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 March 31, 2000
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.)
85 Scarsdale Road, Suite 202
Toronto, Ontario, Canada M3B 2R2
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code (416) 441-6720
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 [ X ]
State the number of shares outstanding of each of the issuer's common
equity, as of the latest practicable date: As of April 30, 2000 -
Class Shares Outstanding
Common Stock 6,607,756
Transitional Small Business Disclosure Format (check one):
YES [ ] NO [ X ]
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
HITCOM CORPORATION
Condensed Consolidated Balance Sheet
March 31, 2000
(Unaudited, all amounts in US Dollars)
ASSETS
Current Assets:
Cash and cash equivalents $ 32,991
Short-term deposits 50,000
Accounts receivable, net of allowance for 820,222
doubtful accounts of $64,296
Inventory 28,267
Other current assets 42,778
- --------------------------------------------------------------------------------
Total current assets 974,258
- --------------------------------------------------------------------------------
Property and equipment, net 234,764
Goodwill, net of amortization of $732,911 3,264,788
- --------------------------------------------------------------------------------
$ 4,473,810
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 1,874,876
Deferred revenue 531,058
Due to officers and directors 21,767
Current portion of obligations under capital lease 16,360
- --------------------------------------------------------------------------------
Total current liabilities 2,444,061
- --------------------------------------------------------------------------------
Long-term debt 513,000
Obligations under capital lease 19,280
- --------------------------------------------------------------------------------
Total liabilities 2,976,341
Commitments and contingencies
Shareholders' equity
Convertible preferred stock $.001 par value, liquidation preference
of $0.80 per share ($818,398 aggregate liquidation preference),
convertible into 0.25 shares of common stock; 5,000,000 authorized;
1,022,998 issued and outstanding 1,022
Common stock $.004 par value, 25,000,000 authorized;
12,462,297 issued; and 6,617,544 outstanding 49,849
Additional paid in capital 5,021,047
Deficit (1,784,718)
Cumulative foreign currency translation adjustment (18,684)
Treasury stock - at cost; 5,844,753 shares of common stock (1,771,047)
- --------------------------------------------------------------------------------
1,497,469
- --------------------------------------------------------------------------------
$ 4,473,810
- --------------------------------------------------------------------------------
See accompanying notes to the condensed consolidated financial statements
- --------------------------------------------------------------------------------
<PAGE>
HITCOM CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
Three-Month Period
Ended March 31,
2000 1999
(All amounts in US Dollars)
Net service revenues $1,884,856 $ 910,043
Cost of services 1,710,446 881,888
- --------------------------------------------------------------------------------
Gross margin 174,410 28,155
- --------------------------------------------------------------------------------
Operating expenses:
Selling, general and administrative 276,483 212,287
Amortization of goodwill 99,942 99,942
Depreciation of property and equipment 19,496 9,422
- --------------------------------------------------------------------------------
Total operating expenses 395,921 321,651
- --------------------------------------------------------------------------------
Operating loss (221,511) (293,496)
Net interest expense (10,838) (9,860)
- --------------------------------------------------------------------------------
Loss from continuing operations (232,349) (303,356)
Income from discontinued operations,
net of tax payable - 62,720
- --------------------------------------------------------------------------------
Net loss $ (232,349) $ (240,636)
- --------------------------------------------------------------------------------
Basic loss per share
Loss from continuing operations $ (0.04) $ (0.03)
Income from discontinued operations - 0.01
- --------------------------------------------------------------------------------
Net loss $ (0.04) $ (0.02)
- --------------------------------------------------------------------------------
Weighted average shares - basic 6,568,930 12,257,092
Weighted average shares - diluted 6,568,930 12,257,092
See accompanying notes to the condensed consolidated financial statements
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
HITCOM CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<S> <C> <C>
Three-Month Period
Ended March 31,
2000 1999
(All amounts in US Dollars)
Operating activities:
Net loss $(232,349) $(240,636)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of goodwill 99,942 99,942
Depreciation of property and equipment - continuing operations 19,496 9,422
Depreciation of property and equipment - discontinued operations - 24,000
Issuance of common shares for interest on convertible debenture 31,200 -
Issuance of common shares for services 20,000 -
Changes in assets and liabilities:
Accounts receivable, net (57,021) (147,535)
Inventory 695 (720)
Other current assets 5,065 (3,780)
Accounts payable and accrued liabilities 363,716 19,980
Deferred revenue (217,227) 60,483
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 33,517 (178,844)
- ---------------------------------------------------------------------------------------------------------
Investing activities:
Purchases of property and equipment (100,368) (68,935)
- ---------------------------------------------------------------------------------------------------------
Financing activities:
Proceeds from (repayment of) capital leases 19,795 (9,510)
Purchase of short-term deposit (50,000)
Proceeds from bank term loan - 13,177
Repayment of line of credit - 107,746
- ---------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 19,795 61,413
- ---------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (47,056) (186,366)
Cash and cash equivalents at beginning of period 80,047 340,484
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 32,991 $ 154,118
- ---------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information
Cash paid for interest during the period $ 265 $ 15,745
Cash paid for income taxes during the period - -
Non Cash investing and financing activities:
Property and equipment acquired through proceeds from capital lease 19,830 -
Conversion of preferred shares into common shares - 119
See accompanying notes to the condensed consolidated financial statements
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
HITCOM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN US DOLLARS)
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of HitCom
Corporation and subsidiaries (collectively "the Company" or "HitCom") have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and Securities and Exchange Commission ("SEC") regulations.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of management, the financial statements reflect all adjustments (of a
normal and recurring nature) which are necessary to present fairly the financial
position, results of operations, stockholders' equity and cash flows for the
interim periods. These unaudited condensed consolidated financial statements
should be read in conjunction with the audited financial statements and notes
thereto for the year ended December 31, 1999, as set forth in HitCom's Annual
Report on Form 10-KSB. The results for the three months ended March 31, 2000,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000. 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 long distance
telecommunication services primarily in Canada. The services are provided on a
prepaid basis through a card or on a post paid basis whereby the customer is
invoiced on a monthly basis for the long distance usage. The company maintains
its own carrier-class switching platform to provide its services.
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 intercompany accounts and transactions have
been eliminated on consolidation. The investment in a 50% owned affiliate has
been accounted for using the equity method.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and reported amounts of revenues and expenses during the reported
period with consideration given to materiality. Actual results could differ from
those estimates.
Revenue Recognition and Deferred Revenue
The Company recognizes revenue as services are rendered as follows:
Prepaid card services
The Company's revenue originates from customer usage of (i) Company and
co-branded 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 - rates, fees and expiration dates of the card - as the ultimate card users
utilize calling time and service fees. All prepaid cards sold by the Company
expire upon either three or six months after first usage. Upon usage or
expiration of the prepaid phone card, the Company recognizes the related
deferred amount as revenue.
Postpaid long distance services
The Company's revenue originates from customer usage of long distance services
which is billed to the customer on a monthly basis. Revenue is recognized as
invoice is issued.
Goodwill
Goodwill represents the excess of cost over the fair value of net assets
acquired for the Channel Telecom acquisition effective May 31, 1999, and is
being amortized on a straight-line basis over a ten year period. Amortization
expense was $99,942 in the first quarters of 2000 and 1999. The Company
evaluates on an ongoing basis the carrying value of goodwill for potential
permanent impairment.
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
Three-Month Period Ended March 31,
2000 __1999__
Numerator:
Net loss available to common shareholders $( 232,349) $ (240,636)
Denominator:
Denominator for basic earnings (loss) per share -
weighted-average shares 6,568,930 12,257,092
Dilutive potential common shares - Adjusted
weighted-average shares and assumed conversions 6,568,930 12,257,092
- --------------------------------------------------------------------------------
Basic and diluted earnings (loss) per share: $ (0.04) $(0.02)
- --------------------------------------------------------------------------------
Employee stock options, convertible preferred stock, convertible debentures and
warrants, are not presented for the years ended December 31, 2000 and 1999,
because they are anti-dilutive due to the net loss available to common
shareholders.
5. Segmented Information
At March 31, 2000, HitCom is operating in only one business segment, long
distance services.
<PAGE>
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operation
Overview
The Company principally derives its revenues from long distance
telecommunication services primarily in Canada. The services are provided on a
prepaid basis through its subsidiary Channel Telecom Inc. (Channel) and on a
post paid basis whereby the customer is invoiced on a monthly basis for the long
distance usage. The company maintains its own carrier-class switching platform
to provide its services.
Prepaid telecommunication services (Channel)
Channel provides long distance services to consumers through prepaid cards under
the Channel brands and private label brands, ("Channel Cards"), 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 Channel Cards provide consumers with a
convenient, attractively priced alternative to traditional presubscribed long
distance services. Channel Cards enable consumers to place local, long distance
and international calls from touch-tone phones, without the need for cash,
operator assistance, collect or other third party billed calls. Consumers can
use the Channel Cards to place international long distance calls from the U.S.
and Canada to more than 200 countries at rates that are generally lower than the
standard plan rates currently charged by the major telecommunication carriers
such as Bell Canada, Sprint and AT&T or the rate charged for a direct call from
a payphone or hotel room.
Consumers access the services of the Channel Cards by dialing a local number or
toll-free number and entering a PIN printed on the back of the card. The system
provides explanation to the services including the time remaining on the card.
Postpaid telecommunication services
This service was just launched in January 2000. Consumers can use the Hitcom
long distance service to place long distance calls from their home or office at
rates that are generally lower than the standard plan rates currently charged by
the major telecommunication carriers such as Bell Canada, Sprint and Primus. The
long distance plans are based on a per minute basis which vary according to the
country dialed. Consumers access the Hitcom long distance service by dialing a
local number and then dialing their destination number. There is no need to
enter a PIN number.
<PAGE>
Results of Operation
THREE MONTHS ENDED March 31, 2000 COMPARED TO THREE MONTHS ENDED March 31, 1999
Revenue
Total revenue increased 107% to $1,884,856 in the first quarter of 2000 from
$910,043 for the same period in 1999. The increase was primarily due to the
growth in Channel's prepaid long distance cards as usage increased, increase in
the number of retail storefronts in which the Company's products are
distributed, and greater brand awareness. The Company launched the Hitcom long
distance residential service in January 2000 which provided consumers with a
post paid long distance service. Revenues from this service were approximately
$20,000 in the first quarter.
Cost of Services:
Cost of services primarily includes payments to other carriers for origination,
transport and termination of international and domestic long distance traffic.
Cost of services decreased to 91% of revenue ($1,710,446) in the first quarter
of 2000 from 97% of revenue ($881,888) for the same period in 1999. With the
implementation of the new carrier class switch in May 1999, Channel has
implemented cost saving programs to decrease cost of services as a percentage of
revenue. These include building private networks and utilizing Voice over
Internet Protocol (VoIP) gateways to reduce transmission costs. Channel has also
continued to expand the number of carriers it uses to terminate its
telecommunication traffic. The increased number of carriers and increased
termination traffic, has allowed Channel to continually negotiate lower
termination rates to reduce cost of services. Hitcom will continue to expand its
private network, implement voice over IP gateways, and expand the number of
carriers it utilizes to reduce transmission costs.
Selling General & Administrative (SG&A):
SG&A expenses decreased to 15% of revenue ($276,483) in the first quarter of
2000 from 23% of revenue ($212,287) for the same period in 1999. The significant
increase in revenue enabled the decrease of SG&A expense as a percentage of
revenue.
Goodwill Amortization
Goodwill represents the excess of cost over the fair value of net assets
acquired for the Channel acquisition effective May 31, 1998 and is being
amortized on a straight-line basis over a ten year period. Amortization expense
was $99,942 in the first quarters of 2000 and 1999.
Depreciation of property and equipment
Depreciation increased to $19,496 in the first quarter of 2000 from $9,422 for
the same period in 1999. The increase in dollar amount was primarily
attributable to increased capital expenditures for property and equipment to
support the growth of the business resulting in increased depreciation expense.
Net Interest Expense (income):
Net interest expense was $10,838 in the first quarter of 2000 as compared to net
interest expense of $9,860 for the same period in 1999. Interest expense was
primarily due to the convertible debenture bearing interest at 8% per annum.
<PAGE>
Discontinued Operations
In December 1999, the Company completed the sale of certain assets and
liabilities that were primarily related to One Plus Marketing, Inc. (One Plus)
to a former officer, director and major shareholder of the Company. The Company
also received 5,837,503 shares of Hitcom's common stock from the purchaser which
has been returned to treasury and has therefore reduced the outstanding number
of common stock in Hitcom. The transaction was recorded at carrying value and
the resulting gain has been recorded directly to additional paid in capital. The
disposal of the One Plus segment is reflected as discontinued operations in the
accompanying condensed consolidated financial statements. Revenue net of
expenses and associated overhead earned from these operations, was $62,720 for
the quarter ended March 31, 1999.
EBITDA - continuing operations
EBITDA loss for the quarter ended March 31, 2000, decreased to $102,073 as
compared to $184,132 for the same period in 1999. The decreased EBITDA loss is
due to decreased cost of services due to the company's various initiatives to
improve gross margin. The Company will continue to implement initiatives to
increase gross margin in 2000. As a percentage of revenue, EBITDA loss decreased
to 5% of revenue in first quarter 2000 as compared to 20% of revenue in first
quarter 1999.
Net loss
Net loss for the quarter ended March 31, 2000 decreased to $232,349 from
$240,636 for the same period in 1998. As a percentage of revenue, net loss
decreased to 12% of revenue in first quarter 2000 as compared to 26% of revenue
in first quarter 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at March 31, 2000 decreased to $32,991 from $80,047 at
December 31, 1999. The Company's liquidity requirements were largely used by
investment needs including capital expenditures for the continued expansion of
the new carrier class switch and building of VoIP gateways.
Cash provided by operating activities in the first quarter of 2000 was $33,517
as compared to cash used of $178,844 for the same period in 1999. Significant
utilization of cash in the first quarter were the net cash losses of $112,911,
$57,021 increase in account receivable due to revenue growth at Channel and
$217,227 decrease in deferred revenue. Increase in account payable - $363,716
primary source of working capital.
Cash used for capital expenditures in the first quarter of 2000 was $100,368 in
the first quarter of 2000 as compared to $68,935 same period in 1999. Capital
expenditures were for the continued expansion of the carrier class switch due to
the growth in revenues and building of VoIP gateways to reduce cost of services.
Cash proceeds from financing activities in the first quarter of 2000 were
$19,795 as compared to proceeds of $111,413 for the same period in 1999.
Financing activities proceeds consisted primarily of increased lease borrowings.
The Company's revolving line of credit of approximately $100,000 was not
utilized as at March 31, 2000.
At March 31, 2000, the Company is not committed to completing any acquisition,
however, the Company is continually looking for further acquisitions which will
expand the Company's product lines and competitive position. Any potential
acquisitions in 2000 will be funded either through stock issuance, new equity
financing and/or increased bank borrowings.
In the first quarter of 1999, Channel obtained a new operating credit facility
from a commercial bank in Canada for approximately $100,000. The new credit
facility is secured by a general security agreement on Channel Telecom Inc.,
$50,000 Guaranteed Investment Certificate and corporate guarantees from HitCom.
Need for Additional Capital to Finance Operations and Capital Requirements
Hitcom believes that it must continue to enhance and expand its network and
build out its telecommunications network infrastructure in order to maintain its
competitive position and continue to meet the increasing demands for service
quality, capacity and competitive pricing. Hitcom's ability to grow depends, in
part, on its ability to expand its operations through the ownership and leasing
of network capacity, which requires significant capital expenditures, that are
often incurred prior to Hitcom's receipt of the related revenue.
The Company has sustained losses from operations since its inception. The
Company's ability to meet its obligations in the ordinary course of business is
dependent upon its ability to raise additional financing through public or
private equity financings, establish profitable operations, enter into
collaborative or other arrangements with corporate sources, or secure other
sources of financing to fund operations.
Management intends to raise working capital through additional equity and/or
debt financings in the upcoming year. However, there can be no assurance that
such financings can be successfully completed on terms acceptable to the Company
or at all. If Hitcom is unable to obtain such additional capital, Hitcom may be
required to reduce the scope of its anticipated expansion, which could have a
material adverse effect on Hitcom's business, financial condition or results of
operations.
NEW ACCOUNTING STANDARDS
Accounting for derivatives and hedging activities
In June 1998, the FASB issued SFAS No. 133 "Accounting for derivatives and
hedging activities," which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133 is effective for all fiscal quarters of the Company's
year ending December 31, 2001. The Company does not expect the adoption of this
statement to have significant impact on the Company's results of operations,
financial position or cash flows.
<PAGE>
PART II
OTHER INFORMATION
Item 1 - Legal Proceedings
None.
Item 2 - Changes in Securities and Use of Proceeds
None.
Item 3 - Defaults Upon Senior Securities
None.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
Item 5 - Other Information
None.
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, 1999
10.4** Letter agreement between the registrant, Rajan Arora and Jeffrey
Shier dated June 30, 1999 regarding forgiveness of indebtedness.
10.5** Stock Purchase Agreement between Scott A. Beil and registrant dated
August 10, 1999 regarding 20% minority interest in One Plus Marketing,
Inc.
10.6** Letter agreement between registrant and Scott A. Beil dated August
11, 1999 regarding voting of stock in registrant.
10.7*** Assets purchase agreement by and between Hitcom Corporation and Scott
A. Beil
10.8*** Assets purchase agreement by and between One Plus Marketing, Inc.
and Scott A. Beil
21.1* List of Subsidiaries of Registrant
27.0 Financial Data Schedule
* Filed as exhibit to the Company's Registration Statement on Form 10-SB
** Filed as Exhibit to the Company's Quarterly Report on Form 10-QSB
for the quarter ended September 30, 1999
*** Filed as Exhibit to the Company's AnnualReport on Form 10-KSB for the
year ended December 31, 2000
B. Form 8-K filings
March 15, 2000 Change in Registerants Certifying Accountant
January 13, 2000 Change in Registerants Certifying Accountant
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/ Rajan Arora
Rajan Arora
President and CEO
Date: May 12, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 32,991
<SECURITIES> 50,000
<RECEIVABLES> 884,518
<ALLOWANCES> (64,296)
<INVENTORY> 28,267
<CURRENT-ASSETS> 974,258
<PP&E> 329,563
<DEPRECIATION> (94,799)
<TOTAL-ASSETS> 4,473,810
<CURRENT-LIABILITIES> 2,444,061
<BONDS> 513,000
0
1,022
<COMMON> 49,849
<OTHER-SE> 1,446,598
<TOTAL-LIABILITY-AND-EQUITY> 4,473,810
<SALES> 1,884,856
<TOTAL-REVENUES> 1,884,856
<CGS> 1,710,446
<TOTAL-COSTS> 2,006,425
<OTHER-EXPENSES> 99,942
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,838
<INCOME-PRETAX> (232,349)
<INCOME-TAX> 0
<INCOME-CONTINUING> (232,349)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (232,349)
<EPS-BASIC> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
