<PAGE>
FORM 10-Q\A
(Amendment No. 1)
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 June 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.
--------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
FLORIDA 65-0036344
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10134 6TH Street, Suite J, Rancho Cucamonga, CA 91730
--------------------------------------------------------------------------------
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code (909) 481-8821
--------------------------------------------------------------------------------
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 June 30, 2000 - 48,836,999 shares.
1
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
HITSGALORE.COM, INC.
BALANCE SHEETS
June 30, December 31,
2000 1999
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash $ 16,810 $ 2,223
Accounts receivable trade 53,320 --
Other current assets 2,355 4,855
------------ ------------
Total current assets 72,485 7,078
Property and equipment, net of accumulated
depreciation of $148,741 in 2000 and $81,233
in 1999 319,014 284,151
Intangible assets, net of accumulated
amortization of $194,042 in 2000 and
$116,425 271,658 349,275
------------ ------------
Total assets $ 663,157 $ 640,504
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Bank overdraft $ 97,859 $ --
Short-term borrowings, less unamortized
debt discount of $507,943 in 2000 420,807 524,000
Due to officers and stockholders 20,500 65,000
Current portion of note payable 4,619 4,788
Accounts payable and accrued expenses 498,813 289,974
Accrued compensation and employee benefits 351,295 174,471
Allowance for cancellation & refunds 5,690 184,664
Merger liabilities assumed 1,726,625 1,726,625
------------ ------------
Total current liabilities 3,126,208 2,969,522
Long-term portion of note payable 12,263 14,387
------------ ------------
Total liabilities 3,138,471 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
50,000,000 shares, issued and outstanding
48,836,999 shares in 2000 and 48,289,848
shares in 1999 48,837 48,289
Additional paid in capital 4,344,481 2,809,589
Accumulated deficit (6,923,396) (5,256,047)
------------ ------------
Total stockholders' deficit (2,475,314) (2,343,405)
------------ ------------
Total liabilities and stockholders' deficit $ 663,157 $ 640,504
============ ============
See Notes to Financial Statements
2
<PAGE>
<TABLE>
HITSGALORE.COM, INC.
UNAUDITED STATEMENTS OF OPERATIONS
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues $ 117,950 $ 1,686,469 $ 104,908 $ 1,294,790
------------ ------------ ------------ ------------
Costs and expenses:
Selling, general and administrative
expenses 1,318,635 1,202,475 748,968 1,021,797
Depreciation and amortization 145,124 63,600 74,721 59,257
------------ ------------ ------------ ------------
Total costs and expenses 1,463,759 1,266,075 823,689 1,081,054
------------ ------------ ------------ ------------
Income (loss) from operations (1,345,809) 420,394 (718,781) 213,736
Interest income 4 2,415 4 2,415
Interest expense (321,544) (378) (321,544) (378)
------------ ------------ ------------ ------------
Income (loss) before income taxes (1,667,349) 422,431 (1,040,321) 215,773
Provision for income taxes -- 157,500 -- 78,970
------------ ------------ ------------ ------------
Net income (loss) $(1,667,349) $ 264,931 $(1,040,321) $ 136,803
============ ============ ============ ============
Basic (loss) earnings per share $ (0.03) $ 0.01 $ (0.02) $ --
Diluted (loss) earnings per share $ (0.03) $ 0.01 $ (0.02) $ --
See Notes to Financial Statements
3
</TABLE>
<PAGE>
HITSGALORE.COM, INC.
UNAUDITED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
2000 1999
------------- -------------
Net cash used in operating activities $ (958,033) $ (868,564)
------------- -------------
Cash flows from investing activities:
Expenditures for property and equipment (102,371) (296,365)
Expenditures for intangible assets -- (98,500)
------------- -------------
Net cash used in investing activities (102,371) (394,865)
------------- -------------
Cash flows from financing activities:
Proceeds from short-term borrowings 684,500 --
Bank overdraft 97,859 --
Proceeds from issuance of common stock
and from exercise of options and warrants 339,425 1,849,760
Proceeds from common stock to be issued -- 138,500
Payments on merger liabilities assumed -- (425,779)
Payments of borrowings from affiliated company -- (22,699)
Payments and borrowings from officers and
Stockholders, net (44,500) (2,250)
Payments on note payable (2,293) (2,161)
------------- -------------
Net cash provided by financing activities 1,074,991 1,535,371
------------- -------------
Net increase in cash 14,587 271,942
Cash at beginning of the period 2,223 1,013
------------- -------------
Cash at end of the period $ 16,810 $ 272,955
============= =============
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 $ 279,750 $ 5,000
Common stock issued for services rendered 87,515 --
Merger liabilities assumed -- 1,873,722
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 737 378
Income taxes -- --
See Notes to Financial Statements
4
<PAGE>
HITSGALORE.COM, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
JUNE 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 reorganization in connection with the Merger (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
under the Securities Act of 1933 becomes effective. IHSI has ceased all
operations and there is no assurance that any such registration statement will
be filed.
5
<PAGE>
SIGNIFICANT ACCOUNTING POLICIES
The unaudited balance sheet as of June 30, 2000, the unaudited statements of
operations for the six months and three months ended June 30, 2000 and 1999 and
the unaudited statements of cash flows for the six months ended June 30,2000 and
1999 have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments, consisting of normal and recurring accruals considered necessary
for a fair presentation, have been included. Results of operations for the six
months ended June 30, 2000 are not necessarily indicative of the results for the
full fiscal year.
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 during the six months
and three months ended June 30, 2000 was approximately 48,232,708 shares and
48,122,343 shares, respectively. The weighted average number of common shares
outstanding during the six months and three months ended June 30, 1999 was
approximately 22,675,655 shares and 47,320,875 shares, respectively. The effect
of outstanding options and warrants for the respective periods were
anti-dilutive and were not included in the computation of diluted earnings
(loss) per share. As of June 30, 2000, the Company had approximately 517,000
options and warrants outstanding, exercisable at prices ranging from $0.70 to
$10.50 per share. The options outstanding expire on various dates through the
year 2001.
In June 2000, Steve Bradford, the Company's President and Chief Executive
Officer, resigned all of his positions with the Company. As a part of the
resignation agreement, Mr. Bradford agreed to, among other things, to return
4,000,000 shares of the Company's common stock that were issued to Mr. Bradford
in connection with the Merger. These shares were returned to the Company in July
2000.
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 $1,667,349 for the six months ended June 30, 2000 and had a
working capital deficiency of approximately $3.1 million at June 30, 2000.
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
<PAGE>
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 has retained counsel to explore
its options with respect to liquidating the Collectibles in payment of monies
due under the Agreement. Because we believe that persons may attempt to defeat
the Company's claims to the collateral and may claim interests in the collateral
adverse to those of the Company, the liquidation process may be protracted and
it is too early to estimate with any degree of certainty the Company's
likelihood of recovery. Because of the uncertainty of collection on the LFT
obligation, the Company wrote off all receivables due from LFT and recorded a
charge to income of $6.9 million in 1999. The Company did not report any
revenues from LFT in 2000.
In April 2000 the Company demanded that LFT return all shares of the Company's
common stock held in its possession, including 8 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 8 million shares transferred to
LFT by the Company's Chairman. The Company has retained counsel to determine
what actions an 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 8 million shares transferred to LFT by the Company's Chairman that were
returned to the Company by LFT were reissued to the Chairman in May 2000.
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 feature contained
in convertible debt securities issued during the second quarter of 2000, and
restated its previously reported operating results. 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, net of
debt discount, as of June 30, 2000 as previously reported, by $507,943.
7
<PAGE>
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 here-in 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 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 approximately $ 117,950 and $104,908 for the six
months and three months ended June 30, 2000, respectively, compared with
$1,686,469 and $1,294,790, respectively, for the corresponding 1999 periods.
Excluding revenues of $1,250,000 recognized from LFT in the second quarter of
1999, net revenues for the six months and three months ended June 30, 1999 would
have been $436,469 and $44,790, respectively. The decrease in revenues,
excluding LFT revenues, for the six months ended June 30, 2000 as compared to
the corresponding 1999 period was the result of the Company focusing almost
solely on completion of its obligations under its agreements with LFT at the
expense of its other products and services. The increase in revenues, excluding
LFT revenues, for the three months ended June 30, 2000 as compared to the three
months ended June 30, 1999 was the result of the Company refocusing its business
back to its original core products and services and the development of new
e-commerce products and services, including the Hitsgalore Business Exchange
("HBX2000"), a B2B exchange, located on the internet at www.HBX2000.com.
Selling, general and administrative expenses-
Selling, general and administrative expenses totaled approximately $1,318,635
and approximately $748,968 for the six months and three months ended June 30,
2000, respectively, as compared to approximately $1,202,475 and $1,021,797,
respectively, for the corresponding 1999 periods. During the six month ended
June 30, 2000, the Company spent heavily on development of enhancements to its
web site and on the development of new products and services, including HBX2000.
The increased spending on the Company's web site and new products principally
occurred in the second quarter of 2000. The increased spending for the six
months ended June 30, 2000 was offset on a comparative basis with the
corresponding period of last year by a reduction in advertising expenses, which
consisted principally of a national radio campaign. The decrease in selling,
general and administrative expenses from $1,021,797 in the second quarter of
1999 to $748,968 in the second quarter of 2000 principally reflects the costs of
the national radio advertising campaign. These costs were incurred in the second
quarter of 1999 with no corresponding costs in the second quarter of 2000.
Selling, general and administrative expenses during the respective periods also
reflect ongoing costs related to pending legal and other administrative matters.
Depreciation and Amortization-
Depreciation and amortization for the six months and three months ended June 30,
2000 totaled approximately $145,124 and 74,723, respectively, as compared to
approximately $63,600 and $59,257, respectively, for the six months and three
months ended June 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
significant resources in its "Trading Floor" and related computer equipment for
its HBX2000 business exchange, located in facilities adjacent to its
administrative offices in Rancho Cucamonga, California.
8
<PAGE>
Interest Expense-
Interest expense for the six months and three months ended June 30, 2000
consists primarily of $320,807 from the amortization of debt discount related to
short-term borrowings (see "Restatement of Second Quarter 2000 Operating
Results").
Income Taxes-
No provisions (credits) for income taxes were made in 2000 due to the Company
reporting operating losses. For the six months and three months ended June 30,
1999, the Company recorded provisions for income taxes of approximately 37.3%
and 36.6% of pre-tax income. 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 1999 fiscal
year.
Liquidity and Capital Resources-
The Company has relied on short-term borrowings, 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 six months of 2000, short-term borrowings, accrued compensation
to executive officers and other liabilities all increased as compared to the
related amounts outstanding at December 31, 1999 (see the related Balance Sheets
and Statements of Cash Flows included elsewhere herein).
As of June 30, 2000, the Company does not have the cash, working capital and
commitments for additional equity or loan facilities to sustain its current
level of operations and will need to raise additional funds in order to maintain
operations at current levels and expand or enhance its products and services.
There can be no assurance that any additional funds will be available to the
Company.
The principal uses of cash in the 1st half of 2000 were cash used in operations
of approximately $958,033 and capital expenditures of approximately $102,000.
9
<PAGE>
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 and in the Company's Current Report on Form 8-K dated June 9,
2000.
In addition, the plaintiffs in the Involuntary Petition under Chapter 7 of the
U.S. Bankruptcy Code that was filed against Systems Communications, Inc. on June
1, 1998 have filed an appeal to the dismissal of the Chapter 7 proceeding that
was entered in the United States Bankruptcy Court for the Middle District of
Florida on April 20, 1999. The Company is waiting on a ruling from the United
Bankruptcy Court to the appeal.
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 and against
Hitsgalore.com, Inc. in the amount of $302,233. As of June 30, 2000, the Company
had reserved a liability for this action in the amount of $450,000.
The Company has been advised that the United States District Court of Pinellas
County, Florida has entered a judgement against Hitsgalore.com, Inc. in favor of
Mr. Edwin B. Salmon, Jr., former Chairman of the Board of Systems
Communications, Inc., and one other person to whom Mr. Salmon transferred shares
of Hitsgalore.com, Inc. common stock in violation of certain lock-up and other
agreements between the Company and Mr. Salmon. The Company intends to vigorously
defend execution of the judgement.
Item 2. Changes in Securities
During the six months ending June 30, 2000, the Company issued shares of common
stock in the following transactions:
The Company issued 1,572,500 shares in a private placement transaction and
received net proceeds of $229,500.
The Company issued 717,143 shares upon exercise of outstanding options and
warrants and upon conversion of short-term borrowings and received net proceeds
of approximately $319,750.
The Company issued 83,384 shares valued at $87,515 in the aggregate for services
rendered to the Company.
In addition, 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
27. ** Financial Data Schedule (Six Months Ended June 30, 2000).
* Incorporated by reference to the Company's Registration Statement on Form
10 as filed on July 23, 1996
** Filed herewith.
(b) Reports on Form 8-K:
The following reports were filed on Form 8-K for the three months ended June 30,
2000:
The Company filed a Form 8-K on April 14, 2000. The event reported was the
inability of the Company to file its Annual Report on Form 10-K for the year
ended December 31, 1999 within the grace period afforded under Rule 12b-25.
The Company filed a Form 8-K on April 17, 2000. The event reported was the
default of the Life Foundation Trust on its payment obligations to the Company.
10
<PAGE>
The Company filed a Form 8-K on June 27, 2000. The events reported were (1) a
notice received by the Company on June 9, 2000, that staff members of the United
States Securities and Exchange Commission intended to make a recommendation to
the Commission seeking authority to file a civil injunctive action in the United
States District Court against the Company and Steve Bradford, the Company's
President and Chief Executive Officer, for alleged violations of Section 10(b)
of Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and
(2) the resignation of Steve Bradford as the Company's President and Chief
Executive Officer, effective June 21, 2000 pursuant to a negotiated
"confidential" resignation agreement.
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
11
