<PAGE> 1
FORM 10-Q/A
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-26668
HITSGALORE.COM, INC.
- ------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
FLORIDA 65-0036344
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10134 6TH Street, Suite J, Rancho Cucamonga, CA 91730
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(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code (909) 481-8821
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SYSTEMS COMMUNICATIONS, INC.
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(Former name)
4707 140th Avenue North, Clearwater, Florida 33762
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(Former Address)
Indicate by check mark whether the registrant (1) had filed all
reports required to be filed by section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--- ---
Number of shares outstanding of the issuer's Common Stock, par value
$0.001 per share, as of September 30, 1998 - 36,862,159 shares.
<PAGE> 2
<TABLE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------- -----------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ -- $ 65,556
Accounts receivable - trade 147,868 --
Accounts receivable from officers and employees -- 60,908
Accounts receivable - other 25,000 --
Other current assets 147,334 130,419
--------- ----------
Total current assets 320,202 256,883
--------- ----------
Furniture and equipment 132,982 130,162
Less accumulated depreciation (76,960) (56,774)
--------- ----------
Net furniture and equipment 56,022 73,388
Note receivable from the sale of assets, less
allowance of $500,000 in 1997 -- --
Deferred compensation -- 52,941
Other non-current assets 4,982 4,982
--------- ----------
Total assets $ 381,206 $ 388,194
========= ==========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 3
<TABLE>
CONSOLIDATED BALANCE SHEETS (CONTINUED)
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------- -----------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' DEFICIT
<S> <C> <C>
Current liabilities:
Notes and debentures payable $ 1,380,328 $ 3,661,700
Accounts payable 579,108 535,516
Accrued compensation and employee benefits 401,439 1,176,578
Liabilities and accruals for claims, assessments
and other losses 1,333,966 1,129,823
Accrued expenses and other current liabilities 408,473 524,576
---------- ----------
Total current liabilities 4,103,314 7,028,193
Deferred liabilities under employment agreements -- 310,794
---------- ----------
Total liabilities 4,103,314 7,338,987
---------- ----------
Common stock subject to rescission 674,124 674,124
---------- ----------
Stockholders' deficit:
Class A convertible preferred stock, stated value
and liquidation preference $1.00 per share;
authorized 5,000,000 shares; issued and
outstanding - 500,000 shares in 1998 55,000 --
Class B convertible preferred stock, stated value
and liquidation preference, $1.00 per share;
authorized 10,000,000 shares; issued and
outstanding, 100,000 shares in 1998 and
2,953,125 shares in 1997 54,764 1,617,260
Common stock - $.001 par value; authorized
50,000,000 shares; issued and outstanding,
36,862,159 shares in 1998 and 12,083,646
shares in 1997 36,862 12,084
Additional paid in capital 23,039,796 18,399,891
Accumulated deficit (27,582,654) (27,654,152)
---------- ----------
Total stockholders' deficit ( 4,396,232) (7,624,917)
---------- ----------
Total liabilities and stockholders' deficit $ 381,206 $ 388,194
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 4
<TABLE>
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended Three Months Ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues $ 123,300 $ 1,467,344 $ 123,300 $ --
--------- --------- --------- ---------
Costs and expenses:
Cost of revenues -- 90,849 -- --
Selling, general and administrative
expenses 932,286 2,707,075 179,425 48,986
Impairment and other losses 29,273 643,501 29,273 17,773
Depreciation and amortization 19,889 490,873 9,533 48,477
--------- --------- --------- ---------
Total costs and expenses 981,448 3,932,298 218,231 115,236
--------- --------- --------- ---------
(858,148) (2,464,954) ( 94,931) (115,236)
Loss from disposition of subsidiary -- (1,595,412) -- --
Gain from sale of license agreement -- 2,695,214 -- --
Interest income 892 4,070 -- 1,026
Interest expense (172,206) (336,746) (35,351) (88,217)
Other income (expense), net 508,725 (114,992) 100,000 (41)
--------- --------- --------- ---------
Loss from continuing
operations before income taxes (520,737) (1,812,820) ( 30,282) (202,468)
Income tax benefit (225,000) (332,900) -- --
--------- --------- --------- ---------
Loss from continuing operations (295,737) (1,479,920) ( 30,282) (202,468)
Discontinued operations:
Income (loss) from operations of
discontinued telecommunications
businesses, less income tax expense
(benefit) of $116,100 and $(32,600)
for the nine months ended
September 30, 1998 and 1997,
respectively 189,547 (53,293) -- (9,512)
Gain from disposition of
telecommunications businesses,
less income tax expense of
$365,500 for the nine months ended
September 30, 1997 -- 596,648 -- --
--------- --------- --------- ---------
Loss before extraordinary
item (106,190) (936,565) ( 30,282) (211,980)
Extraordinary item - Gain from
extinquishment of debt, less
income tax expense of $108,900 177,688 -- -- --
--------- --------- --------- ---------
Net income (loss) $ 71,498 $ (936,565) $ ( 30,282) $ (211,980)
========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 5
<TABLE>
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
Nine Months Ended Three Months Ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic and diluted earnings per share:
Loss from continuing
operations $ (0.02) $ (0.13) $ -- $ (0.02)
Income (loss) from operations of
discontinued telecommunications
businesses 0.01 -- -- --
Gain from disposition of
telecommunications businesses -- 0.05 -- --
Extraordinary item - Gain from
extinquishment of debt 0.02 -- -- --
--------- --------- --------- ---------
Net income (loss) $ -- $ (0.08) $ -- $ (0.02)
========= ========= ========= =========
Weighted average number of
common shares outstanding 16,624,683 11,019,398 30,710,008 11,181,992
========== ========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 6
<TABLE>
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months
Ended September 30,
----------------------
1998 1997
------- ---------
<S> <C> <C>
Net cash used in operating activities $ (315,836) $(1,644,954)
------- ---------
Cash flows from investing activities:
Disposition of businesses, net of cash of
businesses disposed of -- 368,343
Expenditures for furniture and equipment (2,820) (23,753)
Other -- 2,475
------- ---------
Net cash used in investing activities (2,820) 347,065
------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock 40,000 229,500
Proceeds from notes and debentures payable 293,600 1,390,626
Payments on notes, debentures and capital
leases (80,500) (263,541)
Payments on borrowings under lines
of credit -- (75,000)
Payments on common stock subject
to rescission -- (35,000)
Other -- (8,995)
------- ---------
Net cash provided by financing activities 253,100 1,237,590
------- ---------
Net increase (decrease) in cash (65,556) (60,299)
Cash and cash equivalents at
beginning of the period 65,556 61,039
------- ---------
Cash and cash equivalents at
end of the period $ -- $ 740
======= =========
</TABLE>
Supplemental Disclosure of Cash Flow Information and Non-cash Investing and
Financing Activities:
<TABLE>
Nine Months
Ended September 30,
------------------------
1998 1997
--------- ---------
<S> <C> <C>
Equipment capital lease
obligations $ -- $ 73,184
Issuance of common stock upon conversion
of notes and debentures payable 1,980,963 716,318
Redemption of debentures payable 595,523 --
Issuance of common stock in
settlement of accrued and other
liabilities 1,128,530 --
Cash paid during the period for:
Interest 69,528 102,742
Income taxes -- --
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 7
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated balance sheet as of September 30, 1998,
the unaudited consolidated statements of operations for the nine
months and three months ended September 30, 1998 and 1997 and the
unaudited consolidated statements of cash flows for the nine months
ended September 30, 1998 and 1997, have been prepared in accordance
with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments, consisting of normal and recurring accruals considered
necessary for a fair presentation, have been included. Results of
operations for the nine months ended September 30, 1998 are not
necessarily indicative of the results for the full fiscal year (see
Note 7).
Certain amounts in the 1997 financial statements have been
reclassified. Such amounts conform to the 1998 presentation.
Earnings per Share
Basic and diluted earnings per share for all periods presented 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 each of the respective periods.
NOTE 2 NOTE RECEIVABLE FROM THE SALE OF ASSETS
In March 1998, the Company, TNI, International Teledata Corporation
("ITD") and certain former employees of the Company (the "Employees")
entered into an agreement (the "Agreement") which provided for the
transfer of certain ITD assets to the Employees. The assets
transferred pursuant to the Agreement were sold to ITD by TNI
pursuant to the Purchase and Sale Agreement, dated as of January 31,
1997, between TNI and ITD. In connection with the transfer of assets
pursuant to the Agreement, the Company canceled the $500,000
convertible debenture note issued by ITD (the "ITD Note") in
conjunction with the Purchase and Sale Agreement in exchange for
496,902 shares of the Company's common stock beneficially owned by
the Employees, the waiver by the Employees of accrued and unpaid
compensation due to them by the Company and the cancellation of
employment agreements between the Company and the Employees. Included
in income (loss) from operations of discontinued telecommunications
businesses for the nine months ended September 30, 1998 is income of
approximately $306,000 from the cancellation and partial recovery of
the ITD note.
NOTE 3 REDEMPTION OF CONVERTIBLE DEBENTURE NOTES
Effective as of March 31, 1998, the Company redeemed its $450,000 of
outstanding 10% convertible debenture notes in exchange for an
aggregate of 893,278 shares of its common stock and 450,000 stock
purchase warrants. The carrying amount of the debt extinguished
exceeded the fair value of the common stock and warrants issued in
exchange for the debt by $286,588. The excess is classified as an
extraordinary gain in the accompanying unaudited consolidated
statement of operations for the nine months ended September 30, 1998.
Of the
<PAGE> 8
450,000 stock purchase warrants issued in connection with the
redemption, 225,000 are exercisable at $1.50 per share at any time
over a period of two years and 225,000 are exercisable at $0.20 per
share at any time over a period of five years.
NOTE 4 EMPLOYMENT AGREEMENTS
On June 30, 1998, the Company and its former Chief Executive Officer
(the "Former CEO") entered into an agreement and mutual release (the
"Release"). Pursuant to the Release, the Company agreed to issue
300,000 shares of its common stock and release the Former CEO from
any and all claims, demands, contracts, and obligations of any kind
whatsoever which the Company had, has or may have against the Former
CEO in exchange for a release from the Former CEO of any and all
claims, demands, contracts and obligations of any kind whatsoever
which the Former CEO had, has or may have against the Company arising
out of an employment agreement dated as of February 8, 1995 between
the Company and the Former CEO (the "Employment Agreement"). As a
result of the Release, the Company removed all liabilities previously
accrued by the Company under the Employment Agreement from its
consolidated balance sheet and recorded other income of approximately
$380,000.
NOTE 5 STOCKHOLDERS' EQUITY
During the nine months ended September 30, 1998, the Company recorded
the issuance to Timboon, LTD ("Timboon") of 5,000,000 shares of the
Company's common stock, at $0.001 par value, and increased additional
paid-in-capital by $394,472 for the partial conversion by Timboon of
the Company's 4% cumulative convertible debentures. As of September
30, 1998, Timboon holds unconverted debentures totaling approximately
$800,000.
In addition to the shares of common stock issued to Timboon during
the nine months ended September 30, 1998, the Company issued 358,333
shares for $40,000 in cash and 16,049,216 shares for the purpose and
amounts set forth in the following table.
<TABLE>
Number
of Shares Purpose of Issuance
Amount
- --------- --------------------------------------- -----------
<S> <C> <C>
701,783 Conversion of Class B Preferred Stock $ 1,562,496
4,458,621 Exercise of stock options granted to
employees and consultants 470,862
893,278 Extinguishment of debt 223,320
100,000 CCI arbitration award 28,000
100,000 Conversion of Class A preferred Stock --
9,298,334 Conversion of debt 1,581,491
197,200 Consulting services 22,788
300,000 Settlement of employment agreement 300,000
</TABLE>
NOTE 6 BUSINESS ACQUISITIONS AND DIVESTITURES
In May 1998, the Company reactivated a dormant, wholly owned
subsidiary, owned since January 1995, for the purpose of divesting
ownership and control of the subsidiary in connection with the
acquisition of one or more businesses in the telecommunications
industry. A majority of ownership and control of the subsidiary was
sold by the subsidiary to an outside group of managers and investors,
in July 1998, and the Company received a payment of $100,000 from the
subsidiary in consideration for certain undertakings by the Company.
Pursuant to a Recapitalization Agreement in September 1998, the
Company retained 625,000 shares of the subsidiary's common stock out
of 1,000,000 shares originally owned. In October 1998, the subsidiary
acquired a switchless
<PAGE> 9
reseller of long distance telephone services. The subsidiary company
is now known as "Intelicom International, Inc. "Intelicom". The
Company has partially fulfilled its undertakings to Intelicom by
transferring 255,000 shares of Intelicom shares which it retained to
certain persons, or their nominees, identified by the management of
Intelicom, who rendered consulting services to Intelicom and by
declaring a dividend to the Company's stockholders of record on
October 30, 1998, payable in an aggregate of 300,000 shares of
Intelecom owned by the Company. The Company retained 70,000 shares
for investment and future sale. The designee of the Company's
chairman received 25,000 shares of Intelicom owned by the Company in
payment for services, which the chairman rendered to the subsidiary.
On November 6, 1998, Intelicom's board of directors, consisting
solely of Mr. Mark D. Cobb, approved a one share for ten shares
reverse split, which reduced the Company's retained shares to 37,000
shares, and authorized the issue of a total of 234,000 shares to two
investors of cash in Intelicom. On November 7, 1998, Mr. Cobb
approved the issue of an aggregate of 750,000 shares to himself and
two consultants. On November 9, 1998, upon learning of Mr. Cobb's
actions as sole director, the Company and other stockholders,
believing they comprised a majority of Intelicom's issued and
outstanding voting stock, sought to cancel Mr. Cobb's actions and to
remove him as the director. The Company has also been advised that
the seller in Intelicom's single acquisition has given notice of
financial breach and intends to recover ownership of the company sold
to Intelicom. Based on these factors, the Company has not determined
whether or not it is appropriate to proceed with distribution of the
dividend.
NOTE 7 RESTATEMENT OF FINANCIAL RESULTS
The Company has restated its consolidated financial results for the
nine months ended September 30, 1998 and 1997, to (i) retroactively
record the shares of the Company's common stock returned to the
Company in connection with the rescission of business acquisitions at
their fair value and (ii) to reflect a revised allocation of the
provisions for income taxes among continuing operations, discontinued
operations and the extraordinary item from the extinquishment of debt.
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 and the
revised allocation of income taxes was to (i) decrease the Company's
loss from continuing operations, income from discontinued operations
and the gain from the extinquishment of debt for the nine months ended
September 30, 1998, as previously reported, by $225,000, $116,100 and
$108,900, respectively, and (ii) increase the loss from continuing
operations by $1,543,933 and decrease the loss from discontinued
operations and the gain from the disposition of telecommunications
businesses for the nine months ended September 30, 1997 by $3,600 and
$13,744, respectively. The restatement of operating results had no
effect on previously reported net income for the nine months ended
September 30, 1998. The effect on net loss for the nine months ended
September 30, 1997 was an increase of $1,554,077.
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto, appearing
elsewhere herein.
NET REVENUES
The Company had revenues of $123,300 for the nine months and three
months ended September 30, 1998. The revenues recorded during these
periods consisted of the Company's portion of healthcare claims
recovered under service agreements. Net revenues recorded by the
Company in the nine months ended September 30, 1997 were $1,467,344
and were comprised of $1,311,055 from its HMT subsidiary, which was
disposed in June 1998, and $156,289 from its NSC subsidiary. No
revenues were recorded in the 3rd quarter of 1997. The changes in
revenues, excluding the effects of HMT, from period to period were
the result of the timing and amounts of healthcare claims recovered
under service agreements.
Under the terms of the alliance agreement between the Company and
HMG, the Company and HMG are to share approximately $1,192,000 in
revenue upon completion of the healthcare cost recovery phase of the
service agreement (the "Agreement") between HMG and Chrysler
Corporation, as provided for in the Agreement. The Company
anticipates that it will recognize additional revenue, up-to
approximately $548,000, from the Agreement upon completion of the
cost recovery phase of the Agreement.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $932,286 and
$2,707,075, respectively, for the nine months ended September 30,
1998 and 1997, and $179,425 and $48,986, respectively, for the three
months ended September 30, 1998 and 1997. The decrease in selling,
general and administrative expenses for the nine months ended
September 30, 1998 versus 1997 was due to the disposition of HMT and
cost reduction measures undertaken in 1997 as a result of continued
operating losses. The selling, general and administrative expenses
eliminated from the results of operations for the nine months ended
September 30, 1998 versus 1997 as a result of the disposition of HMT
totaled $1,129,379; and, cost reduction measures had the effect of
reducing selling, general and administrative expenses by
approximately $645,000. Cost reduction measures included
consolidation of the Company's remaining operations, closure of the
corporate offices of subsidiaries and reductions in staffing levels
due to reduced business volume. The increase in selling, general and
administrative expenses for the three months ended September 30, 1998
versus 1997 is principally due to higher legal fees associated with
ongoing legal matters, higher costs from consulting and other
professional services related to the Company's ongoing business and
restructuring efforts and changes, from period-to-period, in the
carrying value of deferred compensation assets
and liabilities.
IMPAIRMENT AND OTHER LOSSES
For the nine months ended September 30, 1998, the Company reported
impairment and other losses totaling approximately $29,273 compared
to $643,501 for the same period last year. The Company wrote off, as
impairment and other losses in 1997, approximately $625,700 of
deferred compensation assets related to certain employment
agreements. For the three months ended September 30, 1998, impairment
and other losses were $29,273 as compared to $17,773 for the same
period last year. Impairment and other losses for the three-month
periods are principally the result of adjustments to the recorded
amounts of assets and liabilities.
<PAGE> 11
DEPRECIATION AND AMORTIZATION
The decreases in depreciation and amortization from period-to-period
are primarily due to the disposition of HMT in June 1997 and the
removal, in December 1997, of repossessed capital lease assets from
the Company's consolidated balance sheet.
INTEREST EXPENSE
The decreases in interest expense from period-to-period are
principally due to the effects of lower aggregate amounts of notes
and debentures outstanding, the removal in December 1997 of capital
lease liabilities related to repossessed leased assets from the
Company's consolidated balance sheet and the elimination of interest
expense on the Company's 4% cumulative convertible debentures due
October 1, 1998, as a result of the Settlement Agreement entered
into, effective as of March 2, 1998, between the Company and Timboon.
During the nine months ended September 30, 1998, the Company
converted approximately $2.2 million of debt into equity.
OTHER ITEMS
Results of operations for the nine months ended September 30, 1998
include a gain, recorded as other income, of approximately $380,000
from the removal from the Company's consolidated balance sheet of
liabilities previously accrued under an employment agreement (see
Note 4) and a gain of $100,000, which was recorded in the 1998 third
quarter, from the divestiture of a subsidiary (see Note 6).
Results of operations for the nine months ended September 30, 1997,
include a loss from the disposition of HMT of $1,595,412, a gain of
approximately $2,695,000 from the sale of a license agreement and
financing fees of approximately $120,000 incurred in connection with
the issuance of its 4% convertible debentures. The loss from the
disposition of HMT was principally due to a decrease in the Company's
stock price from the date of its acquisition of HMT to the date of the
rescission of the HMT acquisition agreement.
INCOME TAXES
Income tax benefits applicable to continuing operations were 43.2%
and 18.4% of pre-tax loss from continuing operations for the nine
months ended September 30, 1998 and 1997, respectively. The principal
reasons for the differences between the effective income tax rates
during the periods and the Federal statutory rate of 34% were the
changes during the respective periods in the net deferred income tax
valuation allowance. As of September 30, 1998 and 1997, the Company's
deferred tax assets exceeded its deferred tax liabilities and were
fully reserved at each of those dates.
DISCONTINUED OPERATIONS
Income (loss) from operations of discontinued telecommunications
businesses for the nine months ended September 30, 1998 includes
income of approximately $306,000, recognized in the first quarter of
1998, from the cancellation and partial recovery of the $500,000 note
receivable from the sale of assets in exchange for the elimination of
certain liabilities of the Company (see Note 2).
For the nine months ended September 30, 1997, the Company recorded
pretax gains of approximately $25,000 and $937,148 from the
disposition of certain of TNI's assets and from the rescission of the
ATI acquisition agreement, respectively.
<PAGE> 12
EXTRAORDINARY GAIN
The Company's operating results for the nine months ended September
30, 1998 include an extraordinary gain of approximately $287,000 from
the extinguishment of its $450,000 10% convertible debentures (see
Note 3).
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1998, the Company received
cash of $40,000 from the issuance of 358,333 shares of its common
stock and $293,600 from the issuance of notes and debentures payable.
For the corresponding 1997 period, the Company received cash of
approximately $229,500 and $1.4 million from the issuance of common
stock and notes and debentures payable, respectively. Payments on
notes, debentures and capital leases during the respective periods
were $80,500 and $263,541. In 1997, the Company also used
approximately $75,000 and $35,000 in cash, respectively, to repay
borrowings outstanding under lines of credit and for the repurchase
of common stock subject to rescission and generated approximately
$368,000 in cash from the disposition of businesses. Capital
expenditures were $2,820 for the nine months ended September 30, 1998
versus $23,753 for the same period last year.
The net proceeds from financing activities were used principally to
fund operating losses. For the nine months ended September 30, 1998
and 1997, the Company used cash of approximately $316,000 and $1.6
million, respectively, in operating activities.
Over the past several years, the Company has incurred substantial
operating losses; and, at September 30, 1998, the Company has an
excess of total liabilities over total assets of approximately $4.4
million and an excess of current liabilities over current assets of
approximately $3.8 million. These factors, among others, have
diminished the Company's ability to attract equity or debt capital,
have required the Company to cease further development of its
healthcare management software technology and redirect its business
and have made it difficult for the Company to carry on normal
operating activities. As of September 30, 1998, the Company does not
have any used or unused lines of credit or any other committed and
unused financing facilities. Consequently, it is uncertain whether or
not the Company will have available sufficient cash resources to
continue operations, in which case the Company would be required to
seek other alternatives, including sale, merger or discontinuance of
operations.
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 Company's management is making efforts to determine the possible
effects of Year 2000 issues on its operations. Management is also
attempting to determine if its significant vendors, service providers
and other third parties upon which it relies have addressed or will be
able to address any affected systems which may have a bearing on the
Company's operations. Because the Company is focusing 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. It remains uncertain whether the
potential disruption from Year 2000 issues will have a material effect
on the Company's business operations as the Company is largely
dependant upon service providers and third parties. The accompanying
financial statements contain no provision or
<PAGE> 13
adjustments related to the ultimate outcome of this uncertainty.
While the Company has not fully assessed all of its relationships or
its state of readiness for the Year 2000, it believes that its
service providers and other third parties upon it relies and who have
far greater financial resources than the Company are making efforts
to address Year 2000 compliance.
The Company's information and electronic data processing systems are
purchased and maintained by nationally recognized third party
vendors. The Company does not anticipate spending any significant
amounts for Year 2000 compliance. Assuming the Company's customers
and suppliers are Year 2000 compliant, the Company does not
anticipate that Year 2000 compliance will cause any loss of business
or have any material adverse effect on the Company's results of
operations or financial condition.
[REMAINDER OF PAGE LEFT BLANK]
<PAGE> 14
SYSTEMS COMMUNICATIONS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As of September 30, 1998, the Company was subject to an Involuntary
petition under Chapter 7 of the U.S. Bankruptcy Code, Case No. 98-
09299-8P7 (the "Petition), brought against the Company by certain
former employees and consultants and creditors of the Company and its
subsidiaries. The Company's subsidiaries were not named as parties to
the Petition. The Company intends to vigorously defend the Petition
and believes it will prevail in its defense of the Petition.
On February 3, 1998, the Company agreed to a stipulated award in
arbitration in favor of the former shareholders of CCI. The award
required, among other things, that the Company (i) convert 200,000
shares of its Class A Preferred Stock, held by the former
shareholders of CCI, into 100,000 shares of its common stock and (ii)
issue another 200,000 shares of Class A Preferred Stock to the former
CCI stockholders, which is also convertible into 100,000 shares of
the Company's common stock, and give the former shareholders of CCI
the ability to seek a summary judgment against the Company for
$500,000, without opposition, or accept 500,000 shares of the
Company's Class A Preferred Stock in lieu of a summary judgment.
During 1998, the Company issued 100,000 shares of its common stock,
upon conversion of previously issued preferred stock, and 100,000
shares of its common stock and 500,000 shares of its Class A
Preferred Stock to the former shareholders of CCI in satisfaction of
the award. The Company believes it has complied with all of the
provisions and terms contained in the award to the former
stockholders of CCI but the Company is aware of a possible action by
the former shareholders of CCI 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 but increased its accrual for claims, assessments and
other liabilities by $300,000. It is not possible to predict the
likely outcome of any action the former stockholders may take to set
aside the Company's compliance with the award; however, the Company
believes it has meritorious defenses against any such action.
Item 2. Changes in Securities
During the nine months ended September 30, 1998, the Company issued
5,000,000 shares of its common stock in partial conversion of its
$1,200,000 4% cumulative convertible debentures and an aggregate of
7,742,929 shares of its common stock upon conversion of its
$1,195,000 10% cumulative convertible debentures. The Company also
issued approximately 12.0 million shares upon conversion of Class B
Preferred Stock, upon exercise of stock options granted to employees
and consultants and for other purposes (see Note 5 to the
consolidated financial statements included in Part I).
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits (filed herewith):
10.44 Form of Recapitalization Agreement
27.9 Financial Data Schedule ( Nine Months Ended September 30,
1998, as amended).
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized. The undersigned person
was not an officer or director of the registrant for the period
covered by this report.
HITSGALORE.COM, INC. Date: May 26, 1999
/s/ Steve Bradford
- -----------------------------------------
Steve Bradford
President, Principal Executive Officer,
Principal Accounting Officer and Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SYSTEMS COMMUNICATIONS, INC. FOR THE FISCAL PERIOD
ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 172,868
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 320,202
<PP&E> 132,982
<DEPRECIATION> (76,960)
<TOTAL-ASSETS> 381,206
<CURRENT-LIABILITIES> 4,103,314
<BONDS> 0
0
109,764
<COMMON> 36,862
<OTHER-SE> (4,542,858)
<TOTAL-LIABILITY-AND-EQUITY> 381,206
<SALES> 123,300
<TOTAL-REVENUES> 123,300
<CGS> 0
<TOTAL-COSTS> 981,448
<OTHER-EXPENSES> 508,725
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 172,206
<INCOME-PRETAX> (520,737)
<INCOME-TAX> 225,000
<INCOME-CONTINUING> (295,737)
<DISCONTINUED> 189,547
<EXTRAORDINARY> 177,688
<CHANGES> 0
<NET-INCOME> 71,498
<EPS-BASIC> .00
<EPS-DILUTED> .00
</TABLE>
Exhibit 10.44
Intelicom International Holding, Inc.
RE-CAPITALIZATION AGREEMENT
This Agreement is entered into on this 8th day of September 1998 by
and between Intelicom International Holding, Inc., (hereinafter
"Intelicom") with offices at 28050 US 19 North, Suite 202,
Clearwater, Florida 34621, Systems Communications, Inc.,
(hereinafter"SCI") with offices at 4707 140th Avenue North, Suite 107,
Clearwater, Florida 33762, Affiliated Communications, Company, Inc.,
(hereinafter "ACCI") with offices in Clearwater, Florida.
WHEREAS, SCI and ACCI are shareholders of Intelicom; and
WHEREAS, Intelicom is preparing to do a private placement to raise
operating capital; and
WHEREAS, Intelicom has done an analysis and determined the need to
reduce the number of issued and outstanding shares in order to
provide an attractive opportunity to investors; and
WHEREAS, Intelicom has presented the attached re-capitalization plan
to the parties; and
WHEREAS, SCI and ACCI recognizes the need for re-capitalization of
Intelicom, and would like to enhance the opportunity for Intelicom's
success;
NOW THEREFORE, in consideration of the promises and covenants
contained herein, and other good and valuable consideration, the
receipt and sufficiency of which the Parties hereto acknowledge, the
Parties agree as follows:
1. SCI will surrender 375,000 shares of its 1,000,000 shares of
Intelicom common stock to Intelicom, for cancellation.
2. SCI will distribute 300,000 shares of the remaining stock as a
dividend to its existing shareholders to create a shareholder base
for the Intelicom common stock.
3. SCI will provide Intelicom verification that upon distribution of
the dividend to its shareholders that it will have a minimum of
300 shareholders with a minimum of 100 shares each, in order to
meet the requirements of NASDQ.
4. The remaining 325,000 shares will be used to pay consultants and
fees associated with the furtherance of Intelicom. Of these
shares, SCI will administer 200,000 as agreed, with the prior
approval of Bruce Baker, a third party consultant. The additional
125,000 shares will be put into Dunn Capital Corp., a consulting
firm under an agreement that said shares will not be distributed
without the prior approval of Bruce Baker.
5. The parties agree to cancel the existing ACCI consulting Agreement
by and between the parties.
6. ACCI will return it's issued 2,000,000 shares of Intelicom stock
to Intelicom and Intelicom agrees to redistribute the stock in
accordance with attached re-capitalization as founders stock.
7. With the execution of this Agreement, Intelicom rescinds the
authorization of the additional 1,000,000 shares to ACCI that were
approved in the "Action by Written Consent of the Board of
Directors dated August 9th 1998.
8. Intelicom will issue to Ken Allen as part of his employment
agreement, 50,000 shares of restricted stock.
9. Intelicom will issue to Jackson Morris 25,000 shares of restricted
stock.
10. The parties agree to the re-capitalization as set forth herein
and attached hereto and believe it to be in the best interest of
the shareholders and future investors.
11. This Agreement and interpretation thereof shall be governed by
the laws of the State of Florida and the State and/or Federal
courts located in Hillsborough County Florida shall be the
exclusive proper jurisdiction for any disputes arising hereunder.
IN WITNESS WHEREOF, the undersigned, intending to be legally bound,
have executed this Agreement effective as of the date indicated
above:
Intelicom International Holding, Inc. Systems Communications, Inc.
By: /s/________________________ By: /s/_____________________
Mark D. Cobb, President; Director James T. Kowalczyk, President;
Director
Date: _________________________ Date: ______________________
Affiliated Communications Company, Inc. Systems Communications, Inc.
By: /s/________________________ By: /s/_____________________
Bruce Baker, President; Director Edwin B. Salmon, Secretary;
Director
Date:__________________________ Date: _______________________
