SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X]Annual report under Section 13 or 15(d)of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998.
[ ]Transition report under section 13 or 15(d) of the Securities Exchange Act
of 1934, 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
Securities registered under Section 12(b)of the Exchange Act:
Name of Each Exchange
Title of Each Class On Which Registered
(None) (None)
Securities registered under Section 12(g) of the Exchange Act:
Common Stock
(Title of Class)
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]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure
will be contained, to the best of registerant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-KSB or any amendment to this form 10-KSB [X]
State issuer's revenues for its most recent fiscal year: $3,683,354
State the number of shares outstanding of each of the issuer's common
equity, as of the latest practicable date: As of April 30, 1999:
Class Shares Outstanding
Common Stock 12,328,221
Traditional Small Business Disclosure Format (check one):
Yes[ ] No [X]
<PAGE>
PART I
ITEM 1 - DESCRIPTION OF BUSINESS
Business Development
HitCom Corporation ("Hitcom" or the "Company") was established in 1993 and
incorporated in 1995 under the laws of the state of Missouri as an
online/Internet publisher of city-specific news and information resources that
combined three areas of traditional local reference: i) Local Yellow Pages, ii)
Local news and iii) City information.
The Company was acquired by Royal Oak Resources ("Royal") an OTC Bulletin Board
company in 1995 through a reverse merger. Royal was incorporated under the laws
of the state of Utah in 1982. Following the acquisition, HitCom was
reincorporated under the laws of the state of Delaware. The operating activities
of Royal were not material in HitCom's operating activities.
One Plus Marketing Inc.
HitCom acquired 80% of One Plus Marketing Inc. ("One Plus"), an interactive
voice response company, effective April 1, 1997 for approximately 5.8 million
shares of common stock. The acquisition was treated for accounting purposes as a
reverse merger, resulting in One Plus becoming the accounting acquiror and the
operating activities of the acquiror are presented for historical purposes.
The remaining 20% minority interest in One Plus reverted back to HitCom
effective August 1, 1998.
Channel Telecom, Inc.
Effective May 31, 1998, HitCom acquired Channel Telecom Inc. ("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 the
effective date of acquisition.
Channel owns a 50% interest in Sussex Service Bureau Inc., 1218396 Ontario Ltd.
("Sussex"). Sussex provides Channel calling card technical functionality through
the processing of prepaid phone card activity via an offsite telephone switch.
Business of Issuer
Today, the Company is engaged in the following products and services:
- - Interactive Voice Response/Voice Processing Services offered through its
subsidiary One Plus
- - Prepaid telecommunication services offered through its subsidiary Channel
Interactive Voice Response (IVR) /Voice Processing Services
Interactive Voice Response (IVR) includes a variety of voice processing and
messaging services. IVR allows a user to access, store and carry out
transactions by using his voice or the keypad of a touch tone telephone. HitCom,
through it's operating subsidiary One Plus offers the following IVR services:
800Link(TM)
800Link(TM) is an IVR / Voice Processing Platform for several Direct Sales
Organizations (DSO's) in the United States. DSO's use the Company's 800Link(TM)
to provide advertising support and communication services to their participants.
The basic service includes up to a 5 minute greeting time, holding up to 40
messages with a 14 day storage time and personal security code for retrieving
messages. Each call is time and date stamped with caller ID. Customers have
online account status with monthly billing providing usage detail and balance
information
For an additional fee, other features can be added to an 800Link(TM) account.
They include calling card capabilities, call forwarding, automated attendant,
extended greeting time (up to 30 minutes), group broadcasting (broadcast the
same message to a specified group), call rotation (allows one incoming number to
be rotated evenly to a group), fax back, fax on demand, and fax broadcast
(allows broadcast faxing to a list of fax numbers almost instantly).
GAP Lines
The GAP lines allow subscribers to pre-record a message that their clients and
prospects can access using an 800 number and a Personal Identification Number
("PIN") to listen to the message.
Custom IVR Applications
One Plus develops custom IVR application for virtually any situation. For
instance:
- -Automated online surveys (allows a caller to complete a survey using the
telephone)
- -Automated locator service- allows a caller to find the location nearest to them
- -Automated payment systems
All of the Company's IVR services are marketed through One Plus. The marketing
effort consists of nationally placed advertisements that attract prospects to
obtain the Company's 800Link(TM) services. The majority of new business is still
generated through referral in the US and Canada. One Plus markets 800Link(TM)
service to small businesses and DSOs.
Prepaid Telecommunication Services
Overview
Channel provides long distance services to consumer through Prepaid Cards
("Channel Cards"), primarily under the following brand names: Phone Cash, Phone
Saver and Phone Pass. Channel Cards provide consumers a single point of access
to convenient, easy to use, cost-effective telecommunications products and
services at a fixed rate charge per minute regardless of the time of day.
Channel Cards enable consumers to place local, long distance and international
calls from touch-tone phones, without the need for cash, operator assistance,
collect or other third party billed calls. Consumers can use the Channel Cards
to place international long distance calls from the US and Canada to more than
200 countries at rates that are generally lower than the standard plan rates
currently charged by the major telecommunication carriers such as Bell Canada,
Sprint and AT&T or the rate charged for a direct call from a payphone or hotel
room.
Consumers access the services of the Channel Cards by dialing a local number or
toll-free number and entering a PIN printed on the back of the card. The system
provides explanation to the services including the time remaining on the card.
Sales and Marketing
Channel targets retail markets with substantial international long distance
calling requirements, such as ethnic communities. Therefore, Channel's primary
marketing and distribution focus is to target independent convenience stores
serving ethnic communities and alternative distribution channels, which includes
tour and travel, and vending machines. Channel is refining its retail sales and
marketing program to increase penetration of major national and regional
retailers such as department stores, mass merchandisers, office superstores and
consumer electronics retailers, which the Company had not aggressively targeted.
The opportunity to increase the penetration into these retail areas provides
excellent growth opportunities.
Channel markets its cards primarily through in-house sale sales agents and
distributors to the retail stores. Channel believes that its Channel Cards
provide consumers with a convenient, attractively priced alternative to
traditional presubscribed long distance services. Channel Card rates are set to
attract new customers and to retain its existing customers. While Channel's
rates to specific domestic and international destinations are often more
attractive to customers than the rates of the primary carriers, Channel does
not, as a policy, fix its rates at a discount to the rates charged by the
primary carriers, or at a discount to the rates charged by other carriers.
Channel has used its significant retail international traffic to negotiate very
competitive rates for international termination. Cards are available in $10,
$20, $30, $50, and $100 denominations.
Channel Card Recharge:
Consumers can Recharge their Channel Prepaid Card to increase the number of
minutes available on the Card without purchasing a new Channel Card by using a
major credit card. Recharge enables Channel to make direct sales to consumers,
and to create brand loyalty. Currently, the Channel Card can only be recharged
by calling Channel's customer service department. In 1999, the Company plans to
introduce an on-line recharge system whereby the consumer can recharge the card
over the internet or telephone.
Custom Cards:
Channel has created customized prepaid phone cards for resale or
promotional/institutional use. Custom cards can carry a company image and logo,
product imaging, or any custom design or text desired. Channel can assist and
provide turnkey custom service and advice including market planning, card design
and development, card manufacturing, inventory tracking and fulfillment, and
production of point-of-sale marketing material available including posters,
brochures and displays. Custom voice prompts can be implemented so that
customized company or product messages can be used to greet card users and
additional options can be implemented which allow card users access to other
information about a company or product.
Internet Connectivity Services
HitCom marketed an Internet connectivity service to commercial accounts in the
St. Louis, Missouri market until August 1998. The internet connectivity was
provided using Cisco 7513 router and a direct ATM/ fiber optic connection to the
Internet. The Company's internet services were introduced to the St. Louis
market in 1997.
In the third quarter of 1998, HitCom sold the customer list of this business for
$30,000 and is currently in the process of selling the related hardware
including the Cisco 7513 router. This segment is shown on the consolidated
financial statements as discontinued operations.
HitCom Customer Service
HitCom believes that effective and convenient customer service is essential to
attracting and retaining consumers. HitCom maintains two customer service
centres: i) St.Louis, Missouri, USA serving the IVR customers; and ii) Toronto,
Ontario, Canada serving the Prepaid Card customers. The customer service
departments are responsible for increasing the prepaid amount on the customer
service through a major credit card, assisting consumers in using HitCom's
services, answering questions about usage and resolving billing related issues
and any technical problems. HitCom provides on-line customer support that is
available 24 hours a day, 7 days a week, at the touch of a button. Customer
service representatives can access detailed usage records through HitCom's
systems in order to answer efficiently consumers' questions or resolve
consumers' concerns. In addition, HitCom can identify calling activity by
originating or destination phone numbers.
Internet Protocol (IP) Telephony Related Services
IP Telephony represents the routing of voice and data traffic through the
Internet. IP telephony is now in its infancy but, by all indications, will
quickly become a major factor in the telecommunications industry. IP telephony
is the convergence of CTI (Computer Telephony Integration) with the Internet.
CTI represents the integration of computers and telecommunication functions.
Computers with specialized software and hardware are used to route phone calls,
handle messages, etc. The resulting products and services enhance both the
telephony and computer environments and also create new hybrid applications. A
sampling of existing CTI technologies and applications include intelligent PBXs
(Private Branch Exchanges), IVR (Interactive Voice Response), ACDs (Automatic
Call Distribution centers), fax servers, voice mail and messaging, cellular
phone services, modems and ISDN.
The Company is looking at expanding its technology platforms to support an
aggressive internal growth plan and attract additional strategic acquisitions to
offer new IP telephony driven services.
Industry Overview
Telecommunications Industry Overview
Telecommunications is a complex, rapidly evolving $200 billion industry
affecting every aspect of our lives. Telecommunications no longer refers only to
local and long distance telephone communications. Instead, the industry is now
made up of everything from cellular and satellite or "wireless" communications
to interactive voice and voice mail messaging; from data transmission, including
fax, to voice and video conferencing; and from Internet and intranet
connectivity to cable television. That's just today. The industry is currently
experiencing an unprecedented introduction of new and enhanced communication
technology and services.
The way these services are purchased is changing as well. Not that long ago,
only select groups were able to benefit from the latest communication
advancements and conveniences available. Today, people from every social
economic background are familiar with local and international communications
services and technologies. As a result, prepaid phone cards, prepaid cellular
and even prepaid dial tone have witnessed explosive acceptance and growth.
In the decade since the mid-1980's, divestiture, deregulation and the advent of
computer telephony integration (CTI) have "reopened" a virtually monopolized
industry to promote unparalleled competition and expansion. Now, in addition to
the major players - AT&T, MCI, Sprint and WorldCom - other companies, like
HitCom, are able to successfully compete and thrive by developing new
technologies and pursuing niche markets and opportunities.
By focusing and building upon the products and services that employ computer
telephony, the Company has been able to take advantage of the enormous demand
for alternative and specialized providers and services.
Prepaid Phone Cards Market Overview
The growth of the prepaid phone card market has been extraordinary. According to
industry research, the US market was about $500,000 in 1992 and grew to $500
million by 1994. In 1996, the U.S. prepaid calling card market surpassed the
billion-dollar mark, exceeding all expectations of industry and analysts. A
report released in early 1997 by Atlantic-ACM, a Boston-based market research
firm that tracks the telecommunications industry, predicted the sales of prepaid
cards would reach $2.5 billion by the millenium. Later in 1997, due to
unanticipated sales growth within the retail segment, Atlantic-ACM increased its
long-term forecast by more than 50%. The research firm now estimates overall
revenues for prepaid phone cards to be $4.3 billion by 2001. The shift from
promotional use to retail as well as the changing user demographics clearly
indicates that phone cards are now a well established and accepted consumer
product in North America.
There are primarily two types of prepaid card issuers. Switch-based, those who
have their own platforms and non-switch-based, those who market the cards and
outsource their network needs to switch-based companies that resell prepaid
phone card network services through its own service bureau. The Company is a
switch-based card issuer.
Telecommunication Regulation
Canada is going through the final phases of deregulation in the
telecommunications industry. There are two specific areas of deregulation which
occurred in 1998 and have created new opportunities in the phone card industry:
swipe access functionality and elimination of Teleglobe's (Canada's licensed
company with exclusivity to carry international voice traffic) monopoly on
overseas long distance services. Until late 1997, Bell Canada and the Stentor
Alliance had a monopoly on "swipe" access. Channel obtained swipe functionality
on its cards in 1998, allowing the Channel Cards to be swiped on any of Bell
Canada's pay phones (approximately 70,000) eliminating the user having to enter
the 1-800# and their PIN#. As per the CRTC (Canada's governing telecom
regulator) ruling in 1998, Teleglobe's monopoly on overseas long distance
services was eliminated. This is driving down the price of overseas long
distance in Canada to be more in line with the U.S. Lower pricing will increase
volume and create short-term arbitrage opportunities for companies. The Company
expects to be positioned to take full marketing advantage during this time
period.
The Company's IVR services in USA is not subject to specific industry
regulation.
Switch Platform Services
As the telecommunications industry and product offerings have changed, so have
the networks that process the communication. Until recently, telecommunication
companies used massive switch networks that could perform the more routine, and
most needed services predominantly connecting one caller with another caller.
However, with the influx of new services - voice, data, fax, video,
conferencing, etc. - more sophisticated and flexible switching technology is
required.
HitCom's services are delivered through PC-based switching, application and
database access software running on Company owned call-switching platforms. At
December 31, 1998, the Company was operating on PC based switches only. The
Company has two Excel(R) switches, an LNX 2000 and EXS-1000 which are expected
to be activated in 1999. The Excel(R) LNX 2000 switch is expected to go live in
second quarter 1999 providing voice conferencing services for One Plus
customers. The Excel(R) EXS-1000 will be used for the prepaid card services and
is also expected to be live in second quarter 1999. The new EXS-1000 switch will
provide significant increase in call volume capacity over the current PC-based
switch. However, of greater significance, the new switch has the capability to
utilize significantly more long distance carriers thereby resulting in greater
choice in optimizing least cost routing which should decrease the Company's cost
of services and correspondingly increase gross margin.
Personnel
Currently, the Company, including Channel employs approximately 35 people
including managerial, administration, technical and sales personnel.
Competition
The Company's strategy is to seek to gain a competitive advantage by continuing
to develop unique and innovative services for its subscribers.
The market for the Company's services is intensely competitive. Many of the
Company's competitors in this market are substantially larger and have greater
financial, technical, engineering, personnel and marketing resources, longer
operating histories, greater name recognition and larger customer bases than the
Company. Competitors include Premiere Technologies Inc., Smartalk Teleservices,
RSL Telecom, Teleglobe Canada and Bell Canada. The Company has developed and
continues to expand its own distribution network to gain a competitive advantage
by ensuring the development of its product line and the growth of brand loyalty.
The Company expects that the telecommunication services market will continue to
attract new competitors and new technologies, possibly offering alternative
technologies that are more sophisticated and cost effective than the Company's
current technology. The Company intends to minimize the likelihood of this by
devoting resources to develop new, more efficient and cost-effective services.
In general, the Company does not have the right, contractually or otherwise, to
prevent its subscribers from changing to a competing service provider, and the
Company's subscribers may terminate their service with the Company at will.
Risk Factors
Risks Relating to the Prepaid Card Business
The Prepaid Card business in general has a number of inherent risks, which can
be summarized to include the following: (a) the increased penetration into the
market by competitive Prepaid Card vendors, including those that are
substantially larger than HitCom, (b) the relatively low barriers to entry for
Prepaid Card operators, (c) the price-sensitive nature of consumer demand
resulting in relative lack of customer loyalty to any particular Prepaid Card
company. These inherent risks could place downward pressure on industry wide
Prepaid Card pricing.
Rapid Technological Change in the Telecommunication Market
The telecommunication market is characterized by rapid technological change, new
product and service introduction, new sales channels and evolving industry
standards. HitCom's success will depend, in significant part, upon its ability
to make timely and cost-effective enhancements and additions to its technology
and to introduce new products and services that meet customer demands. HitCom
expects new products and services to be developed and introduced by other
companies that compete with its products and services. The proliferation of new
telecommunications technology, including personal and voice communication
services over the Internet, may reduce demand for long distance services,
including Prepaid Cards. There can be no assurance that HitCom will be
successful in responding to these or other technological changes, evolving
industry standards or to new products and services offered by HitCom's current
and future competitors. The inability of HitCom to respond to these changes
could have a material adverse effect on the Company's business, financial
condition or results of operations.
Risks Associated with Foreign Currency Fluctuations.
HitCom's reporting currency is the U.S. dollar, however, Channel derives almost
all of its revenues, approximately 50% of its cost of services and almost all of
its operating expenses in Canadian Dollars. Accordingly, changes in currency
exchange rates may have a significant effect on HitCom's results of operations.
HitCom may choose to limit its exposure to foreign currency fluctuations in the
future by purchasing forward foreign exchange contracts or engaging in other
similar hedging strategies although to date it has not done so. The failure by
HitCom to hedge its foreign currency exchange exposure may result in foreign
exchange losses to HitCom from Channel's operations. In addition, there can be
no assurance that any currency hedging strategy that HitCom decides to employ,
if any, would be successful in avoiding currency exchange-related losses.
Risks of Network Failure; Dependence on Facilities and Third Parties
Any system or network failure that causes interruptions in HitCom's operations
could have a material adverse effect on the business, financial condition or
results of operations. HitCom's operations also are dependent on its ability to
protect its hardware and other equipment from damage from natural disasters such
as fires, floods, hurricanes and earthquakes, other catastrophic events such as
civil unrest, terrorism and war and other sources of power loss and
telecommunications failures. Although HitCom has taken a number of steps to
prevent their network from being affected by natural disasters, fire and the
like, such as building redundant systems for power supply to the switching
equipment, there can be no assurance that any such systems will prevent HitCom's
switches from becoming disabled in the event of an earthquake, power outage or
otherwise. The failure of HitCom's network, or a significant decrease in
telephone traffic resulting from effects of a natural or man-made disaster,
could have a material adverse effect on HitCom's relationships with their
customers and their business, operating results and financial condition.
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; HitCom will have
sufficient cash to meet its currently anticipated working capital and capital
expenditure requirements for at least twelve months. If HitCom's growth exceeds
current expectations, 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. There can be no assurance that
HitCom will be able to raise such capital on favorable terms or at all. If
HitCom is unable to obtain such additional capital, HitCom may be required to
reduce the scope of its anticipated expansion, which could have a material
adverse effect on HitCom's business, financial condition or results of
operations.
Control of HitCom by Named Officers and Directors
On a fully-diluted basis, executive officers and directors of HitCom, in the
aggregate beneficially own approximately 70% of the outstanding shares of HitCom
Common Stock. These stockholders may be able to exercise control over all
matters requiring stockholder approval, including the election of directors and
approval of significant corporate transactions.
<PAGE>
ITEM 2 - Description of Property
The Company operates its One Plus business through its Corporate head office in
St. Louis, Missouri, USA. The 5,910 square foot office is leased through to June
30, 2000 at rental rates ranging from $4,344 to $4,789 per month.
The Prepaid Card business is operated out of offices at Toronto, Ontario,
Canada. The 2,990 square foot office is leased through to February 28, 2003 at
rental rates ranging from $1,250 to $2,200 per month. Channel also has a 330
square foot sales office in Vancouver, British Columbia which is being rented on
a month to month lease for $300 per month.
The Company believes its facilities have generally been well maintained, are in
good operating condition and are adequate for the Company's current
requirements.
ITEM 3 - Legal Proceedings
The Company is not involved in legal proceedings that would have a material
adverse effect on the Company's financial condition or results of operations if
determined adversely.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the Company's
fourth quarter.
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the OTC Bulletin Board (OTCBB). As of
December 31, 1998, there were approximately 110 shareholders of record of the
Company's Common Stock. The following table sets forth the high and low bid
information for the Common Stock for the periods indicated, as reported by the
OTCBB:
HIGH LOW
Calendar Year 1997
4th Quarter 2.13 0.88
3rd Quarter 2.44 0.88
2nd Quarter 3.38 1.13
Calendar Year 1998
4th Quarter 2.25 0.38
3rd Quarter 1.13 0.69
2nd Quarter 2.50 1.13
1st Quarter 2.69 0.78
The above quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions.
DIVIDENDS
No dividends on the Company's Common Stock was declared during fiscal 1998 and
1997. It is not anticipated that cash dividends will be paid on shares of the
Company's Common stock in the foreseeable future.
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company principally derives its revenues through two operating subsidiaries:
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 Company offers customized
interactive voice-processing systems allowing each member of a national or
international sales organization a method by which the response from a large
advertising campaign can be handled 24 hours a day and pertinent data reported
to their participants almost instantly. The revenues of One Plus are derived
primarily in the United States.
Effective April 1, 1997, the Company acquired 80% of the outstanding stock of
One Plus (the "Acquisition") for 5,837,503 shares of the Company's common stock.
The Acquisition was accounted for as a reverse acquisition in accordance with
APB No. 16 "Business Combinations." As such, One Plus is considered the
accounting acquiror. The historical financial statements prior to April 1, 1997
are those of One Plus.
Effective August 1, 1998, HitCom's major shareholder contributed to capital the
remaining 20% minority interest of One Plus. The cumulative Minority Interest as
at July 31, 1998 totaling $186,439 reverted back to HitCom and is reflected as
an adjustment to Additional Paid in Capital.
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. Channel sets
its Prepaid Card rates to attract new customers and to retain its existing
customers. Channel has used its significant retail international traffic to
negotiate very competitive rates for international termination. Channel sells
its Prepaid Cards to retail stores and distributors at a discount to their face
values of $5, $10, $20, $25, $50 and $100, and records the sale as deferred
revenue until the card user utilizes the calling time.
HitCom acquired Channel effective May 31, 1998. 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 the
date of acquisition.
<PAGE>
Selected Financial Data
Consolidated Statements of Operations
For the Year Ended December 31,1998 and Nine-Month Period Ended December 31,1997
- --------------------------------------------------------------------------------
(9 months)
1998 1997
---------------- ----------------
Net Revenues
IVR - One Plus $2,381,357 65% $2,651,208 100%
Prepaid Card - Channel 1,301,997 35% - -
- --------------------------------------------------------------------------------
3,683,354 100% 2,651,208 100%
- --------------------------------------------------------------------------------
Cost of Services
IVR - One Plus 995,954 27% 1,399,280 53%
Prepaid Card - Channel 1,153,508 31% - -
- --------------------------------------------------------------------------------
2,149,462 58% 1,399,280 53%
- --------------------------------------------------------------------------------
Gross Margin
IVR - OPM 1,385,403 38% 1,251,928 47%
Prepaid Card - Channel 148,489 4% - -
- --------------------------------------------------------------------------------
1,533,892 42% 1,251,928 47%
- --------------------------------------------------------------------------------
Operating expenses:
Selling, general and administrative 1,265,919 34% 960,635 36%
Amortization of goodwill 233,199 6% - -
Depreciation of property & equipment 102,758 3% 57,487 2%
- --------------------------------------------------------------------------------
Total operating expenses 1,601,876 43% 1,018,122 38%
- --------------------------------------------------------------------------------
Operating Income (loss) (67,984) (1%) 233,806 9%
Other expenses (income)
Net interest expense (income) 33,199 1% (2,788) -
- --------------------------------------------------------------------------------
Income (loss) before taxes and minority
interest (101,183) (2%) 236,594 9%
Provision for income taxes - -
Minority interest 20,332 1% 64,257 2%
- --------------------------------------------------------------------------------
Income (loss) from Continuing Operations (121,515) (3%) 172,337 7%
Loss from discontinued operations 457,212 12% 241,798 9%
- --------------------------------------------------------------------------------
Net loss $ (578,727) (15%) $ (69,461) (2%)
================================================================================
OTHER FINANCIAL DATA
EBITDA from Continuing Operations $ 267,973 7% $ 291,293 11%
Cash used in operating activities (306,086) (521,348)
Cash used in investing activities (257,936) (42,378)
Cash provided by(used in)financing activities 715,706 (11,680)
================================================================================
EBITDA is operating income before interest, income taxes, depreciation,
amortization and minority interest. The Company has included information
concerning EBITDA because it believes that EBITDA is used by certain investors
as one measure of an issuer's historical ability to service debt. EBITDA is not
a measurement determined in accordance with GAAP, should not be considered in
isolation or as a substitute for measures of performance based in accordance
with GAAP.
<PAGE>
Results of Operation:
Fiscal Year Ended December 31, 1998 Compared to Nine-Month Period Ended December
31, 1997
Net revenues
Net revenue in 1998 increased by $1,032,146 or 39% to $3,683,354 compared with
net revenue of $2,651,208 for the nine-month period in 1997. The increase in net
sales is due to the Channel acquisition. Channel provided HitCom $1,301,997 in
revenue in seven months 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 in 1998 declined over the nine-month period in 1997 by
$269,851. The decline in One Plus revenue was attributable to lower referral
activities by the DSOs. The Company believes the decline in One Plus revenue
will continue in 1999 due to continued decrease in referral activities by the
DSOs.
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 58% of sales in 1998 from 53% in 1997. 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. Cost of services for Channel was 89% in 1998 as
compared to One Plus which was 42% in 1998 and 53% in 1997. The decrease in cost
of services for One Plus was primarily attributable to decrease in carrier
charges.
In late 1998, the Company purchased a second switch for the Prepaid Card
division which will be implemented in the Second Quarter of 1999. The new
Excel(R) EXS-1000 switch is far superior to the PC based switch that the Company
currently operates. The new switch will provide significant increase in call
volume capacity over the current switch. However, of greater significance, the
new switch has the capability to utilize significantly more long distance
carriers thereby resulting in greater choice in optimizing least cost routing
which should decrease the Company's cost of services and correspondingly
increase gross margin.
Selling General & Administrative (SG&A):
SG&A expenses increased to $1,265,919 (34% of sales) in 1998 from $960,635 (36%
of sales) in nine-month period in 1997. The increase in dollar amount was
primarily attributable to the Channel acquisition and the twelve-month period in
1998 as compared to the nine-month period in 1997.
Depreciation of property and equipment
Depreciation increased to $102,758 in 1998 from $57,487 in nine-month 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, acquisition of Channel and
the twelve-month period in 1998 as compared to the nine-month period 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 $233,199 in 1998.
The Company significantly increased its goodwill resulting from the Channel
Acquisition in the fourth quarter to $3,997,700 from $91,647 as was reported in
the Company's 10-QSB's for the quarters ended June 30, 1998 and September 30,
1998. The increase in goodwill led to the restatement of the Company's goodwill
amortization for the second and third quarters of 1998. Revised 10-QSB will be
filed separately for those corresponding periods.
Operating Loss / Income
Operating loss in 1998 was $67,984 as compared to income of $233,806 in
nine-month period in 1997. Decrease in operating income is primarily due to the
goodwill amortization of $233,199, and decrease in One Plus revenue which
provides higher gross margin than Channel's business.
Net Interest Expense (income):
Net interest expense was $33,199 in 1998 as compared to net interest income of
$2,788 for the nine-month period in 1997. This was attributable to increased
bank borrowings and issuance of the convertible debentures in 1998.
Minority Interest
Effective August 1, 1998, HitCom acquired the remaining 20% minority interest of
One Plus from HitCom's major shareholder for $1. Minority interest from January
1, 1998 to July 31, 1998 totaled $20,332. The cumulative Minority Interest as
at July 31, 1998 totaling $186,439 reverted back to HitCom and was added to
additional paid in capital.
Discontinued Operations
In August 1998, HitCom completed the sale of the customer accounts related to
the Internet Service division (ISP) segment for $30,000. This segment had
focused on providing various levels of Internet access to customers in the St.
Louis, Missouri area. The disposal of the ISP segment is reflected as
discontinued operations. The direct expenses and associated overhead costs net
of revenue earned from these operations, were $426,922 in 1998 and $241,798 for
the nine-month period in 1997. In addition, HitCom recorded a loss on disposal
of the ISP segmnet of $30,290, consisting of $60,290 writedown on the fixed
assets of the ISP segment that are currently being held for resale, netted with
the $30,000 received for the sale of the customer accounts. The total loss
recorded for the discontinued ISP segment in 1998 was $457,212.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at December 31, 1998 increased to $340,484 from
$188,800 at December 31, 1997. The Company's liquidity requirements were largely
used by working capital needs and investment needs including capital
expenditures and the Channel acquisition. These requirements were funded by
issuance of convertible debentures through a private placement and increased
bank borrowings.
Cash used by operating activities in 1998 decreased to $306,086 from $521,348 in
nine month period in 1997. Significant changes included net loss in the year as
compared to net income in 1997 and cash used by account payable and accrued
expenses.
Cash used for capital expenditures and acquisitions in 1998 increased to
$257,936 from $42,378 in nine-month period in 1997. This was primarily as a
result of significant new capital expenditures of $102,745 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.
The Company's total committed capital expenditures for the deployment of the new
EXS-1000 switch in second quarter 1999 is $75,000. At December 31, 1998, 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.
Cash proceeds from financing activities in 1998 were $715,706 as compared to net
repayments of $11,680 in nine-month period in 1997. Financing activities
proceeds consisted primarily of issuance of convertible debentures through a
private placement and new commercial bank term loan facilities.
Issuance of Convertible Subordinated Debentures
During the year the Company had received net proceeds of $528,000 from issuance
of Convertible Subordinated Debentures. The debentures were issued on October 1,
1998 and are due on October 1, 2003, bearing interest at 8% per annum, payable
semi-annually commencing on April 1, 1999. The debentures may be converted at
the option of the holder into fully-paid and non-assessable shares of Common
Stock of HitCom at a conversion price of $0.50 per share (equivalent to a
conversion rate of 2000 shares per $1,000 principal amount of debenture). After
September 1, 2000, the Company may force the conversion of all debentures if the
Company's common stock closes at a price of $2.00 or higher on each trading day
during any 90 consecutive calendar days. After October 1, 2000, the debentures
are subject to redemption upon payment of the principal amount and accrued
interest, at the election of the Corporation. The debentures were issued through
a private placement.
New Commercial Bank Credit Facilities
The Company also restructured its existing credit facilities with a new
commercial bank which provided for net increased credit facilities of $435,000.
The new credit facilities consists of: o Revolving working capital line of
credit of $150,000 which replaced its prior facility of $100,000. The new line
bears interest at prime plus 0.5%. As at December 31, 1998 , $30,000 of the
$150,000 operating line facility was used by the Company. o Term loan for
$385,000 with a commercial bank due on May 1, 2001, bearing interest at 9% per
annum, payable monthly.
Repayment is at $8,000 per month inclusive of interest and principal.
Proceeds from the term loan were used to pay out the existing $100,000
operating facility, Channel acquisition cash requirements and for general
working capital purposes. The balance on this facility at December 31, 1998
was $290,638.
The new credit facilities are secured by a security agreement covering all of
the assets of the Company and personal guarantee from the Company's major
shareholder.
Subsequent to December 31, 1998, Channel obtained a new revolving operating
credit facility from a commercial bank in Canada for approximately $100,000,
bearing interest at Bank Canadian prime plus 1.75% which was 8.0% as at december
31, 1998. The facility is due on demand and is secured by a general security
agreement on Channel, $50,000 Guaranteed Investment Certificate and corporate
guarantees from HitCom.
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 through 1999. 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 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 addition 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, 1999 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.
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. 133 is effective for years beginning after June 15, 1999
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.
<PAGE>
ITEM 7--FINANCIAL STATEMENTS
HITCOM CORPORATION
Consolidated Balance Sheet
December 31, 1998
- --------------------------------------------------------------------------------
ASSETS
1998
Current Assets:
Cash and cash equivalents $ 340,484
Accounts receivable, net of allowance for
doubtful accounts of $50,900 489,060
Inventory 27,208
Prepaid expenses 11,252
- --------------------------------------------------------------------------------
Total current assets 868,004
- --------------------------------------------------------------------------------
Property and equipment, net 341,812
Goodwill, net of amortization of $233,199 3,764,501
Investment in service bureau 23,083
- --------------------------------------------------------------------------------
$4,997,400
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Revolving line of credit $ 30,000
Accounts payable 767,149
Accrued liabilities 205,710
Deferred revenue 390,081
Due to officers and directors 58,503
Current portion of long-term debt 72,255
Current portion of obligations under capital lease 11,068
Net liability for discontinued segment 39,224
- --------------------------------------------------------------------------------
Total current liabilities 1,573,990
- --------------------------------------------------------------------------------
Long term debt 746,383
Obligations under capital lease 2,962
- --------------------------------------------------------------------------------
Total liabilities 2,323,335
- --------------------------------------------------------------------------------
Commitments & contingencies
Shareholders' equity
Convertible preferred stock $.001 par value,
liquidation preference of $0.80 per share
($858,702 aggregate liquidation preference),
convertible into 0.25 shares of common stock;
5,000,000 authorized; 1,073,377 issued and outstanding 1,074
Common stock $.004 par value, 25,000,000 authorized;
12,293,355 issued; 12,286,105 outstanding 49,173
Additional paid in capital 2,901,726
Accumulated deficit (264,298)
Cumulative foreign currency translation adjustment 6,186
Treasury stock - at cost; 7,250 common stock (19,796)
- --------------------------------------------------------------------------------
2,674,065
- --------------------------------------------------------------------------------
4,997,400
================================================================================
The accompanying notes are an integral part of these financial statements
<PAGE>
HITCOM CORPORATION
Consolidated Statements of Operations
For the Year Ended December 31,1998 and Nine-Month Period Ended December 31,1997
- --------------------------------------------------------------------------------
(9 months)
1998 1997
--------- ---------
Net service revenues $3,683,354 $2,651,208
Cost of services 2,149,462 1,399,280
- --------------------------------------------------------------------------------
Gross margin 1,533,892 1,251,928
- --------------------------------------------------------------------------------
Operating expenses:
Selling, general and administrative 1,265,919 960,635
Amortization of goodwill 233,199 -
Depreciation of property and equipment 102,758 57,487
- --------------------------------------------------------------------------------
Total operating expenses 1,601,876 1,018,122
- --------------------------------------------------------------------------------
Operating income (loss) (67,984) 233,806
Other income (expense)
Interest expense (44,319) (13,134)
Interest income 11,120 15,922
- --------------------------------------------------------------------------------
Total other income (expense) (33,199) 2,788
- --------------------------------------------------------------------------------
Income (loss) before taxes and minority interest (101,183) 236,594
Provision for income taxes - -
Minority interest 20,332 64,257
- --------------------------------------------------------------------------------
Income (loss) from continuing operations (121,515) 172,337
Loss from discontinued segment:
Operations 426,922 241,798
Loss on disposal 30,290 -
- --------------------------------------------------------------------------------
457,212 241,798
- --------------------------------------------------------------------------------
Net loss $ (578,727) $ (69,461)
================================================================================
Dividends on convertible preferred stock (58,080) $ (67,280)
- --------------------------------------------------------------------------------
Net loss available to common shareholders $ (636,807) $ (136,741)
================================================================================
Basic and diluted earnings (loss) per share
Income (loss) from continuing operations $ (0.02) $ 0.01
Loss from discontinued segment $ (0.04) $ (0.03)
- --------------------------------------------------------------------------------
Net loss $ (0.06) $ (0.02)
================================================================================
Weighted average shares - basic 10,442,292 7,921,458
Weighted average shares - diluted 10,442,292 8,313,969
The accompanying notes are an integral part of these financial statements
<PAGE>
<TABLE>
HITCOM CORPORATION
Consolidated Statement of Shareholders' Equity
For the Year Ended December 31,1998 and Nine-Month Period Ended December 31,1997
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Cumulative
Foreign
Additional Retained Currency Other
Preferred Stock Common Stock Paid in Earnings/ Translation Treaury Comprehensive
Shares Amount Shares Amount Capital (Deficit) Adjustment Stock Total loss
--------------- ------------------ ---------- --------- ----------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, April 1, 1997 - $ - 100 $ - $ - $ 509,250 $ - $ - $ 509,250
Net loss (69,461) (69,461) (69,461)
Issuance of common stock in ========
stock acquisition of One Plus 5,837,503 23,350 (23,350) -
Recapitalization adjustment (100) -
Acquired deficit in stock
acquisition of HitCom Corp 1,072,543 1,073 2,074,537 8,298 (1,205,399) (10,084) (1,206,112)
Conversion of preferred stock (12,500) (13) 3,125 13 -
Preferred stock dividends 84,100 84 - - 67,196 (67,280) -
Common stock issued 17,500 70 21,649 21,719
Common stock canceled (1,776) (7) (7)
Stock options exercised 125 -
Repurchase of common stock (9,712) (9,712)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 1,144,143 1,144 7,931,014 31,724 (1,139,904) $ 372,509 - (19,796) (754,323)
====================================================================================================================================
Net loss (578,727) (578,727) (578,727)
Foreign currency translation adjustment 6,186 6,186 6,186
Comprehensive income --------
(572,541)
Issuance of common stock in acquisition of ========
Channel Telecom Inc. 3,975,570 15,902 3,462,598 3,478,500
Issuance of common stock for acquisition
related costs of Channel Telecom Inc. 309,240 1,237 269,348 270,585
Minority Interest repurchase 186,439 186,439
Conversion of preferred stock (143,366) (143) 35,842 143 -
Preferred stock dividends 72,600 73 58,007 (58,080) -
Common stock issued 41,689 167 40,038 40,205
Issuance of warrants 25,200 25,200
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 1,073,377 $1,074 12,293,355 $49,173 $ 2,901,726 $(264,298) $6,186 $(19,796) $2,674,065
====================================================================================================================================
</TABLE>
<PAGE>
HITCOM CORPORATION
Consolidated Statement of Cash Flows
For the Year Ended December 31,1998 and Nine-Month Period Ended December 31,1997
- --------------------------------------------------------------------------------
1998 1997
Operating activities:
Net loss $(578,727) $ (69,461)
Adjustments to reconcile net loss to net cash used
in operating activities:
Goodwill amortization 233,199 -
Depreciation 102,758 57,487
Writedown on assets held for resale -
discontinued operations 60,290 -
Minority interest in earnings of subsidiary 20,332 64,257
Issuance of common shares for services 24,205 -
Issuance of warrants for services 25,200 -
Loss on sale of property & equipment 6,171 -
Equity in loss of affiliated Company 2,804 -
Deferred tax benefit 885 (885)
Changes in assets and liabilities, excluding acquisition:
Accounts receivable--net (42,661) 130,002
Inventory (10,651) -
Other assets 46,855 (25,703)
Accounts payable and accrued expenses (70,130) (672,295)
Deferred revenue (126,616) (4,750)
- --------------------------------------------------------------------------------
Net cash used in operating activities (306,086) (521,348)
- --------------------------------------------------------------------------------
Investing activities:
Purchases of property and equipment (102,745) (43,430)
Acquisition of Channel Telecom, net of cash acquired (155,191) -
Cash acquired in reverse acquisition - 1,052
- --------------------------------------------------------------------------------
Net cash used in investing activities (257,936) (42,378)
- --------------------------------------------------------------------------------
Financing activities:
Proceeds from the issuance of convertible debentures 528,000 -
Proceeds from bank term loan 385,000 -
Repayment of bank term loan (94,365) -
Repayment of capital leases (14,108) (1,961)
Repayment of notes payable (33,000) -
Proceeds from due to officers and directors 14,179 -
Repayment on line of credit (70,000) -
Purchase of stock for treasury - (9,712)
Common stock canceled - (7)
- --------------------------------------------------------------------------------
Net cash provided (used) in financing activities 715,706 (11,680)
- --------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 151,684 (575,406)
Cash and cash equivalents at beginning of period 188,800 764,206
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 340,484 $ 188,800
================================================================================
Supplemental disclosure of cash flow information
Cash paid for interest during the period $ 40,204 $ 10,276
Cash paid for income 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 -
Reversion of minority interest 186,439 -
Property & Equipment acquired through proceeds from
capital lease 105,224 15,035
Preferred dividend paid through issuance of preferred
shares 58,080 67,280
Repayment of notes payable through issuance of common
stock 16,000 -
Capital assets disposed of by settlement of capital lease 5,838 -
Conversion of preferred shares into common shares $ 143 $ 13
The accompanying notes are an integral part of these financial statements
<PAGE>
HITCOM CORPORATION
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
1. 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.
The Company's customers are located within North America without a significant
geographic concentration. The Company extends unsecured credit to its customers.
The Company's 800-based services business depends on Direct Sales Organizations
(DSO) referring their independent agents to become customers and use the
Company's services. One DSO referred customers that accounted for approximately
$1,555,000 (42% of total revenue) and $1,625,000 (61% of total revenue) in
revenue for the year ended December 31, 1998 and nine months ended December 31,
1997 respectively.
2. 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.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
reported amounts of revenues and expenses during the reported period with
consideration given to materiality. Actual results could differ from those
estimates.
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. Amortization expense was $233,199 in 1998. For
additional information related to the acquisition see Note 3, "Acquisitions."
Cash and Cash Equivalents
For financial statement presentation purposes, cash and cash equivalents include
deposits with initial maturities of less than three months, including money
market accounts with investments in marketable securities.
Comprehensive Income
The Company has implemented the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income". Under SFAS No.
130, the Company is required to report comprehensive income in the financial
statements, in addition to net income. For the Company, the primary difference
between net income and comprehensive income is from foreign currency translation
adjustments.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration of
credit risk consists principally of account receivable from customers. This risk
is mitigated by the large number of customers in the Company's customer base
resulting in small amounts from each individual customer, net of an allowance
for uncollectable accounts.
Earnings/Loss Per Common Share
Basic earnings per share is calculated by dividing net income or loss available
for common shareholders for the period by the weighted-average number of shares
of common stock outstanding during the period. The assumed exercise of stock
options, warrants, convertible preferred stock and convertible debentures is
included in the calculation of diluted earnings per share, if dilutive.
SFAS No. 128, "Earnings per Share" was adopted in fiscal 1997 with all
prior-period earnings per share data restated. SFAS No. 128 requires dual
presentation of basic and diluted earnings per share on the Consolidated
Statements of Operations and other computational changes. The adoption of SFAS
No. 128 did not have a material effect on previously reported earnings per
share.
Fair Values of Financial Instruments
Management believes that the carrying values of all financial instruments
approximate their fair values.
Foreign Currency Translations
Financial statements of the Company's international subsidiary are translated
into US dollars using the exchange rate at each balance sheet date for assets
and liabilities and an average exchange rate for the revenues and expenses
reported in each fiscal period. The gain of $6,186 is included in shareholders'
equity.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards, to the extent
realizable. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Inventory
Inventory consists of costs of external production of unsold phone cards.
Inventory is valued using the lower of average-cost or market and is charged to
cost of services when the cards are sold. Provision for potentially obsolete or
slow moving inventory is made based on management's analysis of inventory levels
and future sales forecasts.
Long-Lived Assets
The Company evaluates whether events and circumstances have occurred that
indicate the remaining estimated useful life of long lived assets may warrant
revision or that the remaining balance of an asset may not be recoverable. The
measurement of possible impairment is based on the ability to recover the
balance of assets from expected future operating cash flows on an undiscounted
basis or the estimated fair value of assets held for resale less disposal costs.
In the opinion of management, no such impairment exists at December 31, 1998 or
December 31, 1997.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using
principally the straight-line method over the estimated useful lives of the
related assets, ranging from five to seven years. Expenditures for maintenance
and repairs are charged against earnings as incurred.
Operating Segments
The Company has implemented the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for the way public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to stockholders. SFAS No. 131 need not be applied to
interim financial statements in the initial year of its application. The
adoption of SFAS No. 131 did not have an effect on the Company's primary
financial statements, but did affect the disclosure of segment information
contained in Note 17.
Stock-Based Compensation Plans
The Company grants stock options for a fixed number of shares to eligible
employees and consultants of the Company with an exercise price equal to or
greater than the quoted market price of the shares at the date of grant. The
Company accounts for stock options in accordance with Accounting Principles
Board Opinion No. 25 (APB No. 25) "Accounting for Stock Issued to Employees."
The Opinion requires that compensation cost related to fixed stock option plans
be recognized only to the extent that the quoted market price of the shares at
the date of grant exceeds the exercise price. Accordingly the Company recognizes
no compensation expense for its stock option grants.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 allows companies to continue to account for their
stock option plans in accordance with APB No. 25, but encourages the adoption of
a new accounting method based on the estimated quoted market price of employee
stock options. The Company will continue to apply the intrinsic value method of
APB No. 25 for financial reporting purposes. See Note 12 Employee Benefits.
Reclassifications
Certain reclassifications have been made to the amounts presented for 1997 to
conform to the presentation for 1998
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. 133 is effective for years beginning after June 15, 1999
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 consolidated 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
consolidated financial statements.
<PAGE>
3. ACQUISITIONS
Channel Telecom Inc. ("Channel")
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 year ended December 31, 1998 and
the nine-month period ended December 31, 1997.
(unaudited)
(unaudited) (nine-months)
1998 1997
--------- ---------
Net service revenues $4,220,100 $3,488,700
Cost of services 2,471,000 2,011,400
- --------------------------------------------------------------------------------
Gross margin 1,749,100 1,477,300
================================================================================
Net loss $ (745,298) $ (368,120)
================================================================================
Net loss available to common shareholders $ (803,378) $ (435,400)
================================================================================
Basic and diluted loss per share $ (0.07) $ (0.04)
================================================================================
One Plus Marketing Inc. ("One Plus").
Effective August 1, 1998, Hitcom acquired the remaining 20% of the outstanding
common stock of One Plus from Hitcom's major shareholder for $1. The cumulative
Minority Interest as at July 31, 1998 totaling $186,439 reverted back to Hitcom
and is reflected as an adjustment to Additional Paid in Capital.
Effective April 1, 1997, the Company acquired 80% of the outstanding common
stock of One Plus Marketing, Inc. ("One Plus") for 5,837,503 shares of the
Company's common stock. For accounting purposes, the acquisition has been
treated as a recapitalization of One Plus with One Plus as the accounting
acquiror in accordance with APB No. 16 "Business Combinations." The acquisition
was accounted for using the purchase method of accounting. Accordingly, the
purchased assets and liabilities of the Company have been recorded at their
estimated fair value at the date of acquisition.
A summary of net liabilities assumed is as follows:
Assets acquired:
Current assets $ 2,602
Property and equipment and other assets 91,246
- --------------------------------------------------------------------------------
93,848
- --------------------------------------------------------------------------------
Liabilities assumed:
Debt obligations 149,000
Account payable and accrued expenses 1,150,960
- --------------------------------------------------------------------------------
1,299,960
- --------------------------------------------------------------------------------
Net liabilities assumed $ 1,206,112
================================================================================
4. PROPERTY AND EQUIPMENT 1998
----------
Computer equipment and software $ 259,251
Telephone switching equipment 193,950
Office equipment and furniture 90,087
Vending Equipment 15,735
- --------------------------------------------------------------------------------
559,023
Accumulated depreciation (217,211)
- --------------------------------------------------------------------------------
$ 341,812
================================================================================
Depreciation expense was $102,758 and $57,487 in 1998 and 1997, respectively.
5. GOODWILL 1998
----------
Goodwill $3,997,700
Accumulated Amortization (233,199)
- --------------------------------------------------------------------------------
$3,764,501
================================================================================
6. REVOLVING LINE OF CREDIT
In May 1998 the Company negotiated a $150,000 revolving working capital line of
credit with a commercial bank to replace its prior facility. The outstanding
balance on the line of credit was $30,000 at December 31, 1998. The line of
credit bears interest at the Bank's prime rate plus 0.5% which was 8.5% at
December 31, 1998 and is secured by a general security agreement covering all
the assets of the Company and personal guarantees from a major shareholder. The
average outstanding balance on the line of credit was approximately $44,000
during the year with an average interest rate of 8.25%.
The new credit facility matures on May 1, 1999 and is renewable at the option of
the Bank.
7. ACCRUED LIABILITIES 1998
----------
Salaries, commission and benefits $ 82,138
Interest 10,600
Professional fees 26,978
Sales Taxes 22,934
Other 63,060
- --------------------------------------------------------------------------------
$ 205,710
================================================================================
8. DUE TO OFFICERS AND DIRECTORS
Due to Officers and Directors are due to three officers and directors of the
Company, are non-interest bearing and due on demand.
9. LONG TERM DEBT
Long Term Debt consists of the following:
1998
----------
Convertible subordinated debentures $ 528,000
Bank Term Loan 290,638
- --------------------------------------------------------------------------------
818,638
Less: current portion 72,255
- --------------------------------------------------------------------------------
Long-term portion $ 746,383
================================================================================
Convertible Subordinated Debenture
The debentures were issued on October 1, 1998 and are due on October 1, 2003,
bearing interest at 8% per annum, payable semi-annually commencing on April 1,
1999. They are unsecured general obligations of the Company which are
subordinated in right of payment. The debenture may be converted at the option
of the holder into fully-paid and non-assessable shares of Common Stock of the
Company at a conversion price of $0.50 per share (equivalent to a conversion
rate of 2000 shares per $1,000 principal amount of debenture). After September
1, 2000, the Company may force the conversion of all Debentures if the Company's
common stock closes at a price of $2.00 or higher on each trading day during any
90 consecutive calendar days. After October 1, 2001, the debentures are subject
to redemption in whole or in part, substantially pro rata prior to maturity, on
the first day of any calendar month upon payment of the principal amount and
accrued interest, at the election of the Corporation. The debentures were issued
through a private placement.
Bank Term Loan
In May 1998 the Company negotiated a new $385,000 term loan with a commercial
bank due on May 1, 2001, bearing interest at 9% per annum, payable monthly.
Repayment is at $8,000 per month inclusive of interest and principal, with the
remaining outstanding balance due on May 1, 2001. The term loan is secured by a
general security agreement covering all of the assets of the Company and
personal guarantees from a major shareholder.
As of December 31, 1998, the maturities of long-term debt were as follows:
Year Ended December 31, Amount
- --------------------------------------------------------------------------------
1999 $ 72,255
2000 79,032
2001 139,351
2002 -
2003 528,000
- --------------------------------------------------------------------------------
$ 818,638
================================================================================
Interest expense on long-term debt was $29,026 and $3,500 during the year
ended December 31, 1998 and nine-month period ended December 31, 1997,
respectively.
10. SHAREHOLDERS' EQUITY
Preferred Stock
In May 1996, the Company's stockholders approved an amendment and restatement of
the certificate of incorporation that authorized the future issuance of
1,500,000 shares of 8% convertible preferred stock (the "Preferred Stock"),
$.001 par value, with rights and preferences to be determined by the Company's
Board of Directors. The Preferred Stock is convertible at four shares of the
Preferred Stock for one share of Common Stock and is callable at $0.85 per share
upon 30 days written notice if the Preferred Stock is not converted to Common
Stock. The Preferred Stock is entitled to an $0.80 liquidation preference
subject to certain adjustments that coincide with the conversion price. The
Preferred Stock accrues dividends at 8% per annum and may be paid in cash or
like kind. Like kind dividends of 72,600 and 84,100 preferred shares were
declared and paid in 1998 and 1997 and are reflected in the accompanying
consolidated statement of shareholders' equity.
Common Stock
On January 20, 1997, the Board of Directors of the Company authorized a
four-for-one reverse stock split. The split was effected by distributing one
share of new common stock for every four shares of old common stock outstanding.
All shares of old common stock were canceled. All share data was retroactively
adjusted. Cash was paid in lieu of fractional shares.
No dividends have been declared or paid relating to common stock during 1998 and
1997.
Common Stock Disputed
The Company is vigorously disputing 150,000 shares of common stock (the
"Disputed Shares") issued in January 1997 to a former officer and director of
the Company. The Company asserts that the former officer and director was
erroneously issued the Disputed Shares without appropriately fulfilling the
conditions for issuance of the Disputed Shares. Furthermore, the Company asserts
that the issuance of the disputed shares was not authorized by a properly
elected and functioning Board of Directors. As a result of repeated unsuccessful
attempts to recover the Disputed Shares, the Company has filed a lawsuit seeking
cancellation of the Disputed Shares. Management believes that the Disputed
Shares will be ultimately returned and canceled without a material affect on the
consolidated financial position of the Company. The Company has not reflected
the Disputed Shares as issued or outstanding in the accompanying consolidated
financial statements.
Warrants
The Company has warrants outstanding to purchase 155,000 shares of its common
stock at a weighted average exercise price of $3.15 per share to the Company's
financial advisors. The 100,000 warrants issued in 1998 were valued at $25,200
using the Black-Scholes pricing model. The $25,200 was charged to operations and
additional paid in capital. The warrants expire at various dates between January
2000 and October 2000.
Convertible Subordinated Debenture
The debentures were issued on October 1, 1998 and are due on October 1, 2003,
bearing interest at 8% per annum, payable semi-annually commencing on April 1,
1999. At any time while the debenture is outstanding, the debenture may be
converted at the option of the holder into fully-paid and non-assessable shares
of Common Stock of the Company at a conversion price of $0.50 per share
(equivalent to a conversion rate of 2000 shares per $1,000 principal amount of
debenture). For further reference see Note 9, "Long Term Debt."
Treasury Stock
During 1997, the Company repurchased 5,250 common stock shares on the open
market at prices ranging from $1.69 to $1.88 per share. At December 31, 1998,
the Company holds in treasury stock 7,250 shares of common stock which is
reflected in the accompanying consolidated statement of shareholders' equity.
11. EQUITY TRANSACTIONS
In connection with the purchase of Channel effective May 31, 1998, the Company
issued 3,975,570 shares of common stock to the former shareholders of Channel
and 309,240 shares of common stock to consultants who provided services with
regards to the closing of the acquisition. All of the issued shares were valued
at $0.875 per share which was the closing price of HitCom's common stock share
price on December 22, 1997, the date of the public announcement of the
acquisition. For further reference see Note 3, "Acquisitions"
During 1998 and 1997, 143,366 and 12,500 shares of the Preferred Stock were
converted to 35,842 and 3,125 shares of common stock and are reflected in the
accompanying consolidated statement of stockholders' equity.
12. EMPLOYEE BENEFITS
Stock Option Plans
In September 1998, the Board of Directors adopted a stock option plan (the
"1998" plan) under which options to purchase 2,000,000 shares have been
authorized. The options may be incentive stock options or non-qualified stock
options. As of December 31, 1998, there were no options granted under the 1998
plan.
Prior to the 1998 plan, the Company had various stock option agreements that
allowed eligible employees, directors and consultants of the Company to purchase
the Company's common stock at fair market value at the date the option is
granted. The options expired up to ten years from the date the option is
granted. There were 351,967 options granted in 1998 under these various plans.
The following table summarizes stock option activity for the years ended
December 31:
1998 1997
----------------- -----------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
Outstanding - beginning of period 45,700 $0.49 45,825 $0.49
Exercised - - (125) 0.40
Granted 351,967 0.98 - -
Expired (4,750) 1.00 - -
- --------------------------------------------------------------------------------
Outstanding at end of period 392,917 $0.91 45,700 $0.49
================================================================================
The weighted average significant assumptions used to determine those values
using the Black-Scholes option pricing model for 1998 were: volatility of 0.70;
dividend yield of 0%; risk-free interest rate of return of 5.19%; and expected
option lives of 3.4 years.
The following table summarizes information about stock options outstanding as at
December 31, 1998 December 31, 1997
--------------------- ---------------------
Number Weighted Number Weighted
Outstanding Average Outstanding Average
and Years and Years
Exercisable Remaining Exercisable Remaining
$0.40 40,950 8 45,700 9
$0.63 30,000 2 -
$1.00 321,967 4 -
- --------------------------------------------------------------------------------
392,917 45,700
================================================================================
The weighted average fair value of options granted during the year ended
December 31, 1998 was $0.66 per share option. The pro-forma effect on earnings
for the year ended December 31, 1998 of the method consistent with SFAS No. 123
would be to increase reported net loss by approximately $213,845, to
approximately $792,572. The pro-forma effect on earnings per share for the year
ended December 31, 1998 of this method would be to increase reported basic and
diluted net loss by $0.02 per share, to $0.08 per share.
Stock Options Disputed
The Company is vigorously disputing options to purchase 625,000 shares of its
common stock (the "Disputed Stock Options") held by a former officer and
director of the Company. The Company asserts that the former officer and
director's Disputed Stock Options are invalid because the Disputed Stock Options
were not properly approved by the Company's Board of Directors and certain
conditions were not fulfilled. The Company considers the Disputed Stock Options
invalid and believes the matter will be resolved without a material affect on
the financial position of the Company. The Company has not reflected the
Disputed Stock Options as outstanding in the table above or in the accompanying
consolidated financial statements.
Health and Medical Insurance Plan
The Company contributes to health and medical insurance programs for its
employees. Expenses related to the program charged to operations was
approximately $27,600 and $20,416 during the year ended December 31, 1998 and
nine-month period ended December 31, 1997, respectively.
13. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
1998 1997
---------- ----------
Numerator:
Net loss available to common shareholders $( 636,807) $( 136,741)
================================================================================
Denominator:
Denominator for basic earnings (loss) per share -
Weighted-average shares 10,442,292 7,921,458
Effect of dilutive securities:
Employee stock options, convertible preferred
stock and warrants - 392,511
- --------------------------------------------------------------------------------
Dilutive potential common shares -
Adjusted weighted-average shares and assumed
conversions 10,442,292 8,313,969
================================================================================
Basic and diluted earnings (loss) per share $(0.06) $(0.02)
================================================================================
Employee stock options to purchase 392,917 common shares at December 31, 1998,
are not presented because these options are anti-dilutive due to the net loss
available to common shareholders.
Preferred stock convertible into 268,344 common shares at December 31, 1998, are
not presented because these convertible preferred stock are anti-dilutive due to
the net loss available to common shareholders.
Debentures convertible into 1,056,000 common shares at December 31, 1998, are
not presented because these convertible debentures are anti-dilutive due to the
net loss available to common shareholders.
Warrants to purchase 155,000 common shares at December 31, 1998, are not
presented because these warrants are anti-dilutive due to the net loss available
to common shareholders.
14. DISCONTINUED SEGMENT
In August 1998, the Company completed the sale of the customer accounts related
to the Internet Service Provide (ISP) segment for $30,000. This segment focused
on providing various levels of Internet access to customers in the St. Louis,
Missouri area. The disposal of the ISP segment is reflected as discontinued
operations in the accompanying consolidated financial statements. A summary of
discontinued operations for the year ended December 31, 1998 and nine-month
period ended December 31, 1997, is as follows:
(9 months)
1998 1997
--------- ---------
ISP monthly fee revenue 115,943 81,169
================================================================================
Operating loss, net of ISP monthly fee revenue ( 426,922) ( 241,798)
Loss on disposal ( 30,290) -
- --------------------------------------------------------------------------------
Loss before income taxes ( 457,212) ( 241,798)
Income tax benefit - -
- --------------------------------------------------------------------------------
Loss from discontinued operations $( 457,212) $( 241,798)
================================================================================
Loss on disposal of $30,290, consists of writedown on assets held for resale of
$60,290 netted with $30,000 sale of the ISP customer accounts
The following assets and liabilities relating to the ISP business remain on the
Consolidated Balance Sheet as at December 31, 1998:
Assets:
Assets held for resale from discontinued operations $ 66,000
- --------------------------------------------------------------------------------
Liability
Obligations under capital leases 105,224
- --------------------------------------------------------------------------------
Net liability for discontinued operations $ 39,224
================================================================================
15. INCOME TAXES
The tax benefit for income taxes consists of the following for periods ended
December 31:
Year Ended (9 months)
1998 1997
--------- ----------
Current:
Federal income tax $ - $ -
State Income tax - -
- --------------------------------------------------------------------------------
- -
Deferred 885 (885)
- --------------------------------------------------------------------------------
Total $ 885 $ (885)
================================================================================
The net deferred tax asset consists of the following:
Gross assets $ 858,270 $ 617,534
Gross liabilities - (112,481)
- --------------------------------------------------------------------------------
Gross deferred tax asset 858,270 505,053
Less: valuation allowance (858,270) (504,168)
- --------------------------------------------------------------------------------
Net deferred tax asset $ - $ 885
================================================================================
Management of the Company believes more likely than not that the deferred tax
assets will not be realized and, therefore a valuation allowance has been
recorded at December 31, 1998 and 1997.
The tax effect of significant temporary differences representing deferred tax
assets and liabilities are as follows:
1998 1997
Current Non-Current Current Non-Current
---------------------------------------------
Net operating loss carryforwards $ - $ 835,284 $ - $ 575,466
Other 22,986 (70,413)
- --------------------------------------------------------------------------------
Gross deferred tax asset 22,986 835,284 - 505,053
Valuation allowance (22,986) (835,284) - (504,168)
- --------------------------------------------------------------------------------
Net deferred taxes $ - $ - $ - $ 885
================================================================================
The provision for taxes on income as reported differs from the tax provision
computed by applying the statutory federal income tax rate of 34% as follows for
periods ended December 31:
Year Ended (9 months)
1998 1997
------------ ------------
Federal income tax benefit on loss at
Statutory rates of 34% $ (196,767) $ (2,070)
State tax benefit, net of federal benefit (23,873) (241)
Valuation allowance 354,102 -
Other (132,577) 1,426
- --------------------------------------------------------------------------------
Income tax (benefit) expense 885 (885)
================================================================================
The Company has net operating loss carryforwards of approximately $2,190,910.
Utilization of these net operating loss carryforwards is restricted by certain
Internal Revenue Code sections and regulations, and expire through 2018.
16. RELATED PARTY TRANSACTIONS
The Company made purchases of approximately $940,000 in 1998, from Sussex
Service Bureau Inc., a 50% owned affiliate, of which approximately $353,000
remains in account payable at December 31, 1998. Rent expense paid to an officer
and stockholder for office facilities were $27,000 and $14,180 during the year
ended December 31, 1998 and nine-month period ended December 31, 1997,
respectively.
17. OPERATING SEGMENTS
The Company has adopted SFAS No. 131, "Disclosures about segments and related
information." The Company operates in two separate operating segments:
One Plus provides - 800-based services - principally in the United States of
America Channel Telecom - prepaid card services - principally in Canada.
Total,
Year Ended
One Plus Channel Dec 31, 1998
--------- --------- -----------
Sales to external customers $2,381,357 $1,301,997 $3,683,354
Cost of services 995,954 1,153,508 2,149,462
- --------------------------------------------------------------------------------
Gross margin 1,385,403 148,489 1,533,892
- --------------------------------------------------------------------------------
Selling general and administrative 1,023,812 242,107 1,265,919
Amortization of Goodwill - 233,199 233,199
Depreciation of property and equipment 90,637 12,121 102,758
Net interest expense 35,541 (2,342) 33,199
- --------------------------------------------------------------------------------
Income (loss) from continuing segment 235,413 (336,596) (101,183)
Provision for income taxes - - -
Minority Interest 20,332 - 20,332
- --------------------------------------------------------------------------------
Net income (loss) per continuing segment $ 215,081 $ (503,167) $ (121,515)
Reconciling items to net loss per Company:
Loss from discontinued operations $( 457,212)
- --------------------------------------------------------------------------------
Net loss $( 578,727)
================================================================================
ASSETS
Total assets for reportable segments $ 643,966 $ 588,933 $1,232,899
Goodwill 3,764,501 3,764,501
- --------------------------------------------------------------------------------
Consolidated total $ 643,966 $4,353,434 $4,997,400
================================================================================
18. LITIGATION
The Company has filed a lawsuit seeking cancellation of 150,000 shares of common
stock (the "Disputed Shares") issued in January 1997 to a former officer and
director of the Company. The former officer and director submitted a
counterclaim for unpaid consulting fees relating to services in 1996 and 1997 in
the amount of $25,000. Management believes that the Disputed Shares will be
ultimately returned and canceled without a material affect on the consolidated
financial position of the Company. The Company has not reflected the Disputed
Shares as issued or outstanding in the accompanying consolidated financial
statements. Any amount that the Company may be required to pay for consulting
fees will not have a material adverse effect on its consolidated financial
position.
19. SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
In the fourth quarter of 1998, the Company recorded adjustments that increased
its net loss by approximately $245,000. These adjustments included an
approximately $220,000 increase in goodwill amortization due to the revision of
the goodwill amount resulting from the Channel acquisition; approximately
$60,000 writedown on assets held for resale for the ISP business which was
discontinued in the third quarter of 1998; an increase in account receivable
allowance for doubtful accounts by approximately $45,000; and approximately
$80,000 reversal of accrued liabilities established at December 31, 1997, due to
changes in facts that no longer requires the accruals at December 31, 1998.
20. LEASES
The Company leases both office space and equipment used in its operations and
classifies those leases as either operating or capital leases following the
provisions of SFAS No. 13, "Accounting for Leases.". These leases expire through
February 2003. Obligations under capital leases have been recorded in the
accompanying consolidated financial statements at the present value of future
minimum lease payments, discounted at interest rates ranging from 14% to 15%.
As at December 31, 1998, future minimum annual payments under non-cancelable
leases are as follows:
Continuing Discontinued
Operations Operations
Capital Lease Capital Lease
Year Ended December 31, Operating Leases Obligations Obligations
- --------------------------------------------------------------------------------
1999 $ 85,106 $ 13,752 $ 34,872
2000 60,179 4,980 34,872
2001 33,394 - 41,866
2002 32,686 - -
2003 4,389 - -
- --------------------------------------------------------------------------------
Total $ 215,755 $ 18,732 $ 111,610
===============================================---------------------------------
Less: interest 4,702 6,386
--------------------------------
Total capital lease obligations 14,030 $ 105,224
Less: current portion of capital lease obligations 11,068 ==============
---------------
Long-term portion of capital lease obligations $ 2,962
===============
Total rent expense were $94,774 and $60,076 during the year ended December 31,
1998 and nine-month period ended December 31, 1997, respectively.
21. SUBSEQUENT EVENT
Subsequent to December 31, 1998, Channel obtained a new revolving operating
credit facility from a commercial bank in Canada for approximately $100,000,
bearing interest at Bank Canadian prime plus 1.75% which was 8.0% as at december
31, 1998. The facility is due on demand and is secured by a general security
agreement on Channel, $50,000 Guaranteed Investment Certificate and corporate
guarantees from HitCom.
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of HitCom Corporation
We have audited the accompanying consolidated balance sheet of HitCom
Corporation (a Delaware Corporation) and subsidiaries as of December 31, 1998,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for the year ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of HitCom
Corporation and subsidiaries at December 31, 1998, and the consolidated results
of their operations and cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ BDO Seidman LLP
St. Louis, Missouri
March 19, 1999
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of HitCom Corporation
We have audited the accompanying consolidated balance sheet of HitCom
Corporation (a Delaware Corporation) and subsidiaries as of December 31, 1997,
and the related consolidated statement of operations, shareholders' equity, and
cash flows for the nine-month period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of HitCom Corporation
and subsidiaries as of December 31, 1997, and the results of their operations
and their cash flows for the nine-month period ended December 31, 1997,
in accordance with generally accepted accounting principles.
/s/ Moore Stephens Smith Wallace, LLC
St. Louis, Missouri
February 17, 1998
<PAGE>
ITEM 8--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As of February 11, 1999, the Board of Directors have unanimously agreed to
engage BDO Seidman, LLP of St. Louis Missouri to be the Company's new principal
accountant.
At no time during the past two fiscal years or any subsequent period prior to
engagement as principal auditor did the Registrant consult with BDO Seidman, LLP
regarding either the application of accounting principles to a specified
transaction or type of audit opinion which might be rendered on the Registrant's
financial statements or any other matter.
PART III
ITEM 9--DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Scott A. Beil 30 Chairman of the Board, Chief Operating Officer and Director
Rajan Arora 34 President and Chief Executive Officer and Director
Jeffrey Shier 37 Executive Vice President and Director
John Nashmi 31 Chief Financial Officer and Corporate Secretary
Ronald K. Mann 48 Director
RAJAN ARORA
Rajan Arora has been President and Chief Executive Officer and Director since
April 1998. He joined in April 1998 through Hitcom's acquisition of
Channel. He co-founded Channel Telecom Inc. with Mr. Jeffrey Shier in 1994. From
1990 to 1993, Mr. Arora was Vice President of Finance for Madison Avenue
Partners, Ltd., a sports and promotional marketing company. Mr. Arora is a
Chartered Accountant and spent four years with PriceWaterhouseCoopers in public
accounting.
SCOTT A. BEIL
Scott A. Beil has been HitCom's Chairman since April 1997 when HitCom acquired
One Plus from Mr. Beil which he founded in 1991. In April 1997, he also assumed
the position of Chief Executive. With the acquisition of Channel in 1998, Mr.
Beil remained as Chairman but resigned as the Company's CEO and assumed the
position of Chief Operating Officer. Mr. Beil earned his Bachelor of Science
degree in Electrical Engineering from the University of Illinois.
JEFFREY SHIER
Jeffrey Shier has been Executive Vice President and Director of HitCom since
April 1998. He joined HitCom in April 1998 through Hitcom's acuisition of
Channel. He co-founded Channel Telecom, Inc. with Rajan Arora in 1994. From 1990
to 1994, Mr. Shier was involved in the sports marketing and high-end memorabilia
and collectibles business. From 1988 to 1990, Mr. Shier was Director of
Arbitrage at Counsel Capital Corporation in Toronto.
JOHN NASHMI
John Nashmi became the Company's Chief Financial Officer and Corporate Secretary
in January 1999. Prior to joining HitCom, Mr. Nashmi was Senior Manager at TD
Capital - Merchant Banking, which provided mezzanine financing to mid-market
businesses for acquisitions, expansion and turn-around opportunities. From 1996
to 1998, Mr. Nashmi was Vice President Finance with Next Generation Solutions
Inc., a software Value Added Reseller (VAR). From 1994 to 1996, Mr. Nashmi was
with Canadian Imperial Bank of Commerce (CIBC) in their Corporate Lending and
Internal audit groups. Mr. Nashmi is a Chartered Accountant and spent four years
with Deloitte & Touche in public accounting.
RONALD MANN
Ronald Mann has been a Director of HitCom since April 1998, he has acted as an
investment banking consultant for Channel Telecom Inc. since its inception in
1994. Mr. Mann resides in New York and is involved in investment and merchant
banking. From 1987 to 1989, Mr. Mann was Assistant General Manager of Corporate
Finance for the Canadian Imperial Bank of Commerce in Toronto, and Chief
Financial Officer and Director of CIBC Securities, Inc., in Toronto. Mr. Mann
earned his Bachelor of Law degree from the University of Toronto.
In fiscal year ending December 31, 1998, the Company did not pay any fees or
other compensation to its directors.
<PAGE>
<TABLE>
ITEM 10--EXECUTIVE COMPENSATION
The following table sets forth certain information concerning executive
compensation of the Company:
<CAPTION>
- ----------------------- ------ ------------ ---------- --------------- ------------- ----------- ---------- --------------
Securities
Name Other Restricted Underlying
And Annual Stock Options/ LTIP All Other
Principal Salary Bonus Compensation Award(s) SARs Payouts Compensation
Position Year ($) ($) ($) ($ (#) ($) ($)
(a) (b) (c) (d) (e) ) (g) (h) (i)
(f)
- ----------------------- ------ ------------ ---------- --------------- ------------- ----------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Scott Beil
Chairman and COO 1998 $49,222 $ -- $ -- $ -- $ -- $ -- $ --
- ----------------------- ------ ------------ ---------- --------------- ------------- ----------- ---------- --------------
1997 $42,005 $ -- $ -- $ -- $ -- $ -- $ --
- ----------------------- ------ ------------ ---------- --------------- ------------- ----------- ---------- --------------
1996 $28,000 $ -- $ -- $ -- $ -- $ -- $ --
- ----------------------- ------ ------------ ---------- --------------- ------------- ----------- ---------- --------------
Rajan Arora
President & CEO 1998 $38,770 $ -- $ -- $ -- $ -- $ -- $ --
- ----------------------- ------ ------------ ---------- --------------- ------------- ----------- ---------- --------------
Jeffrey Shier
Executive VP 1998 $38,770 $ -- $ -- $ -- $ -- $ -- $ --
- ----------------------- ------ ------------ ---------- --------------- ------------- ----------- ---------- --------------
David Parks
Chief Financial 1998 $72,481 $ -- $ -- $ -- $ -- $ -- $
Officer --
- ----------------------- ------ ------------ ---------- --------------- ------------- ----------- ---------- --------------
</TABLE>
ITEM 11--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of the Company's Common
Stock owned by each person who, as of April 30, 1999, was known by the Company
to own beneficially more than 5% of its outstanding Common Stock and the
ownership of all Executive Officers and Directors of the Company, individually
and as a group.
- --------------------------------------------------------------------------------
Number of Shares Percent
Name and Address of Beneficial Owner Beneficially of
Owned (1) Class
- --------------------------------------------------------------------------------
Scott A. Beil, 700 North Second Street Third
Floor, St. Louis, Missouri 63102 5,837,503 47.5%
- --------------------------------------------------------------------------------
Rajan Arora, 85 Scarsdale Road, North
York, Ontario, Canada 1,987,785 16.2%
- --------------------------------------------------------------------------------
Jeff Shier, 85 Scarsdale Road, North
York, Ontario, Canada 1,987,785 16.2%
- --------------------------------------------------------------------------------
Ronald Mann, 100 Wall Street, 2nd Floor
New York, New York, USA 10010 184,240 (2) 1.5%
- --------------------------------------------------------------------------------
Officers and Directors as a Group 9,997,313 81.4%
================================================================================
(1) As of April 30, 1999, the Company had 12,328,221 shares of Common Stock
outstanding.
(2) The shares are held indirectly through a holding company controlled by
Mr. Mann
<PAGE>
ITEM 12--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 13--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,
Inc.
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
23.1 Consent of Independent Accountants BDO Seidman LLP
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 Section 13 or 15(d) 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/ Rajan Arora
Rajan Arora, President, CEO and Director
Date May 28, 1999
In accordance with the Exchange Act, this report has been signed below by the
following persons on and behalf of the registerant and in the capacities and on
the dates indicated.
By /s/ Scott A. Beil
Scott A. Beil Chairman of the Board and COO
Date May 28, 1999
By /s/ Jeffrey Shier
Jeffrey Shier, Executive Vice President and Director
Date May 28, 1999
By /s/ Ronald Mann
Ronald Mann, Director
Date May 28, 1999
By /s/ John Nashmi
John Nashmi, Chief Financial Officer and Corporate Secretary
Date May 28, 1999
<PAGE>
Consent of Independent Certified Public Accountants
Hitcom Corporation
St. Louis, Missouri
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File No. 333-65651) of our report dated March 19, 1999,
relating to the consolidated financial statements of Hitcom Corporation
appearing in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1998.
/s/ BDO Seidman LLP
St. Louis, Missouri
May 28, 1999
<PAGE>
Consent of Independent Certified Public Accountants
Hitcom Corporation
St. Louis, Missouri
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File No. 333-65651) of our report dated February 17,
1998, relating to the consolidated financial statements of Hitcom Corporation
appearing in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1998.
/s/ Moore Stephens Smith Wallace L.L.C.
St. Louis, Missouri
May 28, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 340,484
<SECURITIES> 0
<RECEIVABLES> 539,960
<ALLOWANCES> (50,900)
<INVENTORY> 27,208
<CURRENT-ASSETS> 868,004
<PP&E> 559,023
<DEPRECIATION> (217,211)
<TOTAL-ASSETS> 4,997,400
<CURRENT-LIABILITIES> 1,573,990
<BONDS> 0
0
1,074
<COMMON> 49,173
<OTHER-SE> 2,623,818
<TOTAL-LIABILITY-AND-EQUITY> 4,997,400
<SALES> 3,683,354
<TOTAL-REVENUES> 3,683,354
<CGS> 2,149,462
<TOTAL-COSTS> 3,751,338
<OTHER-EXPENSES> 20,332
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,199
<INCOME-PRETAX> (121,515)
<INCOME-TAX> 0
<INCOME-CONTINUING> (121,515)
<DISCONTINUED> 457,212
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (578,727)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
