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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
Amendment No. 2
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
--- ACT OF 1934
For the fiscal year ended December 31, 1998
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number 000-26668
HITSGALORE.COM, INC.
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(Exact name of Registrant as specified in its charter)
FLORIDA 65-0036344
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
10134 6th Street, Suite J, Rancho Cucamonga, CA 91730
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(Address of principal executive offices)
Registrant's telephone number, including area code (909) 481-8821
SYSTEMS COMMUNICATIONS, INC.
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(Former name)
4707 140th Avenue North, Clearwater, Florida 33762
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(Former Address)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
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(Continued on next page)
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The aggregate market value of the voting stock held by non-affiliates of the
registrant on September 30, 1999, (based on the average of the high and low bid
prices of such stock on the over-the-counter securities market) was
approximately $28,772,534.
The number of outstanding shares of the registrant's common stock, $.001 par
value, as of September 30, 1999 was 49,979,675. Of the 49,979,675 shares of the
Registrant's common stock outstanding as of September 30, 1999, 43,785,126
shares were restricted securities within the meaning of Rule 144 under the
Securities Act of 1933.
[REMAINDER OF PAGE LEFT BLANK]
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Item 1. BUSINESS.
Corporate History-
Hitsgalore.com, Inc., a Florida corporation (the "Company"), formerly Systems
Communications, Inc., 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. On March 19, 1999, the Company
and Hitsgalore.com, a Nevada corporation, completed a reorganization and merger
(the "Reorganization and Merger Agreement"). Pursuant to the Reorganization and
Merger Agreement, (a) the Company transferred its existing business, properties
and assets to International Healthcare Solutions, Inc. ("IHSI") and caused IHSI
to assume the obligations, debts and liabilities of the Company and, then, (b)
Hitsgalore.com was merged into the Company and the Company changed its name to
Hitsgalore.com, Inc. The Company also declared a reverse split of its issued and
outstanding common stock, in the ratio of one share for each seven shares,
immediately prior to the merger (see "The Reorganization" and "The Merger").
General Business History-
During 1990 and 1991, the Company acquired and divested companies engaged in the
eye glass distribution 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.
Beginning in August 1994, the Company acquired various businesses engaged in the
telecommunications and healthcare cost containment industries. These
acquisitions included (i) Ameristar Telecommunications, Inc. ("ATI"), a reseller
of long-distance telephone and pay-per-view television services and products,
principally to the hospitality industry, (ii) Coast Communications, Inc.
("CCI"), whose principal business was the installation and servicing of
pay-per-view television equipment, (iii) LCI Communications, Inc. ("LCI"),
Comstar Network Services, Inc. ("Comstar"), Intelicom International Holding,
Inc. ("Intelicom"), formerly Affiliated Communications, Inc., and Telcom
Network, Inc. ("TNI"), all of which were engaged in the business of reselling
telecommunications services, (iv) National Solutions Corporation ("NSC"), which
is engaged in the healthcare cost containment business, and (v) Health
Management Technologies ("HMT"), whose principal business was the development,
sale and maintenance of medical management computer software.
In 1996 and 1997, the Company sold, abandoned or otherwise disposed of its
ownership interests in ATI, CCI and HMT, sold substantially all of the operating
assets of TNI and discontinued the operations of all of its remaining
telecommunications businesses. As of December 31, 1998, NSC, LCI, Comstar, TNI
and two newly-formed subsidiaries, IHSI and Ameritel Communications Systems,
Inc. ("Ameritel"), all of which are wholly owned subsidiaries, and Intelicom, in
which the Company has an approximate 15.0% minority interest, were all inactive.
The Company's ownership in all of these subsidiary companies was transferred to
IHSI on March 19, 1999 as a part of the Reorganization and Merger Agreement (see
"The Reorganization" and "The Merger").
Bankruptcy Proceeding-
The Company was subject to an Involuntary Petition under Chapter 7 of the U.S.
Bankruptcy Code (the "Petition") which was filed against the Company on June 1,
1998 in the United States Bankruptcy Court for the Middle District of Florida
(Case No. 98-09299-8P7). The Petition did not include any of the Company's
subsidiaries. On April 20, 1999, the U.S. Bankruptcy Court issued an order
dismissing the Petition.
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The Reorganization-
Immediately prior to the merger with Hitsgalore.com, a Nevada corporation ("Old
Hitsgalore.com") described below (the "Merger"), the Company completed a
reorganization. As part of the reorganization, the Company declared a share
consolidation (a reverse split) of its then issued and outstanding common stock,
options, warrants and other rights to purchase its common stock. The reverse
split reduced each seven shares of common stock outstanding to one share. The
reverse split also applied to all outstanding options, warrants, convertible
securities and other rights to acquire the Company's common stock. The effect of
the reverse split was such that the Company would have approximately 8,000,000
shares of common stock issued and outstanding, assuming exercise of all such
options, warrants and other rights. The Company also transferred its then
existing business, properties and assets, to International Healthcare Solutions,
Inc., Florida corporation organized by the Company for this purpose ("IHSI"). In
consideration for the transfer, the Company received twenty million shares of
IHSI, constituting all of the outstanding common stock of IHSI, thus making IHSI
a wholly owned subsidiary of the Company. The Company also declared a dividend
in kind, payable in all of the shares of IHSI common stock, to the Company's
stockholders of record on April 6, 1999. In furtherance of the dividend, the
ISHI common stock was transferred into a constructive trust for the benefit of
the Company's stockholders. The IHSI common stock is to be distributed to the
Company's stockholders entitled to receive the dividend when a registration
statement covering the distribution under the Securities Act of 1933 becomes
effective. Although the Company expects IHSI to file such registration statement
promptly, there is no assurance that a registration will be filed, of if filed,
as to when it will be filed or when it will become effective.
In connection with the transfer of the Company's previous business, properties
and assets to IHSI, IHSI assumed all the obligations, debts and liabilities of
the Company that existed at that time. Accordingly, IHSI became jointly and
severally liable with the Company for such obligations, debts and liabilities.
Until all of such obligations, debts and liabilities are satisfied or the
Company is released therefrom, the Company has a security interest in the assets
transferred to IHSI. As of the date of the Merger, the Company believed
liabilities assumed were approximately $1.9 million. Such liabilities consisted
principally of unsettled obligations that arose from actions against the Company
that are currently being litigated or are in the process of being settled (see
Notes 5 and 14 to the consolidated financial statements included elsewhere
herein). As of June 30, 1999, such liabilities have been reduced to
approximately $689,000. It is uncertain, however, if the remaining assumed
obligations will be settled in amounts that approximate recorded values. In the
event the Company anticipates settling these obligations in amounts different
from amounts recorded, the Company will account for the differences as
adjustments to retained earnings and additional paid in capital in its post
merger financial statements for the year ended December 31, 1999. Any subsequent
adjustments between recorded amounts and amounts settled will be accounted for
as a charge or credit to earnings in its financial statements for years ending
after December 31, 1999.
The Merger-
On March 19, 1999 (the "Effective Date"), the Company and Old Hitsgalore.com,
completed the Merger pursuant to the Merger and Reorganization Agreement. In the
Merger, Old Hitsgalore.com was merged into the Company and Old Hitsgalore.com's
outstanding common stock was converted into 37,675,000 shares of the Company's
common stock.
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In the Merger, the Company changed its name to Hitsgalore.com, Inc. For
accounting purposes, the acquisition of Old Hitsgalore.com has been treated as a
recapitalization of Old Hitsgalore.com, with Old Hitsgalore.com as the acquirer.
Absence of Stockholder Approval of the Merger-
The Company's stockholders of record immediately prior to the Effective Date
have not approved the merger of Old Hitsgalore.com into the Company. Approval by
the Company's stockholders would not have been required under Florida corporate
law, but for the change of the Company's name in the Articles of Merger to
Hitsgalore.com, Inc. from Systems Communications, Inc. The Company has been
advised by counsel that the Merger is deemed, nevertheless, to be effective as a
merger in fact (a defacto merger). A defacto merger may be voidable by action or
vote of a majority of the Company's stockholders at the date of the merger,
although stockholders are not given a right by Florida law to seek avoidance of
the Merger. Absent such statutory right, only the state has authority to seek
avoidance of the Merger. The Company does not believe that either a majority of
such stockholders or the state would seek to overturn the Merger.
The Company intends to call a special meeting of all record owners of the
Company's common stock at the date of the Merger and who had the right to vote
on the Merger. The special meeting will be called and conducted in accordance
with the Bylaws of the Corporation. The Company will distribute an information
statement to stockholders in accordance with the requirements of Section 14(c)
of the Securities Exchange Act of 1934, as amended, ("Exchange Act"). The
purpose of the special meeting will be to obtain a ratification of the Merger by
a vote of a majority of such stockholders. The Company intends to call the
special meeting as soon as practicable. For reasons described below, the Company
believes a majority of such stockholders will vote in favor of ratification of
the Merger.
On February 6, 1999, the Company informally gathered persons who management
believed were the record holders of a majority of the Company's then issued and
outstanding common stock and entitled to vote on the merger. Notwithstanding the
fact that such persons were assembled together and purported to cast votes in
favor of the merger, they executed a document entitled "Action by Written
Consent". The Company did not give notice of this purported special "meeting",
as required by the Bylaws, to all stockholders of record. Based upon the
favorable vote at this "meeting", the Company entered into the Merger. A later
evaluation of this "meeting" and of the record of stock ownership by the persons
in attendance revealed that it was not a proper special meeting of stockholders
and that a majority of the then issued and outstanding shares of common stock
was not represented at the "meeting", either in person or by proxy, in view of
the fact that some of such persons purported to represent other stockholders
without holding a proxy or other form of written authorization to do so. In
light of this circumstance, the persons who comprised the Company's management
prior to the Merger again assembled on April 16, 1999 the record holders of a
majority of the Company's common stock at the date of the merger. The purpose of
this purported special "meeting" was to ratify the Merger. This "meeting" was
conducted by telephone conference. Once again, notice of this "meeting" was not
given as required by the Bylaws. Accordingly, neither "meeting" was a duly
constituted meeting of stockholders, but could be characterized as a non-binding
"straw poll" of the persons participating. The persons participating in the
conference call, seventeen in number, did hold of record a majority of the
Company's issued and outstanding common stock on the date of the Merger and did
indicate their vote for approval of the Merger. The Company has no reason to
believe that any of such persons
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will vote against ratification of the merger when the Company does call a
special meeting, in accordance with the Bylaws and subject to proper compliance
with Section 14(c) of the Exchange Act.
Dissenters' rights-
Under Florida law, stockholders dissenting from the merger have the right,
called "dissenters' rights", to elect to receive the fair value of ownership in
a party to the merger in lieu of the shares which they would receive or retain
in the merger. In general, the fair value of the dissenter's interest in the
merger party is determined by an independent appraisal of the merger party's
business and assets, and is not determined by the market value of the party's
shares in the public market. Accordingly, a stockholder of the Company
immediately prior to the merger who votes against ratification of the merger
would be entitled, upon demand in accordance with governing law, to exercise
dissenters' rights. The Company intends to acknowledge dissenters' rights
beginning at and from the date the Company obtains a valid ratification vote on
the merger. The Company believes that no stockholder entitled to elect
dissenters' rights will do so in view of the fact that (i) the shares that such
stockholder will receive from the Company in the dividend spin off of the common
stock of IHSI, subject to registration of the shares under the Securities Act,
will represent the same percentage of ownership in the entire, same business
conducted by the Company immediately prior to the Merger, as was then
represented by the stockholder's stock in the Company immediately prior to the
Merger, (ii) the probable appraisal value of the Company's business and assets
immediately prior to the Merger is expected to be insignificant, and (iii) the
value of the Company's common stock in the public securities market after the
merger exceeded the value of the common stock in the public securities market
immediately prior to the Merger, as adjusted for the reverse split effected in
the reorganization. Furthermore, the Company believes the market value of the
Company's common stock in the public securities market immediately following the
Merger, as well as at the date hereof, exceeds the probable appraisal value of
the Company's business and assets immediately prior to the Merger.
Current Business-
As a result of the Merger, the Company is now engaged in the business of an
internet, business-to-business search engine. Old Hitsgalore.com was organized
on July 21, 1998, began beta operations in August 1998 and launched its website
in November 1998. As an internet search engine for business-to business
commerce, the Company provides a searchable database to businesses bringing
people ("hits") to their websites. The Company's revenues are principally
derived from the sale of portal service sponsorships, membership keyword bid and
rank rights and local city editions of its business-to-business search engine.
The Company's website is located on the world wide web at
http://www.hitsgalore.com.
Products and Services-
The Company's portal services currently include free lifetime banner placements,
free banner generation, free real time stock quotes, free internet voice mail
and free E-mail. The Company's most recent portal service is "Free Billboard(TM)
Hits," a music portal.
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Free Banner Placement. Free banner placements (miniature advertisements common
throughout the world-wide web) allow website traffic to "click" and
automatically gain access to the banner-owner's website. The free banner
placements are designed to drive traffic (or "hits") to the sponsors' or
members' business website. The banner-owner obtains a free banner made to order
utilizing templates (free banner generation) provided free of charge by
Hitsgalore. The free banners can be used anywhere on the internet and are placed
into rotation on the Hitsgalore.com website. In many cases, this portal service
provides the first opportunity for the banner owner to advertise on a website
other than its own.
Free Real Time Quotes. Hitsgalore.com provides access to detailed stock quote
information for companies listed on the New York Stock Exchange, NASDAQ,
American Stock Exchange and Bulletin Boards, including current price (real
time), open, change, high, low, earnings per share, volume, shares outstanding,
market capitalization, dividend, ex-dividend date, price/earnings ratio and
industry sector. A ticker look-up feature is also included.
Voice email ("RocketTalk"). RocketTalk allows users to send voice messages
quickly and easily over the Internet to anyone, anywhere. With RocketTalk,
clear, high-quality voice messages to other RocketTalk users can be sent. Or, if
the intended recipient is not yet a RocketTalk user, RocketTalk will forward the
message to the recipient's email address along with a small utility to play it.
Email ("HitsMail"). HitsMail is a state-of-the-art Web-based Internet email
service. A HitsMail user is able to access fast, reliable and free email at any
time from any location. HitsMail also provides many business-minded benefits and
capabilities - allowing the user to take advantage of a Web-based email service
that will grow with their needs.
Billboard Hits. Billboard Hits allows users to make their own custom CD with up
to five songs for free from a library of titles from the 50s, 60s, 70s and 80s.
In order to obtain any of the portal services offered by Hitsgalore.com, the new
member must register and provide Hitsgalore.com with certain relevant
information, including a description of the business or service provided by the
user, and the contact information for the business (location, phone number,
email address, etc). This enables the Company to provide quality business leads
to its sponsors and contact its new members to discuss other revenue generating
products and services. As a result of the Company's business model, both the
Company and the sponsor achieve value by building a database of potential
customers who have voluntarily given their relevant contact and business
information to Hitsgalore.com. New members are generally receptive to additional
sales calls from Hitsgalore.com and the sponsor because the new members have
received something of value, at no cost.
Sponsorships. Under the sponsorship program, sponsors acquire the right to "give
away" the Company's portal services in exchange for lead generation. The sponsor
is required to deposit a minimum of $99.00 with Hitsgalore.com in order to
participate in the sponsorship program. The deposit is non-refundable. When a
member orders a portal service, the sponsor, or sponsors, which are selected on
a rotation basis from the Hitsgalore.com website, pay for the product or service
on the basis of an agreed upon "point" system. The current program allows 200
points for each $99.00 deposit and the points charged to the sponsors' account
currently range from one to four points each time the sponsor is selected to pay
for a portal service. One or more sponsors may be selected
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to pay for a portal service based on the cost of the service or the product. In
the case where more than one sponsor is selected to pay for the cost of the
portal service or product, each participating sponsor receives an email of the
ordering member's relevant business information. When the deposit is fully
utilized, the Company bills the sponsor for additional sponsorship fees.
Bid and Rank. Under the Keyword Bid & Rank Program, a sponsor or member can
choose where they appear on the results page of a selected "keyword". Research
indicates that when someone conducts a search on the Internet, they seldom go
further than the first page or two of results. Thus, it is important to a
business where it first appears on the results page. Many search engines rely on
a "relevancy" process where they count the number of times a keyword might
appear within the site. Accordingly, some website operators have taken to
"imbedding" the keyword multiple times to appear more relevant. With the Keyword
Bid & Rank program offered by Hitsgalore.com, the website operator can ensure
their placement on the results page but pay only for those "click-throughs" that
actually visit their site as a result of a search at Hitsgalore.com. The bidding
process starts at $0.01 per click-through and each time someone is outbid, they
receive email messages notifying them of that fact. Thus, the bidding becomes
"real-time". Each keyword sponsor can have an unlimited number of keywords and
has the ability to bid on each.
Life Foundation Trust Sales Agreement. On April 15, 1999, the Company and the
Life Foundation Trust ("LFT") entered into an agreement that provided for, among
other things, the reservation by Hitsgalore.com of up to 200 metropolitan areas
for the Company's "Local City Editions (LCEs)." LCEs are websites that are
developed by the Company for cities within a specified area. These websites
contain local city content and search capabilities on a local basis.
The total purchase price for the LCEs reserved by Hitsgalore.com under the
agreement is $10.0 million. The websites are to be developed by Hitsgalore.com
over the twelve-month period ending on April 15, 2000 and payment to
Hitsgalore.com by LFT is to be made on that date. The $10.0 million payment is
collateralized by a collection of postage stamps. Through the LCEs,
Hitsgalore.com is able to localize search results. Thus, someone conducting a
search at a local city edition can find those businesses offering a given
product or service within that market. The LCEs also contain local content, such
as articles and stories about the local market, as well as pertinent links to
other local city information such as weather, sports and other media channels.
Certain Matters related to the Offer and Sale of Local City Edition Licenses-
Beginning in January 1999 and ending in April 1999, the Company offered LCEs for
sale on its web site. During that period, it sold LCEs to 37 persons, plus The
Life Foundation Trust. Each LCE is granted a limited non-exclusive use of the
proprietary software, the website and the programming and content therein. Some
of the LCEs also entitled the LCE to earn a performance bonus equal to the price
paid for the license, if the LCE earns commission income from the sale of the
Company's products during the first six months of the license period equal to or
in excess of the price of the license. The performance bonus was payable in
shares of the Company's common stock at no additional cost to the LCE. The
Company has been advised by counsel that the Company's offering of the stock
performance bonus feature may constitute an unregistered public offering of
securities. Accordingly, the Company has made an undertaking to notify all LCEs
to which the stock performance feature applies that the Company will not deliver
shares of its common stock in payment of the performance bonus, but that the
performance bonus will be paid in cash.
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The Company ceased offering LCEs in April 1999 as a result of the agreement with
LFT.
Previous Business-
The Company was previously engaged in the resale of long-distance telephone and
pay-per-view ("PPV") television services and products ("Telecommunications") and
in the healthcare cost containment business ("Healthcare"). As of December 31,
1998, the Company had sold, abandoned, discontinued or otherwise disposed of its
telecommunications businesses and was engaged, solely, in the healthcare cost
containment business. After the Reorganization and Merger Agreement, which was
effective as of March 19, 1999, and the transfer of the Company's then existing
business, properties and assets to IHSI, the Company is now engaged solely in
the business of an internet business-to-business search engine.
The following is a description of the Company's business for the past five years
and prior to giving effect to the Reorganization and Merger Agreement. All of
the Company's business, properties and assets at the time of the Reorganization
and Merger Agreement were transferred to IHSI for a spin-off to the Company's
stockholders.
Healthcare-
The Company entered the healthcare cost containment business with the
acquisition of National Solutions Corporation ("NSC") in 1995. The Company
pursued development for commercial use of licensed healthcare management
information systems technology designed to manage the healthcare benefit costs
of large self-insured companies. The Company licensed the systems technology
under a Cooperative Research and Development Agreement ("CRDA") with the U.S.
Army. The licensed technology was a part of the Civilian Health and Medical
Program for the Uniformed Services ("Champus") program developed by the U.S.
Armed Services. The Company suspended development of the licensed technology in
June 1997 and the CRDA expired in June 1998. The Company attempted to augment
its healthcare cost containment business with the acquisition of Health
Management Technologies ("HMT"), in March 1996, whose principal business was the
development, sale and maintenance of medical management PC based computer
software but disposed of that business in a rescission transaction in June 1997.
After suspension of development of the licensed technology acquired under the
CRDA and the disposition of HMT, the Company redirected its business strategy
and began to develop a network of other healthcare management companies that,
collectively, offered a wide array of healthcare cost containment and case
management services and products for resale by the Company to large self insured
companies on a fee income or revenue sharing basis.
The Company initiated this strategy in 1997, beginning with a strategic alliance
agreement (the "Alliance Agreement") between the Company and HMG Health Care
Claims Auditing, Inc. ("HMG"). The strategic alliance with HMG gave the Company
the ability to, among other things, provide 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.
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In 1998, HMG, as the Company's alliance partner, and the Company negotiated a
service agreement (the "Service Agreement") with Chrysler Corporation to perform
retrospective analysis and recovery services for pharmaceutical claims paid
during 1998 by the auto maker. Pursuant to the Service Agreement and Alliance
Agreement, the Company and HMG were to receive a monthly fee of $4,000 and
$12,000, respectively, from the auto maker and were to share on a 50%-50% basis
twenty percent (20%) of claims recovered, up to $5,000,000 of recovered claims
in the aggregate. HMG began performance under the Service Agreement in May 1998.
Amounts payable to the Company under the Alliance Agreement are being withheld
pending HMG's performance under the Service Agreement and were a part of the
assets transferred to IHSI in connection with the Reorganization and Merger
Agreement. As of the date hereof, it is uncertain whether or not IHSI will
derive any revenues from this agreement.
The Company had also entered into an alliance agreement with Haddon National
Companies, Inc. located in Maple Shade, NJ ("HNCI") and had an alliance
agreement with a major pharmaceutical manufacturer. The alliance agreement with
HNCI gave 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 insurers and other
managed healthcare companies. The alliance with the major pharmaceutical
manufacturer allowed the Company to sell and market the healthcare cost
containment products of its other alliance partners to the pharmaceutical
manufacturers' customers. As of the date of the Reorganization and Merger
Agreement, the Company had not realized any benefits from these alliances and
such benefits, if any, are to be realized by IHSI.
Telecommunications-
As described above, the Company entered the telecommunications business in 1994
with its acquisitions of ATI and CCI and further augmented its
telecommunications businesses in 1995 with the acquisition of TNI and certain
other resellers of telecommunications products and services. These businesses
were engaged in the switch-less resale of long-distance telephone services to
residential and small business customers and the sale of PPV television and
long-distance telephone products, principally to the hospitality industry.
Following each of these acquisitions, the acquired businesses experienced
diminishing revenues and continued to incur operating losses. Consequently, the
Company decided to dispose of or otherwise discontinue the operations of those
businesses. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the notes to the consolidated financial statements
included elsewhere herein.
Employees-
Following completion of the Reorganization and Merger Agreement, the Company had
15 employees and 5 contract programmers on staff.
ITEM 2. PROPERTIES.
The Company does not own any properties. All office space is leased and consists
of approximately 1,420 square feet, in the case of its facilities located in
Cucamonga, CA, and approximately 1,450 square feet, in the case of the
facilities occupied by IHSI. The facilities occupied by IHSI were transferred to
IHSI in connection with the Reorganization and Merger Agreement and a separate
lease was executed. Accordingly, the Company has no future obligations under
that lease. The Company believes that its leased facilities are adequate for its
current needs and that additional suitable facilities will be available, as
required.
ITEM 3. LEGAL PROCEEDINGS.
As of December 31, 1998, the Company was subject to an Involuntary Petition
under Chapter 7 of the U.S. Bankruptcy Code (the "Petition"). The Petition was
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filed against the Company on June 1, 1998 in the United States Bankruptcy Court
for the Middle District of Florida (Case No. 98-09299-8P7). The Petition did not
include any of the Company's subsidiaries. On April 20, 1999, the U.S.
Bankruptcy Court issued an order dismissing the Petition.
The Company was also subject to various other legal and administrative
proceedings. As of December 31, 1998, the Company had accrued liabilities
totaling approximately $1.4 million for loss contingencies related to these
proceedings. Amounts provided, as of December 31, 1998, are estimates and, as
such, are subject to change upon final resolution. Certain of these proceedings
were settled subsequent to December 31, 1998 for less than accrued amounts. For
a more complete discussion of legal proceedings, see Note 14 to the consolidated
financial statements included elsewhere herein.
On May 13, 1999, May 16, 1999 and June 11, 1999, separate putative class action
suits were filed against the Company, Mr. Steve Bradford and Mr. Dorian Reed in
the United States District Court, Central District of California (Case Nos.
99-5060, 99-5151R and 99-6925R, respectively), involving the purchase of the
Company's securities during periods specified in the complaints. On September
20, 1999, the Court entered an order consolidating the three lawsuits into one
and appointing the lead plaintiff and lead counsel for the consolidated lawsuit
(the "Consolidation Order"). Pursuant to the Consolidation Order, on or about
October 8, 1999, a single consolidated amended class action complaint (the
"Amended Complaint") was filed by the plaintiffs in the consolidated putative
class action under Case No. 99-5060R.
The Amended Complaint seeks to assert claims for violations of the federal
securities laws against the Company and Messrs. Bradford and Reed based on
alleged misrepresentations and omissions of fact purportedly made in the
Company's press releases and certain SEC filings during the period from February
17, 1999 through August 24, 1999 (the "Class Period"). The Defendants believe
the claims to be without merit and intend to vigorously contest the lawsuit. On
November 10, 1999, a motion to dismiss the Amended Complaint was filed on behalf
of the Company and Messrs. Bradford and Reed. All discovery is stayed in the
matter pending disposition of the motion to dismiss. A decision on such motion
is not expected until later this year or early 2000. It is not possible to
predict the likely outcome of these cases or the likelihood or amount of any
losses, if any, in the event of an adverse outcome. No provision has been made
in the accompanying financial statements related to these matters.
The Company has filed a Complaint, against one identified and five anonymous
internet posters for Libel, Tortious Interference with Business Relations and
Civil Conspiracy, in the United States District Court for the Middle District of
Florida. The Complaint, entitled Hitsgalore.com, Inc. v. Janice Shell, et al.,
Case NO. 99-1387-CIV-T-26C, seeks damages in excess of twenty million dollars.
The Complaint alleges that, beginning at least as early as May 1999, the
Defendants intentionally and maliciously published and republished a variety of
false and defamatory statements about Hitsgalore.com, Inc. in a nationwide
"cybersmear" campaign on electronic bulletin boards on the internet. These
statements either explicitly stated or implied that the Company engaged in
illegitimate, illegal, dishonest, fraudulent and criminal business operations,
when, in truth and fact, the Defendants knew or should have known that such
statements were false and libelous per se. At the present time, the Company is
seeking to ascertain the identity of the anonymous Defendants through discovery.
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 1998 or during the first three quarters of 1999.
See "Business - Absence of Stockholder Approval of the Merger".
<PAGE> 12
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
Prior to the Reorganization and Merger Agreement, the Company's common stock was
quoted under the stock symbol "SCMI" on the OTC Bulletin Board and over the
counter market. Upon completion of the Merger and Reorganization Agreement, the
Company's common stock was quoted under the stock symbol "HITS" on the OTC
Bulletin Board and over the counter market. Beginning on April 7, 1999, the
Company's common stock is quoted under the stock symbol "HITT" on the OTC
Bulletin Board and 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. Such high and low bid quotations have been
adjusted for the reverse stock split, in the ratio of one share for each seven
shares, declared effective as of the close of business on March 18, 1999. 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, 1997 $ 10.50 $ 10.0625
June 30, 1997 2.1875 1.19675
September 30, 1997 2.84375 1.3125
December 31, 1997 2.40625 1.3125
March 31, 1998 3.9375 0.91
June 30, 1998 2.31 0.63
September 30, 1998 0.98 0.14
December 31, 1998 0.63 0.07
The high and low bid quotations for the Company's common stock on September 30,
1999 were $2.0625 and $1.9375 per share, respectively.
There are no restrictions on the declaration or payment of dividends or any
provisions that 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.
The Company has not paid any dividends on its common stock. Effective as of
October 30, 1998, the Company declared a dividend in kind to its stockholders of
300,000 shares of common stock of Intelicom International Holding, Inc.; and,
effective as of April 6, 1999, the Company declared a dividend in kind to its
stockholders of 20,000,000 shares of common stock of International Healthcare
Solutions, Inc. Distribution of these dividends is subject to the effectiveness
of registration statements under the Securities Act of 1933, as amended, which
are to be filed by IHSI. There is no assurance as to whether or not these
dividends will be distributed to the stockholders entitled to receive the
dividends.
As of September 30, 1999, the Company had approximately 665 registered owners of
its common stock and approximately 4,000 shareholders.
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA.
The following selected historical and pro forma financial data has been derived
from the financial statements and pro forma information of Hitsgalore.com, Inc.
(a development stage enterprise), formerly Systems Communications, Inc., as of
December 31, 1998 and for the period from inception (July 21, 1998) to December
31, 1998, included elsewhere herein. Hitsgalore.com, a Nevada corporation ("Old
Hitsgalore.com"), was merged into the Company, effective as of March 19, 1999
and the Company changed its name to Hitsgalore.com, Inc. For accounting
purposes, the acquisition of Old Hitsgalore.com has been treated as a
recapitalization of Old Hitsgalore.com, with Old Hitsgalore.com as the acquirer.
As a result of the merger, the historical financial statements and operations of
Old Hitsgalore.com became those of the Company. The following selected pro forma
information includes adjustments to retroactively reflect the equivalent number
and par value of the shares of the Company's common stock issued and outstanding
after giving effect to the merger and the obligations, debts and liabilities
assumed in the merger. The pro forma operations and per share data of the
Company, as set forth herein, are not necessarily indicative of the future
operations of the Company. See "Item 1 - Business".
INCOME STATEMENT DATA:
For the Period from Inception
to December 31, 1998
-----------------------------
Historical Pro Forma
------------ ------------
Net revenues $ 17,779 $ 17,779
Net income 1,007 1,007
Basic earnings per share 0.07 --
Diluted earnings per share 0.06 --
BALANCE SHEET DATA:
December 31, 1998
-----------------------
Historical Pro Forma
---------- ---------
Current assets $ 1,984 $ 20,713
Current liabilities 30,727 3,293,360
Total assets 31,734 50,463
Total liabilities 30,727 3,293,360
Stockholders' equity (deficit):
Convertible preferred stock -- 109,764
Common stock -- 45,187
Additional paid in capital -- --
Retained earnings (deficit) 1,007 (3,397,848)
Total Stockholders' equity 1,007 (3,242,897)
The following tables set forth selected financial data of the Company for each
of the five years in the period ending December 31, 1998, before giving effect
to the Reorganization and Merger Agreement. Pursuant to the Reorganization and
Merger Agreement, (a) the Company transferred its existing business, properties
and assets to International Healthcare Solutions, Inc. ("IHSI") and caused IHSI
to assume the obligations, debts and liabilities of the Company and, then, (b)
Old Hitsgalore.com was merged into the Company and the Company changed its name
to Hitsgalore.com, Inc.
<PAGE> 14
The Company also declared a reverse split of its issued and outstanding common
stock, in the ratio of one share for each seven shares, immediately prior to the
merger.
The selected financial data for the years ended December 31, 1997 and 1996 has
been restated to (i) reflect the operations, assets and liabilities of CCI, and
related acquisition indebtedness, in the consolidated financial statements and
(ii) to value the shares of common stock returned to the Company in connection
with rescinded business acquisitions at their fair market value on the dates of
the respective rescission transactions (see Note 19 to the consolidated
financial statements included elsewhere herein). Earnings per share data for all
periods presented has been restated to reflect the reverse split of the
Company's common stock, in the ratio of one share for each seven shares,
declared effective as of March 18, 1999. These tables should be reviewed in
conjunction with the consolidated financial statements of the Company as of
December 31, 1998 and for each of the three years then ended and the notes
thereto appearing elsewhere herein.
<TABLE>
<CAPTION>
INCOME STATEMENT DATA:
Year Ended December 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
Net revenues $ 123,487 $ 1,498,533 $ 2,832,123 $ 91,106 $ --
Loss from
continuing operations
before income taxes (1,034,428) (3,644,074) (20,488,639) (2,004,228) (78,233)
Loss from continuing
operations (772,428) (3,038,574) (18,048,489) (1,989,104) (78,233)
Income(loss) from
operations of
discontinued
telecommunications
businesses 246,243 391,752 (1,508,179) (3,818,921) (50,769)
Gain from disposition
of discontinued
telecommunication
businesses -- 596,648 -- -- --
--------- ---------- --------- ------- -------
Loss before
extraordinary item (526,185) (2,050,174) (19,556,668) (5,808,025) (129,002)
Extraordinary item 181,228 -- -- -- --
--------- --------- ---------- --------- -------
Net loss $ (344,957) $(2,050,174) $(19,556,668) $(5,808,025) $(129,002)
========= ========= ========== ========= =======
Basic earnings per share:
Loss from continuing
operations $ (0.27) $ (1.97) $ (15.13) $ (4.35) $ (0.42)
Income(loss) from
operations of
discontinued
telecommunications
businesses 0.09 0.25 (1.26) (8.35) (0.27)
Gain from disposition
of discontinued
telecommunication
businesses -- 0.39 -- -- --
Extraordinary item 0.06 -- -- -- --
--------- ---------- -------- ------- -------
Net loss $ (0.12) $ (1.33) $ (16.40) $ (12.70) $ (0.69)
========= ========== ========= ========= =========
</TABLE>
<PAGE> 15
<TABLE>
<CAPTION>
INCOME STATEMENT DATA (CONTINUED):
Year Ended December 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Weighted average number
of common shares
outstanding 2,813,704 1,543,158 1,192,780 457,427 186,642
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA:
December 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- ---------- -------
<S> <C> <C> <C> <C> <C>
Current assets $ 239,660 $ 256,883 $ 1,403,881 $ 4,156,868 $ 442,069
Current liabilities 4,395,567 7,028,193 8,208,138 5,417,864 652,107
Total assets 484,310 388,194 5,847,300 21,545,654 780,222
Long-term liabilities 231,617 310,794 1,207,488 4,597,671 77,750
Common stock subject
to rescission 674,124 674,124 709,124 789,624 --
Common stock to be
issued -- -- 2,000,000 2,000,000 --
Stockholders' equity
(deficiency in
assets) (4,816,998) (7,624,917) (6,277,450) 8,740,495 50,365
</TABLE>
[REMAINDER OF PAGE LEFT BLANK]
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations is presented in two parts. Part I is for the Company, after giving
effect to the Merger and Reorganization Agreement. Pursuant to the
Reorganization and Merger Agreement, (a) the Company transferred its existing
business, properties and assets to International Healthcare Solutions, Inc.
("IHSI") and caused IHSI to assume the obligations, debts and liabilities of the
Company and, then, (b) Old Hitsgalore.com was merged into the Company and the
Company changed its name to Hitsgalore.com, Inc. The stock of IHSI was then
placed into a constructive trust and is to be distributed as a dividend in kind
to the Company's stockholders. Distribution of the dividend in kind is subject
to the effectiveness of a registration statement under the Securities Act of
1933, which is to be filed by IHSI, of which there is no assurance (see "Item 1
- - Business"). The effect of the assumption of such obligations, debts and
liabilities is that both the Company and IHSI are jointly and severally
obligated. Until all of such obligations, debts and liabilities are satisfied or
the Company is released in full, the Company is to have a security interest in
the assets transferred to IHSI. The Company also declared a reverse split of its
issued and outstanding common stock, in the ratio of one share for each seven
shares, immediately prior to the merger. For accounting purposes, the merger of
Old Hitsgalore.com into the Company was treated as a recapitalization of Old
Hitsgalore.com, with Old Hitsgalore.com as the acquirer. As a result of the
merger, the historical financial statements and operations of Old Hitsgalore.com
became those of the Company. On a pro forma basis as of December 31, 1998, the
liabilities assumed in connection with the Reorganization and Merger Agreement
totaled approximately $3.3 million and the assets transferred to IHSI totaled
approximately $466,000, net of cash (see "Item 1 - Business").
Part II of the discussion and analysis of financial condition and results of
operations is for the Company before giving effect to the Merger and
Reorganization.
Included elsewhere herein is pro forma information giving effect to the
Reorganization and Merger Agreement as if the acquisition (reverse merger) took
place on the date of inception (July 21, 1998) of Old Hitsgalore.com. The pro
forma condensed balance sheet information as of December 31, 1998 includes pro
forma adjustments to record the obligations, debts and liabilities assumed by
IHSI and for which the Company is jointly and severally obligated, and the
number and par value of the shares of common stock issued and outstanding after
giving effect to the Merger and Reorganization Agreement. No effect has been
given to the use of proceeds, if any, from the exercise of common stock purchase
options, warrants and other rights to purchase the Company's common stock
outstanding as of the date of the merger. The proceeds, if any, from the
exercise of such options, warrants and other rights are to be used, subject to
certain limitations, to reduce or liquidate the liabilities assumed by IHSI.
Part I
As a result of the merger of Old Hitsgalore.com into the Company, the Company is
now engaged in the business of an internet, business-to-business search engine
(see "Item 1 - Business").
For the period from inception (July 21, 1998) to December 31, 1998, Old
Hitsgalore.com was principally engaged in the development of software for
business-to-business internet commerce. Its website was launched in August 1998
and, at that time, it began generating revenues from the sale of sponsorships.
Net revenues for the period from inception to December 31, 1998
<PAGE> 17
were approximately $17,800. During this same period, Old Hitsgalore.com incurred
total costs and expenses of approximately $16,500, consisting primarily of sales
and occupancy expenses.
Part II
Results of Operations
The following tables set forth certain information derived from the consolidated
financial statements of the Company before giving effect to the Reorganization
and Merger Agreement. The results from continuing operations include the
operations of the Company and its healthcare cost containment businesses; and,
the results from discontinued businesses include the operations of the Company's
discontinued telecommunications businesses, all of which were sold, abandoned,
discontinued or otherwise disposed of in 1996 and 1997. The following discussion
should be read in conjunction with the consolidated financial statements of the
Company as of December 31, 1998 and for each of the three years in the period
then ended and notes thereto, appearing elsewhere herein.
Year Ended December 31,
----------------------------------
1998 1997 1996
--------- --------- ----------
Operations of continuing businesses:
Net revenues $ 123,487 $ 1,498,533 $ 2,832,123
Cost of revenues 74,092 109,563 827,063
Selling and administrative
expenses 1,244,391 3,027,384 6,322,627
Impairment and other losses 84,276 1,898,953 14,233,953
Depreciation and amortization 23,647 497,377 1,459,436
Loss from disposition of subsidiary -- (1,595,412) --
Gain from sale of license agreement -- 2,695,214 --
Interest income 892 4,070 8,183
Interest expense 212,842 587,884 381,975
Other income (expense), net 480,441 (125,318) (103,891)
Income (loss) from continuing operations
before income taxes (1,034,428) (3,644,074) (20,488,639)
Operations of discontinued
businesses:
Net revenues -- 405,617 2,177,858
Cost of revenues -- -- 1,320,256
Selling and administrative expenses 1,308 449,925 2,304,059
Impairment and other losses -- -- 494,901
Depreciation and amortization -- 47,460 291,291
Interest income -- -- (971)
Interest expense -- 32,393 38,713
Other income (expense), net 398,551 755,913 832
Income (loss) from operations of
discontinued businesses
before income taxes 397,243 631,752 (2,271,223)
<PAGE> 18
Operations of Continuing Businesses as of December 31, 1998-
Net revenues
Net revenues for the year ended December 31, 1998 were $123,487, compared to
$1,498,533 in 1997 and $2,832,123 in 1996. The decrease in net revenues in 1998
as compared to 1997 was due to the disposition of HMT, together with lower
revenues from healthcare cost containment agreements. The net revenues of HMT
included in the consolidated financial statements were $1,311,055 in 1997. The
Company had no comparable revenues from HMT in 1998. Net revenues from
healthcare cost containment agreements were $123,487 in 1998 as compared to
$187,478 in 1997. These revenues consisted of residual revenues from expired
healthcare cost containment agreements. The expiration of these healthcare cost
containment agreements was also the principal factor in the decrease in net
revenues in 1997 as compared to 1996. Net revenues from these agreements in 1996
were $1,574,825. The net revenues of HMT included in the consolidated financial
statements were $1,257,298 in 1996 versus $1,311,055 in 1997, which partially
offset the decline in the revenues from healthcare cost containment agreements.
As of December 31, 1998, the Company had not realized any healthcare cost
containment revenues from its alliance agreement with HMG Health Care Auditing,
Inc. ("HMG") or from the pharmaceutical cost containment agreement between HMG
and Chrysler Corporation. Under the terms of these agreements, the Company and
HMG were to share approximately $1,192,000 in net revenues upon completion of
the cost recovery phase of the cost containment agreement, which covers
pharmaceutical claims paid by the auto maker for the 1998 fiscal year. The
Company's share of these net revenues was originally estimated to be
approximately $500,000. As of the date hereof, it is uncertain whether or not
the Company will receive any revenues from these agreements. The right to
receive revenues, if any, from these agreements were transferred to IHSI in
connection with the Reorganization and Merger Agreement.
Cost of revenues
Cost of revenues were related to revenues from healthcare cost containment
agreements and vary based on the terms of cost sharing arrangements between the
Company and other service providers. Cost of revenues as a percentage of the
related healthcare cost containment revenues were 60.0%, 58.4% and 52.5% in
1998, 1997 and 1996, respectively. The increases in the cost of revenues as
compared to net revenues were the result of such cost sharing arrangements.
Selling, general and administrative expenses
Selling, general and administrative expenses were $1,244,391, $3,027,384 and
$6,322,627 for the years ended December 31, 1998, 1997 and 1996, respectively.
The principal reasons for the decrease in selling, general and administrative
expenses in 1998 versus 1997 were the effects of the disposition of HMT and
reduced costs, in general, from the downsizing of the Company's operations which
began in early 1997. The disposition of HMT had the effect of reducing selling,
general and administrative expenses in 1998 by approximately $1.1 million as
compared to 1997.
The decrease in selling and administrative expenses in 1997 as compared to 1996
was principally due to the effects of the disposition of HMT on the year to year
comparison and the consolidation and reorganization of the Company's remaining
business operations. The disposition of HMT had the effect of reducing selling,
general and administrative expenses in 1997 versus 1996 by approximately
$443,000. After the effect of the disposition of HMT on the year to year
comparison, selling and administrative expenses in 1997 decreased by
approximately $2.9 million as compared to 1996. This decrease
<PAGE> 19
principally reflects the elimination of substantially all of the selling,
general and administrative expenses of NSC as a result of (i) its suspension of
activities related to the development, sale and marketing of its licensed
healthcare management information systems technology, (ii) the retirement of NSC
management and termination of all of NSC's employees and (iii) the consolidation
of NSC's Texas and Florida operations and facilities into the Company.
Impairment and other losses
Impairment and other losses were $84,276, $1,898,953 and $14,233,953 in 1998,
1997 and 1996, respectively. Impairment losses recognized in 1998 included a
provision of $151,500 for the termination of noncancellable lease agreements and
the write off of certain long-lived healthcare assets, which were no longer in
use. These losses were partially offset by adjustments to previously accrued
loss reserves.
Impairment and other losses recognized in 1997 included, among other things, (i)
the write-off of equipment under capital lease and certain other assets related
to equipment under capital lease, totaling approximately $768,545, (ii)
provisions for lease termination liabilities, totaling approximately $227,860,
related to office space that has been vacated and leased equipment that the
Company is no longer using (iii) a provision of $162,053 for settlement of
actions brought against the Company by Timboon, LTD (see Note 7) and (iv) the
write-off of $625,728 of deferred compensation assets (see Note 13).
As a result of the suspension of all activities related to the development, sale
and marketing of NSC's licensed healthcare management information systems
technology, the Company recognized an impairment loss of $14,233,953 in 1996 to
write off all of NSC's intangible assets, including goodwill.
Depreciation and amortization
The decreases in depreciation and amortization from year to year were
principally due to the disposition of HMT in June 1997, the removal in December
1997 of repossessed capital lease assets from the Company's consolidated balance
sheet and the write off in 1996 of intangibles and goodwill recorded in
connection with the acquisition of NSC.
Interest expense
Interest expense was $212,842, $587,884 and $381,975 in 1998, 1997 and 1996,
respectively. The decrease in interest expense in 1998 as compared to 1997 was
principally due to the effects of lower aggregate amounts of notes and
debentures outstanding during the respective periods and the removal in December
1997 of capital lease liabilities, related to repossessed leased assets, from
the Company's consolidated balance sheet. The increase in interest expense in
1997 over 1996 was principally the result of higher levels of borrowings
outstanding during 1997 as compared to 1996 and an increase the Company's
average effective borrowing rate.
Other items
In 1998, the Company reactivated a dormant, wholly owned subsidiary
("Intelicom") for the purposes of divesting ownership and control of the
subsidiary in connection with the acquisition by the subsidiary of one or more
telecommunications businesses. A majority of ownership and control in Intelicom
was sold to a group of outside managers and investors and the Company received
cash of $100,000, which is included in other income in the accompanying
consolidated statement of operations for the year ended December 31, 1998. As of
December 31, 1998, the Company owned approximately 15% of
<PAGE> 20
Intelicom which was transferred to IHSI in connection with the Merger and
Recapitalization Agreement. The Company's investment in Intelecom had no
accounting basis. Results of operations for the year ended December 31, 1998
also included other income of approximately $380,029 from the settlement of
liabilities previously accrued under an employment agreement between the Company
and its former CEO (see Note 13 to the consolidated financial statements
included elsewhere herein).
Results of operations for the year ended December 31, 1997 included a loss from
the disposition of HMT of $1,595,412, a gain of $2,695,214 from the sale of a
license agreement and financing fees of approximately $120,000 (see Notes 4, 5
and 7 to the consolidated financial statements included elsewhere herein). The
disposition of HMT resulted in a non-cash loss which was principally due to a
decrease in the Company's stock price from the date of its acquisition to the
date of the rescission transaction.
Income Taxes
Income tax benefits applicable to continuing operations were 16.6%, 12.2% and
11.9% of pre-tax loss from continuing operations in 1998, 1997 and 1996,
respectively. The principal reasons for the differences between the effective
income tax rate and the Federal statutory income tax rate were the effects of
the change in the net deferred tax asset valuation allowance and the tax effects
in 1997 and 1996 of rescinded business acquisitions and impairment losses. No
provisions for taxes currently payable were made in 1998, 1997 or 1996. As of
December 31, 1998, the Company's deferred tax assets exceeded its deferred tax
liabilities by approximately $3.9 million, for which the Company had provided a
valuation allowance.
Operations of Discontinued Businesses as of December 31, 1998-
In 1998 and 1997, the Company had income from discontinued operations, before
income taxes, of approximately $397,243 and $631,752 respectively and, in 1996,
had a loss from discontinued operations, before income taxes, of approximately
$2,271,223.
The results of operations of discontinued businesses for the year ended December
31, 1998 included a gain of approximately $398,521 from the cancellation and
partial recovery of the $500,000 note receivable issued to TNI in connection
with the sale of certain of its assets to International Teledata Corporation
("ITD") in 1997. The cancellation and partial recovery of the note receivable,
which was fully reserved by TNI as of the date of its issuance by ITD, was the
result of the transfer, in 1998, of the assets acquired by ITD to certain former
employees of the Company and TNI. (see Notes 5 and 13 to the consolidated
financial statements included elsewhere herein). In 1998, the Company had no
revenues from its discontinued telecommunications businesses.
The results of operations of discontinued businesses for the year ended December
31, 1997 included other income of approximately $750,000 from the settlement of
an arbitration proceeding between TNI and a provider of telecommunications
services to TNI. Excluding this item, the pre-tax loss of the Company's
discontinued telecommunications businesses for the year ended December 31, 1997
was approximately $118,000, compared to approximately $2,271,000 for the year
ended December 31, 1996, a decrease of approximately $2,153,000, on net revenues
of $405,617 and $2,177,858, respectively. The decrease in the pre-tax loss of
the Company's discontinued telecommunications businesses for the year ended
December 31, 1997 as compared to 1996 was principally due to the effect on the
year to year comparison of the discontinuance of TNI's operations, effective as
of December 31, 1996. In 1996, the pre-tax loss of TNI was approximately
$1,792,795 as compared to approximately $48,039 in 1997. The remaining decrease
in the pre-tax loss was
<PAGE> 21
principally due to the effect on the year to year comparison of the disposition
of ATI.
Gain from disposition of telecommunications businesses-
In 1997, the Company recognized gains, before applicable income taxes, of
approximately $25,000 and $937,148 from the disposition of certain of its
telecommunication assets and from the rescission of the ATI business
acquisition, respectively (see Note 4 to the consolidated financial statements
included elsewhere herein).
Extraordinary item-
Effective March 31, 1998, the Company redeemed its $450,000 10% convertible
debentures payable to the former stockholders of TNI in exchange for 893,278
shares of its common stock and 450,000 common stock purchase warrants. The
carrying amount of the debt extinguished exceeded the fair value of the common
stock and warrants issued in exchange for the debt by $292,228. This amount was
reflected as an extraordinary gain from the extinguishment of debt in the
accompanying consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Over the past three fiscal years, the principal sources of liquidity have been
derived from financing activities. In fiscal 1998, 1997 and 1996, the Company
received cash of approximately $57,000, $232,000 and $2.2 million, respectively,
from the issuance of its common stock in reliance upon exemptions under
Regulation D of the Securities Act of 1933 and approximately $307,600, $1.6
million and $2.4 million, respectively, from the issuance of convertible notes
and debentures payable. All share data has been restated for the one share for
each seven shares reverse stock split declared effective March 18, 1999. 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 $94,600, $687,000 and $638,000. 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 1996 used cash of approximately $80,500 for
the repurchase of common stock subject to rescission. Capital expenditures were
$2,820, $7,693 and $552,718 in 1998, 1997 and 1996, respectively.
The proceeds from financing activities were used principally to fund operating
losses. In 1998, 1997 and 1996, the Company used net cash of approximately
$314,507, $1.4 million and $4.2 million, respectively, in operating activities.
See the consolidated statements of cash flows.
Over the past several years, the Company has incurred substantial operating
losses; and, at December 31, 1998, the Company had an excess of total
liabilities over total assets of approximately $4.8 million and an excess of
current liabilities over current assets of approximately $4.2 million. These
factors, among others, required that the Company cease development of its
licensed healthcare management information systems technology and sell, abandon,
discontinue or otherwise dispose of substantially all of its operating
businesses. As of December 31, 1998, the Company did not have any used or unused
lines of credit or any other committed and unused financing facilities.
The Company and its subsidiaries are also subject to various legal and
administrative proceedings that may adversely affect future cash flows. These
actions and administrative proceedings arose from business acquisitions,
<PAGE> 22
disputes with certain persons formerly associated with the Company and its
subsidiary companies as employees or who were under contract in a consulting
capacity and from defaults under certain non-cancelable lease agreements. As of
December 31, 1998, the Company had accrued liabilities totaling approximately
$1.4 million for such loss contingencies. Amounts provided as of December 31,
1998 were estimates and, as such, are subject to change upon final resolution of
the proceedings. However, the Company does not believe that resolution of these
matters will have a material adverse effect on the financial condition or
results of operations of the Company. As a part of the Reorganization and Merger
Agreement, IHSI assumed all obligations related to such proceedings and has
indemnified the Company for such obligations. The Company is also subject to
certain class action proceedings involving the purchase of the Company's
securities in periods following the Merger (see "Item 3 - Legal Proceedings").
In connection with the merger of Old Hitsgalore.com into the Company, the
proceeds, if any, received from the exercise of outstanding and unexercised
stock purchase options, warrants and other rights to purchase common stock were
to be used to pay the debts, liabilities and obligations of the Company assumed
by IHSI and to provide working capital to the Company. As of June 30, 1999 the
Company had realized net proceeds of approximately $1.9 million from the
issuance of stock upon conversion of such outstanding stock purchase options,
warrants and other rights to purchase its common stock. Of this amount
approximately $425,779 was used to pay liabilities assumed in the merger and the
remainder was used to fund current operations.
As of the date of the merger of Old Hitsgalore.com into the Company, the Company
had no sources of working capital other than from operations and from the
exercise of outstanding and unexercised stock purchase options, warrants and
other rights to purchase common stock. As of the date of the Reorganization and
Merger Agreement, IHSI had no significant business operations and was consuming
cash in its operations. Old Hitsgalore.com, as of the date of the Merger and
Reorganization, was generating positive cash flows from its operations, albeit
small. The intent of the Merger and Reorganization Agreement and the
transactions contemplated thereby was to provide the Company with the ability to
liquidate the debts, liabilities and obligations assumed by IHSI and provide
working capital to the Company for future operations (see "Item 1-Business").
However, there is no assurance that the transactions contemplated by the Merger
and Reorganization Agreement will generate a sufficient amount of working
capital for these purposes, in which case, the Company would be required to seek
additional financing sources.
Subsequent to the Merger and Reorganization Agreement, the Company entered into
various transactions with The Life Foundation Trust ("LFT") for the sale of its
common stock and the purchase by LFT of Local City Editions ("LCEs") for up to
200 major metropolitan areas and other cities (see Note 11 to the financial
statements of Hitsgalore.com, Inc. (a Development Stage Enterprise) included
elsewhere herein). The transactions with LFT call for the payment of $20.0
million to the Company on April 15, 2000 as consideration for the stock acquired
by LFT and the LCE sales agreement. The pledge and assignment of certain assets
secure this payment to the Company by LFT.
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
<PAGE> 23
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 an 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 Year 2000 issue is the result of shortcomings in electronic data processing
systems and other electronic equipment that may adversely effect business
operations.
The management of both the Company and IHSI are continuing to assess the
possible effects of Year 2000 issues on their business operations and are
attempting to determine if significant vendors, service providers and other
third parties upon which they rely have addressed or will be able to address any
affected systems that may have a bearing on the respective companies' business
operations.
Because IHSI has focused its business on strategic alliances with service
providers and other third parties, it is largely dependent upon those service
providers and third parties to ensure that shortcomings in their electronic data
processing systems and their electronic equipment that may adversely effect
their business operations are addressed.
The Company's internet software applications have been designed to be Year 2000
compliant and the Company's non-internet information and electronic data
processing systems, and those of IHSI, are purchased and maintained by
nationally recognized third party vendors. Neither the Company nor IHSI
anticipate spending any amounts for Year 2000 compliance over and above normal
and recurring maintenance, development and enhancements to the Company's
internet software and website.
It remains uncertain whether the potential disruption, if any, from Year 2000
issues will have a material effect on the business operations of the Company or
those of IHSI. The accompanying financial statements contain no provisions or
adjustments related to the ultimate outcome of this uncertainty. The managements
of both the Company and IHSI, however, do not anticipate that Year 2000
compliance will cause any loss of business or have any material adverse effect
on the respective companies' operating results or financial condition.
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
PAGE
----
HITSGALORE.COM, INC.
A DEVELOPMENT STAGE ENTERPRISE),
FORMERLY SYSTEMS COMMUNICATIONS, INC.
Independent Auditors' Report 25
Balance Sheet as of December 31, 1998 26
Statement of Operations and Retained Earnings
for the period from inception (July 21, 1998) to December 31, 1998 27
Statement of Cash Flows for the period from inception (July 21, 1998)
to December 31, 1998 28
Notes to Financial Statements 29
Unaudited Pro Forma Condensed Financial Information 36
HITSGALORE.COM, INC. (FORMERLY SYSTEMS COMMUNICATIONS, INC.) AND
SUBSIDIARIES
Independent Auditors' Report on the Consolidated Financial
Statements for the years ended December 31, 1998, 1997
and 1996 39
Consolidated Balance Sheets as of December 31, 1998, 1997
and 1996 40
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 1998 42
Consolidated Statements of Changes in Stockholders' Deficit for
each of the three years ended in the period
December 31, 1998 43
Consolidated Statements of Cash Flows for each of the three
years ended in the period December 31, 1998 45
Notes to Consolidated Financial Statements 46
[REMAINDER OF PAGE LEFT BLANK]
<PAGE> 25
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Hitsgalore.com, Inc.
Rancho Cucamonga, CA
We have audited the balance sheet of Hitsgalore.com, Inc. (a Development stage
enterprise), formerly Systems Communications, Inc., as of December 31, 1998 and
the related statement of operations and retained earnings and cash flows for the
period from inception (July 21, 1998) to December 31, 1998. 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.
These 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 financial statements referred to above present fairly, in
all material respects, the financial position of Hitsgalore.com, Inc. at
December 31, 1998, and the results of its operations and cash flows for the
period from inception (July 21, 1998) to December 31, 1998, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
Hitsgalore.com, Inc., formerly Systems Communications, Inc., will continue as a
going concern. As more fully described in Note 1, the Company is in the
development stage and has assumed a substantial amount of liabilities in
connection with a reorganization and merger agreement. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The 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/ Pender Newkirk & Company
Tampa, Florida
November 5, 1999
<PAGE> 26
HITSGALORE.COM, INC. (A DEVELOPMENT STAGE ENTERPRISE)
FORMERLY SYSTEMS COMMUNICATIONS, INC.
BALANCE SHEET
DECEMBER 31, 1998
ASSETS
Cash $ 1,013
Other current assets 971
-------
Total current assets 1,984
Property and equipment, net of accumulated
depreciation 29,750
-------
Total assets $ 31,734
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 5,000
Advances from stockholders 2,250
Borrowings from affiliated company 22,699
Other current liabilities 778
-------
Total current liabilities 30,727
-------
Commitments and contingencies
Stockholders' equity:
Common stock, no par value; authorized 25,000
shares; issued and outstanding 15,000 shares --
Additional paid-in capital --
Retained earnings 1,007
-------
Total stockholders' equity 1,007
-------
Total liabilities and stockholders' equity $ 31,734
=======
See Notes to Financial Statements
<PAGE> 27
HITSGALORE.COM, INC. (A DEVELOPMENT STAGE ENTERPRISE)
FORMERLY SYSTEMS COMMUNICATIONS, INC.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
FOR THE PERIOD FROM INCEPTION (JULY 21, 1998) TO DECEMBER 31, 1998
Net Revenues $ 17,779
------
Costs and expenses:
Selling expenses 6,817
General and administrative expenses 7,294
Depreciation and amortization 1,883
Interest expense 526
------
Total costs and expenses 16,520
------
Income before income taxes 1,259
Provision for income taxes (252)
------
Net income 1,007
Retained earnings, at inception --
------
Retained earnings, at December 31, 1998 $ 1,007
======
Basic earnings per share $ 0.07
======
Diluted earnings per share $ 0.06
======
See Notes to Financial Statements
<PAGE> 28
HITSGALORE.COM, INC. (A DEVELOPMENT STAGE ENTERPRISE)
FORMERLY SYSTEMS COMMUNICATIONS, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (JULY 21, 1998) TO DECEMBER 31, 1998
Cash flows from operating activities:
Net income $ 1,007
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 1,883
Increase (decrease) in cash from change in
operating assets and liabilities-
Other current assets (971)
Other current liabilities 778
------
Net cash provided by operating activities 2,697
------
Cash flows from investing activities:
Capital expenditures (31,633)
------
Net cash used in investing activities (31,633)
------
Cash flows from financing activities:
Proceeds from notes payable 5,000
Stockholder advances, net 2,250
Borrowings from affiliated company, net 22,699
------
Net cash provided by financing activities 29,949
------
Net increase in cash 1,013
Cash at beginning of period --
------
Cash at end of period $ 1,013
======
See Notes to Financial Statements
<PAGE> 29
HITSGALORE.COM, INC. (A DEVELOPMENT STAGE ENTERPRISE)
FORMERLY SYSTEMS COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 THE COMPANY AND BUSINESS
Hitsgalore.com, Inc. (the "Company"), a Florida corporation, formerly known as
Systems Communications, Inc., is engaged in the business of an internet,
business-to-business search engine. The Company began beta operations in August
1998 and launched its website in November 1998. As an internet search engine for
business-to business commerce, the Company provides a searchable database to
businesses bringing people ("hits") to their websites. The Company's revenues
are principally derived from the sale of portal service sponsorships, membership
keyword bid and rank rights and local city editions of its portal services and
business-to business search engine. The Company's website is located on the
world wide web at http://www.hitsgalore.com.
On March 19, 1999, the Company and Hitsgalore.com, a Nevada corporation ("Old
Hitsgalore.com"), completed a reorganization and merger (the "Reorganization and
Merger Agreement"). Pursuant to the Reorganization and Merger Agreement, (a) the
Company transferred its then existing business, properties and assets to its
wholly-owned subsidiary, International Healthcare Solutions, Inc. ("IHSI"), (b)
caused IHSI to assume substantially all of the obligations, debts and
liabilities of the Company and, then, (c) Old Hitsgalore.com was merged into the
Company and the Company changed its name to Hitsgalore.com, Inc. For accounting
purposes, the merger of Old Hitsgalore.com into the Company was treated as a
recapitalization, with Old Hitsgalore.com as the acquirer. As a result of the
Reorganization and Merger Agreement, the historical financial statements and
operations of Old Histgalore.com prior to March 19, 1999 became those of the
Company.
In connection with the Merger and Reorganization Agreement, the stockholders of
Old Hitsgalore.com received 37,675,000 shares of common stock issued in
connection with the merger in conversion of all of the issued and outstanding
common stock of Old Hitsgalore.com. Up to an additional 4,000,000 shares of the
Company's common stock were set aside for issuance as compensation to
consultants and professionals and for merger costs and expenses. Of the number
of shares set side for issuance as compensation to consultants and professionals
and for merger costs and expenses, 2,000,000 shares were issued.
Immediately prior to the merger, the Company declared a reverse split of its
then issued and outstanding common stock, options, warrants and other rights to
purchase its common stock, in the ratio of one share for each seven shares, so
that immediately preceding the merger the Company would have approximately
8,000,000 shares of common stock issued and outstanding, assuming exercise of
all such options, warrants and other rights. The Company also transferred its
then existing business, properties and assets, excluding cash and the business
and assets of Old Hitsgalore.com, to IHSI in exchange for 100% of the
outstanding common stock of IHSI. The shares of outstanding common stock of IHSI
were then transferred into a constructive trust for the benefit of the Company's
stockholders. The outstanding shares of common stock of IHSI are to be
distributed as a dividend in kind. Distribution of the dividend in kind to
stockholders is subject to the effectiveness of a registration statement under
the Securities Act of 1933, which is to be filed by IHSI.
In connection with the transfer of the Company's business, properties and assets
to IHSI, IHSI assumed all of the Company's obligations, debts and liabilities
that existed as of the March 19, 1999 and unconditionally and irrevocably
indemnified the Company against all of such obligations, debts
<PAGE> 30
and liabilities, with the result that both the Company and IHSI are jointly and
severally obligated for such debts and liabilities.
The proceeds, if any, from the exercise of common stock options, warrants and
other rights to purchase the Company's common stock outstanding as of the date
of the merger are to be used to pay such obligations, debts and liabilities,
subject to certain limitations. Until all of such obligations, debts and
liabilities are satisfied or the Company is released in full, the Company is to
have a security interest in the assets transferred to IHSI.
Unaudited pro forma information giving effect to the Reorganization and Merger
Agreement as if the acquisition of Old Hitsgalore.com took place on date of its
inception (July 1998) is set forth in Note 9. The pro forma balance sheet
information as of December 31, 1998 includes pro forma adjustments to record the
obligations, debts and liabilities assumed by IHSI and the number of shares of
the Company's common stock issued and outstanding after giving effect to the
merger and reorganization agreement. No effect has been given to the use of
proceeds, if any, from the exercise of common stock purchase options, warrants
or other rights to purchase the Company's common stock that were outstanding as
of the date of the merger.
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using the
straight-line method over periods that approximate the useful lives of the
related assets. The cost of leasehold improvements is amortized over the lesser
of the length of the related lease or the estimated useful lives of the assets.
REVENUE RECOGNITION
The Company recognizes revenue from the sale of portal service sponsorships and
membership keyword bid and rank rights at the time the sponsor or member agrees
to the terms and conditions of sale. Revenues from the sale of LCE's are
recognized upon the execution of the LCE agreement and the collection of a
minimum cash deposit or other consideration in payment for the LCE. An allowance
for cancellations, returns and refunds is provided for based on estimates of
future cancellations, returns and requests for refunds, and for amounts that may
be returned to the LCE during the cancellation period.
IN-KIND SERVICES
The principal stockholders of Old Hitsgalore.com provided services to Old
Hitsgalore.com during its development stage without any remuneration. No value
was assigned to such services due to the Company having been in the development
stage and the inability of the Company to estimate the fair value of the
services provided.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements and tax returns. Deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax
<PAGE> 31
bases of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse.
EARNINGS PER SHARE
The Company has applied the provisions of 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 was computed based on the weighted average number of common shares
outstanding during the period. Diluted earnings per share was 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 had been issued.
The weighted average number of common shares outstanding during the period from
inception to December 31, 1998 was 15,000 shares. The weighted average number of
common shares outstanding during the period was increased by 1,800 shares for
purposes of the computation of diluted earnings per share to include incremental
shares from the exercise of outstanding options using the treasury stock method.
The incremental shares issuable upon conversion of convertible notes were not
included in the computation of diluted earnings per share because inclusion of
these shares would have had been antidilutive. Subsequent to December 31, 1998,
the Company entered into a Reorganization and Merger Agreement that had the
effect of increasing shares outstanding by approximately 48,000,000 shares (see
Notes 1 and 9).
LONG-LIVED ASSETS
The Company has applied 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". This statement 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.
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.
NOTE 3 PROPERTY AND EQUIPMENT
Property and equipment, net consists of the following:
Furniture and equipment $ 1,300
Computer software 25,806
Leasehold improvements 4,527
-------
31,633
Less: accumulated depreciation and amortization (1,883)
-------
$ 29,750
=======
<PAGE> 32
NOTE 4 NOTES PAYABLE
Notes payable at December 31, 1998 consists of two (2) $2,500 convertible notes,
bearing interest at 10% per month until conversion. Each note is convertible
into 2,500 shares of the Company's common stock at the time of an initial public
offering of the Company's common stock or other registration of the Company's
common stock for resale. The terms of each note contain an option giving the
holders of the notes the right to demand that the Company repurchase the shares
that are issuable for $2.00 per share if, on December 31, 1999, the fair market
value of the shares is less than $2.00 per share. If the Company does not
complete an initial public offering by December 31, 1999, the note holders have
the option to cancel their agreements and receive payment of $2,500, each, plus
any accrued and unpaid interest or continue to receive monthly interest and
await an initial public offering. The holders of each of the notes were also
given an option to purchase up to 3,000 shares of the Company's common stock at
a price equal to 70% of the offering price in an initial public offering of its
securities.
NOTE 5 ADVANCES FROM STOCKHOLDERS
The advances from stockholders are due on demand.
NOTE 6 BORROWINGS FROM AFFILIATED COMPANY
Borrowings from affiliated company consist of amounts loaned to the Company by a
corporation owned by the Company's principal stockholders. These borrowings are
due on demand.
Note 7 INCOME TAXES
Income taxes consist of taxes currently payable. The principal reason for the
difference between income taxes computed by applying the U.S. Federal income tax
rate of 34% to pre-tax income is the effect of graduated income tax rates.
Note 8 LEASES
The Company leases office space under an operating lease agreement expiring on
October 31, 2000. Total minimum future rentals under this lease agreement
aggregate $11,192 in 1999 and $9,710 in 2000.
NOTE 9 UNAUDITED PRO FORMA INFORMATION
The following unaudited pro forma balance sheet information gives effect to the
Reorganization and Merger Agreement as if the acquisition took place on December
31, 1998.
Total current assets $ 20,713
Total assets 50,463
Total current liabilities 3,293,360
Total liabilities 3,293,360
Stockholders' deficit:
Class A convertible preferred stock, stated value,
and liquidation preference - $1.00 per share,
authorized 5,000,000 shares, 500,000 shares issued
and outstanding 55,000
Class B convertible preferred stock, stated value,
and liquidation preference - $1.00 per share,
authorized 10,000,000 shares, 100,000 shares issued
and outstanding 54,764
Common stock, $.001 par value; authorized 50,000,000
shares; issued and outstanding 45,187,412 shares 45,187
Additional paid-in capital --
Accumulated deficit (3,397,848)
Total stockholders' deficit (3,242,897)
Total liabilities and stockholders' deficit 50,463
<PAGE> 33
Pro forma operating results are the same as those set forth in the accompanying
financial statements, except for earnings per share data. The Company's pro
forma basic and diluted earning per share were less than $.01 per share.
For purposes of pro forma operating results, the Company has not made any
adjustments for increased administrative, legal, accounting and other costs that
the Company may incur in the future as a result of the Merger and Reorganization
Agreement.
NOTE 10 COMMITMENTS AND CONTINGENCIES
On May 13, 1999, May 16, 1999 and June 11, 1999, separate punative class action
suits were filed against the Company, Mr. Steve Bradford and Mr. Dorian Reed in
the United States District Court, Central District of California (Case Nos.
99-5060, 99-5151R and 99-6925R, respectively), involving the purchase of the
Company's securities during periods specified in the complaints. On September
20, 1999, the Court entered an order consolidating the three lawsuits into one
and appointing the lead plaintiff and lead counsel for the consolidated lawsuit
(the "Consolidation Order"). Pursuant to the Consolidation Order, on or about
October 8, 1999, a single consolidated amended class action complaint (the
"Amended Complaint") was filed by the plaintiffs in the consolidated putative
class action under Case No. 99-5060R.
The Amended Complaint seeks to assert claims for violations of the federal
securities laws against the Company and Messrs. Bradford and Reed based on
alleged misrepresentations and omissions of fact purportedly made in the
Company's press releases and certain SEC filings during the period from February
17, 1999 through August 24, 1999 (the "Class Period"). The Defendants believe
the claims to be without merit and intend to vigorously contest the lawsuit. On
November 10, 1999, a motion to dismiss the Amended Complaint was filed on behalf
of the Company and Messrs. Bradford and Reed. All discovery is stayed in the
matter pending disposition of the motion to dismiss. A decision on such motion
is not expected until later this year or early 2000. It is not possible to
predict the likely outcome of these cases or the likelihood or amount of any
losses, if any, in the event of an adverse outcome. No provision has been made
in the accompanying financial statements related to these matters.
In 1995, Dorian Reed was employed by a new business called Internet Business
Broadcasting ("IBB"). The original concept of IBB was to build web sites for
small businesses and create an internet business mall for third party on-line
retailers.
In late 1996, IBB started selling billboard space in IBB's internet business
mall, and elsewhere on the IBB site, to companies wishing to advertise on the
then new and growing internet. IBB signed contracts with individuals who leased
the on-line billboards and IBB would then seek advertisers to purchase the space
on the leased billboards. The proceeds generated by selling the advertising were
to be split between IBB and the lessee of the billboard. In mid-1997, after
failing to adequately collect revenues from a sufficient number of customers,
IBB shut down its business and dissolved.
In early 1998, the Federal Trade Commission ("FTC") filed a lawsuit against Tom
Maher, former President of IBB, Audrey Reed, and Mr. Reed for failure to refund
money to customers and allegedly misleading investors about the potential return
on their investment. In April, 1998, Mr. Reed filed an answer to the FTC
complaint, pro se, denying all the allegations, and did not receive any
subsequent correspondence from the government.
Mr. Reed says he was unaware any case was pending against him until stories
appeared in the press and he was served with a default judgment at the
Hitsgalore.com office in Rancho Cucamonga, CA on May 11, 1999. The judgement
served on Mr. Reed informed him that a federal judge in Baltimore issued an
<PAGE> 34
order in April 1999 for he and his co-defendants to pay $613,110 to 100
customers of IBB.
After being served on May 11, 1999, Mr. Reed immediately and pro-actively
contacted the FTC through counsel regarding the matter. As of November 30, 1999,
Mr. Reed is actively negotiating with the FTC to reach an amicable settlement of
this matter. The FTC has acknowledged that it did in fact receive pleadings in
this case in April 1998, from both Audrey and Dorian Reed in response to the FTC
Complaint. However, said pleadings sat in an FTC office without having been
opened for over a year. Mr. Reed and the FTC are now exchanging information
about the facts that gave rise to the lawsuit, so that the FTC can have a more
realistic view of what actually happened. Although a mere employee of the
subject company, Mr. Reed is stepping forward to get this matter resolved and is
not waiting for the FTC to find the management who actually ran the corporation.
It is anticipated that a settlement will be reached in the near future.
In addition, the following incident involving Mr. Reed took place more than 5
years ago, and the Company is under no obligation to include it in this filing.
In 1992, Mr. Reed was convicted at trial of wire fraud and unlawful use of
access device and served a 10 month sentence in a federal prison camp and
successfully completed the rest of his term on supervised release.
There were several counts amounting to approximately $2,800.00 in losses, plus
court and other costs, which all have been paid. This case did not involve the
purchase or sale of any security.
NOTE 11 SUBSEQUENT EVENTS
On April 15, 1999, the Company agreed to issue two million shares of its common
stock to The Life Foundation Trust ("LFT") for $10.0 million. LFT has
collateralized its obligation to pay for the shares by assigning a collection of
postage stamps. A third party holds the collection in safekeeping. LFT has an
unconditional and irrevocable obligation to redeem the collateral by payment of
the $10.0 million price for the shares issued, in cash, at the end of twelve
months. The Company issued the shares to LFT in a private transaction.
On May 15, 1999, the Company entered into a non-binding letter of intent to
issue LFT an additional five million shares of its common stock at a price of
$100.0 million. The issuance of the shares is subject to an increase in the
Company's authorized shares and due diligence to the Company's satisfaction on a
$900.0 million Promissory Oil Production Note to be delivered as collateral for
LFT's obligation to pay the purchase price. The Company's security interest in
the note is to be limited to $100.0 million and is to be an undivided interest
with LFT, who has agreed to permit the Company to receive the first $100.0
million paid under the note. There is no assurance the Company can obtain
stockholder approval for an increase in authorized shares or that, if the
transaction is completed, any payments will be received on the note (in which
case the Company would seek foreclosure on certain oil and gas leases securing
the note). Pending such shareholder approval, the Company's Chairman of the
Board, and a principal stockholder, has transferred shares from his own account
to LFT to hold the transaction. The Company's Chairman has retained the right to
vote the shares transferred to LFT on all matters requiring the vote of
stockholders. Upon completion of the transaction, the shares transferred by the
Company's Chairman to LFT will be returned to him.
LFT has reserved Local City Editions (LCEs) for up to 200 local city areas for a
total purchase price of $10.0 million from LFT. The agreement provides for,
among other things, that the LCEs will be brought on line over the twelve-month
period ending April 15, 2000. LFT's obligation to pay for these LCEs is
unconditional and irrevocable, is collateralized by the assignment of the stamp
collection described above and is payable on April 15, 2000. The Company
anticipates accruing revenues from its agreement with LFT based on completion of
the LCEs.
<PAGE> 35
On April 20, 1999, the Company completed the purchase of all rights, title and
interest in the internet-related development assets, equipment and software,
owned or under development, by Solvere, Inc. ("Solvere"), a closely held
Delaware corporation. The assets acquired included all computer equipment,
software and internet technology, including, but not limited to all of Solvere's
e-commerce, web-based e-mail, multimedia distribution system and shopping cart
technology. The purchase price consisted of $125,000 in cash and a commitment by
the Company to issue 100,000 shares of its common stock. The common stock which
is to be issued to Solvere was assigned a value of $367,200. Of the total
purchase price, $26,500 was allocated to property and equipment and $465,700 was
allocated to intangible assets. The intangible assets acquired will be amortized
over three years.
Pursuant to the asset purchase agreement, the Company is to pay Solvere, Inc.
$4,000 per month for future systems maintenance costs incurred by Solvere, Inc.
and $125,000 for future development of the acquired internet software
technology. The Company and Solvere, Inc. also agreed to co-license certain of
Solvere, Inc.'s proprietary technology in return for the payment to Solvere,
Inc. of 50% of all marketing costs incurred by Solvere, Inc. and approved by the
Company. The Company was also granted an unrestricted right to use the
proprietary technology.
<PAGE> 36
HITSGALORE.COM, INC. (A DEVELOPMENT STAGE ENTERPRISE)
FORMERLY SYSTEMS COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
Effective March 19, 1999, Hitsgalore.com, Inc. (formerly Systems Communications,
Inc.), a Florida corporation (the "Company"), acquired all of the outstanding
stock of Hitsgalore.com, a Nevada corporation ("Old Hitsgalore.com") pursuant to
a Reorganization and Merger Agreement. For accounting purposes, the acquisition
has been treated as a recapitalization of Old Hitsgalore.com, with Old
Hitsgalore.com as the acquirer. Accordingly, the historical financial statements
and operations of the Company prior to March 19, 1999 are those of Old
Hitsgalore.com. The following pro forma condensed balance sheet information
gives effect to the Merger and Reorganization Agreement as if the acquisition
took place on December 31, 1998. The pro forma condensed balance sheet includes
pro forma adjustments to record the obligations, debts and liabilities assumed
by IHSI, net of cash, and the number and par value of shares issued and
outstanding after giving effect to the Merger and Reorganization Agreement. No
effect has been given to the use of proceeds, if any, from the exercise of
outstanding common stock purchase options, warrants and other rights to purchase
the Company's common stock. The proceeds, if any, from the exercise of such
options, warrants and other rights are to be used, subject to certain
limitations, to reduce or liquidate the liabilities assumed by IHSI for which
the Company remains jointly and severally liable. The operations of the Company
prior to March 19, 1999 are those of Old Hitsgalore.com. The pro forma income
statement information gives effect to the equivalent number of shares of common
stock issued and outstanding after giving effect to the Reorganization and
Merger Agreement.
Pro Forma Condensed Balance Sheet Information:
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
ASSETS
Cash $ 1,013 $ 18,729 (3) $ 19,742
Other current assets 971 971
---------- ----------- ---------
Total current assets 1,984 18,729 20,713
Property and equipment, net 29,750 29,750
---------- ----------- ---------
Total assets $ 31,734 $ 18,729 $ 50,463
========== =========== =========
[REMAINDER OF PAGE LEFT BLANK]
<PAGE> 37
HITSGALORE.COM, INC. (A DEVELOPMENT STAGE ENTERPRISE)
FORMERLY SYSTEMS COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION (CONTINUED)
Pro Forma Condensed Balance Sheet Information (Continued):
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Liabilities:
Current portion of notes and
debentures payable $ 5,000 $ 1,161,364 (3) $ 1,166,364
Advances from stockholders 2,250 2,250
Borrowings from affiliated company 22,699 22,699
Accounts payable -- 312,133 (3) 312,133
Accrued expenses and other liabilities 778 430,867 (3) 431,645
Liabilities and accruals for claims,
Assessments and other losses -- 1,358,269 (3) 1,358,269
---------- ----------- ---------
Total current liabilities 30,727 3,262,633 3,293,360
---------- ----------- ---------
Stockholders equity (deficit):
Convertible preferred stock -- 109,764 (2) 109,764
Common stock 39,675 (1)
5,512 (2) 45,187
Retained earnings (deficit) 1,007 (3,398,855)(4) (3,397,848)
---------- ----------- ---------
Total stockholders equity (deficit) 1,007 (3,243,904) (3,242,897)
---------- ----------- ---------
$ 31,734 $ 18,729 $ 50,463
========== =========== =========
Pro Forma Income Statement Information (5):
Historical Pro Forma
---------- ----------
Net Income $ 1,007 $ 1,007
========== ==========
Basic earnings per share $ 0.07 $ --
========== ==========
Diluted earnings per share $ 0.06 $ --
========== ==========
Weighted Average Number of Common
Shares Outstanding:
Basic earnings per share 15,000 45,187,412
Diluted earnings per share 16,800 47,676,800
- --------------------
(1) To record 39,675,000 shares of the Company's common stock, $.001 par
value, issued and outstanding after giving effect to the Reorganization
and Merger Agreement. Of the 4,000,000 of additional shares that were set
aside for issue in payment of acquisition costs and expenses, 2,000,000
shares are to be issued.
<PAGE> 38
HITSGALORE.COM, INC. (A DEVELOPMENT STAGE ENTERPRISE)
FORMERLY SYSTEMS COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION (CONTINUED)
(2) To record the issued and outstanding convertible preferred and common
stock of the Company on the Effective Date of the Reorganization and
Merger Agreement, after giving effect to a reverse stock split of the
Company's outstanding common stock, in the ratio of one share for each
seven shares.
(3) To record the obligations, debts and liabilities assumed by IHSI in
connection with the Reorganization and Merger Agreement. Pursuant to the
Reorganization and Merger Agreement, the proceeds, if any, received from
the exercise of common stock purchase options, warrants and other rights
to purchase the Company's common stock that were outstanding as of the
Effective Date are to be used, subject to certain limitations, to reduce
or liquidate such obligations, debts and liabilities. No effect has been
given to the use of proceeds, if any, from the exercise of such common
stock purchase options, warrants and other rights.
(4) To record the effect of (1), (2) and (3) as an offset to (increase in)
retained earnings (deficit).
(5) The Company has not made any pro forma adjustments for increased
administrative, legal, accounting and other costs that the Company may
incur in the future as a result of the Merger and Reorganization
Agreement.
- -------------------
[REMAINDER OF PAGE LEFT BLANK]
<PAGE> 39
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Hitsgalore.com, Inc.
Rancho Cucamonga, CA
We have audited the consolidated balance sheets of Hitsgalore.com, Inc.
(formerly Systems Communications, Inc. and Subsidiaries) as of December 31,
1998, 1997 and 1996, and the related consolidated statements of operations,
changes in stockholders' deficit and cash flows for the years 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 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Hitsgalore.com, Inc. (formerly Systems Communications, Inc. and Subsidiaries) at
December 31, 1998, 1997 and 1996, and the consolidated results of their
operations and their cash flows for the years ended December 31, 1998, 1997 and
1996 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that Hitsgalore.com, Inc. (formerly 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 years in the period ended December 31, 1998 and has a working capital
deficiency and stockholders' equity deficiency at December 31, 1998. 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/ Pender Newkirk & Company
Tampa, Florida
November 5, 1999
<PAGE> 40
HITSGALORE.COM, INC. (FORMERLY SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------------------------
1998 1997 1996
---------- ---------- -----------
ASSETS
Current assets:
Cash $ 18,729 $ 65,556 $ 61,039
Trade accounts receivable, less
allowance for doubtful accounts of
$28,074 in 1996 34,500 -- 802,079
Notes and accounts receivable from
officers and employees -- 60,908 102,000
Other current assets 186,431 130,419 438,763
---------- ---------- -----------
Total current assets 239,660 256,883 1,403,881
---------- ---------- -----------
Furniture and equipment, at cost 75,162 130,162 1,812,867
Less accumulated depreciation (46,035) (56,774) (587,598)
---------- ---------- -----------
Net furniture and equipment 29,127 73,388 1,225,269
Note receivable from sale of assets,
less allowance of $500,000 in 1997 -- -- --
Deferred compensation 215,523 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
---------- ---------- -----------
Total assets $ 484,310 $ 388,194 $ 5,847,300
========== ========== ===========
See Notes to Consolidated Financial Statements
<PAGE> 41
HITSGALORE.COM, INC. (FORMERLY SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES)
CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1998 1997 1996
---------- ---------- -----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
<S> <C> <C> <C>
Current liabilities:
Borrowings under lines of credit $ -- $ -- $ 182,651
Current portion of notes and debentures
payable 1,311,364 3,661,700 3,480,758
Current portion of obligations under
capital lease -- -- 242,477
Accounts payable 600,118 535,516 1,452,192
Accrued compensation and employee
benefits 534,970 1,176,578 1,528,153
Accrued interest 312,318 497,514 286,312
Liabilities and accruals for claims,
assessments and other losses 1,358,269 1,129,823 --
Other current liabilities 192,528 27,062 595,363
Deferred revenue 86,000 -- 440,232
---------- ---------- -----------
Total current liabilities 4,395,567 7,028,193 8,208,138
Obligations under capital lease, less current
portion -- -- 458,654
Deferred liabilities under employment
agreements 231,617 310,794 676,261
Other liabilities -- -- 72,573
---------- ---------- -----------
Total liabilities 4,627,184 7,338,987 9,415,626
---------- ---------- -----------
Common stock subject to rescission 674,124 674,124 709,124
---------- ---------- -----------
Common stock to be issued -- -- 2,000,000
---------- ---------- -----------
Commitments and Contingencies
</TABLE>
<TABLE>
<S> <C> <C> <C>
Stockholders' deficit:
Class A convertible preferred stock, stated
value and liquidation preference - $1.00 per
share; authorized 5,000,000 shares, issued
and outstanding 500,000 shares in 1998,
200,000 shares in 1997 and 392,000 shares in
1996 55,000 -- 630
Class B convertible preferred stock, stated
value and liquidation preference - $1.00 per
share; authorized 10,000,000 shares, issued
and outstanding 100,000 shares in 1998,
2,953,125 shares in 1997 and 4,550,000 in 1996 54,764 1,617,260 2,491,745
Common stock - $.001 par value; authorized
50,000,000 shares, issued and outstanding
5,512,412 shares in 1998, 1,726,235 shares
in 1997 and 1,518,125 shares in 1996 5,512 1,726 1,518
Additional paid in capital 23,066,835 18,410,249 16,832,635
Accumulated deficit (27,999,109) (27,654,152) (25,603,978)
---------- ---------- ----------
Total stockholders' deficit ( 4,816,998) (7,624,917) (6,277,450)
---------- ---------- ----------
Total liabilities and stockholders' deficit $ 484,310 $ 388,194 $ 5,847,300
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 42
HITSGALORE.COM, INC. (FORMERLY SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
---------------------------------------
1998 1997 1996
---------- ---------- ----------
Net revenues $ 123,487 $ 1,498,533 $ 2,832,123
---------- ---------- ----------
Costs and expenses:
Cost of revenues 74,092 109,563 827,063
Selling and administrative expenses 1,244,391 3,027,384 6,322,627
Impairment and other losses 84,276 1,898,953 14,233,953
Depreciation and amortization 23,647 497,377 1,459,436
---------- ---------- ----------
Total operating costs and expenses 1,426,406 5,533,277 22,843,079
---------- ---------- ----------
(1,302,919) (4,034,744) (20,010,956)
Loss from disposition of subsidiary -- (1,595,412) --
Gain from sale of license agreement -- 2,695,214 --
Interest income 892 4,070 8,183
Interest expense (212,842) (587,884) (381,975)
Other income (expense), net 480,441 (125,318) (103,891)
---------- ---------- ----------
Loss from continuing
operations before income taxes (1,034,428) (3,644,074) (20,488,639)
Income tax benefit ( 262,000) (605,500) (2,440,150)
---------- ---------- ----------
Loss from continuing operations ( 772,428) (3,038,574) (18,048,489)
Discontinued operations:
Income (loss) from operations of
discontinued telecommunications
businesses, less income tax expense
(benefit) of $151,000, $240,000
and ($763,044) in 1998, 1997 and
1996, respectively 246,243 391,752 ( 1,508,179)
Gain from disposition of
telecommunication businesses, less
income tax expense of $365,500
in 1997 -- 596,648 --
---------- ---------- ----------
Loss before extraordinary item (526,185) (2,050,174) (19,556,668)
Extraordinary item - Gain from
extinguisment of debt, less income
tax expense of $111,000 181,228 -- --
---------- ---------- ----------
Net loss $ (344,957) $(2,050,174) $(19,556,668)
========== ========== ==========
Basic and diluted earnings per share:
Loss from continuing operations $ (0.27) $ (1.97) $ (15.13)
Income (loss) from operations of
discontinued telecommunications
businesses 0.09 0.25 (1.26)
Gain from disposition of
telecommunications businesses -- 0.39 --
Extraordinary item - Gain from
extinguishment of debt 0.06 -- --
---------- ---------- ----------
Net loss $ (0.12) $ (1.33) $ (16.39)
========== ========== ==========
See Notes to Consolidated Financial Statements
<PAGE> 43
<TABLE>
<CAPTION>
HITSGALORE.COM, INC. (FORMERLY 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, 1995 4,800,000 $178,125 4,690,000 $2,728,345 1,060,828 $ 1,061
Issuance of common stock and warrants
for cash -- -- -- -- 59,098 59
Conversion of preferred stock (4,408,000)(177,495) (140,000) (236,600) 322,130 322
Issuance of common stock as
compensation -- -- -- -- 5,965 6
Issuance of common stock in connection
with business acquisitions -- -- -- -- 40,454 40
Issuance of stock for debt -- -- -- -- 29,650 30
Net loss -- -- -- -- -- --
--------- ------- --------- --------- ---------- ------
Balance at December 31, 1996 392,000 630 4,550,000 2,491,745 1,518,125 1,518
Issuance of common stock and warrants
for cash -- -- -- -- 29,365 29
Conversion of preferred stock (192,000) (630)(1,596,875) (874,485) 96,668 97
Issuance of common stock as
compensation -- -- -- -- 142,980 143
Issuance of stock for debt -- -- -- -- 82,489 82
Rescission of business acquisitions -- -- -- -- (142,035) (142)
Repayment of loan to officer -- -- -- -- (1,357) ( 1)
Net loss -- -- -- -- -- --
--------- ------- --------- --------- ---------- -----
Balance at December 31, 1997 200,000 -- 2,953,125 1,617,260 1,726,235 1,726
Issuance of common stock for cash -- -- -- -- 122,619 123
Conversion of preferred stock (200,000) -- (2,853,125)(1,562,496) 100,255 100
Issuance of common stock as
compensation -- -- -- -- 582,855 583
Issuance of stock and warrants in
conversion of notes and debentures -- -- -- -- 2,215,437 2,215
Issuance of stock and warrants in
extinguishment of debt -- -- -- -- 127,611 128
Issuance of stock in settlement of
other obligations 500,000 55,000 -- -- 708,374 708
Common stock received in partial
recovery of note receivable -- -- -- -- ( 70,974) ( 71)
Net loss -- -- -- -- -- --
--------- ------- --------- --------- ---------- ------
Balance at December 31, 1998 500,000 $ 55,000 100,000 $ 54,764 5,512,412 $ 5,512
========= ======= ========= ========= ========== ======
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 44
<TABLE>
<CAPTION>
HITSGALORE.COM, INC. (FORMERLY 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, 1995 $ 11,880,274 $ (6,047,310) $ 8,740,495
Issuance of common stock and warrants
for cash 2,187,214 -- 2,187,273
Conversion of preferred stock 413,773 -- --
Issuance of common stock as
compensation 260,187 -- 260,193
Issuance of common stock in connection
with business acquisitions 1,892,067 -- 1,892,107
Issuance of stock for debt 199,120 -- 199,150
Net loss -- (19,556,668) (19,556,668)
---------- ---------- ----------
Balance at December 31, 1996 16,832,635 (25,603,978) ( 6,277,450)
Issuance of common stock and warrants
for cash 231,471 -- 231,500
Conversion of preferred stock 875,018 -- --
Issuance of common stock as
compensation 384,092 -- 384,235
Issuance of stock for debt 716,236 -- 716,318
Rescission of business acquisitions (572,849) -- (572,991)
Repayment of loan to officer (56,354) -- (56,355)
Net loss -- (2,050,174) (2,050,174)
---------- ---------- ----------
Balance at December 31, 1997 18,410,249 (27,654,152) (7,624,917)
Issuance of common stock for cash 57,377 -- 57,500
Conversion of preferred stock 1,562,396 -- --
Issuance of common stock as
compensation 216,344 -- 216,927
Issuance of stock and warrants in
conversion of notes and debentures 2,048,848 -- 2,051,063
Issuance of stock and warrants in
extinguishment of debt 308,806 -- 308,934
Issuance of stock in settlement of
other obligations 554,655 -- 610,363
Common stock received in partial
recovery of note receivable (91,840) -- (91,911)
Net income (loss) -- (344,957) (344,957)
---------- ---------- ---------
Balance at December 31, 1998 $ 23,066,835 $ (27,999,109) $ (4,816,998)
========== ========== =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 45
<TABLE>
<CAPTION>
HITSGALORE.COM, INC. (FORMERLY SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-------------------------------------
1998 1997 1996
--------- --------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (344,957) $ (2,050,174) $(19,556,668)
Adjustments to reconcile net income (loss)
to net cash used in operations:
Depreciation and amortization 23,647 544,839 1,750,727
Amortization of deferred compensation, net (89,200) (125,503) (16,552)
Gain from settlement of employment
agreement (380,029) -- --
Recovery of note receivable from sale of assets (398,521) -- --
Provision for bad debts 34,269 39,816 522,687
Stock and warrants issued for compensation
and as consideration for extension of debt 22,788 384,235 260,193
Deferred income taxes -- -- (3,203,194)
Impairment losses 84,276 1,898,953 14,728,854
Loss from disposition of subsidiary -- 1,595,412 --
Gain from sale of license agreement -- (2,695,214) --
Gain from disposition of telecommunications
businesses -- (962,148) --
Gain from extinguishment of debt (292,228) -- --
Increase (decrease) in cash from change
in operating assets and liabilities:
Accounts receivable (7,774) 148,912 214,330
Equipment inventories -- -- 73,211
Deferred expenses -- -- 498,697
Other assets (43,668) 52,252 67,037
Accounts payable 436,491 (484,304) (39,308)
Accrued expenses and other liabilities 554,399 401,162 1,060,019
Deferred revenue 86,000 (109,957) (553,982)
--------- --------- ----------
Net cash used in operating activities (314,507) (1,361,719) (4,193,949)
--------- --------- ----------
Cash flows from investing activities:
Acquisition of businesses -- -- (46,854)
Disposition of businesses -- 370,844 --
Expenditures for furniture and equipment (2,820) (7,693) (552,718)
Notes receivable from officers and employees -- -- (50,000)
--------- --------- ----------
Net cash provided by (used in) investing
activities (2,820) 363,151 (649,572)
--------- --------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 57,500 231,500 2,187,273
Proceeds from notes and debentures payable 307,600 1,568,443 2,422,752
Payments on notes payable and capital leases (94,600) (686,858) (637,596)
Payments on shares subject to rescission -- (35,000) (80,500)
Proceeds from (payments on) borrowings under
line of credit -- (75,000) 47,917
--------- --------- ----------
Net cash provided by financing activities 270,500 1,003,085 3,939,846
--------- --------- ----------
Net increase (decrease) in cash (46,827) 4,517 (903,675)
Cash at beginning of the
period 65,556 61,039 964,714
--------- --------- ----------
Cash at end of the
period $ 18,729 $ 65,556 $ 61,039
========= ========= ==========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 46
HITSGALORE.COM, INC. (FORMERLY SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 FORMATION OF THE COMPANY AND DESCRIPTION OF BUSINESS
Hitsgalore.com, Inc., a Florida corporation (the "Company"), formerly Systems
Communications, Inc., 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. On March 19, 1999, the Company
and Hitsgalore.com, a Nevada corporation ("Old Hitsgalore.com"), completed a
reorganization and merger (the "Reorganization and Merger Agreement"). Pursuant
to the Reorganization and Merger Agreement, (a) the Company transferred its
existing business, properties and assets to its wholly-owned subsidiary,
International Healthcare Solutions, Inc. ("IHSI"), (b) caused IHSI to assume the
obligations, debts and liabilities of the Company and, then, (c) Old
Hitsgalore.com was merged into the Company and the Company changed its name to
Hitsgalore.com, Inc. The Company also declared a reverse split of its issued and
outstanding common stock, in the ratio of one share for each seven shares,
immediately prior to the merger.
During 1990 and 1991, the Company acquired and divested companies engaged in the
eye glass distribution 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. Beginning in August 1994,
the Company acquired various businesses engaged in the telecommunications and
healthcare cost containment industries. These acquisitions included (i)
Ameristar Telecommunications, Inc. ("ATI"), a reseller of long-distance
telephone and pay-per-view television services and products, principally to the
hospitality industry, (ii) Coast Communications, Inc. ("CCI"), whose principal
business was the installation and servicing of pay-per-view television
equipment, (iii) LCI Communications, Inc. ("LCI"), Comstar Network Services,
Inc. ("Comstar"), Intelicom International Holding, Inc. ("Intelicom"), formerly
Affiliated Communications, Inc., and Telcom Network, Inc. ("TNI"), all of which
were engaged in the business of reselling telecommunications services, (iv)
National Solutions Corporation ("NSC"), which is engaged in the healthcare cost
containment business, and (v) Health Management Technologies ("HMT"), whose
principal business was the development, sale and maintenance of medical
management computer software. All of these acquisitions were accounted for using
the purchase method of accounting.
In 1996 and 1997, the Company sold, abandoned or otherwise disposed of its
ownership interests in ATI, CCI and HMT and sold substantially all of the
operating assets of TNI. As of December 31, 1998, NSC, LCI, Comstar, TNI and two
newly-formed subsidiaries, IHSI and Ameritel Communications Systems, Inc.
("Ameritel"), all of which are wholly owned subsidiaries, and Intelicom, in
which the Company has an approximate 15.0% minority interest, are all inactive.
As of December 31, 1998, the Company's principal business was to develop a
network of healthcare management companies, third-party healthcare plan
administrators and other healthcare management organizations that would
collectively offer a wide array of healthcare cost containment and case
management services and products for resale by the Company to large self insured
companies. This business and all of the inactive subsidiaries were transferred
to IHSI in connection with the Reorganization and Merger Agreement.
<PAGE> 47
Pursuant to the Merger and Reorganization Agreement, Old Hitsgalore.com was
merged into the Company in exchange for 37,675,000 shares of the Company's
common stock. Up to an additional 4,000,000 shares of the Company's common stock
were set aside for issuance as compensation to consultants and professionals and
for merger costs and expenses. Of the number of shares set side for issuance as
compensation to consultants and professionals and for merger costs and expenses,
2,000,000 shares were issued.
Immediately prior to the merger, the Company declared a reverse split of its
issued and outstanding common stock, options, warrants and other rights to
purchase its common stock, in the ratio of one share for each seven shares, so
that immediately preceding the merger the Company would have approximately
8,000,000 shares of common stock issued and outstanding, assuming exercise of
all such options, warrants and other rights. The Company also transferred its
existing business, properties, assets and liabilities, excluding those of Old
Hitsgalore.com, to IHSI in exchange for 100% of the outstanding common stock of
IHSI. The result of the assumption of liabilities by IHSI is that both the
Company and IHSI are jointly and severally obligated for such liabilities. The
shares of outstanding common stock of IHSI were then transferred into trust for
the benefit of the Company's stockholders. The outstanding shares of common
stock of IHSI are to be distributed as a dividend in kind to the Company's
stockholders, subject to the effectiveness of a registration statement under the
Securities Act of 1933, which is to be filed by IHSI.
After giving effect to these transactions, the remaining business of the Company
consists of the business of Old Hitsgalore.com. For accounting purposes, the
merger of Old Hitsgalore.com into the Company was treated as a recapitalization
of Old Hitsgalore.com, with Old Hitsgalore.com as the acquirer. Accordingly, the
historical financial statements and operations of Old Hitsgalore.com prior to
March 19, 1999 became those of the Company and the historical financial
statements and operations of the Company prior to March 19, 1999 became those of
IHSI.
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.
The Company's minority interest in Intelicom is carried at zero. See Note 4.
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> 48
INTANGIBLE ASSETS
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 that may affect the
recoverability of such assets. If such an assessment indicated that the carrying
value of intangible assets may not be recoverable, the carrying value of
intangible assets was reduced.
In connection with business acquisitions during 1995 and 1996, the Company
recorded intangible assets totaling $14,050,000. Such intangible assets were
being amortized over periods ranging from 3 to 20 years. Amortization expense
charged to operations in 1997 and 1996 was approximately $208,333 and
$1,036,666, respectively. In addition, the Company reduced intangible assets by
approximately $875,001 in 1997 as a result of the rescission of the HMT
acquisition agreement (see Note 4) and by approximately $11,676,667 in 1996 to
write off, as an impairment loss, the unamortized cost of acquired healthcare
management information software technology that has not and is not likely to
produce any significant amounts of future revenues. As of December 31, 1998 and
1997, the Company had fully amortized or written off all intangibles associated
with acquired businesses. As of December 31, 1996, the amortized cost of
intangible assets consisted of approximately $1,083,000 of medical management
computer software acquired in connection with the acquisition of HMT.
GOODWILL
In connection with business acquisitions during 1995 and 1996, the Company
recorded goodwill totaling $7,124,182. Goodwill represents the excess of the
cost of businesses acquired over the fair value of their net assets at the dates
of acquisition and was being amortized on the straight-line method over periods
ranging from 3 to 20 years. Amortization expense charged to operations in 1997
and 1996 was approximately $114,499 and $279,253, respectively. In addition, the
Company reduced the carrying value of goodwill by approximately $1,184,451 in
1997 as a result of the rescission of the HMT acquisition agreement (see Note 4)
and by approximately $2,752,187 in 1996 to reflect an impairment in the value of
the Company's healthcare management and telecommunications assets. As of
December 31, 1998 and 1997, the Company had fully amortized or written off all
goodwill associated with acquired businesses. Goodwill at December 31, 1996
consisted of amounts recorded in connection with the acquisition of HMT.
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.
STOCK PURCHASE OPTIONS AND WARRANTS
The Company follows Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and related Interpretations in accounting
for employee stock options. Under APB 25, if the exercise price of employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
<PAGE> 49
The Company follows FASB Statement No. 123, "Accounting for Stock-Based
Compensation" ("Statement No. 123") for stock purchase warrants and options
issued as consideration in transactions with non-employees. Under Statement No.
123, stock purchase warrants and options are recorded using the fair value
method of accounting based on the use of option pricing models. For purposes of
valuing warrants and options issued as consideration in transactions with
non-employees, the Company uses the Black-Scholes option pricing model.
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.
EARNINGS PER SHARE DATA
The Company has applied, for all years presented, the provisions of Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS No. 128"),
which requires the presentation of both basic and diluted earnings 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.
Basic and diluted earnings per share for each of the three years in the period
ended December 31, 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.
Common stock and earnings per share data for all periods presented has been
adjusted to reflect the reverse split of the Company's issued and outstanding
common stock, in the ratio of one share for each seven shares, effective as of
the close of business on March 18, 1999 (see Notes 1 and 17). The weighted
average number of common shares outstanding, after giving effect to the reverse
split, were 2,813,704 shares in 1998, 1,543,158 shares in 1997 and 1,192,780
shares in 1996.
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 business acquisitions. As
permitted by Statement of Financial Accounting Standards No. 95, cash flows from
operations of discontinued telecommunications businesses are not separately
presented.
LONG-LIVED ASSETS
The Company follows 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". This statement requires impairment losses
to be recorded on long-lived assets used in operations when indicators
<PAGE> 50
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.
DISCLOSURES ABOUT OPERATING SEGMENTS
The Company has adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131"). 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 and related disclosures see Note 15).
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 1997 and 1996 and consolidated financial statements have
been reclassified to conform to the 1998 presentation.
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 and its subsidiaries
have incurred losses from continuing operations of $772,428, $3,038,574 and
$18,048,489 in 1998, 1997 and 1996, respectively, and have used approximately
$314,507, $1,361,719 and $4,193,949, respectively, of cash in their operations.
The Company and its subsidiaries have a net working capital deficiency of
approximately $4.2 million and a deficiency in assets of approximately $4.8
million as of December 31, 1998 and were in default of certain obligations to
their creditors. Additionally, as discussed in Note 14, the Company and its
subsidiaries are subject to various legal and administrative proceedings. An
unfavorable outcome in one or more of these actions or proceedings could have an
adverse effect on the Company's liquidity and ability to maintain current
business operations.
The intent of the Merger and Reorganization Agreement between the Company and
Old Hitsgalore.com, a development stage company, and the transactions
contemplated thereby is to provide the Company with the ability to liquidate the
debts, liabilities and obligations assumed by IHSI and provide working capital
to the Company. However, there is no assurance that the transactions
contemplated by the Merger and Reorganization Agreement will provide the cash
required by the Company to sustain future operations, in which case, the company
would be required to seek additional financing sources. In the absence of a
sufficient amount of cash flows from operations or from future financing
transactions, the Company would be required to seek other alternatives.
<PAGE> 51
Based on the foregoing factors, it is uncertain whether or not the Company will
be able generate adequate cash flows from operations, or from financing
transactions, to carry on or maintain business operations. If the Company is
unable to generate adequate cash flows from operations or from financing
transactions to support its business operations, the Company would be required
to seek other alternatives, including sale, merger or discontinuance of
operations. The consolidated financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
NOTE 4 ACQUISITIONS AND DISPOSITIONS OF BUSINESSES
In 1998, the Company reactivated a dormant, wholly owned subsidiary
("Intelicom") for the purpose of divesting ownership and control of the
subsidiary in connection with the acquisition of one or more telecommunications
businesses. A majority of ownership and control in Intelicom was sold to a group
of outside managers and investors and the Company received cash of $100,000. As
of December 31, 1998, the Company owns approximately 370,000 shares, or
approximately 15%, of the total issued and outstanding shares of common stock of
Intelicom. Of the total number of shares owned by the Company, 300,000 shares
are to be distributed to the Company's stockholders of record as of October 30,
1998 and the remaining shares are to be retained by the Company. The Company had
no accounting basis in its investment in Intelicom; accordingly, the Company
recognized, as other income, the $100,000 it received in connection with the
change in ownership. As of December 31, 1998, Intelicom had no operations.
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 pre reverse split shares, or 44,262 post reverse split shares, of its
common stock valued at $2,000,000. The acquisition was accounted for using the
purchase method of accounting. 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 was $1,373,984 and 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 results of operations of HMT since the date of acquisition, and through the
date of its disposition have been included in the accompanying consolidated
financial statements. The following unaudited pro forma summary operating
results are for the year ended December 31, 1996 and include the results of
operations of HMT (with pro forma adjustments for amortization of goodwill and
intangible assets acquired) as if HMT was acquired as of January 1, 1996. The
pro forma summary is provided for information purposes only. It is based on
historical information and does not necessarily reflect the actual results that
would have occurred nor is it necessarily indicative of future operating results
of the combined companies.
Net revenues from continuing
operations $ 3,035,195
Loss from continuing operations (18,161,892)
Loss from operations of discontinued
telecommunications businesses (1,508,179)
Basic and diluted earnings per share:
Loss from continuing operations (15.23)
Loss from operations of
discontinued telecommunications
businesses (1.26)
Net loss (16.49)
<PAGE> 52
As more fully discussed below, in 1996 and 1997, the Company sold, abandoned or
otherwise disposed of its ownership interests in HMT, ATI and CCI and sold
substantially all of the operating assets of TNI. As a result of the disposition
or discontinuance of the operations of the Company's telecommunications
businesses, the results of operations of those businesses are shown as
discontinued in the accompanying consolidated financial statements.
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 provided 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 44,262 shares
(after giving effect to the reverse stock split) of the Company's common stock
issued in connection with the acquisition. In connection with the disposition of
HMT, the Company recognized a pre-tax loss of approximately $1,595,412, which is
included as a component of loss from continuing operations in the accompanying
consolidated statement of operations for the year ended December 31, 1997. The
loss was based on the fair value of the Company's common stock returned to the
Company by the former stockholders of HMT in exchange for the return of the
stock of HMT to the former stockholders of HMT. On the effective date of the
rescission agreement, HMT had net assets of approximately $1,740,647, net of
cash received, and the fair value of the shares of the Company's common stock
that were returned to the Company by the former shareholders of HMT totaled
approximately $145,235, based on the quoted market price of the Company's common
stock on the OTC Bulletin Board as of the date of the rescission transaction.
The return of the shares was recorded as a reduction in common stock and
additional paid in capital in the amounts of $310 and $144,925, respectively.
The operating results of HMT included in the accompanying consolidated financial
statements for the years ended December 31,1997 and 1996 are summarized as
follows:
1997 1996
--------- ---------
Net revenues $ 1,311,055 $ 1,257,298
Loss from continuing operations,
before income taxes (153,656) (828,895)
In January 1997, the Company sold (a) TNI's long-distance customer base and
existing customer receivables for $76,000 in cash and (b) TNI's utility audit
division customer base, agreements and work-in-process in exchange for $25,000
in cash and a $500,000 convertible debenture issued by International Teledata
Corporation ("ITD"). In connection with the sale of these assets, the Company
recorded a gain of approximately $25,000, which is included in the gain from
disposition of telecommunications businesses in the accompanying consolidated
financial statements for the year ended December 31, 1997. No value was assigned
to the $500,000 convertible debenture issued to the Company by ITD (the "ITD
Note", see Note 5).
In May 1997, the Company and the former stockholders of ATI entered into an
agreement to rescind the August 1994 acquisition of ATI by the Company (the "ATI
rescission agreement"). The ATI rescission agreement provided for the return of
the ATI stock acquired by the Company to the former stockholders of ATI. In
exchange for the return of the ATI stock, the ATI stockholders were required to
return to the Company, for cancellation, 684,410 pre reverse split shares, or
97,772 post reverse split shares, of the Company's common stock, unexercised
warrants to purchase 24,095 shares of the Company's common stock (after giving
effect to the reverse stock split) and $250,000 of 6% acquisition notes payable.
Included in the gain from disposition of telecommunications businesses in the
accompanying consolidated statement of operations for the year ended December
31, 1997 is a pre-tax gain of approximately $937,148 from the rescission of the
ATI acquisition agreement. The gain from the disposition
<PAGE> 53
of ATI was based on the fair value of the Company's common stock returned to the
Company by the former stockholders of ATI in exchange for the return of the
stock of ATI to the former stockholders of ATI. On the effective date of the
rescission agreement, ATI had net liabilities, including acquisition
indebtedness, of approximately $509,392 and the fair value of the shares of the
Company's common stock that were returned to the Company by the former
stockholders of ATI totaled approximately $427,756, based on the quoted market
price of the Company's common stock on the OTC Bulletin Board as of the date of
the rescission transaction. The return of the shares was recorded as a reduction
in common stock and additional paid in capital in the amounts of $684 and
$427,072, respectively.
In May 1996, the Company informed the principals of CCI that it was canceling
the acquisition of CCI, terminating all of the related acquisition documents and
abandoning CCI's business. In connection with the abandonment of CCI's business,
the Company wrote off its remaining investment in CCI and recognized a loss of
approximately $300,000. The principals of CCI filed suit to enforce the
acquisition notes issued by the Company in connection with the CCI acquisition
(see Note 7) and the issuance of 200,000 shares of the Company's Class A
preferred stock. This matter was referred by court order to mandatory
arbitration in the State of Florida (the Arbitration").
On February 3, 1998, the Arbitrators' awarded in favor of the former
shareholders of CCI (the "Award"). The Award required the Company (i) to convert
200,000 shares of previously issued Class A Preferred Stock into 100,000 shares
of common stock (14,286 shares after giving effect to the reverse stock split),
(ii) to issue another 200,000 shares of Class A Preferred Stock to the former
stockholders (which are also convertible into 14,286 post reverse split shares
of the Company's common stock) and (iii) gave the former stockholders the
ability to (a) seek a summary judgment against the Company for $500,000, without
opposition or (b) accept 500,000 shares of Class A Preferred Stock in lieu of a
summary judgment. As of December 31, 1997, the Company had $300,000 of
acquisition notes outstanding in addition to a loss contingency reserve of
approximately $111,000, related to this action.
During 1998, the Company (a) converted 200,000 shares of previously issued
preferred stock into 14,286 shares of common stock and (b) issued (i) 14,286
shares of its common stock in conversion of another 200,000 shares of preferred
stock and (ii) 500,000 shares of its preferred stock in satisfaction of the
arbitration settlement. The fair value of the securities issued pursuant to the
Arbitrators' award totaled approximately $83,000 and was charged against
previously recorded loss reserves. As a result of the Award, the Company was
relieved from the obligations due under the acquisition notes payable to the
former stockholders of CCI.
As of December 31, 1998, the Company believed it had complied with all of the
provisions and terms contained in the Arbitrator's award. Subsequent to December
31, 1998, the former shareholders of CCI filed an action to seek the summary
judgement in lieu of the shares of preferred stock issued to them and to set
aside the Company's compliance with the terms of the Award. As a result of this
uncertainty, the Company relieved the obligations due under the acquisition
notes payable to the former stockholders of CCI from its consolidated balance
sheet as of December 31, 1998 and increased its accrual for claims, assessments
and other liabilities by $300,000 (see Note 14).
In October 1999, the Circuit Court of Pinellas County, Florida, Case No.
99-3990-CI-20, ruled in favor of the former shareholders of CCI and granted a
summary judgement in favor of the former stockholders of CCI in the amount of
$500,000. In the post merger financial statements of Hitsgalore.com, Inc., the
difference between the amounts that were previously accrued for this action and
the amount of the summary judgement will be treated as an adjustment to retained
earnings and additional paid in capital.
<PAGE> 54
The consolidated operating results of the Company for all years presented
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, 1998, 1997 and 1996, are summarized as
follows:
1998 1997 1996
------- ------- ---------
Current assets $ -- $ 539 $ 332,856
Total assets -- 539 660,094
Current liabilities 422,526 494,133 1,186,206
Total liabilities 422,526 494,133 1,378,026
The revenues, costs and expenses of the Company's discontinued
telecommunications businesses for years ended December 31, 1998, 1997 and 1996,
are summarized as follows:
1998 1997 1996
-------- -------- ----------
Net revenues $ -- $ 405,617 $ 2,177,858
Cost of revenues -- -- 1,320,256
Selling and administrative expenses 1,308 449,925 2,304,059
Impairment and other losses -- -- 494,901
Depreciation and amortization -- 47,460 291,291
Interest income -- -- (971)
Interest expense -- 32,393 38,713
Other income (expense), net 398,551 755,913 832
Income (loss) from operations of
discontinued businesses, before
income taxes 397,243 631,752 (2,271,223)
Other income (expense), net of discontinued businesses for the years ended
December 31, 1998 and 1997 includes income of approximately $398,521 from the
partial recovery of the ITD note and net proceeds of approximately $750,000 from
the settlement of an arbitration award, respectively (see Note 5).
NOTE 5 OTHER GAINS AND IMPAIRMENT AND OTHER LOSSES
In March 1998, the Company, TNI, ITD and certain former employees of the Company
(the "Employees") entered into an agreement (the "Agreement") which provided for
the transfer to the Employees of certain of the TNI assets sold to ITD by the
Company in January 1997 (see Note 4). In connection with the transfer of these
assets, the Company canceled the ITD Note. In exchange for cancellation of the
ITD Note, the Company received 70,974 shares of its common stock (after giving
effect to the one share for each seven shares reverse stock split declared
effective as of March 18, 1999) beneficially owned by the Employees, waivers by
the Employees of accrued and unpaid compensation due to them and cancellation of
their employment agreements with the Company. Included in income (loss) from
operations of discontinued telecommunications businesses for the year ended
December 31, 1998 is income of approximately $398,521 from the cancellation and
partial recovery of the ITD Note (see Note 4).
After the sale of the TNI assets described in Note 4, the only remaining
significant asset of TNI was an 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").
<PAGE> 55
On December 24, 1997, TNI, GECCS and NEWS entered into a Confidential Settlement
Agreement and Mutual Full and Final Releases and the award was satisfied in
full. After legal fees and other costs, TNI received net proceeds of
approximately $750,000, which are included in other income (expense), net of
discontinued businesses for the year ended December 31, 1997 (see Note 4).
In connection with the Company's acquisition of NSC in October 1995, the Company
recorded $2,000,000 of common stock which was to be issued to the founders and
management of NSC. The dollar amount of the common stock to be issued was
reflected as common stock to be issued in the Company's consolidated balance
sheet as of December 31, 1996. 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) the $2,000,000 of common stock which was to be issued to
Retiring Management pursuant to the NSC acquisition agreement. In exchange, the
Company granted Retiring Management a license agreement for the exclusive use of
NSC's healthcare management software and technology, subject to certain
limitations. As a result of this agreement, the Company removed the common stock
to be issued and accrued and unpaid bonuses from its consolidated balance sheet
and recognized a gain, in 1997 from the sale of the license agreement totaling
approximately $2,695,214.
During each of the three years in the period ended December 31, 1998, the
Company recognized various losses to reflect, among other things, impairment in
the carrying values of the Company's healthcare management and
telecommunications assets, potential lease termination liabilities and
elimination of deferred compensation assets as a result of the resignation of
certain employees subject to employment agreements. Impairment and other losses
included in the accompanying consolidated statements of operations are
summarized as follows:
Year Ended December 31,
----------------------------------
1998 1997 1996
-------- --------- ----------
Impairment and other losses included
in loss from continuing operations:
Write-off of capital lease and related
assets $ -- $ 768,545 $ --
Provisions for lease termination
liabilities 151,500 227,860 --
Write-off of deferred compensation
assets -- 625,728 --
Write-down of other assets 23,136 67,345 --
Accrual of Timboon settlement liability -- 162,053 --
Write-off of intangibles and goodwill -- -- 14,233,953
Other accruals and adjustments ( 90,360) 47,422 --
-------- --------- ----------
84,276 1,898,953 14,233,953
-------- --------- ----------
Impairment and other losses included
in loss from discontinued operations:
Write off of intangibles and goodwill -- -- 194,901
Write off of Investment in CCI -- -- 300,000
-------- --------- ----------
-- -- 494,901
-------- --------- ----------
$ 84,276 $1,898,953 $14,728,854
======== ========= ==========
For descriptions of the write off of intangibles and goodwill, the accrual of
the Timboon settlement liability and the write off of deferred compensation
assets, see Notes 2, 7 and 13, respectively.
<PAGE> 56
Prior to the rescission of the ATI acquisition agreement (see Note 4), the
Company obtained and guaranteed an equipment lease financing facility for ATI's
use. The lessor subsequently terminated the financing facility, took possession
of the equipment under lease and initiated an action against the Company to
enforce the provisions of the guaranty agreement. In 1998, the Company recorded
a loss provision of $151,500 pursuant to the guaranty agreement (see Note 14).
This loss provision was partially offset by adjustments to previously accrued
loss reserves. In March 1999, the Company settled its obligations under the
guarantee agreement, and other lease defaults with the same lessor in the amount
of approximately $41,000, by the payment of $28,600, in cash. In the post merger
financial statements of Hitsgalore.com, Inc., the difference between amounts
accrued and the amount paid in settlement of this obligation will be treated as
an adjustment to retained earnings and additional paid in capital.
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 for lease termination liabilities
of approximately $122,986. Subsequent to December 31, 1998, the Company settled
its obligation to BFC for $125,000 in cash. In the post merger financial
statements of Hitsgalore.com, Inc., the difference between amounts accrued and
the amount paid in settlement of this obligation will be treated as an
adjustment to retained earnings and additional paid in capital.
NOTE 6 FURNITURE AND EQUIPMENT
Furniture and equipment consists of the following:
DECEMBER 31,
-------------------------------
1998 1997 1996
------- ------- ---------
Furniture and equipment $ 75,162 $130,162 $ 917,869
Equipment under capital lease -- -- 880,163
Leasehold improvements -- -- 14,835
------- ------- ---------
74,162 130,162 1,812,867
Less: accumulated depreciation ( 46,035) (56,774) (587,598)
------- ------- ---------
Net furniture and equipment $ 29,127 $ 73,388 $1,225,269
======= ======= =========
Depreciation expense was $23,647, $174,545 and $327,897 in 1998, 1997 and 1996,
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 BFC. See Notes 5 and 14.
Included in furniture and equipment, net, as of December 31, 1996 is $327,237,
applicable to discontinued telecommunications businesses.
<PAGE> 57
NOTE 7 NOTES AND DEBENTURES PAYABLE
Notes and debentures payable consist of the following:
DECEMBER 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
4% Cumulative convertible debentures
due October 1, 1998 $ 791,664 $1,200,000 $ --
10% Cumulative convertible debentures
due on November 26, 1997 170,000 170,000 200,000
10% Cumulative convertible debentures
due on November 21, 1997 -- -- 300,000
Notes payable to former shareholders of
NSC in equal monthly installments of
$20,000, non-interest bearing 150,000 150,000 150,000
Acquisition notes payable to the former
stockholders of CCI -- 300,000 300,000
6% Acquisition notes payable to former
stockholders of ATI, secured by the
stock of ATI -- -- 250,000
18% Cumulative Convertible Debenture
Note due January 15, 1999 80,000 80,000 --
10% cummulative convertible debenture note
due on June 7, 1999 50,000 -- --
12% Convertible Promissory Note
due March 28, 1997, in default 30,000 30,000 --
10% Cumulative Convertible Debenture
Note due September 1998 30,000 30,000 --
10% Cumulative convertible debentures
due on various dates through
November 1997 -- 1,195,000 1,279,000
10% Convertible debentures payable to
former shareholders of TNI -- 450,000 450,000
12% Cumulative Convertible Debenture
Notes due on various dates through
November 1998 -- 50,000 --
8%-10% Notes payable to stockholders -- -- 162,741
Promissory note in default -- -- 200,000
10.75% demand note payable, secured
by certain accounts receivable -- -- 100,000
5% Note to former stockholder of CCI, due
on demand, secured by certain equipment -- -- 75,000
Other 9,700 6,700 14,017
--------- --------- ---------
1,311,364 3,661,700 3,480,758
Less: current portion (1,311,364) (3,661,700) (3,480,758)
--------- --------- ---------
Long-term portion $ -- $ -- $ --
========= ========= ========
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.
<PAGE> 58
As of December 31, 1997, the Company had converted $120,000 of the 4% Debentures
into 36,623 shares of the Company's common stock, as adjusted for the reverse
stock split. On June 6, 1997, as a result of the Company's refusal to convert
additional 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 23,348 shares of common stock, as adjusted
for the reverse stock split, in conversion of $150,000 of 4% Debentures and the
payment of $970,000, 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, its possible "shorting" of the Company's
common stock in contemplation of conversion and 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
Agreement provided for a cash payment of $1,200,000 in full satisfaction of the
outstanding debt to Timboon or the issuance of such number of shares of the
Company's common stock as could be sold by Timboon with net proceeds of
$1,200,000. In connection with the Settlement Agreement, the Company increased
the principal balance of the 4% Debentures to equal $1,200,000 and recognized a
charge to income of approximately $162,053.
As of December 31, 1998, the Company had issued and Timboon had sold an
aggregate of 714,286 shares of common stock, as adjusted for the reverse stock
split. Timboon realized net proceeds of approximately $408,336 from the sale of
the shares. The Company treated an equal amount of the 4% Debentures as
converted, leaving debentures outstanding of approximately $791,664 as of
December 31, 1998. These debentures were to be settled in cash or by the
issuance of additional shares of the Company's common stock. In March 1999, the
Company issued 142,857 shares of its common stock (after giving effect to the
reverse split in the Company's common stock) in conversion of $200,000 in
principal amount of such outstanding debentures, leaving debentures outstanding
of approximately $591,664 after such conversion. In April 1999, the Company
issued an additional 145,000 shares of its common stock (after giving effect to
the reverse split in the Company's common stock) in full satisfaction of all
outstanding debenture indebtedness owed to Timboon.
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, was 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, 1998 and 1997, the Company had
converted $330,000 of these debentures into 17,429 shares of the Company's
common stock (after giving effect to the reverse stock split in the Company's
common stock) leaving debentures outstanding of approximately $170,000. In April
1999, the Company issued 27,500 shares of its common stock (after giving effect
to the reverse split in the Company's common stock) in full satisfaction of all
of this outstanding debenture indebtedness.
<PAGE> 59
The notes payable to the former shareholders of NSC, due in equal monthly
installments of $20,000, are in default. No payments on these notes have been
made by NSC since April 1996. NSC is accruing interest on these notes at 18% per
annum, the default rate of interest as called for by the notes.
The acquisition notes payable to the former stockholders of CCI were treated as
extinguished in 1998 as a result of the arbitration proceeding brought against
the Company by the former stockholders of CCI (see Notes 4 and 14).
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 23,810 stock purchase warrants exercisable at
$10.50 per share (after giving effect to the reverse stock split) to the note
holders. The 140,000 shares of Class B preferred stock were converted into 7,273
shares of the Company's common stock (after giving effect to the reverse stock
split) in September 1996. The acquisition notes payable, the stock purchase
warrants and 97,773 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 $80,000 18% Cumulative Convertible Debenture Note due January 15, 1999 was
convertible into the Company's common stock, at the election of the holder, at a
conversion price of $17.50 per share (after giving effect to the reverse stock
split). The loan was guaranteed by the Company's Chairman of the Board and was
collateralized by 71,429 shares of the Company's common stock (after giving
effect to the reverse stock split), which was held in escrow pursuant to an
escrow agreement. On January 25, 1999, the Company received a demand for
repayment of this loan and on February 23, 1999, the lender took possession of
the escrowed shares in full payment of the note.
The $50,000 10% cumulative convertible debenture note due on June 7, 1999 was
convertible into 750,000 shares of the Company's common stock and 750,000 common
stock purchase warrants, at the election of the holder. The 750,000 stock
purchase warrants issuable upon conversion of the debenture note were
exercisable at prices ranging from $0.875 to $1.40 per share, as adjusted for
the reverse stock split, and had expiration dates of two years after their date
of issue. This note was paid, in cash, in 1999.
The $30,000 12% Convertible Promissory Note due March 28, 1997 was converted
into 58,309 shares of the Company's common stock (after giving effect to the
reverse stock split) in March 1999. Such conversion was made on terms more
favorable than those contained in the original note agreement for purposes of
inducing conversion. In connection with the conversion of this note, the Company
recorded debt conversion expense of approximately $46,938 for the cost of the
inducement offer.
The $30,000 10% Convertible Debenture Note due September 1998 was converted into
50,000 shares of the Company's common stock (after giving effect to the reverse
stock split) in March 1999. Such conversion was made on terms more favorable
than those contained in the original note agreement for purposes of inducing
conversion. In connection with the conversion of this note, the Company recorded
debt conversion expense of approximately $46,836 for the cost of the inducement
offer.
<PAGE> 60
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 (the "Nidan Debentures"). The Nidan 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
1933, 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
ranged from $10.50 to $35.00 per share, as adjusted for the reverse stock split,
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. As of December 31,
1997, the Company had converted $84,000 of these debentures, leaving a principal
balance of $1,195,000.
In 1997, Nidan Corporation transferred $845,000 in principal amount 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. Subsequently, the note holders and the
Company 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.
In 1998, the Company issued 748,990 shares of its common stock (after giving
effect to the reverse stock split) upon conversion of the $845,000 in principal
amount of Nidan Debentures transferred to residents of the State of Michigan,
according to the original conversion feature contained in the respective
debenture note. The Company also issued, effective as of June 30,1998, 357,143
shares of its common stock (after giving effect to the reverse stock split) and
285,714 common stock purchase warrants, as adjusted for the reverse stock split,
upon conversion of all remaining Nidan Debentures pursuant to a settlement
agreement. The fair value of the securities issued upon conversion of the
remaining debenture notes approximated the carrying value of the debt converted
and no gain or loss was recognized. The warrants issued have an expiration date
of June 29, 2000 and are exercisable at prices ranging from $1.40 to $1.70 per
share.
The $450,000 10% convertible debentures payable to the former shareholders of
TNI that were outstanding as of December 31, 1997 were extinquished, effective
as of March 31, 1998 pursuant to a redemption offer made to the holders of the
notes. Pursuant to the redemption offer, the Company issued an aggregate of
127,611 shares of its common stock (after giving effect to the reverse stock
split) and 64,286 stock purchase warrants, as adjusted for the reverse stock
split. Of the stock purchase warrants issued, 32,143 warrants, exercisable at
$10.50 per share, expire in March 2000 and 32,143 warrants, exercisable at $1.40
per share, expire in March 2003. The carrying amount of the debt extinquished
exceeded the fair value of the common stock and warrants issued in exchange for
the debt by $292,228. This excess is classified as an extraordinary gain in the
accompanying consolidated statement of operations for the year ended December
31, 1998.
The $50,000 12% Cumulative Debenture Notes outstanding as of December 31, 1997
consisted of two notes in the principal amount of $25,000, each. These notes
were due in October and November 1998, respectively, and were converted into
71,547 shares of the Company's common stock (after giving effect to the reverse
stock split) and 71,429 common stock purchase warrants exercisable at $0.70 per
share, as adjusted for the reverse stock split. The warrants issued upon
conversion of these notes expire in the year 2000.
<PAGE> 61
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 were
generally due one year after the date of their issuance and provided 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 $6.30
to $7.00 per share, as adjusted for the reverse stock split.
The $200,000 promissory note in default and the 10.75% demand note payable in
the amount of $100,000 that were outstanding as of December 31, 1996 were paid
in December 1997 from the proceeds of the Settlement Agreement with GECCS and
News (see Note 5).
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).
Except for the guaranty and security agreements described above, all of the
notes and debentures outstanding as of December 31, 1998 are unsecured
obligations of the Company and its subsidiaries.
NOTE 8 BORROWINGS UNDER LINES OF CREDIT
As of December 31, 1998 and 1997, the Company had no used or unused lines of
credit. As of December 31, 1996, the Company, through two of its subsidiaries,
had $182,651 outstanding under lines of credit. Such lines of credit 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.
NOTE 10 INCOME TAXES
Income taxes reflected in the accompanying consolidated statements of operations
consist of deferred income taxes and are allocated among (i) continuing
operations, (ii) the components of discontinued operations and (iii)
extraordinary gains in proportion to their individual effects on income tax
expense, after allocation of income tax expense applicable to continuing
operations. No provisions for income taxes currently payable have been made due
to operating losses for tax purposes.
<PAGE> 62
The allocation of income taxes is summarized as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
-------- -------- ----------
Loss from continuing operations $(262,000) $(605,500) $(2,440,150)
Discontinued operations:
Income (loss) from operations of
discontinued telecommunications
businesses 151,000 240,000 (763,044)
Gain from disposition of
telecommunications businesses -- 365,500 --
Extraordinary item - Gain from
extinguishment of debt 111,000 -- --
------- ------- ---------
Income tax expense (benefit) $ -- $ -- $(3,203,194)
======= ======= =========
Income taxes 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:
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
------- --------- ---------
Amount computed at statutory rate $(351,700) $(1,239,000) $(6,966,137)
Increase (reduction) in taxes
resulting from:
State income taxes (41,400) (120,400) (819,546)
Amortization of goodwill -- 38,900 80,158
Rescission of business acquisitions -- 176,900 --
Impairment losses -- -- 971,769
Change in valuation allowance 131,100 538,190 4,125,702
Other -- (90) 167,904
------- ------- ---------
$(262,000) $ (605,500) $(2,440,150)
======= ========= =========
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, 1998 and 1997 are as follows:
<PAGE> 63
December 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
Deferred tax assets:
Net operating loss carryforwards $3,427,000 $4,034,296 $4,113,122
Allowance for doubtful accounts -- 190,000 10,668
Accrued compensation and liabilities under
employment agreements 143,000 257,000 777,922
Accrued expenses and other current
liabilities 435,000 250,800 --
--------- --------- ---------
Total deferred tax assets 4,005,000 4,732,096 4,901,712
Less-valuation allowance (3,870,000) (4 663 996) (4,125,806)
--------- --------- ---------
Net deferred tax assets 135,000 68,100 776,007
--------- --------- ---------
Deferred tax liabilities:
Intangible assets -- -- 371,029
Deferred compensation 135,000 68,100 389,401
Other -- -- 15,577
--------- --------- ---------
Total deferred tax liabilities 135,000 68,100 776,007
--------- --------- ---------
Net deferred income taxes $ -- $ -- $ --
========= ========= =========
At December 31, 1998, the Company and its subsidiaries had unused net operating
loss carryforwards of approximately $9 million, expiring on various dates
through 2018. Of this amount, approximately $8 million is not restricted as to
use. The balance of the carryforwards amounting to approximately $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.
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, 1998, the
Company had 500,000 shares of Class A preferred stock outstanding. These shares
were issued during the year to the former stockholders of CCI as a result of an
arbitration proceeding brought against the Company by the former stockholders of
CCI (see Notes 4 and 14).
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. During 1998, 2,853,125 shares of Class B preferred stock were
converted into 100,255 shares of common stock (after giving effect to the
<PAGE> 64
reverse stock split). As of December 31, 1998, 100,000 shares of Class B
preferred stock were outstanding and are convertible into 5,195 shares of common
stock.
STOCK PURCHASE OPTIONS AND WARRANTS
The Company has issued common stock purchase warrants in conjunction with the
sale and issuance of common and preferred stock and upon conversion of
convertible debentures. The exercise price of warrants issued was determined
based upon the issue and market prices of the Company's other securities.
Warrants outstanding are exercisable at any time until their expiration date and
entitle the holder to receive one share of common stock for each warrant. After
giving effect to the reverse split of the Company's common stock in the ratio of
one share for each seven shares, declared effective March 18, 1999, the Company
has approximately 924,483 warrants outstanding. Of the warrants outstanding as
of December 31, 1998, 342,340 warrants, exercisable at prices ranging from $0.70
to $31.50 per share, expire in 1999, 566,071 warrants, exercisable at prices
ranging from $0.35 to $10.50 per share, expire in 2000 and 16,072 warrants,
exercisable at $1.40 per share, expire in 2003.
The Company has issued stock options to certain officers, employees, consultants
and directors. Options outstanding as of December 31, 1998, after giving effect
to the reverse split of the Company's common stock, include: options, expiring
in February 1999, to acquire 16,786 shares at $10.50 per share; and options,
expiring in August 2002, to acquire 185,714 shares at $0.70 per share.
During 1998, the Company registered 636,946 shares of its common stock, after
giving effect to the reverse split of the Company's common stock, for resale by
certain of its officers, employees, consultants and directors. The shares
registered for resale were issued upon exercise of non-statutory stock options
granted to those persons during 1998 in exchange for services previously
rendered to the Company. The exercise price of such stock options was equal to
the market price of the Company's stock on the date of grant and ranged from
$0.70 to $0.77 per share.
Options and warrants are summarized as follows. All data has been restated for
the reverse stock split, declared effective as of March 18, 1999, in the ratio
of one share for each seven shares.
<PAGE> 65
Weighted
Exercise Average
Price Range Exercise
Shares per share Price
--------- ------------ ---------
Warrants and options
outstanding at December 31, 1995 240,229 $10.50-$56.00 $19.11
Warrants issued 260,300 $10.50-$70.00 $28.00
Options issued 142,857 $42.00 $42.00
---------
Warrants and options
outstanding at December 31, 1996 643,386 $10.50-$70.00 $26.46
Warrants issued 313,972 $ 0.70-$31.50 $ 7.42
Warrants canceled (23,810) $10.50 $10.50
Options issued 202,500 $ 0.70-$10.50 $ 1.54
Options canceled (142,857) $42.00 $42.00
---------
Warrants and options
outstanding at December 31, 1997 993,191 $ 0.70-$70.00 $13.51
Warrants issued 582,142 $ 0.35-$10.50 $ 1.33
Warrants expired (448,350) $10.50-$70.00 $20.79
Options issued 636,946 $ 0.70-$ 0.77 $ 0.77
Options exercised (636,946) $ 0.70 $ 0.77 $ 0.77
---------
Warrants and options
outstanding at December 31, 1998 1,126,983 $ 0.35-$31.50 $2.06
=========
The Company follows Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and related Interpretations in accounting
for 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.
FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("Statement
No. 123") provides for an alternative fair value method of accounting for
recognizing stock option expense. The fair value method of accounting requires
the use of complex option pricing models that were originally developed for
valuing publicly traded options. Option pricing models also require the use of
subjective assumptions about the Company's stock and do not necessarily provide
a reliable single measure of the fair value of the Company's stock options.
Companies that have not adopted Statement No. 123 are required to present pro
forma disclosure of what net income and earnings per share would have been had
the fair value method of accounting been used to recognize stock option expense.
For purposes of pro forma disclosure, the Company uses a Black-Scholes option
pricing model. The pro forma disclosures are based upon the terms of options
granted during the year, the price of the Company's stock on the date of grant
and certain other assumptions, including the following:
1998 1997 1998
---- ---- ------
Risk-free interest rate 6.50% 6.50% 6.66%
Dividend yield -- -- --
Volatility 1.96 1.73 0.4077
Expected life (in years) N\A 4.50 2.0
<PAGE> 66
The compensation cost of options granted in 1998 as measured under APB 25 and
under Statement No. 123 were the same, accordingly, no pro forma information is
presented for the year ended 1998. The Company's pro forma net loss and basic
and diluted earnings per share data after giving effect to the charges to income
that would have been necessary had the Company adopted Statement No. 123 for the
years ended December 31, 1997 and 1996 and, after giving effect to the reverse
split in the ratio of one share for each seven shares effective as of March 18,
1999, are summarized as follows:
1997 1996
--------- ----------
Loss from continuing operations $(3,319,331) $(19,728,489)
--------- ----------
Income from operations of discontinued
telecommunications businesses 391,752 (1,508,179)
Gain from disposition of discontinued
telecommunications businesses 596,648 --
--------- ----------
Net income (loss) $(2,330,820) $(21,236,668)
========= ==========
Basic and diluted earnings per share:
Loss from continuing operations $ (2.15) $ (2.36)
Income from operations of discontinued
telecommunications businesses .25 (0.18)
Gain from disposition of discontinued
telecommunications businesses .39 --
--------- ----------
Net loss $ (1.51) $ (2.54)
========= ==========
NOTE 12 LEASES
As of December 31, 1998, the Company leases office space under an operating
lease agreement expiring on May 31, 1999. Minimum future rental payments under
this lease agreement as of December 31, 1998 total $8,441.
Rental expense under all operating leases was $34,209, $167,354 and $359,474 in
1998, 1997 and 1996, respectively.
As of December 31, 1998, the Company and its subsidiaries have vacated certain
leased premises and abandoned certain equipment leased under non cancelable
lease agreements and were subject to actions brought by certain lessors for
lease payments and other charges due under the leases. As of December 31, 1998,
the Company and its subsidiaries have liabilities totaling approximately
$841,000 for the estimated obligations due under such lease agreements (see
Notes 5 and 14). Certain of these actions were settled in 1999 for approximately
$209,600 in cash. Amounts previously accrued for those actions totaled
approximately $786,000. In the post merger financial statements of
Hitsgalore.com, Inc., the difference between amounts accrued and amounts paid in
settlement of these obligations will be treated as an adjustment to retained
earnings and additional paid in capital.
NOTE 13 - EMPLOYMENT AGREEMENTS
As of December 31, 1998, 1997 and 1996, the Company had employment agreements
with certain of its key employees. These employment agreements provided for,
among other things, the payment of compensation over five years from the dates
of the respective employment agreements regardless of whether or not the
employees remained in the employ of the Company. The present value of future
<PAGE> 67
obligations under such agreements as of December 31, 1998, 1997 and 1996 was
approximately $376,559, $675,966 and 1,020,913, respectively, and the Company
had deferred compensation assets related to these agreements totaling
approximately $354,494, $179,568 and $1,002,770, respectively. Deferred
compensation assets are reported on the basis that the related employee(s)
continue to provide meaningful service to the Company and are reduced in the
event the employee(s) cease to provide such service. In 1997, certain employees
subject to employment agreements resigned and the Company reduced, as a charge
to income, deferred compensation assets by approximately $625,728 (see Note 5).
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 (see Note 5). In connection with the Agreement the
Employees waived all unpaid compensation due to them by the Company and all
obligations due to them under their employment agreements. Included in the gain
from partial recovery of the ITD Note is approximately $159,104 related to
future obligations under employment agreements and approximately $147,506
related to obligations to the Employees for past service (see Note 5).
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 42,857 shares of its common
stock (after giving effect to the reverse stock split) 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 the employment agreement 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 and recorded
a gain, which is included in other income, of approximately $380,029. Of this
amount, approximately $226,029 related to future obligations under the
Employment Agreement and approximately $154,000 related to obligations to the
Former CEO for past service.
For the years ended December 31, 1998 and 1997, the Company amortized
approximately $256,121 and 219,734, respectively, in deferred compensation
assets and approximately $345,321 and $344,946, respectively, in deferred
compensation liabilities related to employment agreements. The Company also
wrote off deferred compensation assets of approximately $625,728 in 1997 and
recorded gains totaling approximately $385,133 in 1998 from the cancellation of
employment agreements. As a part of the above described agreements, the Company
also recognized gains totaling approximately $301,506 from the waiver by the
employees of compensation previously accrued for past service.
<PAGE> 68
Following is a summary of amounts included in the accompanying consolidated
balance sheets for outstanding employment agreements as of December 31, 1998,
1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Deferred compensation assets included in:
Other current assets $ 138,971 $ 126,627 $ 355,415
Deferred compensation (non-current) 215,523 52,941 647,355
--------- --------- --------
$ 354,494 $ 179,568 $1,002,770
========= ========= =========
Deferred compensation liabilities included in:
Accrued expenses and other current liabilities $ 144,942 $ 365,172 $ 344,652
Deferred liabilities under employment agreements 231,617 310,794 676,261
--------- --------- ---------
$ 376,659 $ 675,966 $1,020,913
========= ========= =========
</TABLE>
NOTE 14 COMMITMENTS AND CONTINGENCIES
As of December 31, 1998, the Company was subject to an Involuntary Petition
under Chapter 7 of the U.S. Bankruptcy Code (the "Petition") which was filed
against the Company on June 1, 1998 in the United States Bankruptcy Court for
the Middle District of Florida (Case No. 98-09299-8P7). The Petition did not
include any of the Company's subsidiary companies. On April 20, 1999, the U.S.
Bankruptcy Court issued an order dismissing the Petition.
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 sought approximately $500,000 in lease payments and
other charges due under the lease agreement. As of December 31, 1998 and 1997,
the Company had accrued a loss reserve for this action of approximately
$500,000, which is included in liabilities and accruals for claims, assessments
and other losses in the accompanying consolidated balance sheets. Subsequent to
December 31, 1998, the Company settled all actions brought against the Company
and its subsidiaries by BFC for a cash payment of $125,000. In the post merger
financial statements of Hitsgalore.com, Inc., the difference between amounts
accrued and amounts paid in settlement of this obligation will be reflected as
an adjustment to retained earnings and additional paid in capital.
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 alleged 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. The outcome of this action, favorable or not, is not
expected to have any material adverse impact on the Company's financial
condition or future results of operations.
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 accompanying
<PAGE> 69
consolidated financial statements include 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 amounts
recorded. Mr. Lame was a petitioner in the Chapter 7 involuntary bankruptcy
proceeding filed against the Company and had a valid claim against the Company
in the bankruptcy in the amount of approximately $5,000.
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 were to be equal to the amount, if any, the Company
was required to pay under the lease guaranty agreement. Included in liabilities
and accruals for claims, assessments and other losses in the accompanying
consolidated balance sheet as of December 31, 1998 is a loss reserve of
approximately $151,500 for the estimated liability under the guarantee
agreement. Subsequent to December 31, 1998, the Company settled all obligations
due to the lessor under the guarantee agreement and approximately $41,000 in
other lease termination liabilities to the lessor for a cash payment of
approximately $28,600. In the post merger financial statements of
Hitsgalore.com, Inc., the difference between amounts accrued and amounts paid in
settlement of these obligation will be reflected as an adjustment to retained
earnings and additional paid in capital.
The Company is subject to a consent order, executed in December 1996, between
the Company and the State of Michigan. The consent order 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 common stock sold
to Michigan purchasers 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. Pursuant to the consent order, the Company ceased the unregistered
sale of securities in Michigan, was censured and paid costs to the state of
$2,500. Upon satisfaction of the consent order, all sanctions are terminated. As
of December 31, 1998, the Company estimates its maximum potential exposure as a
result of a rescission offer to residents of State of Michigan to be
approximately $848,931, including accrued interest of approximately $174,807.
The interest amount is included in accrued interest in the accompanying
consolidated balance sheet. The number of shares the Company believes is subject
to a rescission offer in the State of Michigan, if such an offer were to be
made, totals approximately 31,286 shares (after giving effect to the reverse
stock split); and, the weighted average purchase price of such shares is
approximately $22.75 per share, as adjusted for the reverse stock split. As of
December 31, 1998, 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. In 1998 and 1997, the Company accrued interest expense
of $53,192 and $52,396, respectively, related to its rescission obligation.
<PAGE> 70
As of December 31, 1998, the Company believes that certain holders of the
Company's securities residing in the State of Michigan have sold shares of the
Company's common stock that are subject to the consent order. To the extent that
residents of the State of Michigan have sold shares subject to the consent
order, the holders of such shares, to the Company's knowledge and belief, are
not entitled to relief under the consent order inasmuch as the consent order
provides for a rescission offer and not for damages arising out of the sale of
such shares. Accordingly, the Company believes that, as of December 31, 1998,
its obligations under the consent order have been reduced. The Company, however,
is not able to determine the effect of the sale of such shares, if any, on the
Company's rescission obligation under the consent order.
In May 1996, the Company informed the principals of CCI that it was canceling
the acquisition of CCI, terminating all of the related acquisition documents and
abandoning CCI's business. In connection with the abandonment of CCI's business,
the Company wrote off its remaining investment in CCI and recognized a loss of
approximately $300,000. The principals of CCI filed suit to enforce the
acquisition notes issued by the Company in connection with the CCI acquisition
(see Note 7) and the issuance of 200,000 shares of the Company's Class A
preferred stock. This matter was referred by court order to mandatory
arbitration in the State of Florida (the Arbitration").
On February 3, 1998, the Arbitrators' awarded in favor of the former
shareholders of CCI (the "Award"). The Award required the Company (i) to convert
200,000 shares of previously issued Class A Preferred Stock into 14,286 shares
of common stock (after giving effect to the reverse stock split), (ii) to issue
another 200,000 shares of Class A Preferred Stock to the former stockholders
(which are also convertible into 14,286 post reverse split shares of the
Company's common stock) and (iii) gave the former stockholders the ability to
(a) seek a summary judgment against the Company for $500,000, without opposition
or (b) accept 500,000 shares of Class A Preferred Stock in lieu of a summary
judgment. As of December 31, 1997, the Company had $300,000 of acquisition notes
outstanding in addition to a loss contingency reserve of approximately $111,000,
related to this action.
During 1998, the Company (a) converted 200,000 shares of previously issued
preferred stock into 14,286 shares of common stock and (b) issued (i) 14,286
shares of its common stock in conversion of another 200,000 shares of preferred
stock and (ii) 500,000 shares of its preferred stock pursuant to the Award. The
fair value of the securities issued pursuant to the Award totaled approximately
$83,000 and was charged against previously recorded loss reserves. As a result
of the Award, the Company was relieved from the obligations due under the
acquisition notes payable to the former stockholders of CCI.
As of December 31, 1998, the Company believed it had complied with all of the
provisions and terms contained in the Arbitrator's award. Subsequent to December
31, 1998, the former shareholders of CCI filed an action to seek the summary
judgement in lieu of the shares of preferred stock issued to them and to set
aside the Company's compliance with the terms of the Award. As a result of this
uncertainty, the Company relieved the obligations due under the acquisition
notes payable to the former stockholders of CCI from its consolidated balance
sheet as of December 31, 1998 and increased its accrual for claims, assessments
and other liabilities by $300,000. In October 1999, the Circuit Court of
Pinellas County, Florida, Case No. 99-3990-CI-20, ruled in favor of the former
shareholders of CCI and granted a summary judgement in favor of the former
stockholders of CCI in the amount of $500,000. In the post merger financial
statements of Hitsgalore.com, Inc., the difference between the amounts that were
previously accrued for this action and the amount of the summary judgement will
be treated as an adjustment to retained earnings and additional paid in capital.
<PAGE> 71
The Company is also involved in certain 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 future results of operations.
NOTE 15 SEGMENT INFORMATION
In 1997 and 1996, the Company sold or otherwise disposed of substantially all of
the assets of its telecommunications businesses. As of December 31, 1998, the
Company business activities were in the healthcare cost containment industry,
only.
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 businesses, see Note 4.
For the years ended December 31, 1998 and 1997, the Company had no capital
expenditures applicable to its discontinued telecommunications businesses. In
1996, capital expenditures applicable to the Company's telecommunications
businesses were $12,561.
The identifiable assets of the Company's discontinued telecommunications
businesses are disclosed in Note 4.
In 1998, the Company and its subsidiaries had one customer that accounted for
approximately 100% of the Company's consolidated net revenues from continuing
operations and, in 1997, had another customer that accounted for approximately
53% of the Company's consolidated net revenues from continuing operations. In
1996, the Company had one customer that accounted for approximately 47% of
consolidated net revenues.
The Company had no inter-segment revenues during the periods presented.
NOTE 16 STATEMENTS OF CASH FLOWS SUPPLEMENTAL INFORMATION
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
Non-cash investing and financing activities:
Equipment capital leases $ -- $ 73,184 $ 703,215
Issuance of stock and warrants
in conversion of notes and
and debentures payable 2,051,063 716,318 199,150
Issuance of stock and warrants
in extinquishment of debt 308,934 -- --
Issuance of stock in settlement
of other obligations and accruals 827,290 -- --
Recovery of note receivable
from the sale of assets 91,911 -- --
Cash paid during the period for:
Interest 9,148 131,635 --
Income taxes -- --
<PAGE> 72
NOTE 17 EVENTS SUBSEQUENT TO DECEMBER 31, 1998
On March 19, 1999 (the "Effective Date"), the Company and Hitsgalore.com, a
Nevada Company ("Old Hitsgalore.com"), completed a reorganization and merger
(the "Reorganization and Merger Agreement"). In connection with the
Reorganization and Merger Agreement, the Company:
(i) declared, effective as of the close of business on March 18, 1999, a
reverse split of its issued and outstanding common stock and the common
stock underlying all issued, outstanding and unexpired common stock
purchase options, warrants and other rights to purchase its common
stock in the ratio of one share for each seven shares, so that
immediately preceding the merger the Company would have approximately
8,000,000 shares of common stock issued and outstanding, assuming
exercise of all such options, rights and other rights;
(ii) transferred all of its existing business, property and assets, tangible
and intangible, excluding the business and assets of Old
Hitsgalore.com, to International Healthcare Solutions, Inc. ("IHSI"), a
newly-formed wholly-owned subsidiary of the Company, in exchange for
20.0 million shares of IHSI's common stock;
(iii) caused IHSI to assume all of the debts, liabilities and obligations of
the Company outstanding as of the Effective Date and irrevocably
indemnify the Company against all of such debts, liabilities and
obligations; and
(iv) transferred into trust for the benefit of the Company's stockholders
the 20.0 million shares of IHSI common stock referred to in (ii) above,
which shares are restricted and represented by a single, global
certificate. The shares of IHSI common stock are to be distributed to
the Company's stockholders as a dividend in kind subject to the
effectiveness of a registration statement to be filed by IHSI under the
Securities Act of 1933, as amended.
Pursuant to the Reorganization and Merger Agreement, Old Hitsgalore.com was
merged into the Company on the Effective Date in exchange for the conversion of
all of the issued and outstanding stock of Old Hitsgalore.com into 37.675
million shares of the Company's common stock. The Reorganization and Merger
Agreement also provided for the issuance of up to an additional 4.0 million
shares of the Company's common stock to consultants and professionals rendering
services in connection with the reorganization and merger and for acquisition
costs and fees, of which 2,000,000 shares were issued. On the Effective Date,
the name of the Company was changed to Hitsgalore.com, Inc.
The Reorganization and Merger Agreement also provided that the proceeds, if any,
from the exercise of outstanding common stock purchase options and warrants be
used to pay the debts, liabilities and obligations of the Company assumed by
IHSI pursuant to the Reorganization and Merger Agreement and to provide working
capital to the Company.
<PAGE> 73
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:
Balance, December 31, 1996 $ 28,074
Additions:
Provision for bad debts charged
to operations 46,816
Deductions:
Write-offs (70,214)
Discontinued operations (4,676)
------
Balance, December 31, 1997 --
Additions:
Provision for bad debts charged
to operations 34,269
Deductions:
Write-offs (34,269)
------
Balance, December 31, 1998 $ --
======
The provision for bad debts charged to operations applicable to discontinued
operations was $475,711 in 1996.
NOTE 19 RESTATEMENT OF FINANCIAL RESULTS
The Company restated its consolidated financial results for the years ended
December 31, 1997 and 1996. The 1996 financial statements were restated to
reflect the business, assets and liabilities of CCI. The assets and liabilities
of CCI had previously been removed from the Company's balance sheet, effective
May 1996, as a result of the Company having abandoned the business of CCI. As of
the date the Company abandoned the business of CCI, CCI had ceased operations.
Accordingly, the inclusion of the business of CCI in the consolidated financial
statements had no effect on the Company's operations or cash flows for periods
after May 1996. As a result of the reinstatement of the assets and liabilities
of CCI, the Company retroactively recorded, as a charge to income, $300,000 to
fully reserve the carrying value of CCI's assets. This had the effect of
increasing the Company's loss from continuing operations and net loss for the
year ended December 31, 1996, as previously reported, by $114,000 and $300,000,
respectively.
The 1997 financial statements were restated to retroactively record the shares
of the Company's common stock returned to the Company in connection with the
rescission of business acquisitions at fair value (see note 4). The shares of
common stock returned to the Company in connection with the rescission of
business acquisitions were previously valued and recorded at their original
issue prices at the time of the respective business acquisitions. The effect of
adjusting the value assigned to the shares of the Company's common stock
returned to the Company in connection with the rescission of business
acquisitions was to increase the Company's loss from continuing operations and
net loss, for the year ended December 31, 1997, as previously reported, by
$1,732,264 and $1,533,008, respectively, and increase the gain from disposition
of telecommunication businesses, as previously reported, by $199,256. The per
share effects were to increase the loss from continuing operations and net loss
by $0.16 and $0.14, respectively, and increase the gain from disposition of
telecommunications businesses by $0.02.
<PAGE> 74
The adjustments to the statement of operations for the year ended December 31,
1997 were offset by a corresponding increase in the Company's previously
reported amount of additional paid in capital. As a result, the Company's net
assets as of December 31, 1997 were unchanged by the restatement.
[REMAINDER OF PAGE LEFT BLANK]
<PAGE> 75
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Effective February 20, 1998, Ernst & Young LLP resigned as independent auditor
of the Registrant. The report of Ernst & Young LLP on the Registrant's
consolidated financial statements for the year ended December 31, 1996 did not
contain an adverse opinion or a disclaimer of opinion and was not qualified or
modified as to audit scope or accounting principles. The report 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 audit of the Registrant's consolidated financial
statements for the year 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.A. 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.
On July 26, 1999, the Registrant received written notice from Moore Stephens
Lovelace, P.A. that it was withdrawing as auditor of record for Hitsgalore.com,
Inc. The notice received from Moore Stephens Lovelace was dated as of July 19,
1999, and mailed on July 21, 1999. The reports of Moore Stephens Lovelace, P.A.
on the financial statements of Hitsgalore.com, Inc. (formerly Systems
Communications, Inc.) as of December 31, 1998 and for the period from its
inception (July 21, 1998) to December 31, 1998 and on the consolidated financial
statements of Systems Communications, Inc. (the Registrant's predecessor) for
each of the two years in the period ended December 31, 1998 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 Moore Stephens Lovelace,
P.A. included an explanatory paragraph expressing substantial doubt about the
Registrant's and its predecessor's ability to continue as a going concern.
In connection with the audits of the financial statements of the Registrant and
it's predecessor referred to above, and in subsequent interim periods, there
were no disagreements with Moore Stephens Lovelace, P.A. on any matters of
accounting principles or practices, financial statement disclosure, or auditing
scope and procedures which, if not resolved to the satisfaction of Moore
Stephens Lovelace, P.A. would have caused Moore Stephens Lovelace, P.A. to make
reference to the matter in their report.
Moore Stephens Lovelace, P.A. stated that its withdrawal as auditor of record
for Hitsgalore.com, Inc. was due to changes in management of Hitsgalore.com,
Inc. and information which arose regarding new management which led Moore
Stephens Lovelace, P.A. to be unwilling to be associated with the financial
statements of Hitsgalore.com, Inc. There were no reportable events that were
required to be reported pursuant to Items 304(a) (1) (v) of Regulation S-X.
Moore Stephens Lovelace, P.A. has furnished a letter addressed to the Commission
stating that it agrees with the statements contained herein. A copy
<PAGE> 76
of that letter, dated September 7, 1999 has been filed with the Securities and
Exchange Commission.
The withdrawal of Moore Stephens Lovelace, P.A. as the Registrant's auditor of
record was not recommended or approved by the Registrant's Board of Directors.
The Company authorized Moore Stephens Lovelace, P.A. to respond fully to the
inquiries of a successor accountant concerning its withdrawal as the
Registrant's auditor of record.
On September 2, 1999, the Company engaged Pender Newkirk & Company, Certified
Public Accountants, to audit and report on the financial statements of
Hitsgalore.com, Inc. for each of the three years in the period ended December
31, 1998. The Company has not consulted with Pender Newkirk & Company regarding
the application of accounting principals and has not received any advice from
Pender Newkirk & Company regarding any accounting, auditing or financial
reporting issue or any other matter that was the subject of a disagreement or
reportable event.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
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:
Name Age Positions Since
- ---------------------- --- -------------------------------- ---------
Dorian Reed (1) 44 Chairman of the Board March 1999
Steve Bradford 43 President, Principal Executive March 1999
Officer, Secretary and Director
Robert A. Thompson 47 Vice President, Treasurer, Sept. 1999
Chief Financial Officer and
Director
Melvyn L. Price, Jr. 43 Director April 1999
Phillip Lloyd Kaich 46 Director April 1999
Daniel Melvin Grant 45 Director April 1999
(1) Dorian Reed was a founding stockholder of Old Hitsgalore.com. Mr. Reed
resigned as Chairman of the Board on May 13, 1999 and was reinstated as Chairman
of the Board on July 8, 1999 by unanimous consent of the Company's independent,
outside Directors.
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. None of the incumbent directors have been elected by a
majority of the Company's stockholders. They have been appointed by the Board to
fill vacancies created by the resignations of their predecessors. Directors are
not compensated for their services apart from their executive officer salaries,
if the Director is also an executive officer. 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 that 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.
<PAGE> 77
Mr. Dorian Reed is a principal stockholder and Chairman of the Board of
Directors. Mr. Reed is also the Company's Director of Technology. In 1994 Mr.
Reed was engaged in internet consulting and research, primarily studying
internet market trends for not-for-profit entities. The business Mr. Reed was
involved in was incorporated in January 1995 as Angel Industries, Inc. Mr. Reed
became an employee of Angel Industries until a new business, incorporated in
1995 by the President of Angel Industries, Inc., called Internet Business
Broadcasting ("IBB") became his employer. See "Disclosure of Past Investigations
Involving Dorian Reed". Prior to Hitsgalore.com, Mr. Reed and Steve Bradford
together owned I Wonder Technologies, a now-dormant business that focused on
satellite applications for long distance learning and the transmission of voice,
data, video and the internet.
Disclosure of Past Investigations Involving Dorian Reed-
In 1995, Dorian Reed was employed by a new business called Internet Business
Broadcasting ("IBB"). The original concept of IBB was to build web sites for
small businesses and create an internet business mall for third party on-line
retailers.
In late 1996, IBB started selling billboard space in IBB's internet business
mall, and elsewhere on the IBB site, to companies wishing to advertise on the
then new and growing internet. IBB signed contracts with individuals who leased
the on-line billboards and IBB would then seek advertisers to purchase the space
on the leased billboards. The proceeds generated by selling the advertising were
to be split between IBB and the lessee of the billboard. In mid-1997, after
failing to adequately collect revenues from a sufficient number of customers,
IBB shut down its business and dissolved.
In early 1998, the Federal Trade Commission ("FTC") filed a lawsuit against Tom
Maher, former President of IBB, Audrey Reed, and Mr. Reed for failure to refund
money to customers and allegedly misleading investors about the potential return
on their investment. In April 1998, Mr. Reed filed an answer to the FTC
complaint, pro se, denying all the allegations, and did not receive any
subsequent correspondence from the government.
Mr. Reed says he was unaware any case was pending against him until stories
appeared in the press and he was served with a default judgment at the
Hitsgalore.com office in Rancho Cucamonga, CA on May 11, 1999. The judgement
served on Mr. Reed informed him that a federal judge in Baltimore issued an
order in April, 1999 for he and his co-defendants to pay $613,110 to 100
customers of IBB.
After being served on May 11, 1999, Mr. Reed immediately and pro-actively
contacted the FTC through counsel regarding the matter. As of November 30, 1999,
Mr. Reed is actively negotiating with the FTC to reach an amicable settlement of
this matter. The FTC has acknowledged that it did in fact receive pleadings in
this case in April 1998, from both Audrey and Dorian Reed in response to the FTC
Complaint. However, said pleadings sat in an FTC office without having been
opened for over a year. Mr. Reed and the FTC are now exchanging information
about the facts that gave rise to the lawsuit, so that the FTC can have a more
realistic view of what actually happened. Although a mere employee of the
subject company, Mr. Reed is stepping forward to get this matter resolved and is
not waiting for the FTC to find the management who actually ran the corporation.
It is anticipated that a settlement will be reached in the near future.
In addition, the following incident involving Mr. Reed took place more than 5
years ago, and the Company is under no obligation to include it in this filing.
In 1992, Mr. Reed was convicted at trial of wire fraud and unlawful use of
access device and served a 10 month sentence in a federal prison camp and
successfully completed the rest of his term on supervised release.
<PAGE> 78
There were several counts amounting to approximately $2,800.00 in losses, plus
court and other costs, which all have been paid. This case did not involve the
purchase or sale of any security.
Steve Bradford is the Company's Chief Executive Officer and a Director. For the
past 5 years Mr. Bradford has primarily been self-employed, in the
telecommunications and internet areas. Prior to being a founding stockholder of
Old Hitsgalore.com, Mr. Bradford and Mr. Reed, a principal stockholder of Old
Hitsgalore.com and the Company, together owned I Wonder Technologies, a
now-dormant business that focused on satellite applications for long distance
learning and the transmission of voice, data, video and the internet. From
January 1994 to January 1995, Mr.Bradford also was employed by Biomat, Inc., a
privately held manufacturer of lawn and garden products during its development
stage and assisted it to develop its business plans and other administrative
functions. Beginning July 1996, Mr Bradford served for one year as Chief
Operations Officer of OUP, Inc., a closely held direct mail company in Kansas
City with annual sales in excess of $10 million. Mr. Bradford was also a
director and President of Wamego Real Estate Development, Co., Inc., a Missouri
corporation, then owned by Mr. Bradford's wife. After sale of that company to a
third party and Mr. Bradford's resignation as President, the company filed for
protection under the Bankruptcy Code on September 28, 1995, case number
95-42574, in the Western District of Missouri. The case was converted to a
liquidation on October 8, 1996 and is closed. Mr. Bradford holds a BS degree in
Business Administration and a JD from the University of Kansas.
Robert A. Thompson was named Vice President, Treasurer, Chief Financial Officer
and a Director in September 1999. From February 1996 until June 1998, Mr.
Thompson served as the Chief Financial Officer of Systems Communications, Inc.
Since June 1998, Mr. Thompson served as an accounting and financial reporting
consultant to Systems Communications, Inc. and, since March 1999 to
Hitsgalore.com. From February 1991 to February 1996, Mr. Thompson was Vice
President and Treasurer of Anchor Glass Container Corporation, a Fortune 500
manufacturer of glass containers. Mr. Thompson has 12 years of accounting and
audit experience with two of the "Big 5" international public accounting firms
and since 1986 has held senior financial positions with companies engaged in the
banking, retail, printing and publishing industries.
Melvyn L. Price, Jr. was elected to serve on the Board of Directors by the
standing directors to fill vacancies on April 28, 1999. Since June 1998, Mr.
Price has been Manager of Workstation Services for PCS Health Systems in
Phoenix, AZ, and prior thereto, since August 1985, was Systems Administrator of
Desktop Support for Electronic Data Systems.
Phillip Lloyd Kaich was elected to serve on the Board of Directors by the
standing directors to fill vacancies on April 28, 1999. Mr. Kaich has previously
been an employee benefits insurance broker for certain major insurance companies
and operated a company in the business of purchasing, installing and operating
public payphones throughout southern California. For the past five years, Mr.
Kaich has also been engaged in real estate sales and service. Since 1998, Mr.
Kaich has been a franchisee and owner, operator of Red Carpet Inland Empire
Realty, in Rancho Cucamonga, CA.
Daniel Melvin Grant was elected to serve on the Board of Directors by the
standing directors to fill vacancies on April 28, 1999. Since 1991, Mr. Grant
has been the proprietor of D. Grant Glass, Crestline, CA., involved in the
national sales and installation of glass and other products. Mr. Grant has been
involved in numerous prominent construction projects, including the Getty
Museum, the LA Coliseum and for Marriott Hotels, Sheraton Hotels and Macys, with
as many as 54 skilled craftsman employees under his supervision.
The members of the Company's audit committee include Messrs. Grant, Kaich, Price
and a stockholder.
<PAGE> 79
ITEM 11. EXECUTIVE 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, 1998.
Annual Compensation
---------------------------------------------------
Long-Term
Name & Principal Positions Year Salary Bonus Other Compensation
- -------------------------- ---- ------ ----- ----- ------------
Steve Bradford
Chief Executive Officer (1) 1998 $ -- $ -- $ -- $ --
Stephen E. Williams 1998 75,000 -- -- --
Chief Executive 1997 150,000 -- -- --
Officer (2)(3) 1996 177,500 -- 7,500 --
James T. Kowalczyk 1998 110,000 -- -- --
President (4) 1997 32,500 -- -- --
1996 N\A -- -- --
Edwin B. Salmon, Jr. 1998 150,000 -- -- --
Chief Financial Officer, 1997 150,000 -- -- --
Treasurer and Chairman of 1996 177,000 -- 7,500 --
the Board (2)(4)
(1) Mr. Steve Bradford became the Chief Executive Officer of the Company as a
result of the completion of the Merger and Reorganization Agreement between the
Company and Old Hitsgalore.com, which was effective as of March 19, 1999. As a
principal stockholder of Old Hitsgalore.com, Mr. Bradford was not compensated.
The Company and Mr. Bradford had no arrangements as of December 31, 1998
regarding future compensation for the services of Mr. Bradford, as its Chief
Executive Officer.
(2) The Company entered into employment agreements with Mr. Williams and Mr.
Salmon. These agreements provided for, among other things, the payment of
compensation over 5 years from the date of their employment, regardless of
whether or not these executive officers remained in the employ of the Company.
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. In connection with the
Reorganization and Merger Agreement, Mr.
Salmon resigned all of his positions with the Company.
(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> 80
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding beneficial
ownership of the Company's common stock as of September 30, 1999 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.
Name of Amount and Nature Percent
Beneficial Owner of Beneficial Interest(1) of Class(1)
- ---------------------- ------------------------- ---------
Dorian Reed 28,150,000 (2) 59.9%
Steve Bradford 6,100,000 (3) 13.0
+
All Directors and Executive Officers
as a Group( 4 persons) 6,130,000 (3)(4) 13.0
(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.
(2) Includes 2,000,000 shares owned by Audrey M. Reed, spouse of Mr. Reed. Mr.
Reed disclaims beneficial ownership of these shares.
(3) Includes 2,250,000 and 1,850,000 shares, respectively, owned by Rose Grace
Faith Holdings, LLC and Diana R. Bradford, spouse of Mr. Bradford. Rose
Grace Faith Holdings, LLC is owned by Mr. Bradford and his minor children.
Mr Bradford disclaims beneficial ownership of all of these shares with the
exception of the shares owned by Rose Grace Faith Holdings, LLC.
(4) Includes the shares referred to in (3) and 10,000 shares awarded to each of
Messrs. Price, Kaich and Grant for serving on the Company's Board of
Directors (see "Item 10. - Directors and Executive Officers of the
Registrant").
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During 1998, Mr. Reed and Mr. Bradford, each, advanced the Company, without
interest, $2,500. As of December 31, 1998, these advances had been reduced to
$2,250, in the aggregate. Mr. Reed and Mr. Bradford, as principal stockholders
of Old Hitsgalore.com, provided their services to the Company during its
development stage without compensation and Mr. Reed made available equipment, at
no charge, for use by the Company during its development stage. Mr. Reed and Mr.
Bradford also caused I Wonder Technologies, an affiliated company through common
ownership, to advance the Company $22,699 in cash during its development stage.
<PAGE> 81
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
PAGE
----
HITSGALORE.COM, INC., FORMERLY SYSTEMS COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
Independent Auditors' Report 25
Balance Sheet as of December 31, 1998 26
Statement of Operations and Retained Earnings
for the period from inception to December 31, 1998 27
Statement of Cash Flows for the period from inception
to December 31, 1998 28
Notes to Financial Statements 29
Pro Forma Condensed Financial Information 36
HITSGALORE.COM, INC.(FORMERLY SYSTEMS COMMUNICATIONS, INC.)
AND SUBSIDIARIES
Independent Auditors' Report on the Consolidated Financial
Statements for the years ended December 31, 1998, 1997
and 1996 39
Consolidated Balance Sheets as of December 31, 1998, 1997
and 1996 40
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 1998 42
Consolidated Statements of Changes in Stockholders' Deficit for
each of the three years ended in the period
December 31, 1998 43
Consolidated Statements of Cash Flows for each of the three
years ended in the period December 31, 1998 45
Notes to Consolidated Financial Statements 46
(a) 2. Financial Statement Schedules
No financial statement schedules are being filed as a part of this report as
such schedules are not applicable, are not required or the related information
is included in the consolidated financial statements or notes thereto.
(a) . Exhibits
2.1 xx Reorganization and Merger Agreement, dated February 11, 1999,
between Systems Communications, Inc. and Hitsgalore.com
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.
<PAGE> 82
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
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
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)
<PAGE> 83
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.
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
<PAGE> 84
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
44.x Letter of Intent, Subscription for Stock dated April 15, 1999,
between Hitsgalore.com, Inc and The Life Foundation Trust.
45.x Subscription Agreement and Investment Representations dated
April 15, 1999 between Hitsgalore.com, Inc. and The Life
Foundation Trust.
46.x Purchase Agreement dated March 29, 1999 between Hitsgalore.com,
Inc. and Solvere, Inc.
16.1.+ Letter re change in certifying accountants
16.2 Letter re change in certifying accountants
17.1.## Resignation Letter of Stephen Williams.
17.2.## Resignation Letter of David J. Olivet
P 21 * List of Subsidiaries of Registrant
27.13 x Financial Data Schedule (Year ended December 31, 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")
* Incorporated by reference to the Company's Registration Statement on 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 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 year ended December 31, 1996.
+ Incorporated by reference to the Company's Current Report on Form 8-K, as
filed on February 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.
x Filed herewith.
xx Incorporated by reference to the Company's Current Report on Form 8-K as
filed on February 16, 1999.
xxx Incorporated by reference to the Company's Current Report on Form 8-K as
filed on July 27, 1999.
<PAGE> 85
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the 4th quarter of 1998.
The Company filed a Form 8-K on February 16, 1999. The event reported was a
Reorganization and Merger Agreement entered into between the Company and
Hitsgalore.com, Inc. on February 11, 1999. The Reorganization and Merger
Agreement was completed on March 19, 1999.
The Company filed a Form 8-K on March 10, 1999. The event reported was the
dismissal of the involuntary proceeding filed against the Company under Chapter
7 of the U.S. Bankruptcy Code. The U.S. Bankruptcy Court issued the order
dismissing the bankruptcy petition on April 20, 1999.
The Company filed a Form 8-K on July 27, 1999. The event reported was the
withdrawal of Moore Stephens Lovelace, P.A. as the auditor of record for
Hitsgalore.com, Inc.
The Company filed a Form 8-K\A on September 9, 1999. The events reported
included additional disclosure about the withdrawal of Moore Stephens Lovelace,
P.A. as the auditor of record and the engagement of Pender Newkirk & Company as
the Company's auditors. Pender Newkirk & Company was engaged on September 2,
1999, to audit and report on the financial statements of the for each of the
three years in the period ended December 31, 1998.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized. The undersigned persons were not officers or directors of the
Registrant for the period covered by this report and became the officers and
directors of the Registrant upon consummation of the Reorganization and Merger
Agreement.
HITSGALORE.COM, INC. Date: December 1, 1999
/s/ Dorian Reed
- ---------------------------------
Chairman of the Board
/s/ Steve Bradford
- ---------------------------------
Steve Bradford
Principal Executive Officer,
Secretary and Director
/s/ Robert A. Thompson
- ---------------------------------
Vice President, Principal Accounting
Officer and Director
/s/ Melvyn L. Price
- ---------------------------------
Melvin L. Price
Director
<PAGE> 86
/s/ Phillip Lloyd Haich
- ---------------------------------
Phillip Lloyd Haich
Director
/s/ Daniel Melvin Grant
- ---------------------------------
Daniel Melvin Grant
Director
<PAGE> 87
EXHIBIT 10.44
April 15, 1999
Jeanette B. Wilcher, Trustee
The Life Foundation Trust
7345 East Acoma Drive, Suite 301
Scottsdale, Arizona 85260-3198
Re: Letter of Intent
Subscription for Stock
Dear Jeanette:
This letter agreement replaces and supersedes our previous letter and will
confirm our agreement and understanding concerning the following transaction:
1. The Life Foundation Trust ("LFT") will acquire 2,000,000 shares of the
common stock of Hitsgalore.com, Inc., a Florida public company trading
under the ticker symbol HITT ("Hitsgalore"). All shares will be held
long-term by LFT and subject to a Lock-up Agreement between the parties.
The subscription and acquisition price for the 2 million shares of stock is
five dollars per share, for a total of ten million dollars
($10,000,000.00);
2. LFT reserves in advance Local City Editions for up to 200 major
metropolitan areas and other cities (the "Local Cities"), and the right to
use the proprietary software and the website and the programming and
content contained therein, located at www.hitsgalore.com, in support of
those Local City Editions. The Local City Editions will be purchased and
booked over the next 12 months as the Local Cities are identified and
available to be brought on-line. The total acquisition price of the Local
City Editions reserved hereby is $10,000,000.00. The Local Cities will be
maintained by either Hitsgalore.com or by third parties selected by
Hitsgalore.com. Hitsgalore.com may seek to have local radio stations or
other media maintain the Local City Editions. Any of the Local City
Editions may be repurchased by Hitsgalore.com at its discretion at any time
over the next three (3) years in exchange for cash or stock of
Hitsgalore.com equal to the purchase price paid by LFT.
10134 6th Street, Suite J, Rancho Cucamonga, CA 91730
909-481-8821 909-481-8064 (fax)
website: http://www.hitsgalore.com
<PAGE> 88
Letter of Intent
The Life Foundation Trust
April 15, 1999 Page 2.
The total of $20 million, consisting of the subscription and acquisition price
of $10 million, and the $10 million for the purchase of Local City Editions to
be acquired and booked over the next 12 months, will be unconditionally and
irrevocably paid in full within one (1) year, the payment of which is secured by
LFT granting a security interest and lien in LFT's undivided interest in the
collection of Aden stamps presently held in safekeeping with Day & Meyer, Murray
& Young Corp., 1166 Second Avenue at 61st Street, New York, NY 10021, (the
"Asset").
The Asset is insured as to all risks of physical loss and/or damage for $20
million through Lambert Fenchurch Specialties Group Limited, London, with a
certain underwriter at Lloyd's, London, UK, per Contract No: NA0100098,
Certificate No: NA0112598. The premium for the 12 months ending December 3, 1999
of $70,000 has been paid in full. The Asset has been appraised for $50 million
(catalog value).
To effect the transfer and assignment of the undivided interest in and to the
Asset, the following items shall be delivered by LFT to Hitsgalore:
1. A Deed of Assignment assigning and transferring absolutely and irrevocably
an undivided right, title and interest in and to the Asset;
2. Acknowledgement from Day & Meyer, Murray & Young Corp. noting the interest
of Hitsgalore.
3. An assignment of the Certificate of Insurance from Lambert Fenchurch
Specialties Group Limited, together with an amendment to the Schedule of
Coverages acknowledging the interest of Hitsgalore as an Assured.
4. UCC-1's shall be executed and filed in New York as deemed appropriate by
counsel for Hitsgalore.
Upon receipt of the foregoing items Hitsgalore will instruct its stock transfer
agent to deliver to LFT certificates representing the 2,000,000 shares
subscribed and acquired by LFT.
LFT shall have the unlimited right to substitute for the Asset cash or
marketable securities having a value (as determined by third parties acceptable
to Hitsgalore) at least equal to the value of the Asset. LFT shall also have the
limited right to substitute assets other than cash or marketable securities, if
such substituted asset has an insurable value at least equal to the Asset, and
provided that Hitsgalore shall have the right to reject the transfer if it
believes that such substitution will negatively impact the market value of its
stock.
<PAGE> 89
Letter of Intent
The Life Foundation Trust
April 15, 1999 Page 3.
It is understood and agreed that Hitsgalore will issue a public statement
concerning this Letter of Intent and Subscription for common stock of
Hitsgalore. All such public statements or press releases shall be submitted in
advance to LFT.
If this Letter of Agreement accurately states the agreement of the parties
concerning the subject matter herein, please indicate your acknowledgement,
acceptance and agreement to the terms and conditions as stated herein by
executing this Letter of Intent below and faxing a copy back to Hitsgalore, with
originals to be exchanged as soon as possible.
Very truly yours,
Hitsgalore.com, Inc.
By: \s\ Steve Bradford
--------------------
Steve Bradford, CEO
The terms and conditions set forth in this Letter of Intent are hereby
acknowledged, accepted and agreed, effective as of April 15, 1999.
The Life Foundation Trust
By: \s\ Jeanette B. Wilcher
--------------------------
Jeanette B. Wilcher, Trustee
<PAGE> 90
EXHIBIT 10.45
SUBSCRIPTION AGREEMENT
AND
INVESTMENT REPRESENTATIONS
Board of Directors
Hitsgalore.com, Inc.
10134 6th Street, Suite J
Rancho Cucamonga, CA 91730
Re: Subscription to Purchase Hitsgalore.com Stock
Gentlemen:
1. Subscription. Hitsgalore.com, Inc., a Florida corporation, (referred
to hereinafter as the "Issuer") has offered for sale two million (2,000,000)
shares of its common stock, $0.001 par value (referred to hereinafter as
"Hitsgalore.com Stock") to the undersigned at a price of $5.00 per share.
Subject to the terms and conditions set forth below, the undersigned (referred
to hereinafter as the "Subscriber"), agrees to purchase 2,000,000 shares of
Hitsgalore.com Stock. The Subscriber tenders herewith the sum of $10,000,000 in
investment assets with a market value in excess of the Subscription and insured
against all perils through Lloyds of London, in full payment of the purchase
price, subject to the terms of the offer, acceptance and the conditions
described below.
2. Acceptance. It is understood and agreed that the Issuer shall have
the sole and unconditional right to accept or reject this subscription and
tender of the purchase price, in whole but not in part. The Issuer will move
promptly upon receipt of this subscription to determine the acceptability of
this subscription. If this subscription is deemed to be unacceptable, the
Subscriber will be promptly notified, the subscription price will be returned to
the Subscriber without interest, offset or deduction, and the subscription
documents will be marked "Void." The Issuer may elect to retain copies of said
documents for the sole purpose of demonstrating compliance with the provisions
of an exemption from the registration requirements of federal and state
securities laws.
3. Investment Representations, Warranties and Covenants. The Subscriber
represents and warrants to and covenants with The Issuer as follows:
(a) The Subscriber has carefully reviewed the materials
supplied by the Issuer. The Subscriber acknowledges that it has had the
reasonable opportunity to ask questions and to examine such supplemental
documentation as it may deem necessary to make an informed decision concerning
investment in the Hitsgalore.com Stock. The Subscriber acknowledges that it has
received satisfactory answers to its questions from management of the Issuer and
has verified to its satisfaction the information in the materials provided. The
Subscriber has relied upon its own independent investigation in making its
decision to buy the Hitsgalore.com Stock.
<PAGE> 91
(b) The Subscriber understands that the financial model (if
any) contained in the materials provided or discussions of the potential
profitability of the Issuer or the future value of its Hitsgalore.com Stock are
not projections or guarantees of future profitability; but, such forecasts are
included or discussed solely for the purpose of demonstrating the hypothetical
operations of the Issuer and are subject to the disclaimers included therein.
There can be no guarantee the Company will achieve profitability or create value
in the future in its Hitsgalore.com Stock.
(c) The Subscriber understands that the offer and sale of the
Hitsgalore.com Stock are not registered with the U.S. Securities and Exchange
Commission or the securities authority of any state or jurisdiction; but, the
offer and sale is made instead in reliance upon an exemption from registration
commonly referred to as the "private placement exemption." The Subscriber
understands that there is no public market for the Hitsgalore.com Stock, that
none is expected to develop under current circumstances and that the sale or
other transfer of the Hitsgalore.com Stock, except by gift or inheritance, may
be restricted by federal and state securities laws and by the terms of the offer
and sale. The Subscriber understands that sale or other transfer of the
Hitsgalore.com Stock by it, except by gift or inheritance, may require that the
Hitsgalore.com Stock be the subject of an effective registration statement on
file or qualification with the U.S. Securities and Exchange Commission and
appropriate state securities commission(s) or an opinion of counsel acceptable
to the Issuer and its counsel that the sale or other transfer is exempt from
such registration or qualification. The Subscriber understands that the Issuer
is under no obligation, and it cannot compel the Issuer, to register the
Hitsgalore.com Stock for transfer. The Subscriber understands that it may be
required to bear the economic risk of the investment indefinitely. The
Subscriber understands a notice of these restrictions will be printed on the
Hitsgalore.com Stock certificates and the transfer agent, if any, will be
instructed to honor the notice.
(d) The Subscriber is acquiring the Hitsgalore.com Stock for
investment for its own account and not for the purpose of resale, division,
fractionalization or distribution. The Subscriber acknowledges that it is
holding the Hitsgalore.com pursuant to a "Lock-up" Agreement. The Subscriber has
not predetermined the occurrence of any event or condition upon which it intends
to sell the Hitsgalore.com Stock.
(e) The Subscriber understands that the Issuer has a limited
operating history and that investment in the Hitsgalore.com Stock involves a
high degree of risk which could result in a complete loss of its investment.
(f) The Subscriber is an "accredited investor" as defined in Regulation D under
the Securities Act of 1933, as amended, in that it has a net worth which exceeds
$1,000,000 and its investment in the Hitsgalore.com Stock does not exceed ten
percent of its net worth.
(g) The Subscriber has such knowledge and experience in
business and financial matters that it is able to evaluate the merits and risks
of investment in the Hitsgalore.com Stock. The Subscriber acknowledges that it
has sufficient income and net worth that it is able to bear the economic risk of
loss of its investment and that the complete loss of investment in the
Hitsgalore.com Stock would not prevent it from providing for its commitments and
foreseeable contingencies.
4. Indemnification. The Subscriber acknowledges that it understands the
meaning and legal consequences of the representations, warranties and covenants
contained in paragraph 3, and it agrees to indemnify and hold harmless the
Issuer, its officers and directors, its accountants and counsel from and against
all claim, injury, loss, damage and liability due to or arising out of any
breach of the representations, warranties or covenants contained in this
Subscription Agreement. The indemnification provided herein
<PAGE> 92
shall not expressly, impliedly or in any other manner be deemed to be a waiver
of any rights granted to the Subscriber under federal or state securities laws.
The Subscriber understands the Issuer and its counsel will rely upon its
representations and warranties for the purpose of complying with the
requirements of federal and state securities laws.
5. Confidential Information. The disclosure materials supplied by the
Issuer contain confidential and proprietary information and trade secrets.
Furthermore, the requirements for an exemption from registration and
qualification under federal and state securities laws include limitations on
distribution of disclosure materials. Accordingly, the Subscriber agrees, in
consideration for the Issuer offering it the opportunity to invest in the
Hitsgalore.com Stock, to keep all information in the disclosure materials
confidential and to discuss it only with management of the Issuer.
6. General. This agreement shall be binding upon the Subscriber, its
successors and assigns. This agreement shall not be assignable. This agreement
shall be construed under the laws of the State of Florida.
Subscribed this 15th day of April, 1999.
Signature of Subscriber
Life Foundation Trust
By: \s\ Jeanette B. Wilcher, Trustee
--------------------------------
The foregoing Subscription Agreement and Investment Representations Accepted
this 15th day of April, 1999.
Hitsgalore.com, Inc.
By: \s\ Steve Bradford
------------------
Authorized Officer
<PAGE> 93
EXHIBIT 10.46
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT, by and between Hitsgalore.com, Inc., a Florida public
corporation ("Hits") and Solvere, Inc., a Delaware closely held corporation
("Solvere"), is made and effective as of the 29th day of March, 1999.
NOW THEREFORE, for the mutual promises contained herein, and other good and
valuable consideration, the receipt and sufficiency of which the parties hereby
acknowledge, the parties agree as follows:
1. At Closing, Hits will acquire all of the right, title and interest in
and to the Internet-related development, equipment and software now
owned, or under development, by Solvere (the "Internet Division"). This
includes but is not limited to all computer equipment, software and all
internet technology (such as, by way of example and not limitation,
e-commerce, web-based email (IBC) and all other internet software,
programming and applications of Solvere), all as more fully described
in Exhibit A, which shall be submitted by Solvere, approved by Hits,
and attached hereto and made a part hereof.
2. The purchase price for the Internet Division shall be $125,000, as
follows: $5,000.00 upon receipt of a fully executed Purchase Agreement,
including Exhibit A, with the balance of $120,000.00 due within fifteen
(15) days. In addition, Hits will deliver to Solvere a certificate for
100,000 shares of restricted common stock of Hits. The shares will be
included in the next stock registration filed by Hits to free up the
shares for trading. However, Solvere voluntarily agrees not to sell in
any one week more than two percent (2%) of the previous week's total
volume traded. This will be acknowledged and reflected in a lock up
agreement or other arrangement prior to delivery of the certificates
for the shares.
3. Solvere will provide an office at its Irvine, CA facility to be used by
and on behalf of Hits. Hits will pay $4,000 per month to Solvere as a
maintenance fee for system management for both the Irvine, CA and
Rancho Cucamonga, CA offices.
4. Hits will spend an additional $125,000 in future development costs by
Solvere related to the Internet Division for completion of the: mail
center, real-time quotes, e-mail and shopping cart implementation, on a
project-by-project basis pursuant to budgets prepared by Solvere and
approved by Hits. Solvere will also manage and perform the integration
of the following: banner generator, info cart, pop-up search, and
porn-free net search results. The time frame for this engagement is to
be completed within nine months or sooner from the date of this
agreement.
5. For future business involving Internet Firewall/Proxy server, Solvere
and Hits shall co-License the SpeedShield technology. Solvere and Hits
shall equally share all License fees related to SpeedShield licenses
sold by Solvere. Hits agrees to pay 50% of any reasonable marketing
expenses incurred by Solvere in marketing the SpeedShield, provided
such marketing expenses have been previously submitted by Solvere to
Hits for approval. Hits, as a co-licensor of the SpeedShield
technology, shall have the unrestricted right to use the SpeedShield in
any manner it desires.
6. All Solvere personnel working on any Hits project or application will
sign a confidentiality and non-competition agreement prepared by Hits.
Solvere will take the same efforts to protect the confidential and/or
proprietary information of Hits as it takes with its own such
information. In addition, for a period of three (3) years from the date
hereof, Hits will be the only Internet client of Solvere, without the
<PAGE> 94
prior written approval of Hits (except for the sale by Solvere of licenses
to use the speed shield technology). At the end of the three (3) year
period, each party shall be free to use the SpeedShield technology in any
manner it desires, except that Solvere will not sell, transfer or license
the technology to any business or entity in competition to Hits.
7. Hits will give Solvere the first opportunity to provide any software
programming or applications. However, Hits may use other such providers
if it believes Solvere cannot provide the needed services is a timely
or qualified manner.
8. The Closing of this Purchase shall be on or before the date the
balance of the $120,000 is due from Hits to Solvere.
9. This Purchase Agreement shall be binding on the heirs, successors and
assigns of the parties. Any unresolved dispute arising under this
Purchase Agreement shall be submitted to binding arbitration pursuant
to the rules of the American Arbitration Association, or its
successors. Any arbitration award may be entered as a final judgement
in any court of competent jurisdiction. This Purchase Agreement shall
be construed under California law, and any court proceeding or
arbitration matter shall be heard only in the Rancho Cucamonga, CA
area.
IN WITNESS WHEREOF, the parties have executed this Purchase Agreement effective
as of the date first written above.
Hitsgalore.com, Inc. Solvere, Inc.
By: \s\ Steve Bradford By: \s\ Alexander Truong
------------------ --------------------
CEO President and CEO
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