ITEM 1. BUSINESS.
Systems Communications, Inc. (the "Company"), a Florida corporation, was organized as Florida One Capital Corporation in 1987 and made an initial public offering of its common stock 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., and at various times, as a result of business acquisitions, was a merchandiser of optical products and a developer of residential homes. All business acquisitions made by the Company prior to 1991 were rescinded in 1991 or earlier and the Company was inactive from 1991 until August 1994. In August 1994, the Company acquired Ameristar Telecommunications, Inc. ("ATI"), an Illinois corporation, and Coast Communications, Inc. ("CCI"), an Arizona corporation. ATI sells Operator Service Provider ("OSP"), long-distance telephone and Pay-Per-View ("PPV") television services and products to small and medium-sized hotels and motels. CCI is in the business of installing and servicing PPV equipment. As more fully discussed below, the acquisitions by the Company of ATI and CCI were rescinded in May of 1997 and 1996, respectively.
In June 1995, the Company acquired LCI Communications, Inc. ("LCI"), from an officer and director of the Company, and Comstar Network Services, Inc. ("Comstar"), both of which are Florida corporations; and, in July 1995, the Company acquired Telcom Network, Inc. ("TNI"), a Delaware corporation. All of these companies, individually, operated as switch-less re-sellers of long-distance telephone services and products and were combined into one operating division (hereinafter referred to, collectively, as "TNI"). TNI is also in the business of providing utility and telecommunications audit and cost recovery services to large and small businesses and governmental entities. As more fully discussed below, the Company sold substantially all of the operating assets of TNI in January 1997.
In October 1995, the Company acquired National Solutions Corporation ("NSC"), a Pennsylvania corporation; and, in March 1996, the Company acquired Health Management Technologies ("HMT"), a California corporation. The principal business of NSC is (i) to develop, for commercial use, healthcare management information systems technology obtained under a Cooperative Research and Development Agreement ("CRDA") between NSC and the U.S. Department of the Army (the "U.S. Army") pursuant to the Federal Technology Transfer Act of 1986, as amended, and (ii) sell the benefits from the use of such technology to the U.S. automotive industry (and its down-line vendors), other large, self-insured companies, healthcare insurers, intermediaries, including health maintenance organizations ("HMO's"), preferred provider organizations ("PPO's") and healthcare benefit plan administrators. To date, the Company has not been successful in marketing its management information systems technology due to numerous factors, including large operating losses from businesses acquired and the effect of those losses on the ability of the Company to continue to fund NSC's software development and marketing efforts. HMT develops and markets PC based occupational health software products for managing cases of work disability (absence) that facilitate return to work and reduce disability related costs. As more fully discussed below, the Company's acquisition of HMT was rescinded in June 1997.
The amounts and types of consideration paid by the Company in connection with each of these acquisitions, the nature and terms of the CCI, ATI and HMT rescission transactions and the terms of the sale of substantially all of the operating assets of TNI are more fully described below and in the Notes to the consolidated financial statements.
During the periods following the dates on which these acquisitions occurred, large operating losses have been incurred. These operating losses have principally been funded by the private placement of the Company's debt and equity securities (see "Management's Discussion and Analysis of Financial Condition and Results of Operations").
In May 1996, the Company informed the former stockholders of Coast Communications, Inc. ("CCI") that the Company was canceling the acquisition of CCI and terminating all of the related acquisition documents. The former stockholders of CCI filed suit to enforce promissory notes in the aggregate principal amount of $300,000 issued by the Company in connection with the CCI acquisition and the issuance by the Company of an additional 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.
In January 1997, the Company sold substantially all of the assets of TNI, in two separate transactions, for an aggregate of $101,000 in cash and a $500,000 convertible debenture issued by International TeleData Corporation. The sale of TNI's assets did not include the award in the amount of approximately $1,250,000 granted to TNI in a binding arbitration proceeding between and among GE Capital Communication Services Corporation ("GECCS"), New Enterprise Wholesale Services, Limited Partnership ("News") and TNI. 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.
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.
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 and the cancellation of (i) the 6% notes payable issued in connection with the acquisition and (ii) warrants issued to the former ATI shareholders to purchase 168,668 shares of the Company's common stock. See Notes 4 and 7 to the accompanying consolidated financial statements.
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.
After the sale of substantially all of the operating assets of TNI and the rescission of the CCI, ATI and HMT acquisitions, the Company's remaining operations consist of NSC. As more fully discussed herein, it is uncertain whether or not NSC's operating activities will generate profitable operations in the future or whether or not the Company will have available sufficient resources to fund NSC's operating activities.
At the time the Company acquired these businesses, it anticipated that such businesses would generate higher revenues and operating income than those that have been achieved to date and that the amount of financing needed by the acquired businesses would be less than the amount the Company has provided to date and will likely be needed by those businesses in the future in order for them to attain profitable operations. The principal reasons for the shortfall from the original expectations of the Company for acquired businesses include, among others, (i) the failure of NSC to successfully market the technology acquired under the CRDA, (ii) constraints on the part of the Company to fund the continuing operating losses of businesses acquired, (iii) higher than anticipated product development, sales and marketing costs incurred by both NSC and HMT, (iv) the damage to TNI's business caused by GECCS and News from the failure of GECCS and News to, among other things, provision customer accounts for telecommunication services and products offered by GECCS and News and sold by TNI pursuant the GECCS Agreement and (v) constraints on the part of the Company to fund the PPV capital requirements of new business opportunities available to ATI. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements included elsewhere herein.
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 purchase 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.
For the past three fiscal years the Company has operated in two industry segments: healthcare management information products and services ("Healthcare Management"); and, telecommunications products and services ("Telecommunications"). The healthcare segment includes the operations of NSC and HMT from their respective dates of acquisition; and, the telecommunications segment includes the operations of TNI, Comstar and LCI from their respective dates of acquisition and the operations of ATI and CCI for all periods presented. 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 consolidated statements of operations for all periods presented.
Following is a summary of segment information for each of the three years in the period ended December 31, 1997:
1997 1996 1995 ----------- ------------ ---------- Healthcare: Net revenues $ 1,498,353 $ 2,832,123 $ 91,106 Operating loss(1) (1,502,336) (17,104,177) (363,857)
Telecommunications: Net revenues 405,617 2,177,858 2,893,778 Operating loss(2) (91,768) (1,932,649) (4,036,371)
(1) Includes impairment and other losses of $1,898,953 in 1997 and $14,233,953 in 1996. See Note 5 to the consolidated financial statements.
(2) Includes impairment and other losses of $194,901 and $2,758,779 in 1996 and 1995, respectively. See Note 5 to the consolidated financial statements.
HEALTHCARE MANAGEMENT.
The Company's healthcare management segment consists of NSC and HMT. The Company rescinded the acquisition of HMT in June 1997. As of December 31, 1997, the operations of the Company's healthcare segment consists solely of NSC.
The principal business of NSC is (i) to develop, for commercial use, healthcare management information systems technology obtained under the CRDA between NSC and the U.S. Army in connection with the Civilian Health and Medical Program for the Uniformed Services ("CHAMPUS") developed by the U.S Army, Navy and Air Force (the "Tri-Services") and (ii) sell or license the benefits from the use of such technology to the U.S. automotive industry (and its down-line vendors), other large, self-insured companies, healthcare insurers, PPO's, HMO's, healthcare benefit plan administrators and large pharmaceutical companies that have outcomes analysis needs. NSC's systems technology is designed to identify unnecessary costs and manage healthcare benefits. NSC anticipates using its management information systems technology to assist large self-insured companies, insurers, PPO's, HMO's and healthcare plan administrators to improve the management and administration of healthcare benefits by combining intelligent application of data analysis with strategies to identify misapplied expenditures and overpayments, together with quality management services to effect positive changes in benefits planning. To date, the Company has not been successful in marketing its management information systems technology due to numerous factors, including large operating losses from businesses acquired and the effect of those losses on the ability of the Company to continue to fund NSC's software development and marketing efforts.
CHAMPUS is a unique data-warehousing and outcomes analysis system with extensive data-mining capabilities and has reduced the healthcare related costs of retirees and dependents of men and women serving in the uniformed services. The CHAMPUS data base covers over 18 million individuals. It was developed by the Tri- Services at a cost of over twenty million dollars. This technology has been enhanced and incorporated into NSC's technology base. Analytical measurements, profiling and other decision-making tools have also been incorporated into NSC's software and databases, increasing the comprehensive analysis and decision-making capabilities of NSC's current technology.
The CHAMPUS healthcare program and database is one of the largest in the world. By having the right to use one of the largest healthcare data banks in the world, NSC has the ability to provide potential users of NCS's technology with extensive data- mining capabilities to assist them in managing and controlling their healthcare costs.
The revenues of NSC to date have been derived from the analysis and recovery of healthcare claims that have previously been paid by large self-insured companies such as Chrysler Corporation and Ford Motor Company using the services of Health Management Services ("HMS") on a subcontract basis. The agreement with HMS (the "Teaming Agreement") calls for a portion of revenues derived by NSC, which typically range from 10% to 30% of recovered claims, to be paid to HMS. HMS's portion of revenues derived by NSC typically approximates 50% of NSC's revenues.
The Company, NSC and HMS are currently in dispute regarding the performance of HMS under the Teaming Agreement and the amounts due to HMS by NSC under the Teaming Agreement; consequently, the Teaming Agreement was terminated by provisions contained therein, effective May 16, 1997. On August 19, 1997, HMS filed a notice of intent to arbitrate and demand for arbitration. No date for arbitration has been set.
In September 1997, the Company entered into a strategic alliance with another healthcare claims management company ( HMG Health Care Claims Auditing, Inc. ("HMG") to replace HMS, as its subcontractor, on terms comparable to those under the HMS Teaming Agreement. HMG provides a full range of healthcare cost containment services. HMG's services are broader than those offered by HMS and 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 utilizing data bases available to HMG and those available to NSC under the CRDA.
The Company contemplates that the HMG alliance and other potential healthcare alliances will allow the Company to further enhance its healthcare outcomes analysis, data-mining and management information decision product capabilities and facilitate the sale or license of value added decision making services to its targeted customer base.
NSC's initial software development activities have resulted in an analytical database product with extensive data-mining capabilities which uses selective reporting formats within the databases. The analytical database product contains extensive revisions to the healthcare management information systems technology obtained from the U.S. Army and unique features applicable to both the indemnity and managed care markets. The Company to date, however, has not been able to successfully market or generate any revenues from NSC's management information systems technology. Also, as more fully discussed herein, it is uncertain whether or not the Company will have available sufficient resources to continue to fund NSC's operating activities or whether or not NSC will be able to generate profitable operations in the future.
HMT was founded in response to the emerging PC industry in combination with the growing need to capture better healthcare data and produce reports useful to employers and occupational- health medical providers. It develops and markets PC-based software products for managing cases of work disability (absence) that facilitate return to work and reduce healthcare costs. HMT's market consists of mid to large U.S. employers, insurers, hospitals, TPA', PPO's, HMO's and other healthcare management companies. As discussed elsewhere herein, the Company and the former shareholders of HMT entered into an agreement in June 1997 to rescind the acquisition agreement between the Company and the stockholders of HMT. See above regarding rescission of HMT acquisition.
The revenues and operating loss of NSC were $187,478 and $1,348,679, respectively, in 1997, $1,574,825 and $16,275,288, respectively, in 1996 and $91,106 and $363,857, respectively, from the date of acquisition (October 1995) to December 31, 1995. The revenues and operating loss of HMT were $1,311,054 and $153,656, respectively, for the period from January 1, 1997 to the date of its disposition by the Company and $1,257,298 and $828,895, respectively, for the period from the date of its acquisition by the Company (March 1996) to December 31, 1996.
SERVICES AND PRODUCTS.
NSC has developed the technology licensed under the CRDA to include a broad form of episode building, which has been copyrighted as Continuum. This proprietary technology allows NSC to review multiple hospitalizations and medical services around a common clinical connection. Continuum also includes enhancements to the CHAMPUS software obtained under the CRDA which provides for a broad array of clinical reports, demographic and provider analyses along with special reports that help users evaluate adverse outcomes, surgical cases, trauma cases, AIDS cases and catastrophic cases. Continuum analyzes claims from both a wide and narrow focus with extensive data-mining capabilities within the database and has wide application in the managed care environment, which is the chief use within the CHAMPUS-Tri-Care environment. The system is also able to perform pharmaceutical and research studies for special projects.
LICENSES, TRADEMARKS AND AGREEMENTS.
On June 2, 1994, NSC entered into a Cooperative Research and Development Agreement ("CRDA") with the U.S. Army to further develop and commercialize, on an exclusive basis, the healthcare management information systems used by the Tri-Services to reduce the cost associated with the CHAMPUS program. Under the CRDA, NSC has an irrevocable, perpetual license to use the CHAMPUS database and software technology 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 U.S. CAR'S healthcare benefit programs ("field of use"). The original CRDA expired on June 1, 1997 and was extended for an additional one-year period, effective June 18, 1997. The extension of the CRDA also gave the Company the ability, with the prior approval of the U.S. Army, to use the management information systems technology and CHAMPUS databases obtained under the CRDA to analyze the healthcare benefits of companies outside of the U.S. automotive industry. The license to use the management information systems technology and databases obtained under the CRDA will convert to a non-exclusive, perpetual license, unless the CRDA is further extended on an exclusive basis by the mutual consent of the parties.
NSC is entitled to patent any inventions made by NSC through the course of the CRDA. Similarly, NSC is entitled to copyright any works created by NSC during the course of the CRDA.
MARKET.
The market for NSC's services presently includes the U.S. automotive industry, and their down-line vendors. As discussed elsewhere herein, the Company has been granted the ability to expand its market ("field of use"), with prior approval of the U.S. Army, to include other large corporations, outside of the U.S. automobile industry, that self-insure and have relied on third-party administrators (TPA's) to manage their healthcare benefit programs, the TPA's themselves, HMO's, PPO's and insurers. NSC has also targeted healthcare programs administered by state and municipal governments, which it believes have cost- control needs for their healthcare programs at least comparable to those of the large corporations which self-insure. Should opportunities arise to expand NSC's field of use, the Company has no reason to believe that the approval of the U.S. Army would be unreasonably withheld. The Company, however, has not been successful in marketing its management information systems technology and is pursuing strategic alliances with other healthcare management companies in order to sustain operations and provide the funds required to further develop and market its products. See "Item 1 - Business, Healthcare Management".
HMT's market consists of mid to large U.S. employers, insurers, TPA's, PPO's, HMO's, and other healthcare management companies.
CUSTOMERS.
NSC entered into a service agreement with Chrysler Corporation in 1993 which accounted for a majority of NSC's 1995 and 1996 revenues. As discussed above, this agreement was terminated in September 1997, due to performance issues between Chrysler and NSC's subcontractor, HMS.
In October 1995, NSC entered into a service agreement with Ford Motor Company. The service agreement with Ford expired by its terms on March 31, 1997.
Net revenues recognized in 1997, 1996 and 1995 were $107,102, $1,334,495, and $91,106, respectively, from Chrysler service agreement and $80,376, $240,330, and $ -0-, respectively, from the Ford service agreement.
HMT's customers include insurers, payors and self-insured companies. As more fully described herein, the Company and the former shareholders of HMT entered into an agreement in June 1997 which provides for the rescission of the Company's acquisition of HMT.
COMPETITION.
Other healthcare management information companies, insurers, TPA's, PPO's and HMO's are currently the competition for the Company's approach to control the healthcare costs of large self- insured companies. The Company's competitors have substantially greater financial resources than the Company; and, the Company has suspended software development due to its lack of financial resources. These factors have adversely affected the Company's competitive position (see "Management's Discussion and Analysis of Financial Condition and Results of Operations").
TELECOMMUNICATIONS.
The businesses included in the Company's Telecommunications segment include TNI, Comstar, LCI, CCI and ATI. Following the acquisition of TNI, the operations of TNI, Comstar and LCI were combined into one operating division ( collectively referred to herein as "TNI" ).
TNI, until the sale by the Company of substantially all of its operating assets, operated as a switch-less re-seller of long distance services and provided utility and telecommunications audit and cost recovery services to large and small businesses and governmental entities.
ATI sells Operator Service Provider ("OSP"), long-distance telephone and PPV television products to small and medium sized hotels and motels; and, CCI is engaged in the business of installing and servicing PPV equipment. As discussed elsewhere herein, these companies were disposed of, or abandoned, in May 1997 and May 1996, respectively.
The operating results of the Company's telecommunications businesses are classified as "Discontinued Operations" in the consolidated statements of operations. The revenues and operating loss of TNI were $1,481,317 and $1,792,795, respectively in 1996, and $2,373,491 and $3,122,623, respectively, in 1995. Included in TNI's operating loss for the year ended December 31, 1995 is the write-off of goodwill recorded in connection with the acquisition of TNI by the Company. TNI had no revenues in 1997. Its operating loss for 1997 was $52,307. The revenues and operating loss of ATI were $405,617 and $39,461, respectively, for the period from January 1, 1997 to the date of its disposition, $673,995 and $116,460, respectively, in 1996 and $427,445 and $631,391, respectively, in 1995; and, the revenues and operating loss of CCI were $22,546 and $23,394, respectively, in 1996 and $92,842,and $282,356, respectively, in 1995.
EMPLOYEES.
As of December 31, 1997, the Company and its subsidiaries had four employees. The Company makes extensive use of independent contractors for accounting, legal, administration and sales and marketing.
ITEM 2.
ITEM 2. PROPERTIES.
The Company and its subsidiaries do not own any properties. All office space is leased and the Company believes the leased facilities are adequate for its current needs and that additional suitable space will be available as required.
The following table sets forth information with respect to the office space leased by the Company and its subsidiaries as of December 31, 1997.
(1) As of December 31, 1997, the Company is in default of the lease agreement due to non-payment. The total amount of past due lease payments is approximately $40,000.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
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 proceedings are more fully described in Note 14 to the consolidated financial statements included elsewhere herein.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the fourth quarter of 1997.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON STOCK AND RELATED STOCKHOLDER 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.
Quarter ended High bid Low bid - ------------- -------- ------- March 31, 1996 $ 17.75 $ 9.375
June 30, 1996 $ 12.375 $ 8.50
September 30, 1996 $ 9.00 $ 6.125
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
The high and low bid quotations for the Company's common stock on March 31, 1998 were $0.24 and $0.23 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 March 31, 1998, the Company had 558 registered owners of its common stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial data of the Company for each of the five years in the period ending December 31, 1997. This table should be reviewed in conjunction with the consolidated financial statements of the Company and the notes thereto appearing elsewhere herein.