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, 1998
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 [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
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
================================================================================
RESTATEMENT OF FINANCIAL STATEMENTS AND CHANGES TO CERTAIN INFORMATION
The Company conducted a review of the accounting treatment of the Channel
acquisition which was completed in the second quarter of 1998. The review
determined the following adjustments were required to the previously reported
financial statements as of June 30, 1998:
i) REVISION OF GOODWILL ON CHANNEL ACQUISITION
The acquisition was accounted for under the purchase method. The Company had
recorded a goodwill of $91,647 to be amortized over ten years. Goodwill has now
been revised to $3,997,700 to be amortized over ten years. The revision of the
goodwill amount was due to the value assigned to the 4,184,810 shares issued for
the Channel acquisition. The Company had recorded these shares at their par
value of $0.004 and not at their quoted market price on the date the acquisition
was announced which was $0.875 per share. The resulting restatement has
increased goodwill amortization for the quarter ended June 30, 1998. This change
only affects non-cash amortization of intangible assets and does not impact cash
flows, cash balances, or liabilities of the Company in any way.
ii) CHANGE OF EFFECTIVE DATE OF CHANNEL ACQUISITION
The acquisition of Channel did not close until May 31, 1998, however, the
Company had previously accounted for the acquisition with an effective date of
January 1, 1998. The effective date of the acquisition has now been changed to
May 31, 1998 as the transfer of assets and liabilities to Hitcom did not occur
until the closing of the acquisition.
A summary of the significant effects of the restatement are outlined in Note 6
================================================================================
<PAGE>
Item 1 - FINANCIAL STATEMENTS
HITCOM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
ASSETS
June 30,
1998
------------
(AS RESTATED
SEE NOTE 6)
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
Goodwill, net of amortization 3,964,386
Other assets 47,670
---------
Total $4,975,532
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
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
Minority interest 186,452
Commitments and contingencies
Stockholders' equity (deficit):
Convertible 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 2,733,628
Retained earnings 387,605
Treasury stock--at cost (19,796)
----------
Total stockholders' equity (deficit) 3,151,183
----------
Total $4,975,532
==========
See accompanying notes to the condensed consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
HITCOM CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
For the Three-month For the Six-month
Period Ending June 30, Period Ending June 30
1998 1997 1998 1997
------------------------- ------------------------
(AS RESTATED (AS RESTATED
SEE NOTE 6) SEE NOTE 6)
<S> <C> <C> <C> <C>
Net revenues $ 907,584 $944,768 $1,704,762 $1,780,558
Cost of services 434,972 533,714 841,742 1,062,548
- ------------------------------------------------------------------------------------------------
Gross Margin 472,612 411,054 863,020 718,010
- ------------------------------------------------------------------------------------------------
Selling, general and administrative 318,221 322,991 721,943 485,233
Amortization of goodwill 33,314 - 33,314 -
Depreciation of property and equipment 34,658 25,562 56,308 38,669
- ------------------------------------------------------------------------------------------------
Total operating expenses 386,193 348,553 811,565 523,902
- ------------------------------------------------------------------------------------------------
Operating income 86,420 62,501 51,455 194,108
Other income (expense) --net (29,280) 48,481 (16,028) 52,956
- ------------------------------------------------------------------------------------------------
Income before taxes expense and
minority interest 57,140 110,982 35,427 247,064
Provision for income taxes
Minority interest 15,157 32,746 20,332 32,746
- ------------------------------------------------------------------------------------------------
Net income $ 41,983 $ 78,236 $ 15,095 $ 214,318
================================================================================================
See accompanying notes to the condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HITCOM CORPORATION
CONDENSED 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
------------------------ -----------------------
(AS RESTATED (AS RESTATED
SEE NOTE 6) SEE NOTE 6)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 41,983 $ 78,236 $ 15,095 $214,318
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of property and equipment 34,658 25,562 56,308 38,669
Amortization of goodwill 33,314 - 33,314 -
Minority interest 15,157 32,746 20,332 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 (77,718) (663,109) (12,011) (258,619)
Deferred revenue (164,787) (50,109) (135,283) 32,082
- --------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (111,297) (594,142) (34,069) (129,049)
- --------------------------------------------------------------------------------------------------------------
Cash flows used in investing activities:
Purchases of property and equipment (25,786) (3,271) (52,321) (36,325)
Acquisition of Channel Telecom, net of cash
acquired (155,191) - (155,191) -
Cash acquired in reverse acquisition 1,052 1,052
- --------------------------------------------------------------------------------------------------------------
Net cash used in investing activities . . . . (180,977) (2,219) (207,512) (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 -
Repurchase of common stock - (9,712) - (9,712)
Shareholder distributions - - - (94,423)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)financing activities 224,343 (9,712) 225,423 (104,135)
- --------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (67,931) (606,073) (16,158) (268,457)
Cash and cash equivalents at beginning of period 240,573 764,205 188,800 426,589
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at 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 - - - -
Non cash investing and financing activities:
Common shares issued for acquisition and related
costs of Channel Telecom Inc. 3,749,085 - 3,749,085 -
Repayment of notes payable through issuance of
common stock 16,000 - 16,000 -
See accompanying notes to the condensed consolidated financial statements.
</TABLE>
<PAGE>
HITCOM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1998
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, 1997. The results for the three-month
period and six-months period ended June 30, 1998, are not necessarily indicative
of the results that may be expected for the year ending December 31, 1998. All
amounts presented are in US dollars.
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. 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
first 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. ACQUISITION OF CHANNEL TELECOM INC.
Effective May 31, 1998, HitCom acquired Channel, a prepaid telecommunication
services company based in Canada. This acquisition expanded the Company's
services and provided access to the Canadian marketplace. Hitcom issued
3,975,570 in shares of Common stock and $37,500 in cash for all of the
outstanding stock of Channel. Hitcom issued a further 309,240 in shares of
Common Stock and incurred costs of $172,615 relating to transaction costs for
the Channel acquisition. Hitcom accounted for the acquisition using the purchase
method of accounting. Accordingly, the purchased assets and liabilities have
been recorded at their estimated fair value at the date of acquisition. Amounts
in excess of the fair value of tangible assets acquired was attributed to
goodwill and is being amortized over ten years. The results of operations of
Channel have been included in the consolidated financial statements since May
31, 1998.
Total Consideration Paid:
Issuance of Common Stock $3,478,500
Cash payment 37,500
- --------------------------------------------------------------------------------
$3,516,000
- --------------------------------------------------------------------------------
Acquisition related transaction costs:
Issuance of Common Stock 270,585
Cash payments for costs 172,615
- --------------------------------------------------------------------------------
443,200
- --------------------------------------------------------------------------------
Total Cost of Acquisition $3,959,200
- --------------------------------------------------------------------------------
Less net assets acquired:
Assets acquired:
Cash $ 54,924
Account receivable 336,200
Inventory 16,550
Property and equipment 37,920
Other assets 26,240
- --------------------------------------------------------------------------------
471,834
- --------------------------------------------------------------------------------
Liabilities assumed:
Account payable and accrued expenses 370,154
Deferred Revenue 87,300
Other liabilities 52,880
- --------------------------------------------------------------------------------
510,334
- --------------------------------------------------------------------------------
Net liabilities assumed $ 38,500
- --------------------------------------------------------------------------------
Goodwill $3,997,700
================================================================================
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-Months Ended Six-Months Ended
June 30, 1998 June 30, 1998
(unaudited) (unaudited)
1998 1997
---------------- ----------------
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 loss $ ( 48,100) $ (151,170)
================================================================================
Basic and diluted loss per share $ (0.01) $ (0.02)
================================================================================
5. 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 $41,983 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 $41,983 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
Average Per Share
Income Shares Amount
1998
Earnings per share of common stock - basic $15,095 8,654,209 $0.00
Stock options, warrants and preferred
stock equivalents 1,030,075 $0.00)
------- ---------- -------
Earnings per share of common stock -
on a fully diluted basis $15,095 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
======= ========= =======
6. RESTATEMENT OF FINANCIAL STATEMENTS AND CHANGES TO CERTAIN INFORMATION
The Company conducted a review of the accounting treatment of the Channel
acquisition which was completed in the second quarter of 1998. The review
determined the following adjustments were required to the previously reported
financial statements as of June 30, 1998:
i) REVISION OF GOODWILL ON CHANNEL ACQUISITION
The acquisition was accounted for under the purchase method. The Company had
recorded a goodwill of $91,647 to be amortized over ten years. Goodwill has now
been revised to $3,997,700 to be amortized over ten years. The revision of the
goodwill amount was due to the value assigned to the 4,184,810 shares issued for
the Channel acquisition. The Company had recorded these shares at their par
value of $0.004 and not at their quoted market price on the date the acquisition
was announced which was $0.875 per share. The resulting restatement has
increased goodwill amortization for the quarter ended June 30, 1998. This change
only affects non-cash amortization of intangible assets and does not impact cash
flows, cash balances, or liabilities of the Company in any way.
ii) CHANGE OF EFFECTIVE DATE OF CHANNEL ACQUISITION
The acquisition of Channel did not close until May 31, 1998, however, the
Company had previously accounted for the acquisition with an effective date of
January 1, 1998. The effective date of the acquisition has now been changed to
May 31, 1998 as the transfer of assets and liabilities to Hitcom did not occur
until the closing of the acquisition.
A summary of the significant effects of the restatements are as follows:
Three-Months Ended Six-Months Ended
June 30, 1998 June 30, 1998
--------------------- --------------------
As As
As Previously As Previously
Restated Reported Restated Reported
--------- -------- --------- ----------
Statement of Operations:
Net service revenue $ 907,584 $1,110,811 $1,704,762 $2,241,584
Cost of Services 434,972 558,549 841,742 1,163,280
Gross Margin 472,612 552,262 863,020 1,078,304
Selling General & Administrative 318,221 446,705 721,943 966,060
Amortization of goodwill 33,314 4,582 33,314 4,582
Net income $ 41,983 $ 46,822 $ 15,095 $ 43,828
June 30, 1998
------------------------
As
As Previously
Restated Reported
---------- -----------
Balance Sheet
Data:
Goodwill $3,964,386 $ 87,065
Total assets 4,975,532 1,098,211
Total shareholders' equity (deficit) $3,151,183 $ (726,138)
7. SUBSEQUENT EVENT
On July 29, 1998, the Company purchased its 20% minority interest ($186,452) in
One Plus Marketing, Inc. for $1.
ITEM 2 - Management's Discussion and Analysis
Overview
The Company principally derives its revenues through two operating subsidiaries:
CHANNEL TELECOM INC. (Channel)
Effective May 31, 1998, HitCom acquired Channel, a prepaid telecommunication
services company based in Canada. 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. This acquisition expanded the
Company's services and provided access to the Canadian marketplace. Hitcom
issued 3,975,570 in shares of Common stock and $37,500 in cash for all of the
outstanding stock of Channel. Hitcom issued a further 309,240 in shares of
Common Stock and incurred costs of $172,615 relating to transaction costs for
the Channel acquisition. Hitcom accounted for the acquisition using the purchase
method of accounting. Accordingly, the purchased assets and liabilities have
been recorded at their estimated fair value at the date of acquisition. Amounts
in excess of the fair value of tangible assets acquired was attributed to
goodwill and is being amortized over ten years. The results of operations of
Channel have been included in the consolidated financial statements since May
31, 1998.
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 OPERATIONS
QUARTER ENDED JUNE 30, 1998 (AS RESTATED) COMPARED WITH QUARTER ENDED JUNE 30,
1997
NET REVENUES
Net revenues decreased to $907,584 for the quarter ended June 30, 1998 from
$944,768 for the same period in 1997. Revenues are primarily generated from the
Company's interactive voice response products and services and prepaid phone
calling cards.
COST OF SALES
Cost of sales decreased to 52% of revenue ($434,972) for the quarter ended June
30, 1998 from 56% of revenue ($533,714) for the same period in 1997. Cost of
services primarily includes payments to other carriers for origination,
transport and termination of international and domestic long distance traffic.
The decrease in cost of services was primarily attributable to decrease in
carrier charges for One Plus as the Company was able to renegotiate its long
distance per minute rate with its current service provider.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A):
SG&A expenses decreased to $318,221 (35% of sales) for the quarter ended June
30, 1998 from $322,991 (34% of sales) for the same period quarter in 1997.
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 $33,314 for the quarter ended June
30, 1998.
DEPRECIATION OF PROPERTY AND EQUIPMENT
Depreciation increased to $34,658 for the quarter ended June 30, 1998 from
$25,562 for the same period in 1997. 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
and the acquisition of Channel.
OTHER INCOME (EXPENSE) - NET:
Other expense was $29,280 for the quarter ended June 30, 1998 as compared to net
income of $48,481 for the same period in 1997. This was attributable to
increased bank borrowings in 1998.
MINORITY INTEREST
Minority interest expense decreased to $15,157 for the quarter ended June 30,
1998 from $32,746 for the same period in 1997. Minority interest represents a
20% ownership interest in the Company's subsidiary One Plus owned by the major
stockholder of the Company. On July 29, 1998, subsequent to the end of the
quarter, the Company purchased its 20% minority interest ($186,452) in One Plus
Marketing, Inc. for $1.
NET INCOME
Net income decreased to $41,983 for the quarter ended June 30, 1998 from $78,236
for the same period in 1997. Decrease in operating income is primarily due to
the goodwill amortization of $33,314.
SIX-MONTHS ENDED JUNE 30, 1998 (AS RESTATED) COMPARED WITH SIX MONTHS ENDED JUNE
30, 1997
NET REVENUES
Net revenues decreased to $1,704,762 for the six-months ended June 30, 1998 from
$1,780,558 for the same period in 1997. Revenues are primarily generated from
the Company's interactive voice response products and services and prepaid phone
calling cards.
COST OF SALES
Cost of sales decreased to 49% of revenue ($841,742) for the six-months ended
June 30, 1998 from 59% of revenue ($1,062,548) for the same period in 1997. Cost
of services primarily includes payments to other carriers for origination,
transport and termination of international and domestic long distance traffic.
The decrease in cost of services was primarily attributable to decrease in
carrier charges for One Plus as the Company was able to renegotiate its long
distance per minute rate with its current service provider.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A):
SG&A expenses increased to $721,943 (42% of sales) for the six-months ended June
30, 1998 from $485,233 (27% of sales) for the same period in 1997. 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.
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 $33,314 for the six-months ended
June 30, 1998.
DEPRECIATION OF PROPERTY AND EQUIPMENT
Depreciation increased to $56,308 for the six-months ended June 30, 1998 from
$38,669 for the same period in 1997. 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
and the acquisition of Channel.
OTHER INCOME (EXPENSE) - NET:
Other expense was $16,028 for the six-months ended June 30, 1998 as compared to
net income of $52,956 for the same period in 1997. This was attributable to
increased bank borrowings in 1998.
MINORITY INTEREST
Minority interest expense decreased to $20,332 for the six-months ended June 30,
1998 from $32,746 for the same period in 1997. Minority interest represents a
20% ownership interest in the Company's subsidiary One Plus owned by the major
stockholder of the Company. On July 29, 1998, subsequent to the end of the
quarter, the Company purchased its 20% minority interest ($186,452) in One Plus
Marketing, Inc. for $1.
NET INCOME
Net income decreased to $15,095 for the six-months ended June 30, 1998 from
$214,318 for the same period in 1997. Decrease in net income is primarily due to
increased SG&A expenses, increased interest expense and the goodwill
amortization.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at June 30, 1998 increased to $172,642 from $158,132
at June 30, 1997. The Company's liquidity requirements were largely used by
investment needs including capital expenditures and the Channel acquisition.
These requirements were funded by increased bank borrowings.
Cash Flows from Investing Activities
Cash used for capital expenditures and acquisitions increased to $207,512 for
the six month period ended June 30, 1998 from $35,273 for the same period in
1997. This was primarily as a result of significant new capital expenditures of
$52,321 to enhance and expand the Company's network facilities. The Channel
acquisition and its related costs net of cash acquired utilized the remaining
$155,191 in investing activities.
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
Cash provided by financing activities was $225,423 for the six-months period
ended June 30, 1998 as compared to repayments of $104,135 for the same period in
1997. During the second quarter 1998, the Company restructured its existing
credit facilities. The Company obtained two separate credit facilities making
available $535,000 with a commercial bank secured by a security agreement
covering all of the assets of the Company and personal guarantee from the
Company's major shareholder. Bank loan repayment is at $8,000 per month
inclusive of interest and principal. The credit facilities bear interest between
bank's prime rate plus one-half percent (prime was 8.5% at June 30, 1998) and 9%
fixed rate 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.
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 Year 2000 costs as at December 31, 1998 and has preliminarily
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.
The Company believes it will complete its evaluation of Year 2000 issues by June
30, 1998 and all necessary actions will be implemented by September 30, 1998.
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>
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/ John S. Nashmi
-----------------------
John S. Nashmi,
Chief Financial Officer and Corporate Secretary
Date: June 4, 1999
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<PERIOD-END> JUN-30-1998
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