UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT
For the transition period from ________ to ________
Commission file number 001-13999
HITCOM CORPORATION
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 87-0389677
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
700 North Second Street, Third Floor 63102
St. Louis, Missouri (Zip Code)
(Address of Principal Executive Offices)
Issuer's Telephone Number, Including Area Code (314)231-1000
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes ( X ) No ( )
State the number of shares outstanding of each of the issuer's common
equity, as of the latest practicable date: As of July 29, 1998 -
Class Shares Outstanding
Common Stock 12,165,299
Traditional Small Business Disclosure Format (check one):
Yes No X
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
June 30, 1998
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . $172,642
Accounts receivable-net of allowance
for doubtful accounts of $14,299 . . . . . . . . . . . . 409,810
Prepaid expenses and other . . . . . . . . . . . . . . . 16,873
Total current assets . . . . . . . . . . . . . . . . . . 599,325
Property and equipment-net . . . . . . . . . . . . . . . 364,151
Other assets . . . . . . . . . . . . . . . . . . . . . . . 134,735
Total . . . . . . . . . . . . . . . . . . . . $1,098,211
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
June 30, 1998
Current liabilities:
Current portion of long-term obligations . . . . . . . . 127,033
Accounts payable and accrued expenses. . . . . . . . . . . 947,297
Deferred revenue. . . . . . . . . . . . . . . . . . . . . 294,079
Total current liabilities. . . . . . . . . . . . . . . 1,368,409
Long-term obligations, less current portion . . . . . . . . . . 269,488
Commitments and contingencies
Minority interest (NOTE 3). . . . . . . . . . . . . . . 186,452
Stockholders' equity (deficit):
Preferred stock, $.001 par value-5,000,000 authorized;
1,056,443 issued and outstanding. . . . . . . . . . 1,056
Common stock, $.004 par value-25,000,000 authorized;
12,172,549 issued; 12,165,299 outstanding. . . . . . . . 48,690
Additional paid in capital . . . . . . . . . . . . . . .(1,172,425)
Retained earnings . . . . . . . . . . . . . . . . . . . 416,337
Treasury stock-at cost. . . . . . . . . . . . . . . . . . (19,796)
Total stockholders' equity (deficit). . . . . . . . . . . (726,138)
Total . . . . . . . . . . . . . . . . . . . . . . $1,098,211
See accompanying notes to financial statements.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
For the Three-month For the Six-month
Period Ending June 30 Period Ending June 30
1998 1997 1998 1997
Net revenues . . . . $1,110,811 $944,768 $2,241,584 $1,780,558
Cost and expenses:
Cost of sales . . 558,549 533,714 1,163,280 1,062,548
Selling, general
and administrative 479,272 348,553 1,022,368 523,902
Total costs and
expenses. . 1,037,821 882,267 2,185,648 1,586,450
Operating income. . . . 72,990 62,501 55,936 194,108
Other (income)
expense-net 10,951 (48,481) (8,224) (52,956)
Income before income tax
expense and minority
interest. . . . . . . . 62,039 110,982 64,160 247,064
Income tax expense . . . -- -- -- --
Income before minority
interest. . . . . . . . 62,039 110,982 64,160 247,064
Minority interest . . 15,157 32,746 20,332 32,746
Net income. . . . . . . $46,882 $78,236 $43,828 $214,318
See accompanying notes to financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three-month For the Six-month
Period Ending June 30 Period Ending June 30
1998 1997 1998 1997
Cash flows from
operating
activities:
Net income . . . . $46,882 $78,236 $43,828 $214,318
Adjustments
to reconcile
net income to
net cash provided
by operating
activities:
Depreciation and
amortization . . . 32,567 25,562 56,308 38,669
Minority interest
in earnings of
subsidiaries . . . 13,742 32,746 20,345 32,746
Common stock
issued for
services
rendered . . . . -- -- 20,156 --
Changes in assets
and liabilities:
Accounts
receivable-net . (12,835) (1,634) (77,836) (212,500)
Prepaid
expenses and
other . . . . . . (3,106) (15,834) 2,052 24,205
Other assets . . 22,037 -- 43,804 50
Accounts
payable and
accrued
expenses . . . (200,988) (663,109) (104,268) (258,619)
Deferred
revenue . . (164,787) (50,109) (135,283) 32,082
Net cash
used in
operating
activities (266,488) (594,142) (130,894) (129,049)
Cash flows used
in investing
activities:
Purchases of
property and
equipment . . . (25,786) (3,271) (52,321) (36,325)
Cost of net
assets
acquired . . . . -- 1,052 14,296 1,052
Net cash used in
investing
activities . . . (25,786) (2,219) (38,025) (35,273)
Cash flows used in
financing activities:
Borrowings on debt
obligations . . . . 370,682 -- 372,293 --
Payments on debt
obligations . . . (162,563) -- (160,983) --
Payments on capital
leases . . . . . . . (3,891) -- (6,002) --
Issuance
of common stock 20,115 -- 20,115 --
Costs associated
with equity
placement . . . . -- -- (72,662) --
Repurchase of
common stock . . . . . . -- (9,712) -- (9,712)
Shareholder
distributions . . . . . -- -- -- (94,423)
Net cash
provided by
(used in)
financing
activities . . 224,343 (9,712) 152,761 (104,135)
Net decrease in
cash and cash
equivalents . . . . (67,931) (606,073) (16,158) (268,457)
Cash and cash
equivalents:
Beginning of
period 240,573 764,205 188,800 426,589
End of
period . . . . $172,642 $158,132 $172,642 $158,132
Supplemental cash
flow disclosures:
Cash paid for
interest during
the period . . . $36,344 $3,367 $40,440 $5,602
Cash paid for
taxes during
the period . . . . . . . $-- $-- $-- $--
See accompanying notes to financial statements
FORM 10-QSB - PART I
ITEM 1 - Financial Statements (continued)
HitCom Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 1998
1. Basis of Presentation
The unaudited consolidated balance sheet of HitCom Corporation and
Subsidiaries (the "Company") as of June 30, 1998, and the related
consolidated statements of earnings and cash flows for the three-month and
six-month period ending June 30, 1998 and 1997 have been prepared in
accordance with the instructions to Form 10-QSB. Accordingly, certain
information and disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. These unaudited financial statements should be read in
conjunction with the audited financial statements and notes thereto for the
nine-month period ended December 31, 1997. All amounts presented are in US
dollars.
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. ("One Plus") is considered the "accounting
acquiror." The historical financial statements prior to April 1, 1997, are
those of One Plus Marketing, Inc. (See Subsequent Events).
Prior to April 1, 1997, One Plus was an S Corporation for tax purposes under
provisions of the Internal Revenue Code which provide 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.
On May 28, 1998, the Company acquired 100% of the outstanding stock 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 ratified at the Company's Annual Meeting of Shareholders.
Under the terms of the agreement, the Company exchanged 4,184,810 shares of
Company common stock and $37,500 in cash for all of Channel's outstanding
shares. The effective date of the transaction is January 1, 1998. The
operating results of Channel have been presented in the financial statements
as of January 1, 1998.
In the opinion of the management of the Company, all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of the
financial statements have been included therein. The results of this
interim period are not necessarily indicative of results for the entire year.
2. Earnings per 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 details of earnings per share calculations for the quarter ending
June 30, 1998, and 1997 are as follows:
Weighted
Average Per Share
Income Shares Amount
1998
Earnings per share
of common stock-basic $46,882 9,377,404 $0.01
Stock options, warrants
and preferred
stock equivalents -- 1,030,075 ($0.01)
Earnings per share of
common stock - on
a fully diluted basis $46,882 10,407,479 $0.00
1997
Earnings per
share of common
stock-basic $78,236 7,912,040 $0.01
Stock options,
warrants and preferred
stock equivalents -- 313,836 --
Earnings per
share of common
stock - on
fully diluted basis $78,236 8,225,876 $0.01
The details of earnings per share calculations for the six-month period
ending June 30, 1998, and 1997 are as follows:
Weighted Per
Average Share
Income Shares Amount
1998
Earnings per
share of common
stock - basic $43,828 8,654,209 $0.01
Stock options,
warrants and preferred
stock equivalents -- 1,030,075 ($0.01)
Earnings per
share of common
stock - on a fully
diluted basis $43,828 9,684,284 $0.00
1997
Earnings per
share of common
stock - basic $214,318 3,956,020 $0.05
Stock options,
warrants and preferred
stock equivalents -- 313,836 --
Earnings per
share of common
stock - on
fully diluted basis $214,318 4,269,856 $0.05
3. Subsequent Events
On July 29, 1998, the Company purchased its 20% minority interest ($186,452)
in One Plus Marketing, Inc. for $1.
4. Pro Forma Effects of Channel Acquisition
On May 28, 1998, the Company acquired 100% of the outstanding stock of
Channel Telecom, Inc., ("Channel") headquartered in Toronto, Canada.
The following condensed financial summary reflects the pro forma effects of
the acquisition effective from January 1, 1998 for the pro forma periods
consistent with the reporting requirements for the quarter ending June 30,
1997 and the six-month period ending June 30, 1997 (amounts are stated in US
dollars):
For the Three-month For the Six-month
Period Ending Period Ending
June 30, 1997 June 30, 1997
Revenues $1,256,185 $2, 277,403
Cost of sales 818,392 1,497,555
Selling, general and
administrative 370,024 577,294
Net income $67,769 $202,554
ITEM 2 - Management's Discussion and Analysis
Results of Operations
The Company principally derives its revenues from the sale of interactive
voice response/voice processing services to Direct Sales Organizations and
sale of prepaid phone calling cards. The Company offers customized
interactive voice-processing systems allowing 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. (See Subsequent Events).
Prior to April 1, 1997, One Plus was an S Corporation for tax purposes under
provisions of the Internal Revenue Code which provide 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.
On May 28, 1998, the Company acquired 100% of the outstanding stock 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 ratified at the Company's Annual Meeting of Shareholders.
Under the terms of the agreement, the Company exchanged 4,184,810 shares of
Company common stock and $37,500 in cash for all of Channel's outstanding
shares. The effective date of the transaction will be January 1, 1998. The
operating results of Channel have been presented in the financial statements
as of January 1, 1998.
QUARTER ENDED JUNE 30, 1998 COMPARED TO JUNE 30, 1997
NET REVENUES. Net revenues increased $166,043 or 18% from $944,768 for the
quarter ended June 30, 1997. Revenues are primarily generated from the
Company's interactive voice response products and services and prepaid phone
calling cards. The increase in revenue is primarily attributable to the
acquisition of Channel effective January 1, 1998.
COST OF SALES. Cost of sales increased $24,835 or 5% from $533,714 for the
quarter ended June 30, 1997. The cost of sales percentage to net revenues
decreased from 57% to 50%, 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
along with the prepaid phone calling cards. 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 in 1998 as a
result of its affiliation with its long distance service provider.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased $130,719 or 38% from $348,553 for the quarter ended June
30, 1997. The selling, general and administrative percentage to net revenues
increased to 43% from 37%. The primary reason for the increase is
attributable to the additional costs of administrative support functions to
enhance the management of the Company along with the costs associated with
becoming an SEC reporting public company.
OTHER EXPENSE (INCOME), NET. Other expense (income), net decreased $59,432
from income of $48,481 for the quarter ended June 30, 1997. The primary
reason for the drecrease was attributable to the forgiveness of certain
payables due by the Company.
MINORITY INTEREST. Minority interest expense decreased $17,589 from $32,746
for the quarter ended June 30, 1997. Minority interest represents a 20%
ownership interest in the Company's subsidiary One Plus owned by the major
stockholder of the Company. (See Subsequent Events).
NET INCOME. As a result of the foregoing, net income for the quarter ended
June 30, 1998, decreased by $31,354 or 40% compared to the same period in
1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows from Operating Activities
During the quarter ending June 30, 1998, the Company used cash flows from
operating activities of $266,488 as compared to $594,142 during the
comparable three-month period ending 1997. 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
has been used to reduce these liabilities.
Cash Flows from Investing Activities
During the quarter ending June 30, 1998 and 1997, the Company used $25,786
and $3,271 for purchases of property and equipment related principally to
support the Company's operating and administrative 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 (see
Subsequent Events) 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
During the second quarter 1998, the Company restructured its existing credit
facilities. The Company maintains two separate credit facilities making
available $535,000 with a bank secured by the Company's major stockholder's
stock that bears interest between bank's prime rate plus one-half percent
(prime was 8.5% at June 30, 1998) and 9% and expires on May 1, 2001. At June
30, 1998, approximately $330,000 of the credit arrangements available have
been used by the Company. The amount drawn from the credit arrangements were
used by the Company to retire current debt obligations, cash payments for the
Channel acquisition and capital expenditures.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO JUNE 30, 1997
NET REVENUES. Net revenues increased $461,026 or 26% from $1,780,558 for the
six months ended June 30, 1997. Revenues are primarily generated from the
Company's interactive voice response products and services and prepaid phone
calling cards. The increase in revenue is primarily attributable to the
acquisition of Channel effective January 1, 1998.
COST OF SALES. Cost of sales increased $100,732 or 10% from $1,062,548 for
the six months ended June 30, 1997. The cost of sales percentage to net
revenues decreased from 60% to 52%, 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 along with the prepaid phone calling cards. 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 in
1998 as a result of its affiliation with its long distance service provider.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased $498,466 or 95% from $523,902 for the six months ended June
30, 1997. The selling, general and administrative percentage to net revenues
increased to 46% from 29%. The primary reason for the increase is
attributable to the additional costs of administrative support functions to
enhance the management of the Company along with the costs associated with
becoming an SEC reporting public company.
OTHER EXPENSE (INCOME), NET. Other expense (income), net decreased $44,732
from income of $52,956 for the six months ended June 30, 1997. The primary
reason for the decrease was attributable to the forgiveness of certain
payables due by the Company.
MINORITY INTEREST. Minority interest expense decreased $12,414 from $32,746
for the six months ended June 30, 1997. Minority interest represents a 20%
ownership interest in the Company's subsidiary One Plus owned by the major
stockholder of the Company. (See Subsequent Events).
NET INCOME. As a result of the foregoing, net income for the six months ended
June 30, 1998, decreased by $170,490 or 80% compared to the same period in
1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows from Operating Activities
During the six-month period ended June 30, 1998, the Company used cash flows
from operating activities of $130,894 as compared to $129,049 during the
comparable six-month period ended 1997. 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
has been used to reduce these liabilities.
Cash Flows from Investing Activities
During the six-month period ended June 30, 1998 and 1997, the Company used
$52,321 and $36,325 for purchases of property and equipment related
principally to support the Company's operating and administrative 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 (see
Subsequent Events) 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
During the second quarter 1998, the Company restructured its existing credit
facilities. The Company maintains two separate credit facilities making
available $535,000 with a bank secured by the Company's major stockholder's
stock that bears interest between bank's prime rate plus one-half percent
(prime was 8.5% at June 30, 1998) and 9% and expires on May 1, 2001. At June
30, 1998, approximately $330,000 of the credit arrangements available have
been used by the Company. The amount drawn from the credit arrangements
were used by the Company to retire current debt obligations, cash payments
for the Channel acquisition and capital expenditures.
During the first quarter 1998, the Company recognized $72,662 in equity
placement fees as it attempts to secure additional financing to support the
Company's expansion.
IMPACT ON INFLATION
Management believes that the Company's results of operations are not
dependent upon the levels of inflation.
FORM 10-QSB - PART II
Item 1 - Legal Proceedings
None.
Item 2 - Changes in Securities and Use of Proceeds
None.
Item 3 - Defaults Upon Senior Securities
None.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
Item 5 - Other Information
None.
Item 6 - Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit 27.0 - Financial Data Schedule
B. Reports on Form 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
HITCOM CORPORATION
(Registrant)
By: /s/ DAVID B. PARKS
David B. Parks
Executive Vice President,
Chief Financial Officer,
Corporate Secretary and Director
Date: July 31, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from HitCom
Corporation's June 30, 1998 10-QSB and is qualified in it's entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 172,642
<SECURITIES> 00
<RECEIVABLES> 424,109
<ALLOWANCES> 14,299
<INVENTORY> 00
<CURRENT-ASSETS> 599,325
<PP&E> 543,792
<DEPRECIATION> 179,641
<TOTAL-ASSETS> 1,098,211
<CURRENT-LIABILITIES> 1,368,409
<BONDS> 396,521
00
1,056
<COMMON> 48,690
<OTHER-SE> (775,884)
<TOTAL-LIABILITY-AND-EQUITY> 1,098,211
<SALES> 2,241,584
<TOTAL-REVENUES> 2,241,584
<CGS> 1,163,280
<TOTAL-COSTS> 2,185,648
<OTHER-EXPENSES> 00
<LOSS-PROVISION> 35,009
<INTEREST-EXPENSE> 00
<INCOME-PRETAX> 55,936
<INCOME-TAX> 00
<INCOME-CONTINUING> 55,936
<DISCONTINUED> 00
<EXTRAORDINARY> 00
<CHANGES> 00
<NET-INCOME> 43,828
<EPS-PRIMARY> $0.01
<EPS-DILUTED> $0.00
</TABLE>
