<PAGE>
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-26668
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 of (I.R.S. Employer
incorporation or organization) Identification No.)
10134 6TH Street, Suite J, Rancho Cucamonga, CA 91730
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(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code (909) 481-8821
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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
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Number of shares outstanding of the issuer's Common Stock, par value $.001 per
share, as of September 30, 2000 - 51,409,135 shares.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
HITSGALORE.COM, INC.
BALANCE SHEETS
September 30, December 31,
2000 1999
----------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash $ -- $ 2,223
Accounts receivable 30,600 --
Other current assets 2,355 4,855
----------- -----------
Total current assets 32,955 7,078
Property and equipment, net of accumulated
depreciation of $153,228 in 2000 and $81,233
in 1999 209,641 284,151
Intangible assets, net of accumulated
amortization of $232,850 in 2000 and
$116,425 in 1999 232,850 349,275
----------- -----------
Total assets $ 475,446 $ 640,504
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Bank overdraft $ 6,045 $ --
Short-term borrowings from related parties,
less unamortized debt discount of $373,632
in 2000 375,868 524,000
Due to officers and stockholders 20,262 65,000
Current portion of note payable -- 4,788
Accounts payable and accrued expenses 593,285 289,974
Accrued compensation and employee benefits 453,373 174,471
Other liabilities -- 184,664
Merger liabilities and contingencies 1,821,625 1,726,625
----------- -----------
Total current liabilities 3,270,458 2,969,522
Long-term portion of note payable -- 14,387
----------- -----------
Total liabilities 3,270,458 2,983,909
----------- -----------
Commitments and contingencies
Stockholders' deficit:
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 54,764 54,764
Common stock, $.001 par value; authorized
250,000,000 shares, issued and outstanding
51,409,135 shares in 2000 and 48,289,848
shares in 1999 51,409 48,289
Additional paid in capital 4,742,535 2,809,589
Accumulated deficit (7,643,720) (5,256,047)
----------- -----------
Total stockholders' deficit (2,795,012) (2,343,405)
----------- -----------
Total liabilities and stockholders' deficit $ 475,446 $ 640,504
============ ============
See Notes to Financial Statements
2
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<TABLE>
HITSGALORE.COM, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues $ 148,799 $ 4,633,647 $ 30,849 $ 2,947,178
------------ ------------ ------------ ------------
Operating costs and expenses:
Selling, general and administrative
expenses 1,649,819 2,083,258 331,185 880,783
Depreciation and amortization 215,756 129,527 70,631 65,928
------------ ------------ ------------ ------------
Total operating costs and expenses 1,865,575 2,212,785 401,816 946,711
------------ ------------ ------------ ------------
Income (loss) from operations (1,716,776) 2,420,862 (370,967) 2,000,467
Other income (expense):
Miscellaneous income 10,000 -- 10,000 --
Loss on disposal of assets (2,246) -- (2,246) --
Interest, net (678,651) 2,180 (357,111) 145
------------ ------------ ------------ ------------
Income (loss) before income taxes (2,387,673) 2,423,042 (720,324) 2,000,612
Provision for income taxes -- 920,396 -- 762,896
------------ ------------ ------------ ------------
Net income (loss) $(2,387,673) $ 1,502,646 $ (720,324) $ 1,237,716
============ ============ ============ ============
Basic (loss) earnings per share $ (0.05) $ 0.07 $ (0.01) $ 0.02
Diluted (loss) earnings per share $ (0.05) $ 0.07 $ (0.01) $ 0.02
</TABLE>
See Notes to Financial Statements
3
<PAGE>
HITSGALORE.COM, INC.
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
2000 1999
------------- -------------
Net cash used in operating activities $ (765,743) $ (1,210,466)
------------- -------------
Cash flows from investing activities:
Expenditures for property and equipment (81,187) (334,646)
Expenditures for intangible assets -- (98,500)
------------- -------------
Net cash used in investing activities (81,187) (433,146)
------------- -------------
Cash flows from financing activities:
Proceeds from short-term borrowings 505,000 --
Proceeds from issuance of common stock
and from exercise of options and warrants 349,500 2,153,326
Proceeds from common stock to be issued -- 49,900
Payments of merger liabilities assumed -- (426,728)
Payments of borrowings from affiliated company -- (22,669)
Payments and borrowings from officers and
stockholders, net (7,500) (20,000)
Payments on note payable (2,293) (459)
------------- -------------
Net cash provided by financing activities 844,707 1,733,370
------------- -------------
Net (decrease) increase in cash (2,223) 89,758
Cash at beginning of the period 2,223 1,013
------------- -------------
Cash at end of the period $ -- $ 90,771
============= =============
Supplemental Disclosure of Cash Flow Information and Non-cash Investing and
Financing Activities:
Issuance of common stock upon conversion of
short-term borrowings and notes payable $ 519,000 $ 5,000
Common stock issued for services rendered 101,591 40,000
Note payable issued for services 60,000 --
Transfer of assets in payment of borrowings
from officer 37,238 --
Merger liabilities assumed -- 2,358,371
Non-cash liquidations of merger liabilities
assumed -- 676,304
Stock subscription receivable -- 10,000,000
Issuance of common stock in exchange for
intangible assets -- 367,200
Issuance of note payable in exchange for
equipment -- 28,000
Cash paid during the period for:
Interest 737 890
Income taxes -- --
See Notes to Financial Statements
4
<PAGE>
HITSGALORE.COM, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
THE REORGANIZATION AND MERGER
On March 19, 1999, the Company (formerly Systems Communications, Inc.) and
Hitsgalore.com, a Nevada corporation ("Old Hitsgalore.com"), completed a merger
(the "Merger"). Pursuant to the Merger, 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 Merger, the historical financial statements and operations of Old
Histgalore.com prior to March 19, 1999 became those of the Company. Old
Hitsgalore was incorporated on July 21, 1998 and was in the development stage
until the later part of 1998.
As part of the Merger (and a reorganization of the Company, 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, on the effective date of the Merger.
In connection with the Merger, the stockholders of Old Hitsgalore.com received
37,675,000 shares of common stock in conversion of all of the issued and
outstanding shares of common stock of Old Hitsgalore.com. An additional
2,000,000 shares common stock were issued as compensation to consultants and
professionals rendering services in connection with the Merger.
The Reorganization included the transfer of the Company's previous business,
properties and assets to International Healthcare Solutions, Inc., a Florida
corporation organized for that purpose ("IHSI") in exchange for twenty million
shares of IHSI, constituting all of the outstanding common stock of IHSI. 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 of
the shares under the Securities Act of 1933 becomes effective. IHSI, to the best
of the Company's knowledge and belief, has ceased operations; and, there is no
assurance that any registration statement covering the issuance of IHSI shares
will be filed.
5
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SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principals consistent in all material respects
with those applied in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. The interim financial information is unaudited, but
reflects all normal adjustments which are, in the opinion of management,
necessary to provide a fair statement of results for the interim periods
presented.
Certain amounts in the 1999 financial statements have been reclassified to
conform to the 2000 presentation.
EARNINGS PER SHARE
The weighted average number of common shares outstanding for the nine months and
three months ended September 30, 2000 was approximately 48,233,236 shares and
48,702,752 shares, respectively. The weighted average number of common shares
outstanding for the nine months and three months ended September 30, 1999 was
approximately 22,455,966 shares and 49,722,354 shares, respectively.
The effects of incremental shares from outstanding options and warrants and
convertible debt securities on the computations of loss per share for the nine
months and three months ended September 30, 2000 were anti-dilutive. As of
September 30, 2000, the Company had approximately 127,184 options and warrants
outstanding, exercisable at prices ranging from $0.70 to $10.50 per share. The
options and warrants outstanding expire on various dates through the year 2003.
The Company also has $749,500 of convertible debt securities outstanding. These
securities, if converted as of September 30, 2000, would have been convertible
into approximately 10.7 million shares (see "Short-Term Borrowings from Related
Parties").
In July 2000, Steve Bradford, the Company's former President and Chief Executive
Officer, returned and the Company cancelled 4,000,000 shares of its common stock
pursuant to the terms of a resignation agreement between the Company and Mr.
Bradford.
For the nine months and three months ended September 30, 1999, incremental
shares from the assumed exercise of options and warrants included in the
computation of diluted earnings per share were approximately 32,708 shares and
70,089 shares, respectively.
GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and liquidation of
liabilities in the ordinary course of business. The Company incurred an
operating loss of $2,387,673 for the nine months ended September 30, 2000 and,
as of September 30, 2000, had a working capital deficiency of approximately $3.2
million. Additionally, the Company is subject to various legal and
administrative proceedings, many of which were assumed in the Merger. 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. In the absence of a sufficient amount of cash flows from
operations or from financing transactions, the Company would be required to seek
other alternatives, including sale, merger, reorganization or discontinuance of
operations. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
6
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LIFE TRUST FOUNDATION DEFAULT
On April 17, 2000, the Life Foundation Trust ("LFT") defaulted on its payment
obligations to the Company under an agreement dated April 15, 1999 (the
"Agreement") and an early payment agreement dated February 16, 2000 (the "Early
Payment Agreement").
Under the Agreement, LFT was to pay $10,000,000 for the purchase of 2,000,000
shares of the Company's common stock pursuant to a stock subscription agreement
(the "Subscription Agreement") and $10,000,000 for the development of Local City
Editions of the Company's web site. As of March 31, 2000, the Company had
fulfilled its obligations under the Agreement. The Agreement provided for
payment in full on April 15, 2000. The payment obligation is secured by a
security interest and lien on an undivided interest in a collection of Aden
stamps (the "Collectibles"). The Collectibles are held in safekeeping by an
independent trust company located in New York, NY.
The Early Payment Agreement provided for the payment of $3,500,000 on or before
February 21, 2000 and $16,500,000, in one or more installments, over a period of
thirty days following the date of the initial payment under the Early Payment
Agreement.
As a result of the default by LFT, the Company retained counsel to explore
its options with respect to liquidation of the Collectibles in payment of monies
due under the Agreement. The Company has reason to believe that other persons
may attempt to defeat the Company's claim to the collateral and claim interests
in the collateral adverse to the Company's claim. Thus, the liquidation process
may be protracted. It is too early to estimate with any degree of certainty the
Company's likelihood of recovery. Because of the uncertainty of collecting the
LFT obligations, the Company wrote off all of the receivables due from LFT,
including the Subscription Receivable, and recorded a charge to income of $6.9
million in the fourth quarter of 1999 and discontinued recognizing revenues from
the LFT Agreement.
In April 2000 the Company demanded that LFT return all shares of the Company's
common stock held in its possession, including eight million shares transferred
to LFT by the Company's Chairman in contemplation of completing all of the
proposed transactions between the Company and LFT. Pursuant to the demand for
the return of shares, LFT returned 1,750,000 shares of the 2,000,000 shares
issued to LFT pursuant to the Subscription Agreement and the eight million
shares transferred to LFT by the Company's Chairman. The Company has retained
counsel to determine what actions can be taken to recover the 250,000 shares
issued to LFT under the Subscription Agreement that were not returned to the
Company or any funds received by LFT from the sale of the shares. It is too
early to estimate with any degree of certainty the Company's likelihood of
recovery.
The eight million shares were cancelled and reissued to the to the Company's
Chairman in May 2000.
SHORT-TERM BORROWINGS FROM RELATED PARTIES
Short-term borrowings to related parties at September 30, 2000 consist of
$699,500 payable under a series of promissory note agreements, all of which have
been consolidated into a single promissory note agreement (the "Consolidated
Promissory Note"), and $50,000 payable under a convertible promissory note
agreement, dated as of September 20, 2000.
7
<PAGE>
The terms of the Consolidated Promissory Note provide for a series of principal
payments to the lender totaling $699,500 during the period from November 5, 2000
through September 29, 2001. The payments due under the Consolidated Promissory
Note may be made, at the election of the Company, in cash (the "Cash Payment
Option") or by the issuance of shares of the Company's common stock (the
"Conversion Option"). The Cash Payment Option or the Conversion Option is to be
elected by the Company on the due date of the respective borrowings under the
Consolidated Promissory Note. If the Company elects the Cash Payment Option, it
is also obligated to make an interest payment computed based on the amount of
principal payment and an interest rate of 8% per annum. If the Company elects
the Conversion Option, the number of shares issuable is to be based on the
amount of principal being converted divided by fifty percent (50%) of the bid
price of the Company's shares of common stock as of the close of business on the
due date of the respective borrowings under the Consolidated Promissory Note.
Amounts due under the Consolidated Promissory Note are secured by a lien on all
of the Company's assets.
As of September 30, 2000, the total amount due to the lender under the Cash
Payment Option is approximately $701,234, including interest of approximately
$31,734, and the number of shares issuable, as of September 30, 2000, under the
Conversion Option would have been approximately 9,950,000 shares.
In connection with the consolidation of the series of promissory notes into a
single Consolidated Promissory Note, the Company added the Conversion Option
(the "conversion feature"). The conversion feature was effective as of April 24,
2000 and applies to borrowings outstanding as of April 24, 2000 and all
subsequent borrowings made under the Consolidated Promissory Consolidated Note.
As a result of the conversion feature, the Company recorded the amount of the
beneficial conversion feature ($908,500, in the aggregate) as an increase in
additional paid in capital and as a debt discount. The debt discount is being
amortized over the term of the respective borrowing dates. For the nine months
and three months ended September 30, 2000, the Company recorded interest expense
from the amortization of the debt discount related to these borrowings of
approximately $574,450 and $253,644, respectively, and the unamortized debt
discount related to these borrowings as of September 30, 2000 was approximately
$334,050.
The $50,000 convertible promissory note agreement, dated as of September 20,
2000 (the "September 20, 2000 Note"), matures on December 8, 2000 or on the date
that all offset rights under a settlement agreement, dated as of September 19,
2000 (the "Settlement Agreement"}, are determined, whichever occurs later (the
"Payment Date"). The September 30, 2000 Note, or any portion thereof, plus
$10,000 representing interest and other costs, is convertible, at the election
of the holder, into shares of the Company's common stock on the Payment Date at
a conversion price equal to fifty percent (50%) of the closing bid price of the
Company's common stock at the close of business on the day preceding the receipt
by the Company of a notice of conversion.
The conversion feature applicable to the September 20, 2000 note was valued at
$50,000. For the nine months and three months ended September 30, 2000, the
Company recorded interest expense from the amortization of the debt discount
related to the September 20, 2000 Note of approximately $10,417, and the
unamortized debt discount related to this note as of September 30, 2000 was
approximately $39,583.
The Settlement Agreement provided for, among other things, a change by the
Company in the conversion features included in a convertible promissory note in
the amount of $100,000 dated as of September 23, 1999 (the "September 23, 1999
Note"). The change in the conversion features was a reduction in the conversion
price from $2.00 to $0.106 per share, plus an increase of $6,000 in amounts due
under the note. Upon execution of the Settlement Agreement and conversion of the
September 23, 1999 Note, the Company issued 1,000,000 shares of its common stock
(the "Shares") and recorded interest expense of $60,050, representing the
difference between the intrinsic value of the basic and revised basic beneficial
conversion features at the date of conversion.
8
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The Settlement Agreement also provided for certain offsets against amounts due
under the September 20, 2000 Note (the "Offset Rights") and for the issuance of
additional shares of the Company's common stock should the holder of the
September 23, 1999 Note (the "Holder") receive less than $106,000 from the sale
of the Shares (the "Additional Shares"). The Offset Rights are to be determined
after the sale of the Shares by the Holder and are to be determined based on
sixty percent (60%) of the excess, if any, of the net proceeds received by the
Holder from the sale of the Shares (the "Net Proceeds") over $106,000. The
Additional Shares, if any, as provided for in the Settlement Agreement, are to
be determined based on the shortfall, if any, between $106,000 and the Net
Proceeds, and a conversion price equal to the lessor of $0.106 or fifty percent
(50%) of the trading price of the Company's common stock on the date of such
determination. It is not possible to determine the amount of Offset Rights, if
any, or Additional Shares, if any, pursuant to the Settlement Agreement, until
the date of notification and sale of the Shares.
MERGER LIABILITIES AND CONTINGENCIES
During the third quarter of 2000, the Company revised its estimates of
liabilities and contingencies arising from the merger. The revised estimates
resulted in a net increase in merger liabilities and contingencies, from those
recorded as of December 31, 1999, of approximately $95,000.
STOCKHOLDERS EQUITY
On September 11, 2000, the Company increased the number of its authorized shares
of common stock from 50,000,000 shares to 250,000,000 shares by a Joint Action
by Written Consent of the Board of Directors and Shareholders in lieu of a
Special Meeting of Shareholders. The Articles of Amendment to the Articles of
Incorporation of the Company were filed with the State of Florida on September
15, 2000.
The following table sets forth the number of shares and the dollar amount of the
decrease in stockholders' deficit from the shares of the Company's common stock
issued during the nine months ended September 30, 2000.
Number
Of Shares Amount
----------- ---------
Shares issued upon conversion
of convertible debt 3,122,136 $579,050
Shares issued for cash and upon
exercise of options and warrants 1,679,643 349,500
Shares issued for services 143,384 101,591
Re-issuance of cancelled merger shares 2,000,000 2,000
Issuance of previously unissued merger
shares 2,000,000 --
Cancellation of pre-merger shares in
connection with a rescinded business
transaction (75,876) (76)
Cancellation of shares issued to LTF (1,750,000) --
Cancellation of shares in connection
with resignation of officer (4,000,000) --
COMMITMENTS AND CONTINGENCIES
On July 7, 2000, the United States District Court for the District of Utah,
Central Division, entered a judgment in favor of Kenneth D. Lame against the
Company in the amount of $302,233. As of September 30, 2000, the Company has
provided for the full amount of this contingency.
9
<PAGE>
The staff of the Securities and Exchange Commission has informed the Company
that it is prepared to recommend a settlement, subject to the approval of the
Commission, wherein the Company would consent to the entry of a final judgement
of permanent injunction, without admitting or denying the allegations of a civil
complaint (the "Complaint"), except as to jurisdiction, filed against the
Company, and Stephen J. Bradford, the former President of the Company, for
alleged violations of Section 10(b) of the Securities Exchange Act of 1934
("Exchange Act"), and Rule 10b-5, promulgated thereunder, arising out of
allegedly false and misleading press releases issued by the Company concerning
the Life Foundation Trust. No disgorgement or civil money penalties will be
recommended against the Company. With respect to Mr. Bradford, the staff of the
Commission will recommend a settlement, subject to the approval of the
Commission, wherein Mr. Bradford would consent, without admitting or denying the
allegations of the Complaint except as to jurisdiction, to the entry of a final
judgement of permanent injunction foe alleged violations of Section 10(b) of the
Exchange Act, and Rule 10b-5, promulgated thereunder. A civil money penalty of
$25,000 will be recommended against Mr. Bradford. The proposed settlement with
the Company is currently under consideration by the Commission. Since the
Commission has not approved the proposed settlement, and it may accept, reject,
and/or modify the proposed settlement, the outcome of the proposed settlement is
unknown. Dorian Reed, the Company's current President and Chairman of the Board,
was not a named party to the complaint.
During the third quarter of 2000, the Circuit Court of the Sixth Circuit in and
for Pinellas County, Florida entered Final Judgements of damages in favor of Mr.
Edwin B. Salmon, Jr., the former Chief Executive Officer and Chairman of the of
the Board of the Company, in the amount of $468,467.34 (Case No.
00-002088-CI-15), and in favor of Mr. William Van Hook, an associate of Mr.
Salmon, in the amount of $164,253 (Case No. 00-002946-CI-15). Neither of these
cases was defended by the Company, due to the Company's inability to engage and
pay legal counsel. To the best of the Company's knowledge and belief, the basis
of the complaints brought against the Company by Messrs. Salmon and Van Hook
allege that the Company wrongfully denied the removal of restrictive legends,
pursuant to Rule 144 of the Securities Act of 1933, on the share certificates of
the Company held by them.
Had the Company been able to defend the actions brought against the Company by
Mr. Salmon, it believes that it would have defended those actions by alleging
that Mr. Salmon defrauded the Company's stockholders, engaged in activities
detrimental to the Company's stockholders and misrepresented the financial
affairs of the Company prior to the Merger. Had the Company been able to defend
the actions brought against the Company by Mr. Van Hook, it believes that that
it would have defended those actions by alleging that Mr. Van Hook participated
in the alleged causes of action the Company believes it would have asserted
against Mr. Salmon; and, further, that the shares of common stock transferred to
Mr. Van Hook by Mr. Salmon were transferred in violation of an agreement between
the Company and Mr. Salmon regarding the transferability and sale the shares.
Should either Mr. Salmon or Mr. Van Hook seek a "sister judgement" in the State
of California and attempt to enforce the judgements, the Company intends to
vigorously seek to vacate the judgements. The Company also intends, to the
extent it is able to do so, bring actions against Messrs. Salmon and Van Hook,
which would allege the causes of actions against them, as set forth above. As of
September 30, 2000, the Company believes that it has made adequate provision for
these potential loss contingencies.
10
<PAGE>
On April 27, 2000, the Company filed a Complaint for Libel against Bloomberg,
L.P., a Delaware Limited Partership, and David Evans in the Superior Court of
the State of California for the County of Los Angeles. The lawsuit alleges that
Bloomberg and Evans, through "Bloomberg News", published a series of "Defamatory
Articles" on May 11 and May 12, 1999, which contained certain false and
defamatory statements regarding the Company. As a result of the publication of
the articles, the Company alleges that the Company's stock price dropped about
53% in one day. On May 10, the day before the publication of the first
Defamatory Article, the price of the Company's common stock reached a high of
$20.6875 per share. The Company's stock closed at 9 3/8 on May 11, 1999. The
Complaint seeks damages against Bloomberg and Evans in excess of $500 million.
In response to the Complaint filed by Hitsgalore, Bloomberg filed a special
motion to strike the Complaint pursuant to California's "Anti-SLAPP" statute.
After briefing by the parties and oral arguments, held on July 6, 2000, the
presiding Judge denied the special motion to strike the Complaint without
prejudice. On August 11, 2000, Bloomberg filed a "Renewed Special Motion to
Strike" the Complaint, and a hearing was held on such Motion on October 20,
2000, at which time the presiding Judge granted the Motion, struck Hitsgalore's
Complaint, and ordered that Hitsgalore pay the defendants their reasonable
attorney's fees and costs in an amount to be determined at a hearing to be held
at a later date and upon motion by the defendants. The court has not yet entered
its final order dismissing the action and the defendants have not filed their
motion for attorney's fees and costs. Thus, it is not possible to predict the
likely range of loss, if any. The Company's legal counsel has advised the
Company that the Court's ruling was based on a "public interest" test that has
been rejected by the United States Supreme Court in the case of Gertz v. Welch,
418 U.S. 323 (1974); and, the Company has advised legal counsel the Company
plans to appeal the decision.
On January 11, 2000, the Plaintiffs in a consolidated putative class action
lawsuit against the Company, Mr. Steve Bradford and Mr. Dorian Reed (the
"Defendants") in the United States District Court, Central District of
California (Case No. Cv-99-5060-R(JWJx) filed their Second Consolidated Amended
Class Action Complaint (the "Second Amended Complaint") involving the purchase
of the Company's securities during the period from February 17, 1999 through
August 24, 1999. On February 23, 2000, the Court entered its Order Granting
Defendants' Motion to Dismiss with Prejudice, effectively terminating the action
before the District Court. The Plaintiffs then filed a Notice of Appeal,
appealing the District Court's Order dismissing the case to the United States
Court of Appeals for the Ninth Circuit. In July 2000, the Plaintiffs voluntarily
dismissed the appeal pursuant to a stipulation in which each party agreed to
bear their own respective fees and costs.
RELATED PARTY TRANSACTIONS
Amounts due to officers and stockholders are due on demand and are non-interest
bearing. During the third quarter of 2000, the Company transferred a Company
owned vehicle to the Company's Chairman in payment of outstanding borrowings
from the Chairman. The vehicle was transferred at its net book value and no gain
or loss was recognized.
During 1999, the Company's Chairman of the Board of Directors returned and the
Company cancelled 2,000,000 shares of the Company's common stock for no
consideration. These shares were re-issued to the Company's Chairman of the
Board on August 31, 2000. The cancellation and re-issuance of these shares were
recorded at the par value ($0.001) per share of the Company's common stock.
During 1999, the Company's Chairman of the Board loaned the Company, without
consideration, two (2) million shares received by him in the Merger for issuance
to other persons owed shares pursuant to the Merger (the "unissued merger
shares"). On September 14, 2000, the Company issued two million shares of
unissued merger shares to the Company's Chairman of the Board to replace the
shares that were loaned to the Company.
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During the nine months ended September 30, 2000, the Company issued a related
party 35,715 shares, valued at $62,500, for services rendered to the Company as
a consultant and convertible notes payable, totaling $54,500, for services
rendered in connection with the sale of common stock and exercise of options and
warrants. These convertible promissory notes are included in the Consolidated
Promissory Note, referred to above.
SUBSEQUENT EVENTS
On October 2, 2000, the Company filed a registration on Form S-8 to register
10,000,000 shares of the Company's common stock, which are to be issued to
eligible persons under the Company's Year 2000 Stock Award Plan (the "Plan").
The Plan provides for the grant, from time to time, of shares of the Company's
common stock (the "Shares") as compensation to the Company's employees and
consultants in exchange for services rendered and to be rendered to the Company.
All employees and consultants who provide bona fide services to the Company may
participate in the Plan.
As of October 31, 2000, the Company has awarded 8,866,753 Shares to employees
and consultants under the Plan. Shares awarded under the Plan are to be valued
at eighty percent (80%) of the bid price of the Company's common stock as
reported on the Over the Counter Bulletin Board on the date of grant.
RESTATEMENT OF SECOND QUARTER 2000 OPERATING RESULTS
During the third quarter of 2000, the Company determined that it had incorrectly
accounted for the intrinsic value of the beneficial conversion features
contained in convertible debt securities issued during the second quarter of
2000, and restated its previously reported operating results for the second
quarter. The correction of this error had the effect of increasing interest
expense and the net loss for the six months and three months ended June 30,
2000, as previously reported, by $320,807, increasing additional paid in capital
as of June 30, 2000, as previously reported, by $828,750 and decreasing
short-term borrowings from related parties, net of debt discount, as of June 30,
2000, as previously reported, by $507,943.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The statements contained in this Report on Form 10-Q that are not purely
historical are forward-looking information and statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These include statements regarding the Company's
expectations, intentions, or strategies regarding future matters. All
forward-looking statements included in this document are based on information
available to the Company on the date hereof. It is important to note that the
Company's actual results could differ materially from those projected in such
forward-looking statements contained in this Form 10-Q. The forward-looking
statements contained herein are based on current expectations that involve
numerous risks and uncertainties. Assumptions relating to the foregoing involve
judgments regarding, among other things, the Company's ability to secure
financing or investment for capital expenditures, future economic and
competitive market conditions, and future business decisions. All of these
matters are difficult or impossible to predict accurately and many of which may
be beyond the control of the Company. Although the Company believes that the
assumptions underlying its forward-looking statements are reasonable, any of the
assumptions could be inaccurate and, therefore, there can be no assurance that
the forward-looking statements included in this Form 10-Q will prove to be
accurate.
The following discussion should be read in conjunction with the Financial
Statements and notes thereto, appearing elsewhere herein.
Net revenues-
The Company had net revenues of $148,799 and $30,849 for the nine months and
three months ended September 30, 2000, respectively, compared with $4,633,647
and $2,947,178, respectively, for the corresponding 1999 periods. Excluding
revenues of $4,050,000 and $2,800,000, respectively, from the agreement with
LFT, net revenues for the nine months and three months ended September 30, 1999
would have been $538,647 and $147,178, respectively; and, the revenue decreases
from period to period would have been $389,848 and $116,329, respectively.
The decrease in revenues, excluding LFT revenues, for the nine months and three
months ended September 30, 2000 as compared to the corresponding 1999 periods
was due primarily to two factors. First, prior to the default by LFT (which
occurred on April 17, 2000), the Company focused almost solely on completion of
its obligations to LFT at the expense of its other products and services.
Second, after the default by LFT, the Company began to focus its efforts on the
development of new products and services, such as HBX2000, its B2B Exchange, and
its "bid by impression" and "media rich data description" business models. These
factors, combined, resulted in reductions in revenues from the Company's core
portal sponsorship and key word bid and rank products.
Selling, general and administrative expenses-
Selling, general and administrative expenses totaled $1,649,819 and $331,185 for
the nine months and three months ended September 30, 2000, respectively, as
compared to $2,083,258 and $880,783, respectively, for the corresponding 1999
periods. The decreases from period to period were principally the result of
lower advertising expenditures and variations in the amount of spending for web
site enhancements and new product development.
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Depreciation and Amortization-
Depreciation and amortization for the nine months and three months ended
September 30, 2000 totaled $215,756 and 70,631, respectively, as compared to
$129,527 and $65,928, respectively, for the nine months and three months ended
September 30, 1999. The increases in 2000 as compared to the corresponding
periods of 1999 were due to a higher investment in property and equipment. In
addition to web site and new product development expenditures recorded as
selling, general and administrative expenses, the Company invested in property
and equipment for its HBX2000 "Trading Floor" and business exchange, and for its
new "media rich" studio.
Other income (expense)-
Other income consists of a payment made to the Company by Mr. Steve Bradford
pursuant to the terms of the resignation agreement between the Company and Mr.
Bradford. The Company also transferred ownership to a Company owned vehicle to
Mr. Bradford as a part of the resignation agreement in exchange for $15,000 in
cash and the assumption by Mr. Bradford of a loan in the principal amount of
$16,882, secured by the vehicle. The transfer of ownership resulted in a loss on
disposal of $2,246.
Interest, net for the nine months and three months ended September 30, 2000
consists primarily of approximately $33,000 of accrued interest on short-term
borrowings and $644,917 and 324,111, respectively, from the amortization of debt
discounts related to short-term borrowings from related parties.
Income Taxes-
No provisions (credits) for income taxes were made in 2000 due to the Company
reporting operating losses. For the nine months and three months ended September
30, 1999, the Company recorded provisions for income taxes of approximately
40.0% and 38.1% of pre-tax income, respectively. The principal reason for the
difference between the Federal income rate of 34% and the effective tax rates
for the respective periods was the effect of state income taxes.
In December 1999, the Company reversed all previously recorded provisions for
income taxes that were made during the year. The reversal of previously recorded
income taxes was the result of the elimination of revenues recognized by the
Company under its agreement with LFT due to LFT's default in April 2000 of its
payment obligations to the Company. The default by LFT, the recognition of the
bad debt expense and the write-off of the related LFT receivables associated
with the default caused the Company to report a loss for the full 1999 fiscal
year. As a result, the Company reported no tax provision for the full 1999
fiscal year.
Liquidity and Capital Resources-
The Company has relied primarily on short-term borrowings from related parties,
private placements of the Company's common stock, non-payment of compensation
due to executive officers and deferral of payments to trade and other creditors
to fund its operations. During the first nine months of 2000, the Company
generated cash from short-term borrowings totaling $505,000 and generated
$349,500 from the private placement of its common stock and from the exercise of
options and warrants. Compensation payable to executive officers also increased
by $278,902 and accounts payable and accrued expenses increased by $303,311 (see
the Balance Sheets and Statements of Cash Flows included elsewhere herein).
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As of September 30, 2000, the Company does not have the cash, working capital or
commitments for additional equity or debt financing to sustain its current level
of operations. It will need to generate cash flows from operations and/or raise
additional funds in order to maintain operations at current levels and expand or
enhance its products, services and markets. While the Company is optimistic that
its new B2B Exchange and its "bid by impression" and "media rich data
description" business models will produce sufficient levels of future cash flows
to sustain operations, there is no assurance of that occurring; and, there is no
assurance that the Company will be able to obtain any additional equity or debt
financing.
The principal uses of cash for the nine months ended September 30, 2000 were
cash used in operations of $771,788 and capital expenditures of $81,187.
Other-
In September 2000, the Company announced its intent to acquire HotYellow98.com
and its wholly owned subsidiary, MyFreeOffice.com. After initial due diligence,
the Company decided not to pursue the acquisition.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
All material pending legal proceedings to which the Registrant is a party
are described in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999, in the Company's previously filed reports on Form 10-Q, in
the Company's Current Report on Form 8-K dated June 9, 2000 and in the Notes to
Financial Statements included elsewhere herein.
Item 2. Changes in Securities
During the nine months ending September 30, 2000, the Company issued shares of
common stock in the following transactions:
The Company issued 1,622,500 shares in private placement transactions and
received net proceeds of $309,500.
The Company issued 57,143 shares upon exercise of outstanding options and
warrants and received net proceeds of approximately $40,000.
The Company issued 3,122,136 shares upon conversion of convertible debt.
The Company issued 143,384 shares valued at $101,591 in the aggregate for
services rendered to the Company.
The Company reissued 2,000,000 shares, without consideration, to the Company's
Chairmen that were cancelled in 1999 for issuance to other parties.
The Company issued 2,000,000 shares, without consideration, to the Company's
Chairman to replace shares that were loaned to the Company in 1999 for issuance
to persons owed shares pursuant to the Merger.
The Company cancelled 1,750,000 shares previously issued to LFT as a result of
the default by LFT of its payment obligations to the Company and 75,876 shares
that had been issued prior to the Merger in connection with a rescinded business
transaction.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.i. * Articles of Incorporation, as amended
3.ii * By-laws, as amended
10.1 *** Hitsgalore.com, Inc. - Year 2000 Stock Award Plan
27. ** Financial Data Schedule (Nine Months Ended September 30, 2000)
99.1 *** September 11, 2000 Amendment to Articles of Incorporation
* Incorporated by reference to the Company's Registration Statement on Form 10
as filed on July 23, 1996
** Filed herewith.
*** Incorporated by reference to the Company's Registration Statement on Form
S-8 as filed on October 2, 2000.
(b) Reports on Form 8-K:
No reports were filed on Form 8-K for the three months ended September 30, 2000:
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HITSGALORE.COM, INC. Date: November 14, 2000
By /s/ Robert A. Thompson
----------------------------
Principal Accounting
Officer and Director
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