UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB/A
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GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
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Under Section 12(b) or (g) of the Securities Exchange Act
of 1934
HitCom Corporation
(Name of Small Business Issuer in its charter)
Delaware 87-0389677
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
700 North Second Street, Third Floor, St. Louis, MO 63102
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (314) 231-1000
Securities to be registered under Section 12(b) of the Act:
None
Securities to be registered under Section 12(g) of Act:
Common Stock, $.004 par value per share
8% Convertible Preferred Stock, $.001 par value per share
HitCom Corporation
INDEX
Part I
ITEM 1. Description of Business
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
ITEM 3. Description of Properties
ITEM 4. Security Ownership of Certain Beneficial Owners
and Management
ITEM 5. Directors, Executive Officers, Promoters and
Control Persons
ITEM 6. Executive Compensation
ITEM 7. Certain Relationships and Related Transactions
ITEM 8. Description of Securities
Part II
ITEM 1. Market Price of and Dividends on the Registrant's
Common Equity and Other Shareholder Matters
ITEM 2. Legal Proceedings
ITEM 3. Changes in and Disagreements with Accountants
ITEM 4. Recent Sales of Unregistered Securities
ITEM 5. Indemnification of Directors and Officers
Financial Statements
- - HitCom Corporation for the nine-month period ended December 31, 1997
- - One Plus Marketing, Inc. for the three-month period ended March 31, 1997
- - Channel Telecom Inc. for the nine-month period ended December 31, 1997 and
for the year ended March 31, 1997
- - HitCom Corporation pro forma for the year ended December 31, 1997
(unaudited)? One Plus Marketing, Inc. for the year ended December 31, 1996
(unaudited)
HitCom Corporation
INDEX - CONTINUED
Part III
ITEM 1. Index To Exhibits
Signatures
Introductory Statements
HitCom Corporation (HitCom or the Company) has prepared this Form 10-SB on a
voluntary basis to make available reportable information about the Company to
existing shareholders and others interested in the activities of the Company.
The Company intends to furnish annual and periodic reports consistent with
the Securities and Exchange Commission reporting requirements in the event
that the Company ceases to continue reporting under the Exchange Act.
PART I
ITEM 1-DESCRIPTION OF BUSINESS
History
Overview
HitCom was established in 1993 and incorporated in 1995 under the laws of the
state of Missouri as an online/Internet publisher of city-specific, "real
need" and practical information. The Company's core product IntelliPages,
was a user friendly Internet resource that offered three kinds of city-
specific information consumers need and readily use. These included
1) Business listings - a complete "online yellow pages" style directory,
2) News Now - up to the minute local news, traffic, weather and sports, and
3) City Information - a comprehensive guide featuring content such as local
history and culture, media, government, attractions, nightlife and special
events. The Company was acquired by Royal Oak Resources ("Royal") a NASDAQ
OTC Bulletin Board company in 1995 through a reverse merger. Following the
acquisition, HitCom was reincorporated under the laws of the state of
Delaware and the subsidiary Webtech was formed as the Company's primary
operating subsidiary. Royal was incorporated under the laws of the state of
Utah in 1982. The operating activities of Royal and Webtech are not relevant
in HitCom's current operating structure or activities.
Royal Oak Resources
Royal was incorporated in 1982 under the laws of the state of Utah. Royal
was founded to establish and maintain a drilling business with authority to
own and operate drilling rigs, machinery tools or apparatus as necessary in
the boring or otherwise sinking of wells for the production of oil, gas or
water; to construct or acquire by lease or otherwise and to maintain and
operate pipelines for the convenience of oil and natural gas, oil storage
tanks and reservoirs and tank cars of all kinds, tank steamers and other
vessels, warehouses, storage houses, loading racks and all the other
convenient instrumentalities for the shipping and transportation of crude or
refined petroleum or natural gas and other volatile solid or liquid mineral
substances in any and all forms and to do each and every act necessary for
the production of oil and gas or natural resource properties. The operating
activities of Royal are not relevant in HitCom's current operating structure
or activities.
Webtech, Inc.
Webtech, Inc. was established in 1995 as HitCom's primary operating
subsidiary. Webtech's principal core product IntelliPages, was a user
friendly Internet resource that offered three kinds of city-specific
information consumers need and readily use. These included 1) Business
listings - a complete "online yellow pages" style directory, 2) News Now - up
to the minute local news, traffic, weather and sports, and 3) City
Information - a comprehensive guide featuring content such as local history
and culture, media, government, attractions, nightlife and special events.
The Company determined that Intellipages no long aligned with its strategic
objectives in March 1997 upon the acquisition of One Plus Marketing, Inc. (as
discussed below). As of December 31, 1997, management considers Webtech an
inactive subsidiary and expects to legally dissolve the subsidiary in 1998.
The operating activities of Webtech are not relevant in HitCom's current
operating structure or activities.
One Plus Marketing, Inc.
During 1997, the Company sought to realign its operating risks and as such,
it acquired 80% of the operations of One Plus. The acquisition was treated
for accounting purposes as a reverse merger. Under this accounting
treatment, One Plus became the accounting acquiror and the operating
activities of the accounting acquiror is presented for historical purposes.
The Company exchanged approximately 5.8 million shares of common stock for
80% of the outstanding stock of One Plus. The Company is currently pursuing
the purchase of the remaining 20% minority interest. However, the Company has
not finalized any of the proposed terms. While the Company is considering
the purchase of the minority interest in One Plus, there can be no assurance
that the Company will ultimately acquire the minority interest in One Plus.
Channel Telecom, Inc.
On May 29, 1998, the Company announced that it closed the Channel Telecom
Inc. ("Channel") acquisition. As part of the acquisition the Company
exchanged $175,000 and approximately 4.2 million shares of common stock for
all of Channel's outstanding shares. The Company has remitted $37,500 on or
prior to closing and the remaining balance of $137,500 is payable over a
six-month period ending December 31, 1998. The acquisition is effective
January 1, 1998. The Company expects to finance this acquisition through
either working capital or external bank and or equity financing. Channel's
1997 comparative and pro forma results are presented in the "Financial
Statements."
Channel owns a 50% interest in Sussex Service Bureau Inc., 1218396 Ontario
Ltd. ("Sussex"). Sussex provides Channel calling card technical
functionality through the processing of prepaid phone card activity via a
offsite telephone switch.
The Present Company
Today, the Company is engaged in the following products and services:
- - Interactive Voice Response/Voice Processing Services
- - PhoneCards and PhoneCard Platform Services
- - Internet Connectivity Services
The Company is expanding its research and development to support an
aggressive internal growth plan and to attract additional strategic
acquisitions as well as to establish international partnerships that will
allow the Company to offer new IP (Internet Protocol) telephony driven services
abroad. Today, the Company uses a proprietary PC-based network to handle its
call volume. However, the Company is in the final stages of developing a new
proprietary- switching platform utilizing Excel switching hardware that will
greatly increase and enhance the Company's capabilities. The Company also
plans to license and resell its proprietary switching software as an Excel
Value Added Reseller (VAR) to corporate clients throughout the world.
In first quarter of 1998, the Company announced that Channel was the official
network provider for the Rolling Stones prepaid phonecards. The Rolling
Stones prepaid phonecards are available at concerts, the Rolling Stones
merchandise catalog and in select retail outlets.
The Company has also committed some of its resources to developing a premium
Internet connectivity service targeted at high-end Internet users. One Plus
plans to further integrate its voice and Internet technology to introduce
services using CTI (Computer Telephony Integration) and IP (Internet
Protocol) telephony.
Currently, the Company, including Channel employs approximately 35 full-time
people including managerial, administration, technical and sales personnel.
Products & Services
The following section has been divided by product category. Each product
category listed below includes the product/service the Company, including One
Plus and Channel, offers.
Interactive Voice Response/Voice Processing Services
800Link
One Plus' 800Link has become a favorite Interactive Voice Response(IVR)/Voice
Processing Platform for several Direct Sales Organizations in the United
States. The Company's significant Direct Sales Organizations are comprised
of - Global Prosperity Marketing Group, Golf Connections, Travel Dynamics,
Wealth Masters and Alive International.
The basic service includes:
- - Up to a 5 minute greeting time
- - Up to a 2 minute message time
- - Holds up to 40 messages with a 14 day storage time
- - Personal Security Code for retrieving messages
- - Time and date stamp for each incoming message
- - Caller ID
- - Online account status
- - Monthly account status mailing, including usage detail and balance information
For an additional fee, other features can be added to an 800Link account.
They include:
- - Calling card capabilities
- - Call forwarding (follow me service)
- - Automated attendant
- - Extended greeting time (up to 30 minutes)
- - Reduced response (from 2 minutes to 1 minute)
- - Group broadcasting (broadcast the same message to a specified group)
- - Call rotation (allows one incoming number to be rotated evenly to a group)
- - Fax back
- - Fax on demand
- - Fax broadcast (allows broadcast faxing to a list of fax numbers almost
instantly)
GAP LINES
The GAP lines allow subscribers to pre-record a message that their clients
and prospects can access using an 800 number and a Personal Identification
Number ("PIN") to listen to the message. The minimum message length is 10
minutes.
CUSTOM APPLICATIONS
One Plus can develop a custom IVR application for virtually any situation.
For instance:
- - Automated online surveys (allows a caller to complete a survey using the
telephone)
- - Automated locator service (allows a caller to find the location nearest to
them)
- - Automated payment systems
All of the Company's IVR services are marketed through One Plus. The
marketing effort consists of nationally placed advertisements that attract
prospects to obtain the Company's 800Link services. Nevertheless, the
majority of new business is still generated through referral. Currently,
these products are marketed in the US and Canada.
One Plus has been successful in selling its 800Link service to small
businesses and Direct Sales Organizations. However, the Company has had a
limited sales effort as the Company could not provide the necessary capital
requirements to build a technology infrastructure supporting growth in its
new subscriber base with an enhanced sales effort.
With the implementation of the Company's new telco-grade switch-based
platform, One Plus will now have the capacity it requires to greatly expand
the number of 800Link users. Accordingly, the Company expects to expand its
advertising efforts to attract new subscribers. The Company's advertising
efforts are expected to include enhanced marketing data and increased sales
personnel.
The Company has also hired a new Account Manager to approach additional
Direct Sales Organizations (DSO). DSO's use the Company's 800Link to provide
needed advertising support and communication services to their participants.
Phone Card and Phone Card Platform Services
Channel PhonePass
The Channel PhonePass is one of the best selling retail phone cards in Canada.
Available in a variety of images, this high-end card has become a favorite
with tourists, card collectors, students and anyone who needs a phone card
for long distance convenience.
Some of the benefits include:
- - High commission rate for retailers
- - Multilingual voice prompts to ensure sales to foreign visitors and for
sales in ethnic communities
- - Significant savings over other direct dialing methods
- - Available in $10, $20, $30, $50, and $100 denominations
- - Point-of-sale marketing material available including posters, brochures and
displays
- - Consignment
- - Co-branding
- - Vending machines available for high volume locations
Channel plans to introduce a US version of the Channel PhonePass in the
second quarter of 1998.
Channel PhoneCash
The Channel PhoneCash is a deep discount card offering rates that are
competitive or lower than most residential long distance rates, providing the
best value to consumers and excellent margins for retailers, particularly in
high traffic areas.
Some of the benefits include:
- - Local and 1-800 access numbers
- - Available in $5, $10, $20, and $50 denominations
- - Co-branding
- - Point-of-sale marketing material available including posters, brochures and
displays
- - Vending machines available for high volume locations
Channel plans to introduce a US version of the Channel PhoneCash in the
second quarter of 1998.
CUSTOM CARDS
Channel has created completely customized prepaid phone cards for resale or
promotional/institutional use.
Custom cards can carry a company image and logo, product imaging, or any
custom design or text desired.
Some of the customer benefits include:
- - Turnkey custom service and advice including market planning, card design
and development, card manufacturing, inventory tracking and fulfillment, and
production of point-of-sale marketing material available including posters,
brochures and displays.
- - Custom voice prompts can be implemented so that customized company or
product messages can be used to greet card users and additional options can
be implemented which allow card users access to other information about a
company or product.
- - Available in any denomination.
COLLECTIBLE CARDS
Channel has also premiered its first "collectible" prepaid phone card.
Through an exclusive worldwide licensing agreement, Channel markets a
numbered, four card series featuring the world famous Rolling Stones.
Channel is currently working with other entertainment and sports celebrities
to gain the rights to market prepaid phone cards that carry their trademark
names and images.
There are only a handful of companies in Canada with national presence in the
phone card marketplace. Channel is one of those companies. Further, several
of the major players in Canada do not own their own switching platform and
must rely on a third party service bureau.
Service Bureau
Utilizing the Company's proprietary switching platform and customer service
center, the Company has recently introduced a service bureau for other phone
card sales and marketing organizations. This turnkey solution allows a
non-switch-based marketer of prepaid phone cards to purchase the required
network services from the Company.
The Company's service bureau features:
- - Processing of over 3 million minutes per month. The network is capable of
processing 25 million calls per month
- - 24-hour customer service
- - 24-hour technical staff and system monitoring
- - Excel Switching Platform
- - Competitive rates
- - Superior performance quality
- - Telecommunication expertise
Prior to 1998, the Company's marketing of its phone card capabilities was
limited. With the acquisition of Channel, there efforts will be expanded in
both the US and Canada. All of the Company's PhoneCard products and services
are now marketed under the Channel name (Channel Telecom and Channel Telecom
USA).
Internet Connectivity Services
The Company, through its One Plus subsidiary, markets premium Internet
connectivity services to commercial accounts in the St. Louis, Missouri
market. Internet connectivity services allow the Company's customers access
to the Internet through various methods such as dial up access, dedicated
connections, etc. Those services include:
- - Dedicated ISDN connectivity
- - Dedicated T-1 connectivity
- - Web site development and hosting
- - Related Internet and web services
The Company's Internet connectivity is provided using its state-of-the-art,
100% digital network featuring Cisco 7513 routers and a direct ATM/ fiber
optic connection to the Internet. The Company's service quality offers enhanced
levels of security and 24-hour monitoring and customer support.
The Company's Internet services were introduced to the St. Louis market in
the fall of 1997. The Company's primary objective with its Internet services
sales efforts is to subsidize, and potentially profit from, the Internet
technology (i.e., IP telephony) research and development. During 1997, the
Company expended approximately $500,000 to support its Internet Connectivity
Service products and services.
The St. Louis market consists of approximately 25,000 businesses that fit the
Company's target market for connectivity services. Currently, the Company
serves approximately 100 St. Louis clients.
IP Telephony Related Services
International Fax-to-Fax
The Company's international fax-to-fax service will allow its customers to
fax from developing countries to the United States and Canada at greatly
reduced rates over traditional fax transmission utilizing current long
distance providers. The Company expects to begin marketing its international
fax-to-fax services in late 1998 from at least one international gateway.
Depending upon the success of the international test market, the Company
expects to add international gateways in 1998.
Continuing worldwide deregulation and advancing IP telephony technology is
opening a variety of IP telephony market niches - both domestically and
internationally. The Company has devoted a portion of its resources to the
research and development of several IP telephony related products/services as
well as international market research.
To date the Company has expended insignificant funds relating to research and
development but has completed the design phase of its IP telephony network,
including the US hub gateway. Over the next few months, the Company expects
to complete the provisioning and installation of the hub gateway in the United
States. Hub gateways represent computer platforms equipped with specialized
software and hardware designed to accept local fax communications and route
them over a combination of the Internet and conventional long distance means
to a determined destination.
The Company has decided to pursue these international products based on the
following considerations:
- - Voice telecommunication has more stringent regulations compared to data
(fax) transmission. Even though the Company's IP technology will eventually
carry voice communication, several technical advancements (quality of voice
transmission, transmission stability, etc.) will need to occur in the
industry before this becomes a practical reality.
- - Faxing from most developing countries to the US and Canada is very
expensive. The Company's international fax could be less expensive than
current methods.
- - Fax machines are not as readily available as compared to the US and Canada.
- - The Company has already established key relationships in India and Brazil
that would increase the Company's possibility of success.
Switch Platform Services
In 1998, the Company expects to begin licensing its proprietary switching
technology to organizations throughout the world. The package is expected to
licensed/sold as a turnkey telecommunications platform including all the
necessary hardware and software to get up and running. The software will be
sold in a modular fashion, each module providing a specific function.
Additional modules, optional support packages and upgrades (capacity
expansion) will be offered separately.
The Company purchased an Excel LNX 2000 switch and began development of the
platform in late 1996. Programming for low level switch functionality, or the
"Switching Engine" was completed in the fall of 1997. Work has begun on
several of the "modules," specifically the User Interface Console and Phone
Card modules with an expected completion date in the second quarter 1998.
Before the platform is ready for commercial use, comprehensive documentation
must be written and technicians for customer support recruited and trained.
As these issues are being addressed, development of additional modules will
continue. Platform sales are expected to commence in late 1998.
The Company's goal is to offer a proprietary state-of-the-art, non-blocking
digital switching system which will allow integration of voice processing,
database and networking technologies to provide turnkey and custom telephony
products. Specifically, the system will be aimed at the following marketing
applications:
- - Prepaid and postpaid calling card authorization
- - Prepaid wireless
- - Voice mail
- - Information line
- - 1+ service
- - Callback
- - Enhanced services
- - Stored value transactions
- - Smart card applications in closed environments
- - Other
Industry Overview
Telecommunications Industry Overview
Canada is going through the final phases of deregulation in the
telecommunications industry. There are two specific areas of deregulation
which will create new opportunities in the phone card industry in 1998;
swipe access functionality and elimination of Teleglobe's (Canada's licensed
company with exclusivity to carry international voice traffic) monopoly on
overseas long distance services.
Until late 1997, Bell Canada and the Stentor Alliance had a monopoly on
"swipe" access. Swipe access allows cards to have magnetic stripes which
encode the 1-800# and the PIN# to be dialed on the cards. The cards can be
swiped on any of Bell Canada's pay phones (approximately 70,000) eliminating
the user having to enter the 1-800# and their PIN#. Channel expects to have
swipe functionality on its cards in 1998.
The CRTC (Canada's governing telecom regulator) has ruled that Teleglobe's
monopoly on overseas long distance services must be eliminated by October
1998. This will drive down the price of overseas long distance in Canada to
be more in line with the U.S. Currently Canadian pricing is 30-40% higher
than in the U.S. Lower pricing will increase volume and create short-term
arbitrage opportunities for companies. The Company expects to be positioned
to take full marketing advantage during this time period.
Telecommunications is a complex, rapidly evolving $200 billion industry
affecting every aspect of our lives. Telecommunications no longer refers only
to local and long distance telephone communications. Instead, the industry is
now made up of everything from cellular and satellite or "wireless"
communications to interactive voice and voice mail messaging; from data
transmission, including fax, to voice and video conferencing; and from
Internet and intranet connectivity to cable television. That's just today.
The industry is currently experiencing an unprecedented introduction of new
and enhanced communication technology and services.
The way these services are purchased is changing as well. Not that long ago,
only select groups were able to benefit from the latest communication
advancements and conveniences available. Today, people from every social
economic background are familiar with local and international communications
services and technologies. As a result, prepaid phone cards, prepaid cellular
and even prepaid dial tone have witnessed explosive acceptance and growth.
In the decade since the mid-1980's, divestiture, deregulation and the advent
of computer telephony integration (CTI) have "reopened" a virtually monopolized
industry to promote unparalleled competition and expansion. Now, in addition
to the major players - AT&T, MCI, Sprint and WorldCom - other companies, like
the Company, are able to successfully compete and thrive by developing new
technologies and pursuing niche markets and opportunities.
By focusing and building upon the products and services that employ computer
telephony, the Company has been able to take advantage of the enormous demand
for alternative and specialized providers and services. Specifically, the
Company has established itself in four segments of the industry. They are:
- - Interactive Voice Response services
- - Prepaid phone cards and phone card platform services
- - Internet connectivity services
- - IP (Internet telephony) services
A more detailed explanation and overview of each of these segments follow:
Interactive Voice Response (IVR)
Interactive Voice Response (IVR) includes a variety of voice processing and
messaging services. IVR allows a user to access, store and carry out
transactions by using his voice or the keypad of a touch tone telephone. For
instance, simple call routing - "Press 3 for Customer Service" - is a type of
IVR. So is "Bank by Phone" and "For the nearest location, enter your zip
code." In essence, IVR allows any telephone to become a computer terminal. In
addition to these applications, businesses are developing thousands of new
applications each year that allow them to benefit from the efficiencies and
cost savings surrounding this relatively new technology.
As new uses and consumer acceptance have developed, so has the technology.
Now, instead of using the keypad alone, the systems are using Voice
Recognition to accept and act upon commands. Then, text-to-speech technology
can actually "read" information to the caller from text fields in computer
databases. Of course, there are other, less dramatic, uses for IVR, including
simple voice mail, fax broadcasting and "follow-me" call and fax routing
services.
The Internet is also having an impact on IVR. As increasingly larger numbers
of people are researching and communicating (e-mail) via the Internet, IVR
applications are being used to integrate the telephone and the Internet. An
example would be calling a voice mail system to retrieve e-mail using a
text-to-speech system.
Industry analysts report the IVR market was $1.5 billion in 1995 and predict
it to grow to an estimated $3.7 billion in 2002.
The Company entered the market by providing large Direct Sales Organizations
with customized voice processing systems that allow each member of a national
or international sales organization a method by which the response from a
large advertising campaign can be handled 24 hours a day and pertinent data
reported to the membership almost instantly. In addition, such organizations
are able to broadcast such things as product specifications (by voice or fax)
and motivational messages to their teams. In addition to this market niche, the
Company develops and implements several other custom applications for its
clients, such as automated surveys and fax-on-demand.
Prepaid Phone Cards and Phone Card Platform Services
Prepaid phone cards, originally introduced in Europe in the early 1980's,
have been gaining popularity in the US since 1992, and Canada since 1994. A
prepaid phone card permits a consumer to purchase a "card" (actually an
account) with a preset denomination of call time or "minutes" available. The
consumer can then use the card from virtually any touch tone telephone by
calling a local or toll-free (800 or 888) number to access a "network"
provided or contracted by the card issuer to make a local or long distance
(including international) telephone call.
There are currently two types of prepaid phone cards in use:
Remote Memory Card - a card that has an account number
and a PIN printed or coded into a magnetic strip. This
card does not actually keep track of the usage or time
remaining on the account. Instead, it tells a computer
database on the other end of the line the caller's
identity, allowing the system to "look-up" the most
current account information and balances.
Smart Card - a smart card, unlike a remote memory
card, actually provides data storage, using a tiny
computer chip, of the account usage and balances on
the card itself. Smart card technology has been used
in European markets for several years, and has been
recently introduced in the United States and Canada.
Unlike remote memory cards, smart cards require
"readers" that are not currently available on most
North American telephones.
The Company primarily uses remote memory prepaid phone cards. Initially,
when prepaid phone cards were introduced in North America, they were used by
advertisers as promotional items. For example, a major beverage company gave
everyone who purchased a 12-pack of their product, a free 10-minute card as a
premium for choosing their product. Promotional cards accounted for nearly
60% of the market in 1995. However, 1997 indications are that only about 40%
of prepaid cards are issued for promotional use and that number is steadily
decreasing as the retail market increases.
The retail segment consists of the following primary buyers: transients, the
credit challenged, immigrants, tourists, business travelers, truckers,
students, and those who do not typically carry money (e.g., children). The
shift from promotional use to retail as well as the changing user
demographics clearly indicates that phone cards are now a well established
and accepted consumer product in North America.
There are primarily two types of prepaid card issuers. Facility-based, those
who have their own platforms and non-facility-based, those who market the
cards and outsource their network needs to facility-based companies that resell
prepaid phone card network services through its own service bureau. The
Company is a facility-based card issuer.
The growth of the prepaid phone card market has been extraordinary. According
to industry research, the US market was about $500,000 in 1992 and grew to
$500 million by 1994. In 1996, the US prepaid calling card market surpassed
the billion-dollar mark, exceeding all expectations of industry and analysts.
A report released in early 1997 by Atlantic-ACM, a Boston-based market research
firm that tracks the telecommunications industry, predicted the sales of
prepaid cards would reach $2.5 billion by the millenium. Later in 1997, due
to unanticipated sales growth within the retail segment, Atlantic-ACM
increased its long-term forecast by more than 50%. The research firm now
estimates overall revenues for prepaid phone cards to be $2.7 billion in 1997
and $4.3 billion by 2001.
Internet Connectivity Services
Even though the Internet's roots date back to a 1960s' US Department of
Defense network project, it wasn't until the mid-1990s that its mass
acceptance and communications potential exploded. In 1997, an American
Internet Usage Survey estimated that 31.3 million adults were using the
Internet and 55 million were poised to become Internet users within the next
few years.
As users continue to benefit from their use of the Internet, the need for
"bigger, safer, faster" connections has also increased. Consumers, who
previously used the Internet as a novelty for entertainment purposes have now
become "dependent" on it for research and communications. Many businesses
have found a connection to the Internet to be as important as a telephone and
a fax machine when communicating with their customers and suppliers.
According to a 1997 research report by International Data Corporation (IDC),
Internet connectivity is estimated to be a $1 billion business in 1997, with
revenue expectations projected to be $4 billion by 2000.
Even though the Company offers a premium Internet connectivity service to
commercial clients, the Company's Internet connectivity sales are used to
subsidize its ongoing research and development of applications that will
allow it to benefit from as well as develop for sale emerging concepts and
technologies relating to Internet Protocol (IP) or IP telephony. The Company
has approximately 100 clients located in the St. Louis, Missouri market.
IP Telephony
IP Telephony represents the routing of voice and data traffic though the
Internet. IP telephony is now in its infancy but, by all indications, will
quickly become a major factor in the telecommunications industry. IP
telephony is the convergence of CTI (Computer Telephony Integration) with the
Internet. CTI represents the integration of computers and telecommunication
functions. Computers with specialized software and hardware are used to
route phone calls, handle messages, etc. The resulting products and services
enhance both the telephony and computer environments and also create new hybrid
applications. A sampling of existing CTI technologies and applications
include intelligent PBXs (Private Branch Exchanges), IVR (Interactive Voice
Response), ACDs (Automatic Call Distribution centers), fax servers, voice
mail and messaging, cellular phone services, modems and ISDN.
These new IP telephony applications include PC-to-PC connections, PC-to-phone
connections, and phone-to-phone connections. IP telephony applications
include voice over the Internet and intranets, fax traffic, Web enabled IVR,
Unified Messaging and more.
Some specific applications include:
Voice Applications. IP-based networks can be used to
carry voice in real-time. This capability is provided
through the use of "packetization," where the voice
is digitized and transmitted over the Internet in
packets. The cost, particularly for international
calls can be 90% less than that of placing a regular
long distance call. In addition, voice by-pass
increases the number of lines available so those users
with only a single phone line can now make voice calls
while on the internet.
Fax Applications. Like voice by-pass, fax-to-fax
converts fax signals into "packetized" data. As a
result, fax-to-fax can dramatically cut the cost of
sending long distance faxes, especially overseas, by a
factor of 10 or more, without the need for end users
to purchase additional equipment.
ACD/Call Center Integration with the Web. Call centers
queue and connect incoming telephone calls to service
staff who usually have computers at their desks
providing sales and product information.
Unified Messaging Delivery via the Web. Unified
messaging with IP telephony allows a user to access
multiple media types (voice, fax, e-mail) and multiple
systems, all through a Web browser and, by implication,
from across the Internet.
Conferencing. IP telephony enables networked computer
users to conduct one-on-one, one-to-many and many-to-
many conferences, greatly reducing the cost of
conference calls.
Internet-Enabled IVR. IVR can be integrated with Web
technology, allowing users to navigate IVR menus from
their Web browsers instead of their telephone handsets.
Existing IVR resources can be made available through Web
tools and the Internet.
In 1998, the Company expects to begin marketing its first IP telephony based
service - an international fax-to-fax service that will dramatically cut the
cost of sending international faxes from the Company's "gateway countries" to
the US.
Switch Platform Services
As the telecommunications industry and product offerings have changed, so
have the networks that process the communication. Until recently, telecom
companies used massive switch networks that could perform the more routine,
and most needed services - predominantly connecting one caller with another
caller. However, with the influx of new services - voice, data, fax, video,
conferencing, etc. - more sophisticated and flexible switching technology is
required.
Today's more robust switching technology is most often achieved using
PC-based platforms or switch-based platforms. PC-based platforms are composed
of standard PCs equipped with specialized hardware and software to provide
the necessary functionality. PC-based platforms are generally sufficient to
meet the needs of organizations with a moderate call volume and switching
needs. The significantly more expensive switch-based platforms, which are
built around a "programmable switch," provide a platform naturally suited to
high call volume environments and afford virtually unrestricted switching
flexibility.
Most telecom companies prefer switch-based platforms. And, even when a
company can afford to purchase switch hardware - manufactured by companies
like Excel, Harris, Summa Four, Siemens, NEC and Lucent Technologies -
acquiring software to control the switch, installation and maintenance are up
to the customer.
The abundance of new telecommunications companies combined with those
existing companies that need to upgrade their networks to offer the new
services, is creating an opportunity for companies which have developed their
own proprietary switching platform. Adding to the demand is the fact there
are only a limited number of companies that provide this required switching
expertise.
It appears the world market for intelligent telephony solutions is immense.
According to information obtained from Cabling Installation & Maintenance
Magazine, CTI software and expertise is one of the fastest growing service
sectors. The potential telephony market industry, which would have an
application for the proprietary technology the Company is developing, is
estimated to be $6.3 billion in 1997 and $13.4 billion by 2000.
The Company's goal is to become an Excel VAR (Value Added Reseller) by the
end of 1998. To obtain the designation of an Excel VAR, the Company must
demonstrate to Excel, Inc. (switch manufacturer) that it provides reliable
software that integrates with the Excel switch.
Excel represents a switching platform. If a company desires to operate an
Excel switch they need to secure, either through developing or purchasing
appropriate software to handle its functionality. The Company is currently
integrating its existing software to operate an Excel switch. Upon the
completion of integration, the Company will be able to license and sell its
software to third parties that desire to operate an Excel switch.
ITEM 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company principally derives its revenues from the sale of interactive
voice response/voice processing services to Direct Sales Organizations.
These customized voice processing systems allow each member of a national or
international sales organization a method by which the response from a large
advertising campaign can be handled 24 hours a day and pertinent data
reported to their membership almost instantly. The Company generally
requires its customers to establish a minimum account balance prior to
receiving voice mail service. The Company recognizes revenues as services
are rendered. Account balances in excess of services rendered are recorded as
deferred revenue. Account balances without activity for 180 days are treated
as revenue.
Effective April 1, 1997, the Company acquired 80% of the outstanding stock of
One Plus Marketing, Inc. (the "Acquisition") for 5,837,503 shares of the
Company's common stock. The Acquisition was accounted for as a reverse
acquisition in accordance with APB No. 16 "Business Combinations." As such,
One Plus Marketing, Inc. is considered the "accounting acquiror." The
historical financial statements prior to April 1, 1997 are those of One Plus
Marketing, Inc.
RESULTS OF OPERATIONS AND CASH FLOWS
The following table sets forth certain financial data of the Company for the
years ending December 31, 1997 (pro forma) and 1996. Note that since the
Acquisition has been accounted for as a reverse acquisition, the 1997 results
reflect the three-month period ended March 31, 1997, for One Plus combined
with the Company's nine-month period ended December 31, 1997.
(Unaudited) (Unaudited)
1997 1996
Net revenues $3,568,167 $1,927,142
Costs and expenses:
Cost of sales 1,969,358 1,077,090
Selling, general and administrative 1,418,250 442,359
Total costs and expenses 3,387,608 1,519,449
Operating income 180,559 407,693
Other expense (income)-net 50,566 (13,493)
Income before income tax benefit and
minority interest 129,993 421,186
Tax benefit (885) --
Income before minority interest 130,878 421,186
Minority interest 64,257 --
Net income $66,621 $421,186
(Unaudited) (Unaudited)
1997 1996
Cash flows from operating activities:
Net income $66,621 $421,186
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities
Depreciation and amortization 70,594 26,235
Minority interest in earnings of
subsidiaries 64,257 --
Deferred tax benefit (885) --
Changes in assets and liabilities:
Accounts receivable-net (80,864) (85,185)
Prepaid expenses and other 39,900 (67,041)
Other assets (25,513) --
Accounts payable and accrued expenses (267,805) 30,313
Deferred revenue 77,441 254,520
Net cash provided by (used in)
operating activities (56,254) 580,028
Cash flows used in investing activities:
Purchase of property and equipment (76,483) (243,005)
Cash acquired in reverse acquisition 1,052 --
Net cash used in investing activities (75,431) (243,005)
Cash flows provided by financing activities:
Shareholder distributions (94,424) --
Payments on capital leases (1,961) --
Purchase of stock for treasury (9,712) --
Common stock canceled (7) --
Net cash used in financing activities (106,104) --
Net increase (decrease) in cash and cash
equivalents (237,789) 337,023
Cash and cash equivalents:
Beginning of year 426,589 89,566
End of year $188,800 $426,589
Prior to April 1, 1997, One Plus was an S Corporation for tax purposes and
the One Plus' stockholder elected to be treated as an "S" Corporation under
provisions of the Internal Revenue Code which provides that, in lieu of
corporate income taxes, the stockholder is taxed for the Company's taxable
income. Therefore, no provision or liability for federal and state income
taxes is reflected in the financial data for periods prior to April 1, 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO 1996
NET REVENUES. Net revenues increased $1,641,025 or 85% from $1,927,142 in
1996. Revenues are primarily generated from the Company's interactive voice
response products and services. The increase in net revenues is attributable to
the associated growth in the Company's subscriber bases. The Company
currently has in excess of 15,000 subscribers on the One Plus network which
handles more than one million calls per month. At December 31, 1996, the
Company had approximately 6,000 subscribers on the One Plus network handling
more than 700,000 per calls per month.
COST OF SALES. Cost of sales increased $892,268 or 83% from $1,077,090 in
1996. The cost of sales percentage to net revenues decreased from 56% to
55%, thus gross profit margin increased correspondingly. Cost of sales
primarily represents the long distance minutes purchased to service the
interactive voice response products and services and, thus, increased as a
result of the increase in net revenues discussed above. The Company
purchases long distance minutes from a highly competitive service market. In
late fourth quarter 1997, the Company was able to renegotiate its long
distance per minute rate with its current service provider. The Company
expects its interactive voice response gross profit percentage to increase
between 1 and 2 percent in 1998 as a result of its affiliation with its long
distance service provider.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased $975,891 or 121% from $442,359 in 1996. The selling,
general and administrative percentage to net revenues increased to 40% from
23%. The primary reasons for the increase were attributable to professional
fees and other expenses associated with the re-engineering and restructuring
of the Company in the third and fourth quarters of 1997, combined with the
additional cost requirements to support the enhanced administrative
functions and to become a Securities and Exchange Commission reporting company.
OTHER EXPENSE (INCOME), NET. Other expense (income), net increased $64,059
from income of $13,493 in 1996. The primary reason for the increase was
attributible to the Company's re-engineering and restructuring costs in the
third and fourth quarters of 1997.
MINORITY INTEREST. Minority interest increased $64,257 from no activity in
1996. Minority interest represents a 20% ownership interest in the Company's
subsidiary One Plus owned by the major stockholder of the Company.
NET INCOME. As a result of the foregoing, net income for the year ended
December 31, 1997, decreased by $345,565 or 84% compared to 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows from Operating Activities
During 1997, the Company had net cash flows used by operating activities of
$56,254 as compared to net cash provided by operating activities of $580,028.
Effective with the "reverse merger" acquisition of One Plus, the Company
assumed an immediate increase in accounts payable and accrued expenses of
$1,150,960. Cash from operations was used to reduce these liabilities.
Cash Flows from Investing Activities
During 1997 and 1996, the Company used $76,483 and $243,005 for purchases of
property and equipment related principally to support the Company's
interactive voice response operations.
The Company's total budgeted capital expenditures, including acquisitions,
are currently anticipated to be approximately $1.5 million during 1998 in
connection with the purchase of strategic interactive voice response and
prepaid phone card operations, the minority interest of One Plus and enhanced
phone card computer system upgrades. The Company expects to fund these
expenditures through equity financing and bank borrowings. Although management
anticipates that the Company will continue to expand, there can be no
assurances that the Company's expansions plans will not be adversely affected
by competition, market conditions, or changes in laws or government regulations
affecting telecommunication businesses.
Cash Flows from Financing Activities
The Company maintains a $100,000 secured revolving credit arrangement with a
bank that bears interest at the bank's prime rate plus one percent (prime was
8.5% at December 31, 1997) and expires on April 24, 1998. The Company has
pledged its assets as security for the existing indebtedness. At December
31, 1997, the entire credit arrangement available has been used by the
Company. In May 1998, the Company secured two new separate credit facilities
with a bank totaling $535,000. The Company obtained a $385,000 long-term
note and a $150,000 line-of-credit to support future acquisitions and working
capital. The previous revolving line-of-credit arrangement outstanding at
December 31, 1997 was retired.
SUBSEQUENT EVENTS
On May 29, 1998, the Company closed its acquisition of Channel telecom, Inc.
("Channel") located in Toronto, Canada. Channel is the fourth largest
facility based provider of prepaid phone calling cards in Canada. The
Company exchanged approximately 4.2 million shares of its common stock and a
note totaling $165,000 payable over a seven-month period. In exchange, the
Company received 100% of Channel's outstanding stock. The effective date of
the transaction is January 1, 1998.
OTHER MATTERS
Impact of Year 2000 Issue
The "Year 2000" issue is a general term used to describe the various problems
that may result from the improper processing of dates and calculations
involving years by many computers throughout the world as the Year 2000 is
approached and reached. The Company has reviewed the impact of Year 2000
issues and does not expect any remedial actions taken with respect thereto to
materially adversely affect its business, operations or financial condition.
IMPACT ON INFLATION
Management believes that the Company's results of operations are not
dependent upon the levels of inflation.
PLAN OF OPERATION
Management believes that it can continue to fund its operations at current
revenue levels. However, management has planned an aggressive future revenue
growth plan through acquisitions and increased market shares and thus,
expects to complete a private placement in the second quarter of 1998 to
provide additional funds for working capital, property and equipment
purchases and acquisitions that compliment the Company's strategic goals and
objectives. As of June 15, 1998, the Company has received $400,000 from one
investor attributable to its current private placement offering. The Company
has designed its private placement offering under Regulation D, exemption
4(2) of the Act to raise gross proceeds of $1.5 million with a minimum
requirement of $1 million. The transaction is sold in units at $1, where
each unit is equal to one share of common stock and one warrant at $1.40 per
warrant. Furthermore, if the units are not registered by December 31, 1998,
each holder of a unit will receive a common stock premium adjustment equal to
15% of initial investment.
ITEM 3-DESCRIPTION OF PROPERTIES
The Company operates its interactive voice response and prepaid phone cards
through the following leased offices (includes the Channel locations):
Location Sq Ft Functionality
700 North Second Street Administration/
St. Louis, Missouri 63102 5,910 Technical
3775 Tosovsky Edwardsville,
Illinois 62025 5,605 Operating
85 Scarsdale Road Suite 202
Toronto, Ontario M3B2R2 2,500 Administrative
736 Granville Street, Suite 127
Vancouver, British Columbia V6Z1G3 331 Administrative
Total 14,346
The Company believes its facilities have generally been well maintained, are
in good operating condition and are adequate for the Company's current
requirements.
ITEM 4-SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth the number of shares of the Company's Common
Stock owned by each person who, as of June 1, 1998, and adjusted was known by
the Company to own beneficially more than 5% of its outstanding Common Stock
and the ownership of all Executive Officers and Directors of the Company,
individually and as a group.
Name and Address of Number of Shares Percent of Class
Beneficial Owner Beneficially Owned (1)
Scott A. Beil, 700 North
Second Street Third Floor,
St. Louis, Missouri 63102 5,837,012 48.1%
Rajan Arora, 700 North
Second Street Third Floor,
St. Louis, Missouri 63102 1,987,785 16.4%
Jeffery S. Shier, 700 North
Second Street Third Floor,
St. Louis, Missouri 63102 1,987,785 16.4%
Anthony W. Hitt, 700 North
Second Street, Third Floor,
St. Louis, Missouri 63102 1,005,391 8.3%
Officers and Directors as
a Group 10,817,973 89.2%
__________________
(1) As of June 1, 1998, the Company had outstanding 12,128,852 shares of
Common Stock.
ITEM 5-DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS
The following table sets forth certain information concerning the directors,
advisory directors and key management of the Company:
Name Position Age
Scott A. Beil Chairman & Chief Operating Officer/Director 29
Rajan Arora President & Chief Executive Officer/Director 33
David B. Parks Executive Vice President, Chief Financial
Officer & Corporate Secretary/Director 32
Jeffrey Shier Executive Vice President, Sales &
Marketing/ Proposed Director 36
Ronald K. Mann Proposed Director 47
Scott A. Beil, Chairman and Chief Operating Officer/Director
Scott A. Beil founded One Plus Marketing, Inc., a telecommunications and
voice processing company in 1991, where he has been employed since its
founding. In addition to developing a unique sales and marketing approach that
resulted in doubling in size every year since inception, Mr. Beil designed,
built and managed the proprietary PC-based network that continues to handle
the Company's call volume today.
In April 1997, the Company acquired 80% of One Plus Marketing, Inc. At that
time Mr. Beil became the Company's Chairman and CEO. In the year since the
acquisition, Mr. Beil has successfully recruited and led a team of
professionals who will be responsible for the aggressive growth plans of the
Company.
To date, Mr. Beil has personally designed the technical specifications and
guided the programmers who are responsible for research and development of
the Company's new, proprietary telco-grade Excel switch-based platform. With
the acquisition of Channel Telecom, Mr. Beil will continue to act as Chairman
and focus more intensely on the development and management of the
state-of-the-art switching platform as well as other emerging technologies
that will lead the Company into the next century. In addition to overseeing
design, development and provision of the technology solutions that form the
Company's technology infrastructure; Mr. Beil remains active in the day-to-day
operations and financial aspects of the Company.
Mr. Beil earned his Bachelor of Science degree in Electrical Engineering from
the University of Illinois.
Rajan Arora, President & Chief Executive Officer/Director
Rajan Arora co-founded Channel Telecom Inc., now Canada's fourth largest
facility-based prepaid phone card company, in 1994. Mr. Arora has been
instrumental in the development and implementation of the strategic plan that
has successfully gained Channel national, and now international, attention
and market share.
With the closing of the Channel Telecom Inc. acquisition, Mr. Arora became
the Company's president and Chief Executive Officer and a member of the
Company's Board of Directors. In this position, Mr. Arora is assisting the
Company in the completion of its new strategic business plan. Mr. Arora will
now oversee the implementation of the Company's aggressive plan that includes
internal sales growth, growth through acquisitions and development of a
significant international market for several new services.
From 1990 to 1993, Mr. Arora was Vice President of Finance for Madison Avenue
Partners, Ltd., a sports and promotional marketing company. Prior to that,
Mr. Arora was a Manager at the public accounting firm of Price Waterhouse in
Toronto.
Mr. Arora earned his Bachelor of Arts degree in Economics and Commerce from
the University of Toronto and is a member of the Institute of Chartered
Accountants of Ontario.
David B. Parks, Executive Vice President, Chief Financial Officer & Corporate
Secretary/Director
David B. Parks became the Company's Executive Vice President and Chief
Financial Officer in January 1998. In March of 1998, Mr. Parks was elected
to Corporate Secretary and Director of the Company.
Prior to joining the Company, Mr. Parks spent eight years with the public
accounting firm of Arthur Andersen, LLP. As an Audit Manager, his client
responsibilities included significant public company reporting.
After leaving public accounting, he held the positions of Director of
Internal Audit for a Fortune 500 company and Vice President and Chief
Financial Officer for a large privately held real estate holding company that
was acquired by a publicly traded REIT.
Mr. Parks earned his Bachelor of Science degree in Accounting from the
University of Missouri and is a Certified Public Accountant.
Jeffrey Shier, Executive Vice President, Sales & Marketing/Proposed Director
Jeff Shier co-founded Channel Telecom, Inc. with Rajan Arora in 1994. Mr.
Shier's strong sales and marketing background has been integral in Channel
building one of Canada's largest retail distribution networks for prepaid
phone cards. Mr. Shier is expected to become a Director of the Company upon
the closing of the Company's acquisition of Channel Telecom Inc.
In 1993, and prior to his involvement in Channel Telecom Inc., Mr. Shier
formed Channel Sports Marketing, Inc. which has become Canada's largest
supplier of high-end sports related memorabilia and collectibles. Mr. Shier's
experience in the sports and entertainment memorabilia industry has crossed
over to his role at Channel, and now the Company. Recently, Mr. Shier
negotiated a worldwide exclusive agreement to market collectible prepaid phone
cards featuring the world famous Rolling Stones.
As the Company's Executive Vice President, Sales & Marketing, Mr. Shier will
continue to increase Channel's Canadian phone card market share by doubling
the size of the sales organization and expanding the Company's predominantly
central market presence to nationwide coverage. Mr. Shier will also play an
important role in the US replication of Channel's Canadian phone card marketing
success, the introduction of several emerging technology services in Canada
and the Company's international expansion.
From 1988 to 1990, Mr. Shier was Director of Arbitrage at Counsel Capital
Corporation in Toronto.
Mr. Shier earned his Bachelor of Arts degree in Economics from the University
of Western Ontario.
Ronald K. Mann, Proposed Director
Ronald Mann is a practicing attorney in Toronto, Canada. Mr. Mann has acted
as a financial consultant for Channel Telecom Inc. since its inception in
1994. Mr. Mann is expected to become a Director of the Company upon the
closing of the Company's acquisition of Channel Telecom Inc.
Mr. Mann has served as a member of the Board of Directors for American Eco
Corporation, a publicly traded company on the NASDAQ and TSE exchanges from
October 1993 through September 1996. Mr. Mann has also been involved in
investment and merchant banking throughout Canada, the United States and
several international locations.
From 1987 to 1989, Mr. Mann was Assistant General Manager of Corporate
Finance for the Canadian Imperial Bank of Commerce in Toronto, and Chief
Financial Officer and Director of CIBC Securities, Inc., in Toronto.
Mr. Mann earned his Bachelor of Law degree from the University of Toronto.
ITEM 6-EXECUTIVE COMPENSATION
The following table sets forth certain information concerning executive
compensation of the Company:
Secur-
ities
Other Res- Under- All
Annual tricted lying LTIP Other
Name And Compen- Stock Options/ Pay- Compen-
Principal Salary Bonus sation Award(s) SARs Outs sation
Position Year ($) ($) ($) ($) (#) ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Scott
Beil
Chairman 1997 $42,005(1) $-- $-- ($)-- ($)-- ($)-- ($)--
and CEO 1996 $28,00 $-- $-- ($)-- ($)-- ($)-- ($)--
(1) Amount represents salary for the period from January 1 through
December 31, 1997
No compensation was paid or accrued by the Company to its Executive Officers
in excess of $100,000 for the years ended December 31, 1997 and 1996.
During the first quarter of 1998, the Company entered into an employment
contract with Mr. Parks. The employment contract covers an annual period
from January through December and may be renewed for subsequent periods. The
contract provides for a minimum annual base salary in 1998 of $80,000 and
$100,000 in 1999. Mr. Parks is also entitled to receive a minimum of
240,000 employee stock options to purchase the Company's common stock.
Mr. Parks' employment contract provides for a severance payment in the event
of termination or non-renewal by the Company without cause equal to nine
months, escalating at 1.5 months per future year employed limited to 12
months of the officer's base salary at the rate then in effect at the date of
termination or non-renewal.
The Company is in the process of negotiating employment and non-compete
contracts with Mr. Arora, Mr. Beil and Mr. Shier as contemplated by the
Channel acquisition.
ITEM 7-CERTAIN RELATIONSHIPS AND CERTAIN TRANSACTIONS
Not Applicable.
ITEM 8-DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of 12,500,000 shares of
Common Stock, $0.004 par value (the "Common Stock") traded on the NASDAQ
Stock Exchange OTC Bulletin Board under the symbol HICO and 5,000,000 shares
of Preferred Stock, $0.001 par value (the "Preferred Stock"). The Company's
Common Stock is considered a "penny stock" as defined by the Commission. As
such, Rule 15g-9 under the Exchange Act imposes additional sales practice
requirements on broker-dealers selling the Company's stock.
The following summary of certain provisions of the Common Stock and Preferred
Stock does not purport to be complete and is subject to, and qualified in its
entirety by, the provisions of the Company's Certificate of Incorporation
and applicable law.
COMMON STOCK
At December 31, 1997, there were 7,931,014 and 7,923,764 shares of Common
Stock issued and outstanding and held of record by approximately 350
stockholders. Each holder of Common Stock is entitled to one vote for each
share held and the holders of the Company's 8% Convertible Preferred Stock
are entitled to vote that number of shares of Common Stock into which their
shares of Preferred Stock are convertible. Matters submitted for stockholder
approval generally require a majority vote.
Holders of Common Stock are entitled to received ratably such dividends as
may be declared by the Company's Board of Directors out of funds legally
available therefor, provided that no dividends may be paid until all
cumulated dividends have been paid on the Company's 8% Convertible Preferred
Stock. In the event of liquidation, dissolution or winding up of the
Company, holders of Common Stock would be entitled to share in the Company's
assets remaining after the payment of liabilities and the satisfaction of any
liquidation preference granted the holders of any outstanding shares of
Preferred Stock. Holders of Common Stock have no preemptive or other
subscription rights. The shares of Common Stock are not convertible into any
other security. The outstanding shares of Common Stock are fully paid and
nonassessable.
PREFERRED STOCK
The Company's Preferred Stock may be issued in series, and shares of each
series will have such rights and preferences as are fixed by the Company's
Board of Directors in the resolutions authorizing the issuance of that
particular series. In designating any series of Preferred Stock, the
Company's Board of Directors may, without further action by the holders of
Common Stock, fix the number of shares constituting that series and fix the
dividend rights, dividend rate, conversion rights, voting rights, rights and
terms of redemption (including any sinking fund provisions) and the
liquidation preference of the series of Preferred Stock.
At December 31, 1997, the Company had outstanding 1,144,143 shares of
Preferred Stock designated as 8% Convertible Preferred Stock. Such
outstanding shares have a liquidation preference of $0.80 per share, a
cumulative dividend of $0.80 per share and a conversion right into Common
Stock at the rate of four shares of Preferred Stock for one share of Common
Stock. The outstanding shares of Preferred Stock have voting rights
equivalent to the number of shares of Common Stock into which they are
convertible and under some circumstances are callable by the Company at
$0.85 per share.
Certain Statutory and Charter Provisions
Section 203 of the Delaware General Corporation Law ("DGCL") provides, in
general, that a stockholder acquiring more than 15% of the outstanding voting
shares of a corporation subject to the statute (an "Interested Stockholder")
but less than 85% of such shares may not engage in certain "Business
Combinations" with the corporation for a period of three years subsequent to
the date on which the stockholder became an Interested Stockholder unless (i)
prior to such date the corporation's Board of Directors approved whether the
Business Combination or the transaction in which the stockholder became an
Interested Stockholder or (ii) the Business Combination is approved by the
corporation's Board of Directors and authorized by a vote of at least
two-thirds of the outstanding voting stock of the corporation not owned by
the Interested Stockholder.
Section 203 of the DGCL defines the term "Business Combination" to encompass
a wide variety of transactions with or caused by an Interested Stockholder in
which the Interested Stockholder receives or could receive a benefit on other
than a pro rata basis with other stockholders, including mergers, certain
asset sales, certain issuances of additional shares to the Interested
Stockholder, transactions with the Company which increase the proportionate
interest of the Interested Stockholder or transactions in which the
Interested Stockholder receives certain other benefits.
These provisions could, in addition to the FCC Rules, have the effect of
delaying, deferring or preventing a change in control of the Company. The
Company's stockholders, by adopting an amendment to the Certificate of
Incorporation or Bylaws of the Company, may elect not to be governed by
Section 203, effective twelve months after adoption. Neither the Certificate
of Incorporation nor the Bylaws of the Company currently excludes the Company
from the restrictions imposed by Section 203.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Company's Common Stock is
ChaseMellon Shareholder Services.
PART II
ITEM 1-MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER SHAREHOLDER MATTERS
The following table sets forth the high and low sale prices of the Common
Stock as reported by NASDAQ Stock Exchange OTC Bulletin Board under the
symbol HICO since April 1, 1997. The Company's Common Stock is considered a
"penny stock" as defined by the Commission. As such, Rule 15g-9 under the
Exchange Act imposes additional sales practice requirements on broker-dealers
selling the Company's stock:
High Low
Quarter ended June 30, 1997 3 3/8 1 1/8
Quarter ended September 30, 1997 2 7/16 7/8
Quarter ended December 31, 1997 2 1/8 7/8
On March 16, 1998, the last reported sale price of Common Stock on the
NASDAQ was $1.00 per share.
DIVIDENDS
The Board of Directors has not declared any cash dividends on the Company's
Common Stock. The Board of Directors does not currently intend to declare any
cash dividends in the foreseeable future.
ITEM 2-LEGAL PROCEEDINGS
The Company is involved in various legal proceedings incidental to the
conduct of its business. Management believes that none of these legal
proceedings will result in any material impact on the Company's financial
condition or results of operations.
ITEM 3-CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Not Applicable.
ITEM 4-RECENT SALES OF UNREGISTERED SECURITIES
Preferred Stock
During the period from June through December of 1996, the Company sold 1,051,
250 shares of 8% Convertible Preferred Stock for $841,000 to various
sophisticated investors that had access to corporate information. The
Preferred Stock is convertible at four shares of Preferred Stock for one
share of Common Stock. In December of 1997, 12,500 shares of Preferred Stock
were converted to 3,125 shares of Common Stock at an approximate market value
of $3,125.
All of the Preferred Stock was all sold in transactions exempt from
registration under Regulation D and Section 4(2) of the Securities Act of
1933, as amended (the "1933 Act"). The Company believes that issuance of
Common Stock upon conversion of Preferred Stock was exempt from registration
under Section 4(2) of the 1933 Act.
Common Stock
Effective April 1, 1997, the Company issued 5,837,503 shares of Common Stock
to Scott A. Beil in exchange for an 80% interest in One Plus Marketing, Inc.
In 1997, the Company issued 17,500 shares of Common Stock with an approximate
fair market value of $21,719 to one individual in lieu of compensation for
investor relations services rendered. In 1996, the Company issued 832,072
shares of Common Stock with an approximate fair market value of $1,178,713 to
various individuals in lieu of compensation for professional services
rendered. In 1995, the Company issued 13,302 shares of Common Stock with an
undeterminable fair market value to various individuals in lieu of
compensation for professional services rendered.
In 1997, options to purchase 125 shares of Common Stock were exercised by an
individual at $0.40 per share.
The Company believes that the above mentioned issuances of Common Stock were
exempt from registration under Section 4(2) of the 1933 Act.
ITEM 5-INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation provides that to the fullest
extent permitted by Delaware law, a Director of the Company shall not be
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a Director. Under current Delaware law, liability of a
Director may not be limited (i) for any breach of the Director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions by the
Director not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) in respect of certain unlawful dividend
payments or stock redemptions or repurchases; and (iv) for any transaction
from which the Director derives an improper personal benefit. The effect of
this provision of the Company's Certificate of Incorporation is to limit or
eliminate the rights of the Company and its stockholders (through stockholders'
derivative suits on behalf of the Company) to recover monetary damages
against a Director for breach of the fiduciary duty of care as a Director
including breaches resulting from negligent or grossly negligent behavior)
except in those circumstances described in clauses (I) through (iv) above.
This provision does not limit or eliminate the rights of the Company or any
stockholder to seek nonmonetary relief such as an injunction or recession in
the event of a breach of a Director's duty of care. In addition, The
Company's Certificate of Incorporation and Bylaws provide that the Company
shall indemnify its Directors, Officers, employees and agents to the fullest
extent permitted by Delaware law.
The Company's Bylaws provide that the Company shall indemnify its Officers
and Directors to the fullest extent permitted by Delaware law, including in
circumstances in which indemnification is otherwise discretionary under
Delaware law. The Company intends to obtain Director and Officer ("D&O")
liability insurance with respect to liabilities arising out of certain
matters, including matters arising under the 1933 Act.
At present, there is no pending litigation or proceeding involving any
Officer or Director, employee or agent of the Company where indemnification
will be required or permitted. The Company is not aware of any threatened
litigation or proceeding which may result in a claim for such indemnification.
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of HitCom Corporation:
We have audited the accompanying consolidated balance sheet of HitCom
Corporation (a Delaware corporation) and subsidiaries as of December 31,
1997, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for the nine-month period ended December 31,
1997. 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 consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of HitCom
Corporation and subsidiaries as of December 31, 1997, and the results of
their operations and their cash flows for the nine-month period ended
December 31, 1997, in accordance with generally accepted accounting principles.
/s/ MOORE STEPHENS SMITH WALLACE LLC
St. Louis, Missouri
February 17, 1998
HITCOM CORPORATION
___________
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997
ASSETS
December 31, 1997
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $188,800
Accounts receivable-net of allowance
for doubtful accounts of $6,949 . . . . . . . . . . . . . . . 110,066
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . 6,162
Total current assets. . . . . . . . . . . . . . . . . . . . . . . 305,028
Property and equipment-net . . . . . . . . . . . . . . . . . . . 336,967
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 52,473
Total . . . . . . . . . . . . . . . . . . $694,468
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
December 31, 1997
Current liabilities:
Revolving line of credit . . . . . . . . . . . . . . . . . . . $100,000
Current portion of long-term obligations . . . . . . . . . . . . 59,766
Accounts payable and accrued expenses . . . . . . . . . . . . . . 678,898
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . 429,362
Total current liabilities. . . . . . . . . . . . . . . 1,268,026
Long-term obligations, less current portion . . . . . . . . . . . . 14,658
Commitments and contingencies
Minority interest. . . . . . . . . . . . . . . . . . . . . . . . . 166,107
Stockholders' equity (deficit):
Preferred stock, $.001 par value-5,000,000 authorized;
1,144,143 issued and outstanding . . . . . . . . . . . . . . . . 1,144
Common stock, $.004 par value-12,500,000 authorized;
7,931,014 issued; 7,923,764 outstanding . . . . . . . . . . . . . 31,724
Additional paid in capital. . . . . . . . . . . . . . . . . . .(1,139,904)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . 372,509
Treasury stock-at cost . . . . . . . . . . . . . . . . . . . . . (19,796)
Total stockholders' equity (deficit). . . . . . . . . . . . . . (754,323)
Total. . . . . . . . . . . . . . . . . . . . . . . $694,468
See accompanying notes to financial statements.
HITCOM CORPORATION
___________
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE-MONTH
PERIOD ENDED DECEMBER 31, 1997
For the Nine-month Period
Ended December 31, 1997
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . $2,732,377
Costs and expenses:
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . 1,440,524
Selling, general and administrative. . . . . . . . . . . . . . 1,242,901
Total costs and expenses . . . . . . . . . . . . . . . . . . . 2,683,425
Operating income . . . . . . . . . . . . . . . . . . . . . . . . 48,952
Other expense-net . . . . . . . . . . . . . . . . . . . . . . . . 55,041
Loss before income tax benefit and minority interest. . . . . . . . (6,089)
Tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (885)
Loss before minority interest. . . . . . . . . . . . . . . . . . . . (5,204)
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . 64,257
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ($69,461)
Basic loss per share. . . . . . . . . . . . . . . . . . . . . . . . $(0.01)
Weighted average number of common shares outstanding . . . . . . . 7,921,458
See accompanying notes to financial statements.
HITCOM CORPORATION
___________
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE NINE-MONTH PERIOD ENDED DECEMBER 31, 1997
Pre-
ferred Common
Stock Stock
Shares Amount Shares Amount
Balance,
March
31,
1997. . . . -- $ -- 100 $ --
Issuance
of
common
stock in
stock
acquisi-
tion. . . -- -- 5,837,503 23,350
Re-
capital-
ization
ad-
justment. . -- -- (100) --
Acquired
deficit
in stock
acquisi-
tion. . . 1,072,543 1,073 2,074,537 8,298
Preferred
stock
converted
to common
stock. . . . (12,500) (13) 3,125 13
Preferred
stock
dividends. . 84,100 84 -- --
Common
stock
issued. . . -- -- 17,500 70
Common
stock
cancelled. . -- -- (1,776) (7)
Stock
options
exer-
cized. . -- -- 125 --
Re-
purchase
of
common
stock. . . . -- -- -- --
Net
loss. . . -- -- -- --
Balance
Dec-
ember
31,
1997. . . 1,144,143 $1,144 7,931,014 $31,724
(continued)
Additional Retained
Paid in Earnings/ Treasury
Capital (Deficit) Stock Total
Balance
March 31,
1997. . . . . $-- $509,250 $-- $509,250
Issuance
of
common
stock in
acquisi-
tion. . . . . . (23,350) -- -- --
Re-
capital-
ization
ad-
justment. . . . -- -- -- --
Acquired
deficit
in stock
acquisi-
tion. . . . . . (1,205,399) -- (10,084) (1,206,112)
Preferred
stock
converted
to common
stock. . . . . . -- -- -- --
Preferred
stock
dividends. . . . 67,196 (67,280) -- --
Common
stock
issued. . . . . 21,649 -- -- 21,719
Common
stock
cancelled. . . . -- -- -- (7)
Stock
options
exer-
cized. . . . . . -- -- -- --
Re-
purchase
of
common
stock. . . . . . -- -- (9,712) (9,712)
Net
loss. . . . . . . -- (69,461) -- (69,461)
Balance
December
31,
1997. . . . . . . ($1,139,904) $372,509 ($19,796) ($754,323)
See accompanying notes to financial statements.
HITCOM CORPORATION
___________
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE-MONTH
PERIOD ENDED DECEMBER 31, 1997
For the Nine-
month Period-
ended
December 31,
1997
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . ($69,461)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization . . . . . . . . . . . . 57,487
Minority interest in earnings of
subsidiaries . . . . . . . . . . . . . . . . . . . . 64,257
Deferred tax benefit. . . . . . . . . . . . . . . . . (885)
Changes in assets and liabilities:
Accounts receivable-net . . . . . . . . . . . . . . 130,002
Prepaid expenses and other . . . . . . . . . . . . . (190)
Other assets . . . . . . . . . . . . . . . . . . . . (25,513)
Accounts payable and accrued expenses . . . . . . . (672,295)
Deferred revenue. . . . . . . . . . . . . . . . . . . (4,750)
Net cash used in operating activities. . . . . . . . (521,348)
Cash flows used in investing activities:
Purchases of property and equipment . . . . . . . . . . . . (43,430)
Cash acquired in reverse acquisition . . . . . . . . . . . . 1,052
Net cash used in investing activities . . . . . . . . . . .(42,378)
Cash flows used in financing activities:
Payments on capital leases. . . . . . . . . . . . . . . . . (1,961)
Purchase of stock for treasury . . . . . . . . . . . . . . (9,712)
Common stock canceled . . . . . . . . . . . . . . . . . . . (7)
Net cash used in financing activities . . . . . . . . . . (11,680)
Net decrease in cash and cash equivalent. . . . . . . . . . . (575,406)
Cash and cash equivalents:
Beginning of period. . . . . . . . . . . . . . . . . . . . 764,206
End of period . . . . . . . . . . . . . . . . . . . . . . . $188,800
Supplemental cash flow disclosures:
Cash paid for interest during the period . . . . . . . . . . $10,276
Cash paid for taxes during the period . . . . . . . . . . . $ 0
Property and equipment acquired under a capital lease amounted to $15,035.
During the nine-month period ended December 31, 1997, 17,500 shares of common
stock were issued in exchange for services valued at $21,719.
See accompanying notes to financial statements.
HITCOM CORPORATION
___________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. Organization and Description of Business
HitCom Corporation ("the Company") was incorporated under the laws of the
state of Delaware in 1982. Prior to March 31, 1997, the Company's primary
operations were Internet marketing services. With the acquisition of 80%
of One Plus Marketing, Inc. on April 1, 1997, (see Note 3), the Company
became a facility-based telecommunications company that provides enhanced
communication products and services to businesses and customers. The
Company's customers are located within North America without a significant
geographic concentration.
2. Significant Accounting Policies
Basis of Presentation
The Company's consolidated financial statements have been prepared in
accordance with generally accepted accounting principles. The
consolidated financial statements include the Company and its wholly-owned
and majority-owned subsidiaries. Intercompany balances and transactions
have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities, and the reported amounts of revenues and expenses. Actual
results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid investment securities purchased with an original maturity
date of three months or less to be cash equivalents. At times, cash
balances held at financial institutions were in excess of FDIC insurance
limits. The Company believes that no significant concentration of credit
risk exists with respect to these cash investments.
Property and Equipment
Property and equipment is stated at cost. Depreciation and amortization
is computed using the straight-line method over estimated useful lives
ranging from five to ten years.
Revenue Recognition
The Company generally requires its customers to establish a minimum
account balance prior to receiving services. The Company recognizes
revenue as services are rendered. Account balances in excess of services
rendered are recorded as deferred revenue. Account balances without
activity for 180 days are recorded to revenue.
2. Significant Accounting Policies - Continued
Income Taxes
The Company has implemented the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
SFAS No. 109 utilizes an asset and liability approach and deferred taxes are
determined based on the estimated future tax effects of differences
between the financial statement and tax bases of assets and liabilities
given the provisions of the enacted tax laws.
In accordance with the provisions of SFAS No. 109, a valuation allowance
should be recognized if it is more likely than not that some portion or
all of a deferred tax asset will not be realized.
Earnings/Loss Per Common Share
The Company has implemented the provisions of SFAS No. 128, "Earnings per
Share." SFAS No. 128 simplifies the computation of earnings per share
("EPS") by replacing the presentation of primary EPS with a presentation of
basic EPS. Basic EPS is calculated by dividing income or loss available
to common stockholders by the weighted average number of common shares
outstanding during the period. Options, warrants, and other potentially
dilutive securities are excluded from the calculation of basic EPS.
Diluted EPS includes the options, warrants and other potentially dilutive
securities that are excluded from basic EPS.
The Company has options and warrants on 95,950 shares of common stock and
preferred stock convertible into 349,111 shares of common stock. Diluted
EPS has not been presented as the effects of the options, warrants and
convertible preferred stock are antidilutive.
Impairment of Long Lived Assets
The Company evaluates whether events and circumstances have occurred that
indicate the remaining estimated useful life of long lived assets may
warrant revision or that the remaining balance of an asset may not be
recoverable. The measurement of possible impairment is based on the
ability to recover the balance of assets from expected future operating
cash flows on an undiscounted basis. In the opinion of management, no
such impairment exists at December 31, 1997.
Software Development Costs
All internal costs of computer software development related to the
Company's systems are expensed as incurred.
2. Significant Accounting Policies - Continued
Fair Values of Financial Instruments
Management believes that the carrying values of all financial instruments
approximate their fair values.
Stock-Based Compensation Plans
The Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," on January 1, 1996, for financial note disclosure purposes
and will continue to apply the intrinsic value method of Accounting
Principles Board Opinion No. 25 for financial reporting purposes. See
Note 8 Stockholders' Equity (Deficit).
New Authoritative Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. Earlier application is permitted.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company is in the process of
determining its preferred format. The adoption of SFAS No. 130 will have
no impact on the Company's results of operations, financial position or
cash flows.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 changes how operating
segments are reported in annual financial statements and requires the
reporting of selected information about operating segments in interim
financial reports issued to stockholders. SFAS No. 131 is effective for
periods beginning after December 15, 1997, and comparative information for
earlier years is to be restated. SFAS No. 131 need not be applied to
interim financial statements in the initial year of its application. The
Company is in the process of evaluating the disclosure requirements. The
adoption of SFAS No. 131 will have no impact on the Company's results of
operations, financial position or cash flows.
3. Acquisition
Effective April 1, 1997, the Company acquired 80% of the outstanding
common stock of One Plus Marketing, Inc. ("One Plus") for 5,837,503 shares
of the Company's common stock. For accounting purposes, the acquisition
has been treated as a recapitalization of One Plus with One Plus as the
acquiror in accordance with APB No. 16 "Business Combinations." Under the
provisions of APB No. 16, the Company's assets and liabilities were
adjusted to fair value. A summary of net liabilities assumed is as follows:
Assets acquired:
Cash $1,052
Account receivable-net 578
Prepaid expenses and other 972
Property and equipment 87,123
Other assets 4,123
93,848
Liabilities assumed:
Debt obligations 149,000
Accounts payable and accrued
expenses 1,150,960
1,299,960
Net liabilities assumed $1,206,112
4. Property and Equipment
Property and equipment consists of the following:
Computers and electronic equipment $374,571
Software 20,247
Furniture and fixtures 62,627
Total 457,445
Accumulated depreciation and
amortization (120,478)
Net property and equipment $336,967
5. Revolving Credit Arrangement
The Company has a $100,000 secured revolving credit arrangement with a
bank that bears interest at the bank's prime rate plus one percent (prime
was 8.5% at December 31, 1997) and expires on April 24, 1998. The Company
has pledged its assets as security for the existing indebtedness. At
December 31, 1997, the entire credit arrangement available has been used
by the Company. Interest due has been accrued for the revolving credit
arrangement and reflected on the accompanying balance sheet within
accounts payable and accrued expenses.
6. Notes Payable
The Company has several notes payable ranging in principal values from
$1,000 to $15,000 to former employees and related parties. These notes
are unsecured with interest rates ranging from prime (8.5% at December 31,
1997) plus one percent to 12 percent. Interest due has been accrued for
the notes payable and reflected on the accompanying balance sheet within
accounts payable and accrued expenses. The following reflects the
aggregate future maturities of notes payable at December 31, 1997:
Year Ended December 31, Amount
1998 $49,000
7. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses comprised the following at December
31, 1997:
Amount
Accounts payable $413,023
Employee-related expenses 108,692
Professional fees 75,000
Interest 22,821
Other 59,362
$678,898
8. Stockholders' Equity (Deficit)
Preferred Stock
In May 1996, the Company's stockholders approved an amendment and
restatement of the certificate of incorporation that authorized the future
issuance of 1,500,000 shares of 8% convertible preferred stock (the
"Preferred Stock"), $.001 par value, with rights and preferences to be
determined by the Company's Board of Directors. The Preferred Stock is
convertible at four shares of the Preferred Stock for one share of common
stock. The Preferred Stock is entitled to an $0.80 liquidation preference
subject to certain adjustments that coincide with the conversion price.
The Preferred Stock accrues dividends at 8% per annum and may be paid
in cash or like kind. Like kind dividends of 84,100 preferred shares were
declared and paid in 1997 and are reflected in the accompanying statement
of stockholders' equity (deficit).
During 1997, 12,500 shares of the Preferred Stock were converted to 3,125
shares of common stock and are reflected in the accompanying statement of
stockholders' equity (deficit).
Common Stock
On January 20, 1997, the Board of Directors of the Company authorized a
four-for-one reverse stock split. The split was effected by distributing
one share of new common stock for every four shares of old common stock
outstanding. All shares of old common stock were canceled. All share
data was retroactively adjusted. Cash was paid in lieu of fractional shares.
Common Stock Disputed
The Company is vigorously disputing 150,000 shares of common stock (the
"Disputed Shares") held by a former officer and director of the Company.
The Company asserts that the former officer and director was erroneously
issued the Disputed Shares without appropriately fulfilling the conditions
for issuance of the Disputed Shares. As a result of repeated unsuccessful
attempts to recover the Disputed Shares, the Company has demanded that the
former officer and director immediately return the Disputed Shares.
Management believes that the Disputed Shares will be ultimately returned
and canceled without a material affect on the financial position of the
Company. The Company has not reflected the Disputed Shares as issued or
outstanding in the accompanying financial statements.
8. Stockholders' Equity (Deficit) - Continued
Stock Option Plans
The Company has various stock option agreements that allow eligible
employees, directors and consultants of the Company to purchase the
Company's common stock at fair market value at the date the option is
granted. Options are granted at the discretion of senior management and
the Board of Directors and generally vest over periods ranging from one to
four years. The options expire up to ten years from the date the option is
granted.
The following table summarizes stock option activity from April 1 through
December 31, 1997, under the Company's plans:
Number of Option price
shares per share
Outstanding, March 31, 1997 45,825 $.40 -- $2.00
Exercised (125) .40
Forfeited -- --
Granted -- --
Outstanding, December 31, 1997 45,700 $.40 -- $2.00
No dividends have been declared or paid relating to common stock during 1997.
Stock Options Disputed
The Company is vigorously disputing options to purchase 625,000 shares of
its common stock (the "Disputed Stock Options") held by a former officer
and director of the Company. The Company asserts that the former officer
and director's Disputed Stock Options are invalid because the Disputed
Stock Options were not properly approved by the Company's Board of
Directors and certain conditions were not fulfilled. The Company
considers the Disputed Stock Options invalid and believes the matter will
be resolved without a material affect on the financial position of the
Company. The Company has not reflected the Disputed Stock Options as
outstanding in the table above or in the accompanying financial statements.
Warrants
The Company has issued warrants to purchase 52,500 shares of its common
stock at $.88 per share to the Company's investment banking firm. The
warrants were issued at fair value and expire two years after the date of
issue.
8. Stockholders' Equity (Deficit) - Continued
Treasury Stock
During 1997, the Company repurchased 5,250 common stock shares on the open
market at prices ranging from $1.69 to $1.88 per share. At December 31,
1997, the Company holds in treasury stock 7,250 shares of common stock and
is reflected in the accompanying statement of stockholders' equity.
9. Commitments and Contingencies
Operating Leases
The Company leases certain equipment and facilities under operating leases
through June 2000. At December 31, 1997, future minimum annual payments
under non-cancelable leases are as follows:
1998 $92,328
1999 80,084
2000 28,735
Total minimum lease payments $201,147
Included in the minimum lease payments for 1998 and 1999 are amounts due
to the majority stockholder of $30,000 and $22,500, respectively.
Rent expense was $60,076 for the nine-month period from April 1 through
December 31, 1997, including $14,180 to the majority stockholder for
office facilities.
9. Commitments and Contingencies - Continued
Capital Leases
The Company leases certain property and equipment with lease terms through
August 2000. Obligations under capital leases have been recorded in the
accompanying financial statements at the present value of future minimum
lease payments, discounted at interest rates ranging from 8% to 10.25%.
The capitalized cost of $31,788 less accumulated depreciation of $6,035 in
1997, is included in property and equipment in the accompanying financial
statements. Depreciation expense for this equipment for the nine-months
ended December 31, 1997, was $4,423.
Obligations under capital leases consist of the following:
1997
Total $25,424
Less current maturities 10,766
Long-term portion $14,658
The future minimum lease payments under the capital leases and the net
present value of the future minimum lease payments are as follows:
Year Ended December 31, Amount
1998 $13,122
1999 10,560
2000 5,309
Total minimum lease payments 28,991
Less amount representing interest 3,567
Present value of minimum lease payments $25,424
Legal Proceedings
The Company is involved in various legal proceedings incidental to the
conduct of its business. Management believes that none of these legal
proceedings will result in any material impact on the Company's financial
condition or results of operations.
10. Income Taxes
The tax benefit for income taxes consists of the following at December 31,
1997:
Current:
Federal income tax $ --
State income tax --
--
Deferred (885)
Total ($885)
The net deferred tax asset consists of the following:
Gross assets $617,534
Gross liabilities (112,481)
Gross deferred tax asset 505,053
Less: valuation allowance (504,168)
Net deferred tax asset $885
The tax effect of significant temporary differences representing deferred
tax assets and liabilities are as follows:
Net operating loss carryforward $575,466
Other (70,413)
Total $505,053
The provision for taxes on income as reported differs from the tax
provision computed by applying the statutory federal income tax rate of
34% as follows:
Federal income tax benefit on loss at
statutory rate of 34% ($2,070)
State tax benefit, net of federal benefit (241)
Other 1,426
Income tax benefit ($885)
As part of the Acquisition (discussed in Note 3), the Company purchased
net operating loss carryforwards of approximately $1,693,000. These net
operating loss carryforwards are restricted by certain Internal Revenue
Code sections and regulations and expire through 2012.
13. Subsequent Event (unaudited)
On February 18, 1998, the Company announced the signing of a definitive
agreement to acquire 100% of the outstanding shares of Channel Telecom
Inc., ("Channel") headquartered in Toronto, Canada. Channel is the fourth
largest facility-based provider of prepaid calling cards in Canada. The
transaction had been approved by the Company's Board of Directors and is
expected to be ratified at the Company's Annual Meeting of Shareholders.
Under the terms of the agreement, the Company will exchange approximately
3.8 million shares, adjusted for certain events, of Company common stock
and $175,000 in cash for all of Channel's outstanding shares. The
effective date of the transaction will be January 1, 1998
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To The Board of Directors of One Plus Marketing, Inc.:
We have audited the accompanying statements of income, stockholder's equity
and cash flows of One Plus Marketing, Inc. (an Illinois corporation) for the
three-month period ended March 31, 1997. 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 results of operations and cash flows of One Plus
Marketing, Inc. for the three-month period ended March 31, 1997, in
accordance with generally accepted accounting principles.
/s/ MOORE STEPHENS SMITH WALLACE LLC
St. Louis, Missouri
February 6, 1998
ONE PLUS MARKETING, INC.
___________
STATEMENT OF INCOME FOR THE THREE-MONTH PERIOD ENDED
MARCH 31, 1997
For the
Three-month
Period Ended
March 31, 1997
Net revenues. . . . . . . . . . . . . . . . . . . . . . . . . . $ 835,790
Costs and expenses:
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . 528,834
Selling, general and administrative . . . . . . . . . . . . . 175,349
Total costs and expenses . . . . . . . . . . . . . . . . . . 704,183
Operating income . . . . . . . . . . . . . . . . . . . . . . . 131,607
Other income-net . . . . . . . . . . . . . . . . . . . . . . . . 4,475
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 136,082
Earnings per share. . . . . . . . . . . . . . . . . . . . . . . $1,360.82
Weighted average number of common and common
equivalent shares outstanding . . . . . . . . . . . . . . . . . 100
See accompanying notes to financial statements.
ONE PLUS MARKETING, INC.
___________
STATEMENT OF STOCKHOLDER'S EQUITY FOR THE THREE-MONTH
PERIOD ENDED MARCH 31, 1997
Common Stock
Retained
Shares Amount Earnings Total
Balance, December
31, 1996 100 $ -- $467,592 $467,592
Stockholder
distribution -- -- (94,424) (94,424)
Net income -- -- 136,082 136,082
Balance, March
31, 1997 100 -- $509,250 $509,250
See accompanying notes to financial statements.
ONE PLUS MARKETING, INC.
___________
STATEMENT OF CASH FLOWS FOR THE THREE-MONTH PERIOD ENDED
MARCH 31, 1997
For the
Three-month
Period-ended
March 31, 1997
Cash flows from operating activities:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $136,082
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . 13,107
Changes in assets and liabilities
Accounts receivable, net. . . . . . . . . . . . . . . (210,866)
Prepaid expenses and other . . . . . . . . . . . . . 40,090
Accounts payable and accrued expenses . . . . . . . . . . 404,490
Deferred revenue. . . . . . . . . . . . . . . . . . . . . 82,191
Net cash provided by operating activities . . . . . . . 465,094
Cash flows used in investing activities:
Purchases of property and equipment. . . . . . . . . . . . . (33,053)
Cash flows used in financing activities:
Shareholder distributions. . . . . . . . . . . . . . . . . . . (94,424)
Net increase in cash and cash equivalents. . . . . . . . . . . . 337,617
Cash and cash equivalents:
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . 426,589
End of period . . . . . . . . . . . . . . . . . . . . . . . . . $764,206
Supplemental cash flow disclosures:
Cash paid for interest during the period. . . . . . . . . . . . $ 0
Cash paid for taxes during the period. . . . . . . . . . . . . $ 0
See accompanying notes to financial statements.
ONE PLUS MARKETING, INC.
___________
NOTES TO FINANCIAL STATEMENTS MARCH 31, 1997
1. Organization and Description of Business
One Plus Marketing, Inc. ("the Company") was incorporated under the laws
of the state of Illinois in 1991. The Company designs and markets
interactive voice response and voice processing systems. The Company's
customers are located within North America without a significant geographic
concentration.
2. Summary of Significant Accounting Policies
Basis of Presentation
The Company's financial statements have been prepared in accordance with
generally accepted accounting principles.
Use of Estimates
Preparation of financial statements in accordance with generally accepted
accounting principles requires, among other things, the use of
management's estimates and assumptions which affect the reported revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid investment securities purchased with an original maturity
date of three months or less to be cash equivalents.
Revenue Recognition
The Company generally requires its customer to establish a minimum account
balance prior to receiving voice mail service. The Company recognizes
revenue as service is rendered. Account balances not used are recorded as
deferred revenue. Account balances without activity for 180 days are
recorded to revenue.
Income Taxes
The Company's stockholder has elected to be treated as an "S" Corporation
under provisions of the Internal Revenue Code which provides that, in lieu
of corporation income taxes, the stockholder is taxed for the Company's
taxable income. Therefore, no provision or liability for federal and state
income taxes is reflected in these financial statements.
The unaudited pro forma results if the Company had been a "C" Corporation
for the three-month period ended March 31, 1997, would result in a tax
provision with an effective rate of 40% and an amount of $54,433.
Earnings per share would have decreased by $544.33 per share.
ONE PLUS MARKETING, INC.
___________
NOTES TO FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1997
2. Summary of Significant Accounting Policies - Continued
Depreciation and Amortization
Depreciation and amortization is computed based on the straight-line
method over estimated useful lives ranging from five to seven years.
3. Related Party Transactions
In the normal course of conducting business, the Company has entered into
transactions with various individuals and companies who are related parties.
4. Leases
The Company leases its facilities from the stockholder under an operating
lease through September 30, 1999, with certain renewal options. At March
31, 1997, future minimum annual payments under non-cancelable leases are
as follows:
1997 $13,500
1998 30,000
1999 22,500
Total minimum lease payments $66,000
Rent expense for the period from January 1 through March 31, 1997 was
$7,044.
5. Subsequent Event
Majority Exchange of Common Stock
Effective April 1, 1997, the Company exchanged 80% of the voting stock of
One Plus Marketing, Inc. (the "Exchange") with HitCom Corporation for
5,837,503 common shares of HitCom Corporation, a publicly traded company
on the NASDAQ OTC Bulletin Board. The remaining 20% minority ownership
interest is being retained by the predecessor owner of One Plus Marketing,
Inc. Effective with the closing One Plus Marketing, Inc.'s minority
interest owner will become the Chairman of HitCom Corporation.
ONE PLUS MARKETING, INC.
___________
NOTES TO FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1997
5. Subsequent Event - Continued
Recapitalization of Equity
The Exchange is being treated as a reverse acquisition in accordance with
Accounting Principles Board Opinion No. 16 "Business Combinations." As
part of the reverse acquisition, the Company is being treated as the
accounting acquiror. As such, the accounting acquiror's historical
stockholder's equity prior to the Exchange will be retroactively restated
for the equivalent number of shares received in the transaction with any
difference between par value of the issuer's and acquiror's stock recorded
with an offset to additional paid in capital.
CHANNEL TELECOM INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
AUDITOR'S REPORT
To the Directors of:
Channel Telecom Inc.
I have audited the consolidated balance sheet of Channel Telecom Inc. as at
December 31, 1997 and the consolidated statements of income and deficit, and
changes in financial position for the nine months then ended.
These financial statements are the responsibility of the company's
management. My responsibility is to express an opinion on these financial
statements based on my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I plan and perform an audit to
obtain reasonable assurance 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. In my opinion, these consolidated
financial statements present fairly, in all material respects, the financial
position of the company as at December 31, 1997 and the results of its
operations and the changes in its financial position for the nine months then
ended in accordance with generally accepted accounting principles.
Etobicoke, Ontario /s/SILVANO BOATTO
February 5, 1998 CHARTERED ACCOUNTANT
CONSOLIDATED BALANCE SHEET
(Incorporated under the laws of Ontario)
AS AT DECEMBER 31, 1997
(AMOUNTS EXPRESSED IN CANADIAN DOLLARS)
ASSETS
December March
31, 1997 31, 1997
CURRENT
Cash $ 64,430 $ 8,267
Term deposit 10,000 10,000
Accounts receivable, less allowance of
$52,660 for doubtful accounts
(March 31, 1997 - $42,660 ) 321,605 171,438
Inventory 14,632 8,850
Prepaid expenses and sundry assets 3,865 5,936
Loans receivable, related parties (Note 4) 10,333 10,488
424,865 214,979
Investment in and advances to affiliated
companies (Note 5) 39,551 39,688
Capital assets (Note 6) 45,175 27,537
$ 509,591 $ 282,204
LIABILITIES
CURRENT
Bank loan (Note 7) $ 7,592 $ 7,592
Accounts payable and accrued liabilities 540,098 298,540
Loans payable, related parties (Note 8) 7,963 18,130
555,653 324,262
Bank loan (Note 7) 8,777 14,471
564,430 338,733
SHAREHOLDERS' EQUITY
Capital stock (Note 9) 20 20
Deficit (54,859) (56,549)
(54,839) (56,529)
$ 509,591 $ 282,204
See Accompanying Notes
CONSOLIDATED STATEMENT OF INCOME AND DEFICIT
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
(AMOUNTS EXPRESSED IN CANADIAN DOLLARS)
NINE MONTHS YEAR
ENDED ENDED
DECEMBER 31 MARCH 31
1997 1997
REVENUE
Sales $ 1,770,278 $1,318,672
Less: discounts and returns 610,860 435,480
1,159,418 883,192
COST OF GOODS
Long distance services 797,829 583,747
Cost of cards 49,606 61,531
847,435 645,278
GROSS PROFIT 311,983 237,914
EXPENSES
Salesmen commissions and expenses 104,103 65,114
Administration fees (Note 10(a)) 42,500 60,000
Management fees (Note 10(b)) - 20,500
Salaries and benefits 51,418 -
Advertising 5,563 2,280
Amortization 6,440 6,116
Bad debt 11,242 45,313
Bank charges and interest 1,169 516
Brand development costs 4,826 10,692
Business taxes 2,047 1,765
Insurance 1,677 -
Loan Interest 980 1,187
Office and general 17,405 3,928
Printing 8,855 20,364
Professional fees 17,293 11,393
Rent 14,680 4,732
Telephone 6,873 3,709
Travel and trade shows 13,085 7,708
Share of loss from affiliated company (Note 5) 137 5,332
Interest income - (570)
310,293 270,079
Net income (loss) 1,690 (32,165)
Deficit, beginning of period (56,549) (24,384)
Deficit, end of period $ (54,859) $ (56,549)
See Accompanying Notes
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
(AMOUNTS EXPRESSED IN CANADIAN DOLLARS)
NINE MONTHS YEAR
ENDED ENDED
DECEMBER 31 MARCH 31
1997 1997
OPERATING ACTIVITIES
Cash provided by operations
Net loss $ 1,690 $ (32,165)
Add (deduct): charges to income
not involving cash
Amortization 6,440 6,116
Share of loss from affiliated company 137 5,332
8,267 (20,717)
Net change in non-cash working capital
(Increase) in accounts receivable (150,167) (116,563)
(Increase) decrease in inventory (5,782) 350
(Increase) decrease in prepaid expenses and
sundry assets 2,071 (3,961)
Increase (decrease) in accounts payable 241,558 197,44
95,947 56,553
FINANCING ACTIVITIES
Loans receivable/payable, related parties (10,012) 13,977
Repayment of bank loan (5,694) (8,303)
(15,706) 5,674
INVESTING ACTIVITIES
Additions to capital assets (24,078) (9,762)
Investment in affiliated companies - (20)
Advances to affiliated company - (45,000)
(24,078) (54,782)
Increase in cash 56,163 7,445
Cash, beginning of period 18,267 10,822
Cash, end of period $ 74,430 $ 18,267
For the purposes of this statement, Cash includes term deposits
See Accompanying Note
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
(AMOUNTS EXPRESSED IN CANADIAN DOLLARS)
1. NATURE OF BUSINESS
The company is in the business of developing and marketing prepaid phone
cards which provide the cardholder access to long distance service.
2. SALE OF SHARES
On January 1, 1998, pursuant to a purchase and sale agreement, the
shareholders of the company have sold their shares in Channel Telecom Inc.
to Hitcom Corporation for proceeds of cash and common shares of Hitcom
Corporation. Accordingly, Channel Telecom Inc. will change its year end to
December 31, to coincide with the year end of Hitcom Corporation.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in Canada.
Management believes that the financial statements presented would not
materially differ had they been prepared under United States' Generally
Accepted Accounting Principles.Outlined below are those policies considered
particularly significant for the company.
(a)Principles of consolidation
The accompanying consolidated financial statements include the accounts of
Channel Telecom Inc. and its wholly owned subsidiary, Channel Telecom USA
Limited.
All intercompany balances and transactions have been eliminated on
consolidation.
(b)Revenue recognition
Revenue from the sale of prepaid telephone phone cards is recorded at the
time of sale to customers less related merchant discounts and commissions.
The company accrues for it's cost for future long distance services at the
time of sale by reference to past experience.
(c)Inventory
Inventory consists of phone cards and is stated at the lower of cost and
market, with cost determined using the average cost method.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
(AMOUNTS EXPRESSED IN CANADIAN DOLLARS)
(d)Capital assets
Capital assets are stated at cost. Amortization is being provided annually
on the declining balance method at the following rate:
Furniture and equipment - 20%
Computer equipment - 30%
Vending machines - 20%
(e)Investment in affiliated companies
The company accounts for its investment in affiliated companies, using the
equity method. Under this method, the pro rata share of the investee's
earnings is recorded as income and the carrying value of the investment on
the balance sheet is increased accordingly. Dividends received are
considered as a return of capital and are deducted from the carrying value
of the investment.
(f)Foreign currency translation
Assets and liabilities of integrated foreign subsidiary operations and
foreign currency denominated assets and liabilities of Canadian operations
are translated into Canadian dollars at exchange rates prevailing at the
balance sheet date for monetary items and at exchange rates prevailing at
the transaction date for non-monetary items. The revenues and expenses are
converted at the average exchange rates for the year. Gains or losses on
translation are expensed except for the exchange gains or losses on
long-term monetary items which are deferred and amortized over the
remaining terms of the related items.
4. LOANS RECEIVABLE, RELATED PARTIES
DECEMBER 31 MARCH 31
1997 1997
Canam Marketing Inc. $ 950 $ -
Channel Sports Marketing Inc. 9,383 8,689
Premiere Collector House Inc. - 1,799
$ 10,333 $10,488
The above loans are non-interest bearing and are due on demand.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
(AMOUNTS EXPRESSED IN CANADIAN DOLLARS)
5. INVESTMENT IN AND ADVANCES TO AFFILIATED COMPANIES
The company acquired a 50% interest in Sussex Service Bureau Inc. and
1218396 Ontario Ltd. as one of the two incorporating shareholders. The
investment in these companies consists of:
Sussex
Service 1218396
Bureau Ontario December March
Inc. Ltd. 31, 1997 31, 1997
Percentage ownership 50% 50%
Cost of shares $ (5,322) $ 10 $(5,312) $ 20
Share of net loss (137) - (137) (5,332)
(5,459) 10 (5,449) (5,312)
Note receivable,
due September 15, 2001 30,000 - 30,000 30,000
Note receivable,
due November 15, 2001 15,000 - 15,000 15,000
$ 39,541 $ 10 $ 39,551 $ 39,688
The above notes bear interest at the annual Canada Trust prime interest rate
and are to be repaid at the discretion of Sussex Service Bureau Inc., but no
later than five years from the initial advance.
6. CAPITAL ASSETS
Net Net
Accumulated December March
Cost Amortization 31, 1997 31, 1997
Furniture and equipment $ 35,020 $ (15,433) $ 19,587 $ 20,339
Computer equipment 10,988 (2,985) 8,003 3,918
Vending machines 19,642 (2,057) 17,585 3,280
$ 65,650 $ (20,475) $ 45,175 $ 27,537
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
(AMOUNTS EXPRESSED IN CANADIAN DOLLARS)
7. BANK LOAN
December March
31, 1997 31, 1997
TD Bank Small Business Loan $ 16,369 $ 22,063
Less: current portion 7,592 7,592
$ 8,777 $ 14,471
The above small business loan was used to finance the purchase of assets. The
loan bears interest at the Toronto Dominion Bank prime rate plus 1.75% and is
payable in monthly installments of principal of $632.63.
Future principal repayments on the loan which matures March 21, 2000 are as
follows:
1998 $ 7,592
1999 7,592
2000 1,185
$ 16,369
The company has provided security for the loan, the most significant of which
is a general security agreement covering all the assets of the company. In
addition, certain related individuals have provided a limited guarantee in
the total amount of $3,796.
8. LOANS PAYABLE, RELATED PARTIES
December March
31, 1997 31, 1997
Bheem Capital Corp. $ 3,115 $ 4,065
1027126 Ontario Ltd. 3,115 14,065
Premiere Collector House Inc. 1,733 -
$ 7,963 $ 18,130
The above loans are non-interest bearing and are due on demand.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
(AMOUNTS EXPRESSED IN CANADIAN DOLLARS)
9. CAPITAL STOCK
Authorized:
Unlimited number of common shares
Unlimited number of Class "A" voting, non-redeemable
non-cumulative, non-participating, retractable Preference shares
Unlimited number of Class "B" non-voting, redeemable
non-cumulative, non-participating Preference shares
December March
31, 1997 31, 1997
Stated:
200 common shares $ 20 $ 20
10. RELATED PARTY TRANSACTIONS
(a) During the period, the company paid administration fees in the amount
of $42,500 (year ended March 31, 1997 - $60,000) to Channel Sports
Marketing Inc., a company controlled by individuals who
directly/indirectly own Channel Telecom Inc.
(b) During the period, the company paid management fees in the amount of
$NIL (year ended March 31, 1997 - $20,500) to the holding companies of
the individual shareholders of Channel Telecom Inc.
(c) During the period the company made purchases in the amount of $816,094
(year ended March 31, 1997 - $79,642) from Sussex Service Bureau Inc.,
an affiliated company. These transactions are in the normal course of
business and are measured at the exchange amount being the amount of
consideration established and agreed upon by the related parties.
Included in accounts payable and accrued liabilities is $260,860
(March 31, 1997-$44,535) due to Sussex Service Bureau Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
(AMOUNTS EXPRESSED IN CANADIAN DOLLARS)
11. SUBSEQUENT EVENT
Lease commitments
Subsequent to December 31, 1997, the company entered into a lease
agreement for its office and warehouse facility. The lease is for a
period of five years commencing March 1, 1998 with an option to renew for a
further period of five years.
Future minimum lease payments for the above facility are as follows:
1998 $ 11,212
1999 28,654
2000 32,392
2001 35,382
2002 39,618
Thereafter 6,728
$ 153,986
12. LOSS CARRYFORWARD
The company has non-capital income tax loss carryforward of approximately
$42,900 available to reduce future taxable income and they begin to expire
in year 2002.
HITCOM CORPORATION AND SUBSIDIARIES
___________
PRO FORMA BALANCE SHEET AS OF DECEMBER 31, 1997 (UNAUDITED)
(AMOUNTS STATED IN US DOLLARS)
ASSETS
Channel Pro Pro
HitCom Tele- Forma Forma
Corp- com Adjust- Com-
oration Inc. ments bined
Current assets:
Cash and cash equivalents. . . . $188,800 $51,357 (a) ($37,500) $65,157
Accounts receivable-net of
allowance for doubtful
accounts of $6,949 . . . . . . 110,066 221,907 -- 331,973
Prepaid expenses and other. . . . 6,162 19,893 -- 26,055
Total current assets. . . . . 305,028 293,157 (37,500) 423,185
Property and equipment-net . . . 336,967 31,171 -- 368,138
Other assets. . . . . . . . . . 52,473 27,290 (b) 229,578 307,802
Total. . . . . . . . . $694,468 $351,618 $192,078 $1,099,125
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Channel Pro Pro
HitCom Tele- Forma Form
Corp- com Adjust- Com-
oration Inc. ments bined
Current liabilities:
Revolving line of credit $100,000 $ -- $ -- $100,000
Current portion of long-
term obligations . . . . . 59,766 10,733 (c) 137,500 70,499
Accounts payable and
Accrued expenses . . . . . . . 678,898 372,668 -- 1,051,566
Deferred revenue . . . . . . . 429,362 -- -- 429,362
Total current liabilities 1,268,026 383,401 137,500 1,651,427
Long-term obligations, less
current portion . . . . . . . 14,658 6,056 -- 20,714
Commitments and contingencies
Minority interest . . . . . . 166,107 -- -- 166,107
Stockholders' equity (deficit):
Preferred stock, $.001 par
value-5,000,000
authorized; 1,144,143
issued and outstanding . . . 1,144 -- -- 1,144
Common stock, $.004 par
value-12,500,000
authorized; 11,731,014
issued; 11,723,764
outstanding . . . . . . 31,724 14 (d) 16,725 46,924
Additional paid in capital (1,139,904) -- -- (1,139,904)
Retained earnings . . . . 372,509 (37,853) (e) 37,853 372,509
Treasury stock-at cost . . (19,796) -- -- (19,796)
Total stockholders'
equity (deficit) . . (754,323) (37,839) 54,578 (739,123)
Total . . . . . . . . $694,468 $351,618 $192,078 $1,099,125
HITCOM CORPORATION AND SUBSIDIARIES
___________
PRO FORMA INCOME STATEMENT FOR THE YEAR ENDED
DECEMBER 31, 1997 (UNAUDITED)
(AMOUNTS STATED IN US DOLLARS)
One
Plus HitCom Channel
Market- Cor- Tele-
ing poration com
1/1- 4/1- 1/1- Pro
3/31 12/31 Com- 12/31 Forma
97 97 bined 97 Total
Net
Revenues. . . $835,790 $2,732,377 $3,568,167 $945,079 $4,513,246
Cost of
sales . . . 528,834 1,440,524 1,969,358 678,979 2,648,337
Selling,
general and
admini-
strative . . 175,349 1,242,901 1,418,250 264,788 1,683,038
Total costs
and
expenses . . . 704,183 2,683,425 3,387,608 943,767 4,331,375
Operating
income . . . . 131,607 48,952 180,559 1,312 181,871
Other expense
(income)-net . . (4,475) 55,041 50,566 -- 50,566
Income (loss)
before income
tax benefit
and minority
interest . . . 136,082 (6,089) 129,993 1,312 131,305
Tax benefit . . . -- (885) (885) -- (885)
Income (loss)
before
minority
interest . . . 136,082 (5,204) 130,878 1,312 132,190
Minority
interest . . -- 64,257 64,257 -- 64,257
Net income
(loss). . . . $136,082 ($69,461) $66,621 $1,312 $67,933
Basic
earnings per
share . . . $1,360.82 $(0.01) $0.01 $0.00 $0.01
Diluted
earnings per
share . . . . $1,360.82 N/A $0.01 $0.00 $0.01
Weighted
average
number of
common
and
potential
common shares
outstanding . . . 100 7,921,458 8,368,825 3,800,000 12,168,825
HITCOM CORPORATION AND SUBSIDIARIES
___________
PRO FORMA FOOTNOTES FOR THE YEAR ENDED
DECEMBER 31, 1997 (UNAUDITED)
(AMOUNTS STATED IN US DOLLARS)
1. Basis of Presentation
The pro forma financial statements have been prepared in accordance with
generally accepted accounting principles and represent the results of
operations from both HitCom Corporation and Subsidiaries and Channel
Telecom, Inc. for the year ended December 31, 1997.
All amounts presented are stated in US dollars.
2. Channel Acquisition and Pro Forma Reference Notes
On May 29, 1998, the Company announced that it closed the Channel Telecom
Inc. ("Channel") acquisition. As part of the acquisition the Company
exchanged $175,000 and approximately 4.2 million shares of common stock
for all of Channel's outstanding shares. The Company has remitted $37,500
on or prior to closing and the remaining balance of $137,500 is payable
over a six-month period ending December 31, 1998. The acquisition is
effective January 1, 1998. The Company expects to finance this
acquisition through either working capital or external bank and or equity
financing.
Pro Forma Adjustment References
The following descriptions are presented to reflect the expected effects
of the pro forma adjustments of the Channel transaction. All adjustments
are reflected on the pro forma balance sheet.
(a) Amount of $37,500 represents cash remitted from HitCom Corporation to
the previous owners of Channel.
(b) Amount of $229,578 represents the excess purchase price paid
("goodwill") for the net assets of Channel.
(c) Amount of $137,500 represents the loan between the Company and the
previous owners of Channel. The loan is payable over a six-month
period ending December 31, 1998.
(d) Amount of $16,725 represents the net common stock issued to the
previous owners to acquire the net assets of Channel.
(e) Amount of $37,853 represents the elimination of Channel's net deficit.
ONE PLUS MARKETING, INC.
___________
STATEMENT OF INCOME FOR THE YEAR ENDED
DECEMBER 31, 1996 (UNAUDITED)
For the Year Ended
December 31, 1996
(unaudited)
Net revenues. . . . . . . . . . . . . . . . . . . . . . . . $1,927,142
Costs and expenses:
Cost of sales. . . . . . . . . . . . . . . . . . . . . . 1,077,090
Selling, general and administrative . . . . . . . . . . . 442,359
Total costs and expenses . . . . . . . . . . . . . . . . 1,519,449
Operating income . . . . . . . . . . . . . . . . . . . . . . 407,693
Other income-net . . . . . . . . . . . . . . . . . . . . . . 13,493
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $421,186
Earnings per share. . . . . . . . . . . . . . . . . . . . . . $4,211.86
Weighted average number of common and
common equivalent shares outstanding . . . . . . . . . . . . . 100
See accompanying notes to financial statements.
ONE PLUS MARKETING, INC.
___________
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED
DECEMBER 31, 1996 (UNAUDITED)
For the Year Ended
December 31, 1996
(unaudited)
Cash flows from operating activities:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $421,186
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . 26,235
Changes in assets and liabilities
Accounts receivable-net . . . . . . . . . . . . . . . . (85,185)
Prepaid expenses and other . . . . . . . . . . . . . . . (67,041)
Accounts payable and accrued expenses . . . . . . . . . . 30,313
Deferred revenue. . . . . . . . . . . . . . . . . . . . . 254,520
Net cash provided by operating activities . . . . . . . . 580,028
Cash flows used in investing activities:
Purchases of property and equipment . . . . . . . . . . . . (243,005)
Net increase in cash and cash equivalents. . . . . . . . . . 337,023
Cash and cash equivalents:
Beginning of period . . . . . . . . . . . . . . . . . . . . . . 89,566
End of period . . . . . . . . . . . . . . . . . . . . . . . . . $426,589
Supplemental cash flow disclosures:
Cash paid for interest during the period . . . . . . . . . . . . $0
Cash paid for taxes during the period. . . . . . . . . . . . . . $0
See accompanying notes to financial statements.
ONE PLUS MARKETING, INC.
___________
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 (UNAUDITED)
1. Organization and Description of Business
One Plus Marketing, Inc. ("the Company") was incorporated under the laws
of the state of Illinois in 1991. The Company designs and markets
interactive voice response and voice processing systems. The Company's
customers are located within North America without a significant
geographic concentration.
2. Summary of Significant Accounting Policies
Basis of Presentation
The Company's financial statements have been prepared in accordance with
generally accepted accounting principles.
Use of Estimates
Preparation of financial statements in accordance with generally accepted
accounting principles requires, among other things, the use of
management's estimates and assumptions which affect the reported revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid investment securities purchased with an original maturity
date of three months or less to be cash equivalents.
Revenue Recognition
The Company generally requires its customer to establish a minimum account
balance prior to receiving voice mail service. The Company recognizes
revenue as service is rendered. Account balances not used are recorded as
deferred revenue. Account balances without activity for 180 days are
recorded to revenue.
Income Taxes
The Company's stockholder has elected to be treated as an "S" Corporation
under provisions of the Internal Revenue Code which provides that, in lieu
of corporation income taxes, the stockholder is taxed for the Company's
taxable income. Therefore, no provision or liability for federal and
state income taxes is reflected in these financial statements.
Depreciation and Amortization
Depreciation and amortization is computed based on the straight-line
method over estimated useful lives ranging from five to seven years.
ONE PLUS MARKETING, INC.
___________
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996 (UNAUDITED)
3. Related Party Transactions
In the normal course of conducting business, the Company has entered into
transactions with various individuals and companies who are related parties.
4. Leases
The Company leases it facilities from the stockholder under an operating
lease through September 30, 1999 with certain renewal options. At December
31, 1996, future minimum annual payments under non-cancelable leases are
as follows:
1997 $18,000
1998 30,000
1999 22,500
Total minimum lease payments $70,500
Rent expense for 1996 was $13,454.
Part III
ITEM 1-EXHIBITS
Index
The following exhibits are filed as part of this 10-SB:
3.1 Certificate of Incorporation, as amended
3.2 Bylaws
4.1 Certificate of Designation for 8% Convertible Preferred Stock
10.1 Share Exchange Agreement Between HitCom Corporation and Scott Beil
dated April 14, 1997
10.2 Stock Purchase Agreement Between HitCom Corporation and
Rajan Arora/Jeffrey Shier and The Jeffrey Samuel Shier Family Trust
For Purchase of All Outstanding Stock of Channel Telecom Inc. dated
February 18, 1998
10.3 Employment Agreement Between David B. Parks and HitCom Corporation
21.1 List of Subsidiaries of Registrant
SIGNATURES
In accordance with Section 12 of the Securities and Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
HITCOM CORPORATION
By: /s/ DAVID B. PARKS
David B. Parks
Executive Vice President,
Chief Financial Officer,
Corporate Secretary and Director
Date: March 25, 1998
In accordance with the Securities and Exchange Act of 1934, this registration
statement has been signed by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
Signature Title Date
/s/ SCOTT A. BEIL Chairman of the Board and Director March 25, 1998
Scott A. Beil
/s/ RAJAN ARORA President and Chief Executive Officer March 25, 1998
Rajan Arora and Director
Consent of Independent Accountants
We consent to the inclusion in the registration statement on Form 10-SB of
our report, dated February 17, 1998, on our audit of the financial statements
of HitCom Corporation and subsidiaries.
/s/ MOORE STEPHENS SMITH WALLACE, L.L.C.
St. Louis, Missouri
March 23, 1998
Consent of Independent Accountants
We consent to the inclusion in the registration statement on Form 10-SB of
our report, dated February 6, 1998, on our audit of the financial statements
of One Plus Marketing, Inc.
/s/ MOORE STEPHENS SMITH WALLACE, L.L.C.
St. Louis, Missouri
March 23, 1998
2
HITCOM CORPORATION
___________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997
CHANNEL TELECOM INC.
CHANNEL TELECOM INC.
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