SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X]Annual report under Section 13 or 15(d)of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999.
[ ]Transition report under section 13 or 15(d) of the Securities Exchange Act
of 1934, FOR THE TRANSITION PERIOD FROM _______ to ________
Commission file number 001-13999
HITCOM CORPORATION
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 87-0389677
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
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
Securities registered under Section 12(b)of the Exchange Act:
Name of Each Exchange
Title of Each Class On Which Registered
(None) (None)
Securities registered under Section 12(g) of the Exchange Act:
Common Stock
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure
will be contained, to the best of registerant's knowledge, in definitive
proxy or information statements incorporated by reference in Part IIII of
this Form 10-KSB or any amendment to this form 10-KSB
Yes[ ] No [X]
State issuer's revenues for its most recent fiscal year: $4,405,964
State the number of shares outstanding of each of the issuer's common
equity, as of the latest practicable date: As of March 15, 2000:
Class Shares Outstanding
Common Stock 6,607,815
Traditional Small Business Disclosure Format (check one):
Yes[ ] No [X]
<PAGE>
ITEM 1 -- DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
Hitcom Corporation ("Hitcom" or the "Company") was incorporated in 1995. The
Company's business activities were carried out through two operating
subsidiaries in 1999:
CHANNEL TELECOM, INC.
Effective May 31, 1998, Hitcom acquired Channel Telecom Inc. ("Channel"), a
prepaid telecommunication services company based in Canada. This acquisition
expanded the Company's telecommunication services and provided access to the
Canadian marketplace. Hitcom issued 3,975,570 in shares of common stock and
$37,500 in cash for all of the outstanding stock of Channel. Hitcom issued a
further 309,240 in shares of common stock and incurred costs of $172,615
relating to transaction costs for the Channel acquisition. Hitcom accounted for
the acquisition using the purchase method of accounting. Accordingly, the
purchased assets and liabilities have been recorded at their estimated fair
value at the date of acquisition. Amounts in excess of the fair value of
tangible assets acquired was attributed to goodwill and is being amortized over
ten years. The results of operations of Channel have been included in the
consolidated financial statements since the effective date of acquisition.
ONE PLUS MARKETING INC.
Hitcom acquired 80% of One Plus Marketing Inc. ("One Plus"), an interactive
voice response company, effective April 1, 1997 for 5,837,503 shares of common
stock. The acquisition was treated for accounting purposes as a reverse
takeover, resulting in One Plus becoming the accounting acquiror and the
operating activities of the acquiror are presented for historical purposes.
The remaining 20% minority interest in One Plus reverted back to Hitcom
effective August 1, 1998.
On December 17, 1999, the Company completed the sale of certain assets and
liabilities that were primarily related to One Plus to a former officer,
director and major shareholder of the Company. As consideration for the sale of
the assets and liabilities, the Company received 5,837,503 shares of Hitcom's
common stock, which are currently being held in treasury.
Therefore, effective December 18, 1999, Hitcom had only one active operating
subsidiary - Channel.
<PAGE>
BUSINESS OF ISSUER
PREPAID TELECOMMUNICATION SERVICES
OVERVIEW
Channel provides long distance services to consumers through prepaid cards under
the Channel brands and private label brands, ("Channel Cards"). Channel Cards
provide consumers a single point of access to convenient, easy to use,
cost-effective telecommunications products and services at a fixed rate charge
per minute regardless of the time of day. Channel Cards enable consumers to
place local, long distance and international calls from touch-tone phones,
without the need for cash, operator assistance, collect or other third party
billed calls. Consumers can use the Channel Cards to place international long
distance calls from the 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.
SALES AND MARKETING
Channel targets retail markets with substantial international long distance
calling requirements, such as ethnic communities. Therefore, Channel's primary
marketing and distribution focus is to target independent convenience stores
serving ethnic communities and alternative distribution channels, which includes
tour and travel, and vending machines. Channel is refining its retail sales and
marketing program to increase penetration of major national and regional
retailers such as department stores, mass merchandisers, office superstores and
consumer electronics retailers, which the Company had not aggressively targeted.
The opportunity to increase the penetration into these retail areas provides
excellent growth opportunities.
Channel markets its cards primarily through in-house sales agents and
distributors to the retail stores. Channel believes that its Channel Cards
provide consumers with a convenient, attractively priced alternative to
traditional presubscribed long distance services. Channel Card rates are set to
attract new customers and to retain its existing customers. While Channel's
rates to specific domestic and international destinations are often more
attractive to customers than the rates of the primary carriers, Channel does
not, as a policy, fix its rates at a discount to the rates charged by the
primary carriers, or at a discount to the rates charged by other carriers.
Channel has used its significant retail international traffic to negotiate very
competitive rates for international termination. Cards are available in $10,
$20, $30, $50, and $100 denominations.
CHANNEL CARD RECHARGE:
Consumers can recharge their Channel Card to increase the number of minutes
available on the Card without purchasing a new Channel Card by using a major
credit card. Recharge enables Channel to make direct sales to consumers, and to
create brand loyalty. Currently, the Channel Card can only be recharged by
calling Channel's customer service department. In 2000, the Company plans to
introduce an on-line recharge system whereby the consumer can recharge the card
over the internet or telephone.
CUSTOM CARDS:
Channel has created customized prepaid phone cards for resale or
promotional/institutional use. Custom cards can carry a company image and logo,
product imaging, or any custom design or text desired. Channel can assist and
provide turnkey custom service and advice including market planning, card design
and development, card manufacturing, inventory tracking and fulfillment, and
production of point-of-sale marketing material available including posters,
brochures and displays.
LONG DISTANCE SERVICES
Starting in December 1999, Hitcom commenced offering direct from home long
distance services. This service is on a post paid basis and is direct with the
consumer. The customer establishes an account with Hitcom, upon which long
distance services are provided. On a monthly basis, the customer is billed and
payment is received. Revenue from these services was very minimal in 1999,
however, Hitcom will be aggressively increasing its customer base in fiscal year
2000. This service enables Hitcom to increase its gross margin as it is directly
selling to the customer.
INTERACTIVE VOICE RESPONSE (IVR) /VOICE PROCESSING SERVICES
In 1999, the Company was engaged in the following products and services through
One Plus, which was disposed of in December 1999:
800LINK(TM)
800Link(TM) is an IVR / Voice Processing Platform for several Direct Sales
Organizations (DSO's) in the United States. DSO's use the Company's 800Link(TM)
to provide advertising support and communication services to their participants.
For an additional fee, other features can be added to an 800Link(TM) account.
They include calling card capabilities, call forwarding, automated attendant,
extended greeting time, group broadcasting, fax back, fax on demand, and fax
broadcast.
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 marketing effort consists of nationally placed advertisements that attract
prospects to obtain the Company's 800Link(TM) services. The majority of new
business is still generated through referral in the US and Canada. One Plus
markets 800Link(TM) service to small businesses and DSOs.
This segment is shown on the consolidated financial statements as discontinued
operations.
INTERNET CONNECTIVITY SERVICES
Hitcom marketed an internet connectivity service to commercial accounts in the
St. Louis, Missouri market up until August 1998. The internet connectivity was
provided using Cisco 7513 router and a direct ATM/ fiber optic connection to the
Internet. The Company's internet services were introduced to the St. Louis
market in 1997. In the third quarter of 1998, Hitcom sold the customer list of
this business for $30,000 and is currently in the process of selling the related
hardware including the Cisco 7513 router. This segment is shown on the
consolidated financial statements as discontinued operations. HITCOM CUSTOMER
SERVICE
Hitcom believes that effective and convenient customer service is essential to
attracting and retaining consumers. The customer service departments are
responsible for increasing the prepaid amount on the customer card through a
major credit card, assisting consumers in using Hitcom's services, answering
questions about usage and resolving billing related issues and any technical
problems. Hitcom provides on-line customer support that is available 24 hours a
day, 7 days a week, at the touch of a button. Customer service representatives
can access detailed usage records through Hitcom's systems in order to answer
efficiently consumers' questions or resolve consumers' concerns. In addition,
Hitcom can identify calling activity by originating or destination phone
numbers.
INTERNET PROTOCOL (IP) TELEPHONY RELATED SERVICES
IP Telephony represents the routing of voice and data traffic through the
Internet. IP telephony is now in its infancy but, by all indications, will
quickly become a major factor in the telecommunications industry. IP telephony
is the convergence of CTI (Computer Telephony Integration) with the Internet.
CTI represents the integration of computers and telecommunication functions.
Computers with specialized software and hardware are used to route phone calls,
handle messages, etc. The resulting products and services enhance both the
telephony and computer environments and also create new hybrid applications. A
sampling of existing CTI technologies and applications include intelligent PBXs
(Private Branch Exchanges), IVR (Interactive Voice Response), ACDs (Automatic
Call Distribution centers), fax servers, voice mail and messaging, cellular
phone services, modems and ISDN.
The Company is looking at expanding its technology platforms to support an
aggressive internal growth plan and attract additional strategic acquisitions to
offer new IP telephony driven services.
INDUSTRY OVERVIEW
TELECOMMUNICATIONS INDUSTRY OVERVIEW
Telecommunications 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.
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, Sprint and MCI WorldCom - other companies, like
Hitcom, are able to successfully compete and thrive by developing new
technologies and pursuing niche markets and opportunities. In 1999, Canada's
telecommunication services market - including local, long-distance, internet and
data services - was $19 billion, with the new emerging telephone companies only
capturing 2% of the market. The market is expected to grow to $26 billion by
2002 with the new industry players capturing 9% of the market. By focusing and
building upon the products and services that employ computer telephony, the
Company has been able to take advantage of the enormous demand for alternative
and specialized providers and services.
PREPAID PHONE CARDS MARKET OVERVIEW
The growth of the prepaid phone card market has been extraordinary. According to
industry research, the U.S. market was about $500,000 in 1992 and grew to $500
million by 1994. In 1996, the U.S. prepaid calling card market surpassed the
billion-dollar mark, exceeding all expectations of industry and analysts. A
report released in early 1997 by Atlantic-ACM, a Boston-based market research
firm that tracks the telecommunications industry, predicted the sales of prepaid
cards would reach $2.5 billion by the millenium. Later in 1997, due to
unanticipated sales growth within the retail segment, Atlantic-ACM increased its
long-term forecast by more than 50%. The research firm now estimates overall
revenues for prepaid phone cards to be $4.3 billion by 2001. The shift from
promotional use to retail as well as the changing user demographics clearly
indicates that phone cards are now an established and accepted consumer product
in North America.
There are primarily two types of prepaid card issuers. SWITCH-BASED, those who
have their own platforms and NON-SWITCH-BASED, those who market the cards and
outsource their network needs to switch-based companies that resell prepaid
phone card network services through its own service bureau. The Company is a
switch-based card issuer.
TELECOMMUNICATION REGULATION
Canada is going through the final phases of deregulation in the
telecommunications industry. There are two specific areas of deregulation which
occurred in 1998 and have created new opportunities in the phone card industry:
swipe access functionality and elimination of Teleglobe's (Canada's licensed
company with exclusivity to carry international voice traffic) monopoly on
overseas long distance services. Until late 1997, Bell Canada and the Stentor
Alliance had a monopoly on "swipe" access. Channel obtained swipe functionality
on its cards in 1998, allowing the Channel Cards to be swiped on any of Bell
Canada's pay phones (approximately 70,000) eliminating the user having to enter
the 1-800# and their PIN#. As per the CRTC (Canada's governing telecom
regulator) ruling in 1998, Teleglobe's monopoly on overseas long distance
services was eliminated. This is driving down the price of overseas long
distance in Canada to be more in line with the U.S. Lower pricing will increase
volume and create short-term arbitrage opportunities for companies. The Company
expects to be positioned to take full marketing advantage during this time
period.
The Company's IVR services in USA is not subject to specific industry
regulation.
SWITCH PLATFORM SERVICES
As the telecommunications industry and product offerings have changed, so have
the networks that process the communication. Until recently, telecommunication
companies used massive switch networks that could perform the more routine, and
most needed services - predominantly connecting one caller with another caller.
However, with the influx of new services - voice, data, fax, video,
conferencing, etc. - more sophisticated and flexible switching technology is
required.
Hitcom's services are delivered through a carrier class Excel(R) switch, LNX
which was activated in May 1999. The Excel switch has provided significant
increases in call volume capacity over the Company's previous PC-based switch.
The increased capacity has enabled the Company to significantly increase revenue
and terminated minutes in 1999. However, more importantly, the new switch has
enabled the Company to utilize significantly more long distance carriers thereby
resulting in greater choice in optimizing least cost routing which should
decrease the Company's cost of services and correspondingly increase gross
margin.
PERSONNEL
Currently, the Company employs approximately 30 people including managerial,
administration, technical and sales personnel.
COMPETITION
The Company's strategy is to seek to gain a competitive advantage by continuing
to develop unique and innovative services for its subscribers.
The market for the Company's services is intensely competitive. Many of the
Company's competitors in this market are substantially larger and have greater
financial, technical, engineering, personnel and marketing resources, longer
operating histories, greater name recognition and larger customer bases than the
Company. Competitors include Premiere Technologies Inc., Deutsche Telekom, AT&T,
RSL Telecom, Teleglobe Canada and Bell Canada. The Company has developed and
continues to expand its own distribution network to gain a competitive advantage
by ensuring the development of its product line and the growth of brand loyalty.
The Company expects that the telecommunication services market will continue to
attract new competitors and new technologies, possibly offering alternative
technologies that are more sophisticated and cost effective than the Company's
current technology. The Company intends to minimize the likelihood of this by
devoting resources to develop new, more efficient and cost-effective services.
In general, the Company does not have the right, contractually or otherwise, to
prevent its subscribers from changing to a competing service provider, and the
Company's subscribers may terminate their service with the Company at will.
RISK FACTORS
RISKS RELATING TO THE PREPAID CARD BUSINESS
The prepaid card business in general has a number of inherent risks, which can
be summarized to include the following: (a) the increased penetration into the
market by competitive prepaid card vendors, including those that are
substantially larger than Hitcom, (b) the relatively low barriers to entry for
prepaid card operators, (c) the price-sensitive nature of consumer demand
resulting in relative lack of customer loyalty to any particular prepaid card
company. These inherent risks could place downward pressure on industry wide
prepaid card pricing.
RAPID TECHNOLOGICAL CHANGE IN THE TELECOMMUNICATION MARKET
The telecommunication market is characterized by rapid technological change, new
product and service introduction, new sales channels and evolving industry
standards. Hitcom's success will depend, in significant part, upon its ability
to make timely and cost-effective enhancements and additions to its technology
and to introduce new products and services that meet customer demands. Hitcom
expects new products and services to be developed and introduced by other
companies that compete with its products and services. The proliferation of new
telecommunications technology, including personal and voice communication
services over the Internet, may reduce demand for long distance services,
including prepaid cards. There can be no assurance that Hitcom will be
successful in responding to these or other technological changes, evolving
industry standards or to new products and services offered by Hitcom's current
and future competitors. The inability of Hitcom to respond to these changes
could have a material adverse effect on the Company's business, financial
condition or results of operations.
RISKS ASSOCIATED WITH FOREIGN CURRENCY FLUCTUATIONS.
Hitcom's reporting currency is the U.S. dollar, however, Channel derives almost
all of its revenues, approximately 50% of its cost of services and almost all of
its operating expenses are in Canadian Dollars. Accordingly, fluctuations in
exchange rates between the U.S. and Canadian dollar may have a significant
effect on Hitcom's results of operations. Hitcom may choose to limit its
exposure to foreign currency fluctuations in the future by purchasing forward
foreign exchange contracts or engaging in other similar hedging strategies
although to date it has not done so. The failure by Hitcom to hedge its foreign
currency exchange exposure may result in foreign exchange losses to Hitcom from
Channel's operations. In addition, there can be no assurance that any currency
hedging strategy that Hitcom decides to employ, if any, would be successful in
avoiding currency exchange-related losses.
RISKS OF NETWORK FAILURE; DEPENDENCE ON FACILITIES AND THIRD PARTIES
Any system or network failure that causes interruptions in Hitcom's operations
could have a material adverse effect on the business, financial condition or
results of operations. Hitcom's operations also are dependent on its ability to
protect its hardware and other equipment from damage from natural disasters such
as fires, floods, hurricanes and earthquakes, other catastrophic events such as
civil unrest, terrorism and war and other sources of power loss and
telecommunications failures. Although Hitcom has taken a number of steps to
prevent their network from being affected by natural disasters, fire and the
like, such as building redundant systems for power supply to the switching
equipment, there can be no assurance that any such systems will prevent Hitcom's
switches from becoming disabled in the event of an earthquake, power outage or
otherwise. The failure of Hitcom's network, or a significant decrease in
telephone traffic resulting from effects of a natural or man-made disaster,
could have a material adverse effect on Hitcom's relationships with their
customers and their business, operating results and financial condition.
NEED FOR ADDITIONAL CAPITAL TO FINANCE 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.
CONTROL OF HITCOM BY NAMED OFFICERS AND DIRECTORS
Executive officers and directors of Hitcom, in the aggregate beneficially own
approximately 63% and 50% of the outstanding and fully-diluted shares of Hitcom
common stock. These stockholders may be able to exercise control over all
matters requiring stockholder approval, including the election of directors and
approval of significant corporate transactions.
<PAGE>
ITEM 2 -- DESCRIPTION OF PROPERTY
The Company's head office is in Toronto, Ontario, Canada. The 2,990 square feet
office is leased through to February 28, 2003 at rental rates ranging from
$1,700 to $2,300 per month.
Channel also has the following locations:
- - 330 square feet sales office in Vancouver, British Columbia which is
being rented on a month to month lease for $300 per month.
- - 572 Square feet switch room located in Toronto, Canada is leased
through to February 29, 2004 at rental rates of approximately $1,500
per month
The Company believes its facilities have generally been well maintained, are in
good operating condition and are adequate for the Company's current
requirements.
ITEM 3 -- LEGAL PROCEEDINGS
The Company is not involved in legal proceedings that would have a material
adverse effect on the Company's financial condition or results of operations if
determined adversely.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the Company's
fourth quarter.
<PAGE>
PART II
ITEM 5 -- MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is quoted on the OTC Bulletin Board (OTCBB). As of
December 31, 1999, there were approximately 110 shareholders of record of the
Company's common stock. The following table sets forth the high and low bid
information for the common stock for the periods indicated, as reported by the
OTCBB:
HIGH LOW
CALENDAR YEAR 1999
4th Quarter 0.46 0.30
3rd Quarter 0.55 0.38
2nd Quarter 0.75 0.52
1st Quarter 2.25 0.30
CALENDAR YEAR 1998
4th Quarter 2.25 0.38
3rd Quarter 1.13 0.69
2nd Quarter 2.50 1.13
1st Quarter 2.69 0.78
The above quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions.
DIVIDENDS
No dividends on the Company's common stock was declared during fiscal 1999 and
1998. It is not anticipated that cash dividends will be paid on shares of the
Company's common stock in the foreseeable future.
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
OVERVIEW
The Company principally derives its revenues through two operating subsidiaries:
CHANNEL TELECOM INC. (CHANNEL)
Channel is a provider of long distance services to retail customers. Channel
currently provides its retail services by marketing prepaid cards under its own
brands and private label brands, through an extensive network of independent
retail outlets (through independent sales agents) and distributors throughout
Canada. Channel targets retail markets with substantial international long
distance calling requirements, such as ethnic communities, and believes that its
Prepaid Cards provide consumers with a convenient, attractively priced
alternative to traditional presubscribed long distance services. Channel sets
its Prepaid Card rates to attract new customers and to retain its existing
customers. Channel has used its significant retail international traffic to
negotiate very competitive rates for international termination. Channel sells
its prepaid cards to retail stores and distributors at a discount to their face
values of $5, $10, $20, $25, $50 and $100, and records the sale as deferred
revenue until the card user utilizes the calling time.
Hitcom acquired Channel effective May 31, 1998. This acquisition expanded the
Company's services and provided access to the Canadian marketplace. Hitcom
issued 3,975,570 in shares of Common stock and $37,500 in cash for all of the
outstanding stock of Channel. Hitcom issued a further 309,240 in shares of
common stock and incurred costs of $172,615 relating to transaction costs for
the Channel acquisition. Hitcom accounted for the acquisition using the purchase
method of accounting. Accordingly, the purchased assets and liabilities have
been recorded at their estimated fair value at the date of acquisition. Amounts
in excess of the fair value of tangible assets acquired was attributed to
Goodwill and is being amortized over ten years. The results of operations of
Channel have been included in the consolidated financial statements since the
date of acquisition.
ONE PLUS MARKETING INC. (ONE PLUS)
One Plus derives its revenues from the sale of interactive voice response/voice
processing services to the independent agents of Direct Sales Organizations
(DSO). Therefore, One Plus is dependent upon the DSOs to provide referrals of
their sales agents to use the services. The Company offers customized
interactive voice-processing systems allowing each member of a national or
international sales organization a method by which the response from a large
advertising campaign can be handled 24 hours a day and pertinent data reported
to their participants almost instantly. The revenues of One Plus are derived
primarily in the United States.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO DECEMBER 31, 1998
REVENUE
Revenue increased 239% to $4,405,964 in the year ended December 31, 1999 from
$1,301,997 for the same period in 1998. Revenue includes only Channel's
operation, as One Plus is being shown as a discontinued operation. The increase
in revenue is due to the significant growth in the usage of Channel's prepaid
cards, an increase in the number of retail storefronts in which the Company's
products are distributed, and greater brand awareness.
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 remained constant at 89% of revenue - $3,923,299 in the year
ended December 31, 1999 as compared to $1,153,508 for the same period in 1998.
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 (IP) gateways to reduce transmission costs. Channel has also
continued to expand the number of carriers it uses to terminate its
telecommunication traffic with the addition of five new major international
carriers in 1999. The increased number of carriers and increased termination
traffic, has allowed Channel to continually negotiate lower termination rates to
reduce cost of services.
As a result, Channel has improved its gross margin percentage continuously over
each quarter in 1999. The Company anticipates that its gross margin will improve
in 2000 as it will have the benefit of a full year of its cost saving programs
as compared to only eight months in 1999. 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) and BAD DEBTS:
SG&A and bad dent expenses decreased to 29% of revenue ($1,268,142) in the year
ended December 31, 1999 from 39% of revenue ($501,909) for the same period in
1998. The significant increase in revenue due to Channel's growth, enabled the
decrease of SG&A expense as a percentage of revenue. The Company anticipates
that as revenue continues to grow, SG&A expense as a percentage of sales will
continue to decrease.
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 $399,770 in the year ended December 31, 1999 as compared to $233,199 for the
same period in 1998.
DEPRECIATION OF PROPERTY AND EQUIPMENT
Depreciation increased to $50,225 in the year ended December 31, 1999 as
compared to $12,121 for the same period in 1998. The increase was primarily
attributable to increased capital expenditures for property and equipment to
support the growth of the business.
NET INTEREST EXPENSE:
Net interest expense was $38,916 in the year ended December 31, 1999 as compared
to net interest expense of $8,258 for the same period in 1998. Interest expense
was primarily due to the convertible debenture which was issued in October 1998
and accrues interest at 8% per annum. The 1999 expense reflects a full year of
interest as compared to only three months in 1998.
DISCONTINUED OPERATIONS
In December 1999, the Company completed the sale of certain assets and
liabilities that were primarily related to 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 has been recorded at carrying value and the
resulting gain has been recorded directly to contributed surplus.
Net liabilities disposed:
Assets disposed: $ 237,807
Liabilities disposed 510,898
- --------------------------------------------------------------------------------
Net liabilities disposed 273,091
Treasury common stock received 1,751,251
Legal expenses relating to closing of transaction (11,435)
Income tax expense (12,000)
- --------------------------------------------------------------------------------
Contributed surplus on sale of assets and liabilities $2,000,907
================================================================================
The disposal of the One Plus segment is reflected as discontinued operations in
the accompanying consolidated financial statements. Revenue net of expenses and
associated overhead earned from these operations, was $38,157 and $485,483 for
the years ended December 31, 1999 and 1998, respectively.
In August 1998, Hitcom completed the sale of all of the Internet Service
Provider ("ISP") division including certain computer equipment and customer
accounts for $30,000. This division had focused on providing various levels of
Internet access to customers in the St. Louis, Missouri area. The disposal of
the ISP division is reflected as a discontinued operations. Expenses and
associated overhead costs net of revenue from these operations, was a loss of
$457,212 for the year ended December 31, 1998.
EBITDA - CONTINUING OPERATIONS
EBITDA loss for the year ended ended December 31, 1999, increased to $785,477 as
compared to $353,420 in the same period of 1998. The increase in EBITDA loss
dollar amount is due to increase in SG&A expenses to fund the Company's growth,
however, gross margin as a percentage of sales remained the same. The Company
will continue to implement initiatives to increase gross margin in 2000. As a
percentage of revenue, EBITDA loss decreased to 18% of revenue in 1999 as
compared to 27% of revenue in 1998.
NET LOSS
Net loss for the year ended December 31, 1999 increased to $1,236,231 from
$578,727 for the same period in 1998. The increase in net loss is due to the
same reasons for the increase in EBITDA loss as well as increase in goodwill
amortization to $399,770 in 1999 as compared to $233,199 in 1998. As a
percentage of revenue, net loss decreased to 28% of revenue in 1999 as compared
to 45% of revenue in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at December 31, 1999 decreased to $80,047 from
$340,484 at December 31, 1998. The Company's cash requirements were largely used
for investment and financing requirements. These requirements were funded
primarily by cash reserves and operating activities.
For the year ended December 31, 1999, operating activities generated $83,537 in
cash as compared to utilization of $291,907 for the same period in 1998.
Significant working capital was provided by increase in accounts payable and
accrued expenses ($650,742) and deferred revenue ($446,114) due to growth at
Channel. The EBITDA loss for the year ($785,477) and increase in accounts
receivable ($306,763) were the primary usage of cash in 1999.
Cash used for investing activities for the year ended December 31, 1999 was
$146,605 as compared to $257,936 for the same period in 1998. The 1999 investing
activities were primarily used for the implementation of the new carrier-class
switch at Channel while the 1998 investing activities were primarily used for
the purchase of Channel.
Cash used by financing activities for the year ended December 31, 1999 was
$197,370 as compared to net proceeds of $701,527 for the same period in 1998.
Repayment of bank term loan ($90,243), purchase of short-term deposit ($50,000),
repayments of capital leases ($28,283), and convertible debenture ($15,000) were
the primary usage of cash in 1999. In 1998, financing activities proceeds
consisted primarily of increased bank borrowings and issuance of convertible
debenture.
At December 31, 1999, 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 the following twelve months will be
funded either through stock issuance, new equity financing and/or increased bank
borrowings.
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.
ISSUANCE OF CONVERTIBLE SUBORDINATED DEBENTURES
During 1998, the Company had received net proceeds of $528,000 from issuance of
convertible subordinated debentures. The debentures were issued on October 1,
1998 and are due on October 1, 2003, bearing interest at 8% per annum, payable
semi-annually commencing on April 1, 1999. The debentures may be converted at
the option of the holder into fully-paid and non-assessable shares of common
stock of Hitcom at a conversion price of $0.50 per share (equivalent to a
conversion rate of 2000 shares per $1,000 principal amount of debenture). After
September 1, 2000, the Company may force the conversion of all debentures if the
Company's common stock closes at a price of $2.00 or higher on each trading day
during any 90 consecutive calendar days. After October 1, 2000, the debentures
are subject to redemption upon payment of the principal amount and accrued
interest, at the election of the Corporation. The debentures were issued through
a private placement.
NEW COMMERCIAL BANK CREDIT FACILITIES
In February 1999, Channel obtained a new operating credit facility with 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. The
outstanding balance drawn against this facility was $nil, as at December 31,
1999.
With the disposal of the assets and liabilities of One Plus in December 1999,
the Company disposed of all liabilities relating to a $150,000 operating credit
facility and a term loan with an approved limit of $385,000. These credit
facilities are no longer available to the Company as of December 31, 1999.
In 1998, the Company restructured its then existing credit facilities with a
new commercial bank which provided for credit facilities of $535,000. These
credit facilities consisted of:
- - A revolving working capital line of credit of $150,000. The line bore
interest at prime plus 0.5%. The outstanding balance drawn against this
facility was $nil and $30,000, as at December 31, 1999 and 1998,respectively.
- - A term loan for $385,000 with a commercial bank repayable on May 1, 2001,
which bore interest at 9% per annum, payable monthly. Repayment was at
$8,000 per month inclusive of interest and principal. Proceeds from the
term loan were used to pay out the existing $100,000 operating facility,
Channel acquisition cash requirements and for general working capital
purposes. The balance on this facility at December 31, 1999 and 1998 was
$nil and $290,638.
These credit facilities were secured by a security agreement covering all of the
assets of the Company and a personal guarantee from the Company's major
shareholder.
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.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
DESCRIPTION BALANCE AT ADDITIONS CHARGED BALANCE
BEGINNING TO COST OF SERVICES AT END
OF PERIOD AND OPERATING EXPENSES DEDUCTIONS OF PERIOD
<S> <C> <C> <C> <C>
Allowance for doubtful accounts $ 50,900 $ 75,509 $ 60,046 (1) $ 66,363
Accrued liabilities 205,710 257,636 - 463,346
</TABLE>
(1) Amounts written off during the year
<PAGE>
ITEM 7--FINANCIAL STATEMENTS
HITCOM CORPORATION
Consolidated Balance Sheet
December 31, 1999
- --------------------------------------------------------------------------------
ASSETS
1999
Current Assets:
Cash and cash equivalents $ 80,047
Short-term deposits 50,000
Accounts receivable, net of allowance for
doubtful accounts of $66,363 763,201
Inventory 28,961
Other current assets 47,843
- --------------------------------------------------------------------------------
Total current assets 970,052
- --------------------------------------------------------------------------------
Property and equipment, net (Note 4) 153,892
Goodwill, net of amortization of $632,969 (Note 5) 3,364,731
- --------------------------------------------------------------------------------
$4,488,675
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities 1,523,315
Deferred revenue 748,285
Due to officers and directors (Note 7) 21,767
Current portion of obligations under capital lease (Note 17) 9,627
-------------------------------------------------------------------------------
Total current liabilities 2,302,994
- --------------------------------------------------------------------------------
Long term debt (Note 8) 513,000
Obligations under capital lease (Note 17) 6,218
- --------------------------------------------------------------------------------
Total liabilities 2,822,212
- --------------------------------------------------------------------------------
Commitments & contingencies (Notes 16 and 17)
Shareholders' equity (Note 9)
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;
12,354,061 issued; 6,520,315 outstanding 49,416
Additional paid in capital 4,970,236
Deficit (1,552,369)
Cumulative foreign currency translation adjustment (30,795)
Treasury stock - at cost; 5,844,753 common stock (1,771,047)
- --------------------------------------------------------------------------------
1,666,463
- --------------------------------------------------------------------------------
4,488,675
================================================================================
See accompanying notes to the consolidated financial statements
<PAGE>
HITCOM CORPORATION
Consolidated Statements of Operations
For the Years Ended December 31,1999 and 1998
- --------------------------------------------------------------------------------
1999 1998
--------- ---------
Net service revenues $4,405,964 $1,301,997
Cost of services 3,923,299 1,153,508
- --------------------------------------------------------------------------------
Gross margin 482,665 148,489
- --------------------------------------------------------------------------------
Operating expenses:
Selling, general and administrative 1,192,633 440,267
Bad debts 75,509 61,642
Amortization of goodwill 399,770 233,199
Depreciation of property and equipment 50,225 12,121
- --------------------------------------------------------------------------------
Total operating expenses 1,718,137 747,229
- --------------------------------------------------------------------------------
Operating loss (1,235,472) (598,740)
- --------------------------------------------------------------------------------
Other income (expense)
Interest expense (44,241) (10,600)
Interest income 5,325 2,342
- --------------------------------------------------------------------------------
Total other expense (38,916) ( 8,258)
Loss from continuing operations (1,274,388) (606,998)
Income from discontinued operations,
net of tax payable (Note 13) 38,157 28,271
- --------------------------------------------------------------------------------
Net loss (1,236,231) (578,727)
================================================================================
Basic loss per share (Note 12)
Loss from continuing operations $ (0.11) $ (0.06)
Loss from discontinued operations $ - $ -
- --------------------------------------------------------------------------------
Net loss $ (0.11) $ (0.06)
================================================================================
Weighted average shares - basic 12,139,686 10,442,292
Weighted average shares - diluted 12,139,686 10,442,292
See accompanying notes to the consolidated financial statements
<PAGE>
<TABLE>
HITCOM CORPORATION
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 1999 and 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Cumulative
Foreign
Additional Retained Currency
Preferred Stock Common Stock Paid in Earnings/ Translation Treaury
Shares Amount Shares Amount Capital (Deficit) Adjustment Stock Total
--------------- ------------------ ---------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 1,144,143 $1,144 7,931,014 $31,724 $(1,139,904) $ 372,509 $ - $ (19,796) $(754,323)
Net loss (578,727) (578,727)
Foreign currency translation adjustment 6,186 6,186
Comprehensive income
Issuance of common stock in acquisition of
Channel Telecom Inc. 3,975,570 15,902 3,462,598 3,478,500
Issuance of common stock for acquisition
related costs of Channel Telecom Inc. 309,240 1,237 269,348 270,585
Minority Interest repurchase 186,439 186,439
Conversion of preferred stock (143,366) (143) 35,842 143 -
Preferred stock dividends 72,600 73 58,007 (58,080) -
Common stock issued 41,689 167 40,038 40,205
Issuance of warrants 25,200 25,200
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 1,073,377 $1,074 12,293,355 $49,173 $ 2,901,726 $(264,298) $6,186 $ (19,796) $2,674,065
Net loss (1,236,231) (1,236,231)
Foreign currency translation adjustment (36,981) (36,981
Comprehensive loss
Conversion of preferred stock (115,179) (116) 28,795 116 -
Preferred stock dividends 64,800 64 51,776 (51,840) -
Common stock issued 31,912 127 15,827 15,954
Shares of Hitcom held by subsidiary (1,751,251)(1,751,251)
Sale of One Plus assets and liabilities 2,000,907 2,000,907
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 1,022,998 $1,022 12,354,062 $49,416 $ 4,970,236 $(1,552,369)$(30,795)$(1,771,047)$1,666,463
====================================================================================================================================
</TABLE>
See accompanying notes to the consolidated financial statements
<PAGE>
<TABLE>
HITCOM CORPORATION
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999 and 1998
- ----------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
1999 1998
Operating activities:
Net loss $(1,236,231) $(578,727)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of goodwill 399,770 233,199
Depreciation of property & equipment-continuing operations 50,225 12,121
Depreciation of property & equipment-discontinued operations 87,500 90,637
Writedown on assets held for resale-discontinued operations - 60,290
Minority interest in earnings of subsidiary - 20,332
Issuance of common shares for services 15,827 24,205
Issuance of warrants for services - 25,200
Loss on sale of property & equipment - 6,171
Equity in loss of affiliated Company - 2,804
Deferred tax benefit - 885
Changes in assets and liabilities, excluding acquisition and disposal
Accounts receivable--net (306,763) (42,661)
Inventory (1,753) (10,651)
Other assets (21,893) 46,855
Accounts payable and accrued expenses 650,742 (55,951)
Deferred revenue 446,114 (126,616)
- -----------------------------------------------------------------------------------------------------
Net cash used in operating activities 83,538 (291,907)
- -----------------------------------------------------------------------------------------------------
Investing activities:
Purchases of property and equipment (146,605) (102,745)
Acquisition of Channel Telecom, net of cash acquired - (155,191)
----------------------------------------------------------------------------------------------------
Net cash used in investing activities (146,605) (257,936)
- -----------------------------------------------------------------------------------------------------
Financing activities:
Repayment of (proceeds from) the issuance of convertible debentures (15,000) 528,000
Repayment of (proceeds from) bank term loan (90,243) 290,635
Purchase of short-term deposit 50,000 -
Repayment of capital leases (28,283) (14,108)
Repayment on line of credit (13,844) (70,000)
Repayment of notes payable - (33,000)
- -----------------------------------------------------------------------------------------------------
Net cash provided (used) in financing activities (197,370) 701,527
- -----------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (260,437) 151,684
Cash and cash equivalents at beginning of period 340,484 188,800
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 80,047 $ 340,484
=====================================================================================================
Supplemental disclosure of cash flow information
Cash paid for interest during the period $ 36,108 $ 40,440
Cash paid for income taxes during the period - -
Non cash investing and financing activities:
Common shares issued for acquisition and related costs of Channel Telecom Inc. - 3,749,085
Reversion of minority interest - 186,439
Property & Equipment acquired through proceeds from capital lease 21,280 105,224
Preferred dividend paid through issuance of preferred shares 51,840 58,080
Repayment of notes payable through issuance of common stock - 16,000
Capital assets disposed of by settlement of capital lease - 5,838
Conversion of preferred shares into common shares 116 143
See accompanying notes to the consolidated financial statements
</TABLE>
<PAGE>
HITCOM CORPORATION
Consolidated Statement of Comprehensive Loss
For the Years Ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
1999 1998
Net loss $(1,236,231) $(578,727)
Foreign currency translation adjustment (36,981) 6,186
- --------------------------------------------------------------------------------
Comprehensive loss $(1,273,212) $(572,541)
================================================================================
See accompanying notes to the consolidated financial statements
<PAGE>
HITCOM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
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. Prepaid telecommunication services through its switching platforms.
ii. 800-based services, voice and data messaging.
The Company's customers are located within North America without a significant
geographic concentration. The Company extends unsecured credit to its customers.
The 800-based services segment was disposed of in December 1999, and is
reflected as a discontinued operation for the years ended December 31, 1999 and
1998.
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. The accompanying financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All 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.
800-based services
The Company generally requires its customers to establish minimum account
balances prior to receiving services. Revenue 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.
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. Amortization
expense was $399,770, and $233,199 in 1999 and 1998, respectively. The Company
evaluates on an ongoing basis the carrying value of goodwill for potential
permanent impairment. For additional information related to the acquisition see
Note 3, "Acquisitions."
Cash and Cash Equivalents
For financial statement presentation purposes, cash and cash equivalents include
deposits with initial maturities of less than three months, including money
market accounts with investments in marketable securities.
Comprehensive Income
The Company has implemented the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income". Under SFAS No.
130, the Company is required to report comprehensive income in the financial
statements, in addition to net income. For the Company, the primary difference
between net income and comprehensive income is the impact of foreign currency
translation adjustments.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of accounts receivable from customers. This risk
is mitigated by the large number of customers in the Company's customer base
with relatively small amounts due from each individual customer, net of an
allowance for uncollectable accounts.
Earnings/Loss Per Common Share
Basic earnings per share is calculated by dividing net income or loss available
for common shareholders for the period by the weighted-average number of shares
of common stock outstanding during the period. The assumed exercise of stock
options, warrants, convertible preferred stock and convertible debentures is
included in the calculation of diluted earnings per share, if dilutive.
SFAS No. 128, "Earnings per Share" was adopted in fiscal 1997 with all
prior-period earnings per share data restated. SFAS No. 128 requires dual
presentation of basic and diluted earnings per share on the Consolidated
Statements of Operations and other computational changes. The adoption of SFAS
No. 128 did not have a material effect on previously reported earnings per
share.
Fair Values of Financial Instruments
Management believes that the carrying values of all financial instruments
approximate their fair values.
Foreign Currency Translations
Financial statements of the Company's Canadian subsidiary are translated into
U.S. dollars using the exchange rate at each balance sheet date for assets and
liabilities and an average exchange rate for the revenues and expenses reported
in each fiscal period.
The cumulative loss of $30,795 at December 31, 1999 is included in shareholders'
equity.
Income Taxes
Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards, to the extent
realizable. Deferred income tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred income tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Inventory
Inventory consists of costs of external production of unsold phone cards.
Inventory is valued using the lower of average-cost or market and is charged to
cost of services when the cards are sold.
Long-Lived Assets
The Company evaluates whether events and circumstances have occurred that
indicate the remaining estimated useful life of long lived assets may warrant
revision or that the remaining balance of an asset may not be recoverable. The
measurement of possible impairment is based on the ability to recover the
balance of assets from expected future operating cash flows on an undiscounted
basis or the estimated fair value of assets held for resale less disposal costs.
In the opinion of management, no such impairment exists at December 31, 1999 or
December 31, 1998.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets,
ranging from three to seven years. Expenditures for maintenance and repairs are
charged against earnings as incurred.
Operating Segments
The Company has implemented the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for the way public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to stockholders. SFAS No. 131 need not be applied to
interim financial statements in the initial year of its application. The
adoption of SFAS No. 131 did not have an effect on the Company's primary
financial statements as the Company was operating in only one segment at
December 31, 1999.
Stock-Based Compensation Plans
The Company grants stock options for a fixed number of shares to eligible
employees and consultants of the Company with an exercise price equal to or
greater than the quoted market price of the shares at the date of grant. The
Company accounts for stock options in accordance with Accounting Principles
Board Opinion No. 25 (APB No. 25) "Accounting for Stock Issued to Employees."
ABP No. 25 requires that compensation cost related to fixed stock option plans
be recognized only to the extent that the quoted market price of the shares at
the date of grant exceeds the exercise price. Accordingly, the Company
recognizes no compensation expense for its stock option grants. In October 1995,
the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS
No. 123 allows companies to continue to account for their stock option plans in
accordance with APB No. 25, but encourages the adoption of a new accounting
method based on the estimated market price of employee stock options. The
Company will continue to apply the intrinsic value method of APB No. 25 for
financial reporting purposes. See Note 11 Employee Benefits.
Reclassifications
Certain reclassifications have been made to the amounts presented for 1998 and
1997 to conform to the presentation for 1999.
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. The adoption of this statement is not expected to have significant
impact on the Company's consolidated results of operations, financial position
or cash flows.
3. ACQUISITIONS
Channel Telecom Inc. ("Channel")
Effective May 31, 1998, Hitcom acquired Channel, a prepaid telecommunication
services company based in Canada. This acquisition expanded the Company's
services and provided access to the Canadian marketplace. Hitcom issued
3,975,570 shares of Common stock and $37,500 in cash for all of the outstanding
stock of Channel. Hitcom issued a further 309,240 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 values at the date of acquisition. Amounts in excess of
the fair value of tangible assets acquired was attributed to goodwill and is
being amortized over ten years. The results of operations of Channel have been
included in the consolidated financial statements since May 31, 1998.
Total Consideration Paid:
Issuance of Common Stock $3,478,500
Cash payment 37,500
- --------------------------------------------------------------------------------
$3,516,000
Acquisition related transaction costs:
Issuance of Common Stock $ 270,585
Cash payments: 172,615
- --------------------------------------------------------------------------------
` 443,200
Total Cost of Acquisition: $3,959,200
- --------------------------------------------------------------------------------
Less net liabilities assumed:
Assets acquired:
Cash $ 54,924
Account Receivable 336,200
Inventory 16,550
Property and equipment 37,920
Other assets 26,240
- --------------------------------------------------------------------------------
471,834
Liabilities assumed:
Account payable and accrued expenses 370,154
Deferred Revenue 87,300
Other liabilities 52,880
- --------------------------------------------------------------------------------
510,334
Net liabilities assumed 38,500
- --------------------------------------------------------------------------------
Cost in excess of fair value of tangible assets acquired $ 3,997,700
================================================================================
The following unaudited pro forma summary presents the Company's combined
results as if the acquisition of Channel had occurred at the beginning of the
year ended December 31, 1998, after giving effect to certain adjustments
including goodwill amortization, depreciation and interest expense. These pro
forma results are not necessarily indicative of those that would have occurred
had the acquisition occurred at the beginning of the year ended December 31,
1998.
(unaudited)
1998
----------
Net service revenues $1,839,000
Cost of services 1,475,000
- --------------------------------------------------------------------------------
Gross margin $ 364,000
================================================================================
Loss from continuing operations $ (773,569)
Income from discontinued operations 28,271
- --------------------------------------------------------------------------------
Net loss $ (745,298)
================================================================================
Basic and diluted loss per share $ (0.07)
================================================================================
One Plus Marketing Inc. ("One Plus").
In December 1999, the Company completed the sale of One Plus to a former
officer, director and major shareholder of the Company (see Note 13).
Effective August 1, 1998, Hitcom acquired the remaining 20% of the outstanding
common stock of One Plus from Hitcom's major shareholder for $1. The cumulative
Minority Interest as at July 31, 1998 totaling $186,439 reverted back to Hitcom
and is reflected as an adjustment to Additional Paid in Capital.
Effective April 1, 1997, the Company acquired 80% of the outstanding common
stock of One Plus for 5,837,503 shares of the Company's common stock. For
accounting purposes, the acquisition has been treated as a recapitalization of
One Plus with One Plus as the accounting acquiror in accordance with APB No. 16
"Business Combinations." The acquisition was accounted for using the purchase
method of accounting. Accordingly, the purchased assets and liabilities of the
Company have been recorded at their estimated fair values at the date of
acquisition.
A summary of net liabilities assumed is as follows:
Assets acquired:
Current assets $ 2,602
Property and equipment and other assets 91,246
- --------------------------------------------------------------------------------
93,848
- --------------------------------------------------------------------------------
Liabilities assumed:
Debt obligations 49,000
Account payable and accrued expenses 1,150,960
- --------------------------------------------------------------------------------
1,299,960
- --------------------------------------------------------------------------------
Net liabilities assumed $1,206,112
================================================================================
4. PROPERTY AND EQUIPMENT NET
ACCUMULATED BOOK VALUE
COST DEPRECIATION 1999
Computer equipment $ 51,640 $ 20,670 $ 30,970
Switching equipment and software 88,650 16,890 71,760
Office equipment and furniture 73,170 30,343 42,827
Vending Equipment 15,735 7,400 8,335
- --------------------------------------------------------------------------------
$ 229,195 $ 75,303 $ 153,892
================================================================================
Depreciation expense was $137,725 and $102,758 for the years ended December 31,
1999 and 1998, respectively, of which $87,500 and $90,637 related to the
discontinued operations which were disposed of in 1999 and 1998.
5. GOODWILL
1999
Goodwill $3,997,700
Accumulated Amortization (632,969)
- --------------------------------------------------------------------------------
$3,364,731
================================================================================
6. REVOLVING LINE OF CREDIT
In February 1999, the Company negotiated a revolving operating credit facility
with a commercial bank in Canada for approximately $100,000, bearing interest at
the Bank's prime rate plus 1.75% which was 8.0% at December 31, 1999. The
outstanding balance drawn against the line of credit was $nil at December 31,
1999. Amounts drawn against the facility are due on demand and are secured by a
general security agreement on Channel, $50,000 Guaranteed Investment Certificate
which is included in short-term deposit, and corporate guarantees from Hitcom.
The average outstanding balance drawn against the line of credit was
approximately $55,650 during 1999 with an average interest rate of 8.25%.
In May 1998, the Company negotiated a $150,000 revolving working capital line of
credit with a commercial bank to replace its prior facility. The outstanding
balance drawn against the line of credit was $nil at December 31, 1999. The line
of credit bore interest at the Bank's prime rate plus 0.5% which was 8.5% at
December 31, 1998 and was secured by a general security agreement covering all
the assets of the Company and personal guarantees from a major shareholder. The
average outstanding balance drawn against the line of credit was approximately
$45,000 during 1999 with an average interest rate of 8.25%. This credit facility
was part of the net liabilities that were assumed by the former officer and
director in December 1999 (see Note 13) and was no longer available to the
Company at December 31, 1999.
7. DUE TO OFFICERS AND DIRECTORS
Due to officers and directors are due to two officers and directors of the
Company, are non-interest bearing and are due on demand.
8. LONG TERM DEBT
Long Term Debt consists of the following:
Convertible subordinated debentures $ 513,000
Less: current portion -
- --------------------------------------------------------------------------------
Long-term portion $ 513,000
================================================================================
Convertible Subordinated Debentures
The debentures were issued on October 1, 1998 and are due on October 1, 2003,
bearing interest at 8% per annum, payable semi-annually commencing on April 1,
1999. They are unsecured general obligations of the Company which are
subordinated in right of payment. The debenture may be converted at the option
of the holder into fully-paid and non-assessable shares of Common Stock of the
Company at a conversion price of $0.50 per share (equivalent to a conversion
rate of 2000 shares per $1,000 principal amount of debenture). After September
1, 2000, the Company may force the conversion of all debentures if the Company's
common stock closes at a price of $2.00 or higher on each trading day during any
90 consecutive calendar days. After October 1, 2001, the debentures are subject
to redemption in whole or in part, substantially pro rata prior to maturity, on
the first day of any calendar month upon payment of the principal amount and
accrued interest, at the election of the Corporation. The debentures were issued
through a private placement. In December 1999, $15,000 of the convertible
debentures held by a former officer and director of the Company was repaid and
cancelled.
Bank Term Loan
In May 1998, the Company negotiated a new $385,000 term loan with a commercial
bank due on May 1, 2001, bearing interest at 9% per annum, payable monthly.
Repayment is at $8,000 per month inclusive of interest and principal, with the
remaining outstanding balance due on May 1, 2001. The term loan is secured by a
general security agreement covering all of the assets of the Company and
personal guarantees from a major shareholder. This credit facility was part of
the net liabilities that were assumed by the former officer and director in
December 1999 (see Note 13) and was no longer available to the Company as at
December 31, 1999.
As of December 31, 1999, the maturities of long-term debt were as follows:
Year Ended December 31, Amount
- --------------------------------------------------------------------------------
2000 $ -
2001 -
2002 -
2003 513,000
- --------------------------------------------------------------------------------
513,000
================================================================================
Interest expense on long-term debt was $67,615 and $29,026 during the years
ended December 31, 1999 and 1998, respectively.
9. SHAREHOLDERS' EQUITY
Preferred Stock
The Convertible Preferred Stock ("Preferred Stock") is convertible, at the
option of the holder, at four shares of the Preferred Stock for one share of
common stock and is callable at $0.85 per share upon 30 days written notice if
the Preferred Stock is not converted to common stock. The Preferred Stock is
entitled to an $0.80 liquidation preference subject to certain adjustments that
coincide with the conversion price. The Preferred Stock accrues dividends at 8%
per annum and may be paid in cash or like kind. Like kind dividends of 64,800
and 72,600 preferred shares were declared and paid in 1999 and 1998 and are
reflected in the accompanying consolidated statement of shareholders' equity.
Common Stock
No dividends have been declared or paid relating to common stock during 1999 and
1998.
Common Stock Disputed
The Company is vigorously disputing 150,000 shares of common stock (the
"Disputed Shares") issued in January 1997 to a former officer and director of
the Company. The Company asserts that the former officer and director was
erroneously issued the Disputed Shares without appropriately fulfilling the
conditions for issuance of the Disputed Shares. Furthermore, the Company asserts
that the issuance of the disputed shares was not authorized by a properly
elected and functioning Board of Directors. As a result of repeated unsuccessful
attempts to recover the Disputed Shares, the Company has filed a lawsuit seeking
cancellation of the Disputed Shares. Management believes that the Disputed
Shares will be ultimately returned and cancelled without a material affect on
the consolidated financial position of the Company. The Company has not
reflected the Disputed Shares as issued or outstanding in the accompanying
consolidated financial statements.
Warrants
The Company has warrants outstanding to purchase 155,000 shares of its common
stock at a weighted average exercise price of $3.15 per share to the Company's
financial advisors. The 100,000 warrants issued in 1998 were valued at $25,200
using the Black-Scholes pricing model. The $25,200 was charged to operations and
additional paid in capital. The warrants expire at various dates between January
2000 and October 2000.
Convertible Subordinated Debentures
The debentures were issued on October 1, 1998 and are due on October 1, 2003,
bearing interest at 8% per annum, payable semi-annually commencing on April 1,
1999. At any time while the debentures are outstanding, the debentures may be
converted at the option of the holder into fully-paid and non-assessable shares
of Common Stock of the Company at a conversion price of $0.50 per share
(equivalent to a conversion rate of 2000 shares per $1,000 principal amount of
debenture). For further reference see Note 8, "Long Term Debt."
Treasury Stock
In December 1999, the Company received 5,837,503 shares of common stock from a
former officer and director of the Company as part of the sale of certain assets
net of liabilities assumed. For further reference see Note 13, "Discontinued
Operations."
At December 31, 1999, the Company holds in treasury stock 5,844,753 shares of
common stock, which is reflected in the accompanying consolidated statement of
shareholders' equity.
10. EQUITY TRANSACTIONS
During 1999, 115,179 shares of the Preferred Stock were converted to 28,795
shares of common stock and are reflected in the accompanying consolidated
statement of shareholders' equity.
In connection with the purchase of Channel effective May 31, 1998, the Company
issued 3,975,570 shares of common stock to the former shareholders of Channel
and 309,240 shares of common stock to consultants who provided services with
regards to the closing of the acquisition. All of the issued shares were valued
at $0.875 per share which was the closing price of Hitcom's common stock share
price on December 22, 1997, the date of the public announcement of the
acquisition. For further reference see Note 3, "Acquisitions"
11. EMPLOYEE BENEFITS
Stock Option Plans
In September 1998, the Board of Directors adopted a stock option plan (the
"1998" plan) under which options to purchase 2,000,000 shares have been
authorized. The options may be incentive stock options or non-qualified stock
options. As of December 31, 1999 there were 457,500 non-qualified options
granted under the 1998 plan.
Prior to the 1998 plan, the Company had various stock option agreements that
allowed eligible employees, directors and consultants of the Company to purchase
the Company's common stock at fair market value at the date the option was
granted. The options expired up to ten years from the date the option was
granted. There were 351,967 options granted in 1998 under these various plans.
The following table summarizes stock option activity during each of the two year
periods ended December 31, 1999 as follows:
Weighted
Number Average
of Exercise
Shares Price
Balance December 31, 1997 45,700 $ 0.49
Granted 351,967 0.98
Expired (4,750) 1.00
- --------------------------------------------------------------------------------
Balance December 31, 1998 392,917 $ 0.92
Granted 457,500 0.50
- --------------------------------------------------------------------------------
Balance December 31, 1999 850,417 $ 0.72
================================================================================
The following table summarizes information about stock options outstanding as at
December 31, 1999:
OUTSTANDING OPTIONS OPTIONS EXERCISABLE
Number Weighted Number Weighted
Outstanding Average Outstanding Average
Exercise and Years and Years
Price Exercisable Remaining Exercisable Remaining
$0.40 40,950 8 40,950 8
$0.50 457,500 2 - -
$0.63 30,000 2 30,000 2
$1.00 321,967 4 321,967 4
- --------------------------------------------------------------------------------
850,417 392,917
================================================================================
The weighted average value of options granted during the years ended December
31, 1999 and 1998 were $0.11 and $0.66 per share option, respectively. The
pro-forma effect on earnings for the years ended December 31, 1999 and 1998
giving effect to the method consistent with SFAS No. 123 would be to increase
reported net loss by approximately $50,325 and $213,845, to approximately
$1,286,556 and $792,572, respectively. The pro-forma effect on earnings per
share for the years ended December 31, 1999 and 1998 of this method would be to
increase reported basic and diluted net loss by $0.004 and $0.020 per share, to
$0.11 and $0.08 per share, respectively. The significant assumptions used to
determine those values using the Black-Scholes option pricing model for 1999 and
1998 were: volatility of 0.70; dividend yield of 0%; risk-free interest rate of
return of 6.24% and 5.19%; and expected option lives of 2 and 3.4 years,
respectively.
Health and Medical Insurance Plan
The Company contributed to health and medical insurance programs for the
employees of One Plus. Following the sale of One Plus, the Company has no
responsibility for any further health and medical insurance programs for its
exiting employees. Expenses related to the program charged to discontinued
operations was approximately $19,200 and $27,600 for the years ended December
31, 1999 and 1998, respectively.
12. LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss per
share:
1999 1998
Numerator:
Net loss $(1,236,231) $( 578,727)
Dividends payable on convertible preferred stock ( 51,840) ( 58,080)
- --------------------------------------------------------------------------------
Net loss available to common shareholders $(1,288,071) $( 636,807)
================================================================================
Denominator:
Denominator for basic loss per share -
Weighted-average shares 12,139,686 10,442,292
Effect of dilutive securities:
Employee stock options, convertible preferred
stock and warrants - -
- --------------------------------------------------------------------------------
Dilutive potential common shares - Adjusted weighted-
average shares and assumed conversions 12,139,686 10,442,292
================================================================================
Basic and diluted loss per share $(0.11) $(0.06)
================================================================================
Employee stock options, convertible preferred stock, convertible debentures and
warrants, are not presented for the years ended December 31, 1999 and 1998,
because they are anti-dilutive due to the net loss available to common
shareholders.
13. DISCONTINUED OPERATIONS
In December 1999, the Company completed the sale of certain assets and
liabilities that were primarily related to its One Plus operation to a former
officer, director and major shareholder of the Company. As consideration for the
sale of assets and liabilities, the Company received 5,837,503 shares of
Hitcom's common stock which are currently being held in treasury. This segment
focused on providing various levels of 800-based services primarily to direct
sales organizations. The disposal has been recorded at carrying value with the
resulting gain being recorded directly to additional paid in capital.
The summary of assets and liabilities that were disposed are as follows:
Net liabilities disposed:
Assets disposed:
Accounts receivable and other current assets $ 41,007
Property and equipment, net 196,800
- --------------------------------------------------------------------------------
$ 237,807
- --------------------------------------------------------------------------------
Liabilities disposed:
Bank operating overdraft facility $ 16,156
Accounts payable and accrued expenses 178,821
Deferred revenue 106,400
Long term debt and capital leases 209,521
- --------------------------------------------------------------------------------
$ 510,898
- --------------------------------------------------------------------------------
Net liabilities disposed $ 273,091
Treasury common stock received 1,751,251
Legal expenses relating to closing of transaction ( 11,435)
Income tax expense ( 12,000)
- --------------------------------------------------------------------------------
Additional paid in capital on sale of assets and liabilities $2,000,907
================================================================================
The disposal of the One Plus segment is reflected as discontinued operations in
the accompanying consolidated financial statements. A summary of discontinued
operations for the years ended December 31, 1999 and 1998, respectively, is as
follows:
1999 1998
One Plus revenue $1,597,000 $2,381,356
================================================================================
Income before minority interest and income taxes 38,157 505,815
Minority interest - 20,332
Income taxes - -
- --------------------------------------------------------------------------------
Income from discontinued operation $ 38,157 $ 485,483
================================================================================
In August 1998, the Company completed the sale of the customer accounts related
to the Internet Service Provider (ISP) segment for $30,000. This segment focused
on providing various levels of Internet access to customers in the St. Louis,
Missouri area. The disposal of the ISP segment is reflected as discontinued
operations in the accompanying consolidated financial statements. A summary of
discontinued operations for the year ended December 31, 1998 is as follows:
1998
ISP monthly fee revenue $ 115,943
================================================================================
Operating loss, net of ISP monthly fee revenue 426,922
Loss on disposal 30,290
- --------------------------------------------------------------------------------
Loss before income taxes $ 457,212
Income taxes -
- --------------------------------------------------------------------------------
Loss from discontinued operations $ 457,212
================================================================================
Loss on disposal of $30,290, consists of a writedown on assets held for resale
of $60,290 netted with $30,000 for the sale of the ISP customer accounts.
14. INCOME TAXES
The tax benefit for income taxes consists of the following for years ended
December 31:
1999 1998
Current:
Federal income tax $ 12,000 $ -
State Income tax - -
- --------------------------------------------------------------------------------
12,000 -
Deferred - 885
- --------------------------------------------------------------------------------
Total $ 12,000 $ 885
================================================================================
The net deferred tax asset consists of the following:
Gross assets $508,145 $ 858,270
Gross liabilities - -
- --------------------------------------------------------------------------------
Gross deferred tax asset 508,145 858,270
Less: valuation allowance (508,145) (858,270)
- --------------------------------------------------------------------------------
Net deferred tax asset $ - $ -
================================================================================
Management of the Company believes more likely than not that the deferred tax
assets will not be realized and, therefore a valuation allowance has been
recorded at December 31, 1999 and 1998.
The tax effect of significant temporary differences representing deferred tax
assets and liabilities are as follows:
1999 1998
Current Non-Current Current Non-Current
---------------------------------------------
Net operating loss carryforwards $ - $ 508,145 $ - $ 835,284
Other - 22,986 -
- --------------------------------------------------------------------------------
Gross deferred tax asset - 508,145 22,986 835,284
Valuation allowance - (508,145) (22,986) (835,284)
- --------------------------------------------------------------------------------
Net deferred taxes $ - $ - $ - $ -
================================================================================
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:
Year Ended Year Ended
December 31 December 31
1999 1998
------------ ------------
Federal income tax benefit on loss at
Statutory rates of 34% $(431,923) $ (196,767)
State tax benefit, net of federal benefit ( 76,222) (23,873)
Valuation allowance 508,145 354,102
Other - (132,577)
- --------------------------------------------------------------------------------
Income tax (benefit) expense - 885
================================================================================
The Company has net operating loss carryforwards of approximately $1,270,363.
Utilization of these net operating loss carryforwards is restricted by certain
Internal Revenue Code sections and regulations, and expire through 2018. The
Company also has non-capital loss carryforwards of approximately $616,000
incurred in Canada. The benefit of these loss carryforwards will be recorded in
the year realized. These loss carryforwards expire as follows:
- --------------------------------------------------------------------------------
DECEMBER 31,
2002 $ 9,000
2003 3,000
2004 18,000
2005 103,000
2006 483,000
- --------------------------------------------------------------------------------
Total $ 616,000
================================================================================
15. RELATED PARTY TRANSACTIONS
The Company disposed of assets and liabilities relating to the One Plus
operation to a former officer, director and major shareholder (see Note 13).
The Company made purchases of approximately $901,000, and $940,000 during the
years ended December 31, 1999 and 1998, respectively, from Sussex Service Bureau
Inc., a 50% owned affiliate, of which approximately $305,000 remains in accounts
payable at December 31, 1999.
Rent expense paid to an officer and stockholder for office facilities were $nil
and $27,000 during the years ended December 31, 1999 and 1998, respectively.
16. LITIGATION
The Company has filed a lawsuit seeking cancellation of 150,000 shares of common
stock (the "Disputed Shares") issued in January 1997 to a former officer and
director of the Company. The former officer and director submitted a
counterclaim for unpaid consulting fees relating to services in 1996 and 1997 in
the amount of $25,000. Management believes that the Disputed Shares will be
ultimately returned and canceled without a material affect on the consolidated
financial position of the Company. The Company has not reflected the Disputed
Shares as issued or outstanding in the accompanying consolidated financial
statements. Any amount that the Company may be required to pay for consulting
fees will not have a material adverse effect on its consolidated financial
position (see Note 9).
17. LEASES
The Company leases both office space and equipment used in its operations and
classifies those leases as either operating or capital leases following the
provisions of SFAS No. 13, "Accounting for Leases". These leases expire through
February 2003. Obligations under capital leases have been recorded in the
accompanying consolidated financial statements at the present value of future
minimum lease payments, discounted at interest rates ranging from 14% to 15%.
As at December 31, 1999, future minimum annual payments under non-cancelable
leases are as follows:
CONTINUING
OPERATIONS
CAPITAL LEASE
YEAR ENDED DECEMBER 31, OPERATING LEASES OBLIGATIONS
2000 $ 39,700 $ 13,043
2001 41,700 5,149
2002 44,600 -
2003 22,400 -
2004 3,000 -
- --------------------------------------------------------------------------------
Total $151,400 $ 18,192
============================================
Less: interest 2,347
- --------------------------------------------------------------------------------
Total capital lease obligations 15,845
Less: current portion of capital lease obligations 9,627
- --------------------------------------------------------------------------------
Long-term portion of capital lease obligations $ 6,218
================================================================================
Total rent expense was $92,763 and $94,774 during the years ended December 31,
1999 and 1998, respectively.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Hitcom Corporation
We have audited the consolidated balance sheet of Hitcom Corporation (a Delaware
Corporation) as at December 31, 1999, and the consolidated statements of
operations, shareholders' equity, and cash flows for the years ended December
31, 1999 and 1998. 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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in Canada. Those standards require that we plan and perform an audit to obtain
reasonable assurance that 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 our opinion, these financial statements present fairly, in all material
respects, the financial position of Hitcom Corporation at December 31, 1999, and
the results of operations and cash flows for the years ended December 31, 1999
and 1998 in accordance with accounting principles generally accepted in the
United States.
/s/ Deloitte & Touche LLP
Chartered Accountants
Toronto, Canada
March 30, 2000
<PAGE>
COMMENTS BY THE AUDITOR FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCE
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt on
the Company's ability to continue as a going concern, such as those described in
Note 1 to the financial statements. Our report to the shareholders dated March
30, 2000 is expressed in accordance with Canadian reporting standards which do
not permit a reference to such events and conditions in the report of
independent public accountants when these are adequately disclosed in the
financial statements.
Deloitte & Touche LLP
Chartered Accountant
Toronto, Ontario
Canada
March 30, 2000
ITEM 8-- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
As of March 6, 2000, the Board of Directors have unanimously agreed to engage
Deloitte & Touche LLP of Toronto, Canada to be the Company's new principal
accountant.
At no time during the past two fiscal years or any subsequent period prior to
engagement as principal auditor did the Registrant consult with Deloitte &
Touche LLP regarding either the application of accounting principles to a
specified transaction or type of audit opinion which might be rendered on the
Registrant's financial statements or any other matter.
The former accountant's report on the financial statements for the prior fiscal
year DID NOT contain an adverse opinion or disclaimer of opinion and WAS NOT
modified as to uncertainty, audit scope, or accounting principles.
There were NO disagreements with the former accountant on any matters of
accounting principles, practices, financial statement disclosure, or auditing
scope or procedure.
<PAGE>
PART III
ITEM 9 -- DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Rajan Arora 35 President and Chief Executive Officer and
Director
Jeffrey Shier 38 Executive Vice President and Director
John Nashmi 32 Chief Financial Officer and Corporate Secretary
Ronald K. Mann 49 Director
RAJAN ARORA
Rajan Arora has been President and Chief Executive Officer and Director since
April 1998. He joined Hitcom effective January 1, 1998 when Hitcom acquired
Channel. He co-founded Channel Telecom Inc. with Mr. Jeffrey Shier in 1994. From
1990 to 1993, Mr. Arora was Vice President of Finance for Madison Avenue
Partners, Ltd., a sports and promotional marketing company. Mr. Arora is a
Chartered Accountant and spent four years with PriceWaterhouseCoopers in public
accounting.
JEFFREY SHIER
Jeffrey Shier has been Executive Vice President and Director of Hitcom since
April 1998. He joined Hitcom effective January 1, 1998 when Hitcom acquired
Channel. He co-founded Channel Telecom, Inc. with Rajan Arora in 1994. From 1990
to 1994, Mr. Shier was involved in the sports marketing and high-end memorabilia
and collectibles business. From 1988 to 1990, Mr. Shier was Director of
Arbitrage at Counsel Capital Corporation in Toronto.
JOHN NASHMI
John Nashmi became the Company's Chief Financial Officer and Corporate Secretary
in January 1999. Prior to joining Hitcom, Mr. Nashmi was Senior Manager at TD
Capital - Merchant Banking, which provided mezzanine financing to mid-market
businesses for acquisitions, expansion and turn-around opportunities. From 1996
to 1998, Mr. Nashmi was Vice President Finance with Next Generation Solutions
Inc., a software Value Added Reseller (VAR). From 1994 to 1996, Mr. Nashmi was
with Canadian Imperial Bank of Commerce (CIBC) in their Corporate Lending and
Internal audit groups. Mr. Nashmi is a Chartered Accountant and spent four years
with Deloitte & Touche LLP in public accounting.
RONALD MANN
Ronald Mann has been a Director of Hitcom since April 1998, he has acted as an
investment banking consultant for Channel Telecom Inc. since its inception in
1994. Mr. Mann resides in New York and is involved in investment and merchant
banking. From 1987 to 1989, Mr. Mann was Assistant General Manager of Corporate
Finance for the Canadian Imperial Bank of Commerce in Toronto, and Chief
Financial Officer and Director of CIBC Securities, Inc., in Toronto. Mr. Mann
earned his Bachelor of Law degree from the University of Toronto.
In the fiscal year ended December 31, 1999, the Company did not pay any fees or
other compensation to its directors.
Compliance with section 16(a) of the exchange act
Form 3 was not filed for John Nashmi in fiscal year 1999, it was filed in fiscal
year 2000.
ITEM 10 -- EXECUTIVE COMPENSATION
The following table sets forth certain information concerning executive
compensation of the Company:
<TABLE>
<CAPTION>
- ----------------------- ------ ------------ ---------- --------------- ------------- ----------- ---------- --------------
Securities
Name Other Restricted Underlying
And Annual Stock Options/ LTIP All Other
Principal Salary Bonus Compensation Award(s) SARs Payouts Compensation
Position Year ($) ($) ($) ($ (#) ($) ($)
(a) (b) (c) (d) (e) ) (g) (h) (i)
(f)
- ----------------------- ------ ------------ ---------- --------------- ------------- ----------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Scott Beil
Chairman and COO 1999 $42,000 $ -- $ -- $ -- $ -- $ -- $ --
- ----------------------- ------ ------------ ---------- --------------- ------------- ----------- ---------- --------------
1998 $49,222 $ -- $ -- $ -- $ -- $ -- $ --
- ----------------------- ------ ------------ ---------- --------------- ------------- ----------- ---------- --------------
1997 $28,000 $ -- $ -- $ -- $ -- $ -- $ --
- ----------------------- ------ ------------ ---------- --------------- ------------- ----------- ---------- --------------
Rajan Arora
President & CEO 1999 $ - $ -- $ -- $ -- $ -- $ -- $ --
- ----------------------- ------ ------------ ---------- --------------- ------------- ----------- ---------- --------------
1998 $38,770 $ -- $ -- $ -- $ -- $ -- $ --
- ----------------------- ------ ------------ ---------- --------------- ------------- ----------- ---------- --------------
Jeffrey Shier
Executive VP 1999 $ - $ -- $ -- $ -- $ -- $ -- $ --
- ----------------------- ------ ------------ ---------- --------------- ------------- ----------- ---------- --------------
1998 $38,770 $ -- $ -- $ -- $ -- $ -- $ --
- ----------------------- ------ ------------ ---------- --------------- ------------- ----------- ---------- --------------
</TABLE>
(1) Mr. Scott Beil resigned as Chairman and COO effective December 17, 1999
- --------------------------------------------------------------------------------
OPTION/SAR GRANTS IN FISCAL YEAR ENDING DECEMBER 31, 1999
(Individual Grants)
- --------------------------------------------------------------------------------
Number of Percent
Securities of Total Exerrcise
Underlying Options/SARs of Base
Options/SARs Granted To Price Expiration
Name Granted Employees ($/share) Date
- --------------------------------------------------------------------------------
Rajan Arora
President & CEO 125,000 35% $0.50 Dec 31, 2001
- --------------------------------------------------------------------------------
Jeffrey Shier
Executive VP 75,000 21% $0.50 Dec 31, 2001
- --------------------------------------------------------------------------------
John Nashmi
Chief Financial Officer 75,000 21% $0.50 Dec 31, 2001
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGGREGATE OPTION/SAR EXERCISES IN FISCAL YEAR ENDING DECEMBER 31, 1999
AND DECEMBER 31, 1999 OPTION/SAR VALUES
- --------------------------------------------------------------------------------
Number Of
Unexercised Value Of
Secrurities Unexercised
Underlying In-The-Money
Options/SARs Options/SARs
Shares AT FY-END AT FY-END
Acquired Value Exercisable/ Exercisable/
On Realized Unexercisable Unexercisable
Name Exercise ($ Amount) (# Shares) ($ Amount)
- --------------------------------------------------------------------------------
Rajan Arora
President & CEO - - 125,000 -
- --------------------------------------------------------------------------------
Jeffrey Shier
Vice President - - 75,000 -
- --------------------------------------------------------------------------------
John Nashmi
Chief Financial Officer - - 75,000 -
- --------------------------------------------------------------------------------
ITEM 11 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of the Company's common
stock owned by each person who, as of March 15, 2000 was known by the Company to
own beneficially more than 5% of its outstanding common stock and the ownership
of all executive officers and directors of the Company, individually and as a
group.
- --------------------------------------------------------------------------------
Number of Shares Percent
Name and Address of Beneficial Owner Beneficially of
Owned (1) Class
- --------------------------------------------------------------------------------
Rajan Arora, 85 Scarsdale Road, Suite 202
Toronto, Ontario, Canada 1,987,785 30.1%
- --------------------------------------------------------------------------------
Jeff Shier, 85 Scarsdale Road, Suite 202
Toronto, Ontario, Canada 1,987,785 30.1%
- --------------------------------------------------------------------------------
Ronald Mann, 9A Casmir Road
Toronto, Ontario, Canada 100,000 (2) 2.5%
- --------------------------------------------------------------------------------
John Nashmi, 85 Scarsdale Road, Suite 202
Toronto, Ontario, Canada 7,500 0.1%
- --------------------------------------------------------------------------------
Officers and Directors as a Group 4,083,070 62.8%
================================================================================
(1)As of March 15, 2000, the Company had 6,607,815 shares of common stock
outstanding.
(2)The shares are held indirectly through a holding company controlled by
Mr.Mann
ITEM 12 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 13 -- EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
3.1* Certificate of Incorporation, as amended
3.2* Bylaws
4.1* Certificate of Designation for 8% Convertible Preferred Stock
10.1* Share Exchange Agreement Between HitCom Corporation and Scott Beil
dated April 14, 1997
10.2* Stock Purchase Agreement Between HitCom Corporation and Rajan
Arora/Jeffrey Shier and The Jeffrey Samuel Shier Family Trust For
Purchase of All Outstanding Stock of Channel Telecom Inc. dated
February 18, 1998
10.4** Letter agreement between the registrant, Rajan Arora and Jeffrey
Shier dated June 30, 1998 regarding forgiveness of indebtedness.
10.5** Stock Purchase Agreement between Scott A. Beil and registrant dated
August 10, 1998 regarding 20% minority interest in One Plus Marketing,
Inc.
10.6** Letter agreement between registrant and Scott A. Beil dated August 11,
1998 regarding voting of stock in registrant.
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
23.1 Consent of Independent Accountants Deloitte & Touche LLP
27.0 Financial Data Schedule
* Filed as exhibit to the Company's Registration Statement on Form 10-SB
** Filed as Exhibit to the Company's Quarterly Report on Form 10-QSB for
the quarter ended September 30, 1998
B. Form 8-K filings
The Registrant did not file a Form 8-K during the last quarter of the
period covered by this report.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HITCOM CORPORATION
(Registrant)
By /s/ Rajan Arora
- --------------------------------------------------------------------------------
Rajan Arora, President, CEO and Director
Date April 17, 2000
- --------------------------------------------------------------------------------
In accordance with the Exchange Act, this report has been signed below by the
following persons on and behalf of the registrant and in the capacities and on
the dates indicated.
- --------------------------------------------------------------------------------
By /s/ Jeffrey Shier
- --------------------------------------------------------------------------------
Jeffrey Shier, Executive Vice President and Director
Date April 17, 2000
By /s/ Ronald Mann
- --------------------------------------------------------------------------------
Ronald Mann, Director
Date April 17, 2000
By /s/ John Nashmi
- --------------------------------------------------------------------------------
John Nashmi, Chief Financial Officer and Corporate Secretary
Date April 17, 2000
ASSETS PURCHASE AGREEMENT
BY AND BETWEEN
HITCOM CORPORATION
AND
SCOTT A. BEIL
<PAGE>
ASSETS PURCHASE AGREEMENT
This ASSETS PURCHASE AGREEMENT ("Agreement") dated as of December 17,
1999, by and between HitCom Corporation, a Delaware corporation ("Seller"), and
Scott A. Beil, an individual, ("Purchaser").
WHEREAS, Seller desires to sell to Purchaser and Purchaser desires to
purchase from Seller certain property and assets of Seller.
NOW, THEREFORE, in consideration of the mutual representations,
warranties, covenants, and agreements contained herein, the parties hereto agree
as follows:
ARTICLE I. ASSETS TO BE CONVEYED
At Closing, Seller shall sell, convey, assign, and transfer to
Purchaser, and Purchaser shall purchase and acquire from Seller, the following
items (hereinafter "Assets") of Seller:
(1) all of Seller's computer hardware, software, and systems;
telephones, office supplies, furniture, fixtures, equipment (including
telecopier equipment), and all other tangible property located in the facility
leased by Seller located at 700 North Second Street, Third Floor, St. Louis,
Missouri ("Hitcom's St. Louis Office"), including but not limited to those items
identified on Schedule I(1). Purchaser to verify and confirm the existence of
such assets the day of closing and notify Seller of any discrepancies;
(2) copies or originals of all files, correspondence, internal reports,
proprietary information, technical information, and contractual documents
relating to Seller's operations at Hitcom's St. Louis Office, including, but not
limited to, databases and records on magnetic tape, floppy disk, or other form
of media;
(3) leases identified on Schedule I(3); and
(4) the telephone numbers listed on Schedule I(4).
ARTICLE II. CONSIDERATION FROM PURCHASER
In consideration for the conveyance by Seller to Purchaser of the
Assets, Purchaser shall assume and be solely liable for the liabilities
identified in Schedule II ("Assumed Liabilities"). Except for the Assumed
Liabilities expressly stated in Schedule II, Purchaser shall not assume any
liabilities of Seller.
<PAGE>
ARTICLE III. CLOSING
The closing of the transactions contemplated by this Agreement
("Closing") shall commence at _____ _.M., C.S.T. on December 17, 1999, at the
offices of Purchaser's counsel in Edwardsville, Illinois ("Closing Date"). The
sale and purchase of the Assets shall be deemed effective at 12:59 P.M., on the
Closing Date for all purposes.
ARTICLE IV. CONDITIONS PRECEDENT TO CLOSING
Each of the obligations of the Seller and Purchaser, respectively, to
be performed hereunder shall be subject to the satisfaction or waiver by the
Purchaser and Seller, respectively, at or prior to the Closing Date as provided
herein. Further, the following shall be conditions precedent to the respective
parties' obligation to close:
(1) The representations and warranties of the Seller and Purchaser
contained in this Agreement shall be true in all material respects on and as of
the Closing Date with the same force and effect as though made on and as of such
date;
(2) the Seller and Purchaser, respectively, shall have delivered to
each other all required deliveries as provided in this Agreement.
(3) Purchaser shall have obtained financing to pay the obligations of
and to release Seller from the Assumed Liabilities, upon terms acceptable to
Purchaser, in Purchaser's sole discretion, from the Bank of Edwardsville,
Edwardsville, Illinois ("Purchaser's Lender").
(4) Purchaser shall close on the Assets Purchase Agreement By and
Between One Plus Marketing, Inc. and Scott A. Beil dated December 17, 1999,
concurrently with the closing of this Agreement.
ARTICLE V. SELLER'S DELIVERIES AT CLOSING
At Closing, Seller shall deliver to Purchaser, unless previously
delivered, in form and substance satisfactory to Purchaser and Purchaser's
Lender, the following:
(1) a fully executed and enforceable Bill of Sale for all the Assets,
including the items identified in Schedule I(1), and Schedule I(4);
(2) a fully executed and enforceable assignment of each lease
identified in Schedule I(3) of this Agreement;
(3) a consent to assignment from each of the respective lessors of each
lease identified in Schedule I(3), stating that as of the Closing Date, there
has been no breach by Seller of the respective lease and that Seller is not in
default of the respective lease.
(4) a certified statement of the Seller to the effect that Seller is
authorized by its directors to enter into the transactions contemplated by this
Agreement;
(5) a certificate of good standing from the State of Delaware dated
within 30 days before or on the Closing Date;
(6) All items, books, records, files, agreements, purchase orders,
internal reports, and materials in Seller's possession relating to the Assets;
and
(7) Such other documents and deliveries reasonably required by
Purchaser or Purchaser's Lender to consummate the transactions contemplated by
this Agreement.
ARTICLE VI. PURCHASER'S DELIVERIES AT CLOSING
At Closing, Purchaser shall deliver to Seller, in form and substance
satisfactory to Seller the following:
(1) a fully executed and enforceable Assumption of Liabilities for the
Assumed Liabilities;
(2) a release of Seller for liability under two loans from the Bank
of Edwardsville listed on Schedule II;
(3) Such other documents and deliveries reasonably requested by Seller
to consummate the transactions contemplated by this Agreement.
ARTICLE VII. MUTUAL REPRESENTATIONS AND WARRANTIES
Seller and Purchaser agree, represent and warrant that from the date of
this Agreement, except as otherwise consented to in writing:
(1) At all times subsequent to Closing, Seller and Purchaser each will
permit the other party and their representatives, including but not limited to
lawyers and accountants, during normal business hours, to have access to and
examine and make copies of all books, records, files, and documents in its
possession that relate to the Assets or this Agreement or the other agreements
and instruments referred to in this Agreement or that relate to transactions or
events occurring prior to the Closing or to transactions or events occurring
subsequent to the Closing that are related to or arise out of transactions or
events relating to the Closing.
(2) Seller will be responsible for and pay all federal, state, and
local taxes, including, but not limited to, all income, earnings, and property
taxes, relating to Seller and attributable to Seller's period of ownership of
the Assets. Purchaser will be responsible for and pay all such taxes
attributable Purchaser's period of ownership of the Assets for any period after
the Closing Date.
(3) For any rights or remedies relating to the Assets that may be
enforced after the Closing Date against third parties, Purchaser will notify
Seller in writing of any such enforcement that should properly be instituted in
the name of Seller, and Seller will join with Purchaser in enforcing such rights
and remedies or enforce such rights or remedies in Seller's own name at
Purchaser's sole cost.
(4) All representations, warranties, covenants, and agreements made by
either party to this Agreement shall survive the Closing.
(5) The parties will each use their best efforts to cause all
conditions of the consummation of the transaction contemplated herein to be
satisfied prior to termination of this Agreement.
(6) All covenants, agreements, representations and warranties made in
this Agreement shall be deemed to be material and to have been relied upon by
Purchaser and Seller, notwithstanding any prior knowledge or investigations made
by or on behalf of them.
ARTICLE VIII. SELLER'S REPRESENTATIONS AND WARRANTIES
Seller agrees, represents and warrants that from the date of this
Agreement, except as otherwise consented to in writing by Purchaser:
(1) Seller's business shall be conducted only in the ordinary course
and consistent with past practices except that Seller shall take such action as
may be necessary to preserve the Assets and to comply with all applicable laws,
ordinances, regulations, and orders of all governmental agencies and regulatory
authorities;
(2) Seller shall not dispose of, encumber, assign, or mortgage any of
the Assets;
(3) Seller shall preserve intact its business organization and use its
best effort to keep available the services of its present officers and key
employees and to preserve the goodwill of those having business relationships
with it;
(4) The Seller shall perform all of its obligations under contracts
relating to the Assets;
(5) As of the Closing Date, there will be no material adverse change to
the Assets or the business of Seller from the status and condition as it exists
as of the date of this Agreement, and Seller shall use its best efforts to
preserve the same;
(6) Seller shall pay sales, use, and transfer taxes, if any, payable to
the State of Missouri, any county, or municipality located therein, and any
other federal, state, or local governmental entities in connection with the
transactions contemplated by this Agreement or the other agreements or
instruments referred to in this Agreement;
(7) Seller agrees to indemnify Purchaser against any claims resulting
from Seller's or Purchaser's failure to comply with any bulk sales laws, that
may be applicable to the transactions contemplated by this Agreement;
(8) Seller agrees to comply with any and all state and federal rules
and regulations, including those of the Securities and Exchange Commission, and
notice requirements in connection therewith that may be applicable to the
transactions contemplated by this Agreement. Seller agrees to indemnify
Purchaser from and against any and all costs, claims, and liabilities resulting
from any such failure of Seller to comply with any such rules or regulations;
(9) Seller shall be solely responsible, and Purchaser shall have no
obligations whatsoever, except as specifically set forth on Schedule II, for any
compensation or other amounts payable to any employee of Seller, including, but
not limited to, bonus, salary, employee benefit plans, accrued vacation, fringe,
pension or profit sharing benefits, or severance pay payable to any employee of
Seller for any period;
(10) All mail addressed to Seller relating to the Assets that is
delivered to Seller after the Closing Date shall be delivered by Seller to
Purchaser upon receipt by Seller;
(11) From time to time after the Closing Date, at the request of
Purchaser and without further consideration, Seller shall execute and deliver
such other instruments of conveyance and transfer and take such other action as
Purchaser may specify so as to convey to, transfer to, vest in, and put
Purchaser in possession of the Assets;
(12) Seller is a corporation duly formed and validly existing under the
laws of the State of Delaware and has the power and authority to carry on its
business as now conducted, to own and operate the Assets, to execute this
Agreement and the other agreements and instruments referred to in this Agreement
that it is executing and delivering, and to carry out the transactions
contemplated hereby and thereby;
(13) The execution and delivery by Seller of this Agreement and the
other agreements and instruments referred to in this Agreement have been duly
authorized by the directors of Seller and constitute legal, valid, binding, and
enforceable agreements and instruments of Seller;
(14) Except for loan # 3301059749 dated May 1, 1998 and loan #
3301059750 dated May 1, 1998 both from the Bank of Edwardsville, in
Edwardsville, Illinois, neither the execution, delivery, nor performance of this
Agreement or any other agreement or instrument executed and delivered by or on
behalf of Seller in connection herewith, nor the consummation of the
transactions herein or therein contemplated, nor compliance with the terms and
provisions hereof or thereof, contravenes Seller's Articles of Incorporation or
By-Laws, or any provision of law, statute, rule, regulation, or order of any
court or governmental authority to which Seller is subject, or any judgment,
decree, franchise, order, or permit applicable to Seller, or conflicts or is
inconsistent with or will result in any breach of or constitute a default under
any contract, commitment, agreement, understanding, arrangement, or instrument,
or result in the creation of or imposition of (or the obligation to create or
impose) any lien, encumbrance, or liability on any of the property or assets of
Seller, or will increase any such lien, encumbrance, or liability;
(15) There are no actions, suits, or proceedings pending, or, to
Seller's knowledge, threatened or anticipated, before any court or governmental
or administrative body or agency affecting Seller or the Assets;
(16) No order, permission, consent, approval, license, authorization,
registration, or validation of, or filing with, or exemption by any governmental
agency, commission, board, or public authority is required to authorize, or is
required in connection with, the execution, delivery, or performance by the
Seller of this Agreement or any other agreement or instrument to be executed or
delivered by Seller hereunder;
(17) There are no tax liens to which the Seller or the Assets are
subject; there are no obligations relating to, or claims asserted for, taxes or
assessments against the Seller or Assets. The Assets are not subject to any
obligation or liability for any taxes whatsoever;
(18) Seller has and shall transfer to Purchaser good, valid, and
marketable title to all of the Assets, and except for those Assets which may be
pledged as security for loan # 3301059749 dated May 1, 1998 and loan #
3301059750 dated May 1, 1998 both from the Bank of Edwardsville, in
Edwardsville, Illinois, none of the Assets is subject to any lien, pledge,
encumbrance, or charge of any kind, including, but not limited to, claims for
unpaid taxes; and,
(19) Seller agrees to pay and discharge when due all liabilities and
obligations of Seller relating to the Assets, including until closing, the
Assumed Liabilities.
(20) Seller agrees to guarantee the performance of One Plus Marketing,
Inc., an Illinois corporation, under that Assets Purchase Agreement with Scott
A. Beil dated December 17, 1999.
ARTICLE IX. PURCHASER'S REPRESENTATIONS AND WARRANTIES
Purchaser agrees, represents and warrants that from the date of this
Agreement, except as permitted by this Agreement or otherwise consented to in
writing by Seller:
(1) The execution and delivery by Purchaser of this Agreement and the
other agreements and instruments referred to in this Agreement constitute legal,
valid, binding, and enforceable agreements and instruments of Purchaser; and
(2) Purchaser agrees to provide testimony and cooperate with Seller in
any claim or proceeding between Seller and Dwight, Arant, Flex Financial or St.
Michael's Trading, all without any payment or compensation except for
reimbursement for reasonable travel, food, and lodging expenses.
<PAGE>
ARTICLE X. INDEMNIFICATION
A. Seller indemnifies and agrees to hold Purchaser harmless from,
against, and in respect to the following:
(1) any and all debts, liabilities, or obligations of Seller, direct or
indirect, fixed, contingent, or otherwise existing before or after the Closing
Date, including, but not limited to, any liabilities arising out of any act,
transaction, circumstance, state of facts, or violation of law that occurred or
existed before the Closing Date, whether or not then known, due, or payable and
irrespective of whether the existence thereof is disclosed to Purchaser in this
Agreement or any schedule hereto, except with regard to the Assumed Liabilities;
(2) any and all loss, liability, deficiency, or damage suffered or
incurred by Purchaser as a result of any default by Seller existing on the
Closing Date or any event of default occurring prior to the Closing Date that
with the passage of time would constitute a default, under any contract or other
agreement assumed by Purchaser under this Agreement;
(3) any and all loss, liability, deficiency, or damage suffered or
incurred by Purchaser by reason of any untrue representation, breach of
warranty, or nonfulfillment of any covenant or agreement by Seller contained in
this Agreement or in any certificate, document, or instrument delivered to
Purchaser hereunder or in connection herewith;
(4) any claim for a finder's fee or brokerage or other commission by
any person or entity for services alleged to have been rendered at the instance
of Seller with respect to this Agreement or any of the transactions contemplated
hereby; and
(5) any and all actions, suits, proceedings, claims, demands,
assessments, judgments, costs, and expenses, including, without limitation,
legal fees and expenses, incident to any of the foregoing or incurred in
enforcing this indemnity.
B. Purchaser indemnifies and agrees to hold Seller harmless from,
against, and in respect to the following:
(1) any and all debts, liabilities, or obligations of Purchaser, direct
or indirect, fixed, contingent, or otherwise accruing after the Closing Date
related to the Assumed Liabilities;
(2) any and all loss, liability, deficiency, or damage suffered or
incurred by Seller resulting from any untrue representation, breach of warranty,
or nonfulfillment of any covenant or agreement by Purchaser contained in this
Agreement or in any certificate, document, or instrument delivered to Seller
pursuant hereto or in connection herewith;
(3) any and all loss, liability, deficiency, or damage suffered or
incurred by Seller as a result of Purchaser's failure to discharge the Assumed
Liabilities;
(4) any claim for a finder's fee or brokerage or other commission by
any person or entity, for services alleged to have been rendered at the instance
of Purchaser with respect to this Agreement or any of the transactions
contemplated hereby; and
(5) any and all actions, suits, proceedings, claims, demands,
assessments, judgments, costs, and expenses, including, without limitation,
legal fees and expenses, incident to any of the foregoing or incurred in
enforcing this indemnity.
C. Indemnification of Third-Party Claims
(1) In order for Purchaser or Seller, as the case may be, to be
entitled to any indemnification provided for under this Article, in respect of,
arising out of, or involving a claim made by any person, firm, governmental
authority, or corporation other than the Purchaser or Seller, or their
respective successors, assigns, or affiliates, against the indemnified party,
the indemnified party must notify the indemnifying party in writing of this
third-party claim within 5 days after receipt by the indemnified party of
written notice of the third-party claim.
(2) If a third-party claim as set forth in paragraph (C)(1) above is
made against an indemnified party, the indemnifying party will be entitled to
participate in the defense thereof and, if it so chooses, to assume the defense
thereof with counsel selected by the indemnifying party. Should the indemnifying
party elect to assume the defense of such a third-party claim, the indemnifying
party will not be liable to the indemnified party for any legal expenses
subsequently incurred by the indemnified party in connection with the defense
thereof. If the indemnifying party elects to assume the defense of such a
third-party claim, the indemnified party will cooperate fully with the
indemnifying party in connection with such defense.
(3) If the indemnifying party assumes the defense of a third-party
claim, then in no event will the indemnified party admit any liability with
respect to, or settle, compromise, or discharge, any third-party claim without
the indemnifying party's prior written consent, and the indemnified party will
agree to any settlement, compromise, or discharge of a third-party claim that
the indemnifying party may recommend that releases the indemnified party
completely in connection with the third-party claim.
(4) In the event the indemnifying party shall assume the defense of any
third-party claim, the indemnified party shall be entitled to participate in,
but not control, the defense with its own counsel at its own expense. If the
indemnifying party does not assume the defense of any such third-party claim,
the indemnified party may defend the claim in a manner as it may deem
appropriate, including, but not limited to, settling the claim or litigation
after giving notice of it to the indemnifying party on such terms as the
indemnified party may deem appropriate, and the indemnifying party will
reimburse the indemnified party promptly in accordance with the provisions of
this Article.
(5) Anything contained in this Agreement to the contrary
notwithstanding, Seller shall not be entitled to assume the defense of, but
shall be entitled to notice of and to participate in, any third-party claim
against Purchaser if the third-party claim seeks an order, injunction, or other
equitable relief against Purchaser that, if successful, might interfere with
Purchaser's ownership or use of the Assets.
(6) Notwithstanding any provision of this Agreement to the contrary,
Seller shall have no liability to Purchaser and Purchaser shall have no
liability to Seller under this Article unless the aggregate of all claims
against such party exceeds $1,000 and then only to the extent that such
liability exceeds $1,000.
ARTICLE XI. TERMINATION
Anything contained in this Agreement to the contrary notwithstanding,
this Agreement may be terminated:
(1) by mutual written consent of the Seller and the Purchaser;
(2) by the Seller, by written notice to the Purchaser, if any condition
set forth in Article VI hereof has not been met at Closing and has not
been knowingly and lawfully waived in writing;
(3) by the Purchaser, by written notice to the Seller, if any condition
in Article V hereof has not been met at closing and has not been
knowingly and lawfully waived in writing;
(4) by either the Purchaser or the Seller (by written notice to the
other) if the Closing shall not have occurred on or before December 1,
1999.
ARTICLE XII. MISCELLANEOUS
(1) Except as specifically set forth otherwise in this Agreement, all
fees and expenses incurred by Seller in connection with this Agreement will be
borne by Seller and all fees and expenses incurred by Purchaser in connection
with this Agreement will be borne by Purchaser.
(2) Schedule XII(2) contains a list of Seller's employees which
Purchaser intends to offer to hire after the Closing of this Transaction.
(3) This Agreement will be binding on, inure to the benefit of, and be
enforceable by and against the respective successors and assigns of the parties
hereto.
(4) This Agreement and the agreements, instruments, schedules, and
other writings referred to in this Agreement contain the entire understanding of
the parties with respect to the subject matter of this Agreement. There are no
restrictions, agreements, promises, representations, warranties, covenants, or
undertakings other than those expressly set forth herein or therein. This
Agreement supersedes all prior agreements and understandings between the parties
with respect to its subject matter. This Agreement may be amended only by a
written instrument duly executed by all of the parties or their successors or
assigns.
(5) No waiver of any breach or default hereunder shall be considered
valid unless in writing and signed by the party giving such waiver, and no such
waiver shall be deemed a waiver of any subsequent breach or default of the same
or a similar nature.
(6) The section and paragraph headings contained herein are for the
convenience of the parties only and are not intended to define or limit the
contents of their sections and paragraphs.
(7) This Agreement and all amendments thereof shall be governed by and
construed in accordance with the laws of the State of Illinois without regard to
its conflict of laws provisions.
(8) All notices, claims, certificates, requests, demands, and other
communications under this Agreement will be in writing and notices will be
deemed to have been duly given if delivered or mailed, registered or certified
mail, postage prepaid, return receipt requested, or for overnight delivery, by a
nationally recognized overnight mail service, as follows:
If to Purchaser, to: Scott A. Beil
700 North Second Street
Third Floor
St. Louis, MO 63102-2519
With a copy to: John McCracken, Attorney
Coffey & Gilbert, P.C.
P.O. Box 247
125 N. Buchanan
Edwardsville, IL 62025
If to Seller, to: Raj Arora
85 Scarsdale Road, Suite 202
North York, Ontario, M3B 2R2
With a copy to: Joseph S. von Kaenel, Attorney
Armstrong Teasdale, L.L.P.
One Metropolitan Square, Suite 2600
St. Louis, Missouri 63102-2740
or to such other address as the party to whom notice is to be given previously
may have furnished to the other party in writing in the manner set forth in this
section.
(9) Each party to this Agreement will be responsible for paying its own
attorney, accounting, and other costs and expenses incurred in connection with
this Agreement.
(10) 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.
(11) If any term, condition, or provision of this Agreement shall be
declared invalid or unenforceable, the remainder of the Agreement, other than
such term, condition, or provision, shall not be affected thereby and shall
remain in full force and effect and shall be valid and enforceable to the
fullest extent permitted by law.
(12) This Agreement has been reviewed by both Seller's legal counsel
and Purchaser's legal counsel and shall be construed as if it had been prepared
and drafted jointly by the parties.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
SELLER PURCHASER
HITCOM CORPORATION /S/ SCOTT A. BEIL
By: /S/ Rajan Arora
Title: President & CEO
<PAGE>
SCHEDULE I (1)
Item Quantity
- ----------------------------------------------------------------------
Computers 7
Computer Monitors 7
Intertal PBX with 12 phones 1
Conference Table (small) with 6 chairs 1
Conference Table (large) with 8 chairs 1
RCA Television 1
LaserJet 5 Printer 2
LaserJet 4 Printer 1
LaserJet IIP Printer 1
Desks 2
Hutch 1
NewWorth Series 4000 Network Hub 1
<PAGE>
SCHEDULE I (3)
Leases:
1. Equipment Lease dated July 15, 1998 with Copying Concepts for a Minolta
EP-4000 copier with reversing automatic document feeder, 2,700 sheet cabinet
with duplexing, and twenty bin stapling/3 hole punch sorter; and,
2. IOS - Cannon Fax lease # 611432.
<PAGE>
SCHEDULE I (4)
Telephone Numbers:
1. All of Seller's telephone numbers listed with MCI/Worldcom for Hitcom's
St. Louis Office
2. All of Seller's telephone numbers listed with Cable and Wireless for Hitcom's
St. Louis Office.
<PAGE>
SCHEDULE II
Liabilities Assumed by Purchaser:
1. Loan # 3301059749 dated May 1, 1998 from Bank of Edwardsville in an
amount not exceeding $$263936.44;
2. Loan # 3301059750 dated May 1, 1998 from Bank of Edwardsville in an
amount not exceeding $45,000.00;
3. Account payable to Gallop Johnson in an amount not to exceed $4,200.00;
4. Account payable to Business Alliance Software in an amount not to exceed
$4,300.00;
5. City of St. Louis Personal Property Tax for 1998 in an amount not to exceed
$1,927.00;
6. City of St. Louis Personal Property Tax for 1999 in an amount not to exceed
$2,464.65; and,
7. Accrued employee wages, sick pay and vacation pay, severance pay, bonus and
federal, state and city employment taxes of all employees working at
Hitcom's St. Louis Office.
<PAGE>
SCHEDULE XII(2)
Employees to be hired by Purchaser:
None.
ASSETS PURCHASE AGREEMENT
BY AND BETWEEN
ONE PLUS MARKETING, INC.
AND
SCOTT A. BEIL
<PAGE>
ASSETS PURCHASE AGREEMENT
This ASSETS PURCHASE AGREEMENT ("Agreement") dated as of December 17,
1999, by and between One Plus Marketing, Inc., an Illinois corporation
("Seller"), and Scott A. Beil, an individual, ("Purchaser").
WHEREAS, Seller desires to sell to Purchaser and Purchaser desires to
purchase from Seller certain property and assets of Seller.
NOW, THEREFORE, in consideration of the mutual representations,
warranties, covenants, and agreements contained herein, the parties hereto agree
as follows:
ARTICLE I. ASSETS TO BE CONVEYED
At Closing, Seller shall sell, convey, assign, and transfer to
Purchaser, and Purchaser shall purchase and acquire from Seller, the following
items (hereinafter "Assets") of Seller:
(1) all of Seller's computer hardware, software, and systems;
telephones, office supplies, furniture, fixtures, equipment (including
telecopier equipment), and all other tangible property located in the facility
at 700 North Second Street, Third Floor, St. Louis, Missouri ("OPM's St. Louis
Office"), including but not limited to those items identified on Schedule I(1),
but excluding from the Assets all current insurance policies of Seller.
Purchaser to verify and confirm the existence of such assets the day of closing
and notify Seller of any discrepancies;
(2) copies or originals of all files, correspondence, internal reports,
proprietary information, technical information, and contractual documents
relating to Seller's operations at OPM's St. Louis Office, including, but not
limited to, databases and records on magnetic tape, floppy disk, or other form
of media;
(3) leases identified on Schedule I(3);
(4) the telephone numbers listed on Schedule I(4);
(5) all accounts receivable of Seller as of the Closing Date except an
account receivable from Hitcom Corporation in the amount of $1,650,000.
("Accounts Receivable"). Said Accounts Receivable are being purchased with no
assurance from Seller as to their collectability.
(6) the name "One Plus Marketing" and all derivatives thereof; and,
(7) all customer agreements and customer contracts of Seller and all
operating contracts with suppliers of Seller.
<PAGE>
ARTICLE II. CONSIDERATION FROM PURCHASER
In consideration for the conveyance by Seller to Purchaser of the
Assets, Purchaser shall assume and be solely liable for the liabilities
identified in Schedule II ("Assumed Liabilities"). Purchaser shall deliver
to Seller at Closing 5,837,503 shares of Hitcom Corporation common stock
endorsed in blank with an irrevocable stock power in form acceptable to Seller.
ARTICLE III. CLOSING
The closing of the transactions contemplated by this Agreement
("Closing") shall commence at 4:00 P.M., C.S.T. on December 17, 1999, at the
offices of Purchaser's counsel in Edwardsville, Illinois ("Closing Date"). The
sale and purchase of the Assets shall be deemed effective at 12:59 P.M., on the
Closing Date for all purposes.
ARTICLE IV. CONDITIONS PRECEDENT TO CLOSING
Each of the obligations of the Seller and Purchaser, respectively, to
be performed hereunder shall be subject to the satisfaction or waiver by the
Purchaser and Seller, respectively, at or prior to the Closing Date as provided
herein. Further, the following shall be conditions precedent to the respective
parties' obligation to close:
(1) The representations and warranties of the Seller and Purchaser
contained in this Agreement shall be true in all material respects on and as of
the Closing Date with the same force and effect as though made on and as of such
date;
(2) the Seller and Purchaser, respectively, shall have delivered to
each other all required deliveries as provided in this Agreement.
(3) Purchaser shall close on the Assets Purchase Agreement By and
Between Hitcom Corporation and Scott A. Beil dated December 17, 1999,
concurrently with the closing of this Agreement.
ARTICLE V. SELLER'S DELIVERIES AT CLOSING
At Closing, Seller shall deliver to Purchaser, unless previously
delivered, in form and substance satisfactory to Purchaser, the following:
(1) a fully executed and enforceable Bill of Sale for all the Assets,
including the items identified in Schedule I(1), and Schedule I(4);
(2) a fully executed and enforceable assignment of each lease
identified in Schedule I(3) of this Agreement;
(3) a consent to assignment from each of the respective lessors of each
lease identified in Schedule I(3), stating that as of the Closing Date, there
has been no breach by Seller of the respective lease and that Seller is not in
default of the respective lease;
(4) a fully executed and enforceable assignment of Accounts Receivable
of Seller as of the Closing Date;
(5) a certified statement of the Seller to the effect that Seller is
authorized by its directors to enter into the transactions contemplated by this
Agreement;
(6) a certificate of good standing from the State of Illinois
dated within 30 days before or on the Closing Date;
(7) All items, books, records, files, agreements, purchase orders,
internal reports, and materials in Seller's possession relating to the Assets;
and
(8) Such other documents and deliveries reasonably required by
Purchaser or Purchaser's Lender to consummate the transactions contemplated by
this Agreement.
ARTICLE VI. PURCHASER'S DELIVERIES AT CLOSING
At Closing, Purchaser shall deliver to Seller, in form and substance
satisfactory to Seller the following:
(1) a fully executed and enforceable Assumption of Liabilities for the
Assumed Liabilities;
(2) 5,837,503 shares of Hitcom Corporation common stock endorsed in
blank with irrevocable stock power in form acceptable to Seller;
(3) Such other documents and deliveries reasonably requested by Seller
to consummate the transactions contemplated by this Agreement.
ARTICLE VII. MUTUAL REPRESENTATIONS AND WARRANTIES
Seller and Purchaser agree, represent and warrant that from the date of
this Agreement, except as otherwise consented to in writing:
(1) At all times subsequent to Closing, Seller and Purchaser each will
permit the other party and their representatives, including but not limited to
lawyers and accountants, during normal business hours, to have access to and
examine and make copies of all books, records, files, and documents in its
possession that relate to the Assets or this Agreement or the other agreements
and instruments referred to in this Agreement or that relate to transactions or
events occurring prior to the Closing or to transactions or events occurring
subsequent to the Closing that are related to or arise out of transactions or
events relating to the Closing.
(2) For any rights or remedies relating to the Assets that may be
enforced after the Closing Date against third parties, Purchaser will notify
Seller in writing of any such enforcement that should properly be instituted in
the name of Seller, and Seller will join with Purchaser in enforcing such rights
and remedies or enforce such rights or remedies in Seller's own name at
Purchaser's sole cost.
(3) All representations, warranties, covenants, and agreements made by
either party to this Agreement shall survive the Closing.
(4) The parties will each use their best efforts to cause all
conditions of the consummation of the transaction contemplated herein to be
satisfied prior to termination of this Agreement.
(5) All covenants, agreements, representations and warranties made in
this Agreement shall be deemed to be material and to have been relied upon by
Purchaser and Seller, notwithstanding any prior knowledge or investigations made
by or on behalf of them.
ARTICLE VIII. SELLER'S REPRESENTATIONS AND WARRANTIES
Seller agrees, represents and warrants that from the date of this
Agreement, except as otherwise consented to in writing by Purchaser:
(1) Seller's business shall be conducted only in the ordinary course
and consistent with past practices except that Seller shall take such action as
may be necessary to preserve the Assets and to comply with all applicable laws,
ordinances, regulations, and orders of all governmental agencies and regulatory
authorities;
(2) Seller shall not dispose of, encumber, assign, or mortgage any of
the Assets;
(3) Seller shall preserve intact its business organization and use its
best effort to keep available the services of its present officers and key
employees and to preserve the goodwill of those having business relationships
with it;
(4) The Seller shall perform all of its obligations under contracts
relating to the Assets;
(5) As of the Closing Date, there will be no material adverse change to
the Assets or the business of Seller from the status and condition as it exists
as of the date of this Agreement, and Seller shall use its best efforts to
preserve the same;
(6) Seller shall pay sales, use, and transfer taxes, if any, payable to
the State of Missouri, any county, or municipality located therein, or any other
federal, state, or local governmental entity in connection with the transactions
contemplated by this Agreement or the other agreements or instruments referred
to in this Agreement;
(7) Seller agrees to indemnify Purchaser against any claims resulting
from Seller's or Purchaser's failure to comply with any bulk sales laws that may
be applicable to the transactions contemplated by this Agreement;
(8) Seller agrees to comply with any and all state and federal rules
and regulations, including those of the Securities and Exchange Commission, and
notice requirements in connection therewith that may be applicable to the
transactions contemplated by this Agreement. Seller agrees to indemnify
Purchaser from and against any and all costs, claims, and liabilities resulting
from any such failure of Seller to comply with any such rules or regulations;
(9) All mail addressed to Seller relating to the Assets that is
delivered to Seller after the Closing Date shall be delivered by Seller to
Purchaser upon receipt by Seller;
(10) From time to time after the Closing Date, at the request of
Purchaser and without further consideration, Seller shall execute and deliver
such other instruments of conveyance and transfer and take such other action as
Purchaser may specify so as to convey to, transfer to, vest in, and put
Purchaser in possession of the Assets;
(11) Seller is a corporation duly formed and validly existing under the
laws of the State of Illinois and has the power and authority to carry on its
business as now conducted, to own and operate the Assets, to execute this
Agreement and the other agreements and instruments referred to in this Agreement
that it is executing and delivering, and to carry out the transactions
contemplated hereby and thereby;
(12) The execution and delivery by Seller of this Agreement and the
other agreements and instruments referred to in this Agreement have been duly
authorized by the directors of Seller and constitute legal, valid, binding, and
enforceable agreements and instruments of Seller;
(13) Except for loan # 3301059749 dated May 1, 1998 and loan #
3301059750 dated May 1, 1998 both from the Bank of Edwardsville, in
Edwardsville, Illinois, neither the execution, delivery, nor performance of this
Agreement or any other agreement or instrument executed and delivered by or on
behalf of Seller in connection herewith, nor the consummation of the
transactions herein or therein contemplated, nor compliance with the terms and
provisions hereof or thereof, contravenes Seller's Articles of Incorporation or
By-Laws, or any provision of law, statute, rule, regulation, or order of any
court or governmental authority to which Seller is subject, or any judgment,
decree, franchise, order, or permit applicable to Seller, or conflicts or is
inconsistent with or will result in any breach of or constitute a default under
any contract, commitment, agreement, understanding, arrangement, or instrument,
or result in the creation of or imposition of (or the obligation to create or
impose) any lien, encumbrance, or liability on any of the property or assets of
Seller, or will increase any such lien, encumbrance, or liability;
(14) There are no actions, suits, or proceedings pending, or, to
Seller's knowledge, threatened or anticipated, before any court or governmental
or administrative body or agency affecting Seller or the Assets;
(15) No order, permission, consent, approval, license, authorization,
registration, or validation of, or filing with, or exemption by any governmental
agency, commission, board, or public authority is required to authorize, or is
required in connection with, the execution, delivery, or performance by the
Seller of this Agreement or any other agreement or instrument to be executed or
delivered by Seller hereunder;
(16) Seller has and shall transfer to Purchaser good, valid, and
marketable title to all of the Assets, and except for those Assets which may be
pledged as security for loan # 3301059749 dated May 1, 1998 and loan #
3301059750 dated May 1, 1998 both from the Bank of Edwardsville, in
Edwardsville, Illinois, none of the Assets is subject to any lien, pledge,
encumbrance, or charge of any kind, including, but not limited to, claims for
unpaid taxes; and,
(17) Seller agrees to pay and discharge when due all liabilities and
obligations of Seller relating to the Assets, including until closing, the
Assumed Liabilities.
(18) That to Seller's knowledge there are no liabilities of Seller that
are not listed on Schedule II.
ARTICLE IX. PURCHASER'S REPRESENTATIONS AND WARRANTIES
Purchaser agrees, represents and warrants that from the date of this
Agreement, except as permitted by this Agreement or otherwise consented to in
writing by Seller:
(1) The execution and delivery by Purchaser of this Agreement and the
other agreements and instruments referred to in this Agreement constitute legal,
valid, binding, and enforceable agreements and instruments of Purchaser;
(2) Purchaser agrees to provide testimony and cooperate with Seller in
any claim or proceeding between Seller and Dwight, Arant, Flex Financial or St.
Michael's Trading, all without any payment or compensation except for
reimbursement for reasonable travel, food, and lodging expenses; and,
(3) That to Purchaser's knowledge, there are no liabilities of Seller
that are not listed on Schedule II. Purchaser acknowledges that he has been an
employee and officer of Seller's business and that Purchaser is not relying on
any representation or warranty of Seller except as provided in this Agreement.
ARTICLE X. INDEMNIFICATION
A. Seller indemnifies and agrees to hold Purchaser harmless from,
against, and in respect to the following:
(1) one-half (1/2) of any and all debts, liabilities, or obligations of
Seller, direct or indirect, fixed, contingent, or otherwise, arising from
activities of Seller between April 1, 1997 and the Closing Date, excepting
therefrom any Assumed Liabilities;
(2) any and all loss, liability, deficiency, or damage suffered or
incurred by Purchaser as a result of any default by Seller existing on the
Closing Date or any event of default occurring prior to the Closing Date that
with the passage of time would constitute a default, under any contract or other
agreement assumed by Purchaser under this Agreement;
(3) any and all loss, liability, deficiency, or damage suffered or
incurred by Purchaser by reason of any untrue representation, breach of
warranty, or nonfulfillment of any covenant or agreement by Seller contained in
this Agreement or in any certificate, document, or instrument delivered to
Purchaser hereunder or in connection herewith;
(4) any claim for a finder's fee or brokerage or other commission by
any person or entity for services alleged to have been rendered at the instance
of Seller with respect to this Agreement or any of the transactions contemplated
hereby; and
(5) any and all actions, suits, proceedings, claims, demands,
assessments, judgments, costs, and expenses, including, without limitation,
legal fees and expenses, incident to any of the foregoing or incurred in
enforcing this indemnity.
B. Purchaser indemnifies and agrees to hold Seller harmless from,
against, and in respect to the following:
(1) any and all debts, liabilities, or obligations of Purchaser, direct
or indirect, fixed, contingent, or otherwise accruing after the Closing Date
related to the Assets or the Assumed Liabilities;
(2) all liabilities of Seller arising from activities of Seller prior
to April 1, 1997;
(3) one-half (1/2) of all debts, liabilities, or obligations of Seller,
direct or indirect, fixed, contingent, or otherwise arising from activities of
Seller between April 1, 1997 and the Closing Date, excepting therefrom the
Assumed Liabilities.
(4) any and all loss, liability, deficiency, or damage suffered or
incurred by Seller resulting from any untrue representation, breach of warranty,
or nonfulfillment of any covenant or agreement by Purchaser contained in this
Agreement or in any certificate, document, or instrument delivered to Seller
pursuant hereto or in connection herewith;
(5) any and all loss, liability, deficiency, or damage suffered or
incurred by Seller as a result of Purchaser's failure to discharge the Assumed
Liabilities;
(6) any claim for a finder's fee or brokerage or other commission by
any person or entity, for services alleged to have been rendered at the instance
of Purchaser with respect to this Agreement or any of the transactions
contemplated hereby; and
(7) any and all actions, suits, proceedings, claims, demands,
assessments, judgments, costs, and expenses, including, without limitation,
legal fees and expenses, incident to any of the foregoing or incurred in
enforcing this indemnity.
C. Indemnification of Third-Party Claims
(1) In order for Purchaser or Seller, as the case may be, to be
entitled to any indemnification provided for under this Article, in respect of,
arising out of, or involving a claim made by any person, firm, governmental
authority, or corporation other than the Purchaser or Seller, or their
respective successors, assigns, or affiliates, against the indemnified party,
the indemnified party must notify the indemnifying party in writing of this
third-party claim within 5 days after receipt by the indemnified party of
written notice of the third-party claim.
(2) If a third-party claim as set forth in paragraph (C)(1) above is
made against an indemnified party, the indemnifying party will be entitled to
participate in the defense thereof and, if it so chooses, to assume the defense
thereof with counsel selected by the indemnifying party. Should the indemnifying
party elect to assume the defense of such a third-party claim, the indemnifying
party will not be liable to the indemnified party for any legal expenses
subsequently incurred by the indemnified party in connection with the defense
thereof. If the indemnifying party elects to assume the defense of such a
third-party claim, the indemnified party will cooperate fully with the
indemnifying party in connection with such defense.
(3) If the indemnifying party assumes the defense of a third-party
claim, then in no event will the indemnified party admit any liability with
respect to, or settle, compromise, or discharge, any third-party claim without
the indemnifying party's prior written consent, and the indemnified party will
agree to any settlement, compromise, or discharge of a third-party claim that
the indemnifying party may recommend that releases the indemnified party
completely in connection with the third-party claim.
(4) In the event the indemnifying party shall assume the defense of any
third-party claim, the indemnified party shall be entitled to participate in,
but not control, the defense with its own counsel at its own expense. If the
indemnifying party does not assume the defense of any such third-party claim,
the indemnified party may defend the claim in a manner as it may deem
appropriate, including, but not limited to, settling the claim or litigation
after giving notice of it to the indemnifying party on such terms as the
indemnified party may deem appropriate, and the indemnifying party will
reimburse the indemnified party promptly in accordance with the provisions of
this Article.
(5) Anything contained in this Agreement to the contrary
notwithstanding, Seller shall not be entitled to assume the defense of, but
shall be entitled to notice of and to participate in, any third-party claim
against Purchaser if the third-party claim seeks an order, injunction, or other
equitable relief against Purchaser that, if successful, might interfere with
Purchaser's ownership or use of the Assets.
(6) Notwithstanding any provision of this Agreement to the contrary,
Seller shall have no liability to Purchaser and Purchaser shall have no
liability to Seller under this Article unless the aggregate of all claims
against such party exceeds $1,000 and then only to the extent that such
liability exceeds $1,000.
ARTICLE XI. TERMINATION
Anything contained in this Agreement to the contrary notwithstanding,
this Agreement may be terminated:
(1) by mutual written consent of the Seller and the Purchaser;
(2) by the Seller, by written notice to the Purchaser, if any condition
set forth in Article VI hereof has not been met at Closing and has not
been knowingly and lawfully waived in writing;
(3) by the Purchaser, by written notice to the Seller, if any condition
in Article V hereof has not been met at closing and has not been
knowingly and lawfully waived in writing;
(4) by either the Purchaser or the Seller (by written notice to the
other) if the Closing shall not have occurred on or before January 1,
2000.
ARTICLE XII. MISCELLANEOUS
(1) Except as specifically set forth otherwise in this Agreement, all
fees and expenses incurred by Seller in connection with this Agreement will be
borne by Seller and all fees and expenses incurred by Purchaser in connection
with this Agreement will be borne by Purchaser.
(2) Schedule XII(2) contains a list of Seller's employees which
Purchaser intends to offer to hire after the Closing of this transaction.
(3) This Agreement will be binding on, inure to the benefit of, and be
enforceable by and against the respective successors and assigns of the parties
hereto.
(4) This Agreement and the agreements, instruments, schedules, and
other writings referred to in this Agreement contain the entire understanding of
the parties with respect to the subject matter of this Agreement. There are no
restrictions, agreements, promises, representations, warranties, covenants, or
undertakings other than those expressly set forth herein or therein. This
Agreement supersedes all prior agreements and understandings between the parties
with respect to its subject matter. This Agreement may be amended only by a
written instrument duly executed by all of the parties or their successors or
assigns.
(5) No waiver of any breach or default hereunder shall be considered
valid unless in writing and signed by the party giving such waiver, and no such
waiver shall be deemed a waiver of any subsequent breach or default of the same
or a similar nature.
(6) The section and paragraph headings contained herein are for the
convenience of the parties only and are not intended to define or limit the
contents of their sections and paragraphs.
(7) This Agreement and all amendments thereof shall be governed by and
construed in accordance with the laws of the State of Illinois without regard to
its conflict of laws provisions.
(8) All notices, claims, certificates, requests, demands, and other
communications under this Agreement will be in writing and notices will be
deemed to have been duly given if delivered or mailed, registered or certified
mail, postage prepaid, return receipt requested, or for overnight delivery, by a
nationally recognized overnight mail service, as follows:
If to Purchaser, to: Scott A. Beil
700 North Second Street
Third Floor
St. Louis, MO 63102-2519
With a copy to: John McCracken, Attorney
Coffey & Gilbert, P.C.
P.O. Box 247
125 N. Buchanan
Edwardsville, IL 62025
If to Seller, to: Raj Arora
85 Scarsdale Road, Suite 202
North York, Ontario, M3B 2R2
With a copy to: Joseph S. von Kaenel, Attorney
Armstrong Teasdale, L.L.P.
One Metropolitan Square, Suite 2600
St. Louis, Missouri 63102-2740
or to such other address as the party to whom notice is to be given previously
may have furnished to the other party in writing in the manner set forth in this
section.
(9) Each party to this Agreement will be responsible for paying its own
attorney, accounting, and other costs and expenses incurred in connection with
this Agreement.
(10) 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.
(11) If any term, condition, or provision of this Agreement shall be
declared invalid or unenforceable, the remainder of the Agreement, other than
such term, condition, or provision, shall not be affected thereby and shall
remain in full force and effect and shall be valid and enforceable to the
fullest extent permitted by law.
(12) This Agreement has been reviewed by both Seller's legal counsel
and Purchaser's legal counsel and shall be construed as if it had been prepared
and drafted jointly by the parties.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
SELLER PURCHASER
ONE PLUS MARKETING, INC. /s/ SCOTT A. BEIL
By: /s/ Rajan Arora
Title: President
<PAGE>
SCHEDULE I (1)
Item Quantity
Computers 22
Computer Monitors 18
Desks 9
Fold-out Tables 15
Chairs (5 spoke) 23
Chairs (sidearm) 7
Computer Rack Enclosures 3
RAID Enclosure 1
NMS AG-T1 boards 10
Western Digital 9G SCSI HD 4
Mylex RAID Controller 2
100 Base T 12 Port Hub 2
10/100 Base T 12 Port Hub 1
10 Base T 24 Port Hub 1
Excel LNX Switch 1
25 A DC Power Supply 2
POP Chiller 1
Industrial UPS System 1
HP Laser Jet 5Si 1
LarsCom T3 1
Refrigerator 1
Bunn Coffee Maker 1
Microwave 1
Mustek Flatbed Scanner 1
Persona Plus Card Printer 1
Sharp SF-2118 copier 1
Cubicles 16
Onyx Telephone System 1
Xerox color printer 1
<PAGE>
SCHEDULE I (3)
Leases:
1. GE Capital Lease 316715001 (formerly Colonial Pacific, Lease 130619001);
2. GE Capital Lease 316715002 (formerly Colonial Pacific, Lease 130933001); and,
3. Lease dated June 27, 1995 with Arch Assets I, LLC for the office facility
located at 700 North Second Street, Suite 300, St. Louis, Missouri;
<PAGE>
SCHEDULE I (4)
Telephone Numbers:
1. All of Seller's telephone numbers listed with MCI/Worldcom
2. All of Seller's telephone numbers listed with Cable and Wireless
<PAGE>
SCHEDULE II
Liabilities Assumed by Purchaser as listed below:
1. Seller's accounts payable and liabilities incurred in the ordinary course of
business prior to the Closing Date or attributable to Seller's activities prior
to the Closing Date, including without limitation:
a) trade accounts payable;
b) accrued employee wages, sick pay, vacation pay, severance
pay, bonus, and federal, state, and city employment taxes of
all employees of Seller working at OPM's St. Louis Office;
c) deferred revenue;
d) accrued liabilities for the following accounts:
i) Worldcom;
ii) Cable & Wireless;
iii) St. Louis Presort; and,
iv) Commissions;
e) accounts payable listed on the attached accounts payable
report for One Plus Marketing, Inc. dated as of the Closing
Date; and,
f) Currently due and payable state and city personal property
taxes for the Assets acquired, but not any associated
interest, late fees, or penalties prior to closing.
2. Notwithstanding anything to the contrary in this Schedule, Seller's accounts
payable and liabilities incurred in the ordinary course of business do not
include:
a) any and all accounts payable or liabilities incurred without the prior
knowledge of Purchaser;
b) intercompany charges between Seller and its parent corporation (Hitcom
Corporation, or between Seller and any company affiliated with Seller;
nor,
c) any federal, state, county or city taxes (except for tax liabilities
assumed by Purchaser in Schedule II paragraphs 1 b), and 1 f) above.
<PAGE>
SCHEDULE XII(2)
Employees the Purchaser intends to offer to hire after the Closing of this
Transaction:
None.
Consent of Independent Public Accountants
Hitcom Corporation
St. Louis, Missouri
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File No. 333-65651) of our report dated March 30,
2000, relating to the consolidated financial statements of Hitcom Corporation
appearing in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1999.
/s/ Deloitte & Touche LLP
Toronto, Ontario
April 17, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 80,047
<SECURITIES> 50,000
<RECEIVABLES> 829,564
<ALLOWANCES> (66,363)
<INVENTORY> 28,961
<CURRENT-ASSETS> 970,052
<PP&E> 229,195
<DEPRECIATION> (75,303)
<TOTAL-ASSETS> 4,488,675
<CURRENT-LIABILITIES> 2,302,994
<BONDS> 0
0
1,022
<COMMON> 49,416
<OTHER-SE> 1,616,025
<TOTAL-LIABILITY-AND-EQUITY> 4,488,675
<SALES> 4,405,964
<TOTAL-REVENUES> 4,405,964
<CGS> 3,923,299
<TOTAL-COSTS> 5,241,666
<OTHER-EXPENSES> 399,770
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,916
<INCOME-PRETAX> (1,274,388)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,274,388)
<DISCONTINUED> 38,157
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,236,231)
<EPS-BASIC> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
