<PAGE>
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
( ) TRANSACTION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from to
------------------------ ---------
For Quarter Ended Commission File Number 0-27706
---------------- --------------
XECOM CORP
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Nevada 33-0664567
- ------------------------------------- ----------------------------------------
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
69-730 Highway 111, Suite 101, Rancho Mirage, California 92270
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (619) 202-1555
----------------------------
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(Former Name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 15(d) of the Securities and Exchange Act of
1934 during the preceding 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
----- -----
The number of shares of stock of the registrant, par value .0001, outstanding as
of May 23, 1997, was 10,878,972 shares of common stock; 1,200,000 Series A
Preferred Shares; 3,426,000 Series B Preferred Shares; 830,000 Series C
Preferred Shares outstanding and 16 Series D Preferred Shares.
<PAGE>
FORM 10-QSB REPORT INDEX
PAGE
FORM 10-QSB AND ITEM NO.
PART I FINANCIAL INFORMATION(1)
ITEM 1. Financial Statements
Consolidated Balance Sheet as of March 31, 1997
(Unaudited)................................................ 1
Consolidated Statements of Operations for the three
months ended March 31, 1997 and 1996 (Unaudited).......... 2
Consolidated Statement of Stockholders' Equity for the
three months ended March 31, 1997 (Unaudited)............. 3
Consolidated Statements of Cash Flows for the three
months ended March 31, 1997 and 1996 (Unaudited).......... 4 - 5
Notes to Consolidated Financial Statements (Unaudited) ... 6 - 11
ITEM 2. Managements' Discussion and Analysis of the Financial
Condition and Results of Operations ...................... 12- 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings......................................... 14
Item 3. Defaults Upon Senior Securities........................... 14
PART I - FINANCIAL INFORMATION
- ---------------------
(1) THE ACCOMPANYING FINANCIAL STATEMENTS ARE NOT COVERED BY AN
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS REPORT.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
XECOM CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash $ 100,798
Accounts receivable 690,541
Other receivables 92,338
Investments, available-for-sale 110,013
------------
TOTAL CURRENT ASSETS 993,690
PROPERTY AND EQUIPMENT, net (Note B) 22,198,589
INTANGIBLE ASSETS, net (Note A) 72,621
PREPAID CONSULTING FEE (Note C) 1,078,730
OTHER ASSETS 119,253
------------
$ 24,462,883
------------
------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 1,690,252
Accrued liabilities 1,677,542
Payroll taxes payable 146,933
Customer advance 42,542
Related party debt -- current portion (Note D) 1,060,000
Capital lease obligations -- current portion (Note E) 4,671,971
------------
TOTAL CURRENT LIABILITIES 9,289,240
CONTINGENT LIABILITY (Note E) 700,000
CAPITAL LEASE OBLIGATIONS, net of current portion (Note E) 15,750,945
MINORITY INTEREST (Note A) 367,013
------------
TOTAL LIABILITIES 26,107,198
COMMITMENTS AND CONTINGENCIES (Note E) --
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, $0.0001 par value, 50,000,000 shares
authorized, 5,756,016 shares issued and outstanding March 31,1997 576
Common stock, $0.0001 par value, 100,000,000 shares
authorized, 10,278,972 shares issued and outstanding March 31, 1997 1,027
Additional paid in capital - preferred stock 3,978,041
Additional paid in capital - common stock 1,971,907
Unrealized loss on investments, available-for-sale (90,000)
Retained deficit (7,505,866)
------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (1,644,315)
------------
$ 24,462,883
------------
------------
</TABLE>
(See Notes to Consolidated Financial Statements)
-1-
<PAGE>
XECOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
--------
1997 1996
------- ------
<S> <C> <C>
NET SALES $ 1,261,372 $1,452,652
COST OF SALES 971,964 1,170,568
----------- ----------
Gross Profit 289,408 282,084
OPERATING EXPENSES
Selling, general and administrative expenses 413,160 556,851
Depreciation and amortization 499,428 93,358
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TOTAL OPERATING EXPENSES 912,588 650,209
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LOSS FROM OPERATIONS (623,180) (368,125)
OTHER INCOME (EXPENSES)
Minority interests in consolidated subsidiaries, net income (Loss) (1,104) 8,433
Interest expense (381,604) (89,969)
Other income (expenses) (442) (663)
----------- ----------
TOTAL OTHER EXPENSES, NET (383,150) (82,199)
----------- ----------
LOSS BEFORE INCOME TAXES (1,006,330) (450,324)
Income taxes -- --
----------- ----------
NET LOSS $(1,006,330 $ (450,324)
----------- ----------
----------- ----------
NET LOSS PER COMMON SHARE $ (.09) $ (.06)
----------- ----------
----------- ----------
AVERAGE COMMON SHARES OUTSTANDING 10,278,972 8,178,079
----------- ----------
----------- ----------
</TABLE>
(See Notes to Consolidated Financial Statements)
-2-
<PAGE>
<TABLE>
<CAPTION>
XECOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------------
Common Stock Preferred Stock
- ---------------------------------------------------------------------------------------------------------
Shares Amounts Shares Amounts Additional
Paid
in Capital
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1996 10,074,892 $ 1,007 5,756,020 $ 576 $ 5,949,968
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Preferred D Converted to Common 204,080 20 (4) -- (20)
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Net Loss -- -- -- -- --
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Balance, March 31, 1997 10,278,972 $ 1,027 5,756,016 $ 576 $ 5,949,948
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
Unrealized Loss on Retained Total
Investments Deficit Shareholders
Available- Equity
For-Sale (Deficit)
- -------------------------------------------------------------------------------------
Balance December 31, 1996 $ (90,000) $(6,499,536) $ (637,985)
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Preferred D Converted to Common -- -- --
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Net Loss -- (1,006,330) (1,006,330)
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Balance, March 31, 1997 $ (90,000) $ (7,505,866) $ (1,644,315)
- -------------------------------------------------------------------------------------
</TABLE>
(See Notes to Consolidated Financial Statements)
-3-
<PAGE>
XECOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
- ------------------------------------------------------------------------------
FOR THE
THREE MONTHS ENDED
MARCH 31
--------
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (1,006,330) $ (450,324)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 499,427 93,260
Compensation expense on issuance of Stock 47,242 29,072
Minority interest in subsidiary earnings 1,104 ( 8,433)
Changes in operating assets and liabilities:
Accounts receivable (324,156) (79,861)
Other receivables (7,415) (134,102)
Other assets 158,192 (145,929)
Accounts payable 218,983 (306,553)
Accrued liabilities 466,104 122,502
Customer advances 42,542 63,027
Due from affiliates -- (70,548)
------------ ----------
NET CASH PROVIDED FROM OPERATING ACTIVITIES 95,693 (887,889)
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment --- (101,327)
------------ ----------
NET CASH USED IN INVESTING ACTIVITIES --- (101,327)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from related party debt --- 255,000
Payments on related party debt (3,000) ---
Proceeds from stock subscription --- 400,000
Payments under capital lease obligations (47,490) (56,346)
Proceeds from issuance of preferred stock --- 19,000
Proceeds from issuance of common stock --- 382,480
Non Participating Shareholders Interest --- (29,140)
------------ ----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (50,490) 970,994
------------ ----------
NET INCREASE (DECREASE) IN CASH 45,203 (18,222)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 55,595 141,209
------------ ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 100,798 $ 122,987
------------ ----------
------------ ----------
See Notes to Consolidated Financial Statements
-4-
<PAGE>
XECOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures of cash flow information for the three months
ended March 31, 1997 and 1996, are summarized as follows:
1997 1996
---- ----
Cash paid for interest and income taxes
Interest $ 45,612 $ 36,713
Income Taxes -- --
Noncash investing and financing activities:
Assets acquired by capital lease $ 1,473,544 $4,191,083
-5-
<PAGE>
XECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION AND NATURE OF OPERATIONS
The consolidated financial statements include the accounts of Xecom Corp.
(a Nevada corporation incorporated on May 2, 1985), its wholly owned
subsidiary, Select Switch Systems, Inc. (Select) including its 80%
partnership interest in Select Switch Systems #1 Ltd., (together "the
Company"). All significant intercompany transactions and amounts have been
eliminated in the consolidating process.
The Company is primarily engaged in installing, maintaining and operating
turnkey residential barracks telecommunications services, through a 10-year
subcontract agreement with Sprint Communications Company L.P., to the
nations Army and Air Force installations. The services can include local
and long distance, call waiting, call forwarding, call conferencing,
re-dial, speed dial, voice mail and Internet Access which provides a total
spectrum of communication products and services. The Company has proceeded
with filings to obtain Local Exchange Carrier (LEC) status in the States
where it maintains switching services to the military, to provide both
Local Exchange (Dial Tone) and Internet Services as well as the
aforementioned services to an expanded population of the military and
extending to the civilian households and business customers which surround
these military bases.
BASIS OF ACCOUNTING
The Company's policy is to use the accrual method of accounting and to
prepare and present financial statements which conform to generally
accepted accounting principles. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting periods. Actual results could
differ from those estimates.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated using the
straight-line method over the estimated useful lives of assets, which range
from five to ten years. Assets under capital leases are depreciated by the
straight-line method over the shorter of the lease term or the useful lives
of the assets. Maintenance, repairs and minor renewals are charged to
operations as incurred. Major replacements or betterments are capitalized.
When properties are retired or otherwise disposed, the related costs and
accumulated depreciation are eliminated from the respective accounts and
any gain or loss on disposition is reflected as income or expense.
INTANGIBLE ASSETS
Intangible assets of $72,621 at March 31, 1997, consist of
telecommunications agreements the Company's wholly owned subsidiary,
Select, had with certain colleges and universities. In 1994, Select
contributed telecommunications equipment and the related agreements for
four colleges as consideration for a 80% interest in a Limited Partnership.
The limited partnership which has been consolidated with Select, recorded
intangible assets representing the value of Select's 80% partner interest
in the excess of the book value of the telecommunications equipment
transferred to the partnership. Intangible assets are amortized using the
straight-line method over 10 years. Accumulated amortization was $49,683 as
of March 31, 1997.
MINORITY INTEREST
Minority interest represents the 20% limited partners interest in the net
assets of the limited partnership, Select Switch Systems #1 Ltd.
-6-
<PAGE>
XECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenue derived from telephone services and usage fees is billed and
recorded monthly as the services are provided.
NET LOSS PER SHARE
The net loss per share is computed by dividing the net loss by the weighted
average number of shares outstanding during the period. Preferred stock
Series A, B, and C were determined to be non-common stock equivalents.
Series D preferred stock is a common stock equivalent. The effect of
convertible securities is excluded from the computation because the effect
of the net loss per common share would be anti-dilutive.
INCOME TAXES
Income taxes are provided for using the liability method of accounting in
accordance with Statement of Financial Accounting Standards No. 109 (SFAS
109), "Accounting for Income Taxes." A deferred tax asset or liability is
recorded for all temporary differences between financial and tax reporting.
Deferred tax expense (benefit) results from the net change during the year
of deferred tax assets and liabilities.
ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 1996 the Company adopted a method of accounting for
stock-based compensation plans as required by Statement of Financial
Accounting Standard No. 123 (FAS 123). FAS 123 allows for two methods of
valuing stock-based compensation. The first method allows for the
continuing application of APB 25 in measuring stock-based compensation,
while complying with the disclosure requirements of FAS 123. The second
method uses an option pricing model to value stock compensation and record
as such within the financial statements. The Company will continue to apply
APB 25, while complying with FAS 123 disclosure requirements.
INTERIM INFORMATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. All
intercompany accounts and transactions have been eliminated in
consolidation.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Rule
10-01 of Regulation S-X promulgated by the Securities and Exchange
Commission. Such financial statements do not include all disclosures
required by generally accepted accounting principles for annual financial
statement reporting purposes. However, there has been no material change
in the information disclosed in the consolidated financial statements
included in the Company's Form 10-KSB for the year ended December 31, 1996,
except as disclosed herein. Accordingly, the information contained herein
should be read in conjunction with the consolidated financial statements
and related disclosures contained in the Company's Form 10-KSB for the year
ended December 31, 1996. The accompanying financial statements reflect, in
the opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the interim periods
presented.
-7-
<PAGE>
XECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The periods presented are the three months ended March 31, 1997 and 1996,
respectively. Certain reclassifications have been made to the prior year
financial statements to conform to the current year presentation.
B. PROPERTY AND EQUIPMENT:
Property and equipment at March 31, 1997 is summarized as follows:
1997
----
Machinery and equipment $22,996,740
Furniture and fixtures 145,429
Leasehold - inside/out plant 615,714
Materials and supplies 139,548
-----------
23,897,431
Less accumulated depreciation (1,698,842)
-----------
Property and equipment, net $22,198,589
-----------
-----------
Depreciation expense for the years ended March 31, 1997 and 1996 was
$495,108 and respectively $93,260.
C. PREPAID CONSULTING FEE:
The Company entered into a three year consulting agreement, subsequently
amended to a five year term, commencing January 1, 1996 and expiring
December 31, 2000, with an investment banking company which is a
shareholder of the Company. The investment banking company was issued
1,620,000 shares of Series B preferred stock as consideration in lieu of
monthly payments totaling $1,620,000 for services to be rendered to the
Company over the five year period. The Company recorded a prepaid
consulting fee based on the present value of the monthly payment stream
over the life of the agreement, discounted at 10%. Consulting expense for
the period ended March 31, 1997 and 1996 were $47,242 and $29,072,
respectively.
-8-
<PAGE>
XECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
D. RELATED PARTY-DEBT:
Notes payable at March 31, 1997 is summarized as follows:
MARCH 31, 1997
-----------------
Notes payable to various investors, collateralized
by security interests in the Company's fixed
assets, accounts receivable and telecommunication
agreements, interest payable at 12%, all unpaid
principal and accrued interest are past due. $789,000
Notes payable to various investors, interest payable
ranging from 10% to 15%, personally guaranteed by
shareholders, all unpaid principal and accrued
interest are past due. 255,000
Notes payable to various investors, unsecured,
interest payable ranging from 12% to 18%, all unpaid
principal and accrued interest are past due 16,000
----------
1,060,000
Less current portion 1,060,000
----------
$
----------
----------
E. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company leases office facilities and equipment under operating leases
which expire at various dates through the year 2001. The accompanying
statements of operations include expenses from operating leases of $37,331
and $58,026 for the three months ended March 31, 1997 and 1996,
respectively. Future minimum lease payments due under noncancelable
operating leases are as follows:
1997 $104,870
1998 142,115
1999 144,403
2000 76,035
2001 7,668
Thereafter
--------
$475,091
--------
--------
The noncancelable operating leases provide that the Company pays for taxes,
licenses, insurance, and certain other operating expenses applicable to the
leased items.
-9-
<PAGE>
XECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
COMMITMENTS AND CONTINGENCIES (CONTINUED)
CAPITAL LEASES
The Company finances substantially all of its telecommunication equipment
purchases under capital lease agreements with The CIT Group and Fujitsu
Business Communication Systems, Inc. The leases require monthly payments
over a sixty to eighty-four month period. The following is an analysis of
the book value of the leased assets included in property and equipment as
of March 31, 1997.
1997
------
Cost $21,025,878
Accumulated depreciation (1,508,150)
-----------
$19,517,728
-----------
-----------
The future minimum lease payments under capitalized leases and the present
value of the not minimum lease payments are as follows:
1997 $4,970,566
1998 6,558,831
1999 4,590,725
2000 3,632,190
2001 3,141,330
Thereafter 5,111,688
-----------
Total Payments 27,605,330
Less amount representing interest 7,182,414
-----------
20,422,916
Less current portion of capital leases 4,671,971
-----------
$15,750,945
-----------
-----------
LITIGATION
During 1996 the Company filed a lawsuit in the U.S. District Court of
California against previous directors, shareholders, and officers of Select
Switch Systems, Inc. alleging fraud, conspiracy, breach of fiduciary duty,
and tortious interference with contractual relations. In response to this
action these previous directors, shareholders, and officers of Select
Switch Systems, Inc. filed suit against the Company in the District Court
of Illinois and Texas and in the U.S. District Court of California. These
actions contend the Company is liable for certain alleged unpaid promissory
notes totaling approximately $960,000 and a supposed verbal agreement to
retain an individual as a consultant. Management contends the alleged notes
payable were converted by the previous shareholders/officers of Select
Switch Systems, Inc. to equity of Select Switch Systems, Inc. prior to, and
as part of the purchase agreement between Xecom Corp, and Select Switch
Systems, Inc. Management has recorded the purchase of Select Switch
Systems, Inc. as if the alleged notes payable were converted to equity.
Management has filed pleadings denying that it has any liability with
respect to the claims asserted in the law suit. Management contends that
the notes in question were fraudulently procured and they are prepared to
vigorously defend their position. The claims are preliminary, however,
management believes a reasonable estimate of a loss, based on information
currently available, is $600,000. This amount has been recognized as a loss
in 1996 and appears in the consolidated balance sheet as a contingent
liability.
-10-
<PAGE>
XECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
COMMITMENTS AND CONTINGENCIES (CONTINUED)
LITIGATION (CONTINUED)
During 1996, an action was filed against the Company in Federal Court in
Michigan. In this action, the plaintiff is seeking damages in the sum of
$750, 000 for breach of contract, and for costs of the suit. The complaint
alleges that the Company agreed to pay the plaintiff a commission for
services rendered in connection with raising equity capital for the Company
and that the promised commission has not been paid. The claims are
preliminary, however, management believes reasonable estimate of a loss,
based on information currently available, is $100,000. This amount has been
recognized as a loss in 1996 and appears in the consolidated balance sheet
as a contingent liability.
The Company is party to various other legal proceedings in the ordinary
course of business. Although the ultimate resolution of these proceedings
cannot be ascertained, management does not believe they will have a
materially adverse effect on the results of operations or financial
position of the Company.
TAX MATTERS
As of March 31, 1997 the Company's wholly owned subsidiary had outstanding
payroll tax liabilities for 1994 and 1995, $164,000 due to the Internal
Revenue Service. The Company has entered into an installment payment
agreement which calls for monthly payments of $21,000. The Internal Revenue
Service has filed liens against the Company's assets and will remove the
liens when the tax liabilities have been paid. The Company is in compliance
with regards to the payment agreement.
F. GOING CONCERN:
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue operating as a going concern, which
contemplates the realization of assets and liquidation of liabilities in
the normal course of business.
Although the Company has had recurring losses from operations and has a
working capital deficiency, several steps have been taken by the Company to
reduce its liabilities, reduce its cash requirements and raise capital.
The Company has historically financed its operations through the sale of
equity securities and through funds provided by operating activities. The
Company has entered into an agreement to defer monthly capital lease
payments for a six month period until June 1, 1997, and is currently making
arrangements to extend this agreement for an additional ten months, at
which time, based on current budgets and projections of approximately
40,000 users, revenue from the bases should be in excess of funds required
to meet capital lease obligations and ongoing operating obligations. The
Company currently has approximately 30,000 users. The Company has also
made arrangements to borrow sufficient funds to complete base
installations. These arrangements enables the Company to meet it's current
obligations from funds provided solely from operating activities. For the
quarter ended March 31, 1997 (unaudited) the Company experienced positive
cash flow from operations of approximately $96,000. The Company has
historically been successful in raising capital through the sale of equity
securities and believes that this success will continue.
-11-
<PAGE>
XECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the Company's financial condition as of March 31,
1997 and results of operations for the three months ended March 31, 1997 and
1996, should be read in conjunction with the consolidated financial
statements and notes appearing elsewhere in this 10-QSB. Accordingly, the
information contained herein should also be read in conjunction with the
consolidated financial statements and related disclosures contained in the
Company's Form 10KSB for the year ended December 31, 1996 as well as other
filings with the Securities and Exchange Commission.
The following management's discussion and analysis of results of operations
and financial condition include forward-looking statements with respect to
the Company's future financial performance. These forward-looking statements
are subject to various risks and uncertainties which could cause actual
results to differ materially from historical results or those currently
anticipated.
OVERVIEW AND RECENT DEVELOPMENTS
The Company is primarily engaged in installing, maintaining and operating
turnkey residential barracks telecommunications services, through a 10-year
subcontract agreement with Sprint Communications Company L.P., to the nations
Army and Air Force installations. The services can include local and long
distance, call waiting, call forwarding, call conferencing, re-dial, speed
dial, voice mail and Internet Access which provides a total spectrum of
communication products and services. The Company has proceeded with filings
to obtain Local Exchange Carrier (LEC) status in the States where it
maintains switching services to the military, to provide both Local Exchange
(Dial Tone) and Internet Services as well as the aforementioned services to
an expanded population of the military and extending to the civilian
households and business customers which surround these military bases. As of
May 25, 1997, the Company provides services to approximately 32,000
subscribers.
The Company's wholly owned subsidiary, Select Switch Systems, Inc., is
responsible for providing a variety of telecommunications systems and
services to colleges and university dormitories and United States Army
installations.
Since its inception in 1990, Select Switch Systems, Inc., has primarily
concentrated on developing the small college and university segment of
residential multi-tenant development market. At small colleges and
universities, the Company contracted with the school for the exclusive right
to provide local dial tone and long distance service at the school's
dormitories for a ten year period. In addition, if requested, the Company
will install cabling to provide data transmission and cable television to
tenants.
Select Switch was awarded a ten-year exclusive contract by the Army and Air
Force Exchange Services ("AAFES"), through the prime contractor, Sprint
Communications Company L.P. ("Sprint"), to install, maintain and operate a
turnkey residential barracks telephone service, including, if requested,
wiring for cable television.
The Company is responsible for all costs and expenses associated with
operating and maintaining the telecommunications equipment installed at the
schools and Army bases. The telecommunications equipment remains the
property of the Company. The Company is currently servicing 32 of such
military bases which are comprised of approximately 60,000 residents.
-12-
<PAGE>
XECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESULTS OF OPERATION
For the three months ended March 31, 1997, the Company had a loss from
operations of $623,180 and a net loss of $1,006,330 ($0.09 per share) as
compared to a loss from operations of $368,125 and a net loss of $450,324
($0.06 per share) for the same period in 1996.
In August, 1996, the Company sold its SelecTel subsidiary. For the three
months ended March 31, 1997, the operations reflects that of the Company and
its wholly owned subsidiary, Select Switch, the March 31, 1996 operations
includes the Company, Select Switch and SelecTel Corp.
For the three months ended March 31, 1997, the Company's gross profit was
$289,408, or 23%, as compared to $282,084, or 19%, in 1996. The Company
anticipates that the gross margin in 1997 will increase as the Company signs
up subscribers and provides other enhanced services to the servicemen. This
would augment the fixed trunking and dedicated line costs in the Army-Air
Force programs.
Selling, general and administrative expenses for 1997 amounted to $413,160,
or 33%, of net sales, as compared to $556,851, or 38%, of net sales in 1996.
The Company believes SGA expenses will decrease further as a total percentage
of sales, as there is no need to expand the management infrastructure to run
the operation, including any expansion to new bases.
The net loss for the quarter was predominantly a result of depreciation
expense of $499,428 and interest expense of $381,604 for a total of $881,032.
These expenses directly relate to the telecommunication systems and
equipment and related debt as they relate to the AAFES project.
LIQUIDITY AND CAPITAL RESOURCES
Where the Company provides long-term telecommunications services to the
colleges and universities and to AAFES, the Company installs state of the art
Fujitsu Business Communications Systems, Inc. telecommunications equipment.
The Company has available from 75% up to 100% lease financing from Fujitsu,
through the CIT Group and from Sprint for all installation costs and
equipment at the colleges and universities and AAFES installations. The
Company financed total turnkey project costs of approximately $16.7 million
through such capital lease financing, in 1996, and $1,473,544 for the quarter
ended March 31, 1997.
Although the Company has historically financed its operations through the
sale of equity securities and through funds provided by operating activities,
the Company continues to pursue other measures to meet its working capital
requirements.
In the Company's 10-KSB filing on May, 1997, the Company's auditors included
an explanatory paragraph in their Report of Independent Certified Public
Accountants to the effect that recovery of the Company's assets are dependent
upon future events, the outcome of which is indeterminable, and that the
successful completion of the Company's development program and its
transition, ultimately, to the attainment of profitable operations is
dependent upon obtaining adequate financing to fulfill its development
activities and attain sufficient growth to their user base to enable them to
achieve future profitability.
The Company has entered into an agreement to defer monthly capital lease
payments for a six month period until June 1, 1997, and is currently making
arrangements to extend this agreement for an additional ten months, at which
time, based on current budgets and projections of approximately 40,000 users,
revenue from the bases should be in excess of funds required to meet capital
lease obligations and ongoing operating obligations. The Company currently
has approximately 30,000 users. The Company has also made arrangements to
borrow sufficient funds to complete base installations. These arrangements
enable the Company to meet it's current obligations from funds provided
solely from operating activities. For the quarter ended March 31, 1997
(unaudited) the Company experienced positive cash flow from operations of
approximately $96,000. The Company has historically been successful in
raising capital through the sale of equity securities and believes that this
success will continue.
-13-
<PAGE>
XECOM CORP. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During 1996 the Company filed a lawsuit in the U.S. District Court of
California against previous directors, shareholders, and officers of Select
Switch Systems, Inc. alleging fraud, conspiracy, breach of fiduciary duty,
and tortious interference with contractual relations. In response to this
action these previous directors, shareholders, and officers of Select Switch
Systems, Inc. filed suit against the Company in the District Court of
Illinois and Texas and in the U.S. District Court of California. These
actions contend the Company is liable for certain alleged unpaid promissory
notes totaling approximately $960,000 and a supposed verbal agreement to
retain an individual as a consultant. Management contends the alleged notes
payable were converted by the previous shareholders/officers of Select Switch
Systems, Inc. to equity of Select Switch Systems, Inc. prior to, and as part
of, the purchase agreement between Xecom Corp. and Select Switch Systems,
Inc. Management has recorded the purchase of Select Switch Systems, Inc. as
if the alleged notes payable were converted to equity. Management has filed
pleadings denying that it has any liability with respect to the claims
asserted in the lawsuit. Management contends that the notes in question were
fraudulently procured and they are prepared to vigorously defend their
position. The claims are preliminary, however, management believes a
reasonable estimate of a loss, based on information currently available, is
$600,000. This amount has been recognized as a loss in 1996 and appears in
the consolidated balance sheet as a contingent liability.
During 1996, an action was filed against the Company in Federal Court in
Michigan. In this action, the plaintiff is seeking damages in the sum of
$750,000 for breach of contract, and for costs of the suit. The complaint
alleges that the Company agreed to pay the plaintiff a commission for
services rendered in connection with raising equity capital for the Company
and that the promised commission has not been paid. The claims are
preliminary, however, management believes a reasonable estimate of a loss,
based on information currently available, is $100,000. This amount has been
recognized as a loss in 1996 and appears in the consolidated balance sheet as
a contingent liability.
The Company is party to various other legal proceedings in the ordinary
course of business. Although the ultimate resolution of these proceedings
cannot be ascertained, management does not believe they will have a
materially adverse effect on the results of operations or financial position
of the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The registrant is currently in default on Related Party Indebtedness (current
portion totaling $1,060,000. This amount is currently in dispute. Further
the registrant paid no dividends, and is not in arrears in the payment of
dividends for the quarter ended March 31, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Exhibit 27. Financial Data Schedule
-14-
<PAGE>
XECOM CORP. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-QSB to be signed on its behalf
by the undersigned thereon duly authorized.
XECOM CORP.
BY: /s/ JOSEPH C. VIGLIAROLO
----------------------------
JOSEPH C. VIGLIAROLO
PRESIDENT
June 23, 1997
-15-
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