UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB/A
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GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
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Under Section 12(b) or (g) of the Securities Exchange Act of 1934
HitCom Corporation
(Name of Small Business Issuer in its charter)
Delaware 87-0389677
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
700 North Second Street, Third Floor, St. Louis, MO 63102
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (314) 231-1000
Securities to be registered under Section 12(b) of the Act:
None
Securities to be registered under Section 12(g) of Act:
Common Stock, $.004 par value per share
8% Convertible Preferred Stock, $.001 par value per share
HitCom Corporation
INDEX
Part I
ITEM 1. Description of Business
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
ITEM 3. Description of Properties
ITEM 4. Security Ownership of Certain Beneficial Owners
and Management
ITEM 5. Directors, Executive Officers, Promoters and
Control Persons
ITEM 6. Executive Compensation
ITEM 7. Certain Relationships and Related Transactions
ITEM 8. Description of Securities
Part II
ITEM 1. Market Price of and Dividends on the Registrant's
Common Equity and Other Shareholder Matters
ITEM 2. Legal Proceedings
ITEM 3. Changes in and Disagreements with Accountants
ITEM 4. Recent Sales of Unregistered Securities
ITEM 5. Indemnification of Directors and Officers
Financial Statements
- - HitCom Corporation for the nine-month period ended December 31, 1997
- - One Plus Marketing, Inc. for the three-month period ended March 31, 1997
- - Channel Telecom Inc. for the nine-month period ended December 31, 1997
and for the year ended March 31, 1997
- - HitCom Corporation pro forma for the year ended December 31, 1997
(unaudited)
- - One Plus Marketing, Inc. for the year ended December 31, 1996 (unaudited)
HitCom Corporation
INDEX - CONTINUED
Part III
ITEM 1. Index To Exhibits
Signatures
Introductory Statements
HitCom Corporation ("HitCom" or the "Company") has
prepared this Form 10-SB on a voluntary basis to make
available reportable information about the Company to
existing shareholders and others interested in the
activities of the Company.
The Company intends to furnish annual and periodic reports
consistent with the Securities and Exchange Commission
reporting requirements in the event that the Company ceases
to continue reporting under the Exchange Act.
PART I
ITEM 1-DESCRIPTION OF BUSINESS
History
Overview
HitCom was established in 1993 and incorporated in 1995
under the laws of the state of Missouri as an
online/Internet publisher of city-specific, "real need"
and practical information. The Company's core product
IntelliPages, was a user friendly Internet resource that
offered three kinds of city-specific information consumers
need and readily use. These included 1) Business listings -
a complete "online yellow pages" style directory, 2) News
Now - up to the minute local news, traffic, weather and
sports, and 3) City Information - a comprehensive guide
featuring content such as local history and culture, media,
government, attractions, nightlife and special events. The
Company was acquired by Royal Oak Resources ("Royal") an
OTC Bulletin Board company in 1995 through a reverse merger.
Following the acquisition, HitCom was reincorporated under
the laws of the state of Delaware and the subsidiary Webtech
was formed as the Company's primary operating subsidiary.
Royal was incorporated under the laws of the state of Utah
in 1982. The operating activities of Royal and Webtech are
not relevant in HitCom's current operating structure or
activities.
Royal Oak Resources
Royal was incorporated in 1982 under the laws of the state
of Utah. Royal was founded to establish and maintain a
drilling business with authority to own and operate drilling
rigs, machinery tools or apparatus as necessary in the
boring or otherwise sinking of wells for the production of
oil, gas or water; to construct or acquire by lease or
otherwise and to maintain and operate pipelines for the
convenience of oil and natural gas, oil storage tanks and
reservoirs and tank cars of all kinds, tank steamers and
other vessels, warehouses, storage houses, loading racks and
all the other convenient instrumentalities for the shipping
and transportation of crude or refined petroleum or natural
gas and other volatile solid or liquid mineral substances in
any and all forms and to do each and every act necessary for
the production of oil and gas or natural resource
properties. The operating activities of Royal ceased upon
the 1995 reverse merger and are not relevant in HitCom's
current operating structure or activities.
Webtech, Inc.
Webtech, Inc. was established in 1995 as HitCom's primary
operating subsidiary. Webtech`s principal core product
IntelliPages, was a user friendly Internet resource that
offered three kinds of city-specific information consumers
need and readily use. These included 1) Business listings -
a complete "online yellow pages" style directory, 2) News
Now - up to the minute local news, traffic, weather and
sports, and 3) City Information - a comprehensive guide
featuring content such as local history and culture, media,
government, attractions, nightlife and special events. The
Company determined that Intellipages no long aligned with
its strategic objectives in March 1997 upon the acquisition
of One Plus Marketing, Inc. (as discussed below). As of
December 31, 1997, management considers Webtech an inactive
subsidiary and expects to legally dissolve the subsidiary in
1998. The operating activities of Webtech are not relevant
in HitCom's current operating structure or activities.
One Plus Marketing, Inc.
During 1997, the Company sought to realign its operating
risks and as such, it acquired 80% of the operations of One
Plus. The acquisition was treated for accounting purposes
as a reverse merger. Under this accounting treatment, One
Plus became the accounting acquiror and the operating
activities of the accounting acquiror are presented for
historical purposes.
The Company exchanged approximately 5.8 million shares of
common stock for 80% of the outstanding stock of One Plus.
The Company purchased the remaining minority interest in One
Plus on July 29, 1998 for $1.
Channel Telecom, Inc.
On May 29, 1998, the Company announced that it closed the
Channel Telecom Inc. ("Channel") acquisition. As part of
the acquisition the Company exchanged $37,500 and
approximately 4.2 million shares of common stock for all of
Channel's outstanding shares. The Company has remitted
$37,500 on or prior to closing and the remaining balance of
$137,500 is payable over a six-month period ending December
31, 1998. The acquisition is effective January 1, 1998.
The Company expects to finance this acquisition through
either working capital or external bank and or equity
financing. Channel's 1997 comparative and pro forma results
are presented in the "Financial Statements."
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 a offsite telephone
switch.
The Present Company
Today, the Company is engaged in the following products and
services:
- - Interactive Voice Response/Voice Processing Services
- - PhoneCards and PhoneCard Platform Services
- - Internet Connectivity Services
The Company is expanding its research and development to
support an aggressive internal growth plan and to attract
additional strategic acquisitions as well as to establish
international partnerships that will allow the Company to
offer new IP (Internet Protocol) telephony driven services
abroad. Today, the Company uses a proprietary PC-based
network to handle its call volume. However, the Company is
in the final stages of developing a new proprietary-
switching platform utilizing Excelr switching hardware that
will greatly increase and enhance the Company's
capabilities. The Company also plans to license and resell
its proprietary switching software as an Excelr Value Added
Reseller (VAR) to corporate clients throughout the world.
In first quarter of 1998, the Company announced that Channel
was the official network provider for the Rolling Stones
prepaid phonecards. The Rolling Stones prepaid phonecards
are available at concerts, the Rolling Stones merchandise
catalog and in select retail outlets.
The Company has also committed some of its resources to
developing a premium Internet connectivity service targeted
at high-end Internet users. One Plus plans to further
integrate its voice and Internet technology to introduce
services using CTI (Computer Telephony Integration) and IP
(Internet Protocol) telephony.
Currently, the Company, including Channel employs
approximately 35 full-time people including managerial,
administration, technical and sales personnel.
Products & Services
The following section has been divided by product category.
Each product category listed below includes the
product/service the Company, including One Plus and Channel,
offers.
Interactive Voice Response/Voice Processing Services
800Link
One Plus' 800Link has become a favorite Interactive Voice
Response(IVR)/Voice Processing Platform for several Direct
Sales Organizations in the United States. The Company's
significant Direct Sales Organizations are comprised of -
Global Prosperity Marketing Group, Golf Connections, Travel
Dynamics, Wealth Masters and Alive International.
The basic service includes:
- - Up to a 5 minute greeting time
- - Up to a 2 minute message time
- - Holds up to 40 messages with a 14 day storage time
- - Personal Security Code for retrieving messages
- - Time and date stamp for each incoming message
- - Caller ID
- - Online account status
- - Monthly account status mailing, including usage detail
and balance information
For an additional fee, other features can be added to an
800Link account. They include:
- - Calling card capabilities
- - Call forwarding (follow me service)
- - Automated attendant
- - Extended greeting time (up to 30 minutes)
- - Reduced response (from 2 minutes to 1 minute)
- - 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
- - 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. The minimum message length is 10 minutes.
CUSTOM APPLICATIONS
One Plus can develop a 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 800LinkT services. Nevertheless, the majority of
new business is still generated through referral. Currently,
these products are marketed in the US and Canada.
One Plus has been successful in selling its 800Link service
to small businesses and Direct Sales Organizations. However,
the Company has had a limited sales effort as the Company
could not provide the necessary capital requirements to
build a technology infrastructure supporting growth in its
new subscriber base with an enhanced sales effort.
With the implementation of the Company's new telco-grade
switch-based platform, One Plus will now have the capacity
it requires to greatly expand the number of 800LinkT users.
Accordingly, the Company expects to expand its advertising
efforts to attract new subscribers. The Company's
advertising efforts are expected to include enhanced
marketing data and increased sales personnel.
The Company has also hired a new Account Manager to approach
additional Direct Sales Organizations (DSO). DSO's use the
Company's 800Link to provide needed advertising support and
communication services to their participants.
Phone Card and Phone Card Platform Services
Channel PhonePass
The Channel PhonePass is one of the best selling retail
phone cards in Canada.
Available in a variety of images, this high-end card has
become a favorite with tourists, card collectors, students
and anyone who needs a phone card for long distance
convenience.
Some of the benefits include:
- - High commission rate for retailers
- - Multilingual voice prompts to ensure sales to foreign
visitors and for sales in ethnic communities
- - Significant savings over other direct dialing methods
- - Available in $10, $20, $30, $50, and $100 denominations
- - Point-of-sale marketing material available including
posters, brochures and displays
- - Consignment
- - Co-branding
- - Vending machines available for high volume locations
Channel plans to introduce a US version of the Channel
PhonePass in 1998.
Channel PhoneCash
The Channel PhoneCash is a deep discount card offering
rates that are competitive or lower than most residential
long distance rates, providing the best value to consumers
and excellent margins for retailers, particularly in high
traffic areas.
Some of the benefits include:
- - Local and 1-800 access numbers
- - Available in $5, $10, $20, and $50 denominations
- - Co-branding
- - Point-of-sale marketing material available including
posters, brochures and displays
- - Vending machines available for high volume locations
Channel plans to introduce a US version of the Channel
PhoneCash in 1998.
CUSTOM CARDS
Channel has created completely 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.
Some of the customer benefits include:
- - 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.
- - Available in any denomination.
COLLECTIBLE CARDS
Channel has also premiered its first "collectible" prepaid
phone card. Through an exclusive worldwide licensing
agreement, Channel markets a numbered, four card series
featuring the world famous Rolling Stones. Channel is
currently working with other entertainment and sports
celebrities to gain the rights to market prepaid phone cards
that carry their trademark names and images.
There are only a handful of companies in Canada with
national presence in the phone card marketplace. Channel is
one of those companies. Further, several of the major
players in Canada do not own their own switching platform
and must rely on a third party service bureau.
Service Bureau
Utilizing the Company's proprietary switching platform and
customer service center, the Company has recently introduced
a service bureau for other phone card sales and marketing
organizations. This turnkey solution allows a non-switch-
based marketer of prepaid phone cards to purchase the
required network services from the Company.
The Company's service bureau features:
- - Processing of over 3 million minutes per month. The
network is capable of processing 25 million calls per
month
- - 24-hour customer service
- - 24-hour technical staff and system monitoring
- - Excelr Switching Platform
- - Competitive rates
- - Superior performance quality
- - Telecommunication expertise
Prior to 1998, the Company's marketing of its phone card
capabilities was limited. With the acquisition of Channel,
there efforts will be expanded in both the US and Canada.
All of the Company's PhoneCard products and services are now
marketed under the Channel name (Channel Telecom and Channel
Telecom USA).
IP Telephony Related Services
International Fax-to-Fax
The Company's international fax-to-fax service will allow
its customers to fax from developing countries to the United
States and Canada at greatly reduced rates over traditional
fax transmission utilizing current long distance providers.
The Company expects to begin marketing its international
fax-to-fax services in late 1998 from at least one
international gateway. Depending upon the success of the
international test market, the Company expects to add
international gateways in 1998.
Continuing worldwide deregulation and advancing IP telephony
technology is opening a variety of IP telephony market
niches - both domestically and internationally. The Company
has devoted a portion of its resources to the research and
development of several IP telephony related
products/services as well as international market research.
To date the Company has expended insignificant funds
relating to research and development but has completed the
design phase of its IP telephony network, including the US
hub gateway. Over the next few months, the Company expects
to complete the provisioning and installation of the hub
gateway in the United States. Hub gateways represent
computer platforms equipped with specialized software and
hardware designed to accept local fax communications and
route them over a combination of the Internet and
conventional long distance means to a determined
destination.
The Company has decided to pursue these international
products based on the following considerations:
- - Voice telecommunication has more stringent regulations
compared to data (fax) transmission. Even though the
Company's IP technology will eventually carry voice
communication, several technical advancements (quality
of voice transmission, transmission stability, etc.)
will need to occur in the industry before this becomes
a practical reality.
- - Faxing from most developing countries to the US and
Canada is very expensive. The Company's international
fax could be less expensive than current methods.
- - Fax machines are not as readily available as compared
to the US and Canada.
- - The Company has already established key relationships
in India and Brazil that would increase the Company's
possibility of success.
Switch Platform
In 1998, the Company expects to begin licensing its
proprietary switching technology to organizations throughout
the world. The technology is expected to be licensed/sold as
a turnkey telecommunications platform. The term "platform"
refers to the whole of the components, including hardware,
software and other resources, which provide for specific
telecommunication services to be developed and sold to the
end-user. The software is designed in a modular fashion,
each module providing specific functionality. Software
modules in addition to those provided with the base
platform, optional support packages and upgrades will be
offered separately.
The Company purchased an Excelr LNX 2000 switch and began
development of the platform in late 1996. Programming for
low level switch functionality, or the "Switching Engine"
was completed in the fall of 1997. Work has begun on several
of the "modules," specifically the User Interface Console
and Phone Card modules with an expected completion date in
the second quarter 1998.
Before the platform is ready for commercial use,
comprehensive documentation will be produced and technicians
for customer support recruited and trained. As these issues
are being addressed, development of additional modules will
continue. Platform sales are expected to commence in late
1998.
The Company's goal is to offer a proprietary state-of-the-
art, non-blocking digital switching system which will allow
integration of voice processing, database and networking
technologies to provide turnkey and custom telephony
products. Specifically, the system will be aimed at the
following marketing applications:
- - Prepaid and postpaid calling card authorization
- - Prepaid wireless
- - Voice mail
- - Conference calling
- - 1+ service
- - Callback
- - Enhanced services
- - Stored value transactions
- - Smart card applications in closed environments
- - Other
Industry Overview
Telecommunications Industry Overview
Canada is going through the final phases of deregulation in
the telecommunications industry. There are two specific
areas of deregulation which will create new opportunities in
the phone card industry in 1998: 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. Swipe access allows cards to
have magnetic stripes which encode the 1-800# and the PIN#
to be dialed on the cards. The cards can 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#. Channel expects to have swipe functionality on its
cards in 1998.
The CRTC (Canada's governing telecom regulator) has ruled
that Teleglobe's monopoly on overseas long distance services
must be eliminated by October 1998. This will drive down
the price of overseas long distance in Canada to be more in
line with the U.S. Currently Canadian pricing is 30-40%
higher than in 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.
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 the Company, 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. Specifically, the
Company has established itself in three primary segments of
the industry. They are:
- - Interactive Voice Response services
- - Prepaid phone cards and phone card platform services
- - IP (Internet telephony) services
A more detailed explanation and overview of each of these
segments follow:
Interactive Voice Response (IVR)
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. For instance,
simple call routing - "Press 3 for Customer Service" - is
a type of IVR. So is "Bank by Phone" and "For the nearest
location, enter your zip code." In essence, IVR allows any
telephone to become a computer terminal. In addition to
these applications, businesses are developing thousands of
new applications each year that allow them to benefit from
the efficiencies and cost savings surrounding this
relatively new technology.
As new uses and consumer acceptance have developed, so has
the technology. Now, instead of using the keypad alone, the
systems are using Voice Recognition to accept and act upon
commands. Then, text-to-speech technology can actually
"read" information to the caller from text fields in
computer databases. Of course, there are other, less
dramatic, uses for IVR, including simple voice mail, fax
broadcasting and "follow-me" call and fax routing
services.
The Internet is also having an impact on IVR. As
increasingly larger numbers of people are researching and
communicating (e-mail) via the Internet, IVR applications
are being used to integrate the telephone and the Internet.
An example would be calling a voice mail system to retrieve
e-mail using a text-to-speech system.
Prepaid Phone Cards and Phone Card Platform Services
Prepaid phone cards, originally introduced in Europe in the
early 1980's, have been gaining popularity in the US since
1992, and Canada since 1994. A prepaid phone card permits a
consumer to purchase a "card" (actually an account) with a
preset denomination of call time or "minutes" available.
The consumer can then use the card from virtually any touch
tone telephone by calling a local or toll-free (800 or 888)
number to access a "network" provided or contracted by the
card issuer to make a local or long distance (including
international) telephone call.
There are currently two types of prepaid phone cards in use:
Remote Memory Card - a card that has an account number
and a PIN printed or coded into a magnetic strip. This
card does not actually keep track of the usage or time
remaining on the account. Instead, it tells a computer
database on the other end of the line the caller's
identity, allowing the system to "look-up" the most
current account information and balances.
Smart Card - a smart card, unlike a remote memory card,
actually provides data storage, using a tiny computer
chip, of the account usage and balances on the card
itself. Smart card technology has been used in European
markets for several years, and has been recently
introduced in the United States and Canada. Unlike
remote memory cards, smart cards require "readers"
that are not currently available on most North American
telephones.
The Company primarily uses remote memory prepaid phone
cards. Initially, when prepaid phone cards were introduced
in North America, they were used by advertisers as
promotional items. For example, a major beverage company
gave everyone who purchased a 12-pack of their product, a
free 10-minute card as a premium for choosing their product.
Promotional cards accounted for nearly 60% of the market in
1995. However, 1997 indications are that only about 40% of
prepaid cards are issued for promotional use and that number
is steadily decreasing as the retail market increases.
The retail segment consists of the following primary buyers:
transients, the credit challenged, immigrants, tourists,
business travelers, truckers, students, and those who do not
typically carry money (e.g., children). 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.
Facility-based, those who have their own platforms and non-
facility-based, those who market the cards and outsource
their network needs to facility-based companies that resell
prepaid phone card network services through its own service
bureau. The Company is a facility-based card issuer.
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 US 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 $2.7 billion in 1997
and $4.3 billion by 2001.
IP Telephony
IP Telephony represents the routing of voice and data
traffic though 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.
Switch Platform Services
As the telecommunications industry and product offerings
have changed, so have the networks that process the
communication. Until recently, telecom 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.
Most telecom companies prefer switch-based platforms. And,
even when a company can afford to purchase switch hardware -
manufactured by companies like Excel, Harris, Summa Four,
Siemens, NEC and Lucent Technologies - acquiring software to
control the switch, installation and maintenance are up to
the customer.
The abundance of new telecommunications companies combined
with those existing companies that need to upgrade their
networks to offer the new services, is creating an
opportunity for companies which have developed their own
proprietary switching platform. Adding to the demand is the
fact there are only a limited number of companies that
provide this required switching expertise.
The Company's goal is to become an Excelr VAR (Value Added
Reseller) by the end of 1998. To obtain the designation of
an Excelr VAR, the Company must demonstrate to Excel, Inc.
(switch manufacturer) that it provides reliable software
that integrates with the Excelr switch.
Excelr is a manufacturer of Programmable Switches. If a
company desires to operate an Excelr switch, the company
must, either through development or purchase, appropriate
software to operate the platform functionality. The Company
is currently developing new software and integrating and
updating its existing software to operate an Excelr switch.
Upon completion, the Company will be able to license and
sell its software to third parties that desire to operate an
Excelr switch.
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 Company believes that the
principal competitive factors effecting the market for
enhanced communications services are price, quality of
service, ease of use, service features and customer support.
The Company believes that it competes effectively in these
areas. Additionally, the Company utilizes technology that
has been developed entirely in-house. This gives the Company
much more flexibility and control in the development of new
products, than many competitors, which use off-the-shelf
software or outside development firms. Also, time-to-market
and development costs are reduced and ongoing licensing and
"per port" fees are eliminated.
The Company attempts to differentiate itself from its
competitors in part by offering unique services that support
the needs of niche markets. The Company's voice processing
services provide just that for many home-based
entrepreneurs, direct selling organizations and a multitude
of companies with specialized needs. Most of the Company's
direct competitors are small, private organizations that
have shorter operating histories, less name recognition, and
lesser financial, personnel, marketing and other resources
than the Company.
One notable exception is Premier's Voice-Tel. Although
Voice-Tel's approach to providing voicemail services is
markedly different, the target audience is the same as the
Company's. Voice-Tel has a longer operating history, greater
name recognition, a larger customer and substantially
greater financial, personnel, marketing and other resources
than the Company.
The market for the Company's phone card services is
intensely competitive. Currently, the Company's phone card
business is primarily in Canada. Many of the Company's
competitors in this market have larger customer bases and
greater financial resources than the Company. Competitors
include Smartalk Teleservices, RSL Telecom, Phone Time
Internationl, 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.
ITEM 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company principally derives its revenues from the sale
of interactive voice response/voice processing services to
Direct Sales Organizations. These customized voice
processing systems allow each member of a national or
international sales organization a method by which the
response from a large advertising campaign can be handled 24
hours a day and pertinent data reported to their membership
almost instantly. The Company generally requires its
customers to establish a minimum account balance prior to
receiving voice mail service. The Company recognizes
revenues as services are rendered. Account balances in
excess of services rendered are recorded as deferred
revenue. Account balances without activity for 180 days are
treated as revenue.
Effective April 1, 1997, the Company acquired 80% of the
outstanding stock of One Plus Marketing, Inc. (the
"Acquisition") for 5,837,503 shares of the Company's
common stock. The Acquisition was accounted for as a
reverse acquisition in accordance with APB No. 16 "Business
Combinations." As such, One Plus Marketing, Inc. is
considered the "accounting acquiror." The historical
financial statements prior to April 1, 1997 are those of One
Plus Marketing, Inc.
RESULTS OF OPERATIONS AND CASH FLOWS
The following table sets forth certain financial data of the
Company for the years ending December 31, 1997 (pro forma)
and 1996. Note that since the Acquisition has been
accounted for as a reverse acquisition, the 1997 results
reflect the three-month period ended March 31, 1997, for One
Plus combined with the Company's nine-month period ended
December 31, 1997.
(Unaudited) (Unaudited)
1997 1996
Net revenues $3,568,167 $1,927,142
Costs and expenses:
Cost of sales 1,969,358 1,077,090
Selling, general and administrative 1,418,250 442,359
Total costs and expenses 3,387,608 1,519,449
Operating income 180,559 407,693
Other expense (income)-net 50,566 (13,493)
Income before income tax benefit and
minority interest 129,993 421,186
Tax benefit (885) --
Income before minority interest 130,878 421,186
Minority interest 64,257 --
Net income 66,621 421,186
(Unaudited) (Unaudited)
1997 1996
Cash flows from operating activities:
Net income 66,621 421,186
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities
Depreciation and amortization 70,594 26,235
Minority interest in earnings of
subsidiaries 64,257 --
Deferred tax benefit (885) --
Changes in assets and liabilities:
Accounts receivable-net (80,864) (85,185)
Prepaid expenses and other 39,900 (67,041)
Other assets (25,513) --
Accounts payable and accrued expenses (267,805) 30,313
Deferred revenue 77,441 254,520
Net cash provided by (used in)
operating activities (56,254) 580,028
Cash flows used in investing activities:
Purchase of property and equipment (76,483) (243,005)
Cash acquired in reverse acquisition 1,052 --
Net cash used in investing activities (75,431) (243,005)
Cash flows provided by financing
activities:
Shareholder distributions (94,424) --
Payments on capital leases (1,961) --
Purchase of stock for treasury (9,712) --
Common stock canceled (7) --
Net cash used in financing activities (106,104) --
Net increase (decrease) in cash and cash
equivalents (237,789) 337,023
Cash and cash equivalents:
Beginning of year 426,589 89,566
End of year $188,800 $426,589
Prior to April 1, 1997, One Plus was an S Corporation for
tax purposes and the One Plus' stockholder elected to be
treated as an "S" Corporation under provisions of the
Internal Revenue Code which provides that, in lieu of
corporate income taxes, the stockholder is taxed for the
Company's taxable income. Therefore, no provision or
liability for federal and state income taxes is reflected in
the financial data for periods prior to April 1, 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO 1996
NET REVENUES. Net revenues increased $1,641,025 or 85% from
$1,927,142 in 1996. Revenues are primarily generated from
the Company's interactive voice response products and
services. The increase in net revenues is attributable to
the associated growth in the Company's subscriber bases.
The Company currently has in excess of 15,000 subscribers on
the One Plus network which handles more than one million
calls per month. At December 31, 1996, the Company had
approximately 6,000 subscribers on the One Plus network
handling more than 700,000 per calls per month.
COST OF SALES. Cost of sales increased $892,268 or 83% from
$1,077,090 in 1996. The cost of sales percentage to net
revenues decreased from 56% to 55%, thus gross profit margin
increased correspondingly. Cost of sales primarily
represents the long distance minutes purchased to service
the interactive voice response products and services and,
thus, increased as a result of the increase in net revenues
discussed above. The Company purchases long distance
minutes from a highly competitive service market. In late
fourth quarter 1997, the Company was able to renegotiate its
long distance per minute rate with its current service
provider. The Company expects its interactive voice
response gross profit percentage to increase between 1 and 2
percent in 1998 as a result of its affiliation with its long
distance service provider.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses increased $975,891 or 121% from
$442,359 in 1996. The selling, general and administrative
percentage to net revenues increased to 40% from 23%. The
primary reasons for the increase were attributable to
professional fees and other expenses associated with the re-
engineering and restructuring of the Company in the third
and fourth quarters of 1997, combined with the additional
cost requirements to support the enhanced administrative
functions and to become a Securities and Exchange Commission
reporting company.
OTHER EXPENSE (INCOME), NET. Other expense (income), net
increased $64,059 from income of $13,493 in 1996. The
primary reason for the increase was attributible to the
Company's re-engineering and restructuring costs in the
third and fourth quarters of 1997.
MINORITY INTEREST. Minority interest increased $64,257 from
no activity in 1996. Minority interest represents a 20%
ownership interest in the Company's subsidiary One Plus
owned by the major stockholder of the Company.
NET INCOME. As a result of the foregoing, net income for
the year ended December 31, 1997, decreased by $345,565 or
84% compared to 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows from Operating Activities
During 1997, the Company had net cash flows used by
operating activities of $56,254 as compared to net cash
provided by operating activities of $580,028. Effective
with the "reverse merger" acquisition of One Plus, the
Company assumed an immediate increase in accounts payable
and accrued expenses of $1,150,960. Cash from operations
was used to reduce these liabilities.
Cash Flows from Investing Activities
During 1997 and 1996, the Company used $76,483 and $243,005
for purchases of property and equipment related principally
to support the Company's interactive voice response
operations.
The Company's total budgeted capital expenditures, including
acquisitions, are currently anticipated to be approximately
$1.5 million during 1998 in connection with the purchase of
strategic interactive voice response and prepaid phone card
operations, the minority interest of One Plus and enhanced
phone card computer system upgrades. The Company expects to
fund these expenditures through equity financing and bank
borrowings. Although management anticipates that the
Company will continue to expand, there can be no assurances
that the Company's expansions plans will not be adversely
affected by competition, market conditions, or changes in
laws or government regulations affecting telecommunication
businesses.
Cash Flows from Financing Activities
The Company maintains a $100,000 secured revolving credit
arrangement with a bank that bears interest at the bank's
prime rate plus one percent (prime was 8.5% at December 31,
1997) and expires on April 24, 1998. The Company has
pledged its assets as security for the existing
indebtedness. At December 31, 1997, the entire credit
arrangement available has been used by the Company. In May
1998, the Company secured two new separate credit facilities
with a bank totaling $535,000. The Company obtained a
$385,000 long-term note and a $150,000 line-of-credit to
support future acquisitions and working capital. The
previous revolving line-of-credit arrangement outstanding at
December 31, 1997 was retired.
SUBSEQUENT EVENTS
On May 29, 1998, the Company closed its acquisition of
Channel telecom, Inc. ("Channel") located in Toronto,
Canada. Channel is the fourth largest facility based
provider of prepaid phone calling cards in Canada. The
Company exchanged approximately 4.2 million shares of its
common stock and a note totaling $165,000 payable over a
seven-month period. In exchange, the Company received 100%
of Channel's outstanding stock. The effective date of the
transaction is January 1, 1998.
OTHER MATTERS
Impact of Year 2000 Issue
The "Year 2000" issue is a general term used to describe the
various problems that may result from the improper
processing of dates and calculations involving years by many
computers throughout the world as the Year 2000 is
approached and reached. The Company has reviewed the impact
of Year 2000 issues and does not expect any remedial actions
taken with respect thereto to materially adversely affect
its business, operations or financial condition.
IMPACT ON INFLATION
Management believes that the Company's results of operations
are not dependent upon the levels of inflation.
PLAN OF OPERATION
In October 1998, the Company completed a private placement
of $528,000 principal amount of 8% Convertible Debentures,
which mature on October 1, 2003 and are convertible into the
Company's Common Stock at a rate of $0.50 per share. The
debentures were sold to a total of ten investors, all of
whom were previously personally known by the management of
the Company. Seven of the investors are Canadian citizens
who purchased their debentures in Canada in transactions the
Company believes to be exempt from registration under
applicable Canadian law. The remaining three investors, of
whom one is an officer of the Company, are United States
citizens who purchased their debentures in transactions the
Company believes to be exempt from registration under
section 4(2) of the Securities Act of 1933.
The information concerning the Company was made available to
purchasers of the debentures by providing them with the
Company's reports filed with the Securities and Exchange
Commission. Purchasers of the debentures entered into an
investment agreement with the Company pursuant to which they
confirmed their financial sophistication, acknowledged the
substantial risks of investing in the Company, acknowledged
the illiquidity of their investment and agreed not to
dispose of the debentures or shares unto which they are
convertible except in compliance with applicable securities
laws. The certificates for the debentures bear restrictive
legends prohibiting transfer except in compliance with
applicable securities laws.
Total funds raised in the private placement $528,000
Use of Funds:
Capitol Expenditures $150,000
- Excel Switch & Software for Canadian Installation
- Point of Sale Terminals and Calling Card Vending Machines
Acquisitions $200,000
Working Capitol & General Corporate Purposes $178,000
Total $528,000
Some of the proceeds may be used for the proposed
acquisition of New World Communication, Inc. with respect to
which the Company made a press release on December 29, 1998.
ITEM 3-DESCRIPTION OF PROPERTIES
The Company operates its interactive voice response and
prepaid phone cards through the following leased offices
(includes the Channel locations):
Location Sq Ft Functionality Annual Base Rent
700 North Second Street St.
Louis, Missouri 63102 5,910 Admin/Technical $54,732
3775 Tosovsky Edwardsville, 5,605 Operating $30,000
Illinois 62025
85 Scarsdale Road Suite 202 2,990 Admin $15,698
Toronto, Ontario M3B2R2
736 Granville Street, Suite 331 Admin $4,032
127 Vancouver, British
Columbia V6Z1G3
Total 14,836 $104,462
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 4-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 June
1, 1998, and adjusted 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.
Name and Address of Number of Shares Percent of Class
Beneficial Owner Beneficially Owned (1)
Scott A. Beil, 700 North
Second Street Third Floor,
St. Louis, Missouri 63102 5,837,012 48.1%
Rajan Arora, 700 North
Second Street Third Floor,
St. Louis, Missouri 63102 1,987,785 16.4%
Jeffery S. Shier, 700 North
Second Street Third Floor,
St. Louis, Missouri 63102 1,987,785 16.4%
Anthony W. Hitt, 700 North
Second Street, Third Floor,
St. Louis, Missouri 63102 1,005,391 8.3%
Officers and Directors as
a Group 10,817,973 89.2%
__________________
(1) As of June 1, 1998, the Company had outstanding
12,128,852 shares of Common Stock.
ITEM 5-DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS
The following table sets forth certain information
concerning the directors, advisory directors and key
management of the Company:
Name Position Age
Scott A. Beil Chairman & Chief Operating Officer/Director 29
Rajan Arora President & Chief Executive Officer/Director 33
David B. Parks Executive Vice President, Chief Financial Officer 32
& Corporate Secretary/Director
Jeffrey Shier Executive Vice President, Sales & Marketing/ 36
Proposed Director
Ronald K. Mann Proposed Director 47
Scott A. Beil, Chairman and Chief Operating Officer/Director
Scott A. Beil founded One Plus Marketing, Inc., a
telecommunications and voice processing company in 1991,
where he has been employed since its founding. In addition
to developing a unique sales and marketing approach that
resulted in doubling in size every year since inception, Mr.
Beil designed, built and managed the proprietary PC-based
network that continues to handle the Company's call volume
today.
In April 1997, the Company acquired 80% of One Plus
Marketing, Inc. At that time Mr. Beil became the Company's
Chairman and CEO. In the year since the acquisition, Mr.
Beil has successfully recruited and led a team of
professionals who will be responsible for the aggressive
growth plans of the Company.
To date, Mr. Beil has personally designed the technical
specifications and guided the programmers who are
responsible for research and development of the Company's
new, proprietary telco-grade Excelr switch-based platform.
With the acquisition of Channel Telecom, Mr. Beil will
continue to act as Chairman and focus more intensely on the
development and management of the state-of-the-art switching
platform as well as other emerging technologies that will
lead the Company into the next century. In addition to
overseeing design, development and provision of the
technology solutions that form the Company's technology
infrastructure; Mr. Beil remains active in the day-to-day
operations and financial aspects of the Company.
Mr. Beil earned his Bachelor of Science degree in Electrical
Engineering from the University of Illinois.
Rajan Arora, President & Chief Executive Officer/Director
Rajan Arora co-founded Channel Telecom Inc., now Canada's
fourth largest facility-based prepaid phone card company, in
1994. Mr. Arora has been instrumental in the development and
implementation of the strategic plan that has successfully
gained Channel national, and now international, attention
and market share.
With the closing of the Channel Telecom Inc. acquisition,
Mr. Arora became the Company's president and Chief Executive
Officer and a member of the Company's Board of Directors. In
this position, Mr. Arora is assisting the Company in the
completion of its new strategic business plan. Mr. Arora
will now oversee the implementation of the Company's
aggressive plan that includes internal sales growth, growth
through acquisitions and development of a significant
international market for several new services.
From 1990 to 1993, Mr. Arora was Vice President of Finance
for Madison Avenue Partners, Ltd., a sports and promotional
marketing company. Prior to that, Mr. Arora was a Manager
at the public accounting firm of Price Waterhouse in
Toronto.
Mr. Arora earned his Bachelor of Arts degree in Economics
and Commerce from the University of Toronto and is a member
of the Institute of Chartered Accountants of Ontario.
David B. Parks, Executive Vice President, Chief Financial
Officer & Corporate Secretary/Director
David B. Parks became the Company's Executive Vice President
and Chief Financial Officer in January 1998. In March of
1998, Mr. Parks was elected to Corporate Secretary and
Director of the Company.
Prior to joining the Company, Mr. Parks spent eight years
with the public accounting firm of Arthur Andersen, LLP. As
an Audit Manager, his client responsibilities included
significant public company reporting.
After leaving public accounting, he held the positions of
Director of Internal Audit for a Fortune 500 company and
Vice President and Chief Financial Officer for a large
privately held real estate holding company that was acquired
by a publicly traded REIT.
Mr. Parks earned his Bachelor of Science degree in
Accounting from the University of Missouri and is a
Certified Public Accountant.
Jeffrey Shier, Executive Vice President, Sales &
Marketing/Proposed Director
Jeff Shier co-founded Channel Telecom, Inc. with Rajan Arora
in 1994. Mr. Shier's strong sales and marketing background
has been integral in Channel building one of Canada's
largest retail distribution networks for prepaid phone
cards. Mr. Shier is expected to become a Director of the
Company upon the closing of the Company's acquisition of
Channel Telecom Inc.
In 1993, and prior to his involvement in Channel Telecom
Inc., Mr. Shier formed Channel Sports Marketing, Inc. which
has become Canada's largest supplier of high-end sports
related memorabilia and collectibles. Mr. Shier's
experience in the sports and entertainment memorabilia
industry has crossed over to his role at Channel, and now
the Company. Recently, Mr. Shier negotiated a worldwide
exclusive agreement to market collectible prepaid phone
cards featuring the world famous Rolling Stones.
As the Company's Executive Vice President, Sales &
Marketing, Mr. Shier will continue to increase Channel's
Canadian phone card market share by doubling the size of the
sales organization and expanding the Company's predominantly
central market presence to nationwide coverage. Mr. Shier
will also play an important role in the US replication of
Channel's Canadian phone card marketing success, the
introduction of several emerging technology services in
Canada and the Company's international expansion.
From 1988 to 1990, Mr. Shier was Director of Arbitrage at
Counsel Capital Corporation in Toronto.
Mr. Shier earned his Bachelor of Arts degree in Economics
from the University of Western Ontario.
Ronald K. Mann, Proposed Director
Ronald Mann is a practicing attorney in Toronto, Canada. Mr.
Mann has acted as a financial consultant for Channel Telecom
Inc. since its inception in 1994. Mr. Mann is expected to
become a Director of the Company upon the closing of the
Company's acquisition of Channel Telecom Inc.
Mr. Mann has served as a member of the Board of Directors
for American Eco Corporation, a publicly traded company on
the NASDAQ and TSE exchanges from October 1993 through
September 1996. Mr. Mann has also been involved in
investment and merchant banking throughout Canada, the
United States and several international locations.
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.
ITEM 6-EXECUTIVE COMPENSATION
The following table sets forth certain information
concerning executive compensation of the Company:
Name Year Salary Bonus Other Restr- Secur- LTIP All
And Annual icted ities Pay Other
Principal Compen- Stock Under- outs Compen-
Position sation Awards lying sation
Options/
SARs
($) ($) ($) ($) (#) ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Scott Beil 1997 42,005 -- -- -- -- -- --
Chairman 1996 28,000 -- -- -- -- -- --
and CEO
(1) Amount represents salary for the period from January 1
through December 31, 1997
No compensation was paid or accrued by the Company to its
Executive Officers in excess of $100,000 for the years ended
December 31, 1997 and 1996.
During the first quarter of 1998, the Company entered into
an employment contract with Mr. Parks. The employment
contract covers an annual period from January through
December and may be renewed for subsequent periods. The
contract provides for a minimum annual base salary in 1998
of $80,000 and $100,000 in 1999. Mr. Parks is also entitled
to receive a minimum of 240,000 employee stock options to
purchase the Company's common stock. Mr. Parks' employment
contract provides for a severance payment in the event of
termination or non-renewal by the Company without cause
equal to nine months, escalating at 1.5 months per future
year employed limited to 12 months of the officer's base
salary at the rate then in effect at the date of termination
or non-renewal.
The Company is in the process of negotiating employment and
non-compete contracts with Mr. Arora, Mr. Beil and Mr. Shier
as contemplated by the Channel acquisition.
ITEM 7-CERTAIN RELATIONSHIPS AND CERTAIN TRANSACTIONS
HitCom was founded in 1993 by Anthony Hitt and incorporated
in 1995 under the laws of the state of Missouri as an
online/Internet publisher of city-specific, "real need"
and practical information. The Company was acquired by
Royal Oak Resources an OTC Bulletin Board company in 1995
through a reverse merger. Following the acquisition, HitCom
was reincorporated under the laws of the state of Delaware
and the subsidiary Webtech was formed as the Company's
primary operating subsidiary. As part of the reverse merger
and re-incorporation, Mr. Hitt received 4,021,565 shares of
Common Stock, after certain adjustments. Subsequent to the
Company's 1997 four for one reverse stock split, Mr. Hitt's
shares were accordingly reduced to 1,005,391. The operating
activities of Royal and Webtech are not relevant in HitCom's
current operating structure or activities.
Mr. Hitt may be deemed to be a promoter of the Company. Mr.
Hitt resigned as an officer and director of the Company on
June 6, 1997 and continued as a consultant and part-time
employee until August 21, 1998, when he resigned from such
position.
ITEM 8-DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of
12,500,000 shares of Common Stock, $0.004 par value (the
"Common Stock") traded on the OTC Bulletin Board, which is
maintained by the NASDAQ, under the symbol HICO and
5,000,000 shares of Preferred Stock, $0.001 par value (the
"Preferred Stock"). The Company's Common Stock is
considered a "penny stock" as defined by the Commission.
As such, Rule 15g-9 under the Exchange Act imposes
additional sales practice requirements on broker-dealers
selling the Company's stock.
The following summary of certain provisions of the Common
Stock and Preferred Stock does not purport to be complete
and is subject to, and qualified in its entirety by, the
provisions of the Company's Certificate of Incorporation and
applicable law.
COMMON STOCK
At December 31, 1997, there were 7,931,014 and 7,923,764
shares of Common Stock issued and outstanding and held of
record by approximately 350 stockholders. Each holder of
Common Stock is entitled to one vote for each share held and
the holders of the Company's 8% Convertible Preferred Stock
are entitled to vote that number of shares of Common Stock
into which their shares of Preferred Stock are convertible.
Matters submitted for stockholder approval generally require
a majority vote.
Holders of Common Stock are entitled to received ratably
such dividends as may be declared by the Company's Board of
Directors out of funds legally available therefor, provided
that no dividends may be paid until all cumulated dividends
have been paid on the Company's 8% Convertible Preferred
Stock. In the event of liquidation, dissolution or winding
up of the Company, holders of Common Stock would be entitled
to share in the Company's assets remaining after the payment
of liabilities and the satisfaction of any liquidation
preference granted the holders of any outstanding shares of
Preferred Stock. Holders of Common Stock have no preemptive
or other subscription rights. The shares of Common Stock
are not convertible into any other security. The
outstanding shares of Common Stock are fully paid and
nonassessable.
PREFERRED STOCK
The Company's Preferred Stock may be issued in series, and
shares of each series will have such rights and preferences
as are fixed by the Company's Board of Directors in the
resolutions authorizing the issuance of that particular
series. In designating any series of Preferred Stock, the
Company's Board of Directors may, without further action by
the holders of Common Stock, fix the number of shares
constituting that series and fix the dividend rights,
dividend rate, conversion rights, voting rights, rights and
terms of redemption (including any sinking fund provisions)
and the liquidation preference of the series of Preferred
Stock.
At December 31, 1997, the Company had outstanding 1,144,143
shares of Preferred Stock designated as 8% Convertible
Preferred Stock. Such outstanding shares have a liquidation
preference of $0.80 per share, a cumulative dividend of
$0.80 per share and a conversion right into Common Stock at
the rate of four shares of Preferred Stock for one share of
Common Stock. The outstanding shares of Preferred Stock
have voting rights equivalent to the number of shares of
Common Stock into which they are convertible and are
callable by the Company at $0.85 per share up to 26 months
from issuance.
The Company's convertible preferred stock is callable by the
Company at a price of $0.85 per share upon 30 days written
notice as long as the convertible preferred stock is not
converted into common stock. In determining whether to call
the convertible preferred stock, the Company's management
will consider various factors, including the following:
availability of legally available liquid funds; applicable
loan covenants or other similar restrictions; alternative
uses for the Company's available funds; and whether the
price of the Company's common stock is such that holders of
the convertible preferred stock will convert their stock
rather than permit it to be called.
Certain Statutory and Charter Provisions
Section 203 of the Delaware General Corporation Law
("DGCL") provides, in general, that a stockholder
acquiring more than 15% of the outstanding voting shares of
a corporation subject to the statute (an "Interested
Stockholder") but less than 85% of such shares may not
engage in certain "Business Combinations" with the
corporation for a period of three years subsequent to the
date on which the stockholder became an Interested
Stockholder unless (i) prior to such date the corporation's
Board of Directors approved whether the Business Combination
or the transaction in which the stockholder became an
Interested Stockholder or (ii) the Business Combination is
approved by the corporation's Board of Directors and
authorized by a vote of at least two-thirds of the
outstanding voting stock of the corporation not owned by the
Interested Stockholder.
Section 203 of the DGCL defines the term "Business
Combination" to encompass a wide variety of transactions
with or caused by an Interested Stockholder in which the
Interested Stockholder receives or could receive a benefit
on other than a pro rata basis with other stockholders,
including mergers, certain asset sales, certain issuances of
additional shares to the Interested Stockholder,
transactions with the Company which increase the
proportionate interest of the Interested Stockholder or
transactions in which the Interested Stockholder receives
certain other benefits.
These provisions could, in addition to the FCC Rules, have
the effect of delaying, deferring or preventing a change in
control of the Company. The Company's stockholders, by
adopting an amendment to the Certificate of Incorporation or
Bylaws of the Company, may elect not to be governed by
Section 203, effective twelve months after adoption.
Neither the Certificate of Incorporation nor the Bylaws of
the Company currently excludes the Company from the
restrictions imposed by Section 203.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Company's Common
Stock is ChaseMellon Shareholder Services.
PART II
ITEM 1-MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER SHAREHOLDER MATTERS
The following table sets forth the high and low sale prices
of the Common Stock as reported by OTC Bulletin Board under
the symbol HICO since April 1, 1997. The Company's Common
Stock is considered a "penny stock" as defined by the
Commission. As such, Rule 15g-9 under the Exchange Act
imposes additional sales practice requirements on broker-
dealers selling the Company's stock:
High Low
Quarter ended June 30, 1997 3 3/8 1 1/8
Quarter ended September 30, 2 7/16 7/8
Quarter ended December 31, 2 1/8 7/8
On March 16, 1998, the last reported sale price of Common
Stock on the OTC Bulletin Board was $1.00 per share.
DIVIDENDS
The Board of Directors has not declared any cash dividends
on the Company's Common Stock. The Board of Directors does
not currently intend to declare any cash dividends in the
foreseeable future.
ITEM 2-LEGAL PROCEEDINGS
The Company is involved in various legal proceedings
incidental to the conduct of its business. Management
believes that none of these legal proceedings will result in
any material impact on the Company's financial condition or
results of operations.
ITEM 3-CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Not Applicable.
ITEM 4-RECENT SALES OF UNREGISTERED SECURITIES
Preferred Stock
During the period from June through December of 1996, the
Company sold 1,051,250 shares of 8% Convertible Preferred
Stock for $841,000 to 73 investors who were provided with
information about the Company through a private placement
memorandum. The Preferred Stock is convertible at four
shares of Preferred Stock for one share of Common Stock. In
December of 1997, 12,500 shares of Preferred Stock were
converted to 3,125 shares of Common Stock at an approximate
market value of $3,125.
All of the Preferred Stock was all sold in transactions
exempt from registration under both Regulation D Rule 505,
as the aggregate offering exceeded
$1,000,000 but less than $5,000,000 and there were fewer
than 35 non-accredited investors. The Company believes that
issuance of Common Stock upon conversion of Preferred Stock
was exempt from registration under Regulation D Rule 505.
Common Stock
On May 28, 1998, the Company issued 4,184,810 shares of
Common Stock to the owners of Channel Telecom, Inc. and
designated affiliates in exchange for a 100% interest in
Channel Telecom, Inc.
Effective April 1, 1997, the Company issued 5,837,503 shares
of Common Stock to Scott A. Beil in exchange for an 80%
interest in One Plus Marketing, Inc.
In 1997, the Company issued 17,500 shares of Common Stock
with an approximate fair market value of $21,719 to one
individual in lieu of compensation for investor relations
services rendered. In 1996, the Company issued 832,072
shares of Common Stock with an approximate fair market value
of $1,178,713 to various individuals in lieu of compensation
for professional services rendered. In 1995, the Company
issued 13,302 shares of Common Stock with an undeterminable
fair market value to various individuals in lieu of
compensation for professional services rendered.
In 1997, options to purchase 125 shares of Common Stock were
exercised by an individual at $0.40 per share.
The Company believes that the above mentioned issuances of
Common Stock were exempt from registration under Section
4(2) of the Securities Act of 1933.
ITEM 5-INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation provides that to
the fullest extent permitted by Delaware law, a Director of
the Company shall not be liable to the Company or its
stockholders for monetary damages for breach of fiduciary
duty as a Director. Under current Delaware law, liability
of a Director may not be limited (i) for any breach of the
Director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions by the Director not
in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) in respect of certain
unlawful dividend payments or stock redemptions or
repurchases; and (iv) for any transaction from which the
Director derives an improper personal benefit. The effect
of this provision of the Company's Certificate of
Incorporation is to limit or eliminate the rights of the
Company and its stockholders (through stockholders'
derivative suits on behalf of the Company) to recover
monetary damages against a Director for breach of the
fiduciary duty of care as a Director including breaches
resulting from negligent or grossly negligent behavior)
except in those circumstances described in clauses (I)
through (iv) above. This provision does not limit or
eliminate the rights of the Company or any stockholder to
seek nonmonetary relief such as an injunction or recession
in the event of a breach of a Director's duty of care. In
addition, The Company's Certificate of Incorporation and
Bylaws provide that the Company shall indemnify its
Directors, Officers, employees and agents to the fullest
extent permitted by Delaware law.
The Company's Bylaws provide that the Company shall
indemnify its Officers and Directors to the fullest extent
permitted by Delaware law, including in circumstances in
which indemnification is otherwise discretionary under
Delaware law. The Company intends to obtain Director and
Officer ("D&O") liability insurance with respect to
liabilities arising out of certain matters, including
matters arising under the 1933 Act.
At present, there is no pending litigation or proceeding
involving any Officer or Director, employee or agent of the
Company where indemnification will be required or permitted.
The Company is not aware of any threatened litigation or
proceeding which may result in a claim for such
indemnification.
FINANCIAL STATEMENTS
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 statements of operations, stockholders' equity
(deficit), 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
consolidated 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
HITCOM CORPORATION
___________
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997
ASSETS
December 31, 1997
Current assets:
Cash and cash equivalents . . . . . . . . . $188,800
Accounts receivable-net of allowance
for doubtful accounts of $6,949. . . . . . . 110,066
Prepaid expenses and other . . . . . . . . . 6,162
Total current assets. . . . . . . . . . 305,028
Property and equipment-net . . . . . . . . . . 336,967
Other assets. . . . . . . . . . . . . . . . . . 52,473
Total . . . . . . . . . . . . . . . . . . $694,468
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
December 31, 1997
Current liabilities:
Revolving line of credit . . . . . . . . . . $100,000
Current portion of long-term obligations . . 59,766
Accounts payable and accrued expenses . . . . 678,898
Deferred revenue . . . . . . . . . . . . . . 429,362
Total current liabilities. . . . . . . . 1,268,026
Long-term obligations, less current portion. . . 14,658
Commitments and contingencies
Minority interest. . . . . . . . . . . . . . . . 166,107
Stockholders' equity (deficit):
Preferred stock, $.001 par value-5,000,000
authorized; 1,144,143 issued and outstanding . . . . . 1,144
Common stock, $.004 par value-12,500,000
authorized; 7,931,014 issued; 7,923,764
outstanding . . . . . . . . . . . . . . . 31,724
Additional paid in capital. . . . . . . . . . (1,139,904)
Retained earnings . . . . . . . . . . . . . . 372,509
Treasury stock-at cost . . . . . . . . . . . (19,796)
Total stockholders' equity (deficit). . . . (754,323)
Total. . . . . . . . . . . . . . . . . . $694,468
See accompanying notes to financial statements.
HITCOM CORPORATION
___________
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE-MONTH
PERIOD ENDED DECEMBER 31, 1997
For the
Nine-month
Period Ended
December 31,
1997
Net revenues . . . . . . . . . . . . . . . . . . $2,732,377
Costs and expenses:
Cost of sales . . . . . . . . . . . . . . . . 1,440,524
Selling, general and administrative. . . . . . 1,242,901
Total costs and expenses . . . . . . . . . . 2,683,425
Operating income . . . . . . . . . . . . . . . . 48,952
Other expense-net . . . . . . . . . . . . . . . 55,041
Loss before income tax benefit and minority interest. . . (6,089)
Tax benefit . . . . . . . . . . . . . . . . . . (885)
Loss before minority interest. . . . . . . . . . (5,204)
Minority interest . . . . . . . . . . . . . . . 64,257
Net loss . . . . . . . . . . . . . . . . . . . . ($69,461)
Basic loss per share. . . . . . . . . . . . . . $(0.01)
Weighted average number of common shares outstanding . . . .7,921,458
See accompanying notes to financial statements.
HITCOM CORPORATION
___________
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE NINE-MONTH PERIOD ENDED DECEMBER 31, 1997
Addi Re
tional tained
Preferred Common Paid Earn
Stock Stock in ings/ Treasury
Shares Amount Shares Amount Capital (Deficit) Stock Total
Balance,
March 31,
1997.. -- $-- 100 $-- $-- $509,250 $-- $509,250
Issuance
of common
stock in
stock
acquisi
tion . . . . -- -- 5,837,503 23,350 (23,350) -- -- --
Recapital
ization
adjustment . -- -- (100) -- -- -- -- --
Acquired
deficit in
stock
acquisi
tion 1,072,543 1,073 2,074,537 8,298 (1,205,399) --(10,084)(1,206,112)
Preferred
stock
converted
to common
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 -- -- -- -- --
Re
purchase
of common
stock . . . -- -- -- -- -- --(9,712) (9,712)
Net loss -- -- -- -- -- (69,461) -- (69,461)
Balance,
December 31,
1997 1,144,143$1,144 7,931,014$31,724 ($1,139,904)$372,509 ($19,796)($754,323)
See accompanying notes to financial statements.
HITCOM CORPORATION
___________
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE-MONTH
PERIOD ENDED DECEMBER 31, 1997
For the Nine-month
Period-ended
December 31,
1997
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . ($69,461)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization . . . . 57,487
Minority interest in earnings of subsidiaries 64,257
Deferred tax benefit. . . . . . . . . (885)
Changes in assets and liabilities:
Accounts receivable-net . . . . . . 130,002
Prepaid expenses and other . . . . . (190)
Other assets . . . . . . . . . . . . (25,513)
Accounts payable and accrued expenses . . . . . . . . . . (672,295)
Deferred revenue. . . . . . . . . . (4,750)
Net cash used in operating activities. . . . . . . . . (521,348)
Cash flows used in investing activities:
Purchases of property and equipment . . (43,430)
Cash acquired in reverse acquisition . . 1,052
Net cash used in investing activities . . . . . . . . . .(42,378)
Cash flows used in financing activities:
Payments on capital leases. . . . . . . (1,961)
Purchase of stock for treasury . . . . . (9,712)
Common stock canceled . . . . . . . . . (7)
Net cash used in financing activities . . . . . . . . . .(11,680)
Net decrease in cash and cash equivalents (575,406)
Cash and cash equivalents:
Beginning of period. . . . . . . . . . . . 764,206
End of period . . . . . . . . . . . . . . $188,800
Supplemental cash flow disclosures:
Cash paid for interest during the period . $10,276
Cash paid for taxes during the period . . $ 0
Property and equipment acquired under a
capital lease amounted to $15,035. During
the nine-month period ended December 31,
1997, 17,500 shares of common stock were
issued in exchange for services valued at
$21,719.
See accompanying notes to financial statements.
HITCOM CORPORATION
___________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. Organization and Description of Business
HitCom Corporation ("the Company") was incorporated
under the laws of the state of Delaware in 1982. Prior
to March 31, 1997, the Company's primary operations were
Internet marketing services. With the acquisition of 80%
of One Plus Marketing, Inc. on April 1, 1997, (see Note
3), the Company became a facility-based
telecommunications company that provides enhanced
communication products and services to businesses and
customers. The Company's customers are located within
North America without a significant geographic
concentration.
2. Significant Accounting Policies
Basis of Presentation
The Company's consolidated financial statements have been
prepared in accordance with generally accepted accounting
principles. The consolidated financial statements
include the Company and its wholly-owned and majority-
owned subsidiaries. Intercompany balances and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions. These
estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent
assets and liabilities, and the reported amounts of
revenues and expenses. Actual results could differ from
those estimates.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company
considers all highly liquid investment securities
purchased with an original maturity date of three months
or less to be cash equivalents. At times, cash balances
held at financial institutions were in excess of FDIC
insurance limits. The Company believes that no
significant concentration of credit risk exists with
respect to these cash investments.
Property and Equipment
Property and equipment is stated at cost. Depreciation
and amortization is computed using the straight-line
method over estimated useful lives ranging from five to
ten years.
Revenue Recognition
The Company generally requires its customers to establish
a minimum account balance prior to receiving services.
The Company recognizes revenue as services are rendered.
Account balances in excess of services rendered are
recorded as deferred revenue. Account balances without
activity for 180 days are recorded to revenue.
2. Significant Accounting Policies - Continued
Income Taxes
The Company has implemented the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." SFAS No. 109 utilizes an
asset and liability approach and deferred taxes are
determined based on the estimated future tax effects of
differences between the financial statement and tax bases
of assets and liabilities given the provisions of the
enacted tax laws.
In accordance with the provisions of SFAS No. 109, a
valuation allowance should be recognized if it is more
likely than not that some portion or all of a deferred
tax asset will not be realized.
Earnings/Loss Per Common Share
The Company has implemented the provisions of SFAS No.
128, "Earnings per Share." SFAS No. 128 simplifies the
computation of earnings per share ("EPS") by replacing
the presentation of primary EPS with a presentation of
basic EPS. Basic EPS is calculated by dividing income or
loss available to common stockholders by the weighted
average number of common shares outstanding during the
period. Options, warrants, and other potentially
dilutive securities are excluded from the calculation of
basic EPS. Diluted EPS includes the options, warrants
and other potentially dilutive securities that are
excluded from basic EPS.
The Company has options and warrants on 95,950 shares of
common stock and preferred stock convertible into 349,111
shares of common stock. Diluted EPS has not been
presented as the effects of the options, warrants and
convertible preferred stock are antidilutive.
Impairment of 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. In the opinion of management, no
such impairment exists at December 31, 1997.
Software Development Costs
All internal costs of computer software development
related to the Company's systems are expensed as
incurred.
2. Significant Accounting Policies - Continued
Fair Values of Financial Instruments
Management believes that the carrying values of all
financial instruments approximate their fair values.
Stock-Based Compensation Plans
The Company adopted SFAS No. 123, "Accounting for Stock-
Based Compensation," on January 1, 1996, for financial
note disclosure purposes and will continue to apply the
intrinsic value method of Accounting Principles Board
Opinion No. 25 for financial reporting purposes. See
Note 8 Stockholders' Equity (Deficit).
New Authoritative Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income." SFAS
No. 130 is effective for fiscal years beginning after
December 15, 1997. Earlier application is permitted.
Reclassification of financial statements for earlier
periods provided for comparative purposes is required.
The Company is in the process of determining its
preferred format. The adoption of SFAS No. 130 will have
no impact on the Company's results of operations,
financial position or cash flows.
The FASB has issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information."
SFAS No. 131 changes how operating segments are reported
in annual financial statements and requires the reporting
of selected information about operating segments in
interim financial reports issued to stockholders. SFAS
No. 131 is effective for periods beginning after December
15, 1997, and comparative information for earlier years
is to be restated. SFAS No. 131 need not be applied to
interim financial statements in the initial year of its
application. The Company is in the process of evaluating
the disclosure requirements. The adoption of SFAS No.
131 will have no impact on the Company's results of
operations, financial position or cash flows.
3. Acquisition
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 acquiror in accordance with APB No. 16
"Business Combinations." Under the provisions of APB
No. 16, the Company's assets and liabilities were
adjusted to fair value. A summary of net liabilities
assumed is as follows:
Assets acquired:
Cash $1,052
Account receivable-net 578
Prepaid expenses and other 972
Property and equipment 87,123
Other assets 4,123
93,848
Liabilities assumed:
Debt obligations 149,000
Accounts payable
and accrued expenses 1,150,960
1,299,960
Net liabilities assumed $1,206,112
4. Property and Equipment
Property and equipment consists of the following:
Computers and electronic equipment $374,571
Software 20,247
Furniture and fixtures 62,627
Total 457,445
Accumulated depreciation and
amortization (120,478)
Net property and equipment $336,967
5. Revolving Credit Arrangement
The Company has a $100,000 secured revolving credit
arrangement with a bank that bears interest at the bank's
prime rate plus one percent (prime was 8.5% at December
31, 1997) and expires on April 24, 1998. The Company has
pledged its assets as security for the existing
indebtedness. At December 31, 1997, the entire credit
arrangement available has been used by the Company.
Interest due has been accrued for the revolving credit
arrangement and reflected on the accompanying balance
sheet within accounts payable and accrued expenses.
6. Notes Payable
The Company has several notes payable ranging in
principal values from $1,000 to $15,000 to former
employees and related parties. These notes are unsecured
with interest rates ranging from prime (8.5% at December
31, 1997) plus one percent to 12 percent. Interest due
has been accrued for the notes payable and reflected on
the accompanying balance sheet within accounts payable
and accrued expenses. The following reflects the
aggregate future maturities of notes payable at December
31, 1997:
Year Ended December 31, Amount
1998 $49,000
7. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses comprised the
following at December 31, 1997:
Amount
Accounts payable
$413,023
Employee-related expenses 108,692
Professional fees 75,000
Interest 22,821
Other 59,362
$678,898
8. Stockholders' Equity (Deficit)
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. 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 84,100
preferred shares were declared and paid in 1997 and are
reflected in the accompanying statement of stockholders'
equity (deficit).
During 1997, 12,500 shares of the Preferred Stock were
converted to 3,125 shares of common stock and are
reflected in the accompanying statement of stockholders'
equity (deficit).
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.
Common Stock Disputed
The Company is vigorously disputing 150,000 shares of
common stock (the "Disputed Shares") held by 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. As a result of repeated unsuccessful attempts to
recover the Disputed Shares, the Company has demanded
that the former officer and director immediately return
the Disputed Shares. Management believes that the
Disputed Shares will be ultimately returned and canceled
without a material affect on the financial position of
the Company. The Company has not reflected the Disputed
Shares as issued or outstanding in the accompanying
financial statements.
8. Stockholders' Equity (Deficit) - Continued
Stock Option Plans
The Company has various stock option agreements that
allow 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.
Options are granted at the discretion of senior
management and the Board of Directors and generally vest
over periods ranging from one to four years. The options
expire up to ten years from the date the option is
granted.
The following table summarizes stock option activity from
April 1 through December 31, 1997, under the Company's
plans:
Number Option
of price
shares per share
Outstanding, March 31, 1997 45,825 $.40 -- $2.00
Exercised (125) .40
Forfeited -- --
Granted -- --
Outstanding, December 31, 1997 45,700 $.40 -- $2.00
No dividends have been declared or paid relating to
common stock during 1997.
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 financial statements.
Warrants
The Company has issued warrants to purchase 52,500 shares
of its common stock at $.88 per share to the Company's
investment banking firm. The warrants were issued at
fair value and expire two years after the date of issue.
8. Stockholders' Equity (Deficit) - Continued
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, 1997, the Company holds
in treasury stock 7,250 shares of common stock and is
reflected in the accompanying statement of stockholders'
equity.
9. Commitments and Contingencies
Operating Leases
The Company leases certain equipment and facilities under
operating leases through June 2000. At December 31,
1997, future minimum annual payments under non-cancelable
leases are as follows:
1998 $ 92,328
1999 80,084
2000 28,735
Total minimum lease payments $201,147
Included in the minimum lease payments for 1998 and 1999
are amounts due to the majority stockholder of $30,000
and $22,500, respectively.
Rent expense was $60,076 for the nine-month period from
April 1 through December 31, 1997, including $14,180 to
the majority stockholder for office facilities.
9. Commitments and Contingencies - Continued
Capital Leases
The Company leases certain property and equipment with
lease terms through August 2000. Obligations under
capital leases have been recorded in the accompanying
financial statements at the present value of future
minimum lease payments, discounted at interest rates
ranging from 8% to 10.25%. The capitalized cost of
$31,788 less accumulated depreciation of $6,035 in 1997,
is included in property and equipment in the accompanying
financial statements. Depreciation expense for this
equipment for the nine-months ended December 31, 1997,
was $4,423.
Obligations under capital leases consist of the
following:
1997
Total $25,424
Less current maturities 10,766
Long-term portion $14,658
The future minimum lease payments under the capital
leases and the net present value of the future minimum
lease payments are as follows:
Year Ended December 31, Amount
1998 $13,122
1999 10,560
2000 5,309
Total minimum lease payments 28,991
Less amount representing interest 3,567
Present value of minimum lease payments $25,424
Legal Proceedings
The Company is involved in various legal proceedings
incidental to the conduct of its business. Management
believes that none of these legal proceedings will result
in any material impact on the Company's financial
condition or results of operations.
10. Income Taxes
The tax benefit for income taxes consists of the
following at December 31, 1997:
Current:
Federal income tax $ --
State income tax --
--
Deferred (885)
Total ($885)
The net deferred tax asset consists of the following:
Gross assets $617,534
Gross liabilities (112,481)
Gross deferred tax asset 505,053
Less: valuation allowance (504,168)
Net deferred tax asset $885
The tax effect of significant temporary differences
representing deferred tax assets and liabilities are as
follows:
Net operating loss carryforward $575,466
Other (70,413)
Total $505,053
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:
Federal income tax benefit
on loss at statutory
rate of 34% ($2,070)
State tax benefit, net of
federal benefit (241)
Other 1,426
Income tax benefit ($885)
As part of the Acquisition (discussed in Note 3), the
Company purchased net operating loss carryforwards of
approximately $1,693,000. These net operating loss
carryforwards are restricted by certain Internal Revenue
Code sections and regulations and expire through 2012.
13. Subsequent Event (unaudited)
On February 18, 1998, the Company announced the signing
of a definitive agreement to acquire 100% of the
outstanding shares of Channel Telecom Inc., ("Channel")
headquartered in Toronto, Canada. Channel is the fourth
largest facility-based provider of prepaid calling cards
in Canada. The transaction had been approved by the
Company's Board of Directors and is expected to be
ratified at the Company's Annual Meeting of Shareholders.
Under the terms of the agreement, the Company will
exchange approximately 3.8 million shares, adjusted for
certain events, of Company common stock and $175,000 in
cash for all of Channel's outstanding shares. The
effective date of the transaction will be January 1,
1998.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To The Board of Directors of One Plus Marketing, Inc.:
We have audited the accompanying statements of income,
stockholder's equity and cash flows of One Plus Marketing, Inc.
(an Illinois corporation) for the three-month period ended March
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 financial statements referred to above
present fairly, in all material respects, the results of
operations and cash flows of One Plus Marketing, Inc. for the
three-month period ended March 31, 1997, in accordance with
generally accepted accounting principles.
/s/ MOORE STEPHENS SMITH WALLACE LLC
St. Louis, Missouri
February 6, 1998
ONE PLUS MARKETING, INC.
___________
STATEMENT OF INCOME FOR THE THREE-MONTH PERIOD ENDED
MARCH 31, 1997
For the
Three-month
Period Ended
March 31,
1997
Net revenues. . . . . . . . . . . . . . . $ 835,790
Costs and expenses:
Cost of sales. . . . . . . . . . . . . . 528,834
Selling, general and administrative . 528,834
Total costs and expenses . . . . . . 704,183
Operating income . . . . . . . . . . . . 131,607
Other income-net . . . . . . . . . . . . 4,475
Net income . . . . . . . . . . . . . . . $ 136,082
Earnings per share. . . . . . . . . . . . $1,360.82
Weighted average number of common and
common equivalent shares outstanding . . 100
See accompanying notes to financial statements.
ONE PLUS MARKETING, INC.
___________
STATEMENT OF STOCKHOLDER'S EQUITY FOR THE THREE-MONTH
PERIOD ENDED MARCH 31, 1997
Common Stock
Retained
Shares Amount Earnings Total
Balance, December 31, 1996 100 $-- $467,592 $467,592
Stockholder distribution
-- -- (94,424) (94,424)
Net income -- -- 136,082 136,082
Balance, March 31, 1997 100 $-- $509,250 $509,250
See accompanying notes to financial statements.
ONE PLUS MARKETING, INC.
___________
STATEMENT OF CASH FLOWS FOR THE THREE-MONTH PERIOD ENDED
MARCH 31, 1997
For the
Three-month
Period-ended
March 31,
1997
Cash flows from operating activities:
Net income. . . . . . . . . . . . . . . $136,082
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization. . . . . 13,107
Changes in assets and liabilities
Accounts receivable, net. . . . . . (210,866)
Prepaid expenses and other . . . . . 40,090
Accounts payable and accrued expenses . . . . . . . . . . 404,490
Deferred revenue. . . . . . . . . . 82,191
Net cash provided by operating activities . . . . . . . 465,094
Cash flows used in investing activities:
Purchases of property and equipment. . . (33,053)
Cash flows used in financing activities:
Shareholder distributions. . . . . . . . (94,424)
Net increase in cash and cash equivalents. 337,617
Cash and cash equivalents:
Beginning of period . . . . . . . . . . . 426,589
End of period . . . . . . . . . . . . . . $764,206
Supplemental cash flow disclosures:
Cash paid for interest during the period . $ 0
Cash paid for taxes during the period. . . $ 0
See accompanying notes to financial statements.
ONE PLUS MARKETING, INC.
___________
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
1. Organization and Description of Business
One Plus Marketing, Inc. ("the Company") was incorporated
under the laws of the state of Illinois in 1991. The Company
designs and markets interactive voice response and voice
processing systems. The Company's customers are located
within North America without a significant geographic
concentration.
2. Summary of Significant Accounting Policies
Basis of Presentation
The Company's financial statements have been prepared in
accordance with generally accepted accounting principles.
Use of Estimates
Preparation of financial statements in accordance with
generally accepted accounting principles requires, among other
things, the use of management's estimates and assumptions
which affect the reported revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company
considers all highly liquid investment securities purchased
with an original maturity date of three months or less to be
cash equivalents.
Revenue Recognition
The Company generally requires its customer to establish a
minimum account balance prior to receiving voice mail service.
The Company recognizes revenue as service is rendered.
Account balances not used are recorded as deferred revenue.
Account balances without activity for 180 days are recorded to
revenue.
Income Taxes
The Company's stockholder has elected to be treated as an "S"
Corporation under provisions of the Internal Revenue Code
which provides that, in lieu of corporation income taxes, the
stockholder is taxed for the Company's taxable income.
Therefore, no provision or liability for federal and state
income taxes is reflected in these financial statements.
The unaudited pro forma results if the Company had been a "C"
Corporation for the three-month period ended March 31, 1997,
would result in a tax provision with an effective rate of 40%
and an amount of $54,433. Earnings per share would have
decreased by $544.33 per share.
ONE PLUS MARKETING, INC.
___________
NOTES TO FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1997
2. Summary of Significant Accounting Policies - Continued
Depreciation and Amortization
Depreciation and amortization is computed based on the
straight-line method over estimated useful lives ranging from
five to seven years.
3. Related Party Transactions
In the normal course of conducting business, the Company has
entered into transactions with various individuals and
companies who are related parties.
4. Leases
The Company leases its facilities from the stockholder under
an operating lease through September 30, 1999, with certain
renewal options. At March 31, 1997, future minimum annual
payments under non-cancelable leases are as follows:
1997 $13,500
1998 30,000
1999 22,500
Total minimum lease payments $66,000
Rent expense for the period from January 1 through March 31,
1997 was $7,044.
5. Subsequent Event
Majority Exchange of Common Stock
Effective April 1, 1997, the Company exchanged 80% of the
voting stock of One Plus Marketing, Inc. (the "Exchange")
with HitCom Corporation for 5,837,503 common shares of HitCom
Corporation, a publicly traded company on the NASDAQ OTC
Bulletin Board. The remaining 20% minority ownership interest
is being retained by the predecessor owner of One Plus
Marketing, Inc. Effective with the closing One Plus
Marketing, Inc.'s minority interest owner will become the
Chairman of HitCom Corporation.
ONE PLUS MARKETING, INC.
___________
NOTES TO FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1997
5. Subsequent Event - Continued
Recapitalization of Equity
The Exchange is being treated as a reverse acquisition in
accordance with Accounting Principles Board Opinion No. 16
"Business Combinations." As part of the reverse
acquisition, the Company is being treated as the accounting
acquiror. As such, the accounting acquiror's historical
stockholder's equity prior to the Exchange will be
retroactively restated for the equivalent number of shares
received in the transaction with any difference between par
value of the issuer's and acquiror's stock recorded with an
offset to additional paid in capital.
CHANNEL TELECOM INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
AUDITOR'S REPORT
To the Directors of:
Channel Telecom Inc.
I have audited the consolidated balance sheet of Channel Telecom
Inc. as at December 31, 1997 and the consolidated statements of
income and deficit, and changes in financial position for the
nine months then ended. These financial statements are the
responsibility of the company's management. My responsibility is
to express an opinion on these financial statements based on my
audit.
I conducted my audit in accordance with generally accepted
auditing standards. Those standards require that I plan and
perform an audit to obtain reasonable assurance 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.
In my opinion, these consolidated financial statements present
fairly, in all material respects, the financial position of the
company as at December 31, 1997 and the results of its operations
and the changes in its financial position for the nine months
then ended in accordance with generally accepted accounting
principles.
Etobicoke, Ontario /s/
SILVANO BOATTO
February 5, 1998 CHARTERED ACCOUNTANT
CONSOLIDATED BALANCE SHEET
(Incorporated under the laws of Ontario)
AS AT DECEMBER 31, 1997
(AMOUNTS EXPRESSED IN CANADIAN DOLLARS)
ASSETS
December March
31, 1997 31, 1997
CURRENT
Cash $64,430 $8,267
Term deposit 10,000 10,000
Accounts receivable, less allowance of $52,660
for doubtful accounts (March 31, 1997 - $42,660 ) 321,605 171,438
Inventory 14,632 8,850
Prepaid expenses and sundry assets 3,865 5,936
Loans receivable, related parties (Note 4) 10,333 10,488
424,865 214,979
Investment in and advances to affiliated
companies (Note 5) 39,551 39,688
Capital assets (Note 6) 45,175 27,537
$509,591 $282,204
LIABILITIES
CURRENT
Bank loan (Note 7) $7,592 $7,592
Accounts payable and accrued liabilities 540,098 298,540
Loans payable, related parties (Note 8) 7,963 18,130
555,653 324,262
Bank loan (Note 7) 8,777 14,471
564,430 338,733
SHAREHOLDERS' EQUITY
Capital stock (Note 9) 20 20
Deficit (54,859) (56,549)
(54,839) (56,529)
$509,591 $282,204
See Accompanying Note
CONSOLIDATED STATEMENT OF INCOME AND DEFICIT
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
(AMOUNTS EXPRESSED IN CANADIAN DOLLARS)
NINE MONTHS YEAR
ENDED ENDED
DECEMBER 31 MARCH 31
1997 1997
REVENUE
Sales $1,770,278 $1,318,672
Less: discounts and returns 610,860 435,480
1,159,418 883,192
COST OF GOODS
Long distance services 797,829 583,747
Cost of cards 49,606 61,531
847,435 645,278
GROSS PROFIT 311,983 237,914
EXPENSES
Salesmen commissions and expenses 104,103 65,114
Administration fees (Note 10(a)) 42,500 60,000
Management fees (Note 10(b)) - 20,500
Salaries and benefits 51,418 -
Advertising 5,563 2,280
Amortization 6,440 6,116
Bad debt 11,242 45,313
Bank charges and interest 1,169 516
Brand development costs 4,826 10,692
Business taxes 2,047 1,765
Insurance 1,677 -
Loan Interest 980 1,187
Office and general 17,405 3,928
Printing 8,855 20,364
Professional fees 17,293 11,393
Rent 14,680 4,732
Telephone 6,873 3,709
Travel and trade shows 13,085 7,708
Share of loss from affiliated company (Note 5) 137 5,332
Interest income - (570)
310,293 270,079
Net income (loss) 1,690 (32,165)
Deficit, beginning of period (56,549) (24,384)
Deficit, end of period $(54,859) $(56,549)
See Accompanying Notes
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
(AMOUNTS EXPRESSED IN CANADIAN DOLLARS)
NINE MONTHS YEAR
ENDED ENDED
DECEMBER 31 MARCH 31
1997 1997
OPERATING ACTIVITIES
Cash provided by operations
Net loss $1,690 $(32,165)
Add (deduct): charges to income
not involving cash
Amortization 6,440 6,116
Share of loss from affiliated
company 137 5,332
8,267 (20,717)
Net change in non-cash working capital
(Increase) in accounts receivable (150,167) (116,563)
(Increase) decrease in inventory (5,782) 350
(Increase) decrease in prepaid expenses and
sundry assets 2,071 (3,961)
Increase (decrease) in accounts payable 241,558 197,444
95,947 56,553
FINANCING ACTIVITIES
Loans receivable/payable, related parties (10,012) 13,977
Repayment of bank loan (5,694) (8,303)
(15,706) 5,674
INVESTING ACTIVITIES
Additions to capital assets (24,078) (9,762)
Investment in affiliated companies - (20)
Advances to affiliated company - (45,000)
(24,078) (54,782)
Increase in cash 56,163 7,445
Cash, beginning of period 18,267 10,822
Cash, end of period $74,430 $18,267
For the purposes of this statement, Cash includes term deposits
See Accompanying Note
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
(AMOUNTS EXPRESSED IN CANADIAN DOLLARS)
1. NATURE OF BUSINESS
The company is in the business of developing and
marketing prepaid phone cards which provide the
cardholder access to long distance service.
2. SALE OF SHARES
On January 1, 1998, pursuant to a purchase and sale
agreement, the shareholders of the company have sold
their shares in Channel Telecom Inc. to Hitcom
Corporation for proceeds of cash and common shares of
Hitcom Corporation. Accordingly, Channel Telecom Inc.
will change its year end to December 31, to coincide
with the year end of Hitcom Corporation.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been
prepared in accordance with accounting principles
generally accepted in Canada. Management believes that
the financial statements presented would not
materially differ had they been prepared under United
States' Generally Accepted Accounting Principles.
Outlined below are those policies considered
particularly significant for the company.
(a) Principles of consolidation
The accompanying consolidated financial statements
include the accounts of Channel Telecom Inc. and its
wholly owned subsidiary, Channel Telecom USA Limited.
All intercompany balances and transactions have been
eliminated on consolidation.
(b) Revenue recognition
Revenue from the sale of prepaid telephone phone cards
is recorded at the time of sale to customers less
related merchant discounts and commissions. The
company accrues for it's cost for future long distance
services at the time of sale by reference to past
experience.
(c) Inventory
Inventory consists of phone cards and is stated at the
lower of cost and market, with cost determined using
the average cost method.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
(AMOUNTS EXPRESSED IN CANADIAN DOLLARS)
(d) Capital assets
Capital assets are stated at cost. Amortization is
being provided annually on the declining balance
method at the following rate:
Furniture and equipment - 20%
Computer equipment - 30%
Vending machines - 20%
(e) Investment in affiliated companies
The company accounts for its investment in affiliated
companies, using the equity method. Under this method,
the pro rata share of the investee's earnings is
recorded as income and the carrying value of the
investment on the balance sheet is increased
accordingly. Dividends received are considered as a
return of capital and are deducted from the carrying
value of the investment.
(f) Foreign currency translation
Assets and liabilities of integrated foreign
subsidiary operations and foreign currency denominated
assets and liabilities of Canadian operations are
translated into Canadian dollars at exchange rates
prevailing at the balance sheet date for monetary
items and at exchange rates prevailing at the
transaction date for non-monetary items. The revenues
and expenses are converted at the average exchange
rates for the year. Gains or losses on translation are
expensed except for the exchange gains or losses on
long-term monetary items which are deferred and
amortized over the remaining terms of the related
items.
4. LOANS RECEIVABLE, RELATED PARTIES
DECEMBER 31 MARCH 31
1997 1997
Canam Marketing Inc. $950 $-
Channel Sports Marketing Inc. 9,383 8,689
Premiere Collector House Inc. - 1,799
$10,333 $10,488
The above loans are non-interest bearing and are due on
demand.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
(AMOUNTS EXPRESSED IN CANADIAN DOLLARS)
5. INVESTMENT IN AND ADVANCES TO AFFILIATED COMPANIES
The company acquired a 50% interest in Sussex Service Bureau
Inc. and 1218396 Ontario Ltd. as one of the two
incorporating shareholders. The investment in these
companies consists of:
Sussex Service 1213896 December March
Bureau, Inc. Ontario, Ltd. 31, 1997 31, 1997
Percentage ownership 50% 50%
Cost of shares $(5,322) $10 $(5,312) $20
Share of net loss (137) - (137) (5,332)
(5,459) 10 (5,449) (5,312)
Note receivable,
due September 15, 2001 30,000 - 30,000 30,000
Note receivable,
due November 15, 2001 15,000 - 15,000 15,000
$39,541 $10 $39,551 $39,688
The above notes bear interest at the annual Canada Trust
prime interest rate and are to be repaid at the discretion
of Sussex Service Bureau Inc., but no later than five years
from the initial advance.
6. CAPITAL ASSETS
Net Net
Accumulated December March
Cost Amortization 31, 1997 31, 1997
Furniture and equipment $35,020 $(15,433) $19,587 $20,339
Computer equipment 10,988 (2,985) 8,003 3,918
Vending machines 19,642 (2,057) 17,585 3,280
$65,650 $(20,475) $45,175 $27,537
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
(AMOUNTS EXPRESSED IN CANADIAN DOLLARS)
7. BANK LOAN
December March
31, 1997 31, 1997
TD Bank Small Business Loan $16,369 $22,063
Less: current portion 7,592 7,592
$8,777 $14,471
The above small business loan was used to finance the
purchase of assets. The loan bears interest at the
Toronto Dominion Bank prime rate plus 1.75% and is
payable in monthly installments of principal of $632.63.
Future principal repayments on the loan which matures
March 21, 2000 are as follows:
1998 $ 7,592
1999 7,592
2000 1,185
$ 16,369
The company has provided security for the loan, the most
significant of which is a general security agreement
covering all the assets of the company. In addition, certain
related individuals have provided a limited guarantee in the
total amount of $3,796.
8. LOANS PAYABLE, RELATED PARTIES
December March
31, 1997 31, 1997
Bheem Capital Corp. $3,115 $4,065
1027126 Ontario Ltd. 3,115 14,065
Premiere Collector House Inc. 1,733 -
$7,963 $18,130
The above loans are non-interest bearing and are due on
demand.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
(AMOUNTS EXPRESSED IN CANADIAN DOLLARS)
9. CAPITAL STOCK
Authorized:
Unlimited number of common shares
Unlimited number of Class "A" voting, non-redeemable
non-cumulative, non-participating, retractable Preference shares
Unlimited number of Class "B" non-voting, redeemable
non-cumulative, non-participating Preference shares
December March
31, 1997 31, 1997
Stated:
200 common shares $20 $20
10. RELATED PARTY TRANSACTIONS
(a) During the period, the company paid administration fees
in the amount of $42,500 (year ended March 31, 1997 -
$60,000) to Channel Sports Marketing Inc., a company
controlled by individuals who directly/indirectly own
Channel Telecom Inc.
(b) During the period, the company paid management fees in
the amount of $NIL (year ended March 31, 1997 -
$20,500) to the holding companies of the individual
shareholders of Channel Telecom Inc.
(c) During the period the company made purchases in the
amount of $816,094 (year ended March 31, 1997 -
$79,642) from Sussex Service Bureau Inc., an affiliated
company. These transactions are in the normal course of
business and are measured at the exchange amount being
the amount of consideration established and agreed upon
by the related parties. Included in accounts payable
and accrued liabilities is $260,860 (March 31, 1997-
$44,535) due to Sussex Service Bureau Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
(AMOUNTS EXPRESSED IN CANADIAN DOLLARS)
11. SUBSEQUENT EVENT
Lease commitments
Subsequent to December 31, 1997, the company entered
into a lease agreement for its office and warehouse
facility. The lease is for a period of five years
commencing March 1, 1998 with an option to renew for a
further period of five years.
Future minimum lease payments for the above facility
are as follows:
1998 $ 11,212
1999 28,654
2000 32,392
2001 35,382
2002 39,618
Thereafter 6,728
$ 153,986
12. LOSS CARRYFORWARD
The company has non-capital income tax loss
carryforward of approximately $42,900 available to
reduce future taxable income and they begin to expire
in year 2002.
HITCOM CORPORATION AND SUBSIDIARIES
___________
PRO FORMA BALANCE SHEET AS OF DECEMBER 31, 1997 (UNAUDITED)
(AMOUNTS STATED IN US DOLLARS)
ASSETS
HitCom Channel Pro Pro
Corpor Telecom Forma Forma
ation Inc. Adjustments Combined
Current assets:
Cash and
cash equivalents $188,800 $51,357 (a) ($37,500) $65,157
Accounts
receivable-net
of allowance
for doubtful
accounts of $6,949 110,066 221,907 -- 331,973
Prepaid expenses
and other 6,162 19,893 -- 26,055
Total current assets. 305,028 293,157 (37,500) 423,185
Property and
equipment-net . 336,967 31,171 -- 368,138
Other assets. . . . 52,473 27,290 (b) 229,578 307,802
Total. . . . . . . . . $694,468 $351,618 $192,078 $1,099,125
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
HitCom Channel Pro Pro
Corpor Telecom Forma Forma
ation Inc. Adjustments Combined
Current liabilities:
Revolving
line of credit $100,000 $-- $-- $100,000
Current portion
of long-term
obligations . . . . . 59,766 10,733 (c) 137,500 70,499
Accounts payable
and Accrued expenses 678,898 372,668 -- 1,051,566
Deferred revenue . . . . 429,362 -- -- 429,362
Total current
liabilities . . . . . 1,268,026 383,401 137,500 1,651,427
Long-term
obligations, less
current portion . . . 14,658 6,056 -- 20,714
Commitments and contingencies
Minority interest . . . 166,107 -- -- 166,107
Stockholders' equity
(deficit):
Preferred stock, $.001 par
value-5,000,000
authorized; 1,144,143
issued and outstanding . 1,144 -- -- 1,144
Common stock, $.004 par
value-12,500,000
authorized; 11,731,014
issued; 11,723,764
outstanding . . . . . . 31,724 14 (d) 16,725 46,924
Additional paid
in capital (1,139,904) -- -- (1,139,904)
Retained earnings . . 372,509 (37,853) (e) 37,853 372,509
Treasury stock-at cost . (19,796) -- -- (19,796)
Total stockholders'
equity (deficit) . . (754,323) (37,839) 54,578 (739,123)
Total . . . . . . . . $694,468 $351,618 $192,078 $1,099,125
HITCOM CORPORATION AND SUBSIDIARIES
___________
PRO FORMA INCOME STATEMENT FOR THE YEAR ENDED
DECEMBER 31, 1997 (UNAUDITED)
(AMOUNTS STATED IN US DOLLARS)
One Plus HitCom
Marketing, Corpor Channel
Inc. ation Telecom Pro
1/1- 4/1- 1/1- Forma
3/31/97 12/31/97 Combined 12/31/9 Total
Net revenues . $835,790 $2,732,377 $3,568,167 $945,079 $4,513,246
Costs and expenses:
Cost of sales . . . 528,834 1,440,524 1,969,358 678,979 2,648,337
Selling, general
and administrative 175,349 1,242,901 1,418,250 264,788 1,683,038
Total costs and
expenses . . . . . .704,183 2,683,425 3,387,608 943,767 4,331,375
Operating income . .131,607 48,952 180,559 1,312 181,871
Other expense
(income)-net . (4,475) 55,041 50,566 -- 50,566
Income (loss) before
income tax benefit
and minority
interest . . . . . 136,082 (6,089) 129,993 1,312 131,305
Tax benefit . . . -- (885) (885) -- (885)
Income (loss) before
minority interest 136,082 (5,204) 130,878 1,312 132,190
Minority interest . . -- 64,257 64,257 -- 64,257
Net income (loss). $136,082 ($69,461) $66,621 $1,312 $67,933
Basic earnings per
share . . . . . .$1,360.82 $(0.01) $ 0.01 $0.00 $0.01
Diluted earnings
per share . . . $1,360.82 N/A $0.01 $0.00 $0.01
Weighted average
number of common
and potential
common shares
outstanding . . . 100 7,921,458 8,368,825 3,800,000 12,168,825
HITCOM CORPORATION AND SUBSIDIARIES
___________
PRO FORMA FOOTNOTES FOR THE YEAR ENDED
DECEMBER 31, 1997 (UNAUDITED)
(AMOUNTS STATED IN US DOLLARS)
1. Basis of Presentation
The pro forma financial statements have been prepared in
accordance with generally accepted accounting principles
and represent the results of operations from both HitCom
Corporation and Subsidiaries and Channel Telecom, Inc.
for the year ended December 31, 1997.
All amounts presented are stated in US dollars.
2. Channel Acquisition and Pro Forma Reference Notes
On May 29, 1998, the Company announced that it closed the
Channel Telecom Inc. ("Channel") acquisition. As part
of the acquisition the Company exchanged $175,000 and
approximately 4.2 million shares of common stock for all
of Channel's outstanding shares. The Company has
remitted $37,500 on or prior to closing and the remaining
balance of $137,500 is payable over a six-month period
ending December 31, 1998. The acquisition is effective
January 1, 1998. The Company expects to finance this
acquisition through either working capital or external
bank and or equity financing.
Pro Forma Adjustment References
The following descriptions are presented to reflect the
expected effects of the pro forma adjustments of the
Channel transaction. All adjustments are reflected on
the pro forma balance sheet.
(a) Amount of $37,500 represents cash remitted from
HitCom Corporation to the previous owners of Channel.
(b) Amount of $229,578 represents the excess purchase
price paid ("goodwill") for the net assets of
Channel.
(c) Amount of $137,500 represents the loan between the
Company and the previous owners of Channel. The loan
is payable over a six-month period ending December 31,
1998.
(d) Amount of $16,725 represents the net common stock
issued to the previous owners to acquire the net assets
of Channel.
(e) Amount of $37,853 represents the elimination of
Channel's net deficit.
ONE PLUS MARKETING, INC.
___________
STATEMENT OF INCOME FOR THE YEAR ENDED
DECEMBER 31, 1996 (UNAUDITED)
For the Year
Ended
December 31,
1996
(unaudited)
Net revenues. . . . . . . . . . . . . . . $1,927,142
Costs and expenses:
Cost of sales. . . . . . . . . . . . . . 1,077,090
Selling, general and administrative . 442,359
Total costs and expenses . . . . . . 1,519,449
Operating income . . . . . . . . . . . . 407,693
Other income-net . . . . . . . . . . . . 13,493
Net income . . . . . . . . . . . . . . . $ 421,186
Earnings per share. . . . . . . . . . . . $ 4,211.86
Weighted average number of common and
common equivalent shares outstanding . . 100
See accompanying notes to financial statements.
ONE PLUS MARKETING, INC.
___________
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED
DECEMBER 31, 1996 (UNAUDITED)
For the Year
Ended
December 31,
1996
(unaudited)
Cash flows from operating activities:
Net income. . . . . . . . . . . . . . . $421,186
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization. . . . . 26,235
Changes in assets and liabilities
Accounts receivable-net . . . . . . (85,185)
Prepaid expenses and other . . . . . (67,041)
Accounts payable and accrued expenses . . . . . . . . . . 30,313
Deferred revenue. . . . . . . . . . 254,520
Net cash provided by operating activities . . . . . . . . 580,028
Cash flows used in investing activities:
Purchases of property and equipment . . (243,005)
Net increase in cash and cash equivalents. 337,023
Cash and cash equivalents:
Beginning of period . . . . . . . . . . . 89,566
End of period . . . . . . . . . . . . . . $426,589
Supplemental cash flow disclosures:
Cash paid for interest during the period . $ 0
Cash paid for taxes during the period. . . $ 0
See accompanying notes to financial statements.
ONE PLUS MARKETING, INC.
___________
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 (UNAUDITED)
1. Organization and Description of Business
One Plus Marketing, Inc. ("the Company") was
incorporated under the laws of the state of Illinois in
1991. The Company designs and markets interactive voice
response and voice processing systems. The Company's
customers are located within North America without a
significant geographic concentration.
2. Summary of Significant Accounting Policies
Basis of Presentation
The Company's financial statements have been prepared in
accordance with generally accepted accounting principles.
Use of Estimates
Preparation of financial statements in accordance with
generally accepted accounting principles requires, among
other things, the use of management's estimates and
assumptions which affect the reported revenues and
expenses during the reporting period. Actual results
could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company
considers all highly liquid investment securities
purchased with an original maturity date of three months
or less to be cash equivalents.
Revenue Recognition
The Company generally requires its customer to establish
a minimum account balance prior to receiving voice mail
service. The Company recognizes revenue as service is
rendered. Account balances not used are recorded as
deferred revenue. Account balances without activity for
180 days are recorded to revenue.
Income Taxes
The Company's stockholder has elected to be treated as an
"S" Corporation under provisions of the Internal Revenue
Code which provides that, in lieu of corporation income
taxes, the stockholder is taxed for the Company's taxable
income. Therefore, no provision or liability for federal
and state income taxes is reflected in these financial
statements.
Depreciation and Amortization
Depreciation and amortization is computed based on the
straight-line method over estimated useful lives ranging
from five to seven years.
ONE PLUS MARKETING, INC.
___________
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996 (UNAUDITED)
3. Related Party Transactions
In the normal course of conducting business, the Company
has entered into transactions with various individuals
and companies who are related parties.
4. Leases
The Company leases it facilities from the stockholder
under an operating lease through September 30, 1999 with
certain renewal options. At December 31, 1996, future
minimum annual payments under non-cancelable leases are
as follows:
1997 $18,000
1998 30,000
1999 22,500
Total minimum lease payments $70,500
Rent expense for 1996 was $13,454.
Part III
ITEM 1-EXHIBITS
Index
The following exhibits are filed as part of this 10-SB:
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
10.3 Employment Agreement Between David B. Parks and HitCom
Corporation
21.1 List of Subsidiaries of Registrant
SIGNATURES
In accordance with Section 12 of the Securities and Exchange
Act of 1934, the registrant caused this registration
statement to be signed on its behalf by the undersigned,
thereunto duly authorized.
HITCOM CORPORATION
By: /s/ DAVID B. PARKS
David B. Parks
Executive Vice President,
Chief Financial Officer,
Corporate Secretary and Director
Date: March 25, 1998
In accordance with the Securities and Exchange Act of 1934,
this registration statement has been signed by the following
persons on behalf of the registrant in the capacities and on
the dates indicated.
Signature
Title
Date
/s/ SCOTT A. BEIL
Scott A. Beil
Chairman of the Board and
Director
March 25,
1998
/s/ RAJAN ARORA
Rajan Arora
President and Chief
Executive Officer and
Director
March 25,
1998
Consent of Independent Accountants
We consent to the inclusion in the registration statement on
Form 10-SB of our report, dated February 17, 1998, on our
audit of the financial statements of HitCom Corporation and
subsidiaries.
/s/ MOORE STEPHENS SMITH WALLACE, L.L.C.
St. Louis, Missouri
March 23, 1998
Consent of Independent Accountants
We consent to the inclusion in the registration statement on
Form 10-SB of our report, dated February 6, 1998, on our
audit of the financial statements of One Plus Marketing,
Inc.
/s/ MOORE STEPHENS SMITH WALLACE, L.L.C.
St. Louis, Missouri
March 23, 1998
Exhibit 27.0 Financial Data Schedule
This schedule contains summary financial information
extracted from HitCom Corporation's December 31, 1997 10-SB
and is qualified in its entirety by reference to such
financial statements.
Item Number Item Description December 31, 1997
5-02(1) Cash and cash items $188,800
5-02(2) Marketable securities --
5-02(3)(a)(1) Notes and accounts receivable-trade 117,015
5-02(4) Allowances for doubtful accounts 6,949
5-02(6) Inventory --
5-02(9) Total current assets 305,028
5-02(13) Property, plant and equipment 457,445
5-02(14) Accumulated depreciation 120,478
5-02(18) Total assets 694,468
5-02(21) Total current liabilities 1,268,026
5-02(22) Bonds, mortgages and similar debt 174,424
5-02(28) Preferred stock-mandatory redemption --
5-02(29) Preferred stock-no mandatory redemption 1,144
5-02(30) Common stock 31,724
5-02(31) Other stockholders' equity (787,191)
5-02(32) Total liabilities and stockholders equity 694,468
5-03(b)1(a) Net sales of tangible products 2,732,377
5-03(b)1 Total revenues 2,732,377
5-03(b)2(a) Cost of tangible goods sold 1,440,524
5-03(b)2 Total costs and expenses applicable
to sales and revenues 1,242,901
5-03(b)3 Other costs and expenses --
5-03(b)5 Provision for doubtful accounts and notes 82,042
5-03(b)(8) Interest and amortization of debt discount 12,334
5-03(b)(10) Income before taxes and other items (6,089)
5-03(b)(11) Income tax expense (885)
5-03(b)(14) Income/loss continuing operations (69,461)
5-03(b)(15) Discontinued operations --
5-03(b)(17) Extraordinary items --
5-03(b)(18) Cumulative effect-changes in
accounting principles --
5-03(b)(19) Net income or loss (69,461)
5-03(b)(20) Earnings per share-primary ($0.01)
5-03(b)(20) Earnings per share-fully diluted ($0.01)
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<ARTICLE> 5
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 188,800
<SECURITIES> 0
<RECEIVABLES> 117,015
<ALLOWANCES> 6,949
<INVENTORY> 0
<CURRENT-ASSETS> 305,028
<PP&E> 457,445
<DEPRECIATION> 120,478
<TOTAL-ASSETS> 694,468
<CURRENT-LIABILITIES> 1,268,026
<BONDS> 174,424
0
1,144
<COMMON> 31,724
<OTHER-SE> (787,191)
<TOTAL-LIABILITY-AND-EQUITY> 694,468
<SALES> 2,732,377
<TOTAL-REVENUES> 2,732,377
<CGS> 1,440,524
<TOTAL-COSTS> 1,242,901
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 82,042
<INTEREST-EXPENSE> 12,334
<INCOME-PRETAX> (6,089)
<INCOME-TAX> (885)
<INCOME-CONTINUING> (69,461)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (69,461)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
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