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 June 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.)
700 North Second Street, Third Floor
St. Louis, Missouri 63102
(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 May 14, 1999 -
Class Shares Outstanding
Common Stock 12,360,133
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
June 30, 1999
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 254,597
Accounts receivable, net of allowance for
doubtful accounts of $71,105 590,722
Inventory 51,191
Other current assets 21,332
- --------------------------------------------------------------------------------
Total current assets 917,842
- --------------------------------------------------------------------------------
Property and equipment, net 391,380
Goodwill, net of amortization of $443,084 3,564,616
Investment in service bureau 23,440
- --------------------------------------------------------------------------------
$4,897,278
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Revolving line of credit $ 45,000
Accounts payable 1,367,728
Deferred revenue 419,564
Due to officers and directors 30,087
Current portion of long-term obligations 76,619
Net liability for discontinued segment 18,368
- --------------------------------------------------------------------------------
Total current liabilities 1,960,366
- --------------------------------------------------------------------------------
Long term obligations 754,290
- --------------------------------------------------------------------------------
Total liabilities 2,714,656
- --------------------------------------------------------------------------------
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 955
Common stock $.004 par value, 25,000,000 authorized;
12,367,383 issued; 12,360,133 outstanding 49,441 Additional paid in capital
2,916,899 Accumulated deficit (769,240) Cumulative foreign currency
translation adjustment 4,363 Treasury stock - at cost; 7,250 common stock
(19,796)
- --------------------------------------------------------------------------------
2,182,622
- --------------------------------------------------------------------------------
$4,897,278
================================================================================
See accompanying notes to the condensed consolidated financial statements
<PAGE>
HITCOM CORPORATION
Condensed Consolidated Statements of Operations
(unaudited)
<TABLE>
- --------------------------------------------------------------------------------------------
Three-Month Period Six-Month Period
Ended June 30, Ended June 30,
1999 1998 1999 1998
<CAPTION>
<S> <C> <C> <C> <C>
Net service revenues $1,728,234 $ 850,724 $3,146,926 $1,623,247
Cost of services 1,428,169 369,148 2,596,912 737,459
- --------------------------------------------------------------------------------------------
Gross margin 300,065 481,576 550,014 885,788
- --------------------------------------------------------------------------------------------
Operating expenses:
Selling, general and administrative 423,418 258,135 755,499 592,384
Amortization of goodwill 99,943 33,314 199,885 33,314
Depreciation of property and equipment 33,505 34,658 66,928 56,308
- --------------------------------------------------------------------------------------------
Total operating expenses 556,866 326,107 1,022,312 682,006
- --------------------------------------------------------------------------------------------
Operating income (loss) (256,801) 155,469 (472,298) 203,782
Other income (expense) - net (7,506) (25,494) (32,644) (16,028)
- --------------------------------------------------------------------------------------------
Income (loss) before taxes and
minority interest (264,306) 129,975 (504,942) 187,754
Provision for income taxes - - - -
Minority interest - (6,675) - 20,332
- --------------------------------------------------------------------------------------------
Income (loss) from continuing operations (264,306) 136,650 (504,942) 167,422
Loss from discontinued segment,
net of tax benefit - 72,835 - 152,327
- --------------------------------------------------------------------------------------------
Net income (loss) $(264,306) $ 63,815 $(504,942) $ 15,095
============================================================================================
Net income (loss) available to
common shareholders $(264,306) $ 63,815 $(504,942) $ 15,095
============================================================================================
Basic and diluted earnings (loss) per share
Income (loss) from continuing operations $ (0.02) $ 0.02 $ (0.04) $ 0.02
Loss from discontinued segment $ - $ (0.01) $ - $(0.02)
- --------------------------------------------------------------------------------------------
Net loss $ (0.02) $ 0.01 $ (0.04) $ -
============================================================================================
Weighted average shares - basic 12,360,133 9,377,404 12,308,613 8,654,209
Weighted average shares - diluted 12,360,133 10,407,479 12,308,613 9,684,284
See accompanying notes to the condensed consolidated financial statements
- --------------------------------------------------------------------------------------------
</TABLE>
HITCOM CORPORATION
Condensed Consolidated Statement of Cash Flows
(unaudited)
<TABLE>
Three-Month Period Six-Month Period
Ended June 30, Ended June 30,
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating activities:
Net loss $(264,306) $ 63,815 $(504,942) $ 15,095
Adjustments to reconcile net loss to net
cash used in operating activities:
Goodwill amortization 99,943 33,314 199,885 33,314
Depreciation 33,505 34,658 66,928 56,308
Minority interest in earnings of subsidiary - (6,675) - 20,332
Issuance of common shares for services 15,322 - 15,560 20,156
Changes in assets and liabilities, excluding acquisition:
Accounts receivable--net 45,873 (12,835) (101,662) (77,836)
Inventory (23,263) 22,037 (23,983) 2,052
Other assets (6,655) (3,106) (10,436) 43,804
Accounts payable and accrued expenses 350,130 (77,718) 371,951 (12,011)
Deferred revenue (31,000) (164,787) 29,483 (135,283)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities 219,549 (111,297) 42,784 (34,069)
- -----------------------------------------------------------------------------------------------------------------------------------
Investing activities:
Purchases of property and equipment (47,560) (25,786) (116,496) (52,321)
Acquisition of Channel Telecom Inc., net of cash acquired - (155,191) - (155,191)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (47,560) (180,977) (116,496) (207,512)
- -----------------------------------------------------------------------------------------------------------------------------------
Financing activities:
Proceeds from (repayment of) bank term loan (9,926) 208,119 1,241 211,310
Repayment of capital leases - (3,891) - (6,002)
Issuance of comon stock - 20,115 - 20,115
Repayment of due to officers and directors (18,838) - (28,416) -
Increase (decrease) in revolving line of credits (92,746) - 15,000 -
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) in financing activities (121,510) 224,343 (12,175) 225,423
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 50,479 (67,931) (85,887) (16,158)
Cash and cash equivalents at beginning of period 204,118 240,573 340,484 188,800
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 254,597 $ 172,642 $ 254,597 $ 172,642
===================================================================================================================================
Supplemental disclosure of cash flow information
Cash paid for interest during the period $ 4,371 36,344 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 - 3,749,085
Conversion of preferred shares into common shares - 42 119 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 six months ended
June 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. Investment in a 50% owned
affiliate has been accounted for on the equity method.
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 three-month and six-month periods
ended June 30, 1998:
Three-Month Ended Six-Month Ended
June 30,_1998 June 30,_1998
------------------ ----------------
Net service revenues $1,110,811 $2,241,584
Cost of services 558,549 1,163,280
- --------------------------------------------------------------------------------
Gross margin 552,262 1,078,304
- --------------------------------------------------------------------------------
Net income available to common
shareholders $ 46,882 $ 43,828
- --------------------------------------------------------------------------------
Income per share $ 0.01 $ 0.01
- --------------------------------------------------------------------------------
<PAGE>
HITCOM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. SEGMENTED INFORMATION
At June 30, 1999, HitCom has two separately managed business segments,
Channel One Plus Total
THREE MONTHS ENDED, JUNE 30, 1998
Revenues from external customers $ 169,566 $ 681,158 $ 850,724
Other expense, net - (25,494) (25,494)
Depreciation 2,100 32,558 34,658
Goodwill amortization 33,314 - 33,314
Segment net income (loss)Segment loss (45,814) 109,629 63,815
THREE MONTHS ENDED, JUNE 30, 1999
Revenues from external customers $1,357,592 $ 370,462 $ 1,728,234
Other expense (879) (6,627) (7,506)
Depreciation 9,505 24,000 33,505
Goodwill amortization 99,943 - 99,943
Segment loss (208,691) (66,694) (264,306)
SIX MONTHS ENDED, JUNE 30, 1998
Revenues from external customers $ 169,566 $1,453,681 $ 1,623,247
Other expense, net - (16,028) (16,028)
Depreciation 2,100 54,208 56,308
Goodwill amortization 33,314 - 33,314
Segment income (loss) (45,814) 60,909 15,095
Segment assets 4,368,406 607,126 4,975,532
SIX MONTHS ENDED, JUNE 30, 1999
Revenues from external customers $2,267,635 $ 879,291 $3,146,926
Other expense, net (11,262) (21,382) (32,644)
Depreciation 18,928 48,000 66,928
Goodwill amortization 199,885 - 199,885
Segment loss (475,264) (29,677) (504,941)
Segment assets $4,554,466 $ 342,812 4,897,278
<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 and Phone Saver brand name, 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
was operational effective April 22, 1999, and provides Channel with significant
increase in termination capacity as compared to the existing 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 June 30, 1999 COMPARED TO THREE MONTHS ENDED June 30, 1998
Revenue
Total revenue increased 103% to $1,728,234 in the second quarter of 1999 from
$850,724 for the same period in 1998. The increase is due to the Channel
acquisition, which was consummated on May 31, 1998. Channel provided HitCom
$1,357,592 in revenue in the second quarter of 1999 as compared to $169,566 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.
Revenue for One Plus declined by 46% to $370,462 in the second quarter of 1999
from $681,158 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 83% of revenue ($1,428,169) in the second quarter
of 1999 from 43% of revenue ($369,148) 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 Excel(R) switch in the Second
Quarter of 1999, Channel was able to decrease cost of services and thereby
increase gross margin over the first quarter of 1999. Channel's Cost of services
decreased to 87% of revenue in the second quarter of 1999 from 97% of revenue in
the first 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 lease cost routing capabilities of the new carrier class switch are
Selling General & Administrative (SG&A):
SG&A expenses decreased to 24% of revenue ($423,418) in the second quarter of
1999 from 30% of revenue ($258,135) 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 $99,943 in the second quarter in
1999 as compared to $33,314 for the same period in 1998.
Depreciation of property and equipment
Depreciation was $33,505 in the second quarter of 1999 as compared to $34,658
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 $72,835 for the
second quarter of 1998.
EBITDA - continuing operations
EBITDA in the second quarter of 1999 was a loss of $123,351 as compared income
of $223,441 in the second quarter of 1998. Decrease in EBITDA is due to the
decrease in gross margin at Channel due to not having the full effect in the
quarter of the decrease in cost of services due to improved least cost routing
capability of the new carrier-class switch. Also the significant decrease in the
profitability of One Plus due to the decrease in One Plus revenue.
Net loss
Net loss in the second quarter of 1999 increased to $264,304 from a net income
of $63,815 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
$99,943 in 1999 as compared to $33,314 in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at June 30, 1999 increased to $254,597 from $204,118
at March 31, 1999. The Company's liquidity requirements were largely used by
investment needs including capital expenditures for the new switch for Channel
and financing needs including repayment of revolving line of credit. These
requirements were funded primarily by operating activities.
Cash provided by operating activities in the second quarter of 1999 was $219,549
as compared to cash used of $111,297 for the same period in 1998. Significant
working capital was provided by increase in account payable and accrued
liabilities ($350,130) due to cost of services growth at Channel.
Cash used for capital expenditures in the second quarter of 1999 was $47,560 as
compared to $180,977 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 second quarter of 1999 was $121,510 as
compared to net proceeds of $224,343 for the same period in 1998. Financing
requirements in the 1999 quarter was used primarily for repayments on revolving
line of credit bank facilities. In 1998, financing activities proceeds consisted
primarily of increased bank borrowings
SIX MONTHS ENDED June 30, 1999 COMPARED TO SIX MONTHS ENDED June 30, 1998
Revenue
Total revenue increased 94% to $3,146,926 in the six-month period ended June30,
1999 from $1,623,247 for the same period in 1998. The increase is due to the
Channel acquisition, which was consummated on May 31, 1998. Channel provided
HitCom $2,267,635 in revenue in the six-month period ended June30, 1999 as
compared to $169,566 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 40% to $879,291 in the six-month period ended
June30, 1999 from $1,453,681 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 83% of revenue ($2,596,912) in the six-month
period ended June30, 1999 from 45% of revenue ($737,459) 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 Excel(R) switch on April 22,
1999, Channel was able to decrease cost of services and thereby increase gross
margin over the first quarter of 1999. Channel's Cost of services decreased to
87% of revenue in the second quarter of 1999 from 97% of revenue in the first
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
lease cost routing capabilities of the new carrier class switch are
Selling General & Administrative (SG&A):
SG&A expenses decreased to 24% of revenue ($755,499) in the six-month period
ended June30, 1999 from 36% of revenue ($592,384) 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 $199,885 in the six-month period
ended June 30, 1999 as compared to $33,314 for the same period in 1998.
Depreciation of property and equipment
Depreciation increased to $66,928 in the six-month period ended June30, 1999 as
compared to $56,308 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 $32,644 in the six-month period ended June30, 1999 as
compared to net interest expense of $16,028 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 $152,327 for the
six-month period ended June 30, 1998.
<PAGE>
EBITDA - continuing operations
EBITDA in the six-month period ended June30, 1999 was a loss of $205,484 as
compared income of $293,404 in the same period of 1998. Decrease in EBITDA is
due to the decrease in gross margin at Channel due to not having the full effect
in the six-month period of the decrease in cost of services due to improved
least cost routing capability of the new carrier-class switch. Also the
significant decrease in the profitability of One Plus due to the decrease in One
Plus revenue.
Net loss
Net loss in the six-month period ended June30, 1999 increased to $504,941 from a
net income of $15,095 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 $199,885 in 1999 as compared to $33,314 in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at June 30, 1999 decreased to $254,597 from $340,484
at December 31, 1998. The Company's liquidity requirements were largely used by
investment needs including capital expenditures for the new switch for Channel.
These requirements were funded primarily by working capital and cash reserves.
Cash provided by operating activities in the six-month period ended June30, 1999
was $42,784 as compared to cash used of $34,069 for the same period in 1998.
Significant working capital was provided by increase in account payable and
accrued liabilities ($371,951) due to cost of services growth at Channel.
Cash used for capital expenditures in the six-month period ended June30, 1999
was $116,496 as compared to $207,512 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 six-month period ended June30, 1999 was
$12,175 as compared to net proceeds of $225,423 for the same period in 1998. In
1998, financing activities proceeds consisted primarily of increased bank
borrowings
In the six-month period ended June30, 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 June 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 1999 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 June 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.
In additional to assessing its own systems, the Company is conducting 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 June 30, 1999, the Company has completed its evaluation of Year 2000
issues and all necessary actions will be implemented by September 30, 1999.
The Company currently anticipates that its information technology and
non-information technology systems will be Year 2000 compliant before January 1,
2000, though no assurances can be given that its compliance testing will not
detect unanticipated Year 2000 compliance problems. HitCom does not currently
have contingency plans to prepare for a Year 2000 failure, however, it does plan
to develop one by September 30, 1998. There can be no assurance that such
contingency plans will be adequate. If either HitCom's and/or third parties are
not Year 2000 compliant as of such date and if such contingency plans are
inadequate or fail to address a particular Year 2000 risk, 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: August 16, 1999
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<PERIOD-END> JUN-30-1999
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<RECEIVABLES> 758,950
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