<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 June 30, 1997
OR
( ) TRANSACTION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from to
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For Quarter Ended Commission File Number 0-27706
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XECOM CORP
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(Exact Name of Registrant as Specified in its Charter)
Nevada 33-0664567
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(State or other Jurisdiction of (I.R.S. Employer Identification
Incorporation or organization) No.)
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 August 12, 1997, was 14,668,658 shares of common stock; 0 Series A Preferred
Shares; 1,736,000 Series B Preferred Shares; 830,000 Series C Preferred Shares
outstanding and 16 Series D Preferred Shares.
<PAGE>
FORM 10-QSB REPORT INDEX
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Page
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Form 10-QSB and Item No.
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PART I FINANCIAL INFORMATION(1)
ITEM 1. Financial Statements
Consolidated Balance Sheet as of June 30, 1997
(Unaudited)..........................................................1
Consolidated Statements of Operations for the three months and six
months ended June 30, 1997 and 1996 (Unaudited)......................2
Consolidated Statement of Stockholders' Equity for the six months
ended June 30, 1997 (Unaudited) .....................................3
Consolidated Statements of Cash Flows for the six months
ended June 30, 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 2. Changes In Securities................................................14
Item 3. Defaults Upon Senior Securities.....................................14
Item 5. Other Information...................................................14
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(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 JUNE 30, 1997
(UNAUDITED)
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ASSETS
CURRENT ASSETS
Cash $ 136,355
Accounts receivable 1,050,738
Other receivables 39,147
Investments, available-for-sale 110,013
------------
TOTAL CURRENT ASSETS 1,336,253
PROPERTY AND EQUIPMENT, net (Note B) 24,455,367
INTANGIBLE ASSETS, net (Note A) 68,301
OTHER ASSETS 130,728
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$ 25,990,649
------------
------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 2,241,740
Accrued liabilities 2,738,356
Payroll taxes payable 91,652
Note Payable 400,000
Related party debt -- current portion (Note D) 1,060,000
Capital lease obligations -- current portion (Note E) 4,642,586
------------
TOTAL CURRENT LIABILITIES 11,174,334
CONTINGENT LIABILITY (Note E) 700,000
CAPITAL LEASE OBLIGATIONS, net of current portion (Note E) 18,448,283
MINORITY INTEREST (Note A) 364,947
------------
TOTAL LIABILITIES 30,687,564
COMMITMENTS AND CONTINGENCIES (Note E) ------
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, $0.0001 par value, 50,000,000 shares
authorized, 2,566,016 shares issued and outstanding 257
June 30,1997 Common stock, $0.0001 par value, 100,000,000
shares authorized, 14,668,658 shares issued and
outstanding June 30, 1997 1466
Additional paid in capital 4,303,220
Unrealized loss on investments, available-for-sale (90,000)
Retained deficit (8,911,858)
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TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (4,696,915)
------------
$ 25,990,649
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------------
(See Notes to Consolidated Financial Statements)
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<PAGE>
XECOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
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<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1997 1996 1997 1996
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 1,681,758 $1,379,064 $ 2,943,130 $ 2,831,716
COST OF SALES 1,172,293 1,171,529 2,144,257 2,342,097
----------- ---------- ----------- -----------
Gross Profit 509,465 207,535 798,873 489,619
OPERATING EXPENSES
Selling, general and administrative expenses 429,850 648,301 843,010 1,205,152
Depreciation and amortization 715,466 214,609 1,214,894 307,967
----------- ---------- ----------- -----------
TOTAL OPERATING EXPENSES 1,145,316 862,910 2,057,904 1,513,119
----------- ---------- ----------- -----------
LOSS FROM OPERATIONS (635,851) (655,375) (1,259,031) (1,023,500)
OTHER INCOME (EXPENSES)
Minority interests in consolidated subsidiaries 2790 5,112 1,686 13,545
Interest expense (755,454) (199,073) (1,137,058) (289,042)
Other expenses ( 17,477) (2,675) (17,919) (3,338)
----------- ---------- ----------- -----------
TOTAL OTHER EXPENSES, NET (770,141) (196,636) (1,153,291) (278,835)
----------- ---------- ----------- -----------
LOSS BEFORE INCOME TAXES (1,405,992) (852,011) (2,412,322) (1,302,335)
Income taxes --- --- --- ---
NET LOSS $(1,405,992) $( 852,011) $(2,412,322) $(1,302,335)
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
NET LOSS PER COMMON SHARE $ (.13) $ (.10) $ (.23) $ (.16)
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
AVERAGE COMMON SHARES OUTSTANDING 10,964,504 8,328,958 10,621,377 8,253,518
----------- ---------- ----------- -----------
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</TABLE>
(See Notes to Consolidated Financial Statements)
2.
<PAGE>
XECOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
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<TABLE>
<CAPTION>
Common Stock Preferred Stock
- -----------------------------------------------------------------------------------------------------------------------------------
Shares Amounts Shares Amounts Additional Unrealized Loss on
Paid Investments
in Capital Available-
For-Sale
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1996 10,074,892 $ 1,007 5,756,020 $ 576 $ 5,949,968 $ (90,000)
Preferred D Converted to Common 204,080 20 (4) -- (20) --
Preferred A Converted to Common -
Per Agreement 3,789,686 379 (1,200,000) (120) (400,259) --
Preferred B Converted to Common 600,000 60 (300,000) (30) (30) --
Per Settlement Agreement -- -- (1,690,000) (169) (1,246,439)
Net Loss -- -- -- -- -- --
Balance, June 30, 1997 14,668,658 $ 1,466 2,566,016 $257 $4,303,220 $ (90,000)
- --------------------------------------------------------------------
Retained Total
Deficit Shareholders
Equity
(Deficit)
<S> <C> <C>
Balance December 31, 1996 $(6,499,536) $ (637,985)
Preferred D Converted to Common -- --
Preferred A Converted to Common -
Per Agreement -- (400,000)
Preferred B Converted to Common -- --
Per Settlement Agreement (1,246,608)
Net Loss (2,412,322) (2,412,322)
Balance, June 30, 1997 $(8,911,858) $(4,696,915)
</TABLE>
(See Notes to Consolidated Financial Statements)
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<PAGE>
XECOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
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FOR THE
SIX MONTHS ENDED
JUNE 30
-------------------------
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(2,412,322) $(1,302,335)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,214,894 306,652
Compensation expense (120,636) 58,878
Minority interest in subsidiary earnings (1,686) (13,545)
Loss on sale of contract (16,331)
Changes in operating assets and liabilities:
Accounts receivable (684,353) (92,691)
Other receivables 45,776 (141,581)
Other assets 146,717 (107,016)
Accounts payable 541,564 (363,190)
Accrued liabilities 1,472,814 326,330
Customer advances -- (32,722)
Due from affiliates -- (129,159)
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NET CASH PROVIDED FROM OPERATING ACTIVITIES 186,437 (1,490,379)
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment --- (115,440)
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NET CASH USED IN INVESTING ACTIVITIES --- (115,440)
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 (102,677) (111,944)
Proceeds from issuance of preferred stock --- 594,000
Proceeds from issuance of common stock --- 582,480
Non Participating Shareholders Interest --- (26,426)
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NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (105,677) 1,693,110
----------- -----------
NET INCREASE (DECREASE) IN CASH 80,760 87,291
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 55,595 141,209
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 136,355 $ 228,500
----------- -----------
----------- -----------
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 June 30, 1997 and 1996, are summarized as follows:
1997 1996
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Cash paid for interest and income taxes
Interest $ 90,310 $ 101,366
Income Taxes -- --
Noncash investing and financing activities:
Assets acquired by capital lease $3,468,751 $11,359,990
-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 $68,301 at June 30, 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 $56,250 as
of June 30, 1997.
MINORITY INTEREST
Minority interest represents the 20% limited partners interest in the net
assets of the limited partnership, Select Switch Systems #1 Ltd.
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<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.
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<PAGE>
XECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The periods presented are the six months ended June 30, 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 June 30, 1997 is summarized as follows:
1997
-----------
Machinery and equipment $26,045,377
Furniture and fixtures 145,429
Leasehold - inside/out plant 140,750
Materials and supplies 139,548
-----------
26,471,104
Less accumulated depreciation (2,015,737)
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Property and equipment, net $24,455,367
-----------
-----------
Depreciation expense for the quarter ended June 30, 1997 and 1996 was
$1,206,256 and respectively $307,967.
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 "IBC" 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%.
On June 23, 1997, the Company entered into an agreement with the IBC for
the return of all the remaining shares of stock issued pursuant to the
Consulting Agreement. As a result, shareholders equity was reduced by
approximately $1.2 million. The Investment Banking Company still has the
right on a month to month basis to receive its fee in either cash or
Preferred B stock pursuant to the Agreement.
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<PAGE>
XECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
D. RELATED PARTY-DEBT:
Notes payable at June 30, 1997 is summarized as follows:
June 30, 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 $92,864
and $87,290 for the six months ended June 30, 1997 and 1996, respectively.
Future minimum lease payments due under noncancelable operating leases are
as follows:
1997 $ 69,914
1998 142,115
1999 144,403
2000 76,035
2001 7,668
Thereafter
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$440,135
---------
---------
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 June 30, 1997.
1997
-----------
Cost $23,009,942
Accumulated depreciation (1,820,225)
------------
$21,189,717
------------
------------
The future minimum lease payments under capitalized leases and the present value
of the net minimum lease payments are as follows:
1997 $ 7,020,780
1998 7,807,210
1999 3,447,929
2000 3,428,686
2001 3,375,940
Thereafter 5,581,533
-----------
Total Payments 30,662,078
Less amount representing interest 7,571,209
-----------
23,090,869
Less current portion of capital leases 4,642,586
-----------
$18,448,283
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-----------
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<PAGE>
XECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
COMMITMENTS AND CONTINGENCIES (CONTINUED)
TAX MATTERS
As of June 30, 1997 the Company's wholly owned subsidiary had outstanding
payroll tax liabilities for 1994 and 1995, $101,000 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. STOCK TRANSACTIONS
On June 20, 1997, the Company entered into a settlement agreement whereby
the Class A Preferred Shareholders would forego $396,000 in accrued
dividends, as well as any future dividends, and by which they would also
convert its entire portion or 1,043,750 of their Xecom Class A Preferred
Shares into 3.2 million shares of common stock as opposed to 3939113 common
shares which they were entitled to convert.
On June 23, 1997, the Company entered into an agreement for the return of
700,000 shares of Class B Preferred Stock.
On June 23, 1997, the Company entered into an agreement with the Investing
Banking Company whereby the IBC returned the remaining 990,000 Class
B Preferred Shares which were issued pursuant to a Consulting Agreement
(See Footnote C.)
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<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 June 30,
1997 and results of operations for the six months ended June 30, 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 August 11, 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. In June
1996, the Company sold 10 of its college communication contracts for the
assumption of $956,000 of debt. These contracts generated aproximately $500,000
in revenues, but resulted in continuing operating losses of $170,000 a year.
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 six months ended June 30, 1997, the Company had a loss from operations
of $1,259,031 and a net loss of $2,412,322 ($.23 per share) as compared to a
loss from operations of $1,023,500 and a net loss of $1,302,335 ($.16 per share)
for the same period in 1996.
In August, 1996, the Company sold its SelecTel subsidiary. For the six months
ended June 30, 1997, the operations reflects that of the Company and its wholly
owned subsidiary, Select Switch, the June 30, 1996 operations includes the
Company, Select Switch and SelecTel Corp.
For the six months ended June 30, 1997, the Company's gross profit was $798,873,
or 27%, as compared to $489,619, or 17%, 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 $843,010, or
28%, of net sales, as compared to $1,205,152, or 43%, of net sales in 1996.
The Company believes SG & A 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 and
amoritization expense of $1,214,894 and interest expense of $1,137,058 for a
total of $2,351,952. These expenses directly relate to the telecommunication
systems and equipment and related debt as they relate to the AAFES project.
Earnings before interest, taxes, depreciation and amortization (EBITDA) is
$(44,137) for the six months ended June 30, 1997 compared to $(715,533) for the
prior year. For the three months ended June 30, 1997 the EBITDA was $79,619, as
compared to $(123,756) for the first three months of 1997.
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 $3,468,754 for the six months ended June 30, 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 had 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, as part of a
refinance of all existing leases, 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 six
months ended June 30, 1997 (unaudited) the Company experienced positive cash
flow from operations of approximately $186,437. 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
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 2. CHANGES IN SECURITIES
PREFERRED A STOCK
The Preferred A Shareholders have converted all of the 1.2 million shares
outstanding into 3,789,686 shares of common stock
PREFERRED B STOCK
Pursuant to an agreement, 990,000 Preferred B shares were returned to the
Company that related to Prepaid Consulting.
Pursuant to an agreement, 700,000 Preferred B shares were returned to the
Company as a settlement.
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 June 30, 1997.
ITEM 5. OTHER INFORMATION
The Company has not filed its Form 10KSB for the year ended 12/31/96.
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
October 28, 1997
-15-
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 136,355
<SECURITIES> 110,013
<RECEIVABLES> 1,089,885
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<COMMON> 1,466
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