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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
_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 __
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 _
(Continued on next page)
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The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 31, 1999, (based on the average of the high and low bid
prices of such stock on the over-the-counter securities market) was
approximately $42,929,000.
The number of outstanding shares of the registrant's common stock, $.001 par
value, as of March 31, 1999 was 45,305,396, after giving effect to 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, and to the
Reorganization and Merger Agreement, as more fully described elsewhere
herein.
[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 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. On a pro forma basis as of December 31, 1998, the liabilities assumed
in connection with the transfer of the assets to IHSI totaled approximately
$3.3 million and the assets transferred to IHSI totaled approximately
$466,000, net of cash. As of the date hereof, the liabilities assumed in the
merger have been reduced to approximately $687,000, which consists primarily
of amounts accrued for unsettled contingencies.
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. 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
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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 conference
telephone. 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 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
which such stockholder will receive from the Company in the dividend spin off
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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, the Company
provides a searchable database for businesses bringing people ("hits") to
their internet websites. Revenues are derived from the sale of sponsorships,
keyword bid and rank rights, audio banners, advertising and local city
editions. A local city edition ("LCEs") on the Company's website provides a
local community search engine and local city content, serviced locally by the
licensee the Local City Editor ("LCE").
Sponsorships are sold for $99.00 and give the purchaser, or "sponsor", 200
banners (miniature advertisements) and placement of the banners on the
Company's website. The sponsor can give the individual banners away or sell
them. Should a banner customer of the sponsor also purchase a sponsorship,
the Company, pays a referral fee to the sponsor equal to 25% of the $99.00
purchase price. Referral fees are only paid on purchases of sponsorships by
the banner customers of the sponsor and not on purchases of sponsorships, if
any, subsequently sold by the banner customers of the original sponsor.
Keyword bid and rank revenues are based on the amount a customer is willing
to bid to ensure the order of placement of the description of his or her
website and link to the customer's web page in the search results when the
customer's specified keyword is entered. The higher the bid amount, the
higher the placement on the results of keyword searches. The Company deducts
the bid amount for each click-through to the bidder's website from a non-
refundable deposit balance maintained by each customer who bids. The non-
refundable deposit amount varies based on the amount of the bid price and
ranges from $25.00 to $99.00.
LCE's have the right to use the Company's proprietary software, website,
programming and website content for purposes of maintaining a website with
local city or geographic content. The LCE has full discretion, with certain
content limitations, to among other things, sell their own advertising and
banners, place articles and links to other websites of local interest on the
local city website and sell the Company's products. The Company may also
contact and sell sponsorships and keyword bid and rank rights to the local
city banner customers. The fees have been $1,495, $3,000 and $5,000 for a
one, two and three year license, respectively. Under the terms of the LCEs,
the LCE earns commissions based on any revenues derived by the Company from
the local city customer. The commission rate ranges from 35% to 59% of the
revenues derived by the Company from sales made to the local city customer.
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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 entitle 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 is 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.
The Company ceased offering LCEs in April 1999 as a result of the sale in a
negotiated transaction of LCEs for up to 200 major metropolitan areas and other
cities to Life Foundation Trust. The Company is reviewing whether the offer and
sale of the limited number of LCEs complied with all applicable state and
federal regulations. The Company believes that up to twelve months will be
required for it to initiate operation of the 200 LCEs under its agreement with
Life Foundation Trust. After the Company has established operations under the
LCEs purchased by the Life Foundation Trust, the Company may again offer LCEs to
others. The Company has not made any decision on this matter. In the event the
Company again offers LCEs, the Company intends to comply with the requirements
of state and federal laws governing the sale of securities, franchises and
business opportunities, as may be appropriate at that time.
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.
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
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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.
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.
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 insures 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
manufactures' customers. As of the date of the Reorganization and Merger
Agreement, the Company had not realized any benefits from these two 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
<PAGE> 9
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 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.
The Company is aware that at least two law firms have announced their intent
to file class action complaints involving the purchase of the Company's
securities in periods following the Merger up to the date of publicity
surrounding the judgement against Mr. Reed described in Item 10 "Directors
and Executive Officers of the Registrant". The announcements appear to be
based primarily on an alleged omission of disclosure in the Company's report
on Form 8-K filed with the Securities and Exchange Commission regarding Mr.
Reed and the action brought against Mr. Reed by the Federal Trade Commission
(see Item 10 "Directors and Executive Officers of the Registrant").
The Company does not believe that it has made any misrepresentations or
omissions in documents filed with the Securities and Exchange Commission and
intends to vigorously defend any actions brought against it arising from such
class action complaints. The Company is not able to determine the probability
of a class action claim, or if one or more claims are asserted, their
potential outcome. No provision has been made in the accompanying financial
statements related to this uncertainty.
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.
See "Business - Absence of Stockholder Approval of the Merger".
<PAGE> 10
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 April 15,
1999 were $6.75 and $6.25 per share, respectively. As of the date hereof,
there is no market for the Company's outstanding warrants, options or
convertible debentures and a market is not expected to develop.
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.
As of March 31, 1999 Company had approximately 550 registered owners of its
common stock.
<PAGE> 11
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. The Company also
<PAGE> 12
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's 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>
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)
========= ========== ========= ========= =========
<PAGE> 13
INCOME STATEMENT DATA (CONTINUED):
Year Ended December 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
Weighted average number
of common shares
outstanding 2,813,704 1,543,158 1,192,780 457,427 186,642
========= ========= ========= ========= =========
</TABLE>
<TABLE>
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> 14
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 (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"). Old Hitsgalore.com was organized in July
1998, began beta operations in August 1998 and launched its website in
November 1998. As an internet search engine, the Company provides a
searchable database to businesses bringing people ("hits") to their websites.
Revenues are derived from the sale of sponsorships which give the sponsor
lifetime placement of banners (miniature advertisements common on websites),
the sale of keyword bid and rank rights (rights to determine the position on
the keyword search results) from which the winning bidder(s) pay for each
<PAGE> 15
click-through received and the sale of audio banners and paid advertisements.
Sponsorship rights and the keyword bid and rank program are also available on
a local basis with the Company's Local City Edition program. A Local City
Edition on the Company's website provides a local community search engine and
local city content, serviced locally by a licensee.
For the period from inception (July 21, 1998) to December 31, 1998, Old
Hitsgalore.com was principally engaged in the development of internet
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 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. Excluded from costs and expenses
during the period are the value of services provided to the Company, in-kind,
from officers and directors and from the use of equipment and facilities
provided, in-kind, by officers, directors and principal stockholders.
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.
<TABLE>
Year Ended December 31,
----------------------------------
1998 1997 1996
--------- --------- ----------
<S> <C> <C> <C>
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)
</TABLE>
<PAGE> 16
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 significant
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 estimated to be approximately $500,000. 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
principally reflects the elimination of substantially all of the selling,
general and administrative expenses of NSC as a result of (i) its suspension
<PAGE> 17
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 (iii) 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, as of December 31, 1996, 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
Intelicom which was transferred to IHSI in connection with the Merger and
Recapitalization Agreement. The Company's investment in Intelecom has no
<PAGE> 18
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
principally due to the effect on the year to year comparison of the
disposition of ATI.
<PAGE> 19
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 122,619 shares, 29,635 shares and 59,098
shares, respectively, 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 were also subject to various legal and
administrative proceedings that may adversely affect future cash flows. These
actions and administrative proceedings arose from business acquisitions,
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
<PAGE> 20
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 aware that at least two law firms have announced the filing
of class action complaints 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
are 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 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 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 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 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
up to $120.0 million to the Company within the next twelve months. These
payments are or will be secured by the pledge or an assignment of certain
assets 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
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
<PAGE> 21
years beginning after December 15, 1997. SFAS No. 131 establishes standards
for the way public enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers. The adoption of this
statement did not have a significant effect on the Company's reported
segments or financial statement disclosures.
IMPACT OF INFLATION
The impact of inflation on the costs of the Company and its business units,
and the ability to pass on cost increases to its customers over time is
dependent upon market conditions. The Company is not aware of any
inflationary pressures that have had any significant impact on the Company's
operations over the past several years and, the Company does not anticipate
that inflationary factors will have a significant impact on future
operations.
YEAR 2000 ISSUES
The 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 making efforts to determine
the possible effects of Year 2000 issues on the business operations of each
of the respective companies 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. 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 management 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' results of operations or financial condition.
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 and development and enhancements to the
Company's internet software and website.
<PAGE> 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
PAGE
----
HITSGALORE.COM, INC. (A DEVELOPMENT STAGE ENTERPRISE), FORMERLY SYSTEMS
COMMUNICATIONS, INC.
Independent Auditors' Report 23
Balance Sheet as of December 31, 1998 24
Statement of Operations and Retained Earnings
for the period from inception (July 21, 1998) to December 31, 1998 25
Statement of Cash Flows for the period from inception (July 21, 1998)
to December 31, 1998 26
Notes to Financial Statements 27
Pro Forma Condensed Financial Information 34
HITSGALORE.COM, INC. (FORMERLY SYSTEMS COMMUNICATIONS, INC.) AND
SUBSIDIARIES
Independent Auditors' Report on the Consolidated Financial
Statements for the years ended December 31, 1998 and 1997 37
Independent Auditors' Report on the Consolidated Financial
Statements for the year ended December 31, 1996 38
Consolidated Balance Sheets as of December 31, 1998 and 1997 39
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 1998 41
Consolidated Statements of Changes in Stockholders' Deficit for
each of the three years ended in the period
December 31, 1998 42
Consolidated Statements of Cash Flows for each of the three
years ended in the period December 31, 1998 44
Notes to Consolidated Financial Statements 45
[REMAINDER OF PAGE LEFT BLANK]
<PAGE> 23
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. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 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 consolidated financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may result
from the outcome of this uncertainty.
/s/ Moore Stephens Lovelace, P.A.
Orlando, Florida
April 14, 1999,
except for Note 11 as to
which the date is May 24, 1999
<PAGE> 24
HITSGALORE.COM, INC. (A DEVELEPMENT STAGE ENTERPRISE)
FORMERLY SYSTEMS COMMUNICATIONS, INC.
BALANCE SHEET
DECEMBER 31, 1998
ASSETS
Cash and cash equivalents $ 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> 25
HITSGALORE.COM, INC. (A DEVELEPMENT 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> 26
HITSGALORE.COM, INC. (A DEVELEPMENT 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 and cash equivalents at beginning of period --
------
Cash and cash equivalents at end of period $ 1,013
======
See Notes to Financial Statements
<PAGE> 27
HITSGALORE.COM, INC. (A DEVELEPMENT 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. Revenues
are derived from the sale of sponsorships which give the sponsor lifetime
placement of banners (miniature advertisements common on websites), the sale
of keyword bid and rank rights (rights to determine the position on the
keyword search results) from which the winning bidder(s) pay for each click-
through received and the sale of audio banners and paid advertisements. The
Company's website is located on the world wide web at
http://www.hitsgalore.com. The search engine is also available on a local
basis through the Company's Local City Edition program. A Local City Edition
on the Company's website provides a local community search engine and local
city content, serviced locally by a licensee.
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
common stock may also be issued as compensation to consultants and
professionals rendering services in connection with the Merger and
Reorganization Agreement and for merger costs and expenses. 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 and
<PAGE> 28
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 at the time of sale in the case of sponsorship
rights and, in the case of paid audio banners and paid advertisements, at the
time such banners and advertisements are placed on the Company's website.
Revenues from the sale of keyword bid and rank rights are recognized upon
receipt of cash payment. Revenues from the sale of LCE's are recognized upon
the execution of the license agreement and the collection of a minimum cash
deposit or other consideration in payment of the fee. An allowance for
cancellations, returns and refunds is provided for based on estimates of
future cancellations, returns and requests for refunds, and fees to 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> 29
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.
COMPREHENSIVE INCOME
The Company has applied the provisions of Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("SFAS NO. 130"). 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. Comprehensive income is defined as revenues, expenses, gains and
losses that are included in comprehensive income but excluded from net
income. The Company has no accumulated or current items of comprehensive
income that are excluded from net income. Accordingly, as permitted under
SFAS 130, the Company has not presented a statement of comprehensive income.
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 disclosures.
<PAGE> 30
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. It
remains uncertain whether the potential disruption from Year 2000 issues will
have a material effect on the Company's business operations. The accompanying
financial statements contain no provision or adjustments related to the
ultimate outcome of this uncertainty.
The Company's internet software applications have been designed to be Year
2000 compliant. The Company does not anticipate spending any amounts for Year
2000 compliance over and above normal and recurring maintenance and
development of its internet software and website.
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
=======
Depreciation and amortization expense was $1,833 for the period from inception
to December 31, 1998.
NOTE 4 NOTES PAYABLE
Notes payable at December 31, 1998 consists of two (2) $2,500 convertible
notes. 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. 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.
<PAGE> 31
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 $10,175 in 1999 and $11,652 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
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
The Company is aware that at least two law firms have announced their intent
to file class action complaints involving the purchase of the Company's
securities in periods following the Merger up to the date of publicity
surrounding the judgement against Mr. Reed. The announcements appear to be
based primarily on an alleged omission of disclosure in the Company's report
on Form 8-K filed with the Securities and Exchange Commission regarding Mr.
Reed and the action brought against Mr. Reed by the Federal Trade Commission.
<PAGE> 32
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 May 20, 1999, Mr. Reed is
exploring his legal options for resolving the dispute, including the
possibility of appealing or vacating the judgment.
The Company does not believe that it has made any misrepresentations or
omissions in documents filed with the Securities and Exchange Commission and
intends to vigorously defend any actions brought against it arising from such
class action complaints. The Company is not able to determine the probability
of a class action claim, or if one or more claims are asserted, their
potential outcome. No provision has been made in the accompanying financial
statements related to this uncertainty.
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).
LFT has reserved Local City Editions (LCEs) for up to 200 local city areas for
a total purchase price of $10.0 million. The agreement provides for, among
other things, that the LCEs will be brought on line over the next twelve
<PAGE> 33
months. LFT's unconditional and irrevocable obligation to pay the $10.0
million for the LCEs is collateralized by the assignment of the stamp
collection described above. Payment for the licenses is subject to the Company
and LFT identifying and bringing LCEs on line. The Company will accrue a LCE
fee receivable at the time each LCE is identified and agreements for the LCEs
are executed. At the end of one year, LFT must redeem the collateral asset for
the amount of any accrued license fees. The Company intends to establish and
maintain each Local City Edition. The Company also intends to recruit
companies in each local city where the Company establishes a LCE on behalf of
LFT to sell banner ads and provide local content to the websites. There is no
assurance the Company can recruit companies in every such local city, or that
the Company can adequately maintain such LCEs itself.
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., 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 total purchase price consisted of $125,000
in cash and 100,000 newly issued shares of the Company's common stock
valued and recorded at approximately $770,000.
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.
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<PAGE> 34
HITSGALORE.COM, INC. (A DEVELEPMENT STAGE ENTERPRISE)
FORMERLY SYSTEMS COMMUNICATIONS, INC.
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.
<TABLE>
Pro Forma Condensed Balance Sheet Information:
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
ASSETS
<S> <C> <C> <C>
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
========== =========== =========
</TABLE>
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<PAGE> 35
HITSGALORE.COM, INC. (A DEVELEPMENT STAGE ENTERPRISE)
FORMERLY SYSTEMS COMMUNICATIONS, INC.
PRO FORMA CONDENSED FINANCIAL INFORMATION (CONTINUED)
Pro Forma Condensed Balance Sheet Information (Continued):
<TABLE>
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
<S> <C> <C> <C>
Liabilities:
Current portion of notes and
debentures payable $ 5,000 $ 1,161,364 (3) $ 1,316,364
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
========== =========== =========
</TABLE>
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
available for issue in payment of acquisition costs and expenses,
2,000,000 shares are to be issued.
(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
<PAGE> 36
HITSGALORE.COM, INC. (A DEVELEPMENT STAGE ENTERPRISE)
FORMERLY SYSTEMS COMMUNICATIONS, INC.
PRO FORMA CONDENSED FINANCIAL INFORMATION (CONTINUED
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> 37
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 and 1997, 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 and 1997, and the consolidated results of
their operations and their cash flows for the years ended December 31, 1998
and 1997, 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-year 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/ Moore Stephens Lovelace, P.A.
Orlando, Florida
April 14, 1999
<PAGE> 38
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Hitsgalore.com, Inc.
Rancho Cucamonga, CA
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Hitsgalore.com, Inc. (formerly
Systems Communications, Inc.) and Subsidiaries for the year ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows
of Hitsgalore.com, Inc. (formerly Systems Communications, Inc.) and
Subsidiaries for the year ended December 31, 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 the year ended
December 31, 1996, and has a working capital deficiency and stockholders'
equity deficiency at December 31, 1996. In addition, the Company has not
complied with certain repayment terms of loan agreements. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. The consolidated financial statements do not include any adjustments
to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities
that may result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Tampa, Florida
December 24, 1997
<PAGE> 39
HITSGALORE.COM, INC. (FORMERLY SYSTEMS COMMUNICATIONS, INC.) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
DECEMBER 31,
-------------------------
1998 1997
---------- ----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 18,729 $ 65,556
Accounts receivable - trade 34,500 --
Accounts receivable from officers
and employees -- 60,908
Other current assets 186,431 130,419
---------- ----------
Total current assets 239,660 256,883
---------- ----------
Furniture and equipment, at cost 75,162 130,162
Less accumulated depreciation (46,035) (56,774)
---------- ----------
Net furniture and equipment 29,127 73,388
Deferred compensation 215,523 52,941
Other non-current assets -- 4,982
---------- ----------
Total assets $ 484,310 $ 388,194
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 40
HITSGALORE.COM, INC. (FORMERLY SYSTEMS COMMUNICATIONS, INC.) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
DECEMBER 31,
-------------------------
1998 1997
---------- ----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
<S> <C> <C>
Current liabilities:
Current portion of notes and debentures payable $ 1,311,364 $ 3,661,700
Accounts payable 600,118 535,516
Accrued compensation and employee benefits 534,970 1,176,578
Accrued interest 312,318 497,514
Liabilities and accruals for claims,
assessments and other losses 1,358,269 1,129,823
Other current liabilities 192,528 27,062
Deferred revenue 86,000 --
---------- ----------
Total current liabilities 4,395,567 7,028,193
Deferred liabilities under employment agreements 231,617 310,794
---------- ----------
Total liabilities 4,627,184 7,338,987
---------- ----------
Common stock subject to rescission 674,124 674,124
---------- ----------
Commitments and Contingencies
Stockholders' deficit:
Class A convertible preferred stock, stated
value and liquidation preference - $1.00 per
share; authorized 5,000,000 shares, issued
and outstanding 500,000 shares in 1998 and
200,000 shares in 1997 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
5,512,412 shares in 1998 and 1,726,235 shares
in 1997 5,512 1,726
Additional paid in capital 23,066,835 18,410,249
Accumulated deficit (27,999,109) (27,654,152)
---------- ----------
Total stockholders' deficit ( 4,816,998) (7,624,917)
---------- ----------
Total liabilities and stockholders' deficit $ 484,310 $ 388,194
========== ==========
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE> 41
HITSGALORE.COM, INC. (FORMERLY SYSTEMS COMMUNICATIONS, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
Year Ended December 31,
---------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
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
of 151,000 and $240,000 in 1997 and
income tax benefit of $763,044
in 1996 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) $ (16.40)
========== ========== ==========
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE> 42
HITSGALORE.COM, INC. (FORMERLY SYSTEMS COMMUNICATIONS, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
<TABLE>
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 -- -- -- -- 40,453 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 1,518,124 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) 96,669 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
========= ======= ========= ========= ========== ======
See Notes to Consolidated Financial Statements
<PAGE> 43
HITSGALORE.COM, INC. (FORMERLY SYSTEMS COMMUNICATIONS, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT (Continued)
Additional
Paid-In Accumulated
Capital Deficit Total
---------- ---------- ----------
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> 44
HITSGALORE.COM, INC. (FORMERLY SYSTEMS COMMUNICATIONS, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
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 and cash equivalents at beginning of the
period 65,556 61,039 964,714
--------- --------- ----------
Cash and cash equivalents at end of the
period $ 18,729 $ 65,556 $ 61,039
========= ========= ==========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 45
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
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.
<PAGE> 46
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 may be issued as compensation to consultants and professionals and for
merger costs and expenses. 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.
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.
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 indicates
that the carrying value of intangible assets may not be recoverable, the
carrying value of intangible assets is 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
<PAGE> 47
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.
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 values 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.
REVENUE RECOGNITION
The Company recognizes revenue in the period in which the service is provided
or, in the case of software sales, at the time the software is delivered.
Revenues related to audit or retroactive claims review services, which are
based on a percentage of the savings, are recognized at the time of third
party approval of the reimbursable amounts.
INCOME TAXES
The Company has applied, for all years presented, the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes,"
which requires an asset and liability approach in accounting for income
taxes.
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 earning per
share. Basic earnings per share is computed based on the weighted average
number of common shares outstanding during each year. Diluted earnings per
share is computed based on the sum of the weighted average number of common
shares outstanding plus the additional number of shares that would have been
outstanding if all potentially dilutive common shares, pursuant to stock
purchase warrants and options, convertible preferred stock and convertible
notes and debentures, had been issued.
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
<PAGE> 48
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
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.
COMPREHENSIVE INCOME
The Company has applied the provisions of Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("SFAS NO. 130"). 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. Comprehensive income is defined as revenues, expenses, gains and
losses that are included in comprehensive income but excluded from net
income. The Company has no accumulated or current items of comprehensive
income that are excluded from net income (loss). Accordingly, as permitted
under SFAS 130, the Company has not presented a statement of comprehensive
income.
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).
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
<PAGE> 49
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 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.
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, as December 31,
1998, 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
<PAGE> 50
absence of a sufficient amount of cash flows from operations or from future
financing transactions, the Company would be required to seek other
alternatives.
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 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> 51
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
309,837 shares 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 309,837 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 shares of the
Company's common stock, unexercised warrants to purchase 168,668 shares of the
Company's common stock 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 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
<PAGE> 52
effective date of the rescission agreement, ATI had net liabilities, including
acquisition indebtedness, of approximately $509,392 and the fair value of the
684,410 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,
(ii) to issue another 200,000 shares of Class A Preferred Stock to the former
stockholders (which are also convertible into 100,000 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 100,000 shares of
common stock and (b) issued (i) 100,000 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 believes it has complied with all
of the provisions and terms contained in the Arbitrator's award 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 (see Note 14).
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 and 1997, are summarized
as follows:
1998 1997
------- -------
Current assets $ -- $ 539
Total assets -- 539
Current liabilities 422,526 494,133
Total liabilities 422,526 494,133
<PAGE> 53
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.
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"). 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 sheets as of December 31, 1996 and 1995. 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
<PAGE> 54
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:
<TABLE>
Year Ended December 31,
----------------------------------
1998 1997 1996
-------- --------- ----------
<S> <C> <C> <C>
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 23,126 67,345 --
Accrual of Timboon settlement liability -- 162,053 --
Write-off of intangibles and goodwill -- -- 14,233,953
Other accruals and adjustments ( 90,350) 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
======== ========= ==========
</TABLE>
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.
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 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
<PAGE> 55
balance sheet, which resulted in an additional loss provision for lease
termination liabilities of approximately $122,986.
NOTE 6 FURNITURE AND EQUIPMENT
Furniture and equipment consists of the following:
DECEMBER 31,
---------------------
1998 1997
------- -------
Furniture and equipment, at cost $ 75,162 $130,162
Less: accumulated depreciation ( 46,035) (56,774)
------- -------
Net furniture and equipment $ 29,127 $ 73,388
======= =======
Depreciation expense was $23,647, $174,545 and $330,973 in 1998, 1997 and
1996, respectively.
[REMAINDER OF PAGE LEFT BLANK]
<PAGE> 56
NOTE 7 NOTES AND DEBENTURES PAYABLE
Notes and debentures payable consist of the following:
DECEMBER 31,
-----------------------
1998 1997
--------- ---------
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
Notes payable to former shareholders of
NSC in equal monthly installments of
$20,000, non-interest bearing 150,000 150,000
Acquisition notes payable to the former
stockholders of CCI -- 300,000
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
10% Convertible debentures payable to
former shareholders of TNI -- 450,000
12% Cumulative Convertible Debenture
Notes due on various dates through
November 1998 -- 50,000
Other 9,700 6,700
--------- ---------
1,311,364 3,661,700
Less: current portion (1,311,364) (3,661,700)
--------- ---------
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.
As of December 31, 1997, the Company had converted $120,000 of the 4%
Debentures into 256,361 shares of the Company's common stock. On June 6, 1997,
as a result of the Company's refusal to convert additional debentures,
Timboon, as Plaintiff, filed an action in the United District Court, Southern
District of New York, against the Company, as Defendant, seeking the delivery
of 163,438 shares of common stock 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
<PAGE> 57
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 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 can 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 5,000,000 shares of common stock. Timboon realized net proceeds
of approximately $408,336 from the sale of the shares. The Company has treated
an equal amount of the 4% Debentures as converted, leaving debentures
outstanding of approximately $791,664. These debentures may be settled in cash
or by the issuance of common stock upon conversion. In March 1999, the Company
issued 1,000,000 shares of its common stock (before 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 1,015,000 shares of its common stock (before
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, is equal to the lesser of
(a) 70% of the average closing bid price of the Company's common stock for the
five days preceding the conversion date or (b) 80% of the average closing bid
price of the Company's common stock for the five days prior to issuance of the
debentures. In connection with the issuance of these debentures, the Company
incurred placement fees and other costs of approximately $50,000 and received
net proceeds of approximately $450,000. As of December 31, 1998 and 1997, the
Company had converted $330,000 of these debentures into 122,000 shares of the
Company's common stock, leaving debentures outstanding of approximately
$170,000. In April 1999, the Company issued 192,500 shares of its common stock
(before giving effect to the reverse split in the Company's common stock) in
full satisfaction of all of this outstanding debenture indebtedness.
The notes payable to the former shareholders of NSC, due in equal monthly
installments of $20,000, are currently in default. No payments on these notes
have made by NSC since April 1996. NSC is currently 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
extinguished as a result of the completion of an arbitration proceeding
brought against the Company by the former stockholders of CCI (see Notes 4 and
14).
The $80,000 18% Cumulative Convertible Debenture Note due January 15, 1999 is
convertible into the Company's common stock, at the election of the holder, at
a conversion price of $2.50 per share. The loan is guaranteed by the Company's
<PAGE> 58
Chairman of the Board and is collateralized by 500,000 shares of the Company's
common stock, which is held in escrow pursuant to an escrow agreement. On
January 25, 1999, the Company received a demand for repayment of this loan and
on February 23, 1999, the Company and the lender entered into an agreement for
repayment of the note. Pursuant to the agreement, the lender took possession
of the escrowed shares. The shares are to be sold by the lender in repayment
of the principal amount of the debenture, plus $10,000 and accrued and unpaid
interest. Once the amounts owing to the lender are paid in full from the sale
of such shares, the remaining shares, if any, are to be returned to the
Company.
The $50,000 10% cumulative convertible debenture note due on June 7, 1999 is
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 debenture
note also provides for automatic conversion and repayment upon the effective
date of a registration statement under the Securities Act of 1933 covering
resale of the shares to be issued upon conversion of the debenture note and
upon exercise of the warrants to be issued upon conversion of the note. The
750,000 stock purchase warrants issuable upon conversion of the debenture note
are exercisable at prices ranging from $0.125 to $0.20 per share and expire
two years after their issue date.
The $30,000 12% Convertible Promissory Note due March 28, 1997 was converted
into 408,163 shares of the Company's common stock 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 350,000 shares of the Company's common stock 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.
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 range from $1.50 to $5.00 per share, or (b) a
conversion price equal to 50% of the average closing bid and ask prices of the
Company's common stock at the close of trading on the next day following the
maturity date as set forth in the respective debenture. 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.
<PAGE> 59
In 1998, the Company issued 5,242,929 shares of its common stock 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, 2,500,000 shares of its common stock and
2,000,000 common stock purchase warrants 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 $0.20 to $0.25 per share.
The $450,000 10% convertible debentures payable to the former shareholders of
TNI which 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 893,278 shares of its common stock and 450,000 stock purchase
warrants. Of the stock purchase warrants issued, 225,000 warrants, exercisable
at $1.50 per share, expire in March 2000 and 225,000 warrants, exercisable at
$0.20 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
500,830 shares of the Company's common stock and 500,000 common stock purchase
warrants exercisable at $0.10 per share. The warrants issued upon conversion
of these notes expire in the year 2000.
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.
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
<PAGE> 60
operations. No provisions for income taxes currently payable have been made
due to operating losses for tax purposes.
The allocation of income taxes is summarized as follows:
<TABLE>
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
-------- -------- ----------
<S> <C> <C> <C>
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)
======= ========= =========
[REMAINDER OF PAGE LEFT BLANK]
<PAGE> 61
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:
December 31,
----------------------
1998 1997
--------- ---------
Deferred tax assets:
Net operating loss carryforwards $3,427,000 $4,034,296
Allowance for doubtful accounts -- 190,000
Accrued compensation and liabilities under
employment agreements 143,000 257,000
Accrued expenses and other current liabilities 435,000 250,800
--------- ---------
Total deferred tax assets 4,005,000 4,732,096
Less-valuation allowance (3,870,000) (4 663 996)
--------- ---------
Net deferred tax assets 135,000 68,100
--------- ---------
Deferred tax liabilities:
Deferred compensation 135,000 68,100
--------- ---------
Total deferred tax liabilities 135,000 68,100
--------- ---------
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 in
satisfaction of an arbitration award (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.
<PAGE> 62
As of December 31, 1997, the Company had 2,953,125 shares of Class B preferred
stock outstanding. During 1997, 2,853,125 shares of Class B preferred stock
were converted into 100,255 shares of common stock (after giving effect to the
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.
[REMAINDER OF PAGE LEFT BLANK]
<PAGE> 63
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.
Weighted
Exercise Average
Price Range Exercise
Shares per share Price
--------- ------------ ---------
Warrants and options
outstanding at December 31, 1996 643,386 $10.50-$70.00 $26.46
Warrants issued 99,686 $ 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 778,905 $ 0.70-$70.00 $13.51
Warrants issued 796,428 $ 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
---- ----
Risk-free interest rate 6.50% 6.50%
Dividend yield -- --
Volatility 1.96 1.73
Expected life (in years) N\A 4.50
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
<PAGE> 64
to income that would have been necessary had the Company adopted Statement No.
123 for the year ended December 31, 1997 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:
Loss from continuing operations $(3,319,331)
---------
Income from operations of discontinued
telecommunications businesses 391,752
Gain from disposition of discontinued
telecommunications businesses 596,648
---------
Net income (loss) $(2,330,820)
=========
Basic and diluted earnings per share:
Loss from continuing operations $ (2.15)
Income from operations of discontinued
telecommunications businesses .25
Gain from disposition of discontinued
telecommunications businesses .39
---------
Net loss $ (1.51)
=========
NOTE 12 LEASES
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.
The Company and its subsidiaries have vacated certain leased premises and
abandoned certain equipment leased under non-cancelable lease agreements and
are 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 March 1999 for $28,600 in cash.
Amounts previously accrued for those actions totaled approximately $191,500.
NOTE 13 - EMPLOYMENT AGREEMENTS
As of December 31, 1998 and 1997, the Company had employment agreements with
certain of its key employees. These employment agreements provide 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 remain in the employ of the Company. The present value of future
obligations under such agreements as of December 31, 1998 and 1997 was
approximately $376,559 and $675,966, respectively, and the Company had
deferred compensation assets related to these agreements totaling
approximately $354,494 and $179,568, 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
<PAGE> 65
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 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 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.
Following is a summary of amounts included in the accompanying
consolidated balance sheets for outstanding employment agreements as of
December 31, 1998 and 1997:
</TABLE>
<TABLE>
1998 1997
--------- ---------
<S> <C> <C>
Deferred compensation assets included in:
Other current assets $ 138,971 $ 126,627
Deferred compensation (non-current) 215,523 52,941
--------- ---------
$ 354,494 $ 179,568
========= =========
Deferred compensation liabilities included in:
Accrued expenses and other current liabilities $ 144,942 $ 365,172
Deferred liabilities under employment agreements 231,617 310,794
--------- ---------
$ 376,659 $ 675,966
========= =========
</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.
<PAGE> 66
In October 1997, Boston Financial Corporation ("BFC") took possession of
certain computer equipment leased by NSC from BFC as a result of the default
by NSC of payments due under the lease. On December 11, 1997, BFC filed an
amended suit in District Court, 45th Judicial District, Bexar County, Texas
(Case No. 97CI-14567) against NSC and, as guarantors of the lease agreement,
the Company, ATI and TNI. This action seeks approximately $500,000 in lease
payments and other charges due under the lease agreement. 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.
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
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 are to be equal to the amount, if
any, the Company may be 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 for a cash payment of
approximately $28,600.
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
<PAGE> 67
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 219,000 shares; and, the weighted average
purchase price of such shares is approximately $3.25 per share. 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. 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 100,000 shares of common stock,
(ii) to issue another 200,000 shares of Class A Preferred Stock to the former
stockholders (which are also convertible into 100,000 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 100,000 shares of
common stock and (b) issued (i) 100,000 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
<PAGE> 68
obligations due under the acquisition notes payable to the former stockholders
of CCI. As of December 31, 1998, the Company believes it has complied with all
of the provisions and terms contained in the Arbitrator's award 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.
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
and 1997, the Company business activities are in the healthcare cost
containment industry.
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 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.
The Company has no inter-segment revenues.
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> 69
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 provides 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. On the Effective Date, the name of the Company was
changed to Hitsgalore.com, Inc.
The Reorganization and Merger Agreement also provides 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> 70
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 39,816
Deductions:
Write-offs (63,214)
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 has restated its consolidated financial results for the years
ended December 31, 1997 and 1996. The 1996 financial statements have been
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 have been 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.
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
<PAGE> 71
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.
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 were 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.
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
- ---------------------- --- -------------------------------- ---------
Steve Bradford 42 President, Principal Executive March 1999
Officer, Principal Accounting
Officer, Secretary and Director
Melvyn L. Price, Jr. 43 Director April 1999
Phillip Lloyd Kaich 46 Director April 1999
Daniel Melvin Grant 45 Director April 1999
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
<PAGE> 72
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.
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 liquidtion on October 8, 1996 and is awaiting closing. Mr.
Bradford holds a BS degree in Business Administration and a JD from the
University of Kansas.
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 supervision.
The Company considers Mr. Dorian Reed, age 44, a principal stockholder, to be
a key person who provides services to the Company. 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.
<PAGE> 73
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 May 20, 1999,
Mr. Reed is exploring his legal options for resolving the dispute, including
the possibility of appealing or vacating the judgment.
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.
<PAGE> 74
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.
<TABLE>
Annual Compensation
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
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)
</TABLE>
(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. As of the date hereof, the Company and Mr. Bradford have no
arrangements 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> 75
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 March 31, 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> 76
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 23
Balance Sheet as of December 31, 1998 24
Statement of Operations and Retained Earnings
for the period from inception to December 31, 1998 25
Statement of Cash Flows for the period from inception
to December 31, 1998 26
Notes to Financial Statements 27
Pro Forma Condensed Financial Information 34
HITSGALORE.COM, INC.( FORMERLY SYSTEMS COMMUNICATIONS, INC.)
AND SUBSIDIARIES
Independent Auditors' Report on the Consolidated Financial
Statements for the years ended December 31, 1998 and 1997 37
Independent Auditors' Report on the Consolidated Financial
Statements for the year ended December 31, 1996 38
Consolidated Balance Sheets as of December 31, 1998 and 1997 39
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 1998 41
Consolidated Statements of Changes in Stockholders' Deficit for
each of the three years ended in the period
December 31, 1998 42
Consolidated Statements of Cash Flows for each of the three
years ended in the period December 31, 1998 44
Notes to Consolidated Financial Statements 45
(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> 77
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> 78
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> 79
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 accountant
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.
<PAGE> 80
(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.
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: May 26, 1998
/s/ Steve Bradford
- ---------------------------------
Steve Bradford
Principal Executive Officer,
Principal Accounting Officer,
Secretary and Director
/s/ Melvyn L. Price
- ---------------------------------
Melvin L. Price
Director
/s/ Phillip Lloyd Haich
- ---------------------------------
Phillip Lloyd Haich
Director
/s/ Daniel Melvin Grant
- ---------------------------------
Daniel Melvin Grant
Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTIANS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HITSGALORE.COM, INC. FOR THE YEAR ENDED
DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERNCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 18,729
<SECURITIES> 0
<RECEIVABLES> 34,500
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 239,660
<PP&E> 75,162
<DEPRECIATION> (46,035)
<TOTAL-ASSETS> 484,310
<CURRENT-LIABILITIES> 4,395,567
<BONDS> 0
0
109,764
<COMMON> 5,512
<OTHER-SE> (4,932,274)
<TOTAL-LIABILITY-AND-EQUITY> 484,310
<SALES> 123,487
<TOTAL-REVENUES> 123,487
<CGS> 0
<TOTAL-COSTS> 1,426,406
<OTHER-EXPENSES> (481,333)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 212,842
<INCOME-PRETAX> (1,034,428)
<INCOME-TAX> 262,000
<INCOME-CONTINUING> (772,428)
<DISCONTINUED> 246,243
<EXTRAORDINARY> 181,228
<CHANGES> 0
<NET-INCOME> (344,957)
<EPS-BASIC> (.12)
<EPS-DILUTED> (.12)
</TABLE>
<PAGE> 81
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> 82
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> 83
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> 84
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> 85
(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> 86
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> 87
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> 88
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
