UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________ to ________
Commission file number 001-13999
HITCOM CORPORATION
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 87-0389677
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
700 North Second Street, Third Floor
St. Louis, Missouri 63102
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code (314) 231-1000
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's common
equity, as of the latest practicable date: As of October 15, 1998 -
Class Shares Outstanding
Common Stock 12,294,299
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
================================================================================
The Company conducted a review of the accounting treatment of the Channel
acquisition which was completed in the second quarter of 1998. The review
determined the following adjustments were required to the previously reported
financial statements as of September 30, 1998:
i) REVISION OF GOODWILL ON CHANNEL ACQUISITION
The acquisition was accounted for under the purchase method. The Company had
recorded a goodwill of $91,647 to be amortized over ten years. Goodwill has now
been revised to $3,997,700 to be amortized over ten years. The revision of the
goodwill amount was due to the value assigned to the 4,184,810 shares issued for
the Channel acquisition. The Company had recorded these shares at their par
value of $0.004 and not at their quoted market price on the date the acquisition
was announced which was $0.875 per share. The resulting restatement has
increased goodwill amortization for the three-month and nine-month periods ended
September 30, 1998. This change only affects non-cash amortization of intangible
assets and does not impact cash flows, cash balances, or liabilities of the
Company in any way.
ii) CHANGE OF EFFECTIVE DATE OF CHANNEL ACQUISITION
The acquisition of Channel did not close until May 31, 1998, however, the
Company had previously accounted for the acquisition with an effective date of
January 1, 1998. The effective date of the acquisition has now been changed to
May 31, 1998 as the transfer of assets and liabilities to Hitcom did not occur
until the closing of the acquisition. This change did not have any impact on the
three-month period ending September 30, 1998; the impact was only on the
nine-month period ending September 30, 1998.
A summary of the significant effects of the restatement are outlined in Note 5.
================================================================================
Item 1 - FINANCIAL STATEMENTS
HITCOM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
ASSETS
September 30,
1998
------------
(AS RESTATED
SEE NOTE 5)
Current assets:
Cash and cash equivalents $ 44,334
Accounts receivable--net of allowance
for doubtful accounts of $9,122 447,212
Prepaid expenses and other 16,255
----------
Total current assets 507,801
Property and equipment--net 337,946
Goodwill, net of amortization 3,864,443
Other assets 36,055
---------
Total $4,746,245
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations 139,906
Accounts payable and accrued expenses 878,534
Deferred revenue 301,702
---------
Total current liabilities 1,320,142
Long-term obligations, less current portion 246,180
Commitments and contingencies
Stockholders' equity (deficit):
Convertible preferred stock, $.001 par value,
5,000,000 authorized; 1,056,443
issued and outstanding 1,054
Common stock, $.004 par value--
25,000,000 authorized; 12,172,549
issued; 12,165,299 outstanding 48,698
Additional paid in capital 2,921,841
Retained earnings 228,126
Treasury stock--at cost (19,796)
----------
Total stockholders' equity (deficit) 3,179,923
----------
Total $4,746,245
==========
See accompanying notes to the condensed consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
HITCOM CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
For the Three-Month For the Nine-Month
Period Ending September 30, Period Ending September 30,
1998 1997 1998 1997
------------------------- ------------------------
(AS RESTATED (AS RESTATED
SEE NOTE 5) SEE NOTE 5)
<S> <C> <C> <C> <C>
Net revenues $ 928,981 $ 845,162 $2,552,225 $2,625,720
Cost of services 589,076 481,070 1,326,533 1,528,325
- ------------------------------------------------------------------------------------------------
Gross Margin 339,905 364,092 1,225,692 1,097,395
- ------------------------------------------------------------------------------------------------
Selling, general and administrative 332,785 381,179 925,168 852,807
Amortization of goodwill 99,942 - 133,256 -
Depreciation of property and equipment 23,448 21,213 79,756 59,882
- ------------------------------------------------------------------------------------------------
Total operating expenses 456,175 402,392 1,138,180 912,689
- ------------------------------------------------------------------------------------------------
Operating income (116,270) (38,300) 87,512 184,706
Other income (expense) --net (17,811) (4,234) (33,840) 44,060
- ------------------------------------------------------------------------------------------------
Income before taxes expense and
minority interest (134,081) (42,534) 53,672 228,766
Provision for income taxes - -
Minority interest - 12,672 20,332 45,418
- ------------------------------------------------------------------------------------------------
Income (loss) from continuing operations (134,081) (55,206) 33,340 183,348
Loss from discontinued segment 25,397 47,523 177,723 71,759
- ------------------------------------------------------------------------------------------------
Net income $(159,478) $(102,729) $(144,383) $ 111,589
================================================================================================
See accompanying notes to the condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HITCOM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three-Month For the Nine-Month
Period Ending September 30, Period Ending September 30,
1998 1997 1998 1997
------------------------ -----------------------
(AS RESTATED (AS RESTATED
SEE NOTE 5) SEE NOTE 5)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $(159,478) $(102,729) $(144,383) $111,589
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of goodwill 99,942 - 133,256 -
Depreciation of property and equipment 23,448 21,213 79,756 59,882
Minority interest - 12,672 20,332 45,418
Common stock issued for services rendered - - 20,156 -
Changes in assets and liabilities:
Accounts receivable--net (37,402) 127,456 (115,238) ( 85,044)
Prepaid expenses and other 618 23,591 2,670 47,796
Other assets 11,614 (12,534) 50,836 (12,484)
Accounts payable and accrued expenses (66,996) (101,308) (54,310) (359,927)
Deferred revenue 7,623 64,448 (127,660) 96,530
- --------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (120,631) 32,809 (134,585) (96,240)
- --------------------------------------------------------------------------------------------------------------
Cash flows used in investing activities:
Purchases of property and equipment 2,758 (17,506) (49,563) (53,831)
Acquisition of Channel Telecom, net of cash
acquired - - (155,191) -
Cash acquired in reverse acquisition - - 1,052
- --------------------------------------------------------------------------------------------------------------
Net cash used in investing activities 2,758 (17,506) (204,754) (52,779)
- --------------------------------------------------------------------------------------------------------------
Cash flows used in financing activities:
Borrowings on debt obligations 17,407 - 392,445 -
Payments on debt obligations (17,943) - (181,671) -
Payments on capital leases (9,899) - (15,901) -
Repurchase of common stock - - - (9,712)
Shareholder distributions - - - (94,423)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)financing activities (10,435) - 194,873 (104,135)
- --------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (128,308) 15,303 (144,466) (253,154)
Cash and cash equivalents at beginning of period 172,642 158,132 188,800 426,589
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 44,334 $173,435 $ 44,334 $173,435
==============================================================================================================
Supplemental cash flow disclosures:
Cash paid for interest during the period $ 8,115 $ 2,337 $ 48,555 $ 7,939
Cash paid for taxes during the period - - - -
Non cash investing and financing activities:
Common shares issued for acquisition and related
costs of Channel Telecom Inc. - - $3,749,085 -
Repayment of notes payable through issuance of
common stock - - $16,000 -
See accompanying notes to the condensed consolidated financial statements.
</TABLE>
<PAGE>
HITCOM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SEPTEMBER 30, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Hitcom
Corporation and subsidiaries (collectively "the Company" or "HitCom") have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and Securities and Exchange Commission ("SEC") regulations.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of management, the financial statements reflect all adjustments (of a
normal and recurring nature) which are necessary to present fairly the financial
position, results of operations, stockholders' equity and cash flows for the
interim periods. These unaudited condensed consolidated financial statements
should be read in conjunction with the audited financial statements and notes
thereto for the year ended December 31, 1997. The results for the three-month
period and nine-month periods ended September 30, 1998, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998. All amounts presented are in US dollars.
2. NATURE OF BUSINESS
HitCom Corporation and its subsidiaries (collectively referred to as "Hitcom" or
the "Company") is a telecommunication Company providing two principal services
for businesses and individuals:
i. Enhanced communication including 800-based services, voice and data
messaging which the Company delivers through its network.
ii.Prepaid telecommunication services through its switching platforms.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. Investment in a 50% owned
affiliate has been accounted for on the equity method.
Revenue Recognition and Deferred Revenue
The Company recognizes revenue as services are rendered as follows:
800-based services
The Company generally requires its customers to establish minimum account
balances prior to receiving services. Revenues consists of usage fees based on
per minute rates and monthly fees. Account balances in excess of services
rendered are recorded as deferred revenue. Revenue for unused account balances
is recognized when there has been no activity for six months.
Prepaid card services
The Company's revenue originates from customer usage of (i) Company and
cobranded prepaid calling cards sold through retailers, (ii) recharges of
existing calling cards, and (iii) cards sold for promotional marketing
campaigns. The Company sells cards to distributors and retailers with normal
credit terms. When the distributor or retailer is invoiced, deferred revenue is
recognized. The Company recognizes revenue in accordance with the terms of the
card as the ultimate card users utilize calling time and service fees. The terms
of the card refer to the rates, fees and expiration dates of the card. All
prepaid cards sold by the Company expire upon either six or twelve months after
first usage. Upon expiration and cancellation of the prepaid phone card, the
Company recognizes the related deferred amount as revenue.
Goodwill
Goodwill represents the excess of cost over the fair value of net assets
acquired for the Channel Telecom acquisition effective May 31, 1998, and is
being amortized on a straight-line basis over a ten year period beginning from
the date of acquisition.
4. EARNINGS PER SHARE
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.
details of earnings per share calculations for the quarter ending September 30,
1998, and 1997 are as follows:
Weighted
Average Per Share
Income Shares Amount
1998
Earnings per share of common stock - basic $(159,478) 12,174,546 ($0.01)
Stock options, warrants and preferred
stock equivalents n/a n/a
---------- ---------- -------
Earnings per share of common stock -
on a fully diluted basis $(159,478) 12,174,546 ($0.01)
========== ========== =======
1997
Earnings per share of common stock - basic $(102,729) 7,920,264 ($0.01)
Stock options, warrants and preferred
stock equivalents n/a n/a
---------- ---------- -------
Earnings per share of common stock -
on fully diluted basis $(102,729) 7,920,264 ($0.01)
========== ========== =======
The details of earnings per share calculations for the nine-month period ending
September 30, 1998, and 1997 are as follows:
Weighted
Average Per Share
Income Shares Amount
1998
Earnings per share of common stock - basic $(144,383) 9,827,655 ($0.02)
Stock options, warrants and preferred
stock equivalents n/a n/a
---------- ---------- -------
Earnings per share of common stock -
on a fully diluted basis $(144,383) 9,827,655 ($0.02)
========== ========= =======
1997
Earnings per share of common stock-basic $ 111,589 5,280,176 $0.02
Stock options, warrants and preferred
stock equivalents 313,836 -
--------- --------- ------
Earnings per share of common stock -
on fully diluted basis $ 111,589 5,594,012 $0.02
========= ========= ======
5. RESTATEMENT OF FINANCIAL STATEMENTS AND CHANGES TO CERTAIN INFORMATION
The Company conducted a review of the accounting treatment of the Channel
acquisition which was completed in the second quarter of 1998. The review
determined the following adjustments were required to the previously reported
financial statements as of September 30, 1998:
i) REVISION OF GOODWILL ON CHANNEL ACQUISITION
The acquisition was accounted for under the purchase method. The Company had
recorded a goodwill of $91,647 to be amortized over ten years. Goodwill has now
been revised to $3,997,700 to be amortized over ten years. The revision of the
goodwill amount was due to the value assigned to the 4,184,810 shares issued for
the Channel acquisition. The Company had recorded these shares at their par
value of $0.004 and not at their quoted market price on the date the acquisition
was announced which was $0.875 per share. The resulting restatement has
increased goodwill amortization for the three-month and nine-month periods ended
September 30, 1998 . This change only affects non-cash amortization of
intangible assets and does not impact cash flows, cash balances, or liabilities
of the Company in any way.
ii) CHANGE OF EFFECTIVE DATE OF CHANNEL ACQUISITION
The acquisition of Channel did not close until May 31, 1998, however, the
Company had previously accounted for the acquisition with an effective date of
January 1, 1998. The effective date of the acquisition has now been changed to
May 31, 1998 as the transfer of assets and liabilities to Hitcom did not occur
until the closing of the acquisition. This change did not have any impact on the
three-month period ending September 30, 1998, the impact was only on the
nine-month period ending September 30, 1998.
A summary of the significant effects of the restatements are as follows:
Three-Months Ended Nine-Months Ended
September 30, 1998 September 30, 1998
--------------------- --------------------
As As
As Previously As Previously
Restated Reported Restated Reported
--------- -------- --------- ----------
Statement of Operations:
Net service revenue $2,552,225 $3,089,047
Cost of Services 1,326,533 1,648,071
Gross Margin 1,225,692 1,440,976
Selling General & Administrative 925,168 1,140,453
Amortization of goodwill $ 99,943 $ 2,290 133,256 6,872
Net income (61,826) (159,478) (144,383) (17,999)
Earnings per share $ (0.005) $ (0.013) $ (0.02) $ 0.00
September 30, 1998
------------------------
As
As Previously
Restated Reported
---------- -----------
Balance Sheet
Data:
Goodwill $3,864,443 $ 84,775
Total assets 4,746,245 966,577
Total shareholders' equity (deficit) $3,179,923 $ (599,745)
6. ACQUISITION OF MINORITY INTEREST IN SUBSIDIARY
August 10, 1998, the company purchased the remaining 20% minority interest in
One Plus Marketing, Inc. that it did not already own for $1.
7. SUBSEQUENT EVENT
October 1, 1998, the Company issued Convertible Debentures totaling $528,000 in
aggregate principal amount with interest at 8% per annum payable semiannually.
The Debentures are scheduled to mature on October 1, 2003.
ITEM 2 - Management's Discussion and Analysis
Overview
The Company principally derives its revenues through two operating subsidiaries:
CHANNEL TELECOM INC. (Channel)
Effective May 31, 1998, HitCom acquired Channel, a prepaid telecommunication
services company based in Canada. Channel currently provides its retail services
by marketing Prepaid Cards, primarily under the Phone Cash and Phone Saver brand
name, through an extensive network of independent retail outlets (through
independent sales agents) and distributors throughout Canada. Channel targets
retail markets with substantial international long distance calling
requirements, such as ethnic communities, and believes that its Prepaid Cards
provide consumers with a convenient, attractively priced alternative to
traditional presubscribed long distance services. This acquisition expanded the
Company's services and provided access to the Canadian marketplace. Hitcom
issued 3,975,570 in shares of Common stock and $37,500 in cash for all of the
outstanding stock of Channel. Hitcom issued a further 309,240 in shares of
Common Stock and incurred costs of $172,615 relating to transaction costs for
the Channel acquisition. Hitcom accounted for the acquisition using the purchase
method of accounting. Accordingly, the purchased assets and liabilities have
been recorded at their estimated fair value at the date of acquisition. Amounts
in excess of the fair value of tangible assets acquired was attributed to
goodwill and is being amortized over ten years. The results of operations of
Channel have been included in the consolidated financial statements since May
31, 1998.
ONE PLUS MARKETING INC. (One Plus)
One Plus derives its revenues from the sale of interactive voice response/voice
processing services to the independent agents of Direct Sales Organizations
(DSO). Therefore, One Plus is dependent upon the DSOs to provide referrals of
their sales agents to use the services. The revenues of One Plus are derived
primarily in the United States.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1998 (AS RESTATED) COMPARED WITH QUARTER ENDED
SEPTEMBER 30, 1997
NET REVENUES
Net revenues increased 10% to $928,981 for the quarter ended September 30, 1998
from $845,162 for the same period in 1997. Increase was primarily due to the
Channel acquisition which provided revenue of $473,566 in the quarter.
COST OF SALES
Cost of sales increased to 63% of revenue ($589,076) for the quarter ended
September 30, 1998 from 56% of revenue ($481,070) for the same period in 1997.
Cost of services primarily includes payments to other carriers for origination,
transport and termination of international and domestic long distance traffic.
The increase in cost of services is primarily due to the Channel acquisition.
Channel's business has a higher cost of services than One Plus due to
significant international long distance traffic as compared to the traffic of
One Plus which is only in North America. The international long-distance traffic
is intensely competitive and therefore placing downward pressure on the prices
Channel can sell its services
SELLING, GENERAL AND ADMINISTRATIVE (SG&A):
SG&A expenses decreased to $332,785 (36% of sales) for the quarter ended
September 30, 1998 from $381,179 (45% of sales) for the same period quarter in
1997.
GOODWILL AMORTIZATION
Goodwill represents the excess of cost over the fair value of net assets
acquired for the Channel acquisition effective May 31, 1998 and is being
amortized on a straight-line basis over a ten year period beginning from the
date of acquisition. Amortization expense was $99,942 for the quarter ended
September 30, 1998.
DEPRECIATION OF PROPERTY AND EQUIPMENT
Depreciation increased to $23,448 for the quarter ended September 30, 1998 from
$21,213 for the same period in 1997. The increase in dollar amount was primarily
attributable to increased capital expenditures for property and equipment to
support the growth of the business resulting in increased depreciation expense
and the acquisition of Channel.
OPERATING LOSS
Operating loss increased to $116,270 for the quarter ended September 30, 1998
from $38,300 for the same period in 1997. Increase in operating loss is
primarily due to the goodwill amortization of $99,942 in 1998.
OTHER INCOME (EXPENSE) - NET:
Other expense was $17,811 for the quarter ended September 30, 1998 as compared
to net expense of $4,234 for the same period in 1997. This was attributable to
increased interest charges due to increased bank borrowings in 1998.
MINORITY INTEREST
Effective August 1, 1998, HitCom acquired the remaining 20% minority interest of
One Plus from HitCom's major shareholder for $1. Minority interest expense
decreased to $zero for the quarter ended September 30, 1998 from $12,672 for the
same period in 1997. The cumulative Minority Interest as at July 31, 1998
totaling $186,439 reverted back to HitCom and was added to additional paid in
capital.
DISCONTINUED OPERATIONS
In August 1998, HitCom completed the sale of the customer accounts related to
the Internet Service division (ISP) segment for $30,000. This segment had
focused on providing various levels of Internet access to customers in the St.
Louis, Missouri area. The disposal of the ISP segment is reflected as
discontinued operations. The direct expenses and associated overhead costs net
of revenue earned from these operations, decreased to $25,397 for the quarter
ended September 30, 1998 from $47,523 for the same period in 1997.
NET LOSS
Net loss increased to $159,478 for the quarter ended September 30, 1998 from
$102,729 for the same period in 1997. Decrease in operating income is primarily
due to the goodwill amortization of $99,942.
NINE-MONTHS ENDED SEPTEMBER 30, 1998 (AS RESTATED) COMPARED WITH NINE-MONTHS
ENDED SEPTEMBER 30, 1997
NET REVENUES
Net revenues decreased to $2,552,225 for the nine-months ended September 30,
1998 from $2,625,720 for the same period in 1997. Revenues are primarily
generated from the Company's interactive voice response products and services
and prepaid phone calling cards.
COST OF SALES
Cost of sales decreased to 52% of revenue ($1,326,533) for the nine-months ended
September 30, 1998 from 58% of revenue ($1,528,325) for the same period in 1997.
Cost of services primarily includes payments to other carriers for origination,
transport and termination of international and domestic long distance traffic.
The decrease in cost of services was primarily attributable to decrease in
carrier charges for One Plus as the Company was able to renegotiate its long
distance per minute rate with its current service provider.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A):
SG&A expenses increased to $925,168 (36% of sales) for the nine-months ended
September 30, 1998 from $852,807 (32% of sales) for the same period in 1997. The
primary reason for the increase is attributable to the additional costs of
administrative support functions to enhance the management of the Company along
with the costs associated with becoming an SEC reporting public company.
GOODWILL AMORTIZATION
Goodwill represents the excess of cost over the fair value of net assets
acquired for the Channel acquisition effective May 31, 1998 and is being
amortized on a straight-line basis over a ten year period beginning from the
date of acquisition. Amortization expense was $133,256 for the nine-months ended
September 30, 1998.
DEPRECIATION OF PROPERTY AND EQUIPMENT
Depreciation increased to $79,756 for the nine-months ended September 30, 1998
from $59,882 for the same period in 1997. The increase in dollar amount was
primarily attributable to increased capital expenditures for property and
equipment to support the growth of the business resulting in increased
depreciation expense and the acquisition of Channel.
OPERATING INCOME
Operating income decreased to $87,512 for the nine-months ended September 30,
1998 from $184,706 for the same period in 1997. Increase in operating loss is
primarily due to the goodwill amortization of $133,256 in 1998.
OTHER INCOME (EXPENSE) - NET:
Other expense was $33,840 for the nine-months ended September 30, 1998 as
compared to net income of $44,060 for the same period in 1997. This was
attributable to increased interest charges due to increased bank borrowings in
1998.
MINORITY INTEREST
Effective August 1, 1998, HitCom acquired the remaining 20% minority interest of
One Plus from HitCom's major shareholder for $1. Minority interest expense
decreased to $20,332 for the nine-months ended September 30, 1998 from $45,418
for the same period in 1997. The cumulative Minority Interest as at July 31,
1998 totaling $186,439 reverted back to HitCom and was added to additional paid
in capital.
DISCONTINUED OPERATIONS
In August 1998, HitCom completed the sale of the customer accounts related to
the Internet Service division (ISP) segment for $30,000. This segment had
focused on providing various levels of Internet access to customers in the St.
Louis, Missouri area. The disposal of the ISP segment is reflected as
discontinued operations. The direct expenses and associated overhead costs net
of revenue earned from these operations, increased to $177,723 for the
nine-months ended September 30, 1998 from $71,759 for the same period in 1997.
NET INCOME
Net loss was $144,383 for the nine-months ended September 30, 1998 as compared
to net income of $111,589 for the same period in 1997. Decrease in net income is
primarily due to increased SG&A expenses, increased interest expense and the
goodwill amortization.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at September 30, 1998 decreased to $44,334 from
$173,435 at September 30, 1997. The Company's liquidity requirements were
largely used by operating activities.
Cash Flows from Investing Activities
Cash used for capital expenditures and acquisitions increased to $204,754 for
the nine-month period ended September 30, 1998 from $52,779 for the same period
in 1997. This was primarily as a result of significant new capital expenditures
of $49,563 to enhance and expand the Company's network facilities. The Channel
acquisition and its related costs net of cash acquired utilized the remaining
$155,191 in investing activities.
Although management anticipates that the Company will continue to expand, there
can be no assurances that the Company's expansions plans will not be adversely
affected by competition, market conditions, or changes in laws or government
regulations affecting telecommunication businesses.
Cash Flows from Financing Activities
Cash provided by financing activities was $194,873 for the nine-months period
ended September 30, 1998 as compared to repayments of $104,135 for the same
period in 1997. During the second quarter 1998, the Company restructured its
existing credit facilities. The Company obtained two separate credit facilities
making available $535,000 with a commercial bank secured by a security agreement
covering all of the assets of the Company and personal guarantee from the
Company's major shareholder. Bank loan repayment is at $8,000 per month
inclusive of interest and principal. The credit facilities bear interest between
bank's prime rate plus one-half percent (prime was 8.5% at September 30, 1998)
and 9% fixed rate and expires on May 1, 2001. At September 30, 1998,
approximately $310,000 of the credit arrangements available have been used by
the Company. The amount drawn from the credit arrangements were used by the
Company to retire current debt obligations, cash payments for the Channel
acquisition and capital expenditures.
YEAR 2000 COMPUTER PROGRAM FAILURE
A significant percentage of the software that runs most of the computers relies
on two-digit date codes to perform computations and decision-making functions.
Commencing on January 1, 2000, these computer programs may fail from an
inability to interpret date codes properly, misinterpreting "00" as the year
1900 rather than 2000. HitCom is in the process of evaluating and implementing
Year 2000 compliance programs to ensure that its software, systems and equipment
are Year 2000 compliant and to ensure that the software and technology of their
third party vendors and customers are also Year 2000 compliant. The Company has
not incurred any Year 2000 costs as at September 30, 1998 and has preliminarily
determined that it will not experience any material Year 2000 risks or
expenditures to bring its systems compliant with Year 2000 issues.
In additional to assessing its own systems, the Company is conducting an
external review of its suppliers, and any other third parties with which it does
business, including equipment and systems providers and other telecommunications
service providers, to determine their vulnerability to Year 2000 problems and
any potential impact on the Company. In particular the Company may experience
problems to the extent that telecommunications carriers to which the Company
sends traffic for termination are not Year 2000 compliant. The Company's ability
to determine the ability of these third parties to address issues relating to
the Year 2000 problem is necessarily limited. To the extent that a limited
number of carriers experience disruption in service due to the Year 2000 issue,
the Company believes that it will be able to obtain service from alternate
carriers. However, the Company's ability to provide certain services to
customers in selected geographic locations may be limited.
The Company believes it will complete its evaluation of Year 2000 issues by
September 30, 1999 and all necessary actions will be implemented by September
30, 1999.
The Company currently anticipates that its information technology and
non-information technology systems will be Year 2000 compliant before January 1,
2000, though no assurances can be given that its compliance testing will not
detect unanticipated Year 2000 compliance problems. HitCom does not currently
have contingency plans to prepare for a Year 2000 failure, however, it does plan
to develop one by September 30, 1999. There can be no assurance that such
contingency plans will be adequate. If either HitCom's and/or third parties are
not Year 2000 compliant as of such date and if such contingency plans are
inadequate or fail to address a particular Year 2000 risk, HitCom may be
required to incur unanticipated costs, change relationships with third parties,
forego revenues or be subjected to other material adverse effects.
FORM 10-QSB - PART II
Item 1 - Legal Proceedings
None.
Item 2 - Changes in Securities and Use of Proceeds
None.
Item 3 - Defaults Upon Senior Securities
None.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
Item 5 - Other Information
August 10, 1998, registrant acquired from Scott A. Beil, its Chairman, the
remaining 20% of the stock of One Plus Marketing, Inc. not already owned by the
Company for $1.00 with the result that One Plus Marketing, Inc. became a
wholly-owned subsidiary of registrant. In connection with that transaction, Mr.
Beil agreed to abstain from voting 1,800,000 shares of the 5,837,012 shares of
registrant's common stock owned by him for a two year period commencing on
August 11, 1998. In a related transaction, Rajan Arora, registrant's President
and a director, and Jeffrey A. Shier, a Vice President and director of
registrant, agreed to forgive aggregate indebtedness of $137,500 owed them by
registrant in connection with the registrant's acquisition from them of the
stock of Channel Telecom, Inc.
Item 6 - Exhibits and Reports on Form 8-K
A. Exhibits
3.1* Certificate of Incorporation, as amended
3.2* Bylaws
4.1* Certificate of Designation for 8% Convertible Preferred Stock
10.1* Share Exchange Agreement Between HitCom Corporation and Scott Beil
dated April 14, 1997
10.2* Stock Purchase Agreement Between HitCom Corporation and Rajan
Arora/Jeffrey Shier and The Jeffrey Samuel Shier Family Trust For
Purchase of All Outstanding Stock of Channel Telecom Inc. dated
February 18, 1998
10.4 Letter agreement between the registrant, Rajan Arora and Jeffrey
Shier dated June 30, 1998 regarding forgiveness of indebtedness.
10.5 Stock Purchase Agreement between Scott A. Beil and registrant dated
August 10, 1998 regarding 20% minority interest in One Plus Marketing,
Inc.
10.6 Letter agreement between registrant and Scott A. Beil dated August 11,
1998 regarding voting of stock in registrant.
21.1* List of Subsidiaries of Registrant
27.0 Financial Data Schedule
* Filed as exhibit to the Company's Registration Statement on Form 10-SB
B. Form 8-K filings
The Registrant did not file a Form 8-K during the last quarter of the period
covered by this report.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HITCOM CORPORATION
(Registrant)
By: /s/ John S. Nashmi
-----------------------
John S. Nashmi,
Chief Financial Officer and Corporate Secretary
Date: June 7, 1999
EXHIBIT 10.4
Letter of Agreement
This letter of Agreement dated September 30, 1998 is between Hitcom Corporation
("Borrower") and Jeffrey Shier and Rajan Arora ("Lenders").
Whereas the Borrower has given the Lenders a Promissory Note dated May 29, 1998
for $165,000 ("Note"), and the current amount outstanding as of the date of this
agreement is $137,500.
Whereas the Lenders desire to forgive the Note in full.
Now Therefore in consideration of good and valuable consideration, the parties
hereto agree as follows:
The lender forgives the note owing from the Borrower effective the date of this
letter.
In Witness Whereof Borrower had caused this Agreement to be executed by its duly
authorized officer, and Lenders has executed this Agreement, on the date first
above written.
/s/ Scott Beil
A. Beil, Chairman, HITCOM CORPORATION
/s/Rajan Arora /s/Jeffrey Shier
Rajan Arora, Lenders Jeffrey Shier, Lenders
================================================================================
EXHIBIT 10.5
STOCK PURCHASE AGREEMENT
Between
HITCOM CORPORATION
And
SCOTT A. BEIL
For Purchase of a 20% minority interest in One Plus Marketing, Inc.
Dated August 10, 1998
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT entered into this 10th day of August, 1998,
between Hitcom Corporation, a Delaware corporation ("Buyer"), and Scott A. Beil,
("Beil") an individual resident in the City of St. Louis, Missouri, herein
called the ("Seller");
WITNESSETH:
WHEREAS, Beil owns 20 common shares, being 20% of One Plus Marketing Inc. ("One
Plus"), an Illinois Corporation (the "Company");
WHEREAS, Hitcom owns 80 common shares, being 80% of One Plus, and there are 100
shares outstanding of the company constituting all of the issued and outstanding
shares of capital stock of the Company; and
WHEREAS, Seller desires to sell, and Buyer desires to purchase, the Stock in
consideration for the payment to be made as described hereunder;
NOW THEREFORE, in consideration of the premises and other good and valuable
consideration, the parties hereto agree as follows:
ARTICLE I
Terms of Purchase and Sale
1.1 Upon the terms and subject to the conditions of this Agreement, Seller sells
to Buyer, and Buyer purchases from Seller, the stock for a purchase price of
$1.00.
ARTICLE II
Representation and Warranties of Seller
Seller represents and warrants to Buyer as follows:
2.1 Authority: No conflict. The Agreement constitutes the legal, valid and
binding obligation of Seller enforceable against Seller in accordance with
its terms. Seller has the absolute and unrestricted right, power, authority
and capacity to execute and deliver this Agreement and to perform the
obligations hereunder. The execution and delivery of this Purchase
Agreement by Seller and the consummation of the transactions contemplated
will
(a) not violate or conflict with any provision of the Certificate or
Articles of Incorporation or bylaws of the Company.
(b) result in a breach of, or constitute a default under any agreement,
(or with notice or lapse of time or both result in a breach of or
constitute a default under) or otherwise give any person the right to
terminate, any lease, license, contract or other agreement or
instrument to which Sellers or the Company is a party or by which any
of them are bound and particularly Clause 6.5 of the Stock Purchase
Agreement between Hitcom Corporation and Rajan Arora, Jeffrey Shier,
the Jeffrey Samuel Shier Family Trust dated February 18th, 1998.
ARTICLE III
Representations and Warranties of Buyer
Buyer represents and warrants to Seller as follows:
3.1 Authority: No conflict. This Agreement constitutes the legal, valid and
binding obligation of Buyer in accordance with its terms. Buyer has the
absolute and unrestricted right, power, authority and capacity to execute
and deliver this Agreement and to perform the obligations hereunder. The
execution and delivery of this Purchase Agreement by Buyer and the
consummation of the transactions contemplated will
(a) not violate or conflict with any provision of the Certificate or
Articles of Incorporation or Bylaws of the Buyer.
(b) Result in a breach of or constitute a default under any agreement, (or
with notice or lapse of time or both result in a breach of or
constitute a default under) or otherwise give any person the right to
terminate, any lease, license, contract or other agreement or
instrument to which Buyer or the Company is a party or by which any of
them are bound and particularly Clause 6.5 of the Stock Purchase
Agreement between Hitcom Corporation and Rajan Arora, Jeffrey Shier,
the Jeffrey Samuel Shier Family Trust dated February 18th, 1998.
3.2 Investment Intent. Buyer acknowledges that the Stock has not been
registered under the Securities Act of 1933, as amended (the "1933 Act")
and that Seller has disclosed to Buyer that the stock may not be resold
absent such registration or unless an exemption from registration is
available. Buyer is acquiring the shares for its own account, for
investment purposes only and not with a view to distribution thereof within
the meaning of Section 2(11) of the 1933 Act.
ARTICLE IV
Closing
4.1 The closing ("Closing") under this Agreement shall take place concurrent
with the signing of this Agreement at the offices of Hitcom, 700 North
Second Street, Third Floor, St. Louis, MO 63102-2519.
4.2 Delivery by Seller. At the Closing, Seller shall deliver to Buyer (a)
certificate representing the 20 shares of One Plus endorsed in blank or
with stock powers attached; (b) such other further instruments, documents
or certificates as Buyer may reasonably require to carry out effectively
the transactions contemplated hereunder.
4.3 Delivery by Buyer. At the Closing, Buyer shall deliver: (a) certified
resolutions of Buyers Board of Directors authorizing the execution,
delivery and performance of this Agreement by Buyer; (b) US$1.00; and (c)
such other further instruments, documents or certificates as Buyer may
reasonably require to carry out effectively the transactions contemplated
hereunder.
ARTICLE V
Miscellaneous
5.1 Notices. All notice given in connection with this Agreement shall be in
writing and shall be delivered by personal delivery at the following
addresses:
Seller: Scott A. Beil, Chairman, Hitcom, 700 North Second Street, Third
Floor, St. Louis, MO 63102-2519.
Buyer: Hitcom, 700 North Second Street, Third Floor, St. Louis, MO
63102-2519.
5.2 Further Assurances.The parties hereto agree (i) to furnish upon request to
each other such further information, (ii) to execute and deliver to each
other such documents, and (iii) to do such other acts and things, all as
the other party hereto may at any time reasonably request for the purpose
of carrying out the intent of this Agreement and the documents referred to
herein.
5.3 Entire Agreement and Modification. This Agreement is intended by the
Parties to this Agreement as a final expression of their agreement with
respect to the subject matter hereof, and is intended as a complete and
exclusive statement of the terms and conditions of that agreement. This
Agreement may not be modified, rescinded, or terminated orally, and no
modification, recession, termination or attempted waiver of the provisions
hereof (including this Section) shall be valid unless in writing and signed
by the party against whom the same is sought to be enforced.
5.4 Governing Law. This Agreement shall be governed by, and construed under,
the laws of the State of Missouri without regard to conflicts of laws, all
rights and remedies being governed by such laws.
5.5 Counterparts. This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original copy of this Agreement, and
all of which, when taken together, shall be deemed to constitute but one
and the same agreement.
IN WITNESS WHEREOF Buyer had caused this Agreement to be executed by its duly
authorized officer, and Seller has executed this Agreement, on the date first
above written.
HITCOM CORPORATION
BY
/s/Scott A. Beil /s/Rajan Arora
Scott A. Beil Rajan Arora, President
================================================================================
EXHIBIT 10.6
August 11, 1998
Scott A. Beil
Chairman
Hitcom Corporation
700 North Second Street, Third Floor
St. Louis, MO 63102-2519
Mr. Rajan Arora
President
Hitcom Corporation
85 Scarsdale Road, Suite 202
Toronto, Ontario, M3B 2R2
Dear Raj,
I am enclosing with this letter the executed Stock Purchase Agreement between
myself and Hitcom for 20% of One Plus Marketing Inc.
I currently own 5,837,012 shares in Hitcom, the certificate is deposited with
Hitcom's lender, and 500,000 shares are pledged as collateral in connection with
Hitcom's corporate loans.
I have previously agreed in connection with the Channel Telecom Stock Purchase
Agreement of February 18, 1998 not to sell or otherwise dispose of said shares
for one year from the Closing Date of that transaction except pursuant to a
registered stock offering.
I now agree to abstain from voting 1,800,000 shares of my 5,837,012 shares of
Hitcom from the date of this letter for 2 years at all special and annual
shareholder meetings of Hitcom.
Yours truly,
/s/ Scott A. Beil
Scott A. Beil
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