Security Holders offering
for resale an aggregate of 1,750,000 Shares issuable upon exercise of Warrants
to be issued upon conversion of outstanding Debentures, the number of Shares
offered by each named Security Holder upon exercise of Warrants and the number
of Shares which are owned before and after the offering by each named Security
Holder.
<TABLE>
Number of Number of
shares owned Number of shares owned
prior to shares after the
Name offering(1) offered the offering
- ---- ------------ --------- ------------
<S> <C> <C> <C>
Jon Botula 1,000,000 1,000,000 --
Rose Stromeyer Basso 750,000 750,000 --
</TABLE>
(1) Assumes conversion of Debentures and exercise of Warrants
and Options.
The following table sets forth, at each exercise price level, the number of
Shares issuable and registered hereby for resale by the Selling Security
Holders named in the above table upon exercise of Warrants to be issued
upon conversion of Debentures. The warrants, when issued, will have an
expiration date of two years.
Number of Exercise
Shares Price
- --------- -------
1,000,000 $0.050
250,000 $0.125
250,000 $0.150
250,000 $0.200
The following table sets forth the names of Selling Security Holders
offering for resale an aggregate of 3,837,014 Shares issuable upon
conversion of Debentures, the number of Shares offered by each named
Selling Security Holder upon conversion of Debentures, the number of Shares
which are owned before and after the offering by each named Security Holder
and the principal amount of the Debentures.
<TABLE>
Number of Number of
shares owned Number of shares owned Principal
prior to shares after the amount of
Name offering(1) offered the offering Debentures
- ---- --------- --------- ------------ ----------
<S> <C> <C> <C> <C>
Energy Electric, Inc. 676,439 676,439 -- $ 30,000
Rodriguez Family Partners 1,054,575 1,054,575 -- $ 100,000
Jon Botula 1,120,000 1,120,000 -- $ 50,000
US Loans, Inc. 236,000 236,000 -- $ 10,000
Rose Stromeyer Bosso 750,000 750,000 -- $ 50,000
</TABLE>
(1) Assumes conversion of Debentures.
<PAGE> 45
The following table sets forth the names of Selling Security Holders
offering for resale an aggregate of 250,000 Shares upon conversion of
outstanding Class A Preferred Stock, the number of Shares offered by each
named Security Holder upon conversion of the Class A Preferred Stock and the
number of shares which are owned before and after the offering by each named
Security Holder.
<TABLE>
Number of Number of
shares owned Number of shares owned
prior to shares after the
Name offering offered the offering
- ---- --------- --------- ------------
<S> <C> <C> <C>
Ernest McKay and Paul D.H. LaBarre 250,000 250,000 --
</TABLE>
The Shares included in this Prospectus for resale by Selling Security Holders
were acquired by or are issuable to the Selling Security Holders as a result
of private transactions between the Company and the Selling Security Holder.
The Company also has 23,334,525 shares of issued and outstanding common stock
which is eligible for resale under Rule 144.
The Company believes that the Selling Security Holders have an interest in
selling up to all of the Shares covered by this Prospectus. The decision
whether on not to sell any Shares is within the discretion of each Selling
Security Holder. There is no assurance as to whether or when any Selling
Security Holder will sell any Shares. The Company believes that the decision
by any Selling Security Holder to sell any Shares will be based upon the
price of the Shares on the OTC Bulletin Board.
The Shares covered by this Prospectus must be sold by the Selling Security
Holders through a registered securities broker-dealer into the public
securities market, if sold pursuant to this Prospectus. The Company will not
receive any proceeds from the sales of those Shares. The Company is paying
the cost of the registration. Each of the Selling Security Holders is
expected to make his or her own decision as to whether or not, when and at
what price to sell his or her Shares. Each Selling Security Holder will need
to make arrangements with a securities broker-dealer of his or her own choice
for the sale of his or her Shares. The Company and, to the Company's
knowledge, thr Company nor the Selling Security Holders have made any
arrangement with a security broker/dealer for the sale of the Shares in the
public securities market. Some of the Selling Security Holders, however, have
deposited their Shares into their personal accounts at the securities
brokerage firms with which they normally do business.
Pursuant to the provisions under the Securities Exchange Act of 1934, as
amended, ("Exchange Act") and the rules and regulations thereunder, any
person engaged in a distribution of the Shares offered by this Prospectus may
not simultaneously engage in market making activities with respect to the
Shares during the applicable "cooling off" period prior to the commencement
of such distribution. In addition, and without limiting the foregoing, the
Selling Stockholders will be subject to applicable provisions of the Exchange
Act and the rules and regulations thereunder including, without limitation,
Regulation M, which provisions may limit the timing of purchases and sales of
Shares by the Selling Stockholders.
Any Selling Stockholder or any affiliate of a Selling Stockholder or any
Selling Stockholders who are acting in concert may violate Regulation M
promulgated by the U.S. Securities and Exchange Commission pursuant to the
Securities Exchange of Act of 1934, as amended, in the event any such person,
directly or indirectly, places a bid to purchase, purchases, or attempts to
induce another person to bid for or purchase shares of the Common Stock in
<PAGE> 46
the public market before the time such Selling Stockholder or all the Selling
Stockholders who are acting in concert, as the case may be, have sold all of
their shares of Common Stock which are covered by this Prospectus.
Accordingly, no Selling Stockholder and no affiliate of a Selling Stockholder
and no Selling Stockholders who are acting in concert should place bids for
the purchase of, purchase or attempts to induce another person to bid for or
purchase shares of the Common Stock in the public market for the Common
Stock, in the event a public market develops, until such person has sold all
of his shares covered by this Prospectus. Any person who, directly or
indirectly, bids for or effects any purchase of the Common stock for the
purpose of pegging, fixing or maintaining the price of the Common Stock
(known as "stabilizing"), which bid or purchase does not comply with
Regulation M, will be in violation of the regulation. Furthermore, no
stabilizing is permitted at a price that the person stabilizing knows or has
reason to know does not comply with Regulation M or which is the result of
activity that is fraudulent, manipulative, or deceptive under the federal
securities laws and regulations.
MARKET PRICE OF AND DIVIDENDS ON COMMON STOCK AND RELATED SHAREHOLDER
MATTERS.
The Company's common stock is quoted under the stock symbol "SCMI" on the OTC
Bulletin Board and the over-the-counter market. The following table sets
forth the approximate high and low bid quotations for the Company's Common
Stock for each quarter during the last two years. These bid quotations are
inter-dealer prices without retail markup, mark-down or commission, and may
not represent actual transactions.
<TABLE>
Quarter ended High bid Low bid
- ------------- -------- -------
<S> <C> <C>
December 31, 1996 $ 5.875 $ 4.25
March 31, 1997 $ 1.50 $ 1.4375
June 30, 1997 $ 0.3125 $ 0.28125
September 30, 1997 $ 0.40625 $ 0.1875
December 31, 1997 $ 0.34375 $ 0.1875
March 31, 1998 $ 0.5625 $ 0.13
June 30, 1998 $ 0.33 $ 0.09
September 30, 1998 $ 0.14 $ 0.02
</TABLE>
The high and low bid quotations for the Company's common stock on September
30, 1998 were $.046 and $.044 per share, respectively. As of the date
hereof, there is no market for the Company's outstanding warrants, options
or debentures and a market is not expected to develop.
The Company has not paid any dividends on its common stock from the date of
its incorporation. There are no restrictions on the declaration or payment
of dividends or any provisions which restrict dividends. The payment by
the Company of dividends in the future rests within the discretion of the
Company's Board of Directors and will depend, among other things, upon the
Company's earnings, its capital requirements, its financial condition and
other relevant factors.
As of September 30, 1998, Company had approximately 565 registered owners
of its common stock.
<PAGE> 47
LEGAL MATTERS AND INTEREST OF COUNSEL
The Company will rely on an opinion given by Jackson L. Morris, Esq.,
Tampa, Florida, as to the legality of the Shares. Mr. Morris is the holder
of 200,000 Shares of the Company's Common Stock and warrants to purchase
12,500 shares at $2.00 per share.
EXPERTS
The audited financial statements of the Company as of December 31, 1997 and
for the year then ended have been audited by Moore Stephens Lovelace, P.A.,
independent certified public accountants, as stated in their opinion and
have been included in reliance upon authority of that firm as experts in
accounting and auditing.
The audited financial statements of the Company as of December 31, 1996 and
for each of the two years in the period then ended included in this
Prospectus have been audited by Ernst & Young, LLP, independent certified
public accountants, as stated in their opinion, and have been included in
reliance upon the authority of that firm as experts in accounting and
auditing.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON FINANCIAL DISCLOSURE.
Effective February 20, 1998, Ernst & Young LLP resigned as independent
auditor of the Registrant. The reports of Ernst & Young LLP on the
Registrant's consolidated financial statements for the past two fiscal
years did not contain an adverse opinion or a disclaimer of opinion and
were not qualified or modified as to audit scope or accounting principles.
The reports of Ernst & Young LLP included an explanatory paragraph
expressing substantial doubt about the Registrant's ability to continue as
a going concern.
In connection with the audits of the Registrant's consolidated financial
statements for each of the two years ended December 31, 1996, and in the
subsequent interim periods, there were no disagreements with Ernst & Young
LLP on any matters of accounting principles or practices, financial
statement disclosure, or auditing scope and procedures which, if not
resolved to the satisfaction of Ernst & Young LLP, would have caused Ernst
& Young LLP to make reference to the matter in their report.
Ernst & Young LLP has furnished a letter addressed to the Commission
stating that it agrees with the statements contained herein. A copy of that
letter, dated February 25, 1998, is filed as an exhibit to the Company's
Form 8-K dated February 25, 1998.
Effective March 4, 1998, the Registrant engaged Moore Stephens Lovelace,
P.L. to audit its 1997 consolidated financial statements. The decision to
cease the registrant-auditor relationship between Registrant and Ernst &
Young LLP and the engagement of Moore Stephens Lovelace, P.A. was not
recommended or approved by the Registrant's Board of Directors.
<PAGE> 48
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report on the Consolidated Financial
Statements for the year ended December 31, 1997 49
Independent Auditors' Report on the Consolidated Financial
Statements for the year ended December 31, 1996 and 1995 50
Consolidated Balance Sheets as of December 31, 1997 and 1996
and as of June 30, 1998 (unaudited) 51
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 1997 and for the
six months ended June 30, 1998 and 1997 (unaudited) 53
Consolidated Statements of Changes in Stockholders' Deficit for
each of the three years in the period ended December 31, 1997
and for the six months ended June 30, 1998 (unaudited) 55
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1997 and for the
six months ended June 30, 1998 and 1997 (unaudited) 57
Notes to Consolidated Financial Statements 58
<PAGE> 49
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Systems Communications, Inc.
Clearwater, Florida
We have audited the consolidated balance sheet of Systems Communications,
Inc. and Subsidiaries as of December 31, 1997, and the related consolidated
statement of operations, changes in stockholders' deficit and cash flows
for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Systems Communications, Inc. and Subsidiaries at December 31,
1997, and the consolidated results of their operations and their cash flows
for the year ended December 31, 1997, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that Systems Communications, Inc. and Subsidiaries will continue
as a going concern. As more fully described in Note 3, the Company has
incurred operating losses during each of the years in the three-year period
ended December 31, 1997, and has a working capital deficiency and
stockholders' equity deficiency at December 31, 1997. In addition, the
Company has not complied with certain repayment terms of loan agreements
and currently has no source of operating revenues. These conditions raise
substantial doubt about the Company's ability to continue as a going
concern. The consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability
and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
/s/ Moore Stephens Lovelace, P.A.
Orlando, Florida
May 8, 1998
<PAGE> 50
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Systems Communications, Inc.
We have audited the accompanying consolidated balance sheet of Systems
Communications, Inc. and Subsidiaries as of December 31, 1996 and the
related consolidated statements of operations, stockholders' equity, and
cash flows for each of the two years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Systems
Communications, Inc. and Subsidiaries at December 31, 1996, and the
consolidated results of their operations and their cash flows for each of
the two years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that Systems Communications, Inc. and Subsidiaries will continue
as a going concern. As more fully described in Note 3, the Company has
incurred operating losses during each of the years in the two-year period
ended December 31, 1996, and has a working capital deficiency and
stockholders' equity deficiency at December 31, 1996. In addition, the
Company has not complied with certain repayment terms of loan agreements.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
/s/ Ernst & Young LLP
Tampa, Florida
December 24, 1997
<PAGE> 51
<TABLE>
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------- JUNE 30,
1997 1996 1998
--------- --------- --------
ASSETS (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 65,556 $ 61,039 $ 12,940
Accounts receivable, less allowance for
doubtful accounts of $28,074 in 1996 -- 802,079 --
Notes and accounts receivable from officers
and employees 60,908 102,000 4,569
Other current assets 130,419 438,763 145,086
--------- --------- --------
Total current assets 256,883 1,403,881 162,595
--------- --------- --------
Furniture and equipment 130,162 1,812,867 132,982
Less accumulated depreciation (56,774) (587,598) (67,428)
--------- --------- --------
Net furniture and equipment 73,388 1,225,269 65,554
Note receivable from the sale of assets, less
allowance of $500,000 in 1997 -- -- --
Deferred compensation 52,941 662,199 --
Intangible assets, net of accumulated
amortization of $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 4,982 173,667 4,982
--------- --------- --------
Total assets $ 388,194 $ 5,847,300 $ 233,131
========= ========= ========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 52
<TABLE>
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
DECEMBER 31,
----------------------- JUNE 30,
1997 1996 1998
---------- ---------- ----------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' DEFICIT
<S> <C> <C> <C>
Current liabilities:
Borrowings under lines of credit $ -- $ 182,651 $ --
Current portion of notes and debentures payable 3,361,700 3,180,758 2,785,928
Current portion of obligations under
capital lease -- 242,477 --
Accounts payable 535,516 1,452,192 507,808
Accrued compensation and employee benefits 1,176,578 1,528,153 758,910
Accrued interest 497,514 286,312 470,786
Liabilities and accruals for claims,
assessments and other losses 1,129,823 -- 1,084,012
Other current liabilities 27,062 595,363 --
Deferred revenue -- 440,232 --
---------- ---------- ----------
Total current liabilities 6,728,193 7,908,138 5,607,444
---------- ---------- ----------
Obligations under capital lease, less
current portion -- 458,654 --
Deferred liabilities under employment agreements 310,794 676,261 --
Other liabilities -- 72,573 --
---------- ---------- ----------
Total liabilities 7,038,987 9,115,626 5,607,444
---------- ---------- ----------
Common stock subject to rescission 674,124 709,124 674,124
---------- ---------- ----------
Common stock to be issued -- 2,000,000 --
---------- ---------- ----------
Commitments and Contingencies
Stockholders' deficit:
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,
4,550,000 shares in 1996 and 100,000
shares in 1998 1,617,260 2,491,745 54,764
Common stock - $.001 par value; authorized
50,000,000 shares, issued and outstanding
12,083,646 shares in 1997, 10,626,874 shares
in 1996 and 23,881,873 shares in 1998 12,084 10,627 23,882
Additional paid in capital 16,866,883 16,823,526 19,592,281
Accumulated deficit (25,821,144) (25,303,978) (25,719,364)
---------- ---------- ----------
Total stockholders' deficit (7,324,917) (5,977,450) (6,048,437)
---------- ---------- ----------
Total liabilities and stockholders' deficit $ 388,194 $ 5,847,300 $ 233,131
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 53
<TABLE>
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended
Year Ended December 31, June 30,
--------------------------------------- -------------------
1997 1996 1995 1998 1997
---------- ---------- ----------- ------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues $ 1,498,533 $ 2,832,123 $ 91,106 $ -- $ 1,467,344
---------- ---------- ----------- ------- ---------
Costs and expenses:
Cost of revenues 109,563 827,063 -- -- 90,849
Selling and administrative expenses 3,027,384 6,322,627 1,887,275 752,861 2,658,089
Impairment and other losses 1,898,953 14,233,953 -- -- 625,728
Depreciation and amortization 497,377 1,459,436 148,192 10,356 442,396
---------- ---------- --------- ------- ---------
Total operating costs and expenses 5,533,277 22,843,079 2,035,467 763,217 3,817,062
---------- ---------- --------- ------- ---------
(4,034,744) (20,010,956) (1,944,361) (763,217) (2,349,718)
Gain from sale of license agreement 2,695,214 -- -- -- 2,695,214
Gain from rescission of business
acquisition 259,352 -- -- -- 281,421
Interest income 4,070 8,183 3,777 892 3,044
Interest expense (587,884) (381,975) (63,644) (136,855) (248,529)
Other income (expense), net (125,318) (103,891) -- 408,725 (114,951)
---------- ---------- --------- ------- ---------
Income (loss) from continuing
operations before income taxes (1,789,310) (20,488,639) (2,004,228) (490,455) 266,481
Income tax benefit (483,000) (2,554,150) ( 15,124) -- --
---------- ---------- --------- ------- ---------
Income (loss) from continuing
operations (1,306,310) (17,934,489) (1,989,104) (490,455) 266,481
Discontinued operations:
Income (loss) from operations of
discontinued telecommunications
businesses, less income tax expense
(benefit) of $240,000, ($649,044)
($241,577), $-0-, and ($29,000),
respectively 391,752 ( 1,322,179) (3,818,921) 305,647 (47,381)
Gain from disposition of
telecommunication businesses, less
income tax expense of $243,000, $-0-,
$-0-, $-0- and $29,000, respectively 397,392 -- -- -- 610,392
---------- ---------- --------- ------- ---------
Income (loss) before extraordinary
item (517,166) (19,256,668) (5,808,025) (184,808) 829,492
Extraordinary item - Gain from
extinguisment of debt -- -- -- 286,588 --
---------- ---------- --------- ------- ---------
Net income (loss) $ (517,166) $(19,256,668) $(5,808,025) $ 101,780 $ 829,492
========== ========== ========= ======= =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 54
<TABLE>
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
Six Months Ended
Year Ended December 31, June 30,
---------------------------------- -----------------------
1997 1996 1995 1998 1997
---------- --------- --------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Basic earnings per share:
Income (loss) from continuing
operations $ (0.12) $ (2.15) $ (0.58) $ (0.04) $ 0.02
Income (loss) from operations of
discontinued telecommunications
businesses 0.03 (0.16) (1.23) 0.02 --
Gain from disposition of
telecommunications businesses 0.04 -- -- -- 0.06
Extraordinary item - Gain from
extinguishment of debt -- -- -- 0.02 --
---------- --------- --------- ---------- ----------
Net loss $ (.05) $ (2.31) $ (1.81) $ -- $ 0.08
========== ========= ========= ========== ----------
Weighted average number of
common shares outstanding 10,802,103 8,349,459 3,201,991 13,810,977 10,936,609
========== ========= ========= ========== ==========
Diluted earnings per share:
Income (loss) from continuing
operations $ (0.12) $ (2.15) $ (0.58) $ (0.04) $ 0.02
Income (loss) from operations of
discontinued telecommunications
businesses 0.03 (0.16) (1.23) 0.02 --
Gain from disposition of
telecommunications businesses 0.04 -- -- -- 0.05
Extraordinary item - Gain from
extinguishment of debt -- -- -- 0.02 --
---------- --------- --------- ---------- ----------
Net loss $ (.05) $ (2.31) $ (1.81) $ -- $ 0.07
========== ========= ========= ========== ==========
Weighted average number of
common shares outstanding,
assuming dilution 10,802,103 8,349,459 3,201,991 13,810,977 12,243,826
========== ========= ========= ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 55
<TABLE>
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
CLASS A CLASS B
PREFERRED PREFERRED COMMON STOCK
------------------ -------------------- ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------- --------- --------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 1,700,000 $ -- -- $ -- 2,797,485 $ 2,798
Issuance of common stock and warrants
for cash -- -- -- -- 1,477,874 1,478
Issuance of stock as compensation 1,525,000 20,625 -- -- 1,053,090 1,053
Issuance of stock and warrants in
consideration for extension of
related party indebtedness -- -- 140,000 236,600 -- --
Issuance of stock and warrants in
connection with business acquisitions 1,575,000 157,500 4,550,000 2,491,745 2,339,765 2,339
Reclassification of common stock
subject to rescission -- -- -- -- (242,416) (242)
Net loss -- -- -- -- -- --
--------- ------- --------- --------- ---------- ------
Balance at December 31, 1995 4,800,000 178,125 4,690,000 2,728,345 7,425,798 7,426
Issuance of common stock and warrants
for cash -- -- -- -- 413,688 414
Conversion of preferred stock (4,408,000)(177,495) (140,000) (236,600) 2,254,910 2,255
Issuance of common stock as
compensation -- -- -- -- 41,754 42
Issuance of common stock in connection
with business acquisitions -- -- -- -- 283,172 283
Issuance of stock for debt -- -- -- -- 207,552 207
Rescission of business acquisitions (200,000) -- -- -- -- --
Net loss -- -- -- -- -- --
--------- ------- --------- --------- ---------- ------
Balance at December 31, 1996 192,000 630 4,550,000 2,491,745 10,626,874 10,627
Issuance of common stock and warrants
for cash -- -- -- -- 205,556 206
Conversion of preferred stock (192,000) (630)(1,596,875) (874,485) 676,682 677
Issuance of common stock as
compensation -- -- -- -- 1,000,857 1,001
Issuance of stock for debt -- -- -- -- 577,421 577
Rescission of business acquisitions -- -- -- -- (994,247) (994)
Repayment of loan to officer -- -- -- -- (9,497) (10)
Net loss -- -- -- -- -- --
--------- ------- --------- --------- ---------- -----
Balance at December 31, 1997 -- -- 2,953,125 1,617,260 12,083,646 12,084
Issuance of common stock for cash -- -- -- -- 358,333 358
Conversion of preferred stock -- -- (2,853,125)(1,562,496) 701,783 702
Issuance of common stock as
compensation -- -- -- -- 4,655,821 4,656
Issuance of stock and warrants for
debt and in settlement of other
obligations -- -- -- -- 6,579,108 6,579
Cancellation of common stock in
settlement agreements and disposition
of assets -- -- -- -- (496,818) (497)
Net income -- -- -- -- -- --
--------- ------- --------- --------- ---------- ------
Balance at June 30, 1998 (Unaudited) -- $ -- 100,000 $ 54,764 23,881,873 $23,882
========= ======= ========= ========= ========== ======
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 56
<TABLE>
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT (Continued)
Additional
Paid-In Accumulated
Capital Deficit Total
---------- ---------- ----------
<S> <C> <C> <C>
Balance at December 31, 1994 $ 286,852 $ (239,285) $ 50,365
Issuance of common stock and warrants
for cash 4,109,409 -- 4,110,887
Issuance of stock as compensation 430,095 -- 451,773
Issuance of stock and warrants in
consideration for extension of
related party indebtedness 105,000 -- 341,600
Issuance of stock and warrants in
connection with business acquisitions 7,731,935 -- 10,383,519
Reclassification of common stock
subject to rescission (789,382) -- (789,624)
Net loss -- (5,808,025) (5,808,025)
---------- ---------- ----------
Balance at December 31, 1995 11,873,909 (6,047,310) 8,740,495
Issuance of common stock and warrants
for cash 2,186,859 -- 2,187,273
Conversion of preferred stock 411,840 -- --
Issuance of common stock as
compensation 260,151 -- 260,193
Issuance of common stock in connection
with business acquisitions 1,891,824 -- 1,892,107
Issuance of stock for debt 198,943 -- 199,150
Rescission of business acquisitions -- -- --
Net loss -- (19,256,668) (19,256,668)
---------- ---------- ----------
Balance at December 31, 1996 16,823,526 (25,303,978) ( 5,977,450)
Issuance of common stock and warrants
for cash 231,294 -- 231,500
Conversion of preferred stock 874,438 -- --
Issuance of common stock as
compensation 383,234 -- 384,235
Issuance of stock for debt 715,741 -- 716,318
Rescission of business acquisitions (2,105,005) -- (2,105,999)
Repayment of loan to officer (56,345) -- (56,355)
Net loss -- (517,166) (517,166)
---------- ---------- ----------
Balance at December 31, 1997 16,866,883 (25,821,144) (7,324,917)
Issuance of common stock for cash 39,642 -- 40,000
Conversion of preferred stock 1,561,794 -- --
Issuance of common stock as
compensation 488,999 -- 493,655
Issuance of stock and warrants for
debt and in settlement of other
obligations 634,466 -- 641,045
Cancellation of common stock in
settlement agreements and disposition
of assets 497 -- --
Net income -- 101,780 101,780
---------- ---------- ---------
Balance at June 30, 1998 (Unaudited) $ 19,592,281 $ (25,719,364) $(6,048,437)
========== ========== =========
See Notes to Consolidated Financial Statements
<PAGE> 57
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
Year Ended December 31, June 30,
------------------------------------- --------------------
1997 1996 1995 1998 1997
---------- ---------- --------- ------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (517,166) $(19,256,668) $(5,808,025) $ 101,780 $ 829,492
Adjustments to reconcile net income (loss)
to net cash used in operations:
Depreciation and amortization 544,839 1,750,727 459,327 10,356 442,396
Amortization of deferred compensation, net (125,503) (16,552) 61,819 (93,878) 60,645
Gain from settlement of employment
agreement -- -- -- (380,029) --
Provision for bad debts 39,816 522,687 181,753 -- 39,816
Provision for inventory obsolescence -- -- 145,776 -- --
Stock and warrants issued for compensation
and as consideration for extension of debt 384,235 260,193 793,373 22,788 262,173
Deferred income taxes -- (3,203,194) (256,699) -- 29,000
Impairment losses 1,898,953 14,428,854 2,758,779 -- 625,728
Gain from sale of license agreement (2,695,214) -- -- -- (2,695,214)
Gain from rescission of business acquistion (259,352) -- -- (281,421)
Gain from disposition of telecommunications
businesses (640,392) -- -- -- (640,392)
Gain from extinguishment of debt -- -- -- (286,588) --
Recovery of note receivable from sale of
assets -- -- -- (305,345) --
Other -- -- -- 298 1,000
Increase (decrease) in cash from change
in operating assets and liabilities:
Accounts receivable 148,912 214,330 317,161 56,426 160,497
Equipment inventories -- 73,211 (80,091) -- --
Deferred expenses -- 498,697 (92,130) -- --
Other assets 52,252 67,037 (42,702) (25,219) 9,179
Accounts payable (484,304) (39,308) (430,448) (25,554) (463,837)
Accrued expenses and other liabilities 401,162 1,060,019 224,948 687,169 255,356
Deferred revenue (109,957) (553,982) 5,937 -- (109,957)
---------- ---------- --------- ------- ---------
Net cash used in operating activities (1,361,719) (4,193,949) (1,761,222) (237,796)(1,475,539)
---------- ---------- --------- ------- ---------
Cash flows from investing activities:
Acquisition of businesses -- (46,854) (1,428,312) -- --
Disposition of businesses 370,844 -- -- -- 370,844
Expenditures for furniture and equipment (7,693) (552,718) (131,744) (2,820) (23'751)
Notes receivable from officers and employees -- (50,000) (52,000) -- --
Other -- -- (64,852) -- ( 27)
---------- ---------- ----------- ------- ---------
Net cash provided by (used in) investing
activities 363,151 (649,572) (1,676,908) (2,820) 347,066
---------- ----------- --------- ------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock 231,500 2,187,273 4,110,887 40,000 229,500
Proceeds from notes and debentures payable 1,568,443 2,422,752 475,349 228,500 1,261,366
Payments on notes payable and capital leases (686,858) (637,596) (262,814) (80,500) (170,425)
Payments on shares subject to rescission (35,000) (80,500) -- -- (35,000)
Proceeds from (payments on) borrowings under
line of credit (75,000) 47,917 (2,100) -- (75,000)
Other -- -- -- -- (8,995)
---------- ---------- --------- ------- ---------
Net cash provided by financing activities 1,003,085 3,939,846 4,321,322 188,000 1,201,446
---------- ---------- --------- ------- ---------
Net increase (decrease) in cash 4,517 (903,675) 883,192 (52,616) 72,973
Cash and cash equivalents at beginning of the
period 61,039 964,714 81,522 65,556 61,039
---------- ---------- --------- ------- ---------
Cash and cash equivalents at end of the
period $ 65,556 $ 61,039 $ 964,714 $ 12,490 $ 134,012
========== ========== ========= ======= =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 58
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 FORMATION OF THE COMPANY AND DESCRIPTION OF BUSINESS
Systems Communications, Inc. (the "Company") was organized as Florida One
Capital Corporation in 1987 and in 1988 made an initial public offering of
its common stock as a blank check company for the purpose of acquiring other
companies. During 1990 and 1991, the Company acquired and divested companies
engaged in the eye glass distsibution and residential building industries
and for a brief period of time, operating under the name of Highland
Healthcare Corporation, was under the control of another publicly-owned
blank check company formed for the purpose of acquiring healthcare related
businesses. During the period from the fall of 1991 to the date of the first
acquisition described below, the Company had no operations or assets and was
dormant. During the period 1994 through 1997, the Company acquired and
disposed of various businesses and currently has one operating subsidiary (
"National Solutions Corporation"). The acquisition and disposition of
businesses during this period are more fully described herein.
In 1994, the Company changed its name from Highland Healthcare Corporation
to Systems Communications, Inc. and, effective August 29, 1994, acquired all
of the outstanding stock of (i) Ameristar Telecommunications, Inc. ("ATI"),
a re-seller of long-distance and pay-per-view services and products,
principally to the hospitality industry, and (ii) Coast Communications, Inc.
("CCI"), whose principal business is the installation and servicing of pay-
per-view equipment. The Company identified ATI as the accounting acquirer
and accounted for the transaction as a purchase business combination.
Effective June 1, 1995, the Company completed the acquisition of all of the
outstanding stock of LCI Communications, Inc. ("LCI"), a re-seller of
telecommunication services, from a Director and executive officer of the
Company (a person designated as a "promoter/shareholder" of the Company).
The net assets acquired were recorded at the promoter/shareholder's
historical cost basis.
Effective June 12, 1995, the Company acquired all of the outstanding stock
of Comstar Network Services, Inc. ("Comstar"), a re-seller of long-distance
telephone services.
Effective July 7, 1995, the Company acquired all of the outstanding stock of
Telcom Network, Inc. ("TNI"), a re-seller of telecommunications services and
products, principally to residential and small business customers. TNI also
audits utility and telecommunications payments and provides cost recovery
services to its customers (large and small businesses and governmental
entities) for a percentage of recovered savings.
Effective October 27, 1995, the Company acquired all of the outstanding
stock of National Solutions, Inc. ("NSC"). The principal business of NSC is
to (i) develop, for commercial use, healthcare management information
systems technology acquired from the U.S. Government pursuant to the Federal
Technology Transfer Act of 1986, as amended, and (ii) sell the benefits from
the use of such technology to large, self-insured companies, insurers, third
party administrators ("TPA's"), health maintenance organizations ("HMO's")
and healthcare plan administrators. To date, the Company's revenues have
been derived primarily from retroactive analysis of claims paid using the
services of subcontractors, with respect to which the Company has received a
percentage of the recovered savings.
<PAGE> 59
Effective March 12, 1996, the Company acquired all of the outstanding stock
of Healthcare Management Technologies ("HMT"). The principal business of HMT
is the development, sale and maintenance of medical management "Windows"
based computer software.
In May 1996, the Company gave notice to the principals of CCI that it was
canceling all of the related acquisition agreements and abandoning the
business of CCI. The abandonment of CCI is subject to an arbitration
proceeding initiated by the former shareholders of CCI (see Notes 4 and 14).
In January 1997, the Company sold substantially all of the operating assets
of TNI. As of that date, the only remaining significant asset of TNI
consisted of the arbitration award in the amount of $1,250,000 granted to
TNI in a binding arbitration proceeding between and among TNI, GE Capital
Communications Services Corporation ("GECCS") and New Enterprise Wholesale
Services, Limited Partnership ("NEWS"). On December 24, 1997, the Company,
GECCS and NEWS entered into a Confidential Settlement Agreement and Mutual
Full and Final Releases (the "Settlement Agreement") regarding the
arbitration award in favor of the Company. Pursuant to the Settlement
Agreement, GECCS\NEWS paid $1,250,000 in full satisfaction of the
arbitration award. Of that amount, the Company received approximately
$750,000, which is net of legal fees. The proceeds from the Settlement
Agreement were used to pay trade and other obligations.
In May 1997, the Company and the former shareholders of ATI entered into a
rescission agreement which provides for the rescission of the Company's
August 1994 acquisition of ATI; and, 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 (See Note 4).
The dispositions of CCI, TNI (which includes the operations of Comstar and
LCI subsequent to the dates of their respective acquisitions) and ATI, all
of which comprised the Company's telecommunications segment, and the
operations of those businesses for all periods presented are reflected as
components of discontinued operations in the accompanying consolidated
statements of operations (See Note 4).
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant inter-company
transactions and balances have been eliminated in consolidation.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Depreciation is provided using
the straight-line method over periods that approximate the assets' useful
lives.
Capitalized lease assets are recorded at the lower of present value of
minimum future lease payments at inception of the lease or the fair value of
the asset and are amortized straight-line over the shorter of the lease term
or estimated useful life of the asset.
<PAGE> 60
INTANGIBLE ASSETS
Intangible assets as of December 31, 1996 consist of the cost of acquired
medical management computer software ($1,500,000) and acquired customer
lists. The useful life assigned to medical computer software was 3 years. As
of December 31, 1996, the unamortized cost of medical computer software was
approximately $1,083,000 and amortization for the year 1996 was
approximately $416,700. In 1997, the cost of medical computer software and
related accumulated amortization were removed from the Company's
consolidated balance sheet as a result of the rescission of the HMT
acquisition agreement. Amortization in 1997 for the period prior to the
rescission of the HMT acquisition agreement was approximately $208,000. The
cost of acquired customer lists ($150,000) was fully amortized at December
31, 1995.
In 1995, the Company recorded $12,400,000 of intangible assets (healthcare
management decision software technology) acquired in connection with its
acquisition of NSC. The estimated useful life of the acquired software
technology was 20 years. The Company wrote-off the unamortized cost of the
software technology acquired in connection with the NSC acquisition, as of
December 31, 1996, due to continued operating losses and the failure of NSC
to successfully market the acquired technology (See Note 5).
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
The Company assesses the recoverability of intangible assets, including
goodwill, if facts and circumstances suggest that the carrying amount of
intangible assets may have been impaired. In making its assessment, the
Company gives consideration to the undiscounted cash flows from the use of
such assets, the estimated fair value of such assets and other factors which
may affect the recoverability of such assets. If such an assessment
indicates that the carrying value of intangible assets may not be
recoverable, the carrying value of intangible assets is reduced.
Excess of cost over the fair value of net assets acquired as of December 31,
1996 consists of goodwill recorded in connection with the acquisition of HMT
and was assigned a useful life of 15 years. In 1997, the excess of cost over
the fair value of net assets acquired associated with the HMT acquisition
and related accumulated amortization were removed from the Company's
consolidated balance sheet as a result of the rescission of the HMT
acquisition agreement (See Note 4).
In 1995, the Company recorded approximately $2,718,000 in goodwill in
connection with its acquisition of NSC. As of December 31, 1996, the Company
wrote-off the unamortized cost of goodwill recorded in connection with the
NSC acquisition, as an impairment loss, due to the failure of NSC to
successfully market the acquired technology (See Note 5).
REVENUE RECOGNITION
The Company recognizes revenue in the period in which the service is
provided or, in the case of software sales, at the time the software is
delivered. Revenues related to audit or retroactive claims review services,
which are based on a percentage of the savings, are recognized at the time
of third party approval of the reimbursable amounts.
INCOME TAXES
The Company has applied, for all years presented, the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," which requires an asset and liability approach in accounting for
income taxes.
<PAGE> 61
EARNINGS PER SHARE
In 1997, the Company adopted Statement of Financial Accounting Standards No.
128 "Earnings Per Share" ("SFAS No. 128"), which requires the presentation
of both basic and diluted earning per share. Basic earnings per share is
computed based on the weighted average number of common shares outstanding
during each year. Diluted earnings per share is computed based on the sum of
the weighted average number of common shares outstanding plus the additional
number of shares that would have been outstanding if all potentially
dilutive common shares, pursuant to stock purchase warrants and options,
convertible preferred stock and convertible notes and debentures, had been
issued. The adoption of SFAS No. 128 did not have any impact on previously
reported earnings per share.
Basic and diluted earnings per share for each of the three years ended in the
period ending December 31, 1997 and for the six months ended June 30, 1998 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.
<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>
STATEMENT OF CASH FLOWS
The operating, investing and financing activities included in the
consolidated statements of cash flows are presented net of the assets and
liabilities acquired in connection with business combinations and the
assets and liabilities disposed of in connection with the rescission of the
ATI and HMT acquisition agreements. As permitted by Statement of Financial
Accounting Standards No. 95, cash flows from operations of discontinued
telecommunications businesses are not separately presented.
<PAGE> 62
LONG-LIVED ASSETS
The Company has applied, for all periods presented, the provisions of
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed
Of", which requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. Statement No. 121 also addresses the
accounting for long-lived assets that are expected to be disposed of (see
Note 5).
IMPACT OF OTHER RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income
("SFAS NO. 130"), which is effective for fiscal years beginning after
December 15, 1997. SFAS No. 130 establishes standards for the reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. Although SFAS No. 130 only impacts
display as opposed to actual amounts recorded, it represents a change in
financial reporting. The adoption of this statement will not have an impact
on the Company's reported earnings.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS No. 131"), which is effective for
years beginning after December 15, 1997. SFAS No. 131 establishes standards
for the way public enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers. The adoption of this
statement will not have a significant effect on the Company's reported
segments and related disclosures.
USE OF ESTIMATES
The process of preparing financial statements requires the use of estimates
and assumptions regarding certain types of assets, liabilities, revenues
and expenses. Such estimates primarily relate to unsettled transactions and
events as of the date of the financial statements. Accordingly, upon
settlement, actual results may differ from estimated amounts.
RECLASSIFICATIONS
Certain amounts in the 1996 and 1995 consolidated financial statements have
been reclassified to conform to the 1997 presentation.
INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The unaudited consolidated balance sheet at June 30, 1998, and the
unaudited consolidated statements of operations, changes in stockholders'
deficit and 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. Note disclosures related to
the interim periods are also unaudited. Accordingly, the financial
statements do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, alladjustments, 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.
<PAGE> 63
NOTE 3 GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and liquidation of
liabilities in the ordinary course of business. The Company incurred net
losses (including losses from operations of discontinued businesses) of
$517,166, $19,256,668 and $5,808,025 in 1997, 1996 and 1995, respectively,
and used approximately $1,362,000, $4,194,000 and $1,761,000, respectively,
of cash in operations. The Company has a net working capital deficiency of
approximately $6.5 million and a deficiency in assets of approximately $7.3
million at December 31, 1997 and is currently in default of certain of its
obligations to trade and other creditors (see Notes 7 and 14).
Additionally, as discussed in Note 14, the Company is required to offer
purchasers of the Company's common stock in certain jurisdictions the right
to rescind their stock purchase transactions. Pursuant to a consent order
from the State of Michigan, the Company is required to make a rescission
offer to Michigan purchasers of the Company's common stock, unless such
purchasers are afforded an opportunity to resell their shares in the public
market pursuant to an effective registration statement at prices higher
than the cost of such shares to the Michigan purchasers. The Company has
not been be able to satisfy the requirements of the consent order. It is
uncertain whether or not the failure by the Company to satisfy the
requirements of the consent order will have a material adverse impact on
the accompanying consolidated financial statements (See Note 14).
The Company is attempting to raise additional equity and debt financing to
support its business operations but, there is no assurance that sufficient
amounts of equity or debt financing will be available to the Company. As of
December 31, 1997, the Company had no financing facilities available for
working capital or for other purposes.
Based on the foregoing factors, it is uncertain whether or not the Company
can generate adequate cash flows from operations, or from financing
transactions, to meet its obligations as they become due. In that event,
the Company would be required to seek other alternatives, including sale,
merger or discontinuance of operations. The consolidated financial
statements do not included any adjustments that might result from the
outcome of this uncertainty.
NOTE 4 ACQUISITIONS AND DISPOSITIONS OF BUSINESSES
On August 29, 1994, the Company acquired, in two separate transactions, all
of the outstanding stock of ATI and CCI in exchange for an aggregate of
1,700,000 shares of the Company's Class A convertible preferred stock and
an aggregate of $550,000 principal amount of notes payable. Of the
preferred stock issued in connection with these acquisitions, 1,500,000
shares were issued to the former shareholders of ATI and 200,000 shares
were issued to the former shareholders of CCI. Of the notes issued in
connection with these acquisitions, $300,000 were issued to the former
shareholders of CCI and $250,000 were issued to the former shareholders of
ATI. Each share of preferred stock issued in connection with these
acquisitions is convertible into one-half share of the Company's common
stock at the election of the holder at any time prior to a public offering
of the Company's common stock and are automatically converted at the time
of such public offering. The shares of Class A convertible preferred stock
<PAGE> 64
issued to the former shareholders of ATI were converted into 750,000 shares
of common stock in August 1996. The shares of Class A preferred stock
issued to the former shareholders of CCI are subject to an arbitration
proceeding between the Company and the former shareholders of CCI (See Note
14). The $550,000 of acquisition notes payable bear interest at the rate of
6% per annum and were originally due within 90 days of the date of such
acquisitions. Such notes have been extended from time to time and are due
upon completion of a public offering of the Company's common stock. The
$300,000 of acquisition notes payable to the former shareholders of CCI are
subject to an arbitration proceeding between the Company and the former
shareholders of CCI (See Note 14). The Company identified ATI as the
accounting acquirer and accounted for the acquisition of ATI and CCI as a
purchase business combination. No goodwill was recorded in connection with
these business acquisitions.
In June 1995, the Company completed the acquisition of all of the
outstanding stock of LCI from a Director and executive officer of the
Company (a person designated as a promoter/shareholder of the Company) in
exchange for 1,075,000 shares of the Company's Class A preferred stock. The
net assets acquired were recorded at the promoter/shareholder's historical
cost. The cost basis of the promoter/shareholder was de minimis.
In June 1995, the Company acquired all of the outstanding stock of Comstar
in exchange for 200,000 shares of the Company's common stock, valued at
$126,000,and 500,000 shares of its Class A convertible preferred stock,
valued at $157,500. The total purchase price was $283,500. Each share of
preferred stock issued in connection with this acquisition is convertible
into one-half share of the Company's common stock at the election of the
holder at any time prior to a public offering of the Company's common stock
and are automatically converted at the time of such public offering. The
shares of Class A preferred stock issued to the former shareholder(s) of
Comstar were converted into 250,000 shares of common stock in October 1996.
The excess of the purchase price over the fair value of net assets acquired
($273,250) was allocated to goodwill and assigned a useful life of 5 years.
The unamortized cost of goodwill recorded in connection with the
acquisition of Comstar was written off as an impairment loss in 1996 with
no associated income tax benefit (see Note 5). This impairment loss is
included in the loss from operations of discontinued telecommunications
businesses for the year ended December 31, 1996.
In July 1995, the Company acquired all of the outstanding stock of TNI in
exchange for 4,550,000 shares of the Company's Class B convertible
preferred stock, valued at $2,492,000, $450,000 of 10% convertible
debentures and $50,000 in cash. Holders of the convertible debentures are
also entitled to receive an aggregate of 225,000 stock purchase warrants,
valued and recorded at $141,750, exercisable at any time prior to a public
offering of the Company's common stock for an exercise price of $1.50 per
share. Each share of preferred stock issued in connection with this
acquisition is convertible into approximately .36 shares of the Company's
common stock at the election of the holder at any time prior to a public
offering of the Company's common stock and are automatically converted at
the time of such public offering. The 10% convertible debentures issued in
connection with the acquisition, plus accrued interest, are due at the time
of a public offering of the Company's common stock and are convertible, at
the election of the holder, into the Company's common stock at the public
offering price in such public offering. The total purchase price for TNI
was $3,138,195. The excess of the purchase price over the fair value of the
net assets acquired was $2,943,401. The unamortized cost of goodwill
recorded in connection with the TNI acquisition was written off as an
impairment loss in 1995 with no associated income tax benefit (see Note 5).
This impairment loss is included in the loss from operations of
<PAGE> 65
discontinued telecommunications businesses for the year ended December 31,
1995. As of December 31, 1997, the Company has converted 1,596,875 shares
of Class B convertible preferred stock issued in connection with the
acquisition into 580,682 shares of common stock. There have been no
conversions of the notes issued in connection with the acquisition.
Subsequent to December 31, 1997, the Company made a redemption offer to the
holders of the $450,000 10% convertible debentures issued in connection
with the acquisition (see Notes 7 and 18).
In October 1995, the Company acquired all of the outstanding stock of NSC
in exchange for 2,000,000 shares of the Company's common stock valued at
$6,916,000, cash of $1,000,000 and $250,000 in notes payable. The purchase
price also included shares of the Company's common stock, valued at
$2,000,000, which were to have been issued to the founders and management
of NSC no later than November 30, 1996. The dollar amount of the shares to
be issued ($2,000,000) is shown as common stock to be issued in the
accompanying consolidated balance sheet as of December 31, 1996. The number
of additional shares to be issued was to be determined at the date of
issuance based upon a formula and upon issuance valued at $2,000,000 in the
aggregate. The formula to determine the number of additional shares which
were to have been issued is $5,000,000 minus outstanding advances made to
NSC by the Company divided by the quoted market value of the Company's
common stock. The $250,000 in notes payable are non-interest bearing and
are due in equal monthly installments of $20,000 (see Note 7). The total
purchase price for NSC was $14.4 million, including the $2,000,000 in
additional shares which were to have been issued in November 1996 pursuant
to the acquisition agreement and approximately $1.7 million of liabilities
assumed in excess of assets acquired and deferred income taxes of
approximately $1.0 million. The excess of the purchase price over the fair
value of the assets acquired (approximately $2,718,000) was assigned a
useful life of 20 years. The net assets acquired also included $12,400,000
for healthcare management decision software technology that was assigned a
useful life of 20 years. The Company wrote off the unamortized cost of
goodwill and intangibles recorded in connection with the acquisition of NSC
as of December 31, 1996, as an impairment loss (See Note 5).
As of December 31,1996, the Company had not issued any of the shares of
common stock which were to be issued to the founders and management of NSC
pursuant to the NSC acquisition agreement. In January 1997, the founders
and management of NSC (the "Retiring Management") resigned in a negotiated
agreement between the Company and Retiring Management. The material
features of the agreement included the waiver by Retiring Management of (a)
all accrued and unpaid bonuses ($695,214) and (b) $2,000,000 of the
Company's common stock which was to be issued to Retiring Management
pursuant to the NSC acquisition agreement in exchange for a license
agreement for the exclusive use by Retiring Management of NSC's software
and technology to service state governments west of the Mississippi River
(excluding Utah), Mexico and Central and South America. The license
agreement, subject to minimum performance standards, is to provide for a
royalty fee of one-half of one percent of all revenues derived by Retiring
Management from such license agreement and for (i) the sharing on a 50-50
basis, of the net profits (to be defined) earned by NSC from the States of
New York and New Jersey and by Retiring Management from Mexico and (ii) a
requirement that Retiring Management use NSC, for a reasonable fee, as its
sole supplier of data processing services to process work derived from the
license agreement for a period of two years. As a result of the waiver by
Retiring Management of accrued and unpaid bonuses and common stock to be
issued, the Company removed the common stock to be issued and the accrued
and unpaid bonuses from its consolidated balance sheet and recognized a
gain from the sale of the license agreement totaling approximately
$2,695,000.
<PAGE> 66
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
($1,373,984) was assigned a useful life of 15 years. The net assets
acquired included $1,500,000 of medical computer software, which was
assigned a useful life of 3 years.
The following unaudited pro forma summary operating results for the year
ended December 31, 1996, include the results of operations of companies
acquired in 1995 for the full year and the operating results 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
operating results for the year ended December 31, 1995 reflect the
operating results of companies acquired in 1995 and, HMT acquired in 1996,
with pro forma adjustments (primarily goodwill and intangible amortization)
as if the acquisitions were consummated on January 1, 1995. The pro forma
summary is provided for information purposes only. It is based on
historical information and does not necessarily reflect the actual results
that would have occurred nor is it necessarily indicative of future
operating results of the combined companies.
<TABLE>
Year Ended December 31,
--------------------------------
1996 1995
----------- -----------
<S> <C> <C>
Net revenues from continuing
operations $ 3,035,195 $ 2,384,874
------------ -----------
Loss from continuing operations $(18,047,892) $(4,085,486)
------------ -----------
Loss from operations of discontinued
telecommunications businesses $( 1,322,179) $(3,794,890)
------------ -----------
Basic earnings per share:
Loss from continuing operations $( 2.16) $( 1.28)
Loss from operations of
discontinued telecommunications
businesses ( 0.16) ( 1.19)
------------ -----------
Net loss $( 2.32) $( 2.47)
============ ===========
</TABLE>
All of the acquisitions described above have been accounted for using the
purchase method of accounting. The results of operations of these acquired
businesses have been included in the consolidated financial statements
since their respective dates of acquisition.
As more fully discussed below, the Company has sold or otherwise disposed
of the businesses included in the Company's telecommunications segment. The
operations of those businesses are shown as operations of discontinued
telecommunications businesses in the above pro forma summary.
In May 1996, the Company informed the principals of Coast Communications,
Inc. ("CCI") that the Company was canceling the acquisition of CCI and
terminating all of the related acquisition documents; consequently, the
Company removed the assets and liabilities of CCI and the debt and
<PAGE> 67
preferred stock issued in connection with the CCI acquisition from the
Company's consolidated balance sheet in May 1996 with no material effect on
the Company's results of operations. The principals of CCI filed suit to
enforce promissory notes in the aggregate principal amount of $300,000,
which were issued by the Company in connection with the CCI acquisition and
the issuance of 200,000 shares of the Company's Class A preferred stock
they allege are due them under the acquisition agreement. This matter was
referred by court order to mandatory arbitration in the State of Florida.
On February 3, 1998, the Arbitrators' awarded in favor of the former
shareholders of CCI. The award requires, among other things, that the
Company (i) convert 200,000 shares of its Class A Preferred Stock, held by
the former shareholders of CCI, into 100,000 shares of its common stock and
(ii) issue another 200,000 shares of Class A Preferred Stock to the former
CCI stockholders, which is also convertible into 100,000 shares of the
Company's common stock, and that the Company give the former shareholders
of CCI the ability to seek a summary judgment against the Company for
$500,000, without opposition, or accept 500,000 shares of the Company's
Class A Preferred Stock in lieu of a summary judgment (See Note 14).
As more fully discussed below, in January 1997 and May 1997, the Company
disposed of substantially all of the remaining assets of its
telecommunications segment, consisting of TNI (which include the operations
of Comstar and LCI) and ATI and, entered into an agreement to rescind the
March 1996 acquisition of HMT.
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 International Teledata Corporation ("ITD"). No value was assigned
to the $500,000 convertible debenture (the "ITD Note") received by the
Company. By its terms, the ITD Note 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 (See Note 17).
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). However,
there is no assurance that, upon an event of default by ATI, that ATI would
have sufficient funds to liquidate the promissory note.
The disposition of TNI and ATI resulted in gains of approximately $392,000,
net of tax, in the aggregate. The gains from the disposition of TNI and ATI
are reflected as a component of discontinued operations in the accompanying
consolidated statement of operations for the year ended December 31, 1997.
<PAGE> 68
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 gain
of approximately $259,000, which is included as a component of continuing
operations in the consolidated statement of operations for the year ended
December 31, 1997.
The consolidated operating results of the Company for all years presented
have been restated to segregate, as discontinued operations, the results of
operations of the Company's discontinued telecommunications businesses. The
assets and liabilities of the telecommunications segment, included in the
accompanying consolidated balance sheets as of December 31, 1997 and 1996,
are summarized as follows:
1997 1996
--------- ---------
Current assets $ 539 $ 332,856
Total assets 539 660,094
Current liabilities 194,133 886,206
Total liabilities 194,133 1,078,026
The revenues, costs and expenses of the Company's telecommunications
businesses, included in income(loss) from operations of discontinued
telecommunications businesses in the accompanying consolidated statements
of operations for each of the three years in the period ended December 31,
1997, are summarized as follows:
<TABLE>
1997 1996 1995
-------- --------- ---------
<S> <C> <C> <C>
Net revenues $405,617 $2,177,858 $2,893,778
Cost of revenues -- 1,320,256 2,014,460
Selling and administrative expenses 449,925 2,304,059 1,845,775
Impairment and other losses -- 194,901 2,758,779
Depreciation and amortization 47,460 291,291 311,135
Interest income -- (971) (627)
Interest expense 32,393 38,713 20,466
Other income(expense), net 755,913 832 4,288
Income (loss) from operations of
discontinued businesses, before
income taxes 631,752 (1,971,223) (4,060,498)
Income tax expense (benefit) 240,000 (649,044) (241,577)
Income (loss) from operations of
discontinued businesses 391,752 (1,322,179) (3,818,921)
</TABLE>
<PAGE> 69
NOTE 5 IMPAIRMENT AND OTHER LOSSES
Impairment and other losses included in the accompanying consolidated
statements of operations are summarized as follows:
<TABLE>
Year Ended December 31,
-----------------------------------
1997 1996 1995
--------- ---------- ---------
<S> <C> <C> <C>
Impairment and other losses included
in loss from continuing operations:
Write-off of capital lease and related
assets $ 768,545 $ -- $ --
Provision for loss contingencies 437,335 -- --
Write- off of deferred compensation
assets 625,728 -- --
Write-down of other assets 67,345 -- --
Write-off of NSC intangibles and goodwill -- 14,233,953 --
--------- ---------- ---------
1,898,953 14,233,953 --
--------- ---------- ---------
Impairment and other losses included
in loss from discontinued operations:
Write-off of TNI goodwill -- -- 2,758,779
Write-off of investment in Comstar 194,901 --
--------- ---------- ---------
-- 194,901 2,758,779
--------- ---------- ---------
$1,898,953 $14,428,854 $2,758,779
========= ========== =========
</TABLE>
In 1997, the Company removed, from its consolidated balance sheet, the
capital lease and other assets related to equipment under lease from Boston
Financial & Equity Corporation ("BFC") due to BFC having taken possession
of certain computer equipment leased by NSC from BFC and the initiation by
BFC of an action filed in the State of Texas against the Company seeking
approximately $500,000, due under the lease agreement. The removal of the
capital lease and other assets related to equipment under lease resulted in
a loss of $768,545. The Company also recorded a loss contingency of
approximately $500,000 and removed the related capital lease obligation
from the Company's consolidated balance sheet, which resulted in an
additional loss provision of $122,986, which is included in the provision
for loss contingencies in the above table.
In 1997, the Company also made various other provisions for loss
contingencies related to leased office space, which has been vacated,
leased equipment that the Company is not presently using and for the loss
from the settlement of claims brought against the Company by Timboon, LTD.
The total amount of these loss provisions was $437,335, including $122,986
related to the BFC lease. Included in this amount is $162,053 related to
the Timboon Settlement Agreement (see Notes 7 and 14).
The write-off of deferred compensation assets in 1997 is the result of the
resignation of certain employees subject to employment agreements (see Note
13).
Impairment and other losses in 1996 reflect the write-off of the Company's
investment in Comstar, including goodwill recorded in connection with the
acquisition, and the write-off of the unamortized cost of goodwill and
intangibles recorded in connection with the Company's 1995 acquisition of
NSC. The write-off of the Company's investment in Comstar is the result of
the Company's decision to sell substantially all of the assets of TNI and
abandon its remaining Telecommunications businesses; and, the write-off of
<PAGE> 70
the unamortized cost of goodwill and intangibles recorded in connection
with the acquisition of NSC is the result of continued operating losses and
the failure of NSC to successfully market the software technology acquired
by the Company in connection with the acquisition. The write-off of the
Company's investment in Comstar is included in loss from operations of
discontinued telecommunications businesses for the year ended December 31,
1996; and, the write-off of the unamortized cost of goodwill and
intangibles recorded in connection with the acquisition of NSC is reflected
in loss from continuing operations for the year ended December 31, 1996.
At December 31, 1995, the Company recognized a charge to income of
$2,758,779, which is reflected as a component of discontinued operations in
the accompanying consolidated statement of operations for the year ended
December 31, 1995, to write off, with no associated income tax benefit, all
of the goodwill related to its acquisition of TNI. This write-off reflects
the damages caused to the business of TNI as a result of actions taken by
GE Capital Communications Services Corporation ("GECCS") and New Enterprise
Wholesale Services, Ltd. ("News"), which actions included, among other
things, (i) the failure of GECCS and News to provision customer accounts
for telecommunications products and services offered by GECCS and News and
sold by TNI pursuant to a contractual agreement among TNI, GECCS and News,
(ii) the cancellation of TNI customers by GECCS and News and (iii) the
failure of GECCS and News to properly bill and collect revenues due to TNI.
TNI, as claimant in a binding arbitration proceeding against GECCS and
News, was awarded damages under the GECCS Agreement in the amount of
approximately $1,250,000. The award, which was entered on October 10, 1996,
was appealed by GECCS to the U.S. District Court for the Northern District
of Georgia on the grounds that the arbitrators exceeded their powers by
awarding TNI damages under the GECCS Agreement. On September 30, 1997, the
U.S. District Court confirmed the award; and, a motion for summary judgment
was entered on October 1, 1997. On December 24, 1997, the Company, GECCS
and News entered into a Confidential Settlement Agreement and Mutual Full
and Final Releases (the "Settlement Agreement"). Pursuant to the Settlement
Agreement, GECCS\News paid $1,250,000 in full satisfaction of the
arbitration award. Of that amount, the Company received approximately
$750,000, which is net of legal fees. The net proceeds from the Settlement
Agreement are reflected in income(loss) from discontinued operations in the
accompanying consolidated statement of operations for the year ended
December 31, 1997.
NOTE 6 FURNITURE AND EQUIPMENT
Furniture and equipment consists of the following:
<TABLE>
DECEMBER 31,
----------------------
1997 1996
------- ---------
<S> <C> <C>
Furniture and equipment $130,162 $ 917,869
Equipment held under capital lease -- 880,163
Leasehold improvements -- 14,835
------- ---------
130,162 1,812,867
Less: accumulated depreciation (56,744) (587,598)
------- ---------
Net furniture and equipment $ 73,388 $1,225,269
======= =========
</TABLE>
<PAGE> 71
Depreciation expense was $174,545, $330,973 and $122,471 in 1997, 1996 and
1995 respectively.
In 1997, the Company removed, from its consolidated balance sheet, capital
lease assets with a net carrying amount of $579,681 related to equipment
under lease from Boston Financial & Equity Corporation. See Notes 5 and 14.
Included in furniture and equipment, net, as of December 31, 1996 is
$327,237, applicable to discontinued telecommunications businesses.
NOTE 7 NOTES AND DEBENTURES PAYABLE
Notes and debentures payable consist of the following:
<TABLE>
DECEMBER 31,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
4% Cumulative convertible debentures
due October 1, 1998 $ 1,200,000 $ --
10% Cumulative convertible debentures
due on various dates through
November 1997 1,195,000 1,279,000
10% Cumulative convertible debentures
due on November 21, 1997 -- 300,000
10% Cumulative convertible debentures
due on November 26, 1997 170,000 200,000
10% Convertible debentures payable to
former shareholders of TNI 450,000 450,000
Notes payable to former shareholders of
NSC in equal monthly installments of
$20,000, non-interest bearing 150,000 150,000
6% Acquisition notes payable to former
shareholders of ATI, secured by the
stock of ATI -- 250,000
18% Cumulative Convertible Debenture
Note due January 15, 1999 80,000 --
12% Cumulative Convertible Debenture
Notes due on various dates through
November 1998 50,000 --
12% Convertible Promissory Note
due March 28, 1997, in default 30,000 --
10% Cumulative Convertible Debenture
Note due September 1998 30,000 --
8%-10% Notes payable to stockholders 1,700 162,741
Promissory note in default -- 200,000
10.75% demand note payable, secured by
certain accounts receivable -- 100,000
5% Note to former shareholder of CCI, due
on demand, secured by certain equipment -- 75,000
Other 5,000 14,017
--------- ----------
3,361,700 3,180,758
Less: current portion (3,361,700) (3,180,758)
--------- ---------
Long-term portion $ -- $ --
========= =========
</TABLE>
<PAGE> 72
On February 24, 1997, the Company issued $1,120,000 of 4% cumulative
convertible debentures due October 1, 1998 (the "4% Debentures") to
Timboon, LTD ("Timboon", a non U.S. person) in reliance upon exemptions
under Regulation S of the Securities Act of 1933. The 4% Debentures were
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 lesser of (a) 80% of the average closing bid price of the Company's
common stock for the five days preceding the issuance of the debentures or
(b) 70% of the average closing bid price of the Company's common stock for
the five 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 Company, through December 31, 1997, converted $120,000 of
the 4% Debentures issued to Timboon into 256,361 shares of the Company's
common stock. On June 6, 1997, as a result of the Company's refusal to
convert additional 4% Debentures, Timboon, as Plaintiff, filed an action in
the United District Court, Southern District of New York, against the
Company, as Defendant, seeking the delivery of 163,438 shares of the
Company's common stock to Plaintiff as a result of the conversion of an
additional $150,000 of 4% Debentures and the payment of $970,000 (the
principal amount of the 4% Debentures that had not been converted by
Timboon) to Timboon, plus damages. The Company filed a counterclaim against
Timboon alleging that Timboon breached the representations and covenants it
made in the Off-Shore Securities Subscription Agreement. These
representations and covenants related to, among other things, Timboon's
investment intent in acquiring the Company's securities and its possible
"shorting" of the Company's common stock in contemplation of conversion. In
addition, the Company alleged that Timboon participated in manipulative
market activity with the intent to artificially depress the market price of
the Company's common stock. Effective March 2, 1998, the Company and
Timboon entered into a Settlement Agreement and Release (the "Settlement
Agreement") in settlement of all claims brought against each other in
connection with the 4% Debentures. The Settlement provides for the
Company's payment of $1,200,000 in full satisfaction of outstanding
principal of and accrued interest on these debentures or the Company's
issuance to Timboon of such number of shares of its common stock as can be
sold by Timboon with net proceeds of $1,200,000. As of the date hereof, the
Company has issued an aggregate of 5,000,000 shares to Timboon and the
Company is advised by Timboon that it has sold all of such shares with net
proceeds of approximately $400,000. The Company has treated an equal amount
of the 4% convertible debentures as converted, leaving an outstanding
obligation of approximately $800,000. The Company is unable to estimate the
total number of shares which it may be required to issue under the
Settlement, in the event it is not able to repay its obligation with cash;
but, at the date of this Prospectus, the number of shares would be
approximately 19,000,000 , based upon current bid quotations. In connection
with the Settlement Agreement the Company increased the principal balance
of the 4% Debentures to equal $1,200,000 and recognized a loss of
approximately $162,000 (see Note 5).
During 1996, the Company privately placed with Nidan Corporation, in
reliance upon exemptions under Regulation D of the Securities Act of 1933,
a series of one-year 10% cumulative convertible debentures in the aggregate
principal amount of $1,279,000. These debentures were convertible into
shares of the Company's common stock on various dates through November 1997
or on the effective date of a registration statement under the Securities
Act of 1993, if earlier. The number of shares of common stock issuable upon
conversion of these debentures, in either case, was generally to be
determined by dividing the principal amount of the debentures, plus accrued
and unpaid interest, by the lesser of (a) the fixed conversion prices set
forth in the debentures, which range from $1.50 to $5.00 per share, or (b)
<PAGE> 73
a conversion price equal to 50% of the average closing bid and ask prices
of the Company's common stock at the close of trading on the next day
following the maturity date as set forth in the respective debenture. Nidan
Corporation transferred a significant portion of these debentures to
residents of the State of Michigan without the consent of the Company. The
Company believed that the conversion of these debentures could have
constituted a violation of Michigan securities law as a result of the
Company being subject to a consent order (see Note 14); accordingly, the
Company refused to convert these debentures at maturity. Subsequent
negotiations determined that the offer to Michigan residents of the
underlying common stock was made by the conversion feature of the
debentures and that the issuance of common stock in conversion would not in
of itself constitute an additional violation under the consent order. As of
the date of this Prospectus, these debentures have been converted into an
aggregate of 7,742,919 shares of the Company's common stock.
On November 21, 1996 and November 26, 1996, the Company privately placed,
in reliance upon exemptions under Regulation S of the Securities Act of
1933, $300,000 and $200,000, respectively, of 10% one-year cumulative
convertible debentures. These debentures were convertible into shares of
the Company's common stock at any time after 45 days from the date of their
issuance and prior to their scheduled one-year maturity dates. The
conversion price of these debentures, plus accrued and unpaid interest, is
equal to the lesser of (a) 70% of the average closing bid price of the
Company's common stock for the five days preceding the conversion date or
(b)80% of the average closing bid price of the Company's common stock for
the five days prior to issuance of the debentures. In connection with the
issuance of these debentures, the Company incurred placement fees and other
costs of approximately $50,000 and received net proceeds of approximately
$450,000. As of December 31, 1997, the Company has converted $330,000 of
these debentures into 122,000 shares of the Company's common stock and has
outstanding unconverted debentures totaling $170,000. At the time the
Company determined not to convert any more of the Timboon debentures for
the reasons described above, it decided not to convert any more of these
debentures for the same reasons. As of the date of this Prospectus, the
unconverted debentures outstanding at December 31, 1997 are still
outstanding and no attempts have been made by the holders of the debentures
to force their conversion or repayment.
The 10% convertible debentures payable to the former shareholders of TNI,
plus accrued and unpaid interest, are due at the time of a public offering
of the Company's common stock and the filing of a registration statement.
These debentures are convertible at a conversion price equal to the public
offering price in such registration statement at the election of the
holder. In March 1998, the Company made an offer to each of the holders of
these convertible debentures to redeem the debentures in return for 1.5
shares of the Company's common stock for each dollar of principal, plus
accrued interest, due to each of the debenture holders, plus common stock
purchase warrants exercisable at any time over a five year period at an
exercise price of $0.20 per share. The number of common stock purchase
warrants to be issued upon acceptance of the offer to redeem the debentures
is to be determined by dividing the principal amount of each debenture by
two(2). As of March 31, 1998 (the expiration date of the offer), the
Company received the acceptance of all of the holders of the debentures.
Pursuant to the redemption offer, the Company issued 893,278 shares of its
common stock and 450,000 stock purchase warrants (225,000 of which are
exercisable at $1.50 per share by the terms of the respective debenture
note and 225,000 of which are exercisable at $0.20 per share pursuant to
the redemption offer).
<PAGE> 74
The notes payable to the former shareholders of NSC, due in equal monthly
installments of $20,000, are currently in default. The Company has not made
any payments on these notes since April 1996. The holders of these notes
have not initiated collection efforts for the amounts due to them under the
notes. The Company is currently accruing interest on these notes at 18% per
annum, the default rate of interest as called for by the notes.
The 6% acquisition notes payable to the former shareholders of ATI were
originally due within 90 days of the date of acquisition of ATI. These
notes were subsequently modified to delay their due date to the date of a
public offering of the Company's common stock or upon placement of a bridge
financing facility to refinance the debt. These notes were also extended
from time to time. In consideration of these extensions, the Company issued
140,000 shares of its Class B preferred stock and 166,668 stock purchase
warrants exercisable at $1.50 per share to the note holders. The 140,000
shares of Class B preferred stock were converted into 50,910 shares of the
Company's common stock in September 1996. The acquisition notes payable,
the stock purchase warrants and 684,410 shares of the Company's common
stock issued to the former shareholders of ATI in connection with the
acquisition and as consideration for extension of indebtedness are to be
returned to the Company in connection with the May 1997 rescission of the
ATI acquisition agreement (see Note 4).
The notes payable and debentures associated with the acquisitions of
subsidiaries, described above, are collateralized by the stock of the
respective subsidiaries.
The 18% Cumulative Convertible Debenture Note due January 15, 1999 is
convertible into the Company's common stock, at the election of the holder,
at a conversion price of $2.50 per share, is guaranteed by the Company's
Chairman of the Board and is collateralized by 500,000 shares of the
Company's common stock, which is held in escrow pursuant to an escrow
agreement.
The 12% Cumulative Debenture Notes consist of two notes in the principal
amount of $25,000, each, and are due in October and November 1998,
respectively. These notes are convertible, at the election of the holder,
into shares of the Company's common stock at an exercise price of $.10 per
share. Interest accrued may also be converted into shares of the Company's
common stock at a price equal to the average of the bid and ask prices of
the Company's common stock on the next day following conversion. Upon
conversion, the holders of the notes are also entitled to receive common
stock purchase warrants. The number of warrants to be issued upon
conversion of these notes is equal to the principal amount of the notes
divided by 0.1 and are exercisable at $0.10 per share.
<PAGE> 75
The 12% Convertible Promissory Note due March 28, 1997 is in default. The
Note is convertible, at the election of the holder, into the Company's
common stock at $2.00 per share, plus 3,000 common stock purchase warrants,
exercisable at $2.00 per share for a two year period. The common stock
purchase warrants are to be issued either upon conversion or payment of the
Note.
The 10% Convertible Debenture Note due September 1998 is payable, at the
election of the holder, from the proceeds of the GECCS\News arbitration
award, from the proceeds of the $500,000 note received by the Company from
the sale of certain of TNI assets (the "ITD Note") or by the issuance of
the Company's common stock at the average of the bid and ask prices of the
Company's common stock as of the date of the note. This note was not paid
from the proceeds of the GECCS\News arbitration award and, in March 1998,
the Company canceled the ITD Note pursuant to an agreement between and
among the Company, ITD and certain former employees of the Company and TNI
(see Note 18). After these events, the note is either payable in cash or by
the issuance of the Company's common stock at the election of the holder.
As of December 31, 1996, the Company had $162,741 of 8-10% notes payable to
stockholders due on various dates through December 1997. These notes are
generally due one year after the date of issuance and provide the holder
with the right to convert the principal amount of the note, plus accrued
and unpaid interest, into shares of the Company's common stock at
predetermined conversion prices at any time prior to maturity. During 1997,
these stockholders loaned the Company an additional $91,443, the Company
made payments of $84,484 and $168,000 of such notes, plus accrued interest,
were converted into shares of the Company's common stock at a negotiated
conversion prices ranging from $0.90 to $1.00 per share.
The $200,000 promissory note in default outstanding as of December 31, 1996
was paid in December 1997 from the proceeds of the Settlement Agreement
with GECCS and News (see Note 4).
The 10.75% demand note payable in the amount of $100,000 outstanding at
December 31, 1996 was paid in December 1997 from the proceeds of the
Settlement Agreement with GECCS and News (see Note 4).
The 5% note payable to a former shareholder of CCI in the amount of $75,000
at December 31, 1996 was relieved, in full, as a result of the rescission
in May 1997 of the ATI acquisition (see Note 4).
As of December 31, 1997 and 1996, all of the Company's notes and debentures
outstanding are classified as current in the accompanying balance sheet.
NOTE 8 BORROWINGS UNDER LINES OF CREDIT
As of December 31, 1997, the Company had no used or unused lines of credit.
The Company, through two of its subsidiaries, had lines of credit which
were fully utilized at December 31, 1996.
NOTE 9 FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosures about Fair
Value of Financial Instruments" requires disclosure of the estimated fair
value of financial instruments. It is not practicable to estimate the fair
value of the Company's debt instruments because most of the debt
instruments that have been issued by the Company are unique due to their
terms being negotiated as a part of the acquisition of companies or in
connection with private placements and, in many cases, comparable
instruments do not exist. The carrying amount of the Company's other
financial instruments, cash and cash equivalents and accounts receivable,
are a reasonable estimate of their fair value.
<PAGE> 76
NOTE 10 INCOME TAXES
Income tax expense (benefit) for each of the three years in the period
ended December 31, 1997 consists of deferred income taxes and is allocated
among (i) continuing operations and (ii) the components of discontinued
operations in proportion to their individual effects on income tax expense
(benefit) for the year after the allocation of income tax expense (benefit)
applicable to continuing operations. No provisions for income taxes
currently payable were made in 1997, 1996 or 1995.
The allocation of income tax expense (benefit) for each of the three years
in the period ended December 31, 1997 among continuing operations and the
components of discontinued operations is summarized as follows:
<TABLE>
YEAR ENDED DECEMBER 31
------------------------------------
1997 1996 1995
-------- ---------- --------
<S> <C> <C> <C>
Loss from continuing operations $(483,000) $(2,554,150) $( 15,124)
Discontinued operations:
Income(loss) from operations of
discontinued telecommunications
businesses 240,000 ( 649,044) (241,577)
Gain from disposition of
telecommunications businesses 243,000 -- --
------- --------- -------
Income tax expense (benefit) $ -- $(3,203,194) $(256,701)
======= ========= =======
</TABLE>
Income tax expense (benefit) applicable to continuing operations differs
from the amounts computed by applying the U.S. Federal income tax rate of
34 percent to loss before income taxes as a result of the following:
<TABLE>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
------- --------- --------
<S> <C> <C> <C>
Amount computed at statutory rate $(608,400) $(6,966,137) $(681,438)
Increase (reduction) in taxes
resulting from:
State income taxes ( 46,200) (819,546) (80,169)
Amortization of goodwill 38,900 80,158 9,490
Rescission of business acquisitions 176,900 -- --
Impairment losses -- 971,769 --
Change in valuation allowance (44,500) 4,011,702 732,893
Other 300 167,904 4,100
------- --------- -------
$(483,000) $(2,554,150) $( 15,124)
======= ========= =======
</TABLE>
The principal reasons for the difference between the amounts of income tax
benefit allocated to loss from discontinued operations in 1996 and 1995 and
the amounts computed by applying the U.S. federal income tax rate of 34
percent to loss from discontinued operations before income taxes, is due
primarily to amortization of goodwill, impairment losses and adjustments to
the valuation allowance recorded as a reduction of goodwill in conjunction
with the Company's 1995 acquisition of NSC.
PAGE> 77
In the first ten months of 1995, the Company recorded net deferred tax
assets of approximately $930,000 with an addition to the valuation
allowance in the same amount. As part of the acquisition of NSC, the
Company recorded approximately $3.8 million of deferred tax liabilities.
Because the deferred tax liabilities after the NSC acquisition exceeded the
previously recorded gross deferred tax assets, the Company reversed the
valuation allowance (approximately $980,000 as of October 31, 1995,
$248,000 of which is applicable to operations of discontinued businesses).
Because this occurred as part of a business combination rather than through
operations, the adjustment was recorded as a reduction in goodwill
associated with the NSC acquisition rather than as an adjustment to
operations.
The Company has temporary differences between the amounts of assets and
liabilities for financial reporting purposes and the amounts of such assets
and liabilities as measured by enacted tax laws. The Company also has net
operating loss carryforwards available to reduce future taxable income. The
significant components of the Company's deferred tax assets and liabilities
as of December 31, 1997 and 1996 are as follows:
<TABLE>
December 31,
----------------------
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $3,337,500 $3,999,122
Allowance for doubtful accounts 190,000 10,668
Accrued compensation and liabilities under
employment agreements 257,000 777,922
Accrued expenses and other current liabilities 250,800 --
--------- ---------
Total deferred tax assets 4,035,300 4,787,712
Less-valuation allowance (3,967,200) (4,011,705)
--------- ---------
Net deferred tax assets 68,100 776,007
--------- ---------
Deferred tax liabilities:
Intangible assets -- 371,029
Deferred compensation 68,100 389,401
Other -- 15,577
--------- ---------
Total deferred tax liabilities 68,100 776,007
--------- ---------
Net deferred income taxes $ -- $ --
========= =========
</TABLE>
At December 31, 1997, the Company and its subsidiaries had unused net
operating loss carryforwards of approximately $8.8 million, expiring on
various dates through 2011. Of this amount, approximately $7.7 million is
not restricted as to use. The balance of the carryforwards amounting to
approximately $1.1 million is restricted to offsetting future taxable
income, if any, of the respective companies which generated the
carryforwards and may be further limited as to utilization in any one year
by existing tax laws.
Prior to the acquisition of HMT (See Note 4), it was taxed under Subchapter
S of the Internal Revenue Code and consequently, was not subject to Federal
income tax.
<PAGE> 78
NOTE 11 - STOCKHOLDERS' EQUITY
CLASS A PREFERRED STOCK
The Company's Class A preferred stock is non-voting, has a stated value and
liquidation preference of $1.00 per share, is convertible into one-half
share of the Company's common stock at the election of the holder at any
time prior to a public offering of the Company's common stock and
automatically converts into common stock at the time of such public
offering. As of December 31, 1997, no shares of Class A preferred stock
were outstanding.
CLASS B PREFERRED STOCK
The Company's Class B preferred stock is non-voting, has a stated value and
liquidation preference of $1.00 per share, is convertible into shares of
the Company's common stock (with such number of shares to be determined as
of the date of issuance), based on the stated value divided by the 10-day
average closing bid price of the Company's common stock) at the election of
the holder at any time prior to a public offering of the Company's common
stock and automatically converts into common stock at the time of such
public offering. As of December 31, 1997, the Company had 2,953,125 shares
of Class B preferred stock outstanding.
STOCK PURCHASE OPTIONS AND WARRANTS
The Company has issued common stock purchase warrants in conjunction with
the sale and issuance of common stock, preferred stock and convertible
debentures. The exercise prices of warrants issued were determined based
upon prices related to the issuance of the Company's other securities. Such
warrants are generally exercisable at any time within two years from the
date of issuance and entitle the holder to receive one share of common
stock for each warrant. In August 1997, the Company, by written consent of
the Board of Directors, extended the exercise date of all warrants with
expiration dates in 1997 and 1998 to December 31, 1998.
The Company has also issued stock options to certain officers, employees
and directors. Options granted in 1996 totaled 1,000,000 and are
exercisable at $6.00 per share. These options were canceled effective as of
December 31, 1997. Options granted in 1997 totaled 1,417,500. Of the total
number of options granted in 1997, 117,500 are exercisable at any time over
a two year period at an exercise price of $1.50 per share and 1,300,000 are
exercisable at any time over a five year period at an exercise price of
$0.10 per share.
<PAGE> 79
Options and warrants outstanding are summarized as follows:
<TABLE>
Weighted
Exercise Average
Price Range Exercise
Shares per share Price
--------- ------------ ---------
<S> <C> <C> <C>
Warrants outstanding
at December 31, 1995 1,680,936 $1.50-$8.00 $2.73
Warrants issued 1,822,098 $1.50-$10.00 $4.00
Options issued 1,000,000 $6.00 $6.00
---------
Warrants and options
outstanding at December 31, 1996 4,503,700 $1.50-$10.00 $3.78
Warrants issued 697,805 $0.10-$4.50 $1.06
Warrants canceled (166,668) $1.50 $1.50
Options issued 1,417,500 $.010-$1.50 $0.22
Options canceled (1,000,000) $6.00 $6.00
---------
Warrants and options
outstanding at December 31, 1997 5,452,337 $0.10-$10.00 $1.93
=========
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires
use of option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement No. 123, and has been determined as if the Company
had accounted for its employee stock options under the fair value method of
that Statement. The fair value for the options granted in 1997 was
estimated at the date of grant using a Black-Scholes option pricing model
with the following assumptions: risk-free interest rate of 6.50%; no
dividend yield; a volatility factor of the expected market price of the
Company's common stock of 173%; and a weighted-average expected life of
4.75 years. The assumptions used in 1996 to estimate the fair value of
options granted in that year were: risk-free interest rate of 6.66%; no
dividend yield; a volatility factor of the expected market price of the
Company's common stock of 40.77%; and a weighted-average expected life of
two years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no restrictions and
are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, the existing models, in management's opinion, do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
<PAGE> 80
For purposes of the following pro forma disclosure, the estimated fair
value of options granted to employees have been expensed. The Company's pro
forma net loss and basic earnings per share data after giving effect to the
charges to income, as if the Company accounted for stock options under the
provisions of Statement No. 123, for the years ended December 31, 1997 and
1996 are summarized as follows:
<TABLE>
1997 1996
--------- ----------
<S> <C> <C>
Loss from continuing operations $(1,292,600) $(19,614,489)
--------- ----------
Income (loss) from operations of discontinued
telecommunications businesses 238,300 ( 1,322,179)
Gain from disposition of discontinued
telecommunications businesses 241,600 --
--------- ---------
Net income (loss) $ (812,700) $(20,936,668)
========= ==========
Basic earnings per share:
Loss from continuing operations $ (.12) $ (2.35)
Income (loss) from operations of discontinued
telecommunications businesses .02 (0.16)
Gain from disposition of discontinued
telecommunications businesses .02 --
--------- ---------
Net loss $ (.08) $ (2.51)
========= =========
</TABLE>
<PAGE> 81
NOTE 12 LEASES
The capital lease obligations outstanding as of December 31, 1996 were
removed from the Company's consolidated balance sheet in 1997 as a result
of the rescission of the ATI acquisition agreement (see Note 4) and the
taking of possession by the lessor of certain computer equipment leased by
NSC (see Notes 5 and 14).
The Company leases office space and equipment under operating leases
expiring on various dates through November 31, 2000. Total minimum future
rental payments under non-cancelable operating leases having remaining
terms in excess of one year as of December 31, 1997 are as follows:
1998 $ 55,949
1999 47,833
2000 43,847
2001 --
2002 --
-------
Total minimum future rental payments $ 147,629
=======
Rental expense under all operating leases was $167,354, $359,474, and
$94,961 in 1997, 1996, and 1995, respectively. During 1997, the Company
vacated certain leased premises and is subject to certain additional lease
payments and other charges under the leases, all which have been recorded
as of December 31, 1997. In addition, the Company is in default of the
lease agreement on its San Antonio, TX location.
NOTE 13 - EMPLOYMENT AGREEMENTS
Employment agreements with certain key employees provide for, among other
things, the payment of compensation over 5 years from the date of
employment regardless of whether or not the employee remains in the employ
of the Company. The present value of future obligations under such
agreements was $675,966 at December 31, 1997. The Company also has deferred
compensation assets related to these agreements. Deferred compensation has
been reported on the basis that the related employee(s) continue to provide
meaningful service to the Company. In the event the employee(s) cease to
provide such service, deferred compensation is reduced accordingly.
Following is a summary of amounts included in the accompanying consolidated
balance sheets for such agreements as of December 31, 1997 and 1996:
<TABLE>
1997 1996
--------- ---------
<S> <C> <C>
Deferred compensation assets included in:
Other current assets $ 126,627 $ 355,415
Deferred compensation (non-current) 52,941 647,355
--------- ---------
$ 179,568 $1,002,770
========= =========
Deferred compensation liabilities included in:
Accrued expenses and other current liabilities $ 365,172 $ 344,652
Deferred liabilities under employment agreements 310,794 676,261
--------- ---------
$ 675,966 $1,020,913
========= =========
</TABLE>
<PAGE> 82
During 1997, certain employees subject to the above described employee
agreements resigned resulting in charges to income, in the aggregate, of
approximately $626,000, to write-off the unamortized portion of the related
deferred compensation asset (see Note 5). Effective in May 1994, the
Company entered into a letter agreement to employ its then current Chief
Executive Officer. In connection with that letter agreement, the Company
reserved 500,000 shares of its common stock, valued at $15,000, and
1,375,000 shares of its Class A preferred stock, valued at $20,625, to be
issued as additional compensation upon satisfaction of certain conditions
as set forth in the letter agreement. Such conditions were met during 1995
and the shares of common stock and Class A preferred stock previously
reserved for issuance were issued. In connection with the issuance of such
shares, the Company recorded deferred compensation of $35,625 which is
being amortized over the life of the related employment agreement(5 years).
The unamortized deferred compensation asset recorded in 1995 was written-
off in 1997 due to the resignation of that Chief Executive Officer.
NOTE 14 COMMITMENTS AND CONTINGENCIES
The Company is subject to various legal and administrative proceedings.
These proceedings include (i) a consent order executed between the Company
and the State of Michigan requiring the Company to use its best efforts to
satisfy the prerequisites of the Securities and Exchange Commission and the
Michigan Securities Bureau for registering the common stock sold by the
Company to purchasers of its securities in the State of Michigan, (ii)
actions brought against the Company by certain former employees and persons
formerly under contract with the Company for payments allegedly due them,
(iii) an action by a shareholder seeking the rescission of the sale by the
Company of its common stock to the shareholder, (iv) an action by an
equipment lessor seeking approximately $500,000 in lease payments and other
charges due under a lease agreement and (v) an action by the former
stockholders of CCI.
These legal and administrative actions are more fully described below.
The consent order executed by the Company and the State of Michigan in
December 1996, requires the Company to use its best efforts to satisfy the
prerequisites of the Security and Exchange Commission and the Michigan
Securities Bureau for registering the common stock sold to Michigan
purchasers of its common stock for resale by them in the public market.
This action is the result of the sale by the Company of its securities in
the State of Michigan without an exemption from registration under the
Michigan Uniform Securities Act. In the event the Company is unable to
effect a registration statement or such purchasers are unable to resell
their shares pursuant to such registration statement at a higher price than
their cost, then the Company is required to use its best efforts to satisfy
the prerequisites of the Securities and Exchange Commission and the State
of Michigan for making a rescission offer to all such purchasers. Also,
pursuant to the consent order, the Company must cease the unregistered sale
of securities in Michigan, has been censured and has paid costs to the
state of $2,500. Upon satisfaction of the consent order, all sanctions are
terminated. As of December 31, 1997, the Company estimates its maximum
potential exposure as a result of any rescission offer which may be
required to be made in the State of Michigan to be approximately $795,739,
including interest of approximately $121,615. The interest amount is
included in accrued interest in the accompanying consolidated balance
sheet. The number of shares the Company believes may be subject to a
rescission offer in the State of Michigan, if such an offer were to be
made, is approximately 219,000 shares; and, the weighted average purchase
price of such shares is approximately $3.25 per share. The Company has not
<PAGE> 83
satisfied the requirements of the consent order. Due to the "best efforts"
nature of the Company's compliance obligation, the Company believes that
its performance of the terms of the consent order is deferred until such
time it is able to both financially and functionally comply with the
consent order. During the six months ended June 30, 1998, the Company
accrued additional interest expense of $26,596 related to the potential
rescission offer.
On April 15, 1997, Mr. Ken Lame, as Plaintiff, filed an action in the
United States District Court, District Court of Utah, Central Division
(Case No. 2:97CV0292W) against the Company and NSC, as Defendants. This
action arises from a consulting agreement between Mr. Lame and NSC. The
action seeks approximately $250,000, plus interest and attorney's fees, for
payments Mr.Lame alleges are due him under a consulting agreement. The
Company has recorded a loss reserve of approximately $118,500 related to
this action. Resolution of this matter adverse to the Company could result
in an additional loss accrual but the Company does not anticipate that it
will incur a liability materially in excess of the amount recorded.
On May 21, 1997, Mr. Jeff Good, as Plaintiff, filed an action in the United
States District Court, Southern District of Iowa, Davenport Division (Case
No. 3-97-CV-80085) against the Company, as Defendant, for amounts Mr. Good
alleges are due under an employment agreement between Mr. Good and one of
the Company's subsidiaries (which subsidiary is no longer conducting
business). This action seeks compensation and benefits under the employment
agreement in excess of $200,000. The Company believes this action to be
without merit and intends to vigorously defend it. However, it is not
possible to predict the likely outcome of this matter.
On May 1, 1997, Mr. John Jassy, as Plaintiff, filed an action in the
Circuit Court of the Sixth Judicial Circuit in and for Pinellas County,
Fl., Civil Division (Case No. 97-3103-CI-20) against the Company, Mr.
Stephen E. Williams and Mr. Edwin B. Salmon, Jr., as Defendants. This
action alleges that numerous misrepresentations and deceptive statements
were made to Mr. Jassy and certain family members of Mr. Jassy to induce
them to purchase the Company's securities. The action seeks rescission of
those security purchases, payment of compensation Mr. Jassy alleges is due
to him from his employ by the Company as an executive officer and repayment
of a loan made to Mr. Williams by Mr. Jassy. This action seeks
approximately $500,000, plus interest and attorney's fees. Included in the
amounts claimed by plaintiff, are approximately $450,000, including
interest, to repurchase approximately 100,000 shares of the Company's
common stock purchased by plaintiff and his family members, approximately
$47,000, plus interest, Mr. Jassy alleges is payable to him in unpaid
salary and benefits and $2,500, plus interest, Mr. Jassy claims is owed to
him by Mr. Williams, a former President and Chief Executive Officer of the
Company. On May 11.1998, the Company was notified of dismissal of this
case.
In May 1996, the Company informed the principals of Coast Communications,
Inc. ("CCI") that the Company was canceling the acquisition of CCI and
terminating all of the related acquisition documents. The principals of CCI
filed suit to enforce promissory notes in the aggregate principal amount of
$300,000, which were issued by the Company in connection with the CCI
acquisition and the issuance of 200,000 shares of the Company's Class A
preferred stock they allege are due them under the acquisition agreement.
This matter was referred by court order to mandatory arbitration in the
State of Florida. On February 3, 1998, the Arbitrators' awarded in favor of
the former shareholders of CCI. The award requires, among other things,
<PAGE> 84
that the Company (i) convert 200,000 shares of its Class A Preferred Stock,
held by the former shareholders of CCI, into 100,000 shares of its common
stock and (ii) issue another 200,000 shares of Class A Preferred Stock to
the former CCI stockholders, which is also convertible into 100,000 shares
of the Company's common stock, and gave the former shareholders of CCI the
ability to seek a summary judgment against the Company for $500,000,
without opposition, or accept 500,000 shares of the Company's Class A
Preferred Stock in lieu of a summary judgment. As of December 31, 1997, the
Company has recorded a loss contingency of $111,000, related to this
action. On August 4, 1998, the Company issued 500,000 shares of its Class A
Preferred Stock to the former shareholders of CCI in satisfaction of the
award in arbitration with no adjustment to the recorded loss reserve.
In October 1997, Boston Financial Corporation ("BFC") took possession of
certain computer equipment leased by NSC from BFC as a result of the
default by NSC of payments due under the lease. On December 11, 1997, BFC
filed an amended suit in District Court, 45th Judicial District, Bexar
County, Texas (Case No. 97CI-14567) against NSC and, as guarantors of the
lease agreement, the Company, ATI and TNI. This action seeks approximately
$500,000 in lease payments and other charges due under the lease agreement.
The Company is attempting to negotiate a settlement of this matter and may
have several counterclaims against BFC should the Company and BFC fail to
settle. However, it is not possible to predict the likely outcome of such
negotiations or any counterclaims the Company may have against BFC. As of
December 31, 1997, the Company has recorded a loss contingency reserve of
approximately $500,000 related to this action.
On June 6, 1997, Timboon, LTD ("Timboon"), as Plaintiff, filed an action in
the United States District Court, Southern District of New York (Case No.
97 Civ. 4464 (JSR), against the Company, as Defendant, seeking the delivery
of 163,438 shares of the Company's common stock to Plaintiff as a result of
the conversion of $150,000 of the Company's 4% Convertible Debentures,
issued to Timboon in February 1997 in reliance upon exemptions under
Regulation S of the Securities Act of 1933, and the payment of $970,000
(the principal amount of the Company's $4% Convertible Debentures that have
not been converted by Timboon) to Timboon, plus damages. The Company filed
a counterclaim against Timboon alleging that Timboon breached the
representations and covenants it made in the Off-Shore Securities
Subscription Agreement. These representations and covenants related to,
among other things, Timboon's investment intent in acquiring the Company's
securities and its possible "shorting" of the Company's common stock in
contemplation of conversion. In addition, the Company alleged that Timboon
participated in manipulative market activity with the intent to
artificially depress the market price of the Company's common stock.
Effective March 2, 1998, the Company and Timboon Ltd. entered into a
Settlement Agreement and Release (the "Settlement Agreement") in settlement
of all claims brought against each other in connection with the debentures
issued to Timboon. See Note 7.
Prior to the rescission of the ATI acquisition agreement, the Company
obtained and guaranteed an equipment lease financing facility for ATI's
use. The financing facility was subsequently terminated by the lessor due
to non-payment by ATI of payments due under the related lease agreements.
In connection with the rescission of the ATI acquisition agreement, ATI
issued a promissory note to the Company in the amount of $180,000, payable
upon the default by ATI of payments due under the lease financing facility.
Payments due to 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. In the event of a default by ATI under the lease
<PAGE> 85
financing facility, it is uncertain whether or not the Company would be
able to satisfy the terms of the guaranty agreement or whether or not ATI
would be able to satisfy the terms of the promissory note.
As of December 31, 1997, the Company and its subsidiaries have pending
outstanding judgments totaling approximately $170,000, exclusive of the CCI
judgment referred to above. These judgments arose from cancellation of
office and equipment leases and from non-payment of obligations due to
trade creditors.
The Company is also involved in numerous other legal and administrative
actions incurred in the ordinary course of business, none of which are
expected to have a material impact on the Company's results of operations.
On June 8, 1998, the Company learned that an Involuntary Petition was filed
on June 1, 1998 against the Company in the United States Bankruptcy Court
for the Middle District of Florida (see Note 17).
NOTE 15 SEGMENT INFORMATION
The Company's operations are classified into two industry segments:
healthcare management and cost containment products and services
("Healthcare") and telecommunications products and services, including pay-
per-view related services ("Telecommunications"). In 1996 and 1997, the
Company disposed of substantially all of the assets of its
telecommunications businesses. Consequently, the healthcare segment is the
only segment in which the Company has continuing operations. The operations
of the Company's telecommunications segment are classified as discontinued
operations in the accompanying consolidated statements of operations for
all periods presented. For summary operating results of the Company's
discontinued telecommunications segment, see Note 4.
Capital expenditures of the Company's discontinued telecommunications
segment were $-0-, $12,561 and $208,503 in 1997, 1996 and 1995,
respectively; and, the identifiable assets of the Company's discontinued
telecommunications segment included in the consolidated balance sheets as
of December 31, 1997 and 1996 are $539 and $660,094, respectively.
In 1997, HMT had one customer that counted for approximately 50% of the
Company's consolidated net revenues from continuing operations. In 1996 and
1995, the NSC had one customer that accounted for approximately 47% and
100.0% of the Company's consolidated net revenues from continuing
operations. The Company has no inter-segment revenues.
<PAGE> 86
NOTE 16 STATEMENTS OF CASH FLOWS SUPPLEMENTAL INFORMATION
<TABLE>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- ------------------
1997 1996 1995 1998 1997
-------- -------- --------- -------- -------
<S> <C> <C> <C> <C> <C>
Non-cash investing and
financing activities:
Equipment capital leases $ 73,184 $ 703,215 $ 112,308 $ -- $ 73,184
======== ======== ======== ======== =======
Notes payable issued in
connection with
business acquisitions $ -- $ -- $ 700,000 $ -- $ --
======== ======== ========= ======== =======
Issuance of stock for debt $ 716,318 $ 199,150 $ -- $ 276,125 $716,318
======== ======== ========= ======== =======
Issuance of common stock in
settlement of accrued and
other liabilities $ -- $ -- $ -- $ 526,862 $ --
======== ======== ========= ======== =======
Redemption of debentures
payable $ -- $ -- $ -- $ 286,588 $ --
======== ======== ========= ======== =======
Recovery of note receivable
from the sale of assets $ -- $ -- $ -- $ 305,345 $ --
======== ======== ========= ======== =======
Cash paid during the period for:
Interest $ 131,635 $ -- $ 23,055 $ 7,277 $ 76,217
======== ======== ========= ======== ========
Income taxes $ -- $ -- $ -- $ -- $ --
======== ======== ========= ======== =======
</TABLE>
NOTE 17 EVENTS SUBSEQUENT TO DECEMBER 31, 1997
In March 1998, the Company made an offer to each of the holders of its 10%
convertible debentures payable to the former shareholders of TNI to redeem
the debentures in return for 1.5 shares of the Company's common stock for
each dollar of principal, plus accrued interest, due to each of the
debenture holders, plus common stock purchase warrants exercisable at any
time over a five year period at an exercise price of $0.20 per share. The
number of common stock purchase warrants issued upon acceptance of the offer
to redeem the debentures was determined by dividing the principal amount of
each debenture by two (2). As of March 31, 1998 (the expiration date of the
offer), the Company had received the acceptance of all of the holders of the
debentures. Pursuant to the redemption offer, the Company issued 893,278
shares of its common stock and 450,000 stock purchase warrants (225,000 of
which are exercisable at $1.50 per share by the terms of the respective
debenture note and 225,000 of which are exercisable at $0.20 per share
pursuant to the redemption offer). The carrying amount of the debt
extinguished exceeded the fair value of the common stock and warrants issued
in exchange for the debt. This excess is classified as an extraordinary gain
in the accompanying unaudited consolidated statement of operations for the
six months ended June 30, 1998.
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
<PAGE> 87
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
and the cancellation of their employment agreements with the Company.
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.
The Company learned on June 8, 1998 that an Involuntary Petition (the
"Petition") was filed on June 1, 1998 against the Company in the United
States Bankruptcy Court for the Middle District of Florida (Case No. 98-
09299-8P7) under Chapter 7 of the Bankruptcy Act (the "Proceeding") by
certain petitioners (the "Petitioners"). The names of the Petitioners and
the amounts of their alleged claims are set forth in the following table.
<TABLE>
Petitioner Name Amount Claimed
- --------------- --------------
<S> <C>
Kenneth D. Lame $ 212,519
Barry L. Johnson 9,171
Jon T. Lame 2,325
Jack Arthur 26,498
K. Philip Lame 489
Keith A. Krenz 77,442
</TABLE>
Kenneth Lame served as a consultant to NSC from October 31, 1995 to January
17, 1997 and as its President and Chief Executive Officer from January 1997
to March 1997. Part of Kenneth Lame's assigned duties as the President and
Chief Executive Officer of NSC was development of a business, operating and
marketing plan for NSC's "CHAMPUS software and data base." Kenneth Lame did
not deliver any business, operating or marketing plans to NSC and NSC
terminated the services of Kenneth Lame in March 1997. NSC disputes the
alleged claim of Kenneth Lame, which is properly against NSC. Kenneth Lame
arranged for NSC to engage the services of Petitioners Johnson, Jon T. Lame,
Arthur and K. Philip Lame to assist him in development of the business,
operating and marketing plan. The Company believes that it never employed
Kenneth Lame or the Petitioners named in the preceding sentence and is not
indebted to them in any amount. Furthermore, the Company believes the
alleged claims of Petitioners Arthur, Jon. T. Lame and K. Philip Lame have
been paid in full and the alleged claim of Petitioner Johnson has been
reduced to $4,000.
Kenneth Lame introduced Health Management Technologies, Inc. ("HMT") to the
Company which the Company ultimately acquired and later divested. The
Company and Kenneth Lame entered into a letter agreement dated July 16, 1996
for payment of a finder's fee to Kenneth Lame for the HMT acquisition. The
Company believes it has satisfied in full all of its monetary obligations to
Kenneth Lame under the letter agreement. Furthermore, Kenneth Lame has a
suit pending against the Company and NSC in The United States District
Court, District of Utah (case no. 2:97-cv-00292 C) for the claims which he
asserts against the Company in the Petition. Accordingly, the Company
believes Petitioners Kenneth Lame, Johnson, Jon T. Lame, Arthur and K.
Philip Lame are creditors of NSC, to the extent of provable claims, and not
creditors of the Company.
Petitioner Krenz was a shareholder of NSC at the time it was acquired by the
Company. As a part of the acquisition agreement, the Company issued a
promissory note to Mr. Krenz in the amount of $129,070. The Company paid
$51,628 of this note prior to May 1996; but, suspended payments because the
Company discovered the business, assets and prospects of NSC had been
<PAGE> 88
misrepresented. The Company has not received any correspondence or any
demand for payment from Mr. Krenz since the date it suspended payments to
Mr. Krenz.
Subsequent to the filing of the original petition, five additional creditors
joined in the petition. Four of the five additional petitioners are
creditors of NSC and not the Company and the Company disputes the claim of
the other creditor. The Company filed a motion to dismiss the Petition on
the grounds that it does not meet the requirements of the U.S. Bankruptcy
Code and the Petitioners filed a motion for summary judgment. On October 27,
1998, the U.S. Bankruptcy Court denied the motion for summary judgement and
set a hearing date of January 12, 1999. In the event the Company prevails,
it intends to seek sanctions against the Petitioners and its counsel for any
damages it sustains as a result of the Petition.
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.
In May 1998, the Company reactivated a dormant, wholly owned subsidiary, owned
since January 1995, for the purpose of divesting ownership and control of the
subsidiary in connection with the acquisition of one or more businesses in the
telecommunications industry. A majority of ownership and control of the
subsidiary was sold by the subsidiary to an outside group of managers and
investors, in July 1998, and the Company received a payment of $100,000 from
the subsidiary in consideration for certain undertakings by the Company.
Pursuant to a Recapitalization Agreement in September 1998, the Company
retained 625,000 shares of the subsidiary's common stock out of 1,000,000
shares originally owned. In October 1998, the subsidiary acquired a switchless
reseller of long distance telephone service. The Company has partially
fulfilled its undertakings to the subsidiary by transferring 255,000 shares of
the subsidiary's shares which it retained to certain persons, or their
nominees, identified by the subsidiary's management, who rendered consulting
services to the subsidiary and by declaring a dividend to the Company's
stockholders of record on October 30, 1998, payable in an aggregate of 300,000
shares of the subsidiary's shares owned by the Company. The Company will
retain 70,000 shares for investment and future sale. The designee of the
Company's chairman received 25,000 shares of the subsidiary's shares owned by
the Company in payment for services which the chairman rendered to the
subsidiary.
<PAGE> 89
NOTE 18 - Valuation and Qualifying Accounts
Valuation and qualifying accounts (which are deducted from the assets to
which they apply) consist of an allowance for doubtful accounts.
Following is a summary of the allowance for doubtful accounts:
<TABLE>
<S> <C>
Balance, December 31, 1995 $510,000
Additions:
Provision for bad debts charged
to operations 522,687
Deductions:
Write-offs (985,254)
CCI Elimination (19,359)
-------
Balance, December 31, 1996 28,074
Additions:
Provision for bad debts charged
to operations 39,816
Deductions:
Write-offs (63,214)
Discontinued operations (4,676)
-------
Balance, December 31, 1997 $ --
=======
</TABLE>
The provision for bad debts charged to operations applicable to discontinued
operations was $475,711 in 1996.
NOTE 19 - PROPOSED ACQUISITION
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 equity or 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. Subsequent thereto, the Agreement to Exchange Stock was
terminated by the mutual consent of the parties.
<PAGE> 90
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
<TABLE>
<S> <C>
Filing Fees:
U.S. Securities and Exchange Commission $ 1,400
Transfer Agent and Registrar's Fee 1,000
Accounting Fees and Expenses 15,000
Printing and Engraving Expenses 1,500
TOTAL $ 18,900
Item 14. Indemnification of Directors and Officers.
The Florida Business Corporation Act, effective July 1, 1990 as revised,
empowers a Florida corporation to provide indemnification to directors,
officers, employees and agents of the corporation (including persons who
serve at the request of the corporation in such capacities in another
corporation, partnership, joint venture, trust or other enterprise) by
reason of his service in such capacity (a) against liability (including
attorneys fees and costs and costs of settlement) in an action, otherwise
than by or in the right of the corporation, if he acted in good faith and in
a manner he reasonably believed to be in, or not opposed to, the best
interests of the corporation and with respect to criminal proceedings had no
reasonable cause to believe his conduct was unlawful, provided that a
judgment, order, settlement, conviction or plea of nolo contendre shall not
create a presumption that such person is not entitled to indemnity; and (b)
against expenses and amounts paid in settlement in an action by or in the
right of the corporation, if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
corporation, but not to the extent such person is adjudged liable except as
the court shall determine such person is fairly and reasonably entitled to
indemnification for expenses. Indemnification shall be made only when
specifically authorized in the particular case by a majority of a quorum of
disinterested directors or by a majority of a committee designated by the
board or by independent legal counsel or by a majority of disinterested
stockholders. Expenses of litigation may be advanced by the corporation, if
the indemnified person undertakes to repay such amounts in the event it
later is determined that he is not entitled to indemnification. Any such
person may apply to a court of competent jurisdiction for indemnification,
notwithstanding a contrary determination by the board of directors or the
stockholder.
[Remainder of page left blank]
<PAGE> 91
Item 15. RECENT SALES OF UNREGISTERED SECURITIES.
During the three years ended December 31, 1997, the Company has sold the
securities set forth in the following tables in reliance upon exemption from
registration under the Securities Act of 1933, as provided by Section 4(2)
thereof.
(a) The following table sets forth cash sales of the Company's common stock
during each of the three years ended December 31, 1997. The persons who
acquired the Company's common stock were existing shareholders of the
Company, were known by the Company's management or were introduced to the
Company's management by other investors or persons acquainted with the
Company.
</TABLE>
<TABLE>
Approximate
Year Ended Number of Number of Total
December 31, Investors Shares Proceeds
- ----------- --------- --------- -----------
<S> <C> <C> <C>
1995 130 1,477,874 $4,110,887
1996 70 413,688 2,187,273
1997 10 205,556 231,500
</TABLE>
(b) The following table sets forth the number of shares and the value
assigned to the shares of the Company's common stock issued during each of
the three years ended December 31, 1997 as compensation for services
rendered to the Company by Directors, officers, consultants, legal counsel
and other advisors.
<TABLE>
Approximate
Year Ended Number of Number of
December 31, Recipients Shares Amount
- ----------- ---------- --------- -------
<S> <C> <C> <C>
1995 31 1,053,090 $431,148
1996 7 41,754 260,193
1997 10 1,000,857 384,235
</TABLE>
(c) The following table sets forth the number of shares and the value
assigned to the shares of the Company's common stock issued in connection
with the acquisition of businesses and assets for the three years ended
December 31, 1997.
<TABLE>
Approximate
Number of Busines or Assets Number of
Date Recipients Acquired Shares Amount
- ---- ---------- ---------------------- --------- -------
<S> <C> <C> <C> <C>
June 1995 1 Comstar 200,000 $ 126,000
September 1995 6 Long-distance customer
Base 19,763 74,111
October 1995 3 NSC 2,000,000 6,916,000
October 1995 1 NSC acquisition fees 100,000 346,000
December 1995 1 Long-distance customer
Base 20,002 130,413
March 1996 2 HMT 309,837 2,000,000
July 1996 1 HMT acquisition fees 23,333 65,000
</TABLE>
<PAGE> 92
(d) The following table sets forth the number of shares of the Company's
common stock issued upon conversion of the Company's Class A and Class B
preferred stock and the amount of Class A and Class B preferred stock which
was converted into shares of the Company's common stock for each of the
three years ended December 31, 1997. See (f) below.
Approximate Class of Security Number of
Year Ended Number of converted into common
December 31, Recipients common stock shares Amount
- ------------ ---------- ----------------- --------- -------
1995 N\A N\A N\A N\A
1996 6 Class A preferred 2,204,000 $177,495
2 Class B preferred 50,910 236,600
1997 4 Class A preferred 96,000 630
2 Class B preferred 580,682 874,485
(e) The following table sets forth the number of shares of the Company's
common stock issued upon conversion of the Company's convertible notes and
debentures and the amount of convertible note and debenture indebtedness
which was converted into shares of the Company's common stock for the three
years ended December 31, 1997. See (g) below.
Date of Number of Amount of
Name of Lender Conversion common shares Indebedness
- -------------- ---------- ------------- -----------
Renee Woody March 1996 1,000 $ 1,500
Robert Sweet March 1996 1,000 1,500
Richard Sweet March 1996 9,845 14,768
Lynn Hennegan March 1996 1,000 1,500
Sean Davis March 1996 1,000 1,500
Bart Andeer March 1996 250 375
Floroe Andeer March 1996 250 375
Brittany Leigh, Inc. March 1996 76,740 110,837
American First
Equipment Leasing, Inc. March 1996 116,467 66,652
Ken Gilde, Jr. February 1997 19,033 85,899
Richard Sweet February 1997 41,565 41,565
Edwin Salmon February 1997 25,762 25,762
Lee Mullineaux February 1997 51,296 46,395
American First
Equipment Leasing, Inc. February 1997 61,404 61,404
RIC Investment Fund February 1997 90,113 304,356
RANA Investment
Company April 1997 31,887 30,937
Timboon, LTD May 1997 87,912 50,000
Timboon, LTD May 1997 168,449 70,000
<PAGE> 93
(f) The following table sets forth the number of shares of the Company's
Class A and Class B preferred stock and the value assigned to the shares of
the Company's Class A and Class B preferred stock issued in connection with
the acquisition of businesses and for other purposes for the three years
ended December 31, 1997. See (d) above.
Approximate Business or assets
Number of acquired or other Class of Number of
Date Recipients purpose for issuance Preferred shares Amount
- ------------- ---------- ----------------------- --------- --------- --------
June 1995 1 Acquisition of LCI Class A 1,075,000 $ -0-
June 1995 1 Officer compensation Class A 1,375,000 20,625
June 1995 1 Acquisition of Comstar Class A 500,000 157,500
August 1995 1 Consulting fees Class A 150,000 -0-
July 1995 7 Acquisition of TNI Class B , 550,000 2,491,745
February 1996 2 Extension of indebedness Class B 140,000 236,600
(g) The following table sets forth the date, name and amount of note and
debenture indebtedness issued for cash by the Company for the three years
ended December 31, 1997. The persons who acquired the Company's notes and
debentures were existing shareholders of the Company, were known by the
Company's management or were introduced to the Company's management by other
investors or persons acquainted with the Company. See (e) above.
Date Name Amount
- ------------- ------------------------------------- ---------
January 1995 American First Equipment Leasing, Inc. $ 32,000
February 1995 American First Equipment Leasing, Inc. 5,000
February 1995 Brittany Leigh, Inc. 1,000
March 1995 Brittany Leigh, Inc. 17,150
April 1995 Brittany Leigh, Inc. 113,750
May 1995 Brittany Leigh, Inc. 39,500
May 1995 American First Equipment Leasing, Inc. 16,000
June 1995 Richard Sweet 20,000
June 1995 American First Equipment Leasing, Inc. 10,000
July 1995 Brittany Leigh, Inc. 10,000
October 1995 American First Equipment Leasing, Inc. 15,000
October 1995 Brittany Leigh, Inc. 52,000
November 1995 American First Equipment Leasing, Inc. 100,000
March 1996 Richard Sweet 25,000
April 1996+ Toby Walker 200,000
April 1996 American First Equipment Leasing, Inc. 49,000
June 1996 Nidan Corporation 500,000
July 1996 Nidan Corporation 345,000
August 1996 Toby Walker 200,000
September 1996 American First Equipment Leasing, Inc. 5,000
October 1996 American First Equipment Leasing, Inc. 24,000
October 1996 Nidan Corporation 246,000
November 1996 Nidan Corporation 65,000
November 1996 RIC Investment Fund 300,000
November 1996 RANA Investment Company 200,000
December 1996 American First Equipment Leasing, Inc. 4.717
December 1996 Richard Sweet 15,000
December 1996 Nidan Corporation 39,000
January 1997 Lee Mullineaux 10,000
January 1997 Tuzo Jerger 30,000
January 1997 Judson Marquart 20,000
February 1997 Timboon, LTD 1,120,000
April 1997 American First Equipment Leasing, Inc. 30,000
April 1997 Edwin B. Salmon 9,633
<PAGE> 94
Date Name Amount
- ------------- ------------------------------------- ---------
April 1997 Brittany Leigh, Inc. 55,000
July 1997 American First Equipment Leasing, Inc. 4,500
August 1997 Veronica Tully 2,000
August 1997 Paige Clarke 3,000
September 1997 Edwin B. Salmon 10,000
September 1997 American First Equipment Leasing, Inc. 5,000
September 1997 Brittany Leigh, Inc. 10,000
September 1997 Energy Electric, Inc. 30,000
October 1997 Edwin B. Salmon 5,500
October 1997 Mark and Virginia Blanchard 25,000
November 1997 Henry Rodriguez 70,000
November 1997 Mark and Virginia Blanchard 25,000
December 1997 RTR Financial Coporation 80,000
(h) The following table sets forth the date, name and amount of note and
debenture indebtedness issued by the Company for the three years ended
December 31, 1997 in connection with the acquisition of businesses. See
Notes 7 and 17 to the consolidated financial statements.
Business
Date Name Acquired Amount
- --------- ------------------- -------- -------
July 1995 Telcom United North TNI $ 225,000
July 1995 Donald McAlister TNI 75,000
July 1995 David Fink TNI 25,000
July 1995 Leonard D'Innocenzo TNI 25,000
July 1995 Dean Colantino TNI 25,000
July 1995 Don Dugan TNI 25,000
July 1995 Comgi Retirement Trust TNI 12,500
July 1995 John and Sharon Lang TNI 12,500
July 1995 Dale Higgins TNI 12,500
July 1995 Thomas Jannarone TNI 12,500
October 1995 Keith Krenz NSC 129,071
October 1995 Dinesh Khaladkar NSC 120,929
<PAGE> 95
(i) The following table sets forth options and warrants issued by the
Company for the three years ended December 31, 1997, the names of the
holders, the date on which the options and warrants were issued, the
exercise price of the warrants and options and their date of expiration.
Date Number of Expiration Exercise
Name of Security Holder Issued Shares Date Price
- ------------------------ ------- -------- ---------- --------
Michael Zidek 6/25/95 1,000 12/31/98 $1.50
Joseph Caudle 6/26/95 2,000 12/31/98 1.50
Jack & Adrienne Moye 6/26/95 6,667 12/31/98 1.50
David Brickely 6/26/95 10,000 12/31/98 1.50
Thomas Jehl 6/26/95 20,000 12/31/98 1.50
Richard L Summers 6/26/95 24,300 12/31/98 1.50
Desert West Invest. Res. 6/26/95 15,000 12/31/98 1.50
Telford A Walker 6/26/95 50,000 2/2/98 3.00
Ronald O Nestor 6/26/95 3,750 8/12/98 3.00
Tuzo Jerger 6/26/95 2,750 8/12/98 3.00
Arnold A Schnoll 7/5/95 10,000 12/31/98 1.50
Edward & Martha Carey 7/5/95 10,000 12/31/98 1.50
Mark S Carney 7/5/95 75,000 12/31/98 1.50
David C & David A Rippy 7/6/95 10,000 12/31/98 1.50
Art Leffers 7/6/95 6,700 12/31/98 1.50
Janice M Shelton 7/6/95 2,000 12/31/98 1.50
David K Brickley 7/6/95 10,000 12/31/98 1.50
William A Cameron 7/6/95 2,000 12/31/98 1.50
Maurice W Nicholson 7/6/95 20,000 12/31/98 1.50
Adrienne Moye 7/6/95 3,333 12/31/98 1.50
Arnold A Schnoll 7/6/95 5,000 12/31/98 1.50
David K Brickley 7/10/95 3,320 12/31/98 1.50
David K Brickley 7/10/95 1,680 12/31/98 1.50
Jess Robinson 7/10/95 3,333 12/31/98 1.50
Robert & Lynn Kilroy 7/10/95 2,000 12/31/98 1.50
Harold S & Jean V Davis 7/11/95 3,400 12/31/98 1.50
Janice Lee Davis 7/11/95 3,400 12/31/98 1.50
Sarah Brewer Cooley 7/14/95 3,333 12/31/98 1.50
Arnold A Schnoll 7/14/95 10,000 12/31/98 1.50
Keith Jassy 7/14/95 10,000 2/9/99 1.50
John Jassy 7/14/95 10,000 2/9/99 1.50
Arnold A Schnoll 7/17/95 8,000 12/31/98 1.50
Mike Hied 7/17/95 5,000 12/31/98 1.50
Richard & Judith Alexander 7/28/95 2,000 12/31/98 1.50
Arnold Schnoll 7/30/95 7,000 12/31/98 1.50
Richard Summers 7/30/95 12,850 12/31/98 1.50
Desert West Invest. Res. 7/30/95 32,667 12/31/98 1.50
Telford A Walker 7/30/95 22,000 2/2/98 1.50
Peter J Desforges 8/3/95 10,000 12/31/98 1.50
Amen J Wardy 8/4/95 6,667 12/31/98 1.50
Joseph M Caudle 8/5/95 2,000 12/31/98 1.50
Richard L Summers 8/8/95 6,400 12/31/98 1.50
Jerome D Nourse 8/12/95 8,000 12/31/98 1.50
Newberry Family Irr. Trust 8/12/95 6,667 12/31/98 1.50
OWL Holdings, L P 8/12/95 10,000 12/31/98 1.50
Keven D Foster 8/12/95 2,000 12/31/98 4.00
Mark S Carney 8/12/95 25,000 12/31/98 1.50
Timothy A Wesley 8/12/95 5,000 12/31/98 1.50
Michael Heid 8/16/95 3,333 12/31/98 1.50
Mark S Carney 8/16/95 25,000 12/31/98 1.50
<PAGE> 96
Date Number of Expiration Exercise
Name of Security Holder Issued Shares Date Price
- ------------------------ ------- -------- ---------- --------
Ronald T Bean 8/16/95 166,666 12/31/98 1.50
Peter Wilson 8/19/95 6,667 12/31/98 1.50
Vista Quest 8/22/95 25,000 12/31/98 1.50
Vista Quest 8/22/95 25,000 12/31/98 2.00
Timothy A Wesley 8/25/95 2,500 12/31/98 1.50
Telford A Walker 8/26/95 135,000 2/2/98 3.00
Joe Gupta 8/28/95 10,000 12/31/98 1.50
Timothy A Wesley 9/22/95 7,500 12/31/98 1.50
Vista Quest 9/23/95 25,000 12/31/98 2.50
Michael L Basso 9/25/95 10,000 12/31/98 1.50
Cesar A Muniz 9/25/95 5,000 12/31/98 1.50
David E Salmon 9/25/95 5,000 12/31/98 1.50
John B Troubh 10/17/95 10,000 12/31/98 3.50
Stephen W Leahy 10/17/95 7,000 12/31/98 3.50
Seth Sholes 10/17/95 5,000 12/31/98 3.50
Joseph Musto 10/17/95 4,000 12/31/98 3.50
Steven T Lebman 10/17/95 5,000 12/31/98 3.00
Robt W Jr & Delores Meyer 10/17/95 50,000 12/31/98 3.50
Ronald Bean 10/17/95 100,000 12/31/98 3.50
Robert W Meyer, Jr 11/1/95 25,000 12/31/98 3.00
Augzella Bean 11/1/95 5,714 12/31/98 3.50
Ronald Bean 11/1/95 50,000 12/31/98 3.50
Renata Young 11/14/95 4,300 12/31/98 3.50
JAR Investments Co Ltd 11/14/95 4,300 12/31/98 3.50
Anita Rice 11/14/95 4,300 12/31/98 3.50
Mark Geiselmayr 11/14/95 4,300 12/31/98 3.50
Paul B. & Pete Ropner 11/14/95 4,300 12/31/98 3.50
R A Ferrin Co Inc SEP 11/14/95 4,300 12/31/98 3.50
Robert I Nash 11/14/95 4,300 12/31/98 3.50
Steven R Nash 11/14/95 5,750 12/31/98 3.50
Geraldine S Barlow 11/14/95 4,300 12/31/98 3.50
Joyce T Rice 11/14/95 5,750 12/31/98 3.50
Thomas E Daniels, Jr 11/14/95 4,300 12/31/98 3.50
Floyd E Hodges 11/14/95 2,150 12/31/98 3.50
Fred S & Arlene Kolm 11/14/95 2,150 12/31/98 3.50
Susan O Vogeler Trust 11/14/95 4,300 12/31/98 3.50
Keven J Monson 11/14/95 4,300 12/31/98 3.50
Bradford K Beesley 11/14/95 4,300 12/31/98 3.50
George W Mills 11/14/95 7,200 12/31/98 3.50
William Beesley III 11/14/95 4,300 12/31/98 3.50
Famous Maid Brassier Corp 11/14/95 10,000 12/31/98 2.50
Bruce L Varga 11/14/95 1,500 12/31/98 3.50
Albert Max Koehler, Jr 11/14/95 5,000 12/31/98 3.50
David A Rippy 11/14/95 10,000 12/31/98 3.50
David C Rippy 11/14/95 5,000 12/31/98 3.50
Merle Davis 11/14/95 2,000 12/31/98 3.50
Merle Davis 11/14/95 2,000 12/31/98 3.50
Merle Davis 11/14/95 14,000 12/31/98 3.50
Richard Summers 11/14/95 6,400 12/31/98 1.50
Mark S Carney 11/14/95 25,000 12/31/98 1.50
Elgin Cary 11/14/95 13,200 12/31/98 3.50
David S Schneeweiss 11/14/95 10,000 12/31/98 3.50
Robert L Frank 11/14/95 5,000 12/31/98 3.50
Dennis Epstein 11/14/95 22,000 12/31/98 3.50
Edward & Martha Cary 11/14/95 5,000 12/31/98 3.50
Karen Jo Kelly 11/14/95 2,286 12/31/98 3.50
JoAnn Paulich 11/14/95 2,000 12/31/98 3.50
<PAGE> 97
Date Number of Expiration Exercise
Name of Security Holder Issued Shares Date Price
- ------------------------ ------- -------- ---------- --------
Thomas Capaldi 11/14/95 20,000 12/31/98 3.50
Suzanne Kuhns 11/14/95 13,200 9/7/99 3.50
Merle Davis 11/15/95 3,000 12/31/98 3.50
Stanley & Anne Kotler 11/15/95 5,000 12/31/98 3.50
Rich Family Prtshp, LLC 12/6/95 10,000 12/31/98 3.50
Leon & Sandra Karash 12/6/95 4,000 12/31/98 3.50
Clark Mech'cal Contractors 12/6/95 2,150 12/31/98 3.50
Timothy C Richards 12/6/95 2,150 12/31/98 3.50
Donald & Elsie Mae Bryan 12/6/95 2,150 12/31/98 3.50
Thomas Capaldi 12/6/95 9,000 12/31/98 3.50
Jane A Miller 12/6/95 5,000 12/31/98 3.50
Phyllis J Rice 12/6/95 5,000 12/31/98 3.50
David A Rippy 12/22/95 15,000 12/31/98 8.00
Elgin Cary 12/22/95 40,100 12/31/98 3.50
Suzanne Kuhns 12/22/95 40,100 9/7/99 3.50
John T Orton 1/9/96 4,500 1/8/98 2.50
Travis S Shannon 1/9/96 3,000 1/8/98 2.50
James P Acos 1/9/96 2,000 1/8/98 2.50
William Kovacs 1/9/96 6,000 1/8/98 2.50
Robert Riess 1/9/96 4,000 1/8/98 2.50
James Dicanio 1/9/96 2,000 1/8/98 2.50
Ronald O Nestor 1/9/96 20,000 1/8/98 2.50
Larry Barels 1/9/96 4,000 1/8/98 2.50
William J Conrad 1/9/96 6,500 1/8/98 2.50
David Anawalt 1/9/96 2,000 1/8/98 2.50
Nikki Nestor & Ben Cherski 1/9/96 3,000 1/8/98 2.50
Tuzo Jerger 1/9/96 5,000 1/8/98 2.50
T Jerger & I. Rollover 1/9/96 4,800 1/8/98 2.50
Timothy C Richards 1/9/96 2,150 1/8/98 3.50
Marae & James Kimball 1/9/96 2,875 1/8/98 3.50
Bruce Jorgenson 1/9/96 11,450 1/8/98 3.50
Stephen D Taylor 1/9/96 3,600 1/8/98 3.50
William Madsen 1/9/96 2,150 1/8/98 3.50
Reynold T Rice 1/9/96 2,150 1/8/98 3.50
Brent & Joenne Rice 1/9/96 2,150 1/8/98 3.50
Jay Rice 1/9/96 68,185 1/8/98 3.50
Merle Davis 1/9/96 25,000 1/8/98 3.50
Thomas R Ballman 1/9/96 5,000 1/8/98 5.00
Virginai V Armstrong 1/9/96 4,286 1/8/98 3.50
David B Douglas 1/9/96 6,000 1/8/98 3.50
Catherine D Audrey IRA 1/9/96 2,000 1/8/98 2.50
Bonbright Family Trust 1/9/96 4,286 1/8/98 3.50
Larry Snapp 1/9/96 24,350 1/8/98 3.50
John & Cindy Rodgers 1/9/96 5,000 1/8/98 3.00
Wexford Gravel Pension Tst 1/9/96 30,000 1/8/98 3.50
Ron Nestor 1/9/96 68,300 1/8/98 2.50
Karen Jo Kelly 2/9/96 1,000 2/8/98 8.00
Joseph S Calabrese 2/9/96 17,000 2/8/98 8.00
David Marchetti 2/9/96 3,000 2/8/98 8.00
Robert L Frank 2/9/96 1,500 2/8/98 8.00
Mike & Laura Heid 2/9/96 1,000 2/8/98 8.00
Michael A Rich 2/9/96 1,500 2/8/98 8.00
Rich Fmly Prtshp LLC 2/9/96 1,500 2/8/98 8.00
Dennis & Elizabeth Epstein 2/9/96 5,500 2/8/98 8.00
Robert & MaryAnn Stevenson 2/9/96 1,500 2/8/98 8.00
Karen Jo Kelly 2/9/96 4,167 2/8/98 8.00
Ryan Kelly 2/9/96 125 2/8/98 8.00
<PAGE> 98
Date Number of Expiration Exercise
Name of Security Holder Issued Shares Date Price
- ------------------------ ------- -------- ---------- --------
Jack & Adrienne Moye 2/9/96 834 2/8/98 8.00
Adrieane Moye 2/9/96 1,417 2/8/98 8.00
General Consultants 2/9/96 700 2/8/98 3.50
General Consultants 2/9/96 31,157 2/8/98 3.50
Douglas L Drumwright 2/9/96 4,167 2/8/98 8.00
David B Douglas 2/9/96 7,500 2/8/98 8.00
Jay Rice 2/9/96 17,667 2/8/98 8.00
Robert W Meyer Jr 2/9/96 18,000 2/8/98 3.50
Ronald Bean 2/9/96 13,333 2/8/98 1.50
Ronald Bean 2/9/96 53,271 2/8/98 3.50
Dave Rippy 2/16/96 10,000 2/15/98 3.50
Michael Heid 2/16/96 1,000 2/15/98 4.50
Elgin Cary 2/16/96 33,000 2/22/98 8.00
John Jassy 2/16/96 78,929 2/15/98 3.00
Gregory Somers & E Johnson 2/16/96 834 2/15/98 8.00
Helt Industries Ltd 2/16/96 1,000 2/15/98 8.00
Patrick & Joan Griffiths 2/16/96 1,667 2/15/98 8.00
John A Beckwith 2/23/96 2,000 2/15/98 8.00
George & Louise Werner 2/23/96 2,500 2/15/98 8.00
Steve Reid 3/8/96 207,000 3/7/98 4.00
Steve Reid 3/8/96 70,000 3/7/98 2.50
Merle Davis 3/12/96 8,000 3/11/98 3.50
Janice M Shelton 3/12/96 963 3/11/98 10.00
Richard L Summers 3/12/96 282 3/11/98 10.00
David A Rippy 3/12/96 2,000 3/11/98 10.00
Robert E Smith Ttee 3/12/96 938 3/11/98 10.00
Michael J Donnelly 3/12/96 1,000 3/11/98 10.00
Matthew P Rippy 3/12/96 500 3/11/98 10.00
Michael C Rippy 3/12/96 750 3/11/98 10.00
Brittney Leigh, Inc. 3/12/96 2,500 3/11/98 10.00
Albert Max Koehler, Jr. 3/12/96 250 3/11/98 10.00
Anthony P Grasso 3/12/96 2,500 3/11/98 10.00
Standard Cap. Group, Inc. 3/12/96 50,000 3/11/98 4.00
Edward Cary 3/12/96 1,500 3/11/98 8.00
Eddie Yoon 3/12/96 3,000 3/11/98 2.50
David C Rippy 3/12/96 500 3/11/98 10.00
Thom Mcnamee 4/8/96 2,500 2/15/98 8.00
Richard Sweet 4/8/96 14,345 4/7/98 1.50
Brittany Leigh Inc. 4/8/96 76,740 4/7/98 1.50
Amer. First Equip Leasing 4/8/96 116,467 4/7/98 1.50
Walter P Langtry 4/25/96 5,246 4/24/98 7.62
Arthur J Leffers 4/25/96 3,300 4/24/98 7.62
Ronald E Soderling 4/25/96 10,000 4/24/98 10.00
Mathew P Rippy 4/25/96 500 4/24/98 10.00
Michael C Rippy 4/25/96 750 4/24/98 10.00
David C Rippy 4/25/96 500 4/24/98 10.00
David A Rippy 4/25/96 2,000 4/24/98 10.00
Mike Donnelly 4/25/96 1,000 4/24/98 10.00
Albert Max Koehler 4/25/96 250 4/24/98 10.00
David B Douglas 4/25/96 7,500 4/24/98 6.00
William O Schelm 7/2/96 1,504 7/1/98 5.50
Richard L Summers 7/2/96 292 7/1/98 5.50
James T Kowalczyk 7/2/96 23,709 7/1/98 5.50
Jerry Jackintell 7/2/96 7,021 7/1/98 5.50
<PAGE> 99
Date Number of Expiration Exercise
Name of Security Holder Issued Shares Date Price
- ------------------------ ------- -------- ---------- --------
John T Orton 7/2/96 502 7/1/98 5.50
David W Reue 7/2/96 3,009 7/1/98 5.50
Travis Shannon 7/2/96 1,003 7/1/98 5.50
Nelson S Clark 7/2/96 2,006 7/1/98 5.50
Sharon G DeBruyn 7/2/96 1,003 7/1/98 5.50
Craig D Brewer 7/2/96 2,006 7/1/98 5.50
Catherine D Andrey IRA 7/2/96 1,003 7/1/98 5.50
Parker Shelton 7/2/96 1,413 7/1/98 5.50
Summit City Investments 7/2/96 2,758 7/1/98 5.50
Donald J Schmidt 7/2/96 501 7/1/98 5.50
Nidan, Inc 7/2/96 90,910 7/1/98 5.50
Telford Walker 7/16/96 4,000 7/15/98 3.50
Nidan, Inc 7/19/96 69,000 7/23/98 5.50
James T Kowalczyk 8/8/96 24,000 8/7/98 3.50
Jay Rice 8/8/96 11,000 8/7/98 5.00
John D Jassy 8/8/96 2,500 8/7/98 8.00
John D Jassy 8/8/96 938 8/7/98 10.00
Ronald Nestor 8/8/96 17,500 8/7/98 3.50
Kevin J Monson 8/12/96 2,006 8/12/98 5.00
Sun Financial Group Inc. 8/27/96 5,000 8/26/98 3.83
Timothy A Wesley 8/30/96 2,000 8/29/98 4.50
Nidan, Inc 10/17/96 17,142 10/16/98 5.50
Nidan, Inc 10/17/96 5,000 10/16/98 4.50
Sencar, Inc 11/7/96 4,020 11/6/98 4.50
Mark S Carney 11/7/96 20,052 11/6/98 4.50
Wesley Family Loving Trust 11/7/96 11,232 11/6/98 4.50
Merle Davis 11/7/96 6,000 11/6/98 4.50
Merle Davis 11/7/96 2,037 11/6/98 4.50
Nidan, Inc 1/24/97 18,667 1/23/99 4.50
Tuzo Jerger 2/6/97 9,250 2/5/99 2.00
Ron Nestor 2/6/97 6,250 2/5/99 2.00
Judson Marquardt 2/6/97 2,000 2/5/99 2.00
Peter Wilson 2/10/97 32,450 2/9/99 2.50
Ronald P Teevan 2/10/97 2,000 2/9/99 2.50
Ronald P Teevan 2/10/97 2,000 2/9/99 2.50
Famous Maid Brassier Corp 2/10/97 5,000 2/9/99 2.00
John Powell 2/10/97 2,222 2/9/99 4.50
Lee Mullineaux 2/10/97 50,000 2/9/99 1.00
Floyd Hodges 2/10/97 1,438 2/9/99 3.50
Fred S & Arlene Kolm, 2/10/97 1,437 2/9/99 3.50
Martin Nelson 2/10/97 1,437 2/9/99 3.50
Jeffrey Esfeld 2/10/97 1,437 2/9/99 3.50
Jackson Morris 2/10/97 12,500 2/9/99 2.00
Cyber Broadcasting 3/19/97 500,000 3/18/99 1.50
Russell Armstrong 3/21/97 50,000 Canceled 2.50
Mark Woodward 3/21/97 50,000 Canceled 2.50
Amer. First Equip Leasing 3/22/97 150,822 Canceled 0.20
Brittany Leigh Inc. 3/22/97 60,032 Canceled 0.20
Brittany Leigh Inc. 4/22/97 40,076 Canceled 0.20
Amer First Equip Leasing 4/22/97 150,288 Canceled 0.20
Edwin B Salmon 4/22/97 50,028 Canceled 0.20
Ronald Soderling 8/14/97 65,000 8/13/99 0.10
Merle Davis 8/14/97 8,000 8/13/99 4.00
Mark & Virginia Blanchard 10/31/97 250,000 10/30/99 0.10
John Powell 11/5/97 2,000 11/4/99 4.00
Henry Rodreguez 11/14/97 1,000,000 11/13/99 0.17
Mark & Virginia Blanchard 11/26/97 250,000 11/25/99 0.10
<PAGE> 100
Date Number of Expiration Exercise
Name of Security Holder Issued Shares Date Price
- ------------------------ ------- -------- ---------- --------
Hugh M Gibbons 12/23/97 500,000 12/22/99 0.47
Edward & Martha Cary 3/3/98 416,666 3/2/00 0.10
Suzanne Kuhns 3/3/98 208,333 3/2/00 0.10
David Fink 4/1/98 12,500 4/1/00 1.50
Donald P Dugan 4/1/98 12,500 4/1/00 1.50
Donald McAllister 4/1/98 37,500 4/1/03 0.20
Leonard D'innoceno 4/1/98 12,500 4/1/00 1.50
John And Sharon Lang 4/1/98 6,250 4/1/00 1.50
John And Sharon Lang 4/1/98 6,250 4/1/03 0.20
Telcom United North 4/1/98 112,500 4/1/03 0.20
Telcom United North 4/1/98 112,500 4/1/00 1.50
Thomas Jannarone 4/1/98 6,250 4/1/03 0.20
Leornard F D'Innoceno 4/1/98 12,500 4/1/03 0.20
Dale D Higgins 4/1/98 6,250 4/1/00 1.50
Dale D Higgins 4/1/98 6,250 4/1/03 0.20
R Thomas Jannarone 4/1/98 6,250 4/1/00 1.50
David Fink 4/1/98 12,500 4/1/03 0.20
Donald T. McAllister 4/1/98 37,500 4/1/00 1.50
Dean Charles Colantino 4/1/98 12,500 4/1/00 1.50
Comgi Retirement Trust 4/1/98 6,250 4/1/00 1.50
Comgi Retirement Trust 4/1/98 6,250 4/1/03 0.20
Donald Dugan 4/1/98 12,500 4/1/03 0.20
K. Gregory Wohl Ira 4/23/98 16,667 12/31/98 1.50
Nidan, Inc. 7/7/98 1,000,000 7/6/00 0.20
Nidan, Inc. 7/7/98 1,000,000 7/6/00 0.25
Edwin B. Salmon 8/15/97 500,000 8/14/02 0.10
James Kowalczyk 8/15/97 500,000 8/14/02 0.10
Larry R. Snapp 8/15/97 100,000 8/14/02 0.10
Richard A. Sweet 8/15/97 100 000 8/14/02 0.10
Ronald Tevan 8/15/97 100,000 8/14/02 0.10
David Salmon 2/20/97 25,000 2/19/99 1.50
Cesar Muniz 2/20/97 25,000 2/19/99 1.50
Robert Thompson 2/20/97 50,000 2/19/99 1.50
Linda Grasso 2/20/97 12,500 2/19/99 1.50
William VanHook 2/20/97 5,000 2/19/99 1.50
<PAGE> 101
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
3.i. *Articles of Incorporation, as amended
3.ii.*By-laws, as amended
4. Convertible Debentures
P 1.* Convertible Debenture Note, dated December 5, 1995,
between the Company and Telcom United North, Inc.
P 2.* Convertible Debenture Note, dated December 5, 1995,
between the Company and Donald T. McAllister, M.D
P 3.* Convertible Debenture Note, dated December 5, 1995,
between the Company and David Fisk.
P 4.* Convertible Debenture Note, dated December 5, 1995,
between the Company and Leonard F. D'Innocenzo
P 5.* Convertible Debenture Note, dated December 5, 1995,
between the Company and Dean Charles Colantino
P 6.* Convertible Debenture Note, dated December 5, 1995,
between the Company and Donald P. Dugan.
P 7.* Convertible Debenture Note, dated December 5, 1995,
between the Company and Comgi Retirement Trust,
John R. Lang, M.D./Sharon B. Lang: Trustees
P 8.* Convertible Debenture Note, dated December 5, 1995,
between the Company and John R. Lang, M.D./Sharon B. Lang.
P 9.* Convertible Debenture Note, dated December 5, 1995,
between the Company and Dale D. Higgins
P 10.* Convertible Debenture Note dated December 5, 1995,
between the Company and R. Thomas Jannarone.
11.# Form of Offshore Offering Distribution agreement by and
between Systems Communications, Inc. and Victory
Investments, LLC.
12.# Form of 10% cumulative Convertible Debentures due November
21, 1997 in the aggregate amount of $500,000.
13.# Form of Offshore Securities Subscription Agreement for
$500,000 10% Cumulative Convertible Debentures.
14.# Form of Offshore Securities Subscription Agreement for
$1,120,000 4% Convertible Debentures.
15.#### Form of 10% Cumulative Convertible Debenture Note.
16.++ Form of Settlement Agreement dated as of March 2, 1998 between
the Company and Timboon LTD, including Joint Escrow
Instructions and Revocable Proxy.
17.+++ Form of Non-Statutory Incentive Stock Option Agreement
5.3 x Opinion of Jackson L. Morris, Esq.
10. Material Contracts
P 1.* Ameristar Stock Acquisition Agreement
P 2.* HMT Stock Purchase Agreement (March 12, 1996)
P 3.* NSC Agreement to Exchange Stock (August 24, 1995)
P 4.* NSC Restated Agreement to Exchange Stock (October 13, 1995)
P 5.* NSC Assignment and Amendment of Restated Agreement to
Exchange Stock (October 20, 1995)
P 6.* Telcom Restated Stock Purchase Agreement (June 16, 1995)
7. Employment Contracts
P (a)* Robert L. Alexander
P (b)* Russell H. Armstrong
P (c)* Edwin B. Salmon
P (d)* Stephen E. Williams
P (e)* Mark Woodward
P (f)* John D. Looney
P (g)* John A. Paolicelli
P (h)* James L. Tolley
P (i)* David J. Olivet
(j)## Karen Wolfe
(k)## James W. Wolfe
(l)## Eric R. Wolfe
<PAGE> 102
P 8.* HMT Trademark Registration for "RETURN" Software Program
(December 8, 1992)
P 9.* HMT - Medicode Value-Added Reseller Software Development,
Marketing, and Maintenance Agreement (March 9, 1995)
P 10.* NSC Cooperative Research and Development Agreement Between
NSC and the U.S. Army (June 2, 1994)
P 11.* Services and Marketing Agreement By and Among GE Capital
Communication Services Corporation and Telcom
(March 31,1995)
P 12.* Joint Venture Agreement Between Universal Network
Services, Inc. and Telcom (February 13, 1995).
P 13.* Comstar Acquisition Agreement
P 14.* Coast Communications Acquisition Agreement
P 15.* Teaming Agreement with Health Management Systems, Inc.
P 16.** Authorized sales agent agreement between MCI
Telecommunications Corporation and Ameristar, dated June 12,
1995
P 17.** Zero Plus-Zero Minus billing and information management
agreement between Zero Plus Dialing, Inc. and Ameristar,
dated May 16, 1996
P 18.** Telecommunications Agreement between U.S. Long Distance,
Inc. and Ameristar
P 19.** Tri-Party Agreement among Ameristar, U.S. Long Distance,
Inc. and Zero Plus Dialing, Inc.
P 20.** Telephone Agreement between Ameristar and U.S. Long
Distance, Inc., dated July 10, 1996
P 21.** License Agreement between Ameristar and VCA Pictures, dated
February 13, 1996
P 22.** Agreement between Ameristar and United International
Pictures, dated April 1, 1996
P 23.** Marketing Agreement, dated October 2, 1995, between
Ameristar and U.S. Osiris Corporation
P 24.** Operator Service Agreement dated April 15, 1995, between
Opticom and Ameristar
P 25.** Mitel OSS Servicing Agreement, dated September 1, 1993
between MasterCorp, Inc. and Ameristar
P 26.** Telecommunications Agreement, dated January 15, 1996
between Long Distance Exchange Corp. and Ameristar
P 27.** Agreement, dated January 1995, between LDOS
Communications, Inc. and Ameristar
P 28.** Agreement, dated February 28, 1994, between L.D.
Communications, Inc. and Ameristar
P 29.** Contract Operator Services Agreement for Public Pay Phones
and Letters of Agency, dated January 7, 1992, between Fone
America, Inc. and Ameristar
P 30.** Payphone Aggregator Agreement, dated July 22, 1993,
between Communication TeleSystems International and
Ameristar
P 31.** Operator Service Agreements between Capital Network
System, Inc. and Ameristar
P 32.* Agreements between Ameristar Network Exchange, Inc. and
Ameristar
P 33.** Agreement dated November 11, 1991 between Ameristar and
Access Telecommunications, Inc.
P 34.** Agreement dated September 16, 1991 between Conquest
Operator Services Corporation and Ameristar
35.## Heads of Agreement for change in Management of National
Solutions Corporation.
36.## Rescission Agreement, dated May 21, 1997 by and between the
Company, Ameristar Telecommunications, Inc., Mark Woodward
and Russell Armstrong.
<PAGE> 103
37.## Promissory note dated May 21, 1997 between ATI and the
Company.
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.
39.## Cooperative Marketing and Option Agreement dated June 9, 1997
between HMT and the Company.
40.## Purchase and Sale Agreement between TNI and International
TeleData Corporation dated January 31, 1997.
41.## Form of Convertible Debenture in the amount of $500,000
between International TeleData Corporation and TNI.
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.
43.### Agreement to Exchange Stock, dated November 14, 1997, by and
between Grant Kolb and Patrick Loeprich (as "Sellers") and
the Company
16.* Letter re change in certifying accountant
16.1.+ Letter re change in certifying accountant
17.1.## Resignation Letter of Stephen Williams.
17.2.## Resignation Letter of David J. Olivet
P 21 * List of Subsidiaries of Registrant
23.7 x Consent of Jackson L. Morris, Esq.(included in Exhibit 5.3)
23.8 xx Consent of Ernst & Young, LLP
23.9 x Consent of Moore Stephens Lovelace, P, A.
27.1 * Financial Data Schedule (Year ended December 31, 1995)
27.2 **** Financial Data Schedule (Nine months ended September 30, 1996)
27.3 #### Financial Data Schedule (Year ended December 31, 1996)
27.4 **** Financial Data Schedule (Three months ended March 31, 1997)
27.5 **** Financial Data Schedule (Six months ended June 30, 1997)
27.6 **** Financial Data Schedule (Nine months ended September 30, 1997)
27.7 #### Financial Data Schedule (Year ended December 31, 1997)
27.8 **** Financial Data Schedule (Three months ended March 31, 1998)
27.9 **** Financial Data Schedule (Six months ended June 30, 1998)
99. Additional Exhibits
1. *** Arbitration award in the matter of the Arbitration between
Telcom Network, Inc. and GE Capital Communication Services
("GECCS") and New Enterprise Wholesale Services, Ltd.
(News")
<PAGE> 104
* Incorporated by reference to the Company's Form 10 as filed with the
Commission on July 23, 1996.
** Incorporated by reference to the Company's Registration Statement on
Form 10/A as filed with the Commission on September 17, 1996.
*** Incorporated by reference to the Company's Current Report on Form 8-K
dated October 29, 1996.
**** Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the respective quarterly period.
# Incorporated by reference to the Company's Current Report on Form 8-K
as filed on March 27, 1997.
## Incorporated by reference to the Company's Current Report on Form 8-K,
as filed on July 28,1997.
### Incorporated by reference to the Company's Current Report on Form 8-K,
as filed on November 21,1997.
#### Incorporated by reference to the Company's Annual Report on Form 10-K
for the respective annual period.
+ Incorporated by reference to the Company's Current Report on Form 8-K, as
filed on November 25, 1998.
++ Incorporated by reference to the Company's Current Report on Form 8-K, as
filed on March 10, 1998.
+++ Incorporated by reference to the Company's registration statement on Form
S-8, File No. 333-52455.
++++ Incorporated by reference to the Company's registration statement on Form
S-8, File No. 333-57685.
X Filed herewith.
XX To be filed by amendment.
(b) Financial Statement Schedules
No schedules are being filed as a part of this registration statement as such
schedules are not applicable, are not required or the required information is
included in the consolidated financial statements or notes thereto.
<PAGE> 105
Item 17.Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the Securities
Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range may
be reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) (_230.424(b) of this chapter) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
<PAGE> 106
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned thereunto duly authorized in Clearwater, Florida on the 16th day
of July 1998.
SYSTEMS COMMUNICATIONS, INC. Date: November 3, 1998
/s/ James T. Kowalczyk
- ---------------------------------
JAMES T. KOWALCZYK
President, Principal Executive Officer
and Director
/s/ Richard A. Sweet
- ---------------------------------
RICHARD A. SWEET
Director
/s/ Larry R. Snapp
- ---------------------------------
LARRY R. SNAPP
Director
/s/EDWIN B. SALMON, JR.
- ---------------------------------
EDWIN B. SALMON, JR.
Director and Chairman
/s/EDWIN B. SALMON, JR.
- ---------------------------------
EDWIN B. SALMON, JR.
Principal Financial Officer
EXHIBIT 5.3
October 15, 1998
By Certified First Class U.S. Mail and Telephone Facsimile
Board of Directors
Systems Communications, Inc.
Clearwater, Florida
Re: Registration Statement on Form S-1
Commission file no. 333-59283
Gentlemen:
I am special counsel for Systems Communications, Inc., a Florida corporation,
(the "Company"), in connection with the registration under the Securities Act of
1933, as amended, (the "Act") on Form S-1 ("Registration Statement") for the
offer and sale of up to 25,536,509 shares (the "Shares") of the Company's
common stock, par value $.001 per share, which at the date hereof are
partially (i) issued, outstanding and owned by stockholders of the Company and
(ii) will be issued and outstanding upon exercise by the holders of certain
options and warrants and upon the conversion by the holders of certain
debentures. Based upon my review of appropriate records of proceedings of the
Company's board of directors, the forms of relevant options, warrants and
debentures and the Company's audited balance sheets for the period and years
ended December 31, 1996 and 1997, and statement of changes in stockholders'
equity from inception to December 31, 1997, it is my opinion that the Shares
included in the Registration Statement are or, when issued and delivered
against payment required for exercise of the related options and warrants and
in conversion of the related debentures, will be legally authorized, duly and
validly issued, fully paid and non-assessable.
I hereby consent to the use of this opinion as an exhibit to the Registration
Statement and the reference to me therein under the caption "Interests of Named
Experts and Counsel." Please be advised that I am a stockholder and warrant
holder of the Company, as reflected on the Company's official records.
Very truly yours
/s/ Jackson L. Morris
Jackson L. Morris
Exhibit 23.9
Consent of Independent Certified Public Accountants
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated May 8, 1998, in the Registration Statement (Form
S-1 No. 333-59283) and related Prospectus of Systems Communications, Inc.
and Subsidiaries dated on or about October 28, 1998.
Certified Public Accountants
/s/ Moore Stephens Lovelace, P.A.
Orlando, Florida
October 28, 1998
