UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE 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.)
85 Scarsdale Road, Suite 202
Toroto, Ontario, Canada M3B 2R2
(Address of Principal Executive Offices) (Zip Code)
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 [ ] No [X]
State the number of shares outstanding of each of the issuer's common
equity, as of the latest practicable date: As of October 30, 1999 -
Class Shares Outstanding
Common Stock 12,358,206
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
HITCOM CORPORATION
Condensed Consolidated Balance Sheet
September 30, 1999
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 179,091
Accounts receivable, net of allowance for
doubtful accounts of $65,555 663,165
Inventory 38,756
Other current assets 43,931
- --------------------------------------------------------------------------------
Total current assets 924,943
- --------------------------------------------------------------------------------
Property and equipment, net 381,193
Goodwill, net of amortization of $443,084 3,464,674
Investment in service bureau 23,083
- --------------------------------------------------------------------------------
$4,793,893
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Revolving line of credit $ 45,000
Accounts payable 1,426,454
Deferred revenue 620,121
Due to officers and directors 21,441
Current portion of long-term obligations 74,840
Net liability for discontinued segment 16,916
- --------------------------------------------------------------------------------
Total current liabilities 2,204,772
- --------------------------------------------------------------------------------
Long term obligations 739,164
- --------------------------------------------------------------------------------
Total liabilities 2,943,936
- --------------------------------------------------------------------------------
Shareholders' equity
Convertible preferred stock $.001 par value,
liquidation preference of $0.80 per share
($764,239 aggregate liquidation preference),
convertible into 0.25 shares of common stock;
5,000,000 authorized; 955,298 issued and outstanding 985
Common stock $.004 par value, 25,000,000 authorized;
12,367,383 issued; 12,360,133 outstanding 49,432
Additional paid in capital 2,916,864
Accumulated deficit (1,082,240)
Cumulative foreign currency translation adjustment (15,288)
Treasury stock - at cost; 7,250 common stock (19,796)
- --------------------------------------------------------------------------------
1,849,957
- --------------------------------------------------------------------------------
$4,793,893
================================================================================
See accompanying notes to the condensed consolidated financial statements
<PAGE>
HITCOM CORPORATION
Condensed Consolidated Statements of Operations
(unaudited)
<TABLE>
- --------------------------------------------------------------------------------------------
Three-Month Period Nine-Month Period
Ended September 30, Ended September 30,
1999 1998 1999 1998
<CAPTION>
<S> <C> <C> <C> <C>
Net service revenues $1,494,856 $ 928,981 $4,641,782 $2,552,225
Cost of services 1,149,769 589,076 3,746,681 1,326,533
- --------------------------------------------------------------------------------------------
Gross margin 345,087 339,905 895,101 1,225,692
- --------------------------------------------------------------------------------------------
Operating expenses:
Selling, general and administrative 509,604 332,785 1,265,102 925,168
Amortization of goodwill 99,942 99,942 299,827 133,256
Depreciation of property and equipment 30,526 23,448 97,454 79,756
- --------------------------------------------------------------------------------------------
Total operating expenses 640,072 456,175 1,662,383 1,138,180
- --------------------------------------------------------------------------------------------
Operating income (loss) (294,985) (116,270) (767,282) 87,512
Other income (expense) - net (18,015) (17,811) (50,660) (33,840)
- --------------------------------------------------------------------------------------------
Income (loss) before taxes and
minority interest (313,000) (134,081) (817,942) 53,672
Provision for income taxes - - - -
Minority interest - - - 20,332
- --------------------------------------------------------------------------------------------
Income (loss) from continuing operations (313,000) (134,081) (817,942) 33,340
Loss from discontinued segment,
net of tax benefit - 25,397 - 177,723
- --------------------------------------------------------------------------------------------
Net income (loss) $(313,000) $(159,478) $(817,942) $ (144,383)
============================================================================================
Net income (loss) available to
common shareholders $(313,000) $(159,478) $(817,942) $ (144,383)
============================================================================================
Basic and diluted earnings (loss) per share
Income (loss) from continuing operations $ (0.03) $ (0.01) $ (0.07) $ -
Loss from discontinued segment $ - $ - $ - $(0.02)
- --------------------------------------------------------------------------------------------
Net loss $ (0.03) $ (0.01) $ (0.07) $(0.02)
============================================================================================
Weighted average shares - basic 12,358,206 12,174,546 12,325,106 9,827,655
Weighted average shares - diluted 12,358,206 12,174,546 12,325,106 9,827,655
See accompanying notes to the condensed consolidated financial statements
- --------------------------------------------------------------------------------------------
</TABLE>
HITCOM CORPORATION
Condensed Consolidated Statement of Cash Flows
(unaudited)
<TABLE>
Three-Month Period Nine-Month Period
Ended September 30, Ended September 30,
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating activities:
Net loss $(313,000) $(159,478) $(817,942) $(144,383)
Adjustments to reconcile net loss to net
cash used in operating activities:
Goodwill amortization 99,942 99,942 299,827 133,256
Depreciation 30,526 23,448 97,454 79,756
Minority interest in earnings of subsidiary - - - 20,332
Issuance of common shares for services - - 15,322 20,156
Changes in assets and liabilities, excluding acquisition:
Accounts receivable--net (72,442) (37,402) (174,103) (115,238)
Inventory 12,435 618 (11,548) 2,670
Other assets (22,242) 11,614 (32,679) 50,836
Accounts payable and accrued expenses (13,939) (66,996) 382,106 (54,310)
Deferred revenue 200,557 7,623 230,040 (127,660)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (78,163) (120,631) (11,523) (134,585)
- -----------------------------------------------------------------------------------------------------------------------------------
Investing activities:
Proceeds from sale of (purchases of) property and equipment (20,340) 2,758 (136,836) (49,563)
Acquisition of Channel Telecom Inc., net of cash acquired - - - (155,191)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (20,340) 2,758 (136,836) (204,754)
- -----------------------------------------------------------------------------------------------------------------------------------
Financing activities:
Proceeds from (repayment of) long term debt (18,357) (10,435) (40,972) 194,873
Repayment of due to officers and directors 41,354 - 12,938 -
Increase (decrease) in revolving line of credits - - 15,000 -
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) in financing activities 22,997 (10,435) (13,034) 194,873
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (75,506) (128,308) (161,393) (144,466)
Cash and cash equivalents at beginning of period 254,597 172,642 340,484 188,800
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 179,091 $ 44,334 $ 179,091 $ 44,334
===================================================================================================================================
Supplemental disclosure of cash flow information
Cash paid for interest during the period $ 4,371 8,115 20,116 40,440
Cash paid for income taxes during the period - - - -
Non Cash investing and financing activities:
Common shares issued for acquisition of Channel Telecom Inc. - - - 3,749,085
Conversion of preferred shares into common shares - 25 119 85
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
HITCOM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of HitCom
Corporation and subsidiaries (collectively "the Company" or "HitCom") have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and Securities and Exchange Commission ("SEC") regulations.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of management, the financial statements reflect all adjustments (of a
normal and recurring nature) which are necessary to present fairly the financial
position, results of operations, stockholders' equity and cash flows for the
interim periods. These unaudited condensed consolidated financial statements
should be read in conjunction with the audited financial statements and notes
thereto for the year ended December 31, 1998, as set forth in HitCom's Annual
Report on Form 10-KSB. The results for the three months and nine months ended
September 30, 1999, are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999. All amounts presented are in US
dollars.
2. NATURE OF BUSINESS
HitCom Corporation and its subsidiaries (collectively referred to as "Hitcom" or
the "Company") is a telecommunication Company providing two principal services
for businesses and individuals: i. Enhanced communication including 800-based
services, voice and data messaging which the Company delivers through its
network.
ii. Prepaid telecommunication services through its switching platforms.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Revenue Recognition and Deferred Revenue
The Company recognizes revenue as services are rendered as follows:
800-based services
The Company generally requires its customers to establish minimum account
balances prior to receiving services. Revenues consists of usage fees based on
per minute rates and monthly fees. Account balances in excess of services
rendered are recorded as deferred revenue. Revenue for unused account balances
is recognized when there has been no activity for six months.
Prepaid card services
The Company's revenue originates from customer usage of (i) Company and
cobranded prepaid calling cards sold through retailers, (ii) recharges of
existing calling cards, and (iii) cards sold for promotional marketing
campaigns. The Company sells cards to distributors and retailers with normal
credit terms. When the distributor or retailer is invoiced, deferred revenue is
recognized. The Company recognizes revenue in accordance with the terms of the
card as the ultimate card users utilize calling time and service fees. The terms
of the card refer to the rates, fees and expiration dates of the card. All
prepaid cards sold by the Company expire upon either six or twelve months after
second usage. Upon expiration and cancellation of the prepaid phone card, the
Company recognizes the related deferred amount as revenue.
Goodwill
Goodwill represents the excess of cost over the fair value of net assets
acquired for the Channel Telecom acquisition effective May 31, 1998, and is
being amortized on a straight-line basis over a ten year period beginning from
the date of acquisition.
4. PRO FORMA EFFECTS OF CHANNEL ACQUISITION
The following unaudited pro forma summary presents the Company's combined
results as if the acquisition of Channel occurred at the beginning of the
respective periods, after giving effect to certain adjustments including
goodwill amortization, depreciation and interest expense. These pro forma
results are not necessarily indicative of those that would have occurred had the
acquisition occurred at the beginning of the nine-month period ended September
30, 1998:
Nine-Month Ended
September 30, 1998
------------------
Net service revenues $3,089,047
Cost of services 1,648,071
- --------------------------------------------------------------------------------
Gross margin 1,440,976
- --------------------------------------------------------------------------------
Net loss available to common shareholders $ 317,825
- --------------------------------------------------------------------------------
Net loss per share $ 0.03
- --------------------------------------------------------------------------------
<PAGE>
HITCOM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. SEGMENTED INFORMATION
At September 30, 1999, HitCom has two separately managed business segments,
Channel One Plus Total
THREE MONTHS ENDED, SEPTEMBER 30, 1998
Revenues from external customers $ 473,566 $ 455,415 $ 928,981
Other expense, net - (17,811) (17,811)
Depreciation 2,100 21,348 23,448
Goodwill amortization 99,942 - 99,942
Segment net income (loss)Segment loss (126,822) (32,656) (159,478)
THREE MONTHS ENDED, SEPTEMBER 30, 1999
Revenues from external customers $1,115,985 $ 378,871 $ 1,494,856
Other expense, net (6,100) (11,915) (18,015)
Depreciation 6,526 24,000 30,526
Goodwill amortization 99,942 - 99,942
Segment loss (173,497) (139,503) (313,000)
NINE MONTHS ENDED, SEPTEMBER 30, 1998
Revenues from external customers $ 643,132 $1,909,093 $ 2,552,225
Other expense, net - (33,840) (33,840)
Depreciation 4,200 75,556 79,756
Goodwill amortization 133,256 - 133,256
Segment income (loss) (172,636) 28,253 (144,383)
Segment assets 4,292,658 453,587 4,746,245
NINE MONTHS ENDED, SEPTEMBER 30, 1999
Revenues from external customers $3,383,620 $1,258,162 $4,641,782
Other expense, net (17,362) (33,298) (50,660)
Depreciation 25,454 72,000 97,454
Goodwill amortization 299,827 - 299,827
Segment loss (648,761) (169,181) (817,942)
Segment assets $4,451,081 $ 342,812 4,793,893
<PAGE>
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operation
Overview
The Company principally derives its revenues through two operating subsidiaries:
Channel Telecom Inc. (Channel)
Channel is a provider of long distance services to retail customers. Channel
currently provides its retail services by marketing Prepaid Cards, primarily
under the Phone Cash, Fone Buster and Phone Saver brand names, through an
extensive network of independent retail outlets (through independent sales
agents) and distributors throughout Canada. Channel targets retail markets with
substantial international long distance calling requirements, such as ethnic
communities, and believes that its Prepaid Cards provide consumers with a
convenient, attractively priced alternative to traditional presubscribed long
distance services.
In the second quarter of 1999, Channel expanded its switching facilities with
the addition of a carrier class switch based in Toronto, Canada. The new switch
provides Channel with significant increase in termination capacity as compared
to the previous PC based switch.
One Plus Marketing Inc. (One Plus)
One Plus derives its revenues from the sale of interactive voice response/voice
processing services to the independent agents of Direct Sales Organizations
(DSO). Therefore, One Plus is dependent upon the DSOs to provide referrals of
their sales agents to use the services. The revenues of One Plus are derived
primarily in the United States.
Results of Operation
THREE MONTHS ENDED September 30, 1999 COMPARED TO THREE MONTHS ENDED September
30, 1998
Revenue
Total revenue increased 61% to $1,494,856 in the third quarter of 1999 from
$928,981 for the same period in 1998. Channel's Revenue increased 136% to
$1,115,985 in the third quarter of 1999 as compared to $473,566 for the same
period in 1998. Channel has experienced significant growth during the year due
to increased usage of the Channel cards, an increase in the number of retail
storefronts in which the Company's products are distributed, and greater brand
awareness.
Revenue for One Plus declined by 17% to $378,871 in the third quarter of 1999
from $455,415 for the same period in 1998.
Cost of Services:
Cost of services primarily includes payments to other carriers for origination,
transport and termination of international and domestic long distance traffic.
Cost of services increased to 77% of revenue ($1,149,769) in the third quarter
of 1999 from 63% of revenue ($589,076) for the same period in 1998. The increase
in cost of services is primarily due to the Channel acquisition. Channel's
business has a higher cost of services than One Plus due to significant
international long distance traffic as compared to the traffic of One Plus which
is only in North America. The international long-distance traffic is intensely
competitive and therefore placing downward pressure on the prices Channel can
sell its services.
Channel's Cost of services decreased to 84% of revenue in the third quarter of
1999 from 87% of revenue in the second quarter of 1999. The decrease was due to
the full effect of the cost savings achieved with the implementation of the new
carrier-class switch in the Second Quarter of 1999. The new switch is capable of
concurrently utilizing numerous long distance carriers thereby resulting in
greater choice in optimizing least cost routing. Channel expects cost of
services as a percentage of revenue to continually decrease for the remainder of
1999 as the full effect of improved least cost routing capabilities of the new
carrier class switch takes place. Channel has continued to expand the number of
carriers it uses to terminate its telecommunication traffic with the addition of
another major international carrier. Channel now terminates its traffic through
six different major international carriers.
Selling General & Administrative (SG&A):
SG&A expenses decreased to 34% of revenue ($509,604) in the third quarter of
1999 from 36% of revenue ($332,785) for the same period in 1998. The significant
increase in revenue due to Channel's growth, enabled the decrease of SG&A
expense as a percentage of revenue.
Goodwill Amortization
Goodwill represents the excess of cost over the fair value of net assets
acquired for the Channel acquisition effective May 31, 1998 and is being
amortized on a straight-line basis over a ten year period beginning from the
date of acquisition. Amortization expense was $99,942 in the third quarters of
1999 and 1998.
Depreciation of property and equipment
Depreciation was $30,526 in the third quarter of 1999 as compared to $23,448 for
the same period in 1998.
Discontinued Operations
In August 1998, HitCom completed the sale of all of the Internet Service
division including certain computer equipment and customer accounts for $30,000.
This division had focused on providing various levels of Internet access to
customers in the St. Louis, Missouri area. The disposal of the ISP division is
reflected as a discontinued operations. The direct expenses and associated
overhead costs net of revenue earned from these operations, was $25,397 for the
third quarter of 1998.
EBITDA - continuing operations
EBITDA in the third quarter of 1999 was a loss of $164,517 as compared income of
$7,120 for the same period in 1998. Decrease in EBITDA is due to the decrease in
gross margin at Channel due to increased competition in the markets that the
Company operates and the loss at One Plus due to the decrease in One Plus
revenue.
Net loss
Net loss increased to $313,000 in the third quarter of 1999 from $159,478 for
the same period in 1998. Increase in net loss is due to the same reasons for the
increase in EBITDA loss.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at September 30, 1999 decreased to $179,091 from
$254,597 at June 30 1999. The Company's liquidity requirements were largely used
by operating activities and purchases of property and equipment.
Cash used by operating activities in the third quarter of 1999 was $78,163 as
compared to $120,631 for the same period in 1998. Significant working capital
was provided by increase in deferred revenue ($200,557) due to increase in
Channel's revenue. The EBITDA loss for the quarter and increase in account
receivable were the primary usage of cash in 1999.
Cash used for capital expenditures in the third quarter of 1999 was $20,340 as
compared to net proceeds of $2,758 for the same period in 1998.
Cash provided by financing activities in the third quarter of 1999 was $22,997
as compared to cash used of $10,435 for the same period in 1998. Financing
requirements in the 1999 quarter was provided primarily by increase in Due to
officers and directors for salary wages accrued but not paid.
NINE MONTHS ENDED September 30, 1999 COMPARED TO NINE MONTHS ENDED September 30,
1998
Revenue
Total revenue increased 82% to $4,641,782 in the nine-month period ended
September 30, 1999 from $2,552,225 for the same period in 1998. The increase is
primarily due to the Channel acquisition, which closed on May 31, 1998.
Channel's revenues increased 426% to $3,383,620 in the nine-month period ended
September 30, 1999 as compared to $643,132 for the same period in 1998. Channel
has experienced significant growth during the year due to increased usage of the
Channel card, an increase in the number of retail storefronts in which the
Company's products are distributed, and greater brand awareness.
Sales for One Plus declined by 34% to $1,258,162 in the nine-month period
ended September 30, 1999 from $1,909,093 for the same period in 1998.
Cost of Services:
Cost of services primarily includes payments to other carriers for origination,
transport and termination of international and domestic long distance traffic.
Cost of services increased to 81% of revenue ($3,746,681) in the nine-month
period ended September 30, 1999 from 52% of revenue ($1,326,533) for the same
period in 1998. The increase in cost of services is primarily due to the Channel
acquisition. Channel's business has a higher cost of services than One Plus due
to significant international long distance traffic as compared to the traffic of
One Plus which is only in North America. The international long-distance traffic
is intensely competitive and therefore placing downward pressure on the prices
Channel can sell its services.
With the implementation of the new carrier class switch in the second quarter of
1999, Channel has implemented cost saving programs to decrease cost of services
as a percentage of revenue. The new switch is capable of concurrently utilizing
numerous long distance carriers thereby resulting in greater choice in
optimizing least cost routing. Channel expects cost of services as a percentage
of revenue to continually decrease for the remainder of 1999 as the full effect
of improved least cost routing capabilities of the new carrier class switch
takes place. Channel has continued to expand the number of carriers it uses to
terminate its telecommunication traffic with the addition of five new major
international carriers in the nine-month period. Channel now terminates its
traffic through six different major carriers. The increased number of carriers
and increased termination traffic, has allowed Channel to continually negotiate
lower termination rates to reduce cost of services.
Selling General & Administrative (SG&A):
SG&A expenses decreased to 27% of revenue ($1,265,102) in the nine-month period
ended September 30, 1999 from 36% of revenue ($925,168) for the same period in
1998. The significant increase in revenue due to Channel's acquisition, enabled
the decrease of SG&A expense as a percentage of revenue.
Goodwill Amortization
Goodwill represents the excess of cost over the fair value of net assets
acquired for the Channel acquisition effective May 31, 1998 and is being
amortized on a straight-line basis over a ten year period beginning from the
date of acquisition. Amortization expense was $299,827 in the nine-month period
ended September 30, 1999 as compared to $133,256 for the same period in 1998.
Depreciation of property and equipment
Depreciation increased to $97,454 in the nine-month period ended September 30,
1999 as compared to $79,756 for the same period in 1998. The increase in dollar
amount was primarily attributable to increased capital expenditures for property
and equipment to support the growth of the business resulting in increased
depreciation expense.
Net Interest Expense (income):
Net interest expense was $50,660 in the nine-month period ended September 30,
1999 as compared to net interest expense of $33,840 for the same period in 1998.
This was attributable to increased bank borrowings and interest expense on the
convertible debentures issued in October 1998.
Discontinued Operations
In August 1998, HitCom completed the sale of all of the Internet Service
division including certain computer equipment and customer accounts for $30,000.
This division had focused on providing various levels of Internet access to
customers in the St. Louis, Missouri area. The disposal of the ISP division is
reflected as a discontinued operations. The direct expenses and associated
overhead costs net of revenue earned from these operations, was $177,723 for the
nine-month period ended September 30, 1998.
EBITDA - continuing operations
EBITDA in the nine-month period ended September 30, 1999 was a loss of $370,001
as compared income of $300,524 in the same period of 1998. Decrease in EBITDA is
due to the decrease in gross margin at Channel due to increased competition in
the markets that the Company operates and the significant decrease in the
profitability of One Plus due to the significant decrease in One Plus revenue.
Net loss
Net loss in the nine-month period ended September 30, 1999 increased to $817,942
from a net loss of $144,383 for the same period in 1998. Increase in net loss is
due to the same reasons for the increase in EBITDA loss as well as the goodwill
amortization of $299,827 in 1999 as compared to $133,256 in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at September 30, 1999 decreased to $179,091 from
$340,484 at December 31, 1998. The Company's liquidity requirements were largely
used by investment needs including capital expenditures for the new
carrier-class switch for Channel.
These requirements were funded primarily by cash reserves.
Cash used by operating activities in the nine-month period ended September 30,
1999 was $11,523 as compared to $134,585 for the same period in 1998.
Significant working capital was provided by increase in Account payable and
accrued expenses ($382,106) and Deferred revenue ($230,040) due to growth at
Channel. The EBITDA loss for the nine-month period and increase in account
receivable were the primary usage of cash in 1999.
Cash used for capital expenditures in the nine-month period ended September 30,
1999 was $136,836 as compared to $204,754 for the same period in 1998. The 1999
investing activities were primarily used for the implementation of the new
carrier-class switch at Channel while the 1998 investing activities were
primarily used for the purchase of Channel.
Cash used by financing activities in the nine-month period ended September 30,
1999 was $13,034 as compared to net proceeds of $194,873 for the same period in
1998. In 1998, financing activities proceeds consisted primarily of increased
bank borrowings
In the nine-month period ended September 30, 1999, Channel obtained a new
operating credit facility from a commercial bank in Canada for approximately
$100,000. The new credit facility is secured by a general security agreement on
Channel Telecom Inc., $50,000 Guaranteed Investment Certificate and corporate
guarantees from HitCom.
At September 30, 1999, the Company is not committed to completing any
acquisition, however, the Company is continually looking for further
acquisitions which will expand the Company's product lines and competitive
position. Any potential acquisitions in the following twelve months will be
funded either through stock issuance, new equity financing and/or increased bank
borrowings.
Need for Additional Capital to Finance Growth and Capital Requirements
HitCom believes that it must continue to enhance and expand its network and
build out its telecommunications network infrastructure in order to maintain its
competitive position and continue to meet the increasing demands for service
quality, capacity and competitive pricing. HitCom's ability to grow depends, in
part, on its ability to expand its operations through the ownership and leasing
of network capacity, which requires significant capital expenditures, that are
often incurred prior to HitCom's receipt of the related revenue.
HitCom believes that, based upon its present business plan and its existing cash
resources and expected cash flow from operating activities; it will have
sufficient liquidity to support operations at current levels. If HitCom's growth
exceeds current expectations, or if HitCom obtains one or more attractive
opportunities to purchase the business or assets of another company, or if
HitCom's cash flow from operations after the end of such period is insufficient
to meet its working capital and capital expenditure requirements, HitCom will
need to raise additional capital from equity or debt sources.
YEAR 2000 COMPUTER PROGRAM FAILURE
A significant percentage of the software that runs most of the computers relies
on two-digit date codes to perform computations and decision-making functions.
Commencing on January 1, 2000, these computer programs may fail from an
inability to interpret date codes properly, misinterpreting "00" as the year
1900 rather than 2000. HitCom is in the process of evaluating and implementing
Year 2000 compliance programs to ensure that its software, systems and equipment
are Year 2000 compliant and to ensure that the software and technology of their
third party vendors and customers are also Year 2000 compliant. The Company has
not incurred any significant Year 2000 costs as at September 30, 1999 and has
determined that it will not experience any material Year 2000 risks or
expenditures to bring its systems compliant with Year 2000 issues. The new
carrier-class switch and software at Channel is Year 2000 compliant.
In additional to assessing its own systems, the Company has conducted an
external review of its suppliers, and any other third parties with which it does
business, including equipment and systems providers and other telecommunications
service providers, to determine their vulnerability to Year 2000 problems and
any potential impact on the Company. In particular the Company may experience
problems to the extent that telecommunications carriers to which the Company
sends traffic for termination are not Year 2000 compliant. The Company's ability
to determine the ability of these third parties to address issues relating to
the Year 2000 problem is necessarily limited. To the extent that a limited
number of carriers experience disruption in service due to the Year 2000 issue,
the Company believes that it will be able to obtain service from alternate
carriers. However, the Company's ability to provide certain services to
customers in selected geographic locations may be limited.
At September 30, 1999, the Company has completed its evaluation of Year
2000 issues and all necessary actions have now been implemented.
The Company currently anticipates that its information technology and
non-information technology systems is currently Year 2000 compliant. If either
HitCom's and/or third parties are not Year 2000 compliant, HitCom may be
required to incur unanticipated costs, change relationships with third parties,
forego revenues or be subjected to other material adverse effects.
<PAGE>
NEW ACCOUNTING STANDARDS
Accounting for derivatives and hedging activities
In June 1998, the FASB issued SFAS No. 133 "Accounting for derivatives and
hedging activities," which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. SFAS No. 132 is effective for years beginning after December 15,
1997 and requires comparative information for all fiscal quarters of fiscal
years beginning after June 15, 1999. The Company does not expect the adoption of
this statement to have significant impact on the Company's results of
operations, financial position or cash flows.
SOP 98-5 Reporting on the Costs of Start-up Activities
SOP 98-5 "Reporting on the Costs of Start-up Activities," requires that the
costs, be expensed as incurred. This statement is effective for financial
statements issued for fiscal years beginning after December 15, 1998. Management
believes that the adoption of SOP 98-5 will have no material effect on its
financial statements.
PART II
OTHER INFORMATION
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.
<PAGE>
Item 6 - Exhibits and Reports on Form 8-K
A. Exhibits
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
10.4** Letter agreement between the registrant, Rajan Arora and Jeffrey
Shier dated June 30, 1998 regarding forgiveness of indebtedness.
10.5** Stock Purchase Agreement between Scott A. Beil and registrant dated
August 10, 1998 regarding 20% minority interest in One Plus Marketing
10.6** Letter agreement between registrant and Scott A. Beil dated August 11,
1998 regarding voting of stock in registrant.
21.1* List of Subsidiaries of Registrant
27.0 Financial Data Schedule
* Filed as exhibit to the Company's Registration Statement on Form 10-SB
** Filed as Exhibit to the Company's Quarterly Report on Form 10-QSB for
the quarter ended September 30, 1998
B. Form 8-K filings
The Registrant did not file a Form 8-K during the last quarter of the
period covered by this report.
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/ John S. Nashmi
-----------------------
John S. Nashmi,
Chief Financial Officer and Corporate Secretary
Date: November 15, 1999
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