<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________ to _____________
Commission file number: 000-27706
XECOM CORP.
(Name of small business issuer specified in its charter)
Nevada 87-0421183
--------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
69-730 Highway 111, Suite 101, Rancho Mirage, California 92270
--------------------------------------------------------------
(Address of principal executive offices, including zip code)
619-202-1555
------------------------------------------------
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange
Title of each class on which registered
------------------- ----------------------
None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.0001 par value per share
------------------------------------------
(Title of Class)
Check whether the issuer: (i) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (ii) has been subject to such filing requirements for the past 90 days.
Yes No X
----- ----
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for the fiscal year ended December 31, 1996 were
$4,632,318.
The number of shares outstanding of the issuer's common stock as of
__________, 1997, was ___________ shares. The aggregate market value of the
common stock (___________ shares) held by non-affiliates, based on the
average of the bid and asked prices ($_________) of the common stock as of
__________, 1997 was $__________.
Transactional Small Business Disclosure Format (Check one): Yes No X
--- ---
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The Company is currently subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and in
accordance therewith files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information may be inspected and copied
at the public reference facilities of the Commission at 450 Fifth Street,
N.W., Washington D.C. 20549; at its New York Regional Office, Room 1400, 7
World Trade Center, New York, New York, 10048; and at its Chicago Regional
Office, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2411,
and copies of such materials can be obtained from the Public Reference
Section at prescribed rates. The Company intends to furnish its stockholders
with annual reports containing audited financial statements and such other
periodic reports as the Company may determine to be appropriate or as may be
required by law.
2
<PAGE>
Xecom Corp. (the "Company") is filing an incomplete annual report on Form
10-KSB, which includes only the Company's financial statements for the fiscal
year ended December 31, 1996. An amended Form 10-KSB, containing all the
information required under the Exchange Act, will be filed by the Company in
the immediate future.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements required by this Item 7 are attached as Exhibit
"A" hereto and are incorporated herein by reference.
3
<PAGE>
EXHIBIT A
XECOM CORP. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
<PAGE>
C O N T E N T S
PAGE
INDEPENDENT AUDITORS' REPORT . . . . . . . . . . . . . . . . . . . . . . . 1
CONSOLIDATED FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1995 . . . . 2
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 1996 AND 1995 . . . . . . . . . . . . . . . . . . . 3
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) FOR THE
YEARS ENDED DECEMBER 31, 1996 AND 1995 . . . . . . . . . . . . . 4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1996 AND 1995 . . . . . . . . . . . . . . . . . . . 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. . . . . . . . . . . . . .6 - 19
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
XECOM CORP:
We have audited the accompanying consolidated balance sheets of Xecom Corp.
(a Nevada corporation) and its subsidiaries (Note A) as of December 31, 1996
and 1995, and the related consolidated statements of operations,
shareholders' equity (deficit), and cash flows for the years then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Xecom Corp. and its subsidiaries as of December 31, 1996 and
1995, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note N to the
financial statements, the Company's default on certain loan agreements,
recurring losses, decreases in working capital, and negative cash flows raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note N to
the financial statements. The financial statements do not include any
adjustments relating to the recoverability and classification of reported
asset amounts or the amounts and classification of liabilities that might
result from the outcome of this uncertainty.
Harlan & Boettger, LLP
San Diego, California
April 24, 1997
<PAGE>
XECOM CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS As of December 31,
-----------------------------
1996 1995
---------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 55,595 $ 141,209
Accounts receivable, less allowance for doubtful accounts
of $130,300 and $54,580 366,385 839,908
Due from affiliates 26,123 65,433
Other receivables 58,800 79,123
Investments, available-for-sale (Note D) 110,013 437,600
----------- ----------
TOTAL CURRENT ASSETS 616,916 1,563,273
PROPERTY AND EQUIPMENT, net (Note C) 21,220,153 3,626,642
INTANGIBLE ASSETS, net (Notes A and B) 76,940 94,216
PREPAID CONSULTING FEE (Note E) 1,125,972 1,246,734
OTHER ASSETS 277,445 77,745
----------- ----------
$23,317,426 $ 6,608,610
----------- ----------
----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 2,934,823 $ 2,320,566
Accrued liabilities 1,194,410 241,775
Payroll taxes payable 163,961 113,668
Customer advance - 50,000
Related party debt - current portion (Note F) 1,060,000 812,625
Capital lease obligations - current portion (Note H) 3,260,116 205,241
----------- ----------
TOTAL CURRENT LIABILITIES 8,613,310 3,743,875
CONTINGENT LIABILITY (Note H) 700,000 -
CAPITAL LEASE OBLIGATIONS, net of current portion (Note H) 14,276,645 844,807
MINORITY INTEREST (Note A) 365,456 421,957
----------- ----------
TOTAL LIABILITIES 23,955,411 5,010,639
COMMITMENTS AND CONTINGENCIES (Note H) - -
SHAREHOLDERS' EQUITY (DEFICIT)(Note J)
Preferred stock, $0.0001 par value, 50,000,000 shares
authorized, 5,756,020 and 5,537,000 shares issued
and outstanding December 31, 1996 and 1995, respectively 576 554
Common stock, $0.0001 par value, 100,000,000 shares
authorized, 10,074,892 and 7,939,892 shares issued and
outstanding December 31, 1996 and 1995, respectively 1,007 794
Additional paid in capital - preferred stock 4,078,041 3,028,526
Additional paid in capital - common stock 1,871,927 700,177
Less stock subscription receivable - (400,000)
Unrealized loss on investments, available-for-sale (Note D) (90,000) -
Nonparticipating SelecTel shareholders' interests - (56,409)
Retained deficit (6,499,536) (1,675,671)
----------- ----------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (637,985) 1,597,971
----------- ----------
$23,317,426 $ 6,608,610
----------- ----------
----------- ----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
2
<PAGE>
XECOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
<S> <C> 1996 <C> 1995
--------------------------------
NET SALES $ 4,632,318 $ 5,523,872
COST OF SALES 3,922,990 4,676,698
------------ ------------
Gross Profit 709,328 847,174
OPERATING EXPENSES
Selling, general and administrative expenses 2,570,451 1,055,746
Depreciation and amortization 949,745 43,734
------------ -------------
TOTAL OPERATING EXPENSES 3,520,196 1,099,480
------------ -------------
LOSS FROM OPERATIONS (2,810,868) (252,306)
GAIN ON SALE OF SUBSIDIARY (Note K) 537,076 -
OTHER INCOME (EXPENSES)
Minority interests in consolidated subsidiaries,
net income 23,819 68,247
Interest expense (970,947) (30,977)
Realized loss on investments, available-for-sale
(Note D) (627,587) (562,400)
Realized loss on impairment of assets to be disposed of
(Note L) (290,835) -
Other income (expenses) 17,963 (3,163)
Contingent loss (Note H) (700,000) -
----------- -------------
TOTAL OTHER EXPENSES, NET (2,547,587) (528,293)
----------- -------------
LOSS BEFORE INCOME TAXES (4,821,379) (780,599)
Income taxes (Note G) (2,486) (1,611)
----------- -------------
NET LOSS $(4,823,865) $ (782,210)
----------- -------------
----------- -------------
NET LOSS PER COMMON SHARE $ (.62) $ (.21)
----------- -------------
----------- -------------
AVERAGE COMMON SHARES OUTSTANDING 8,752,207 3,791,780
----------- -------------
----------- -------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
3
<PAGE>
XECOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Nonparticipating
Common Stock Preferred Stock Additional SelecTel
--------------- ----------------- Paid-in Shareholders'
Shares Amount Shares Amount Capital Interest
------ ------ ------ ------ ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 350 $ - - $ - $488,453 $(173,793)
Capital contributions - - - - 433,300 -
Common stock private
placement 600,000 60 - - 499,940 -
Reverse merger of
Xecom (Note B) 6,399,542 640 2,900,000 290 991,061 -
Issuance of common
stock for acquired
company (Note B) 940,000 94 - - (947,521) -
Series B preferred
stock issued for
services - - 1,620,000 162 1,246,572 -
Series B preferred
stock private
placement - - 1,017,000 102 1,016,898 -
Less stock
subscription
receivable - - - - (400,000) -
Minority interest - - - - - 117,384
Net loss - - - - - -
---------- ------ --------- ------- ---------- ----------
BALANCE, DECEMBER 31,
1995 7,939,892 $ 794 5,537,000 $ 554 $3,328,703 $ (56,409)
Issuance of common
stock for cash 555,000 55 - - 622,445 -
Issuance of common
stock for services 320,000 32 - - 309,968 -
Preferred Series C
issued for cash - - 830,000 83 829,917 -
Payment of stock
subscription
receivable - - - - 400,000 -
Preferred Series D
issued for cash - - 20 - 440,000 -
Preferred Series B
issued for cash - - 19,000 2 18,998 -
Preferred Series B
converted to common 1,260,000 126 (630,000) (63) (63) -
Change in unrealized
loss on investments,
available-for-sale - - - - - -
Minority interest - - - - - 56,409
Net loss - - - - - -
---------- ------ --------- ------- ---------- ----------
BALANCE, DECEMBER 31,
1996 10,074,892 $1,007 5,756,020 $ 576 $5,949,968 $ -
---------- ------ --------- ------- ---------- ----------
---------- ------ --------- ------- ---------- ----------
Unrealized
Loss on Total
Investments Shareholders'
Available- Retained Equity
For-Sale Deficit (Deficit)
------------- ---------- -------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $ - $(893,970) $(579,310)
Capital contributions - - 433,300
Common stock private
placement - - 500,000
Reverse merger of
Xecom (Note B) - 509 992,500
Issuance of common
stock for acquired
company (Note B) - - (947,427)
Series B preferred
stock issued for
services - - 1,246,734
Series B preferred
stock private
placement - - 1,017,000
Less stock
subscription
receivable - - (400,000)
Minority interest - - 117,384
Net loss - (782,210) (782,210)
-------- ----------- ----------
BALANCE, DECEMBER 31,
1995 $ - $(1,675,671) $1,597,971
Issuance of common
stock for cash - - 622,500
Issuance of common
stock for services - - 310,000
Preferred Series C
issued for cash - - 830,000
Payment of stock
subscription
receivable - - 400,000
Preferred Series D
issued for cash - - 440,000
Preferred Series B
issued for cash - - 19,000
Preferred Series B
converted to common - - -
Change in unrealized
loss on investments,
available-for-sale (90,000) - (90,000)
Minority interest - - 56,409
Net loss - (4,823,865) (4,823,865)
-------- ----------- ----------
BALANCE, DECEMBER 31, 1996 $(90,000) $(6,499,536) $(637,985)
-------- ----------- ----------
-------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
XECOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
<S> <C> 1996 <C> 1995
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(4,823,865) $ (782,210)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 949,745 43,734
Minority interest in subsidiary earnings (80,055) (68,534)
Gain on sale of subsidiary (537,076) -
Realized loss on investments, available-for-sale 237,600 562,400
Realized loss on impairment of assets to be disposed of 290,835 -
Common stock issued for services 310,000 -
Contingent loss 700,000 -
Changes in operating assets and liabilities:
Accounts receivable (295,714) (238,106)
Other receivables (12,480) (8,971)
Accounts payable 1,850,597 347,824
Accrued liabilities 465,395 34,431
Payroll taxes payable 163,961 -
Customer advances - 50,000
---------- ------------
NET CASH USED IN OPERATING ACTIVITIES (781,057) (59,432)
---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (2,082,373) (1,335,277)
Due from affiliates 39,310 (65,433)
Other assets 120,749 (814)
Deposits (211,391) -
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (2,133,705) (1,401,524)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from related party debt 255,000 -
Payments on related party debt - (200,000)
Payments under capital lease obligations (227,852) -
Payments of stock subscription receivable 400,000 -
Proceeds from capital contribution before reverse merger - 433,300
Proceeds from preferred stock Series B private placement 19,000 1,017,000
Proceeds from issuance of preferred Series C stock 830,000 -
Proceeds from issuance of preferred Series D stock 440,000 -
Proceeds from issuance of common stock 622,500 100,000
Nonparticipating SelecTel shareholders' interests - 185,918
Proceeds from sale of subsidiary 490,500 -
--------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,829,148 1,536,218
--------- ----------
NET INCREASE (DECREASE) IN CASH (85,614) 75,262
CASH, BEGINNING OF YEAR 141,209 65,947
--------- -----------
CASH, END OF YEAR $ 55,595 $ 141,209
--------- -----------
--------- -----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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., and its majority
owned subsidiary, SelecTel Corporation (SelecTel) (see footnote K),
(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 LP, to the
nation's 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.
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid debt or equity instruments purchased with an original
maturity of three months or less to be cash equivalents. There were no
cash equivalents as of December 31, 1996 and 1995.
FAIR VALUE
The Company has cash, receivables and accounts payable for which the
carrying value approximates fair value due to the short-term nature of
these instruments.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated using the
straight-line method over the estimated useful lives of the 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 cost and accumulated depreciation are eliminated from the
respective accounts and any gain or loss on disposition is reflected as
income or expense.
6
<PAGE>
XECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INTANGIBLE ASSETS
Intangible assets of $76,940 and $94,216 at December 31, 1996 and 1995,
respectively, consist of telecommunication 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 $45,364 and $28,088 as of December 31, 1996
and 1995, respectively.
MINORITY INTEREST
Minority interest represents the 20% limited partners interest in the net
assets of the limited partnership, Select Switch Systems #1 Ltd.
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 adjusted for
preferred dividends in arrears 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 on 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 (FAS
No.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.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk include cash equivalents and accounts
receivable arising from its normal business activities. The Company places
its cash and cash equivalents with high credit quality financial
institutions. The Company periodically has money in a financial
institution that is subject to normal credit risk beyond insured amounts.
The Company believes that no significant concentration of credit risk
exists with respect to cash investments.
Regarding accounts receivable, the Company believes that credit risk is
limited due to the large number of entities comprising the Company's
customer base. In addition, the Company routinely assesses the financial
strength of its customers, and based upon factors surrounding the credit
risk of its customers, establishes an allowance for uncollectible accounts
and, as a consequence, believes that its accounts receivable credit risk
exposure beyond such allowances is limited.
7
<PAGE>
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the
current year presentation.
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 No.123). FAS No.123 allows for two
methods of valuing stock-based compensation. The first method allows for
the continuing application of APB No.25 in measuring stock-based
compensation, while complying with the disclosure requirements of FAS
No.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 No.25, while complying with FAS No.123
disclosure requirements (see Note J).
B. RESTATED TRANSACTIONS:
The following transactions which were recorded for the year ended December
31, 1995 have been restated as follows:
ACQUISITION OF SELECTEL CORPORATION
The acquisition of 70% of SelecTel has been restated and recorded by the
Company as a reverse merger in accordance with CICA "Business
Combinations", and Accounting Principle Board Opinion No. 16 (APB No. 16)
"Business Combinations".
In September 1995, Xecom Corp. acquired 70% of SelecTel through the
issuance of 1,000,000 shares of common stock, 1,000,000 shares of 10%
Series B cumulative, convertible, nonparticipating preferred stock and a
$1,500,000 9% demand promissory note which was converted by the note holder
into 1,200,000 shares of 11% Series A, cumulative, convertible,
participating preferred stock and an additional 700,000 shares of Series B
preferred stock.
The Company originally recorded the transaction under the Purchase Method,
in accordance with APB No.16 and valued the investment at $3,270,000 which
was reflected in the consolidated financial statements under the caption
Goodwill and Intangible Assets.
Based on Reverse Merger accounting, the Company has recorded an investment
of $28,293 based on their 70% ownership of the net assets of SelecTel
Corporation on the date of acquisition (September 8, 1995). Due to the
fact that Xecom Corp. had minimal operations for the three years prior to
the reverse merger the consolidated operations for the period from January
1, 1995 to September 8, 1995 are the operation solely of SelecTel
Corporation. On the date of acquisition the cumulative retained deficit of
Xecom Corp. of $306,019 was eliminated against additional paid in capital
and replaced with the retained deficit of SelecTel Corporation of
$893,461. The net effect on the restated financial statements was
the elimination of $3,241,707 in goodwill and a reduction in
shareholders' equity of $3,241,707.
8
<PAGE>
XECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
B. RESTATED TRANSACTIONS: (CONTINUED)
ACQUISITION OF SELECT SWITCH SYSTEMS, INC.
The acquisition of 100% of Select has been restated and recorded by the
Company under the Purchase Method per APB No. 16.
In December 1995, Xecom Corp. acquired 100% of the outstanding common stock
of Select for 940,000 shares of common stock.
The Company originally recorded the transaction under the Pooling of
Interest Method per APB No.16 and included the operations of Select in the
Consolidated Statements of Operations for the year ended December 31, 1995.
The proforma consolidated net sales and net loss for the year ended
December 31, 1995 would have been $6,205,631 and $2,210,436, respectively,
if the companies had combined at the beginning of the period. The proforma
net loss per common share would have been $.47 per share.
The operations of Select have been included in the Consolidated Statements
of Operations only for the period after the date of acquisition (December
12, 1995). The Company recorded a negative investment of $(947,427) based
on the negative net worth of Select on the date of acquisition. The
negative net worth included approximately $963,000 of additional paid in
capital which was previously classified as related party debt. The net
effect of this restated transaction on the financial statements was a
reduction in shareholders' equity of $947,427 and a reduction of
consolidated net loss of $1,487,735 for the year ended December 31, 1995.
STOCK ISSUED FOR PREPAID CONSULTING AGREEMENT
The Company originally recorded a $1,620,000 asset, "Prepaid Consulting
Fee", based on the gross monthly payment stream required over the 5 year
life of the agreement (see Note E).
The Company has restated the asset, "Prepaid Consulting Fee", by recording
the asset at the present value of the gross monthly payment stream over the
life of the agreement, discounted at 10%. The net effect on the restated
financial statements was a decrease of $373,266 in the asset and a
corresponding decrease in additional paid in capital.
9
<PAGE>
XECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
C. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1996 and 1995 is summarized as
follows:
<TABLE>
<CAPTION>
<S> <C> 1996 <C> 1995
----------- ----------
Machinery and equipment $21,528,788 $2,463,315
Furniture and fixtures 139,837 128,502
Leasehold - inside/out plant 615,714 839,711
Materials and supplies 139,548 156,275
Construction in progress - 464,204
----------- ----------
22,423,887 4,052,007
Less accumulated depreciation (1,203,734) (425,365)
----------- -----------
Property and equipment, net $21,220,153 $3,626,642
----------- -----------
</TABLE>
Depreciation expense for the years ended December 31, 1996 and 1995 was
$932,469 and $43,734, respectively.
D. INVESTMENTS, AVAILABLE-FOR-SALE:
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No.115 (FAS No. 115), "Accounting for Certain
Investments in Debt and Equity Securities." The Company's investment
securities are classified as "available-for-sale." Accordingly,
unrealized gains and losses and the related deferred income tax effects
are excluded from earnings and reported in a separate component of
shareholders' equity. Realized gains or losses are computed based on
specific identification of the securities sold. FAS No. 115 superseded
FAS No. 12, "Accounting for Certain Marketable Securities," under which
investment securities were generally carried at the lower of aggregate
market or amortized cost and unrealized gains were not recognized.
Investments, available-for-sale consist of 2,000,000 shares of common stock
of Maesa Gaming Management, Inc. (Maesa) acquired by the Company in May
1995 for 500,000 shares of the Company's common stock. The original
investment was valued at $1,000,000, based on a 40% discount applied to the
ten day average closing price of the Maesa stock for the five trading days
immediately before and after the transaction. At December 31, 1995, the
fair market value of the Maesa stock had decreased. Management determined
that the decrease in fair market value was other than temporary and
recognized a realized loss of $562,400. The Company recorded an additional
realized loss on investment of $237,600 for the year ended December 31,
1996. Subsequent to December 31, 1996, the Maesa stock incurred a further
decrease in market value. Based on information currently available,
management believes the subsequent decrease in the fair market value is
temporary, not permanent, and has recorded an unrealized loss of $90,000 as
a separate component of shareholders' equity (deficit) as of December 31,
1996.
Also included in investments, available-for-sale are 130,000 shares of
common stock of TeleTek, Inc., received by the Company in 1996 as partial
consideration for the sale of the Company's majority owned subsidiary,
SelecTel Corporation (see Note K).
10
<PAGE>
XECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
D. INVESTMENTS, AVAILABLE-FOR-SALE: (CONTINUED)
Subsequent to December 31, 1996, it was determined by management that the
TeleTek, Inc. securities had no fair market value and the decline in fair
market value was other than temporary. A loss on investment of $389,987
representing the permanent impairment has been charged against income for
the year ended December 31, 1996 and the investment in TeleTek, Inc. has
been written down to its par value of $13 (130,000 shares x $0.0001 per
share). (See Note M.)
E. 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 years ended December 31, 1996 and 1995 were $130,262 and $0,
respectively.
F. RELATED PARTY-DEBT:
Notes payable at December 31, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
<S> As of December 31,
------------------------------
<C> 1996 <C> 1995
---------- ---------
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 $789,000
Notes payable to various investors, interest payable ranging
from 10% to 15%, personally guaranteed by shareholders and
an officer of the Company, 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 23,625
---------- ----------
1,060,000 812,625
Less current portion 1,060,000 812,625
----------- ----------
$ - $ -
----------- ----------
----------- ----------
</TABLE>
The notes payable contain certain covenants which include, but are not
limited to, requiring the Company to maintain a term life insurance policy
on the promissors payable to the payee in an amount sufficient to pay the
principal and accrued interest in the event of promisor's death. The
Company was not in compliance with this covenant as of December 31, 1996.
All of the notes are past due as of December 31, 1996. Certain note
holders have demanded payment and initiated formal action against the
Company in regards to disputed and past due amounts. (See Note H.)
11
<PAGE>
XECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
G. INCOME TAXES:
The provision for income taxes for the years ended December 31, 1996 and
1995 consists solely of the minimum state taxes.
The Company's total deferred tax assets and liabilities as of December 31,
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
<S> <C> 1996 <C> 1995
---------- ----------
Deferred tax assets:
Net operating loss carryforwards $ 989,100 $ 433,700
Accounts payable 440,200 132,800
Accrued expenses 150,600 43,800
---------- ----------
1,579,900 610,300
Deferred tax liability:
Accounts receivable 54,200 9,800
Tax over book depreciation 90,900 33,000
---------- ----------
Net deferred tax asset/(liability) 1,434,800 567,500
Valuation allowance (1,434,800) (567,500)
----------- -----------
Net deferred tax assets $ - $ -
----------- -----------
----------- -----------
</TABLE>
As of December 31, 1996, the Company had net operating loss carryforwards,
before any limitations, which expire as follows:
Year Ending
December 31, Federal
------------ -----------
2004 $ 39,600
2005 32,300
2006 7,500
2008 131,400
2009 483,000
2010 2,197,600
2011 3,702,600
----------
$6,594,000
----------
----------
Pursuant to the Internal Revenue Code Section 382, use of the net operating
loss of approximately $2,022,600 of the Company's wholly owned subsidiary
will be limited due to a cumulative change in ownership of more than 50%.
The net operating loss available is estimated to be approximately $88,000
per year and can be utilized at that rate until such loss is fully utilized
or expires, whichever is earlier.
12
<PAGE>
XECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
H. 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 $182,449 and $99,823 for the years ended December 31, 1996 and
1995, respectively. Future minimum lease payments due under noncancelable
operating leases as of December 31, 1996 are as follows:
1997 $149,324
1998 151,612
1999 148,360
2000 76,035
2001 7,668
Thereafter -
--------
$532,999
--------
--------
The noncancelable operating leases provide that the Company pays for
taxes, licenses, insurance and certain other operating expenses
applicable to the leased items.
CAPITAL LEASES
The Company finances substantially all of its telecommunication equipment
purchases under capital lease agreements with The CIT Group and Fujistu
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 December 31, 1996 and 1995.
1996 1995
----------- -------------
Cost $18,088,666 $1,390,228
Accumulated depreciation (1,018,366) (154,059)
----------- -------------
$17,070,300 $ 1,236,169
----------- -------------
----------- -------------
The future minimum lease payments under capitalized leases and the present
value of the net minimum lease payments as of December 31, 1996 are as
follows:
1997 $ 4,461,313
1998 4,152,854
1999 4,119,462
2000 3,562,314
2001 3,070,730
Thereafter 4,966,115
------------
Total payments 24,332,788
Less amount representing interest 6,796,027
------------
17,536,761
Less current portion of capital leases 3,260,116
------------
$14,276,645
------------
------------
13
<PAGE>
XECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
H. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
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 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 the current year and appears in the 1996 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 the current year and appears in the 1996
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 December 31, 1996 and 1995 the Company's wholly owned subsidiary had
outstanding payroll tax liabilities for 1994, 1995 and the third quarter of
1996 of approximately $164,000 and $114,000, respectively, 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 currently in compliance with the payment agreement.
14
<PAGE>
XECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
I. Supplemental Cash Flow Information:
Supplemental disclosures of cash flow information for the years ended
December 31, 1996 and 1995 are summarized as follows:
1996 1995
Cash paid for interest and ---------- ------------
income taxes:
Interest $ 434,302 $ 30,977
Income taxes 2,486 1,611
Noncash investing and
financing activities:
Assets acquired by capital leases $16,714,565 $ -
Preferred stock Series B issued for
consulting agreement - 1,246,734
Common stock issued for subscription
receivable - 400,000
Common stock issued for services 310,000 -
Reverse merger of Xecom Corp. - 992,500
Stock issued for wholly owned subsidiary - 947,427
Capitalized interest 403,950 -
Unrealized loss on investments,
available-for-sale 90,000 -
Realized loss on investments,
available-for-sale 237,600 562,400
Accrued contingent liability 700,000 -
Realized loss on impairment of assets
to be disposed of 290,835 -
Conversion of preferred Series B to
common stock 239,463 -
J. SHAREHOLDERS' EQUITY (DEFICIT):
COMMON STOCK
In October 1995, the Board of Directors and shareholders voted to amend the
Company's Articles of Incorporation and By-laws. The effect of the
restatement is (i) to change the authorized capital from 50,000,000 shares,
no par value common stock to 100,000,000 shares, $0.0001 par value common
stock and (ii) to authorize the issuance of 50,000,000 shares, $0.0001 par
value preferred stock.
PREFERRED STOCK
Of the 50,000,000 authorized shares of preferred stock, 13,700,020 shares
have been designated as indicated below. The remaining authorized
preferred stock may be issued in one or more series, and the Board of
Directors is authorized to designate the series and fix the relative
rights, preferences, and limitations of the respective series without any
further vote or action of the shareholders.
15
<PAGE>
XECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
J. SHAREHOLDERS' EQUITY (DEFICIT): (CONTINUED)
CLASS A PREFERRED STOCK
Series A, 11% cumulative, participating, nonvoting, convertible preferred
stock, 1,200,000 shares authorized, issued and outstanding as of December
31, 1996 and 1995. The outstanding shares as of December 31, 1996 and 1995
are not common stock equivalents.
The holders of Series A preferred stock shall, at their option, be entitled
to convert each share of Series A preferred stock into such number of
fully paid and nonassessable shares of common stock as will be determined
by dividing $2,400,000 by the conversion price, which is based on a ten
day average trading bid price immediately prior to the date of notice of
conversion.
CLASS B PREFERRED STOCK
Series B, 10% cumulative, nonparticipating, nonvoting, convertible
preferred stock, 5,000,000 shares authorized, 3,726,000 and 4,337,000
shares issued and outstanding as of December 31, 1996 and 1995,
respectively. The outstanding shares as of December 31, 1996 and 1995 are
not common stock equivalents.
The holders of Series B preferred stock shall, at their option, be entitled
to convert each share of Series B preferred stock into two shares of
common stock.
CLASS C PREFERRED STOCK
Series C, 10% cumulative, nonparticipating, nonvoting, convertible
preferred stock, 7,500,000 shares authorized, 830,000 and 0 shares issued
and outstanding as of December 31, 1996 and 1995, respectively. The
outstanding shares as of December 31, 1996 are not common stock
equivalents.
The holders of Series C preferred stock shall, at their option, be entitled
to convert each share of Series C preferred stock into one share of common
stock.
CLASS D PREFERRED STOCK
Series D, voting, convertible preferred stock, 20 shares authorized, 20 and
0 shares issued and outstanding as of December 31, 1996 and 1995,
respectively. The outstanding shares as of December 31, 1996 are common
stock equivalents.
The holders of Series D preferred stock shall, at their option, be entitled
to convert each share of Series D preferred stock into such number of
fully paid and nonassessable shares of common stock as will be determined
by dividing the amount of $25,000 by the conversion price, which is the
lesser of the closing bid price on the date of signing the Subscription
Agreement or 65% of the average closing bid price for three trading days
immediately preceding the date of conversion.
16
<PAGE>
XECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
J. SHAREHOLDERS' EQUITY (DEFICIT): (CONTINUED)
DIVIDENDS
The preferred shareholders are entitled to receive preferential and
cumulative annual dividends on Series A, B, and C preferred stock at the
rate of 11%, 10%, and 10% per share, respectively, and are entitled to a
preference, in liquidation, in the amount of the stated value per share
plus any dividends declared and unpaid. The Series D shareholder is not
entitled to receive dividends but is entitled to a preference, in
liquidation, in the amount of $25,000 per share which is to be paid before
the payment of any liquidation preferences to holders of Series A, B and C
preferred stock. As of December 31, 1996 and 1995, no dividends on
cumulative preferred stock had been declared, resulting in an aggregate
amount of cumulative preferred stock dividends in arrears of $592,098 and
$0, respectively.
REDEMPTION
Series A and B preferred stock is redeemable at any time after January 1,
1997 at the option of the Board of Directors. Series C preferred stock is
redeemable at any time after May 1, 1997. Shares may be redeemed by paying
in cash a sum equal to 200% of the stated value per share and any declared
and unpaid dividends. Series A, B and C preferred stock may not be
redeemed until all cumulative dividends declared and cumulative dividends
in arrears have been paid.
Series D preferred stock is redeemable twelve months after issuance at the
option of the Board of Directors for $25,000 per share.
STOCK OPTIONS
On April 30, 1996, stock options were granted to six directors of the
Company entitling them to purchase 150,000 shares of the Company's common
stock at the price of $1.00 per share and 150,000 shares of common stock at
the price of $2.00 per share. The options are exercisable at any time from
the grant date and expire April 30, 2001. Stock option transactions are
summarized as follows:
Exercise
Stock Options Price Per Share
------------- ---------------
Under option at December 31, 1995 - -
Granted 300,000 $1.00 - $2.00
Exercised - -
Canceled - -
-------
Options exercisable at December 31, 1996 300,000
-------
-------
Had compensation cost for options granted in 1996 and 1995 been determined
based on the fair values at the grant dates, as prescribed in FAS 123, the
Company's pro forma net loss and pro forma net loss per share would have
been as follows:
Year ended December 31,
-----------------------
1996 1995
--------- ---------
Net loss:
As reported $(4,823,865) $(782,210)
Pro forma (4,940,865) -
Net loss per share
As reported (.62) (.21)
Pro forma (.63) -
17
<PAGE>
XECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
J. SHAREHOLDERS' EQUITY (DEFICIT): (CONTINUED)
WARRANTS
In 1996, the Company granted warrants to purchase a total of 5,194,653
shares of $0.0001 par value common stock at $0.60 - $1.00 per share to
unrelated third parties. The warrants granted in 1996 are exercisable at
any time from the grant date. One warrant was issued to purchase 833,333
shares of common stock and expires in September 1999. The warrants to
purchase the remaining 4,361,320 shares of common stock expire at various
dates through June 2000.
There were no warrants granted, exercised or canceled on or prior to
December 31, 1995 and none of the warrants granted in 1996 were exercised
or canceled as of December 31, 1996.
K. SALE OF SUBSIDIARY:
In August 1996, the Company sold its 70% interest in SelecTel Corporation
to TeleTek, Inc., in exchange for 130,000 shares of common stock
(restricted per Section 144), $270,000 in cash, and a promissory note in
the amount of $300,000 which was discounted to $220,500 and paid in full by
December 31, 1996 for total cash consideration of $490,500. The sale of
SelecTel resulted in a gain of $537,076, which has been reported in the
consolidated statement of operations for the year ended December 31, 1996.
Subsequent to December 31, 1996, it was determined that the stock of
TeleTek, Inc. had a fair market value of $0 and a permanent impairment was
recorded for the year ended December 31, 1996 (see Notes D and M).
L. LOSS ON IMPAIRMENT OF ASSETS TO BE DISPOSED OF:
Statement of Financial Accounting Standards No. 121 (SFAS No. 121),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" issued by the Financial Accounting Standards
Board (FASB) is effective for financial statements for fiscal years
beginning after December 31, 1995. SFAS No. 121 establishes new guidelines
regarding when impairment losses on long-lived assets, which include plant
and equipment, and certain identifiable intangible assets, should be
recognized and how impairment losses should be measured.
The Company has entered into an agreement with an unrelated third party to
sell certain telecommunications equipment located on various college
campuses. In exchange for the equipment, the buyer will assume the capital
lease obligations on the equipment.
As of December 31, 1996, the assets had not been sold. However, based upon
the purchase agreement, the sale is expected to occur in June 1997. The
net book value of these assets at December 31, 1996 was $1,247,300 and the
balances of the corresponding capital lease obligations totaled $930,436.
In accordance with SFAS No.121, the carrying amount of the assets exceed
their fair value, resulting in an impairment loss at December 31, 1996.
The fair value of the assets, per SFAS No. 121, is the amount at which the
asset could be sold in a current transaction between willing parties.
Since the buyer is willing to purchase the assets by assuming the capital
lease obligations (without any other consideration), the fair value of the
assets at December 31, 1996 was determined to be the balance of the capital
lease obligations.
16
<PAGE>
XECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
L. LOSS ON IMPAIRMENT OF ASSETS TO BE DISPOSED OF: (CONTINUED)
The loss on impairment of assets to be disposed of recognized in other
income (expenses) for the year ended December 31, 1996 is as follows:
Net book value of assets to be disposed of $1,247,300
Less fair value of assets (956,465)
----------
Recognized loss on impairment $ 290,835
----------
----------
M. SUBSEQUENT EVENTS:
In March 1997, the management of TeleTek, Inc. notified the SEC that they
had discovered irregularities in its accounting and billing procedures.
Based on this announcement, the closing price of the stock of TeleTek, Inc.
decreased to $0 per share and trading activity has been suspended. Based
on these events, the Company has recorded a permanent impairment in their
investment in TeleTek, Inc. as of December 31, 1996 (see Note D).
N. GOING CONCERN:
As shown in the accompanying financial statements, the Company incurred net
operating losses of $4,823,865 for the year ended December 31, 1996 and
$782,210 for the year ended December 31, 1995. As of December 31, 1996,
current liabilities exceeded current assets by approximately $7,996,394.
In addition, the Company had negative cash flows from operations of
$781,057 for the year ended December 31, 1996. These factors as well as
the uncertainty regarding the Company's ability to continue to raise
capital through the sale of equity securities create an uncertainty as to
the Company's ability to continue as a going concern.
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 its 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.
The ability of the Company to continue as a going concern is dependent upon
their success in their endeavors to obtain additional sources of capital,
and attain sufficient growth in their user base to enable them to achieve
future profitability. The accompanying financial statements do not include
any adjustments that might be necessary should the Company be unable to
continue as a going concern.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Dated: June 4, 1997 XECOM CORP.
By: /s/ Joseph C. Vigliarolo
--------------------------------------
Joseph C. Vigliarolo
President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated below.
XECOM CORP.
Dated: June 4, 1997 By: /s/ Joseph C. Vigliarolo
-------------------------------------
Joseph C. Vigliarolo
President and Chief Financial Officer
and Director
Dated: June 4, 1997 By: /s/ Clifford L. Casey
-----------------------------------
Clifford L. Casey, Director
Dated: June 4, 1997 By: /s/ Dal Neth Ritchie Grauer
-----------------------------------
Dal Neth Ritchie Grauer
Secretary and Director
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 55,595
<SECURITIES> 110,013
<RECEIVABLES> 496,685
<ALLOWANCES> 130,300
<INVENTORY> 0
<CURRENT-ASSETS> 616,916
<PP&E> 22,423,887
<DEPRECIATION> 1,203,734
<TOTAL-ASSETS> 23,317,426
<CURRENT-LIABILITIES> 8,613,310
<BONDS> 14,276,645
0
576
<COMMON> 1,007
<OTHER-SE> (639,568)
<TOTAL-LIABILITY-AND-EQUITY> 23,317,426
<SALES> 4,632,318
<TOTAL-REVENUES> 4,632,318
<CGS> 3,922,990
<TOTAL-COSTS> 7,443,186
<OTHER-EXPENSES> 2,547,587
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 970,947
<INCOME-PRETAX> (4,821,379)
<INCOME-TAX> 2,486
<INCOME-CONTINUING> (4,823,865)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,823,865)
<EPS-PRIMARY> (.62)
<EPS-DILUTED> (.62)
</TABLE>
