<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 September 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
- ------------------------------- -------------------------------------
(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 No X
--- ---
The number of shares of stock of the registrant, par value .0001, outstanding
as of November 12, 1997, was 15,309,658 shares of common stock; 1,686,000
Series B Preferred Shares; 605,000 Series C Preferred Shares outstanding
and 16 Series D Preferred Shares.
<PAGE>
FORM 10-QSB REPORT INDEX
Page
----
Form 10-QSB and Item No.
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PART I FINANCIAL INFORMATION(1)
ITEM 1. Financial Statements
Consolidated Balance Sheet as of September 30, 1997
(Unaudited) ................................................ 1
Consolidated Statements of Operations for the three
months and nine months ended September 30, 1997 and 1996
(Unaudited) ................................................ 2
Consolidated Statement of Stockholders' Equity for the nine
months ended September 30, 1997 (Unaudited)................. 3
Consolidated Statements of Cash Flows for the nine months
ended September 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 - 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................ 15
Item 2. Changes In Securities........................................ 15
Item 3. Defaults Upon Senior Securities.............................. 15
Item 5. Other Information............................................ 15
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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 SEPTEMBER 30, 1997
(UNAUDITED)
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ASSETS
CURRENT ASSETS
Cash (Note E) $ 2,583,272
Accounts receivable 1,053,790
Other receivables 14,602
Investments, available-for-sale 110,013
-----------
TOTAL CURRENT ASSETS 3,761,677
PROPERTY AND EQUIPMENT, net (Note B) 24,096,504
INTANGIBLE ASSETS, net (Note A) 63,982
DEFERRED FINANCING COSTS net (Note G) 1,220,162
OTHER ASSETS 131,055
-----------
$29,273,380
-----------
-----------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 705,813
Accrued liabilities 1,387,270
Related party debt -- current portion (Note D) 1,060,000
Capital lease obligations -- current portion (Note E) 3,356,833
-----------
TOTAL CURRENT LIABILITIES 6,509,916
CONTINGENT LIABILITY (Note E) 700,000
CAPITAL LEASE OBLIGATIONS, net of current portion (Note E) 28,182,000
MINORITY INTEREST (Note A) 356,598
-----------
TOTAL LIABILITIES 35,748,514
COMMITMENTS AND CONTINGENCIES (Note E) --
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, $0.0001 par value, 50,000,000 shares
authorized, 2,441,016 shares issued and outstanding
September 30, 1997 244
Common stock, $0.0001 par value, 100,000,000 shares
authorized, 15,159,658 shares issued and outstanding
September 30, 1997 1,516
Additional paid in capital 4,387,183
Unrealized loss on investments, available-for-sale (90,000)
Retained deficit (10,774,077)
-----------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (6,475,134)
-----------
$29,273,380
-----------
-----------
(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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $2,019,133 $ 799,464 $4,962,263 $3,631,180
COST OF SALES 1,382,508 810,539 3,526,765 3,152,636
---------- --------- ---------- ----------
Gross Profit 636,625 (11,075) 1,435,498 478,544
OPERATING EXPENSES
Selling, general and
administrative expenses 1,277,498 795,251 2,120,508 2,000,403
Depreciation and
amortization 386,244 208,712 1,601.138 516,679
---------- --------- ---------- ----------
TOTAL OPERATING EXPENSES 1,663,742 1,003,963 3,721,646 2,517,082
---------- --------- ---------- ----------
LOSS FROM OPERATIONS (1,027,117) (1,015,038) (2,286,148) (2,038,538)
OTHER INCOME (EXPENSES)
Minority interests in
consolidated subsidiaries 8,926 10,801 10,612 24,346
Interest expense (843,452) (316,400) (1,980,510) (605,442)
Other expenses (576) 10,518 (18,495) 7,180
Loss on write down of
investment -- (237,600) -- (237,600)
Gain on sale of subsidiary -- 537,076 -- 537,076
---------- --------- ---------- ----------
TOTAL OTHER EXPENSES, NET (835,102) 4,395 (1,988,393) (274,440)
---------- --------- ---------- ----------
LOSS BEFORE INCOME TAXES (1,862,219) (1,010,643) (4,274,541) (2,312,978)
Income taxes -- -- -- --
NET LOSS $(1,862,219) $(1,010,643) $(4,274,541) $(2,312,978)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET LOSS PER COMMON SHARE $ (.12) $ (.11) $ (.35) $ (.27)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
AVERAGE COMMON SHARES
OUTSTANDING 14,919,343 8,800,436 12,069,776 8,437,155
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</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
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Shares Amounts Shares Amounts Additional Unrealized Loss Retained Total
Paid on Investments Deficit Shareholders
in Capital Available- Equity
For-Sale (Deficit)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1996 10,074,892 $ 1,007 5,756,020 $ 576 $ 5,949,968 $ (90,000) $(6,499,536) $ (637,985)
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Preferred D Converted to
Common 204,080 20 (4) -- (20) -- -- --
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Preferred A Converted to
Common -- Per Agreement 3,789,686 379 (1,200,000) (120) (400,259) -- -- (400,000)
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Preferred B Converted to
Common 700,000 70 (350,000) (35) (35) -- -- --
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Preferred C Converted to
Common 75,000 8 (75,000) (8) -- -- -- --
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Per Settlement Agreement -- -- (1,690,000) (169) (1,246,439) (1,246,608)
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Preferred C Dividends 166,000 17 -- -- (17) -- -- --
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Common Stocks Issued for
Services 150,000 15 -- -- 83,985 -- -- 84,000
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Net Loss -- -- -- -- -- -- (4,274,541) (4,274,541)
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Balance, September 30, 1997 15,159,658 $ 1,516 2,441,016 $244 $4,387,183 $ (90,000) $(10,774,077) $(6,475,134)
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</TABLE>
(See Notes to Consolidated Financial Statements)
-3-
<PAGE>
XECOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
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FOR THE
NINE MONTHS ENDED
SEPTEMBER 30
------------
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(4,274,541) $(2,312,978)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,601,136 503,687
Compensation expense (36,636) 179,435
Minority interest in subsidiary earnings (10,612) (24,346)
Loss on sale of contract (16,331) --
Changes in operating assets and liabilities:
Accounts receivable (637,405) (532,423)
Other receivables 20,321 26,338
Financing costs (1,234,862) --
Other assets 146,390 (98,563)
Accounts payable 614,516 (435,292)
Accrued liabilities 3,163,267 352,088
Customer advances -- 120,495
Due from affiliates -- (166,259)
----------- -----------
NET CASH PROVIDED FROM OPERATING ACTIVITIES (664,757) (2,387,818)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment -- (262,910)
Proceeds from sale of subsidiary -- 318,000
Payments on notes receivable -- 12,500
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES -- 67,590
CASH FLOWS FROM FINANCING ACTIVITIES
Net Proceeds from debt refinance 3,719,385 --
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 (123,951) (285,860)
Payment on notes payable (400,000) --
Proceeds from issuance of preferred stock -- 1,299,000
Proceeds from issuance of common stock -- 582,480
Non Participating Shareholders Interest -- (51,777)
----------- -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 3,192,434 2,198,843
----------- -----------
NET INCREASE (DECREASE) IN CASH 2,527,677 (121,385)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 55,595 141,209
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,583,272 $ 19,824
----------- -----------
----------- -----------
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 nine months ended
September 30, 1997 and 1996, are summarized as follows:
1997 1996
---- ----
Cash paid for interest and income taxes
Interest $ 2,382,486 $ 320,950
Income Taxes -- --
Noncash investing and financing activities:
Assets acquired by capital lease $ 3,477,111 $15,298,466
Payables included in Equipment Refinance $ 5,973,140 --
Refinance of Capital Leases and Debt $27,120,914 --
-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 $63,982 at September 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 $58,322 as of September 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.
-6-
<PAGE>
XECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
A. 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)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The periods presented are the nine months ended September 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 September 30, 1997 is summarized as follows:
1997
----
Machinery and equipment $26,045,956
Furniture and fixtures 153,210
Leasehold - inside/out plant 140,750
Materials and supplies 139,548
-----------
26,479,464
Less accumulated depreciation (2,382,960)
-----------
Property and equipment, net $24,096,504
-----------
-----------
Depreciation expense for the quarter ended September 30, 1997 and
1996 was $1,573,479 and respectively $493,883.
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 Indian Wells Investment Company ("IWIC"), an
affiliate of the Company. IWIC 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 IWIC 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. IWIC still has the right on a month to month
basis to receive its fee in either cash, in the amount of $25,000 per
month, or Preferred B stock pursuant to the Agreement.
-8-
<PAGE>
XECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
D. RELATED PARTY-DEBT:
Notes payable at September 30, 1997 is summarized as follows:
September 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 $127,821 and $107,142 for the nine months ended September 30,
1997 and 1996, respectively. Future minimum lease payments due under
noncancelable operating leases are as follows:
1997 $ 34,957
1998 142,115
1999 144,403
2000 76,035
2001 7,668
Thereafter
--------
$405,178
--------
--------
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)
E. COMMITMENTS AND CONTINGENCIES (CONTINUED)
CAPITAL LEASES
The Company finances substantially all of its telecommunication
equipment purchases under capital lease agreements with First
Continental Capital Corporation. The leases require monthly payments
over an eighty-four month period. The following is an analysis of the
book value of the leased assets included in property and equipment as of
September 30, 1997.
1997
----
Cost $25,482,462
Accumulated depreciation (2,173,391)
-----------
$23,309,071
-----------
-----------
In August 1997, the Company entered into a series of agreements to
refinance all of the Company's AAFES related debt obligations. The
Equipment Refinancing Agreements consist of the sale and leaseback of
all of the Company's switching equipment already installed.
Specifically, the Company sold all of its switching and central office
equipment to First Continental Capital Corporation ("Lessor") for
approximately $29,000,000; (b) the Lessor leased back all of the
Equipment to the Company pursuant to a seven-year lease, with an
effective interest rate, fully amortized, of 10.25% PER ANNUM, with a
moratorium on lease payments until June 30, 1998; and (c) the proceeds
of the sale were used to pay off all existing obligations to Fujitsu and
CIT (approximately $19,708,000) and to Sprint ($7,413,000) and to escrow
a total of approximately $2,370,000 for payment of certain outstanding
obligations and an estimated reserve for any state sales taxes on the
sale that may arise, if any.
The future minimum lease payments under capitalized leases and the
present value of the net minimum lease payments are as follows:
1997 $ 52,657
1998 3,962,041
1999 6,715,062
2000 6,695,819
2001 6,643,073
Thereafter 21,096,481
-----------
Total Payments 45,165,133
Less amount representing interest 13,626,300
-----------
31,538,833
Less current portion of capital leases 3,356,833
-----------
$28,182,000
-----------
-----------
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<PAGE>
XECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
E. COMMITMENTS AND CONTINGENCIES (CONTINUED)
F. STOCK TRANSACTIONS
On June 20, 1997, the Company entered into a settlement agreement whereby
the Class A Preferred Shareholder, Top-Net Inc., a Nevada corporation,
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 3,939,113 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.)
On July 1997, the Company issued 166,000 shares of common stock to the
Preferred C Shareholders in lieu of cash dividends.
G. DEFERRED FINANCING COSTS
Pursuant to an agreement with First Continental Capital Corp., the
Company paid a 4% fee to obtain the equipment refinance. As a result,
the Company recorded a deferred charge of $1,234,862, which it plans to
amortize over the life of the lease, or 84 months. Accordingly, the
Company recorded $14,700 as an expense for the period ending September 30,
1997.
-11-
<PAGE>
XECOM CORP. AND SUBSIDIARIES
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 September
30, 1997 and results of operations for the nine months ended September 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.
This Report, including the disclosures below, contains forward-looking
statements that involve substantial risks and uncertainties. When used herein,
the terms "anticipates," "expects," "estimates," "believes" and similar
expressions, as they relate to the Company or its management, are intended to
identify such forward-looking statements. The Company's actual results,
performance or achievements may differ materially from those expressed or
implied by such forward-looking statements.
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 November 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 approximately
$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
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
In August 1997, the Company refinanced all of the Company's AAFES related debt
obligations. Specifically, the Company sold all of its switching and central
office equipment for approximately $29,000,000; the lessor leased back all of
the equipment to the Company pursuant to a seven-year lease, with an effective
interest rate of 10.25% with a 10-month moratorium on lease payments until June
30, 1998. The proceeds of the sale were used to pay off all existing
obligations to Fujitsu and CIT (approximately $19,708,000) and to Sprint
($7,413,000) and to escrow a total of approximately $2,370,000 for payment of
certain outstanding obligations and an estimated reserve for any state sales tax
on the sale that may arise, if any.
RESULTS OF OPERATION
The Company's net sales revenues increased from $3,631,180 for the nine months
ended September 30, 1997, to $4,962,263, an increase of 37% for the same period
in 1997.
In August, 1996, the Company sold its SelecTel subsidiary. For the nine months
ended September 30, 1997, the operations reflects that of the Company and its
wholly owned subsidiary, Select Switch. The September 30, 1996 operations
includes the Company, Select Switch and SelecTel Corp. SelecTel Corp. accounted
for approximately $2.75 in revenues for 1996.
For the nine months ended September 30, 1997, the Company's gross profit was
$1,435,498, or 29% of net sales revenue as compared to $478,544, or 13% of net
sales revenue 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.
Selling, general and administrative expenses for 1997 amounted to $2,120,508, or
42% of net sales, as compared to $2,000,403, or 55% of net sales in 1996. The
net loss of $4,274,541 was predominantly the result of depreciation and
amortization expense of $1,601,138 and interest expense of $1,980,510 for a
total of $3,581,648. These expenses directly relate to the telecommunication
systems and equipment and related debt as they relate to the AAFES project.
LIQUIDITY AND CAPITAL RESOURCES
Both the intended increase of the Company's Military Business and the entry into
the CLEC Business will require substantial additional capital investment, in
particular for communication lines and central office switching equipment.
Notwithstanding the Equipment Refinancing Agreements, which relate only with the
Company's debt on equipment already in place, the Company will have to expend
significant amounts of capital for the acquisition and maintenance of equipment
on new bases. Management estimates that, during the next 18 to 24 months, the
cost for such expansion will be approximately $15 million, and that the cost of
the initial entry into the CLEC Business will be approximately $5 million. The
Company believes that the vast majority, if not all of such funds, will have to
come from sources outside the Company. There can be no assurances that the
Company will be able to obtain the needed financing on terms acceptable to the
Company, if at all. The failure of the Company to obtain such financing or to
meet its financial commitments could have a material adverse effect on the
Company's business operations or could cause the Company to reduce operations.
As of September 30, 1997, the Company's aggregate cash and cash equivalent
totaled $2,583,272. The Company financed its operations in 1997 primarily from
credit extended by Fujitsu and Sprint. The Company generated little or no cash
flow from operations, and no assurance can be given when, or whether, the
Company will be able to earn significant cash flow therefrom. Until such time,
the Company must rely on outside sources of financing to enable it to carry out
its business plan during the next 18 to 24 months.
-13-
<PAGE>
XECOM CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
As of August 22, 1997, the Company refinanced its existing debt to Fujitsu and
Sprint by entering into the Refinancing Agreement. The proceeds from the
Refinancing Agreement are sufficient to retire the debt to Sprint and Fujitsu,
but not to contribute toward the cost of the Company's continuing operations
during the next 18 to 24 months. Consequently, the Company is now current in
its obligations to Sprint, its Principal Business Partner; and the Company has
until July 1, 1998 (before lease payments commence) to build up revenues from
operations and to obtain additional outside financing. Accordingly, just in
order to continue its business operations under the Sprint Agreement, the
Company must obtain significant outside financing. There can be no assurances
that such external sources of financing will be available on terms acceptable to
the Company or at all. In the event the Company does not receive such
financing, the Company will be forced to reduce operations to a level which can
be sustained by internally generating funds.
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.
NEW ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which requires additional disclosures
related to stock based compensation plans. The Company adopted this statement
effective January 1, 1996, which did not have a material effect on the Company's
results of operations or financial position. The Company also adopted the
provisions of SFAS No. 121, "Accounting for the Impairment of Long-lived
Assets," which did not have a material effect on the Company's results of
operations or financial position.
-14-
<PAGE>
XECOM CORP. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to various legal proceedings which have been disclosed
in prior quarterly reports.
ITEM 2. CHANGES IN SECURITIES
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 September 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
-15-
<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
November 11, 1997
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<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,583,272
<SECURITIES> 110,013
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